Will Russia buy up Belarus' defence and oil industries in 2014?

At a press conference on 11 June, Russian ambassador to Belarus, Aleksandr Surikov, announced that Russia had agreed with Belarus to acquire three Belarusian military and high-tech large-scale industrial complexes.

Belarus has always been very reluctant to sell of its state property for various reasons, which is not limited to just collecting rent for the elite, but also maintaining political control over their employees.

However, three groups of assets seem to be up for sale: companies that work with the Russian military industry, industries dependent on Russian energy resources and many barely profitable companies from Belarus' regions, which create a burden on the budget but have helped to sustain regional economies and social stability.

While the first two appear to be bargaining trips in Belarus' dealings with Russia, the latter is unable to attract foreign investors as their goods are intended primarily for a domestic market and barely economically viable as is.


Military and High-Tech Industries

The Belarusian regime has always approached privatisation with a great deal of caution. Lukashenka and other high-ranking officials constantly repeat ad nauseam the phrase “we are not going to sell to anyone that which was created by the hard work of many generations of Belarusians”.

This patriotic rhetoric, however, cannot be taken at face value – the regime naturally wants to retain control over the public sector in order to prevent any kind of social discontent or anti-government activity from flaring up. Nevertheless, it is now apparent that it will finally have to part with several groups of assets, which create serious problems for the Belarusian economy.

In 2007 and 2011 Belarus had to sell to Russia one of its major assets - the Beltransgaz company, which controlled the transit of gas from Russia to Europe in Belarus. The deal ensured that Belarus would receive discounted gas prices for many years to come.

This year the first group of enterprises on the auction block, and No1 candidates for sale, are a handful of military and high-tech industrial complexes whose primary customers are found in Russia. As Russian ambassador in Belarus Aleksandr Surikov said on 11 June “We have reached a basic agreement on Integral, Peleng and MZKT. The last international evaluation of MZKT assets will be completed by 31 July”.

Integral is closely connected with the Russian market and requires substantial investment after years of decline and stagnation. “The Russians want Integral incorporated in their military-industrial complex, which will ensure a maximum of output for the enterprise”, Head of State Property Committee​ Heorhi​ Kuzniacoŭ said.

Another high-tech project of particular interest to the Russia is Peleng. Belarus negotiated the sale of 25% of its shares of the company to Roskosmos, a Russian space industry corporation. The Peleng company produces optoelectronic space equipment and conducts research in the same field.

The Minsk Wheel Tractors Factory (MZKT) may also potentially join the Russian state holding Russian Technologies. It will produce chassis and tractors for the Russia's army and its oil industry. Currently, MZKT is one of the main manufacturers of tractors for Russian army.


Oil and Gas Dependent Enterprises

The second group of industries up for sale are those which are heavily dependent on Russian oil and gas. It is starting to look like the Hrodna Azot and Mazyr refineries are likely to be sold off as well.

In May Belarus announced that it would auction off 25% of its Hrodna Azot shares, the largest enterprise in the Hrodna region, which produces chemicals and fertilisers.

The enterprise is Belarus' largest consumer of natural gas, therefore selling it to Russia is, to a degree, a logical step.

However, the conditions for its sale are rather unattractive for the business community. For example, part of the deal states that workers’ conditions cannot deteriorate over the first 5 years of the deal. Moreover, investors must provide Belarus' agricultural sector with the necessary amount of fertilisers and build a new production complex that is estimated to cost $1.2bn.

Last but not least, investors must guarantee a steady gas supply for 10 years to ensure the full production capacity of Azot is maintained throughout. Nevertheless, Russia has shown continued interest in the company, with Gazprom, Evrokhim and Rosneft being the main candidates for its purchase.

Meanwhile, according to the Russian ambassador in Belarus, Russia so far has no interest in buying up a large portion of Mazyr refinery's shares due to the unfavourable terms that would be associated with any deal. As part of the conditions for selling its shares, Belarus is demanding that any new owner retains the current number of workers and increases the refinery's production capacity.


The Government Will Get Rid of its Bad Assets?

Belarus is ready to get serious about privatisation, but at the moment it only wants to sell off low-profit companies that are vital for sustaining local regional economies.

As a study of the 2011-2013 pilot privatisation project conducted by Belarus Public Policy Fund​ shows, the government is trying to sell off mainly companies with low profit margins that are full of personnel that are years, if not decades, away from retirement. In doing so, it is not seeking to rake in profits, but rather is trying to maintain local employement levels in the regions where these factories are often the core of their respective local economies.

Simply put, the state tries to shift the responsibility for maintaining social welfare from the state budget to the private sector. Few would then question potential investors' reluctance to jump on these 'opportunities'.

According to Civitta consulting expert Daniel Krutzinna, the international business community does not believe that Belarus will implement any extensive privatisation anytime in the near future. It will rather focus on a number of deals with Russian companies and on the sale of unprofitable companies to local investors.

As the three groups of companies up for sale will demonstrate, Belarus' privatisation is set up so that it is inherently favourable to Russian interests. Very likely, Belarusian industries will be used for leverage in the Russia-Belarus bargaining within the Eurasian Economic Union, where Belarus seeks to get the most favourable gas and oil trade prices it possible can.

While Russia is about to acquire several important military-related industries, it is hard at work negotiating on other industries, trying to make the terms of their sale much less 'social'.

With smaller, but socially important enterprises, especially in the regions, which do not interest foreigners, Belarus will face a bigger dilemma – finding a local business that will agree to become partners in supporting the state’s social contract.