US embassy cable - 05MINSK1425

UNCLAS SECTION 01 OF 02 MINSK 001425 
 
SIPDIS 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ETRD, ECON, EINV, BO 
SUBJECT: GOB Forum Warns Against Investing in Belarus 
 
MINSK 00001425  001.2 OF 002 
 
 
1. Summary: On November 17 Econoff and Econasst attended an 
investment conference in Mogilev, eastern Belarus, hosted by local 
authorities.  In traditional fashion, about half the speakers 
called for foreign and domestic investment to Mogilev.  However, 
the rest of the speakers presented reasons not to invest in 
Belarus.  One speaker listed GOB-created barriers to investment, 
another gave problems faced by small and medium enterprises, and a 
third stated Belarus misuses the pittance it does attract.  Most 
interestingly, a Russian diplomat spoke about Belarus' lack of rule 
of law and how that is blocking the Belarusian-Russian union state. 
Surprisingly, local officials seemed to agree with this criticism. 
But maybe this is not so surprising, given the sentiments President 
Lukashenko expressed to the media on November 23, "Foreign 
investors are like cockroaches, crawling into every hole and 
crack." End summary. 
 
2. On November 17, Mogilev city authorities held an investment 
conference to attract foreign and domestic investment to their city 
and region.  Around 300 attended, including delegations from 
Klaipeda, Lithuania and Pacheon, South Korea. 
 
 
What is Investment? 
------------------- 
 
3. The conference began with an event where Emboffs spoke with 
several Mogilev region businesses that are seeking "investment." 
The vast majority of those firms are fully or partially state- 
owned.  With few exceptions (mainly 100% private companies), when 
these companies ask for "investment," they actually mean loans. 
Most claimed they do not have authority to sell shares in their 
company to attract foreign capital.  Instead, they expect 
foreigners to give them money for modernization, or even just to 
cover salaries.  In exchange they offered to pay the "investment" 
back, either in cash or in goods. 
 
 
"Political Stability + Strong Government = Investment" 
--------------------------------------------- --------- 
 
4. The first several speakers, from the city council, Mogilev Free 
Economic Zone (FEZ), and Mogilev Technology Park, all spoke about 
the advantages in investing in Belarus.  The representative of the 
city council stated that political stability and Lukashenko's 
strong form of governing create an ideal investment climate.  He 
stressed Mogilev's geographic position, "in the very center of 
Europe," including its location along the main highway and rail 
link from the EU to Moscow.  Mogilev Oblast has an unemployment 
rate of 1.8%, and an average salary of USD 235 per month.  Mogilev 
most desires foreign investment for its chemical industries, which 
represent 34% of production.  Other major enterprises produce 
fibers, textiles and elevators.  State owned textile firm Mogoteks 
is the regions largest exporter.  In 2005 the oblast expects to 
export USD 200 million in goods to Russia, with much smaller 
amounts to other countries.  Also in 2005 the regional government 
for the first time sold a plot of land, and it privatized 25 firms, 
earning USD two million.  The Free Zone representative added that 
Lukashenko is unhappy with Belarus' free economic zones, and has 
ordered them to attract "high-tech" companies.  Unfortunately, so 
far this year the Mogilev FEZ has not attracted any foreign 
investment. 
 
5. Also speaking in favor of investing in Belarus was Gennadiy 
Melnikov, general director of cell phone company Velcom.  Melnikov 
claimed Belarus is a fantastic place to invest, and that the GOB 
has provided his company with many benefits.  He also expounded on 
the value of agricultural development, and announced Velcom would 
provide low cost cell phone service to rural villagers.  [Comment: 
Assisting rural villages is a main plank in Lukashenko's platform. 
Melmikov unsurprisingly did not mention that in October 2003 the 
GOB expropriated without compensation a 20% share of Velcom from 
Cypriot/Syrian founder SB Telecomm, giving the GOB a 51% share in 
the company.  Nor did he mention that a week later the BKGB 
arrested his predecessor and six other senior Velcom officials and 
deported them.  Melnikov also failed to state that this year the 
GOB created a 100% state-owned cell phone provider to undercut 
Velcom.  End comment.] 
 
 
Mogilev Looks Shabby in Comparison 
---------------------------------- 
 
6. The mayors of Klaipeda, Lithuania and Pacheon, South Korea both 
gave highly professional presentations that made Mogilev look all 
the shabbier in comparison.  The Klaipeda mayor spoke about the 
hundreds of millions of Euros his city has attracted in recent 
years, much of it related to the city's thriving port.  Belarusian 
 
MINSK 00001425  002.2 OF 002 
 
 
companies invested Litas 2.35 million [USD 800,000] in Klaipeda in 
2005, making Belarus one of the smaller investors in the city. 
Pacheon's mayor showed a very slick film on his city and discussed 
the value of decentralizing economies. 
 
 
Why Not to Invest in Belarus 
---------------------------- 
 
7. The next series of speakers all gave valid reasons not to invest 
in Belarus.  Ivan Ivanov, local representative for the 
International Finance Corporation, praised Belarus for its open 
economy (exports make up a high share of GDP), political stability, 
good infrastructure and skilled workers.  However, he explained 
that foreign investors look at more than just these factors. 
Belarus scares away investment by changing its laws far too often, 
by having a very complicated tax code, and because the GOB 
frequently differentiates between "our" and "other" companies, 
discriminating against those that are not state-owned or are 
foreign.  While acknowledging that some in the GOB are starting to 
think about such issues, Ivanov argued the GOB must open a dialogue 
with businesspeople. 
 
8. A representative of the state-run Belarusian Chamber of Commerce 
and Industry provided comparative statistics of foreign investment 
around the world to show that Belarus fares very poorly, even 
compared to other CIS states.  Even though the GOB claims Belarus 
attracted USD 647 million in foreign investment in 2003, he said 
this is wrong, that Belarus really only attracted USD 171 million 
that year.  He further argued that Belarus squanders the investment 
it does attract, and that all investment must be controlled by the 
GOB so it can be used effectively. 
 
9. Evgeniy Novozhilov, Trade Counselor at the Russian Embassy in 
Minsk, was supposed to talk about benefits of the Belarusian- 
Russian union state for investment.  Instead, he said Belarus has 
created three sets of problems that hurt the union state and 
investment: 1) Russia facilitates the free market while Belarus 
does the opposite; 2) Russia is ruled by laws while Belarus is 
ruled by presidential decrees; and 3) Minsk has largely refused to 
work with Russia to align the two countries' laws.  Even when the 
laws are the same, Belarus issues a great many rules and 
regulations that ensure these laws are applied differently in 
Belarus.  [See septel for a more detailed report of his speech.] 
 
10. Last, Anatoly Zhigalov of the firm Promleasing outlined the 
problems for small and medium enterprises (SME) in Belarus.  He 
explained: SMEs have a hard time attracting investments and 
credits; are crippled by the lack of free press, which makes it 
hard for them to find accurate market information and business 
partners; that the "conservatism" of Belarus' large state-owned 
companies makes them unwilling to work with private SMEs; and that 
Belarus in general has a poor support infrastructure for SMEs. 
 
 
Comment 
------- 
 
11. This conference was organized by local GOB officials in 
Mogilev.  While they win points for honesty and transparency, it 
was very odd to attend an investment conference that provided more 
reasons not to invest than to do so.  More strangely, the city and 
oblast officials all smiled and nodded their heads in agreement as 
speaker after speaker gave reasons not to invest in Belarus.  The 
only sign of discontent came from the Pacheon mayor's GOB-provided 
translator (likely BKGB), who stopped translating as the criticism 
continued.  Econoff left with the strong feeling that local 
officials were "checking a box" by hosting this conference, but in 
reality know most of the problems they face are caused by their own 
authorities in Minsk.  Lukashenko's public comments, such as 
calling foreign investors "cockroaches," demonstrate the regime's 
true feelings toward investment.  However, the local officials were 
delighted that Embassy representatives attended, and even displayed 
an American flag on stage. 
 
KROL