Belarus will suffer another significant recession in 2016. After falling by nearly 4% YOY in 2015, GDP will contract to a similar extent this year as Russian demand for exports further weakens, refined oil transit revenues fall, and government spending declines. Falling real wages, high inflation, and extensive external debt obligations further dampen the market’s outlook. Still, Belarus remains an attractive market in the long term, and MNCs should take this time of economic weakness to get ahead of the competition by developing a long-term strategic plan to capture opportunities as they arise.
The drastic drop in oil prices and tanking Russian Economy over the past year and a half has rocked the rigid, inflexible Belarusian economy. Too centralized to adapt to changing conditions, the country’s excessive reliance on exports to Russia and refined oil export revenues has left it vulnerable to precisely the downturn it is experiencing. As government revenues have contracted, this lingering Soviet-style economy has been unable to sustain large subsidies for its thousands of state-owned enterprises (SOEs) and social benefits, causing real wages and consumption to contract. Meanwhile, the Belarusian ruble’s collapse over the course of 2015 has elevated inflation and further undermined purchasing power.
To be sure, none of these dynamics will change in the next year. The highly-popular conservative regime remains committed to ensuring stability and security and therefore will continue to avoid any significant but potentially destabilizing economic reforms. Likewise, reliance on Russia will only intensify as Belarus’ high debt burden and extremely low financial reserves require sizeable financial support from Moscow in order to sustain the economy. Some US$ 4.4 billion in foreign and domestic state debt is due in 2016, which amounts to more than the total central bank reserves as of February. Russia, which has given funds for years to avoid a possible economic collapse on its western border, once again came to the rescue and in February promised to provide US$ 2 billion in loans.
Should MNCs pull out?
Although there is a lot of negative news, this does not mean MNCs should be pulling out of Belarus. The country remains attractive on account of its:
- Political stability
- Easy serviceability because of geographic proximity to major markets
- Highly urbanized population
- Positive business operating environment that has comparatively less corruption than its neighbors
Belarus’ primary industries – food processing, chemical production, oil products – have remained resilient. In addition, the government has initiated a privatization drive and the localization of some aspects of production has become more appealing in light of the significant depreciation and sanctions on Russia. Several European firms across several sectors have shown an interest in this already as Belarus provides access to the large Eurasian Economic Union (EEU).
So what should MNCs do?
For 2016, firms should emphasize lower-cost products, focus on the value of their products for increasingly price-sensitive consumers, and offer promotions to maintain brand loyalty and seize market share as customers trade down. Also, MNCs should use 2016 to best position themselves for the future by aligning their teams on the long-term opportunity and making strategic decisions now regarding their investments. Looking ahead, firms can’t rely on past performance benchmarks when setting targets for the coming years and will have to increase their focus to identify specific pockets of opportunity as they arise. In more strategic terms, MNCs should search for opportunities to acquire local assets and players at a significant discount now during the privatization drive and consider the benefits of localizing production.
The high growth rates witnessed in the region – whether in Russia, Kazakhstan, or Belarus – at various points over the past 15 years are not set to return. Past high growth was an anomaly, yet this does not mean these markets lack profitable opportunities or are unattractive, particularly as emerging markets globally slow as well. MNCs should take 2016 to re-align and adjust their expectations for Belarus so they can start implementing their long-term strategies and get ahead of the competition.
For a full, more comprehensive update on the Belarusian economy, FSG clients can access our latest Belarus Market Spotlight. Not a client? Contact us to learn more.
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