Entering the Belarusian Energy Market. Positive Factors and Impediments for Swiss Investors


Seminar Paper, 2021

26 Pages, Grade: 5.9


Excerpt

Table of Contents

Abstract

1 Introductory section
1.1 Initial situation
1.2 Phenomenon
1.3 Relevancy
1.4 Formulation of the question - scientific issue
1.5 Objective target and expected results
1.6 Demarcations
1.7 Structure of the term paper

2 Theory section
2.1 Facts and figures of Belarus
2.1.1 Starting a business in Belarus
2.1.2 Free economic zones in Belarus
2.1.3 Belarus in economic numbers
2.2 Relationship Belarus – Switzerland
2.2.1 Hofstede’s 6 Dimension Model
2.2.2 Bilateral relations Switzerland – Belarus
2.2.3 Swiss flagship in investing into Belarus: StadlerRail
2.3 Energy business in Belarus
2.3.1 Current state of the energy system
2.3.2 Growth potential
2.4 Political and other issues in Belarus
2.4.1 Political crisis in the aftermath of the presidential election
2.4.2 Concerns on economic growth
2.5 Conclusion of the theory section

3 Evaluation section
3.1 Evaluation of economic and political state of Belarus
3.1.1 Economy of Belarus
3.1.2 Belarusian – Swiss relationship
3.1.3 Energy business growth potential
3.1.4 Entering Belarusian energy market
3.2 Discussion
3.2.1 Economic Belarus
3.2.2 Belarusian – Swiss future
3.2.3 Belarusian Energy
3.2.4 Setting up a legal entity in Belarus
3.3 Results of the evaluation section

4 Conclusion
4.1 Closing remarks
4.2 Recommended actions
4.3 Outlook

Bibliography

Directory of representations

Directory of figures

Directory of tables

Attachment

Factors of entering Belarusian energy market in subclassified and alphabetic order

Abstract

Many Western European energy companies have been entering the CESEE (Central Europe, Southeastern Europe) markets in the late 1990ies or early 2000s. Still up to today, one country is still a bit left out of the entire region in entering into energy business – Belarus. In this document the author tries to narrow down the positive factors and impediments entering the Belarusian energy market from a perspective of a Swiss energy investors eye. It is a glimpse of what investors can expect, what they need to look for and what to watch out for, or just to get an overview of how the Belarusian markets (not only necessary for the energy market alone) are behaving. For more than 20 years Belarus has shown a stable GDP growth, which seemed to lower the last two years. Though, the set-up of free economic zones in the bigger cities of Belarus with certain tax relieves and other perks could be very attractive to foreign investors seeking an investment in Belarus. Recently, and officially due to COVID-19, certain perks (e.g. tax reliefs) have been seen diminishing. These changes sign an uncertainty of structures of the governmental laws and rules for foreign investors. Additionally, Belarus is still a net importer of energy and is seeking therefore foreign investors getting into the Belarusian energy market. Especially, the green energy part is missing in Belarus, therefore the state of Belarus is looking for Renewable Energy Source (RES) investments and would like to attract foreign investors with guaranteed purchasing electricity perks. Additionally, since the presidential election in August of 2020 tensions from the government of Belarus against its own civil society have been increasing, which plays further an important role for the future political and economic stability in the country of Belarus, especially in attracting foreign investors.

1 Introductory section

1.1 Initial situation

In terms of an expansion of their Central, Eastern, and Southeastern Europe (CESEE) business, energy companies in Switzerland like Alpiq Ltd. may get business introduced in the Republic of Belarus. With enough business within the Republic of Belarus it may lead to opening a branch, a representative or in other words a legal entity. Rules and regulations are set by several state driven agencies in Belarus (e.g. National Agency of Investment and Privatization of Belarus), therefore setting up a legal entity in Belarus comes also with challenges for any energy company outside of Belarus. Notwithstanding, to attract foreign companies to do business in the Republic of Belarus stimulus packages are also been drawn in form of certain tax reliefs in specific free economic zones in Belarus. Additionally, the current political instable situation may show potential impediments on a successful implementation of a legal entity in the Republic of Belarus. The aim of this term paper therefore is to structure this information and to find the positive aspects as much as impediments on setting up a legal entity in Belarus.

1.2 Phenomenon

Observations are made that Energy companies in Switzerland are playing a role in the CESEE markets (Alpiq, 2015). Nevertheless, not many Swiss Energy companies do have a representation or a branch in the Republic of Belarus. As Belarus could be potentially a connection point between Russia and the European Union, having a branch or representation in Belarus might be an interesting opportunity for Energy companies not only in Switzerland. On the other hand, Belarus with the presidential election in August 2020 and the upraise of the people coupled with the current COVID-19 crisis may have a negative impact for a smooth implementation of a legal entity set-up.

1.3 Relevancy

The Republic of Belarus is seeking investment in the field of Renewable Energy Sources (RES) and is therefore looking for investors outside of Belarus. This specific field might be an interesting opportunity for Swiss Energy companies getting a foot into Belarus with a high development potential. The National Agency of Investment And Privatization (2020, p. 17) is calling it a significant resource potential. Under Renewable Energy Sources Belarus understands a growth potential in the field of wind energy resources, hydropower, biogas and biomass, wood fuel (wood waste) and solar power.

1.4 Formulation of the question - scientific issue

In this term paper answers to setting up a legal entity in the Republic of Belarus in the context of positive factors and impediments are to be explored and found. Therefore, the underlying formulation of the question is set as following:

Which factors help an energy related Swiss corporation setting up a legal entity in the Republic of Belarus and which impediments are to be expected?

1.5 Objective target and expected results

The following results are expected to be delivered with this term paper:

- Identification and illustration of positive factors as well as impediments of setting up a legal entity in the Republic of Belarus for Swiss Energy corporations.
- Derivation and release of recommended actions for setting up a legal entity in the Republic of Belarus.

1.6 Demarcations

The following demarcations are set in the underlying term paper:

- The relation of countries of this term paper is set to be Switzerland and Belarus only.
- This term paper focuses only on Energy corporations. Bigger Swiss companies entering or entered the Belarus market not being Energy corporations might be referred as an example or side note and shall be exceptions.
- Political, economic and even social events may be touched in this term paper, nevertheless asymmetric information topics and foreign currency exchange rate issues will be not included in this term paper.

1.7 Structure of the term paper

The underlying term paper is a literature-based work, which tries to take the newest literature found about economical facts and figures, energy in Belarus and the relation between Belarus and Switzerland into account. In the theory part of this paper facts and figures of Belarus are being described followed by the relationship between Belarus and Switzerland to conclude how the two countries doing business with each other in the current state. Common casualties as well as differences are shown with underlying material. The theory part ends with an overview of the current state of political issues in the Republic of Belarus. The evaluation part points out the different positive and negative aspects of setting up a legal entity in Belarus. The term paper is rounded up with a conclusion section, in which recommended actions are being presented as well as closing remarks and an outlook is given.

2 Theory section

2.1 Facts and figures of Belarus

2.1.1 Starting a business in Belarus

For starting a business in Belarus three different legal forms of creating a company can be chosen. Closed joint-stock company (public or private) with a minimum of two and a maximum of 50 shareholders and a minimum capital requirement of USD 1’500, where an open joint-stock company requires a minimum of two shareholders without maximum and a minimum capital requirement of USD 6’000 is one way of a legal entity form. A limited liability company has set a minimum of two and a maximum of 50 founders and has no minimum nor maximum capital requirement, as well as limited liability to the amount contributed. A private unitary company has no minimum number of partners and no capital requirements at all, though has full liability for its obligations (Export Entreprises, 2020). According to the World Bank Group (2020a) in their ‘2020 Doing Business’ ranking, Belarus gets an overall rank of 49th place, where in sub-group of this data report ‘Starting a business’ Belarus gets a rank on 30th place. This is mainly due to the time of starting a business with only nine days (The World Bank Group, 2020b) and the roughly cheap cost paired with a low paid-in minimum capital requirement. Document requirement processes are now digitized and are possible to be approved within a day (Republic of Belarus, 2020). Another point to mention about doing business in Belarus is the slightly lower corruption in comparison to other CESEE countries (Transparency.org, 2019b). Nevertheless, the Corruption Perception Index for Belarus show a low 45/100 points, which is ranking 66th out of 180 countries in the worldwide ranking (Transparency.org, 2019a).

2.1.2 Free economic zones in Belarus

Belarus offers six free economic zones for organizing your legal entity, which are close to urban centers in Brest, Gomel-Raton, Minsk, Vitebsk, Mogilev and Grodno (Republic of Belarus, 2020). In the capital Minsk the free economic zones include perks as for example no profit taxes, no real estate taxes, no land taxes and no customs duties (Free economic zone Minsk, n.d.). Other zones or parks come with similar perks, e.g. Hi-Tech Park (IT related area) or Great Stone Industrial Park (Republic of Belarus, 2020).

2.1.3 Belarus in economic numbers

Several other numbers to mention are Standard & Poor’s grants Belarus a stable outlook with a B grading. In the Transparency International Corruption Perceptions Index Belarus ranks out of 180 countries on 66th place, whereby the Global Innovation Index (GII) sets Belarus on 72nd rank. GII also ranks Belarus on 6th worldwide in the ‘Mobile app creation’ (National Agency of Investment And Privatization, 2020, p. 9).

The GDP of Belarus according The World Bank Group (2020b) is set at USD 60.03 billion and growths annually by 3.1 %. The inflation is relatively high with 12.1 % as of 2018.

Editor’s note: This image was removed due to copyright reasons

Figure 1: Country Profile – Belarus. Source: The World Bank Group, 2020b.

In a paper about convergence and growth in CESEE countries (Eftimoski, 2019, p. 874), Belarus (non-EU CESEE country with a low level of real GDP per capita in 1997) recorded one of the highest growth rates in CESEE countries.

Abbildung in dieser Leseprobe nicht enthalten

Figure 2: Convergence and growth in CESEE. Source: Eftimoski, 2019, p. 874

According to the Swiss Embassy in Minsk (2020, p. 8) the Republic of Belarus has geographically an advantage as it is situated between Russia and the European Union. For investors a better access to the Russian market might be given and well educated and hardworking employees, low salary (average salary roughly around CHF 500 per month), a stable social situation and in comparison, little corruption is backing an advantage for potential investors.

In the same report called Economical Report of Belarus (free translation from French) the Swiss Consulate in Minsk (2020, p. 1) figured that the economic growth has been decreasing within the year 2019 as the GDP only grew + 1.2%. One of the reasons seemed to be the increased export tax from Russia of 5% for the import of crude oil. Another reason is the high number of state-owned enterprises (SOE) in Belarus. The productivity of the private sector in Belarus shows a 40% higher rate than SOEs (Swiss Consulate in Minsk, 2020, p. 2). To be close to the responsible persons in the state of Belarus is key for private businessmen as this advantage is not to be underestimated (Swiss Consulate in Minsk, 2020, p. 4).

2.2 Relationship Belarus – Switzerland

2.2.1 Hofstede’s 6 Dimension Model

To start with a comparison between Belarus and Switzerland a look on the Hofstede’s 6 Dimension Model gives an insight in the cultural differences between the two countries. On Power Distance Belarus is a country where the society accept a hierarchical order, where power holders’ profit more than less powerful people in the same society, whereby the Swiss love to be independent and leaders shall empower the people (Hofstede Insights, n.d.).

Editor’s note: This image was removed due to copyright reasons

Figure 3: Country Comparison Belarus – Switzerland. Source: Hofstede Insights, n.d.

On Individualism Belarus scores less than Switzerland, meaning that Belarus society aims to live in a collectivist society, and they look after each other, where the Swiss society are the total counterpart and are expected to take care of themselves (Individualist society). Masculinity underlines that, as Belarusian are a feminist society and value solidarity and value equality more than the Swiss. The Swiss society is masculine which equals a competitive character as success is defined to be a winner. In the Uncertainty Avoidance Belarus scores highly, which shows character of the society of not tolerating unconventional ideas that easily. Strict rules and laws are highly linked with this score. Switzerland scores in the medium part, stating they are not very much threatened by unknown situations but totally let things happen is also not to the convenience of Swiss people. The only dimension which shows almost an equal result is to be observed with the Long Term Orientation, which states that both the Belarusian and Swiss society tends to be highly pragmatic. On the last one a bigger difference is to be observed again. Indulgence in Belarus society is scored with 15, which indicates a strong control of their desires and impulses, which tends to a cynical behavior. In contrast, Switzerland has a high score indicating letting desires and impulses go and enjoy life. This rather tends to optimism (Hofstede Insights, n.d.).

2.2.2 Bilateral relations Switzerland – Belarus

The bilateral trade volume between Belarus and Switzerland averaged the last six years between 116 and 220 Mio CHF (Swiss Embassy in Minsk, 2020, p. 7). Foreign direct investment (FDI) into Belarus sums up to 10’007 Mio USD as of end of 2019 (Belstat, 2020, p. 66 – free translated into English), where Switzerland has investment of roughly 76.4 Mio USD and equals to 0.76% of overall direct investments into Belarus. Those figures according to Swiss Embassy in Minsk (2020, p. 12) shows Switzerland ranked 13th of main direct investors into Belarus. The Federal Department of Foreign Affairs (FDFA) in Switzerland reports that the trade potential remains underexploited (FDFA, 2020). Though FDFA (2020) report that around 30 companies with roots to Switzerland are represented in the Republic of Belarus. The most important one is StadlerRail with over 1’500 employees in Belarus.

In early 2019 talks in press which are free translated into English (Hirschi, 2019) were indicating that the Swiss Consulate in Minsk may get a proper embassy. Indeed, the opening of the Swiss Embassy in the Belarusian capital Minsk was taking place on 13th February 2020. In early 2020 press releases were mentioning that the relations between Switzerland and Belarus have gained momentum since lifting sanction against Belarus in 2016 (Swissinfo, 2020). As of December 2020, the State Secretariat for Economic Affairs (SECO) has been again extending its sanctions (first sanction in October 2020) against Belarus due to ongoing tensions between the government of Belarus and its civil society. The SECO is urging Belarus to follow international human rights standards (SECO, 2020).

2.2.3 Swiss flagship in investing into Belarus: StadlerRail

As mentioned by the FDFA (2020) StadlerRail (railway producer) is one important Swiss employer in Belarus. This is also recognized by the state of Belarus (Republic of Belarus, n.d.) as they mention StadlerRail as a successful project on their webpage. StadlerRail already started to win a tender offer in 2010 in Belarus and delivered 16 trains (Speiser, 2014 – free translation into English). Additional orders were following and StadlerRail as mentioned by the FDFA (2020) employs currently over 1’500 workers in the Republic of Belarus. According to a news article which is free translated into English in the Neue Zürcher Zeitung (Feldges, 2020) railways out of Belarus are not only delivered to CIS states like Russia, Georgia and Azerbaijan but also orders are being received from Bolivia, Hungary and Norway. This shows that an investment in Belarus can become a successful story.

Additionally, the Belarusian-Swiss Business Council, which comprises businesspeople and associations, held meeting since 2013. The lead of the chairperson is taken of StadlerRail’s board of directors (FDFA, 2020).

2.3 Energy business in Belarus

2.3.1 Current state of the energy system

Belarus had a demand of 27 Million tonnes of oil equivalent (Mtoe) in the year 2018, where only 15% of the demand side could be delivered by own energy production in the country. This makes Belarus one of the least energy self-sufficient countries in the world. Therefore, most of the remaining part needs to be imported. In 2018 close to 97% or 39 terrawatt hours (TWH) of all electricity generation came from natural gas. That again makes Belarus one of the biggest importers of natural gas worldwide. Additionally, Belarus imports 17 Mtoe of crude oil, which mainly is imported from Russia. Though as Belarus is a big oil refiner, this is mostly be re-exported to countries like Ukraine (IEA, 2020). The price of Natural Gas coming from Russia has increased again from USD 127 in 2020 to USD 128.5 in 2021 per thousand cubic meters. This is to be put into relations with the price the European countries pay: USD 258 per thousand cubic meters (Tut, 2021b).

36% of total consumption of energy is taken by the industry sector (7.3 Mtoe). The industry sector also is the biggest consumer of electricity and heat. With 27% (5.2 Mtoe) the residential sector is followed second biggest energy consumer. The largest increase of energy consumption from the year 2000 to the year 2018 comes from the transport sector with an increase of 80%. The transport sector is also the largest consumer of oil products in the country (IEA, 2020).

In 2020 one nuclear power station has been started and another one is planned to go on the net in July 2021. Both have a capacity of 1’200 megawatt (MW) and will decrease in percentage the overall electricity generation coming from natural gas only (IEA, 2020).

Renewable Energy Sources (RES) are quite scarce in Belarus. Only 6% is accounted for in Belarus’ energy mix in 2018. In the electricity generation it was accounted for only with 2% (IEA, 2020). Belarus introduced a new energy security concept in 2015 (Government of the Republic of Belarus, 2015 – free translated into English) and plans to increase its share of RES to 8% in 2030 and to 9% in 2035 (National Agency of Investment And Privatization, 2020, p. 17).

Editor’s note: This image was removed due to copyright reasons

Figure 4: Energy sector structure of Belarus, Source: IEA, 2020

The energy sector structure in Belarus is state-owned and is basically a state monopoly and includes hierarchically defined state-owned companies. The total installed electricity capacity of Belarus is 10’069 MW, whereby state-owned BelEnergo manages 89% or 8’938 MW. Recently, independent producers have been able to get into the market with small installations in the RES market (Novikau, 2019, p. 3).

In the paper by Novikau (2019, p. 3) the current cost of generation of electricity of BelEnergo is USD 0.071 per kilowatt hours (kWh). The electricity prices in Belarus, regulated by the government, is USD 0.08 per kWh for households and USD 0.11 per kWh for the industry.

2.3.2 Growth potential

According to the National Agency of Investment And Privatization of Belarus (2020, p. 17) the state of Belarus sees a high resource potential in Renewable Energy Sources (RES). That is investing in wind power, hydroelectricity, biogas and biomass, solar installation and wood fuel. The current use of RES in Belarus is low and the annual power generation is at 2’908.61 kWh per year, whereby wind power generation is topping the electricity generation with a total of 709.62 kWh per year and 125 installations. Solar energy is generating the lowest electricity outcome of the RES with a total of 413.30 kWh per year. Hydro energy has the lowest numbers of installation with 35 power plants only.

Abbildung in dieser Leseprobe nicht enthalten

Figure 5: Current use of RES in Belarus, Source: National Agency of Investment And Privatization of Belarus (2020, p. 18)

The paper suggests that for wind farms, there is a potential of 1’840 places in 22 different Belarusian regions for installing wind farms which have all in all a production potential of 1’600 MW. Further for hydropower there is potential found in the river basins of Dnepr, Neman and Western Dvina. Municipial solid waste, agricultural waste or wastewater treatment facilities are ready available and can be materialized with large economic potential into biogas or biomass RES businesses. Solar radiation is similar to countries like Germany or Poland and can be seen as underdeveloped in Belarus. As Belarus has big land filled of forest, wood waste and logging can be used to materialize into a succesful RES business (National Agency of Investment And Privatization of Belarus, 2020, p. 17).

This high resource potential is backed by the state of Belarus who purchases RES produced electricity at preferential tariffs (National Agency of Investment And Privatization of Belarus, 2020, p. 18). Additionally, governmental support is given in the form of state policies about RES investments, and legal guarantees which are guaranteed connection to the state supply network as well as guaranteed purchase of all produced RES electricity tariffs (National Agency of Investment And Privatization of Belarus, 2020, p. 19).

Feldges (2020) writes in his news article in the NZZ – Neue Zürcher Zeitung which is free translated into English about the modernisation need in Belarus. According to Michael Kühn, who advises Swiss companies about expansions to CIS states, energy supply and agriculture in Belarus have both an immense need of modernisation.

[...]

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Details

Title
Entering the Belarusian Energy Market. Positive Factors and Impediments for Swiss Investors
College
Kalaidos University of Applied Sciences Switzerland  (IIM)
Course
CAS International Management
Grade
5.9
Author
Year
2021
Pages
26
Catalog Number
V1044740
ISBN (eBook)
9783346465962
ISBN (Book)
9783346465979
Language
English
Keywords
Energy, Belarus, Switzerland, energy company, RES, Renewable Energy Sources, Investment, Investment in Belarus
Quote paper
Fabian Boner (Author), 2021, Entering the Belarusian Energy Market. Positive Factors and Impediments for Swiss Investors, Munich, GRIN Verlag, https://www.grin.com/document/1044740

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