Sergei Kuznetsov in Minsk -

Manufacturing in Belarus, including its core machine manufacturing sector, has been badly hit by weakening demand in neighbouring Russia. Unreformed industrial giants, relics from Soviet times, are being forced to cut or suspend production as orders fall, weighing on the rest of the country’s faltering economy. Even so, the authorities show little appetite to start badly needed reforms.

On August 25, the National Statistics Committee of Belarus (Belstat) published a disappointing set of foreign trade data for the first half of the year. Belarusian exports to Russia, its traditional market, dropped by 33.3% on year in January-June; Russia’s share of Belarusian exports fell to 36.5%, compared with 40.3% during the same period last year.

Machine manufacturing, which accounts for roughly a quarter of employees in the overall manufacturing sector, appeared to be at the centre of this storm. Exports of tractors (to all markets) dropped by 33% in the first half from the year before, truck tractors by 81.5%, trucks by 68.7% and agricultural engineering products by 42.5%. The contraction in exports, combined with sluggish domestic demand, has hit the country’s industrial output, which decreased by 7.2% on year in January-July.

“I understand that there are difficulties. But imagine that there is a war in the economy or an emergency situation. We must do our best to hit all our targets this year in these war-like economic conditions,” Belarusian President Alexander Lukashenko said on August 6 as he met with the country’s prime minister, Andrei Kobyakov.

However, this “wartime” rhetoric won’t change the reality. The majority of machinery plants in Belarus have been running below capacity, while employees have seen their salaries cut as the plants fail to sell goods already produced. The International Monetary Fund (IMF) predicts the country’s GDP will drop by 2.3% in 2015; the European Bank for Reconstruction and Development (EBRD) forecasts a 3.5% decline.

“External factors created 80% of this situation – it is not our fault,” Lukashenko complained. “We cannot wait for improvements in neighbouring countries, our traditional markets. You are aware of the trends. Therefore, we will have to be aggressive, to compete with others and penetrate new markets.”

Offering funding, not reforms

Traditional giants of the industry, including the Minsk-based tractor maker MTZ, truck manufacturer MAZ and the Gomel-based producer of agricultural equipment Gomselmash, appear to be in the most dire straits. As a result, in late June the Belarusian authorities were forced to offer assistance to those plants, as they have done for many other failing state-owned enterprises in the past.

According to special decrees signed by Lukashenko, MTZ was allowed to raise up to $150mn through a domestic bond issue, and ordered the Finance Ministry to raise up to $426mn by selling a special bond issue to Belarusian commercial banks with the aim of supporting Gomselmash.

“The government will continue to support these enterprises, however I believe the Belarusian machinery industry has no future,” Stanislav Bogdankevich, former governor of the Belarusian central bank, tells bne IntelliNews. He points out that in previous years the authorities refused proposals from Russian companies to create joint ventures, in particular with state-owned truck maker MAZ, which could have helped the Belarusian giants survive in the current difficult times.

Indeed, the Russian truck maker KAMAZ, which is controlled by state corporation Rostekhnologii, previously failed to secure an agreement on a merger with MAZ. In April this year, Russian Deputy Prime Minister Arkady Dvorkovich told reporters that this project is off the table, as "there is no common understanding regarding the management structure."

Meanwhile, Georgy Grits, deputy head of the Belarusian Confederation of Industrialists and Entrepreneurs, believes that the possible creation of “supranational groups” through mergers between Belarusian and Russian corporations could still provide the Belarusian manufacturers with a chance to avoid the worst-case scenario. “Mutually beneficial co-operation in production and supply is necessary,” Grits tells bne IntelliNews.

Grits adds that the military vehicles producer MZKT, known globally under the Volat brand, could benefit from such a scheme. “Belarus is negotiating the possible integration of this enterprise into Russia’s military-industrial complex,” he says.

However, these plans could also remain unimplemented. “I would not want to see the assets… privatised and sold,” Lukashenko said on August 14, as he visited MZKT, adding the company could continue its cooperation with Russia without requiring a merger. “We have always been responsible people who have implemented all contracts and agreements with Russia. We are ready to [continue to] work.”

Excessive workforce

“According to the World Bank, up to a third of the workforces of Belarusian [state-owned] enterprises is excessive to production demand. The numbers of employees do not correspond to production volumes and the efficiency of the enterprises,” Grits says.

He adds that the management boards and the Belarusian government “understand” the necessity to reduce the number of employees, but they want to create a system of measures that will reduce the possible shocks. “The creation of new jobs in small and medium-sized businesses should act as an airbag during any layoffs,” Grits underlines.

But mass layoffs at Belarusian state-owned enterprises are off the table for now, especially in the year of a presidential election. Lukashenko, who has been in power since 1994, is expected to win a fifth consecutive term with a big majority on October 11. “We cannot allow any ill-advised action: no mass layoffs, no telling people they are surplus to requirements, nothing of this kind. We have to preserve the labour collectives and jobs,” Lukashenko said on July 1, clearly in campaign mode. “This is a key task because crises come and go, but once the crisis is over and labour collectives and enterprises have been destroyed, we will have nothing to rely on and protect our independence with.”

Yet Bogdankevich believes the Belarusian economy needs a comprehensive programme of transformation, which should involve changing the system of management at public companies. According to the World Bank, state-owned enterprises account for over 50% of output and two-thirds of employment in Belarus. "State-owned companies should be put on an equal footing with private companies," Bogdankevich says.

"For instance, the [industry] ministry each year provides output targets to MAZ and MTZ. However, we need a transition to a new economic model that will be based on market rules… The state should do what it is responsible for – it should secure a low level of inflation, a stable exchange rate of the domestic currency, and lower taxation," Bogdankevich says.