VZCZCXRO2366
PP RUEHFL RUEHKW RUEHLA RUEHROV RUEHSR
DE RUEHSK #0172/01 0720829
ZNY CCCCC ZZH
P 120829Z MAR 08
FM AMEMBASSY MINSK
TO RUEHC/SECSTATE WASHDC PRIORITY 7007
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE
RUEHVEN/USMISSION USOSCE 1869
RHMFISS/HQ USEUCOM VAIHINGEN GE
RUFOADA/JAC MOLESWORTH RAF MOLESWORTH UK
RUEHBS/USEU BRUSSELS

C O N F I D E N T I A L SECTION 01 OF 02 MINSK 000172 
 
SIPDIS 
 
SIPDIS 
 
E.O. 12958: DECL: 03/11/2018 
TAGS: PGOV PINR ECON EFIN IBRD EBRD BO
SUBJECT: NO IMMINENT ECONOMIC CRASH IN BELARUS - IFI 
OFFICIALS 
 
REF: A. 07 MINSK 1020 
     ¶B. MINSK 133 
     ¶C. 07 MINSK 1061 
 
Classified By: DCM Jonathan Moore for reason 1.4 (d). 
 
Summary 
------- 
 
¶1.  (C) World Bank Regional Director for Belarus, Ukraine and 
Moldova Paul Birmingham told representatives of Minsk's 
diplomatic corps March 10 that he sees little likelihood of 
an economic crisis in Belarus in the short term.  Birmingham 
noted that the Belarusian authorities had managed to weather 
the storm of Russian gas price increases in 2007, even if the 
credits and privatizations they had used to survive were less 
than transparent.  He described the Bank's loans to Belarus 
as well as marginal improvements in transparency and business 
climate here.  Birmingham predicted strong growth in 2008, 
and inflation in the low double digits, but pointed to the 
possibility of additional inflationary pressure, if the 
government addresses higher food prices through wage 
increases.  In a separate meeting, EBRD Country Director for 
Belarus Michael Davey reported on progress of the EBRD's 
micro-lending programs in Belarus.  End summary. 
 
Fundamentals of Belarus' Economy Stable - WB Official 
--------------------------------------------- -------- 
 
¶2.  (C) In a briefing for members of the diplomatic corps in 
Minsk, visiting World Bank Regional Director for Belarus, 
Ukraine and Moldova Paul Birmingham said that, unlike in 
years past, his institution saw no reason to expect an 
imminent crisis in either Belarus' economy or its public 
finances.  Birmingham said he expected strong GDP growth, 
about seven per cent in 2008, and said that Belarus' foreign 
trade growth in the recent past had been "phenomenal," with 
trade with Russia and with EU countries each making up 
roughly 40 per cent.  He added that Belarus' hard currency 
reserves were strengthening and that he saw no reason to 
expect a devaluation of the Belarusian ruble in the near term. 
 
¶3.  (C) Addressing the effect of rising prices for Russian 
natural gas, Birmingham said that Belarus had survived a 
shock that few economies could withstand, noting that the 
January 2007 price increases were the equivalent of a loss of 
five per cent of the country's GDP.  That said, he criticized 
some of the methods that Belarus had used to survive the 
shock.  Birmingham said that the privatization of telecom 
operator Velcom lacked transparency and that the USD 1.5 
billion credit secured from the Russian Federation included 
terms, including non-economic terms, which were worrisome. 
 
 
Inflation, Particularly Food Costs, a Concern 
--------------------------------------------- 
 
¶4.  (C) Birmingham told the assembled diplomats that he 
expected inflation for Belarus to remain "in the low double 
digits" for 2008.  He noted, however, that government 
statistics likely underestimated the impact of inflation on 
ordinary citizens.  If the increase in food prices -- a 
global phenomenon -- led to reciprocal increases in wages, an 
inflationary spiral would result, one that could threaten 
Belarus' economic growth and stability. 
 
World Bank Lending in Belarus Continues 
--------------------------------------- 
 
¶5.  (C) Describing World Bank lending in Belarus, Birmingham 
said that Bank actions were in line with the Belarus Country 
Strategy approved in December 2007.  A USD 15 million credit 
package to assist in the reconstruction of objects of social 
infrastructure was currently awaiting parliament's approval 
while a USD 60 million water project was being debated by the 
Presidential Administration.  Birmingham said that the World 
Bank also planned a significant set of loans to support 
energy efficiency. 
 
Structural Reform Does Not Materialize 
-------------------------------------- 
 
¶6.  (C) Though the World Bank continued to advocate 
structural reforms for Belarus' economy, Birmingham noted 
that GOB efforts had been marginal here.  Some steps had been 
made to improve the investment climate, such as the abolition 
of the "golden share" law (septel) and improvements in 
licensing, registration and taxation policy, but these 
 
MINSK 00000172  002 OF 002 
 
 
improvements had been small and/or symbolic at best.  The 
state sector continued to constitute 75 to 80 per cent of GDP 
and this figure would remain above 50 per cent for the 
foreseeable future.  Though Lukashenko was eager to lure FDI, 
it remained at roughly one per cent of GDP, and a weak force 
in the Belarusian economy. 
 
EBRD - Foreign Interest in Real Estate, "Just Not Yet" 
--------------------------------------------- --------- 
 
¶7.  (C) In a separate briefing, EBRD Country Director Michael 
Davey and staff told emboffs that EBRD's micro-lending 
activity (ref A) had slipped somewhat after January 1, 2008, 
perhaps as a result of apprehension on the part of individual 
entrepreneurs faced with new hiring restrictions (ref B). 
The level of loans issued by the program recovered, however, 
in February 2008.  Davey noted that the start up of the 
EBRD-co-owned Small Business Bank was proceeding according to 
plan and the bank should be licensed in April 2008, and 
operational in May.  While the EBRD's lending activities are 
limited to the private sector, emboffs encouraged EBRD staff 
to consider U.S. Department of the Treasury prohibition of 
transactions with certain regime entities in logistical 
matters as well. 
 
¶8.  (C) Davey described a steady amount of interest from 
Western real estate funds in the Belarusian market.  He noted 
that with the maturation of other markets in Central and 
Eastern Europe, such as Romania and Bulgaria, fund managers 
were increasingly looking at the Belarusian market as an 
option.  Davey was quick to add, however, that these managers 
were not prepared to invest under current conditions and 
would wait "for something to happen" in Belarus first. 
 
Comment 
------- 
 
¶9.  (C) We agree with Birmingham's assessment that an 
imminent collapse in the Belarusian economy is unlikely. 
That said, the regime's insistent search for new and enhanced 
revenue streams is evidence that economic pressure on public 
finances is growing (ref B).  With Russian natural gas prices 
up 19 per cent this year (ref C) and rates rumored to 
increase next quarter, it remains to be seen if Russian 
bilateral credits and opaque privatizations will be enough to 
keep the "social state" afloat. 
STEWART