Economy of Minsk

As with many former Soviet cities, Minsk benefits from ever increasing urbanization. Just like Moscow and those who flock there from across the Russian Federation, the people who flock to Minsk believe, either accurately or not, that the city harbors more opportunities for a better life than their more rural hometowns ever could. As a result, over the course of Belarusian independence, Minsk grew from only 16.5 percent of the country’s population in 1989 to a level greater than 20 percent today.

This boils down to the simple fact that Minsk, the generator of 46 percent of revenue collected for the national budget, serves as the main economic engine for the Belarusian economy. How the city grows significantly affects the national economy, and as such a large portion of foreign investment usually ends up in the national capital. The city’s importance in the national economic picture warrants exploration of the different key sectors of the Minsk economy, hopefully one that paints a more complete picture of how the city creates revenue.

Industry in Minsk

According to the National Statistics Committee of Belarus, industry makes up some 26.4 percent of the gross regional product of the capital (worth 12.76 billion USD in 2013). The city’s manufacturing sector produces goods especially for domestic use. In particular, Minsk manufacturers dominate the market for television sets, trucks, and laundry machines (which helps to explain why clothes drying machines remain, otherwise inexplicably, a foreign concept in Belarus).

Government intervention, as championed by President Alexander Lukashenko after his election in 1995, concentrated the focus of Minsk’s manufacturing sector on domestic consumer goods. As a result, Minsk continues to operate some 250 factories and plants, many of which originated during the Soviet era, and as such generally use a lot more labor than their Western counterparts. Factory employment provides some 40 percent of Minsk residents with work, even today.

Although a large portion of Minsk-manufactured products find their way no farther than the department stores and vehicle dealerships of Belarus, the country exports an even larger portion. Belarus sells some 70 percent of its manufactured goods outside the national borders, mostly within the Eurasian Economic Community (EAEC) and other former Soviet republics. The best-known Minsk-made brands include MTZ tractors (from “Minski Traktarny Zavod”), MAZ trucks (from “Minski Autamabilny Zavod”), Atlant appliances, and Horizont televisions.

Information Technology and Telecommunications in Minsk

Even more so than industry, the vast majority of Belarusian information and communication technologies (ICT) businesses reside in Minsk. The reasons usually given for this include access to the country’s best universities (and their graduating classes, with a typical total of 16,000 IT graduates annually), superior infrastructure (buildings, communication network, transportation, etc.), and political support. Regarding the last category, support from the Belarusian government, the biggest demonstration of this came when President Lukashenko decreed the opening of the High Technologies Park (HTP) in Minsk. Situated adjacent to the Museum of Stones, this 124-acre site opened in June 2009. Only a short distance from Uruchcha Metro Station, it served as home to 141 companies (as of June 2105), the majority of which partnered with at least one foreign entity. Beyond software development, companies settled into the HTP include those associated with nanoelectronics, telecommunications, radio navigation, and data protection, among other similar enterprises. Belarus’ three top companies that provide outsourcing services – EPAM Systems, the IBA Group, and Intetics Co. – maintain addresses in the park.

Retail and Service Sector in Minsk

With ever-increasing attention bearing down on Belarus and its position as one of the founding members of the EAEC, Minsk continues to garner greater interest from potential investors. Since 2006, with the opening of the Stolitsa mall below Independence Square, modern shopping centers have found their way into the national capital. The newest of these projects include two shopping and trade complexes currently under construction by Dana Holdings: the Mayak Minska commercial district (under construction next to Ushkhod Metro Station), and the Minsk World property (at the side of the old Minsk-1 airport).

At the level of individual brands, Milavitsa stands as probably one of Minsk’s greatest successes. Inheritors of the heritage of Francois Tournier’s haberdashery, a company that opened shop in Russian Imperial Minsk in 1908, this clothier extended into women’s lingerie in 1964 under the Beloruska name. In 1991, the company reemerged into post-Communist Minsk as “Milavitsa”, the Belarusian name for the Morning Star or Venus, which the company retained when in 2000 it fully became a private enterprise. This company today drives the cutting edge of innovation for Belarus, even becoming the first of any firm in the country to certify itself under ISO 9001 quality management standards. Today, the world recognizes Milavitsa as a leading international manufacturer of women’s underwear, swimwear, and knitwear. It’s also served as the springboard for the launch of a number of Belarusian supermodel careers.

However, many international retail and service sector firms find getting a foothold in Belarus problematic, and in many such cases, local companies assumed the lead in providing what those international firms would have, if the hurdles to opening business been lower. Coffeehouses serve up a classic example of such cases. Starbucks, Costa Coffee, and other popular international firms have failed to enter the market in Minsk, and in their place have risen three key companies: Coffeeberry, Union, and Coffee Box.

Coffeeberry got its start in 2006 when it took on the coffee concessionaire for the Stolitsa Mall. In 2012, it slowly began to spread out to new locations, including popular hangouts on Internationalnaya and Zamkovaya streets. Union also got its start as a coffee concessionaire for the newer and more upscale Galileo Mall, opened above the city’s Central Bus Station in 2013, and this brand also spread slowly across Belarus’ capital to locations adjacent to KGB headquarters and Gorky Park. Coffee Box, however, chose an opposite approach, spreading fast across Minsk at numerous strategic locations in 2014, focusing its marketing on Wifi-dependent coffee drinkers. However, the continued Russian sanctions-driven economic fallout from the Ukrainian crisis forced the company recently to shut down its lesser profitable locations, leaving only a few surviving venues standing.

Coffee Box’s example serves as a useful cautionary tale on Minsk’s retail and service sector growth potential. Investors and firm managers must prepare for setbacks, foreseeable or otherwise.

Transport in Minsk

Minsktrans boasts at being the oldest public transportation system in the country. Founded in 1892, the system originally operated horse-drawn trams. However, by the 1950s, the system grew to include electrical trams, buses, and trolleybuses.

In 1984, the Minsk Metro opened, and even today the subterranean railroad system and its 35.5 kilometers (22 miles) of track continues to expand, with a third line scheduled to open in 2017. It serves, as the fifth largest subway system in the former Soviet Union (behind Moscow and St. Petersburg in Russia, and Kyiv and Kharkiv in Ukraine), more than 800,000 passengers daily.

Minsk’s commuter rail system currently operates out of a single central hub at the main Passenger Rail Station. The surface rail routes reach out to suburban stations using trains designated with a red emblem depicting an Aster flower. However, increased commuter demand prompted a review of that system, and as a result, authorities plan to move most commuter lines to “Uskhodni” (East), “Paudnyovi” (South), and “Paunochny” (North) stations by 2020. Most likely the new Minsk-National Airport line will continue to serve the centralized Passenger Rail Station.

The highway system, meanwhile, continues to improve. In 2002, the MKAD, a 30-year road project that allowed truck traffic to bypass Minsk’s city center and free up city roads to local traffic, opened as a modern beltway, providing high speed dual-carriageway routes for trucks and other long-distance travelers to go from one end of Minsk to the other, or even to get to different areas of the city’s suburbs quickly. Recently, however, construction on a second beltway began about 15-20 kilometers (9-12 miles) further out. The first segment under construction will run from the M-6 toll expressway (Minsk-Hrodna) near Rakau to the M-3 toll expressway (Minsk-Vitsebsk) near Astroshytsy, connecting there with the R-80 Republic Road (which would be improved into an expressway). The second segment will carry traffic from Rakau southward to the M-1/E-30 near Sukhodoly, where a future motorway segment would continue eastward to the M-5 toll motorway near Dukora. The third would involve improvements to the R-80/M-2 segment and the M-1/E-30 motorway, the main line connecting Brest with Moscow. These highway improvements would allow for further development in the exurban settlements further out from the MKAD, as well as decrease traffic volumes within the city (speeding up traffic there as a result).

Energy sector in Minsk

Minsk’s energy portfolio includes nearly half a dozen Combined Heat and Power (CHP) stations run on natural gas, with some electrical input from external sources located within both the Belarusian and Russian electrical grids. Local producers extract most of the natural gas for these complexes locally.

Petroleum products that appear on the Minsk market typically originates from Russian sources. Generally, Russia sells crude oil to Belarus at a lower price than what other countries pay, and facilities located around Mazyr in the Homiel Region process almost all of the refined product that comes to the national capital

Banking and finance sector in Minsk

Being within the EAEC, Belarus suffers to some degree from the secondary effects of sanctions imposed internationally on its economic community partner, Russia. In 2013, before the Ukraine conflict began, Standard & Poor increased Belarus’s sovereign credit rating from a “C’ rating to a “B-”, indicating an improved outlook as the country recovered from the 2008 global economic meltdown. Despite the government’s refusal to make recommended spending adjustments in the aftermath of that crisis, S&P gave the national economy a stable outlook. After international sanctions were imposed on Moscow following the hostile annexation of Crimea and apparent invasion of Ukraine’s Donbas region, Belarus nonetheless continued to maintain this same rating.

Because S&P never gives a national capital a higher assessment than the sovereign credit rating of the country it rules, Minsk also maintains a “B-” rating. However, because of “strong budgetary performance, neutral liquidity, and a low debt burden,” S&P qualified this rating with an “indicative credit level” of “b+”.

The assessment noted that Minsk benefits in particular from a concentration of national resources being given over to improvements within the capital for projects such as the International Ice Hockey Federation World Championships that took place in 2014. Despite housing only 20 percent of the national population, the city maintains 30 percent of the country’s gross domestic product, which manifests itself mostly through large-scale capital improvements. Unlike on the national level, legal mechanisms limit the debt spending of the city to 30 percent of the overall budget.

The local economy feels most of the negative effect from Western sanctions targeting Russia through its banking sector.Moody’s provided a gloomy picture of the deteriorating situation with Minsk’s in early 2014, noting that many Belarusian financial institutions lack the foreign currency reserves needed to weather shocks resulting from radical changes in forex markets or reduction in energy subsidies currently provided by Russia. This provides a rather significant economic dependence on its eastern neighbor, and to date, the banking sector only sluggishly responds to this vulnerability.

Moody’s also predicted that by the end of 2015 deposits should grow by 20 percent in anticipation of money supply growth from improved wages, while credit becomes more expensive, far exceeding any real growth in wages. This appeared to put a damper on domestic investment prospects, further raising the importance locally of attracting foreign investors.