Despite current difficulties, Belarus will move towards Mr Lukashenka's main goal of re-establishing the economic system of the late Soviet period. This economy will focus on an industrial system consisting of large and obsolete enterprises producing equally obsolete low-quality goods at high cost and low (subsidised) prices. Shielded from market signals, Belarus will rely on the Russian market and hope to regain its recently high growth rates, with little incentive to restructure or modernise. The success of Mr Lukashenka's current policies is contingent on continued Russian demand for low-price, low-quality Belarusian goods. While Russia's difficulties put this into serious question, the election of the new Russian prime minister, Yevgeny Primakov, bodes well for Belarus in the short term. Mr Primakov's distrust of the market and his reliance on direct government control will help to maintain the existing chains of supply that Belarus has been at pains to preserve with Russia since the dissolution of the Soviet Union.
-- but will suffer as a result of Russia's recession
Russia's deep recession, however, will greatly diminish Mr Lukashenka's chances of continued high growth on the strength of booming exports to Russia. As a result of the effect of Russia's problems on Belarus, we have revised our growth forecast for Belarus sharply downwards. We now expect 7% growth in 1998 and no growth in 1999, down from the 10% recorded in 1997. Exports fell dramatically following Russia's crisis in August, and are unlikely to pick up much in 1999, owing to continued low Russian demand. Our forecast for improved growth in 2000, compared with next year's stagnation, is dependent on stabilisation in Russia. Because of policies favouring trade with Russia, as well as the low value-added content of exports, exporters will find it very difficult to switch to Western markets, and will face little option but to reduce industrial output targets or continue building up stocks. To avoid hyperinflation, we expect the government to rein in the easy credits enjoyed by both the industrial and agricultural sectors, resulting in a further sharp reduction in output and a temporary fall in the current account as a percentage of GDP.