Belarusian Economic Research and Outreach Center

Belarus turns hockey tournament into a sales pitch

For the first time in recent memory, snowy, and normally sleepy, Minsk is echoing with the sound of drilling and hammering. Large international hotel chains, including Hilton, Kempinski, and Marriott, are setting up shop, preparing to welcome guests expected to swarm the Belarusian capital for the Ice Hockey World Championships running May 9 to 25.

Planes carrying hockey devotees will land on a brand new runway currently being laid out at Minsk National Airport; and tourists will be able to hop on and off a spiffy new commuter train, as well as take advantage of a few additional metro stops.

For the occasion, the former Soviet state, often dubbed Europe’s last dictatorship, is striving to put on a friendlier face, too. Americans, normally required to receive an invitation and pay a fee of about $200 for the privilege of visiting, will be allowed in with just a passport and a hockey ticket. Restrictions on other foreign nationals are being temporarily lifted as well, with almost any hockey-goer able to enter the country without a visa from April 25 to May 31.

The effort, economists tell Monitor Global Outlook, betrays more than an eagerness to play host. “One of the goals of the championship here is to show to the world that Belarus is ready to open up,” said Kateryna Bornukova, a research fellow at the Minsk-based Belarusian Economic Research and Outreach Center (BEROC).

The question is: Will investors respond to the overture? Economists interviewed by MGO are split, with some pointing to the country’s low taxes, good infrastructure, strong private property rights, a well-educated workforce, and agricultural resources. Others, though, warn of the unpredictability of dictatorship, Soviet-style red tape, and high inflation.

Ms. Bornukova, for one, is a cheerleader. Belarus is a prime spot for international investment, she argues.

The country offers a rather attractive 18-percent corporate income tax rate, which applies to both large and small enterprises, notes Bornukova. And although most foreign companies don’t receive special tax privileges, the government is making it easier for international businesses – such as the hotel chains driving construction in Minsk – to obtain licenses and visas for foreign employees. There are also efforts under way to ease bureaucratic burdens, such as the notorious, byzantine tax-reporting process, said Bornukova.

The country earned a decent 63rd spot out of 189 countries ranked in the World Bank’s 2014 Ease of Doing Business Report, and a few brave pioneers are already testing the ground. Cisco, for example, recently set up an office in Minsk, hiring mostly local workers.

Bornukova thinks there should be more like Cisco. “People should not be afraid just because of the image of this country to invest in it,” she says.

Still, other global rankings of Belarus are less flattering. The country scored 123 out of 177 countries in Transparency International’s 2013 Corruption Perceptions Index, a result that likely sends a chill down the spine of many an investor.

In May 2010 the country set up a National Investment and Privatization Agency tasked with finding foreign investors and bringing them to Belarus, but the official sales pitch has so far elicited little response, says Robert Kirchner from the GET Belarus, a Berlin-based governmental organization that provides independent advice to Belarus.

About half the $7.8 billion in foreign direct investment that flowed into Belarus in the first half of 2013, came from Russia, according to Robert Legvold, a professor emeritus at Columbia University who specializes in Eastern Europe.

Part of the problem, according to Mr. Kirchner is a “messy” government administration, a trait that, he says, is “a common legacy in most CIS [Commonwealth of Independent States] countries.”

Tax rates may be relatively low, says Mr. Legvold, “but companies have to be sure they don’t run into wage restrictions, wage regulations, or price controls.” The central government, he adds, still has a tight grip on economic management.

Uncertainty about politics and economic policy is another factor keeping investors at bay, says Legvold. As authoritarian leaders go, President Alexander Lukashenko is still “pretty young,” says Legvold.

Belarus’ mighty, possessive neighbor to the north may add to investors’ hesitancy, especially in light of recent developments in neighboring Ukraine. Though Russia would be “pleased” to see its Texas-sized protégé attract more investment from Europe, North America, and Asia, “a complete reorientation (or prospective reorientation) of Belarus trade and investment toward Europe,” seems unlikely as long as Vladimir Putin holds the reins of power in Russia, Legvold told MGO via e-mail.

Moscow wants to keep Belarus as dependent as possible, added Bornukova, even though the country is “far from the point of the critical mass of foreign investment that may be uncomfortable to Russia.”

Right now, the biggest roadblock to investment in Belarus is runaway inflation, according to Legvold. Consumer prices have been climbing by over 50 percent a year in recent years, though inflation remained under 17 percent in 2013.

The government is aiming to keep inflation under 11 percent in 2014, but President Lukashenko is likely to try to stimulate the slow-growing economy with fiscal stimulus that could once again turn up the pressure on prices, says Legvold.

Belarus’ economy, currently worth some $63 billion, is expected to grow by 2.1 percent in 2014, according to the Belarusian Institute of Privatization and Research. In the next five years, private businesses are expected to account for 50 percent of the gross domestic product, the government recently announced.

Hilton, Kempinski, and Marriott, part of 40 hotels being built or refurbished for the hockey championships, confirmed they would be opening in Belarus in time for the tournament but declined to comment further.

The construction starts in Minsk will do little for Belarus’ economy, predicts GET Belarus’ Kirchner, but the hockey tournament “is a big opportunity for country marketing, and might lead to some subsequent increase in tourism,” he says. And by putting itself on the tourist map, Belarus might end up on investors’ radar screens as well.

The article was published by Monitor Global Outlook

Original article