20 April 2018 Belt and Road Initiative: The Role of Belarus Belarus, a landlocked nation in Eastern Europe bordering Russia, Latvia, Lithuania, Poland and Ukraine, has caught rising interest among Hong Kong’s business community in recent years under the Belt and Road Initiative (BRI). Going hand in hand with its role as a transport gateway linking China with the EU and CIS countries, it is seen as an increasingly open investment destination for manufacturing and high-tech developments. An Important Transport Node on the Silk Road Economic Belt Strategically located on the new Eurasia land bridge, eight rail container routes on the China-Western Europe trade pass through Belarus, enabling cargo to move much faster between China and Germany via Kazakhstan, Russia, Belarus and Poland, taking about 17 days. In comparison, sea freight takes around three weeks longer, although the freight cost of travelling by rail is about 60-70% higher. As shippers have become more receptive to the expanding rail container routes, more than 3,000 Sino-European trains used Belarus’s rail network in 2017. Belarus is a bridge between Europe (CIS and EU) and Asia. Source: Great Stone Industrial Park Two pan-European Corridors – II (Berlin-Moscow) and IX (Helsinki-Greece) – pass through Belarus, strengthening its position as a main trade and transport thoroughfare in the region. Standing at the border between Belarus and Poland is the Kozlovichi-Kukuryki checkpoint – one of the busiest cargo truck checkpoints between the Commonwealth of Independent States (CIS) and the European Union (EU). 1 Belt and Road Initiative: The Role of Belarus The Kozlovichi-Kukuryki checkpoint at the Belarusian-Polish border is one of the busiest cargo checkpoints between CIS and the EU. In light of the recent enlargement of Poland’s Pomeranian Special Economic Zone (PSEZ) with an aim of integrating with the New Silk Road Route connecting China and West Europe near the Polish-Belarusian border and the ongoing talks with Germany’s Duisburg Inland Port about the Duisburg-Brest-Minsk rail link, cross-border traffic between Poland and Belarus is expected to soar in coming years. To cope with the expected traffic growth, the country is continuing to upgrade or convert cities such as Brest and Grodno into large trans-shipment centres and logistics hubs. While the details of the project have not yet been disclosed, it has been reported that the China Gansu International Corporation for Economic and Technical Co-operation (CGICOP) is about to start construction of its own transport and logistics complex in the Grodno region, close to the cargo-and-passenger border crossing point between Belarus and Poland. Currently, more than 100mn tons of goods transit through Belarus every year, supporting a large transport sector that accounts for 6% of GDP. The present volume of trade, as well as the country’s ongoing investment in infrastructure for transportation and manufacturing industry, continues to make Belarus prosper as an important node on the Silk Road Economic Belt. Having reaped the early profits from the increasing level of Asia-Europe rail traffic, the country’s state-owned railway company, Belarusian Railways, is anticipating an uptrend in Eurasian cargo flows. For 2018, it expects container shipping on the China-EU-China route to grow by a further 30% to top 300,000 containers, after a 74% year-on-year growth to 245,400 containers last year. As new logistics and trans-shipment facilities are being built to handle the switches between broad-gauge (1,520mm) and standard-gauge (1,435mm) rail for trains carrying Chinese/Asian cargo to the EU market, or consolidate shipments before sorting and sending to final customers or warehouses in Europe, industry agglomeration featuring manufacturing relocation is also in the offing. A Manufacturing Relocation Destination 2 Belt and Road Initiative: The Role of Belarus Under Belarus’s membership of the Eurasian Economic Union (EAEU or EEU), products made in Belarus can be treated, subject to the country of origin rules, as Belarusian- made and able to be exported to the other EAEU markets of Russia, Kazakhstan, Armenia and Kyrgyzstan, free of tariffs.[1] This, coupled to the country’s geographical proximity to most of the markets in Europe, as well as well-connected road and rail transportation networks, helps to make Belarus an attractive destination for foreign manufacturing companies. Belarus is an increasingly popular gateway for foreign manufacturers looking to make inroads into the 180 million-strong EEU/EAEU market. Source: National Agency of Investment and Privatization, Republic of Belarus To oil the wheels further, the Belarusian government has continued to liberalise its economy and provide generous investment incentives. As a result, it has welcomed increasing numbers of foreign investors in a number of priority sectors that feature export-oriented, import-substituting and high-tech industries, such as information and communication technologies (ICT), creation and development of logistics systems, home appliances and electronics and the production of electrical equipment. As an added incentive for new-to-the-market companies, the Belarusian government has established six free economic zones (FEZs) across the country’s six major regions – Brest, Gomel, Grodno, Minsk, Mogilev and Vitebsk. All of these offer would-be investors a range of incentives, including preferential arrangements on corporate income, real estate and land taxes. Chinese investment, which grew more than 11-fold between 2011 (US$19mn) and 2017 (US$232mn), is one of the factors spearheading the manufacturing investment in Belarus. Most notable examples of Chinese investment in Belarus include Midea Group’s joint venture with Belarus’ Horizont Holding Company, which has been producing microwave ovens and water heaters in the Free Economic Zone Minsk (FEZ Minsk) on the outskirts of Minsk since 2007, and the China-Belarus Industrial Park, otherwise known as Great Stone Industrial Park, which was co-founded by Hong Kong-based state enterprise China Merchants Group (CMG) in 2012 and is expected to operate until 2062. 3 Belt and Road Initiative: The Role of Belarus Midea-Horizont production lines in FEZ Minsk. Thanks to its unrivalled perks, such as exemptions on corporate income tax, value-added tax (VAT), VAT on imports, real estate tax, land tax and tax on dividends, Great Stone has had great success in attracting Chinese companies. Current residents include ZTE, Huawei, Zoomlion, YTO Group Corporation, Xinzhu Corporation, Lotusland Renewable Energy and CGICOP. Other deals in the pipeline include companies working in the fields of composite materials, film coating technologies for cars, and joint design. 4 Belt and Road Initiative: The Role of Belarus According to Belarus President Decree No.166, Great Stone enjoys the largest tax exemption in the country. Source: Great Stone Industrial Park With Phase I of the park’s development now completed, the Great Stone Industrial Park expects to see the number of resident companies grow from the current 27 to at least 35 by the end of 2018, when Phase II is due to finish, and to 60-70 by 2020 under Phase III of the development. To facilitate Sino-European cargo flows, Great Stone has been holding talks with Germany’s Duisburg Inland Port about linking up to the Duisburg-Brest-Minsk rail service, and there are plans for a direct connection between the park and Minsk International Airport, 5km away. This should help the park further develop multimodal logistics involving air-rail and/or air-road freight. 5 Belt and Road Initiative: The Role of Belarus China’s largest offshore industrial park offering unrivalled perks till 2062. An Evolving High-Tech Economy Also in sync with the country’s development vision is the advancement of the high-tech industries. Few people know that Belarus has had a strong industrial base since the Soviet era, with a world class reputation for the quality of its machinery manufacturing, chemical engineering, petrochemicals, light industry (e.g. textiles, knitting, sewing, footwear, and household electrical appliances) and food processing. Belarusian companies that have achieved international success include Polimaster, which makes radiation detection equipment and is said to have 20% of the US market in radiation measurement devices; Belshina, producer of some of the largest tyres in the world; and BelAZ, manufacturer of the world’s most powerful dump trucks with a capacity of 496 tons. The country is also a leading manufacturer of potash fertiliser, with an estimated one-sixth of the global potassium market. Examples of Belarus’s traditional industrial success. Source: National Agency of Investment and Privatization, Republic of Belarus 6 Belt and Road Initiative: The Role of Belarus To counter its lack of natural resources, the country has built on this robust industrial foundation by establishing a reputation for technological innovation and nurturing the rapid growth of its IT sector. Between 2006 and 2016, Belarus’s export of IT services grew at a compound annual growth rate (CAGR) of 35% from US$48mn to US$957mn. The sector’s share of Belarusian exports grew from 2% to 14% over that period. Successful Belarusian IT products include Viber (one of the world’s most popular cross- platform instant messaging and VoIP applications, with much of the development outsourced to Belarus), Viber, face-swapping application, MSQRD and multiplayer online game, World of Tanks. Examples of Belarus’s early IT success. Source: National Agency of Investment and Privatization, Republic of Belarus Many of Belarus’s more pioneering tech companies are keen to tap into the opportunities offered by China and other countries across Asia, and see Hong Kong businesses as their natural partners in any such move. Furthermore, as an acknowledged IP hub, Hong Kong is uniquely positioned to help Belarusian tech companies fulfil their technology transfer aspirations and successfully commercialise their IP properties in the wider Asian market.