Foreign Minister Sergei Martynov interview for the Euromoney, 1 April 2009

- We could start talking about the new Eastern Partnership of the European Union. As I understand, Belarus’ participation has been approved by the Council of the European Union. What do you think about benefits for Belarus from participation in this initiative?

- I would like to emphasize that we should talk not only about benefits for Belarus, but also benefits for the European Union, because participation of Belarus in the Eastern Partnership and, generally speaking, the relationship with the European Union is a matter of important mutual benefits. Belarus is an important country strategically located between the European Union and Russia, the two very important power centers in this part of the world. Belarus is a very meaningful player in areas from international security, I mean also nuclear security, conventional weapons control, to stability and well-being as a neighbour of the European Union, to issues related to transit, energy cooperation, fighting illegal migration, trafficking, etc. Actually, without Belarus the Eastern Partnership would not ‘click’.

So, the benefits are mutual. And here I would like to emphasize that Belarus is not asking for membership in the European Union. We are not even seeking a candidate’s status, so to say. But we are interested in a very meaningful cooperation with our neighbour European Union. And we are not ‘begging’ for particular financing from the European Union. Actually, you would see that the financing, which is supposed to be provided to the Eastern Partnership, is a rather modest financing. It is about USD 600 mln. for five years for six countries, which is almost infinitesimal. So, it is not the financing within the European Partnership programme that we are looking forward. We are looking, above all, to a non-discriminative relationship with the European Union, and no double standards. Other things we are going to work for ourselves. We have our hands, we have our brains, and we will work for the mutual benefits of Belarus and our neighbours.

Also, what is important about this Partnership, is to make sure that everybody in this part of the world are involved, including Russia, our principal partner and a very important factor as a power center in this part of the world. We are speaking of a very meaningful in-depth involvement of Russia in activities of the European Partnership, of course in the areas which are of interest to Russia.

- Does the Government of Belarus consider membership in the European Union as desirable and conceivable?

- I mentioned to you that this is not our goal in the forseeable future.

- In terms of Belarus’ standing in international security and nuclear security, and conventional weapons security, how is that relevant to the European Union and this Partnership? Could you explain it very briefly?

- In terms of nuclear security, you may remember that Belarus was one of the four heirs of the nuclear arsenal of the Soviet Union. We had nuclear weapons at our disposal, but we took a conscious decision to renounce their possession. Belarus was the first country among the heirs of the nuclear arsenal of the Soviet Union to take this decision and to accede to the Non-Proliferation Treaty as a non-nuclear power, non-nuclear state. This has not only to be appreciated, but also respected. So, we invested a lot into making sure that the global nuclear security is preserved.

In terms of conventional weapons security, Belarus, you may also know, had a huge conventional arms arsenal after the collapse of the Soviet Union, because we were the most western bulwark of the former Soviet Union. When we acceded, at the request of our European colleagues, to the Conventional Forces Reduction Treaty (CFE Treaty), we had to eliminate ten times more of the conventional weapons than countries like the United States and France. And we did it at our own cost. That was our huge contribution also to the security of Europe.

- In terms of energy cooperation, what can Belarus bring to the Partnership?

- You know, Belarus is a very important energy transit country. Although we don’t produce oil or gas ourselves, we carry about 30 percent of the Russian gas flowing to Western Europe, and we carry about 50 percent of the Russian oil which goes to countries of the European Union.

You might have observed in the course of the recent gas crisis that Belarus was the most reliable partner in this part of the world, because we not only continued with gas trafficking to Europe even at the time of the crisis, but we increased the trafficking to try to compensate for the problems created by the gas crisis down the pipes, so to say, in our neighbours in the European Union. And we also had a physical capacity, a technical capacity to do that, because we had invested in previous years a lot in modernization and upgrading of our pipeline system. This is a huge contribution, everybody appreciates it very much.

- Is that why you are able to continue supplies because of the modernization and upgrading of the transit system?

- This is one of important factors. If you didn’t have a system which works, the pipeline system would not carry gas or oil.

- What are other reasons for your being able to continue with the supply of gas?

- It was our political will, the respect of our obligations before Russia and before the European Union countries, and our technical capabilities, which all of them are extremely important factors.

- You said that without Belarus the Eastern Partnership would not ‘click’. Could you just explain a little bit about that, and why that is the case?

- If you would look at the membership of the European Union, then without Belarus it is a little bit more of the same, so to say. But involvement of Belarus in the Eastern Partnership gives the Eastern partnership a whole new dimension. It makes it new.

- You said everyone was going to be involved in the Eastern Partnership, including Russia. Is that something that has become official?

- In our view, it is official. You would know that countries who are invited to be partners as it were in this programme are six countries: Belarus, Ukraine, Moldova, Armenia, Azerbaijan and Georgia. But the decision of the EU summit, which approved the Eastern Partnership, also provided for participation of third countries in specific projects in the Partnership. We believe this is a very important provision, which gives the opportunities for the interested countries, outsider the Partnership programme, to participate. We are convinced that Russia has to be involved, because without Russia many projects would not make too much sense, regional projects, I mean.

- Could you just give an example?

- To give you an example, Belarus is proposing to consider within the Eastern Partnership programme, when it is intact, of course, it will be several weeks later, to consider a project of expansion of one of the international transportation corridors, I believe it is 9-B, which is a corridor going from Lithuania via Belarus to Ukraine. We propose that it should be extended to Kaliningrad, which is Russia, and then at the other end to the Black Sea area, which will make it possible to connect the Black Sea area and the Baltic Sea area. This is an important infrastructural project for the whole region. But without participation of Russia it would not make it as wholesome as it should be envisaged.

- Is this transportation corridor a pipeline or a road system?

- It is a railway and road system. Motorway and railroad.

- Why is it so important that it is extended to Kaliningrad?

- There is already a fairly developed system of east-west transportation routes, and here, by the way, Belarus is also a very important component of that, because we carry more than 100 mln. tons of cargoes in our territory, and 90 percent of these cargoes go either to the European Union from Russia or from Russia to the European Union. But from north to south there is much less infrastructure carrying goods. And that is important for the future to improve that.

- Would this corridor go, for example, from the Baltic countries, where exactly does the corridor begin and end?

- Kaliningrad, Klaipeda, Vilnius, Minsk, Kiev, and, probably, Odessa. But that is again a proposal of Belarus at this point. It has to be considered by others also.

- Is Belarus’ enthusiasm for this Partnership in any way caused by the global financial crisis and decreasing process and demand for the products that Belarus exports?

- In fact, these two things are not related, because the idea of the Eastern Partnership was initiated by the European Union countries about at least a year ago, when the crisis was not glooming yet. Belarus was also involved by the initiators of this idea in working on this concept. We contributed to it in our own fashion.

So, strictly speaking, they are not related. But, of course, as the Eastern Partnership will evolve under the conditions of crisis, it will have to take into account the new factor.

- I think the Eastern Partnership over the past year has become more expansive in terms of its aims. Has Belarus’ participation anything to do with the increasing gas prices from Russia that Belarus has to deal with?

- We do not see any direct connection between gas prices and our participation in the Eastern Partnership. Belarus has been consistently of the view that we have to have an excellent relationship on both eastern direction and western direction, i.e. with Russia and the European Union. So, this is a position of principle of Belarus, it is not a speculated position. And the Eastern Partnership, in our view, provides a framework for such a relationship.

- Is Belarus’ participation in the programme all dependent on the country not recognizing the independence of Abkhazia and South Ossetia?

- We are firmly of the view that issues related to the Caucasus and issues of participation in the Eastern Partnership for Belarus have no relationship whatsoever. And one should not be made dependent on the other.

- In terms of facility Belarus has secured from the IMF, could you explain why that facility was needed?

- The facility was needed because Belarus is an export-oriented country. We export about 65–70 percent of our GNP. On many positions which we manufacture we export almost 100 percent of the production. So, when the global economic crisis started to unfold, it did not affect us in the banking or financial areas very much, but it started to affect us through the lowered demand from our costumers for our goods.

To provide a cushion of security in balance of payments, we needed a facility like that. The crucial thing is that our customers had problems in paying for our goods. But we need to continue to carry on with our economy. Therefore, this security cushion from IMF was required, and it was negotiated.

- I think the biggest single export products sector is oil products and fertilizers. What is the main market for these products?

- In terms of oil products, they are produced by two huge oil refineries we have here, which were also modernized and have a very high degree of added value. Major markets for them would be outside Russia and CIS, because Russia has its own ample production of oil and oil products.

In terms of potassium, its markets are also outside of Russia, because Russian is along with Belarus one of the world key producers of potassium.

- When you are talking about the customers’ difficulty of paying and the limited demand from the customers for the products that Belarus produces, are these customers primarily in the EU, or in Europe?

- The pattern of our foreign trade is almost even between Russia and CIS, and the European Union. Our general trade turnover is the biggest with Russia. But if we would look at the exports component of that, exports from Belarus, then the key partner for us is the European Union. The EU accounts for 44 percent of our exports, Russia accounts for 32 percent of our exports. These are the figures for 2008.

In terms of the decline in the demand, I believe, at this point we are seeing more decline in the east than in the west. But both vectors are affected by that.

If we look at the statistics of our foreign trade for January and February, then we see that our exports are more affected to the east than to the west. Although in the west the sales are also down, as anywhere in the world.

If you would take CIS, including Russia, then within this CIS, including Russia, Russia would account for probably 95 percent of our exports. So, it is larger Russia, the rest of CIS is much less, except for Ukraine which is a very meaningful partner for us.

Then, what does not go to Russia and the EU, goes to countries like China, India, Vietnam, South Africa, Venezuela, etc. As an export-oriented economy, we have to work globally to place our goods in the markets.

- You said that as yet the crunch hasn’t affected Belarus in its banking and financial areas, but through low demand for the customers. Do you think that in the future the banking and financial areas will see an affect? What affect?

- The banking system of course will feel the affects of the crisis exactly for the reasons I explained, because there is a lower customers’ demand, and the traffic of liquidity within the economy suffers because of that. That affects banks, of course. But they were not affected and they will not be affected by our international positions, because our banking system was not involved in the things like derivatives of subprime.

- Do you think another devaluation of the ruble will be necessary in the near future or not?

- As far as I know, the National Bank has been stating that they do not have intentions of abrupt devaluation of the currency. They are the authority in this area, not the Ministry of Foreign Affairs.

- Attached to the IMF loan are various recommendations. How committed is Belarus to fulfilling those recommendations, given that in the past recommendations of IMF have not been fulfilled in Belarus?

- You may know that the previous important facility which was negotiated between Belarus and IMF was in 1995. At that point fairly soon after negotiating we decided we didn’t need it.

This time when we negotiated it, we believe we continue to need it, and we respect our commitments. We always respect our commitments.

- Moving to privatization programme, how welcome are foreign investors in the privatization programme? Are you primarily targeting foreign investors? Will foreign investors be able to gain 100 percent of privatized companies?

- First of all, you must understand that Belarus is a successful economy, of course crisis topic aside. Belarus’ GNP growth throughout the last 10 years was from 8 to 10 percent annually. It is a sharp and consistent growth. That had been made possible by a very important capital investment in the economy.

Even this year, for first two months of the year, even under the crisis conditions, the rate of the investment in the economy is 123 percent in Belarus compared to last year over 2007.

But we intend to involve as much foreign investment as possible in the economy, exactly because the economy is going very fast, and we need additional resources to keep it going.

Therefore, we make important steps to attract more foreign investment. In the course of the last year, we started to revamp our rules of the game in the economy. We did a lot in this area for the World Bank, for example, to recognize Belarus in 2008 as one of the top five fastest reforming economies in the world. We continue to work on that. Last year, we were elevated 30 positions up in the International World Bank index of conditions for doing business.

But that is not enough for us. We want to be within the top 30 positions. We continue with the economic reform. In January 2009, the government adopted an important reform plan consisting of 52 important reform elements. So, we will continue the reforming of the economy, also for involvement of foreign businesses. The privileges which are provided for foreign investors are very important. Any foreign investor can own 100 percent of an enterprise here. They can transfer their profits without any limitations. They can own banks in Belarus, 100 percent if they wish. They can have joint ventures, whatever.

Apart from that, we have important incentives for not only foreign investors, but for any investors, including national ones, in terms that we have six free economic zones which are export oriented in the country. Last year, among other liberalization measures, we adopted an important package of measures for promoting development of small and medium cities and towns, which are settlements with 50,000 population and less. The regime, which has been provided for those settlements, is actually the same as for free economic zones. Actually, about 80 percent of the territory of the country de fact has an investment regime as a free economic zone.

Also, what is very important for a foreign investor, in our view, is that Belarus is a country which is not only export oriented, but we are also a manufacturing economy. We are an economy with a very skilled labour and very talented engineer corps. We have a very impressive R&D complex.

And, finally, Belarus is a member of the customs union with Russia and Kazakhstan. So, an investor, who comes to Belarus, will on the one hand enjoy this important strategic position and convenient, comfortable geographic position of Belarus. The investor will also enjoy a direct access not only to the market of Belarus, which is 10 mln. people, but also to the combined market of the customs union, which will be about 200 mln. people.

- What precise benefits, or additional benefits are gained in the free economic zones?

- It is taxation, customs tariffs, and a number of other incentives. We can provide, if you wish, specific information on that.

- What are the main points of the reform plan that was announced in January?

- The reform plan primarily deals with ease and freedom of doing business in Belarus. The main points are, for example, the rules of registration of enterprises. Now in Belarus we have changed a permit system to a system of notification. So, you can open a new business in Belarus from today to tomorrow. We can file your papers today, and tomorrow you will start operating your business. Things like land ownership, ownership of enterprises have been already in place. So, we are making the economy much more liberal in terms of its openness and rules of the game, of playing the game. And we would also like to open up the economy to provide for a good balance between national investment and foreign investment, and a good balance in terms of flows of investment from different parts of the world.

Last year, in our view, investors responded very positively to the changes in the economy. Last year, the inward investment grew almost two times.

- Do you have an expectation of how much the economy in Belarus will grow this year?

- It is difficult to say, because the global economic situation in our markets is very much unpredictable. So far, the first two months of the year, our GNP grew by a little bit over 2 percent. That is the available statistics so far, which is not bad at all under the conditions.

- You said that the drop in terms of exports has been significant from the east. Could you give me some specific figures in terms of how much?

- That depends on country by country. You can take the statistics and see. Roughly speaking, exports on a country by country basis would be down to 80, 60, 50 percent compared to January last year. Exports to Russia, depending on specific positions, would be around 50–60 percent at this point (January-February this year compared to January-February last year).

Our industry is cautiously optimistic for the second quarter of the year. They have already a portfolio of orders and contracts which, they believe, will take them to a better position.

- Why would there be an improvement?

- Because of the gradually growing demand throughout our customers’ base. The spring is coming up. Agriculture has to go. There are anti-cyclical factors like food production etc., which will start going. Belarus is, for example, a very important producer of agricultural machinery, fertilizers, and foods also.

- Why, do you think, there has been this decrease in exports, especially to Russia? Is it simply because of the slowing economic growth in Russia or is it because of protectionist measures in Russia?

- It has been because of the much slower pace of economic growth in Russia. They have their own difficulties, which are reflected in their demand, of course.

But the government of Russia works now to alleviate that, and the governments of Belarus and Russia also have adopted a joint plan of anti-crisis measures to make sure that our trade is not affected to the extent possible. These measures are directed at continuing to provide each other full access to our respective markets. It is a plan which was adopted by the two governments at the end of January and approved by the presidents of the two countries.

- And it basically says the commitment not to introduce any more protection measures?

- It envisages specific measures to that effect. They are talking about certain lists and criteria which will be used to make sure that goods from Russia will continue to have access on a totally national basis to Belarus, and goods from Belarus will continue to have access to the Russian market on the national basis also. They will enjoy the same regime as national goods.

- So, it is basically continuation of the customs union?

- The customs union is there. We have 95 percent of harmonization of tariffs with Russia. So, it is about not using measures of protectionism in the crisis period between the two countries.

- How much is the slowing of foreign capital flows into Belarus? How much was that a reason to apply for the IMF loan?

- As I explained to you already, the expectation of the slackening demand for our goods because of the liquidity problems of our customers was the reason for that, and that continues to be a factor.

- So, it has nothing to do with slowing of foreign capital flows into Belarus?

- These two are related. If our customers buy our goods less than before, then there is a slowing of the capital flows.

- How much of a problem would cause Belarus the fact that the external debt were not be available anymore?

- At this point it continues to be available. We continue to work with our partners — Russia, China, European countries, World Bank, EBRD — on this issue to make sure that the economy is going.

- Is the gas price increases and the weakening demand from Russia weakening Belarus’ relationship with Russia at all?

- The relationship with Russia is now weakened by those factors, even though these are the factors which are important in the economy. Our relationship with Russia is very in-depth and comprehensive. We have a union between Belarus and Russia. We call it a Union State of Belarus and Russia, where the two countries being independent entities with their own governments have an in-depth relationship from areas like economies to areas like equal rights of citizens in terms of taxation, access to health services, access to education, free settlement, free movement, etc. So, it is a big comprehensive relationship.

Of course, the economic component of that relationship is very important. Our trade with Russia in 2008 was USD 35 bln. In 2007, it was 20–30 percent less.

- The issue of currency union with Russia, is that still on the table?

- The currency union with Russia has been worked on with Russia for a number of years. We are at a point, where there is a common understanding between us and Russia that introduction of a single currency for both countries is the goal, which has to be down the road, when we have a more in-depth economic integration. It should be like a roof on a house, which we continue to build in terms of economic integration.

What we are discussing now with Russia is joint measures to increase and improve use of the Russian ruble for payments in our mutual trade. Historically it has been formed the way that Belarus and Russia use a lot of dollars and euros in their trade between themselves. So, there is now an effort between the two governments and banking systems to try to use as much as possible the Russian ruble and the Belarusian ruble to serve our bilateral trade. Of course, we would welcome the strengthening of the Russian ruble as a regional currency, which will serve the trade flows in the region.

- As far as I understand, there has been some move away as part of the IMF reforms in the efforts to stabilize the Belarusian ruble, a move away from the currency peg with the ruble to a basket that is more comprised of euros and dollars. Will that damage the possibilities for an eventual currency union?

- We do not believe it will damage the prospects of the currency union whatsoever, because pegging to the three currencies is a measure, which gives stability also to the Belarusian currency. And you cannot approach a currency union with a weak currency. This would be a wrong strategy.

- Going back to the Eastern Partnership. The EU said that this includes various measures such as free trade agreements, programmes to enhance EU partners’ administrative capacities, regulatory approximation. Are these all things that Belarus is eager to work to?

- These are areas which are of interest to us, because the European Union is our very important trade partner. Therefore, trade regimes, prospects of a free trade zone are of much interest to us. We are also very much interested in customs facilitation, visa facilitation. We cannot see as acceptable the situation where the current visa regime for Belarusians is the harshest on the side of the European Union in Europe. There are also very important infrastructural projects, which I have already referred to you, including energy transit, energy transportation, gas storages, energy efficiency facilities, etc.

- When do you think would be the earliest day conceivable that there could be a free trade zone between Belarus and the European Union?

- We do not have a timetable for that. It is too early to say. We have to work for that, both in Belarus and in the European Union.

- Do you think this closer partnership with the European Union will cause a reassessment of the importance of your external relations, primarily economic, with the other close partners, such as Venezuela, China, and Russia?

- No, we don’t think so. Moreover, we are of a very firm view that there is no need to make a choice between our relationship with Russia and other partners and our relationship with the European Union. We are not going to make such a choice. We strongly believe in the need to develop as tight and as productive relationship with both. We will continue to do so.

Belarus has what we call a ‘multi-vectoral foreign policy’, which means that we have to have an excellent relationship with all our major partners. When we say ‘major partners’, we have, of course, Russia on the one side to the east, and the European Union to the west, and key countries in what you might call ‘South’, like China, India, Venezuela, Vietnam, South Africa, and other countries.

- What about the US?

- The US is, of course, a more than important center of power in the world, including the economic power. We work to improve our relationship with the United States. We are looking forward to a joint effort with the new US administration to provide for a more healthy relationship between our two countries than we used to have before.

If you were to observe the US-Belarus relationship, you might have seen that in the second half of the year 2008 there was a much better atmosphere in the relationship between Belarus and the United States than before.

- What particular concrete factors showed that better atmosphere?

- For example, in the first half of the year 2008 the United States introduced economic sanctions against certain Belarusian industries. By September they had relaxed those sanctions. That is a clear indication of the changes I have in mind.

- In terms of the economic relations with countries like Venezuela or Iran, and Cuba, for example, how important are those economic relations to Belarus? Are they primarily symbolic, or do they have a more concrete tangible content?

- They are not symbolic, they are concrete and tangible. Of course, if you compare volumes of trade, then our volumes of trade with Russia and the European Union will be much-much larger than our volumes of trade with Iran or Venezuela. But, for example, energy security is something which is very important to this country. We were working with Venezuela and Iran to start extracting oil in those countries. We already are extracting oil in Venezuela. We are almost there with Iran. For us it is of strategic importance to have the capacity, the opportunity to diversify the sources and routes of energy supply to our country. Therefore, this relationship is very meaningful and important.

Also, we build important industrial facilities in Venezuela. Belarus is building in Venezuela a plant to produce trucks, another plant to produce tractors. You may know that Belarus accounts for 6 percent of the world output of tractors. We also build a plant in Venezuela to produce huge dump trucks with the lifting capacity of several hundred tons. Belarus is also one of the three key players in the world in this market. We account for about 30 percent of the world market of dump trucks.

- Are there any similar programmes with Iran?

- We are also working with Iran to have a tractor production and truck production there. We also have a project here in Belarus of producing Iranian cars.

- How much do these sanctions from the EU and the US damage the Belarusian economy?

- In fact, we may say that the sanctions did not do a serious damage to our economy, because we took our measures of precaution. We have re-oriented the affected trade flows to other countries. But that does not mean to say that economic sanctions is not an instrument which could be disregarded by us. We believe it is an instrument that a) is not effective, b) it is outdated, and c) they should not be applicable at all.

- Why is it outdated?

- It is outdated because in the 21th century in the globally interdependent economy you cannot solve problems by sanctions, economic sanctions, in particular. It does not work.

- In terms of relaxation of US sanctions, how exactly have these sanctions been relaxed?

- The sanctions were introduced by the US towards Belneftekhim (oil and oil processing concern) and its enterprises. In September, they suspended their sanctions against two of the key enterprises of this concern.

- Do you think the interest of foreign investors, for example, in privatization has decreased because of the crisis?

- It is too early to say. The statistics of the first two months in terms of foreign investment is weaker than a year ago. The investors, which is natural, are at this point a little bit more cautious. But they are cautious throughout the world, not only in Belarus. We are looking forward to bottoming out everywhere, and then a new enthusiasm of investors throughout the world in Belarus, and we try to get well prepared for that.

- In terms of privatization of one of the biggest banks here, what is the latest on that?

- The banking sector in Belarus is one of the most open in terms of conditions and facilities provided for foreign capital. In Belarus, you can have a 100 percent foreign owned bank or banks. We already have 100 percent foreign owned banks. You can have part of a bank capital, and I am going to provide you some indicative figures: out of about 30 major banks in Belarus about 1/3 has the capital which is controlled by foreign investors up to 100 percent. Out of these 30 banks, 25 or 26 have foreign capital. And a foreign bank in Belarus has access also to working with physical persons. Not in every country you have a foreign bank allowed to have accounts of physical persons. And here foreign banks are allowed to do that, to attract the savings of Belarusian nationals. There is a very express interest of foreign banks in Belarus. For example, we have Western European banks working here for many years, like Raiffeisen Bank. We are quiet happy with what they do in Belarus. We have banks from the Middle East and Gulf area, and other countries also coming to Belarus.