The longevity of Belarus’ president, Aleksander Lukashenka, owes as much to the structure of the country’s economy as it does to his sharp and often criticized leadership skills, which have resulted in a narrowing of the political space and suppression of opposition. Much of his legitimacy rests on an implicit social contract under which the government traditionally provided security from unemployment and inflation which ravaged other post-communist economies during the transition to free markets, in exchange for popular support. The government is able to provide such security largely through maintaining a Soviet style system, under which 75% of the economy and two thirds of the work force remains state controlled, and large subsidies from Russia, Belarus’ major trading partner. The developments of the last decade, however, including a currency crisis, hyperinflation, and a deep recession in the Russian market, have buffeted the economy, threatening to derail growth. Recognising this reality, Mr Lukashenka announced at the fifth Belarussian Congress in July 2016, that a major drive must be undertaken to attract foreign investment, encourage privatisation and restore economic dynamism.

Encouraging foreign capital to take advantage of potential privatisations or establish new operations will take more than highlighting Belarus’ low labour and production costs however. The taking of risks in a country with such prominent political and economic uncertainties requires an insurance industry with a certain technical and financial depth. Unfortunately, Belarus’ insurance sector lags noticeably behind its regional peers. Gross written premiums in 2015 amounted to USD 516mn, with a penetration rate of only 1% as compared to 3% in neighbouring Poland, and although measured in roubles growth was a respectable 13%, high rates of inflation meant in real terms this was wiped out. Moreover, the local industry is characterised by a clutch of small insurers with low levels of capacity and one large state owned entity, which controls over 50% of market premium, leaving few meaningful options to cover complex risks.

Within a freer market insurers could turn to international reinsurance to deepen capacity, but legislation in Belarus means the Belarussian National Reinsurance Organisation (Belarus Re) enjoys a monopoly on the export of risk, and the compulsory cession of 100% of premium surplus per risk, beyond 20% of an insurer’s equity. While this has allowed Belarus Re to enjoy a respectable underwriting profit in recent years it retains high exposure to credit and interest rate risk in the Belarussian industrial and financial sectors. A major loss or systemic crisis could threaten Belarus Re’s viability, forcing it to depend on capital injections from the central bank which in recent years has experienced a shortage of foreign currency.

There are growing indications that the government is prepared to consider insurance market reform as part of a larger discussion with the World Bank on economic liberalisation. In particular the establishment of the Antimonopoly Regulation and Trade Ministry in June 2016, has raised hopes for changes in the reinsurance industry which would help spread risk through the global markets, benefitting the overall economy through expanding local market competition and capacity. In Belarus, however, regime coherence and the maintenance of power often count for more than what orthodox consensus would say is sound economic policy. Mr Lukashenka will be aware that previous examples of reinsurance market liberalisation in the 1990s and 2000s resulted in the disappearance of national champions in other countries, such as the National Institute of Reinsurance in Argentina, and a subsequent reliance on major foreign international reinsurers. Given the suspected weakness of Belarus Re’s finances, serious questions would be raised about its ability to compete in an international market, and its failure would likely mean key sectors of the state controlled economy would need to be reinsured abroad. The prospect of moving the financial security of such assets outside of government control will doubtless activate Mr Lukashenka’s well developed political antennae, potentially leaving the proponents of reform frustrated.

This article first appeared in the magazine Emerging Europe - December 2016