Ben Aris in Berlin -

Is Belarus about to throw off its title of "last dictatorship in Europe" and earn itself a new moniker, "the last untapped market in Europe"?

Belarus has been closed for business for most of the last decade and half, as President Alexander Lukashenko managed to retain much of the socialist economic system. Today, investors are starting to talk about the "Belarusian economic miracle."

Growth over the first nine months of this year hit 10.7% year-on-year and is still accelerating, while the country's industrial production was the fastest growing in the Commonwealth of Independent States (CIS) in the first quarter of this year. Wages have also been rising fast, reaching an average $444 per month in August, which is feeding a virtuous circle of spending, profits and investments. In the first nine months of 2008, capital and construction investments in Belarus were up 23.2% year-on-year, also one of the highest levels in the CIS.

Of course, much of this fast growth is down to the low base the economy started from, but it's also indicative of the pace at which the economy is being thrown open. And these numbers will only improve since the president threw his considerable political weight behind opening up the economy further at the start of this year.

Desperately seeking friends

The change of heart came after Russia and Belarus, which is a gas consumer as well as a major transit route for Russian gas on its way to Western Europe, got into a row over gas prices in the winter of 2006 and Moscow threatened to turn off the taps. Moscow wanted to hike the price that the small northern republic pays for its own gas and Minsk retaliated by slapping a tax on Russian oil transiting through its territory. "Belarus is very interesting at the moment," says Ian Hague, co-founder of Firebird Management, the biggest fund investing into Central and Eastern Europe. "It seems that since the gas row, Lukashenko has decided he better look for other partners rather than just rely on Russia."

Belarus was already reforming, albeit slowly. Surrounded by booming economies on every side, reform was leaking into the country by a process of osmosis: as most of the republic's trade and banking partners were introducing things like international standard accounts, they began asking their Belarusian counterparties for reporting that fit these standards. But with the full weight of the government behind reform since the start of this year, the pace of change has increased dramatically and investment is being sucking in: over the first six months of this year, the inflow of foreign direct investment was $1.23bn, almost as much as was invested in all of 2007. First Deputy Economy Minister Petr Zhabko said in October: "In 2007, Belarus attracted $5.4bn in investment. This year we plan to have $7bn."

The banking sector is in the vanguard of the changes and grabbed headlines after high-profile acquisitions by European institutions: amongst others, Austria's Raiffeisen International took a controlling stake in Priorbank and Germany's Commerzbank looks set to buy Belinvestbank. In all, Belarus has 28 commercial banks, of which 23 now have foreign capital - including seven that are fully owned by foreign investors - versus none only two years ago; the share of foreign capital in the sector is now 22.2%, according to the National Bank of Belarus (NBB), and may reach 30% by the end of the year. "The share of foreign investment will increase considerably if all proposals about the establishment of new banks with foreign capital are implemented, and if we sell stakes in existing banks to non-residents or increase existing foreign shares," NBB board member, Sergei Dubkov, said in September.

Foreign investment is likely to accelerate markedly over the next three years after the government announced in June it would sell shares in 969 state-owned companies, setting off a flurry of legislation to prepare for the change. Some of the republic's most famous brands are on the list and investors are already sniffing around the national stock exchange with interest.

Political winds

Change is even coming on the political front. Lukashenko called September's parliamentary elections the most free and democratic ever. The Organization for Security and Co-operation in Europe disagreed, but after a decade and a half of tight political control, there is little left of an organised opposition, so the increased freedoms remain a promise. Nevertheless, arguably for the first time since the fall of the Soviet Union, parliament is debating policy rather than simply rubberstamping any order the president gives and ministerial jobs actually mean something.

The EU offered an olive branch in October when it lifted travel bans on President Lukashenko and other high-ranking officials in an effort to encourage the one-time pariah state to continue the process. "At this moment, the Belarusians are looking to the EU. The moderates are hoping that they get something to be able to encourage further reforms in Belarus," EU External Relations Commissioner Benita Ferrero-Waldner said after the elections.

Clearly relations are improving, but at issue is what pace the liberalization will proceed. However, as the investors have already been shown the money, the growing volumes of cross-border business will be the most effective salve for the bruised relations between the republic and the rest of Europe.

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