VZCZCXYZ0028
RR RUEHWEB

DE RUEHSK #0494/01 1251431
ZNR UUUUU ZZH
R 051431Z MAY 06
FM AMEMBASSY MINSK
TO RUEHC/SECSTATE WASHDC 4362
INFO RUCNOSC/ORGANIZATION FOR SECURITY COOPERATION IN EUROPE
RUEHGV/USMISSION GENEVA 0308
RUEHVEN/USMISSION USOSCE 1135
RUEHBS/USEU BRUSSELS
RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC
RHMFISS/HQ USEUCOM VAIHINGEN GE
RUFOADA/JAC MOLESWORTH RAF MOLESWORTH UK

UNCLAS MINSK 000494 
 
SIPDIS 
 
SIPDIS 
 
DEPT PASS TO USTR 
 
E.O. 12958: N/A 
TAGS: ECON ETRD PREL USTR BO
SUBJECT: Regime Nationalizing and Milking Economy 
 
Ref: 05 Minsk 1383 
 
¶1. Summary: By most estimates the GOB controls about 80% of 
economic activity, but the state has refused to divulge the exact 
amount.  Over the past few years the state's share of the economy 
has been growing as the GOB renationalizes previously privatized 
companies and increases its ownership stake in a number of firms. 
In past years the regime used the Golden Share as the means to take 
over companies, but recently has abandoned the Golden Share for 
other methods of seizing enterprises.  Such ownership is highly 
lucrative for the regime; only a handful of companies, almost all 
of which are state-owned, are responsible for most government 
revenues and even for most of Belarus' GDP.  In December the GOB 
issued a decree demanding more revenue from these most profitable 
companies.  In March Lukashenko additionally transferred Belarus' 
largest exporter, the state-owned Belneftekhim conglomerate, under 
his personal control and supervision.  End summary. 
 
 
GOB's Share of the Economy 
-------------------------- 
 
¶2. Ivan Ivanov, local representative for the International Finance 
Corporation, told Econoff that he has asked various GOB 
interlocutors many times for data on how much of the Belarusian 
economy is state-owned, but the GOB refuses to divulge this 
information.  Valery Dashkevich, a former analyst with 
Belgazprombank, estimated that Belarus has roughly 10,000 
registered corporations.  Of those, 5,900 are fully state-owned and 
the rest are either fully private or joint-stock companies (whose 
ownership is divided between the GOB and private entities). 
 
¶3. GOB statements on state ownership of companies have been 
contradictory.  The Ministry of Economy announced that as of the 
beginning of the year Belarus had 4,636 stock corporations.  Of 
these, 1,818 were open stock corporations (which generally means 
the state and private entities share ownership) and 2,818 were 
closed stock corporations (all but eleven of which are believed to 
be fully private).  The ministry claimed the GOB owned 68.5% of the 
shares of all these companies.  [Note: the ministry did not explain 
this statement, but perhaps meant it owns 68.5% of the value of 
these companies.  Further complicating this picture is that the 
ministry was only referring to companies owned at the national 
level, not those with shares owned by local governments.]  The 
ministry's statement went on to say that 904 stock companies still 
exist which were once privatized by the government.  The GOB owned 
shares in 634 of these, and no shares in 270.  Of that 634, the GOB 
owned more than 75% of 355 (up from 303 a year earlier), between 
50% and 75% of 80 (up from 66), between 25% and 50% of 122 
companies (down from 166), and less than 25% of 77 companies (down 
from 129).  This trend demonstrates that not only does the GOB own 
shares in a large number of companies, but that over the past year 
it has been increasing its ownership stake in these companies. 
 
¶4. In a somewhat contradictory statement, in April the Ministry of 
Economics announced that as of the beginning of the year there were 
895 registered open stock companies in Belarus, only 99 of which 
were fully private.  In 2005 the GOB only sold its shares in only 
four companies, earning USD 27,400. 
 
 
Highly Centralized Economy 
-------------------------- 
 
¶5. Several economists have told Econoff that just 20 companies 
account for half of Belarus' exports and that 133 companies, 
employing around one million workers (one-quarter of the 
workforce), are responsible for nearly all government revenue and 
the vast majority share of GDP.  Independent economists told 
Econoff that the GOB considers the list of these most profitable 
companies to be classified information.  Another 60% of companies 
are estimated to be operating with very low profitability or else 
are loss-making.  The GOB recently announced that there were 2,600 
unprofitable Belarusian companies during the first three months of 
¶2006.  Unprofitable companies were concentrated in metalworking and 
machine building, light industry, food processing, and timber, 
woodworking and paper production. 
 
¶6. The GOB owns all the largest companies.  In 2004 the GOB 
published a list of the country's 14 top grossing companies, all of 
which were state-owned.  [The list is in descending order: 
Belaruskaly (potash), Belarus Metallurgical Factory BMZ, Minsk 
Tractor Factory MTZ, Minsk Automobile Factory MAZ, Belarus 
Automobile Factory BelAZ, Khimvolokno (chemical fibers), AZOT 
(chemicals), Mozyr Oil Refinery, NAFTAN oil refinery, Atlant 
(refrigerators), Horizont (televisions), Integral (microchips), 
Belomo (optics), and Vityaz (televisions and domestic appliances). 
Post believes the two oil refineries now top this list.]  The GOB 
also considers 221 of the country's largest companies to be 
"natural monopolies."  By law the state owns all these companies 
and prevents them from facing competition.  Examples of natural 
monopolies include oil refineries and pipelines, 
telecommunications, postal services, railroad and air transport, 
and all utilities (heat, power, water). 
 
 
Largest Exporter and All its Income to be Put Under President 
--------------------------------------------- ---------------- 
 
¶7. In 2005 Belarus' largest export commodity was oil and refined 
oil products, even though the country imported 93% of its crude 
from Russia.  The state-owned concern Belneftekhim controls 
Belarus' oil refining, much of its oil trade and a host of other 
companies.  [Note: A Belarusian state concern operates roughly at 
the level of a ministry.]  Belneftekhim controls 40 companies with 
116,000 employees, which account for 30% of Belarus' industrial 
output and 35% of its exports.  In late March Lukashenko's press 
service announced Belneftekhim would be placed under the personal 
control and supervision of Lukashenko.  This move will give 
Lukashenko personal control over all of Belneftekhim's significant 
revenues. 
 
 
GOB Takes Over Yet More Companies, Uses Golden Share Less 
--------------------------------------------- ------------ 
 
¶8. The GOB is invoking its internationally unpopular Golden Share 
to take over companies less frequently than in the past (reftel). 
During 2006 Post knows of only one usage of the Golden Share.  On 
April 6, the GOB extended its Golden Share control over the 
Obuvtorg shoe factory for another three years.  The GOB owns 19% of 
the company, but the Ministry of Trade used the Golden Share to 
take control in October 2003, preventing two shareholders from 
buying a majority stake in the company.  The shareholders were 
offering two to three times the listed price for shares, but the 
GOB announced it feared these shareholders would use the company's 
warehouses to store goods other than shoes if they took control. 
 
¶9. Instead of using the Golden Share, the GOB has been increasing 
its ownership share of companies in exchange for providing 
financial assistance.  As in the past, the GOB pays significantly 
less per share in these companies than their public list price.  On 
April 25, Deputy Prime Minister Vladimir Semashko announced that 
Lukashenko would soon sign a presidential decree mandating that the 
GOB only provide a company with financial assistance after it 
transfers 100% ownership to the government. 
 
¶10. In December the GOB announced it was paying off the debts of 
motorcycle and bicycle manufacturer Motovelo in exchange for a 90% 
stake in the previously 100% private company.  While shares in the 
company were previously worth BYR 10,000 [USD 4.65], the GOB 
acquired its 90% at BYR 600 [USD 0.28] per share. 
 
¶11. Also in December the GOB used the Golden Share to raise its 
stake in the Kamvol woolen fabric company from 33.8% to 99.9%, in 
exchange for restructuring the company's debt to the state.  In 
this case the GOB had to use the Golden Share since the owners of 
32% of the company opposed the state taking control. 
 
¶12. In February the Council of Ministers issued a decree giving the 
state an 80.54% stake in Krasnoselskstroimaterialy, one of Belarus' 
largest construction material companies, in exchange for forgiving 
USD 5.8 million in debt. 
 
¶13. In February the GOB took control of equipment at ten factories 
in exchange for the state paying BYR 34.8 billion [USD 16.2 
million] which these companies owed to German banks. 
 
¶14. In March under a presidential decree the GOB increased its 
stake in the Neman Glass Factory from 94.32% to 100% in exchange 
for forgiveness of tax arrears.  After taking full control the GOB 
immediately granted the company a USD 6.7 million loan from the 
budget, ordered a state-controlled bank to provide another USD 2.2 
million, and reduced by half the factory's utility and tax 
payments. 
¶15. Also in March Lukashenko signed a presidential decree giving 
the GOB 100% ownership of the Minsk Bearings Plant, up from the 
state's previous 70% share.  In return the GOB will restructure the 
company's debt. 
 
¶16. On March 30, the CEO of IT company Infopark complained at 
Minsk's annual IT convention that the Ministry of Communications 
stifles internet-based business with its monopoly on 
telecommunications and stated that the ministry frequently 
nationalizes successful IT start-ups.  He called on Belarus' IT 
companies to unite and confront the ministry. 
 
¶17. In April the Council of Ministers announced the state budget 
would pay half the interest in a loan for malt producer Belsolod, 
in exchange for an unspecified increase in government ownership. 
 
¶18. On April 4, the Council of Ministers signed a resolution 
increasing the GOB's ownership in seven companies (including three 
of Belarus' four sugar refineries).  For each company the state 
budget covered a portion of interest on their loans in 2005.  The 
GOB already owned a controlling stake in each company, but further 
raised its ownership by 0.01% to 16.2%. 
 
 
More Nationalization to Come? 
----------------------------- 
 
¶19. In December an anonymous source in the GOB told Interfax that 
the government was drafting a decree on "coercive alienation of 
former state property."  This decree would allow the state to 
nationalize previously state-owned companies if their current 
owners "mismanage or do not invest in their development."  So far 
such a decree has not been made public.  In March Lukashenko told 
the Third All-Belarusian People's Assembly that the GOB would not 
privatize any of Belarus' largest companies, but would allow them 
to "incorporate smaller and less profitable companies.  They will 
make Belarusian monsters that will swallow weaker companies, and 
gigantic companies will appear.  Then we will hit the world's stock 
exchanges with their billion-dollar capitalization.  That will be 
the right time to sell shares, but we will not trade a share for a 
bottle of Belarusian vodka.  A share will cost millions of 
dollars." 
 
 
GOB Asking for More from Its Companies 
-------------------------------------- 
 
¶20. On December 28, Lukashenko signed a presidential decree 
stipulating that highly profitable state-owned companies must give 
a greater share of their profits to the government.  Companies with 
a profit of up to 20% must transfer to the state an additional 5% 
of net profit, between 20% and 22% profit must give 10%, 22% to 25% 
give 15%, 25% to 27% give 17%, 27% to 30% give 20% and those with 
profit of more than 30% must give an additional 25% of net profit 
to the GOB.  The GOB estimated this decree would increase state 
revenues by BYR 105.2 billion [USD 48.9 million].  The Cabinet of 
Ministers added a proviso that made this decree retroactive for 
several of the largest state-owned companies.  The proviso 
specified that in December Belaruskaly had to pay an additional USD 
29.7 million, Belarus Metallurgical Factory BMZ USD 7.6 million, 
Belorusneft USD 6.5 million, Gometransneft Druzhba USD 3.5 million, 
Belarusian Lotteries USD 702,000, and Druzhba USD 690,000. 
 
 
Comment 
------- 
 
¶21. By most estimates the GOB now controls around 80% of economic 
activity.  Over the past few years the GOB has been increasing this 
share by renationalizing previously privatized companies while 
selling just a few poorly performing state companies.  In past 
years the GOB used the Golden Share mechanism to take over 
companies.  Now, perhaps as a result of international criticism of 
the Golden Share -- including in WTO negotiations, the GOB has 
found other means through which to nationalize the economy.  The 
state now owns more companies and greater shares of each of these 
companies than it did before, and the GOB is finding new ways to 
extract profits from these firms.  Lukashenko's recent move to take 
personal control over Belneftekhim, Belarus' largest conglomerate, 
is particularly indicative of the means to which the regime will go 
to find revenue. 
KROL