New Chal­lenges, New So­lu­tions

Be­larus re­mains com­mit­ted to the so­cially ori­ented eco­nomic model

Economy of Belarus - - CONTENTS - Niko­lai SNOPKOV

Be­larus re­mains com­mit­ted to the so­cially ori­ented eco­nomic model

Rea­sons Be­hind Eco­nomic Woes

This year the national econ­omy faced new chal­lenges. Cou­pled with the ex­ist­ing fac­tors, they re­sulted in currency mar­ket in­sta­bil­ity, de­val­u­a­tion of the Be­laru­sian ru­ble and high in­fla­tion.

The fac­tors that had and will have a desta­bi­liz­ing ef­fect on the Be­laru­sian econ­omy in­clude:

Be­larus’ cur­rent eco­nomic dif­fi­cul­ties are tem­po­rary. their im­pact will be slowly weak­en­ing as the national econ­omy will be get­ting back on track.

• an in­ef­fec­tive sec­toral struc­ture of pro­duc­tion that is dom­i­nated by en­ergy and ma­te­rial-in­ten­sive in­dus­tries and in­dus­tries with an­ti­quated tech­nolo­gies. In terms of ma­te­rial in­ten­sity the Be­laru­sian econ­omy is placed ninth out of 44 coun­tries of Cen­tral and East­ern Europe. In terms of en­ergy in­ten­sity of GDP we are 29th in the world (out of 130 coun­tries on the list) out­strip­ping even Rus­sia with its co­los- sal re­serves of raw ma­te­ri­als. High­tech ex­port ac­counts for merely 2 or 3% of to­tal exports. The mod­ern­iza­tion of a num­ber of in­dus­tries over the last 10 years helped re­duce the cap­i­tal con­sump­tion, but the cap­i­tal con­sump­tion re­mains high in a num­ber of in­dus­tries, in­clud­ing ma­chine-build­ing (56.6%), chem­i­cal and petro­chem­i­cal in­dus­try (56.1%), fuel in­dus­try (54.1%), power en­gi­neer­ing (51.4%), and agri­cul­ture (40.4%);

• heavy re­liance on imports that make up 38% of Be­larus’ econ­omy. This is at­trib­uted to the fact that for many decades Be­larus was “an assem­bly shop” of the former So­viet Union, though the coun­try did not abound in nat­u­ral re­sources;

• so­cial is­sues re­sult­ing from “the trans­for­ma­tional shock” which dragged Be­larus down to the 105th po­si­tion in terms of life ex­pectancy (ac­cord­ing to the UN ter­mi­nol­ogy, “life ex­pectancy at birth”).

To elim­i­nate these fun­da­men­tal dis­pro­por­tions the govern­ment had to in­vest con­sid­er­ably into the real pro­duc­tion sec­tor and the so­cial de­vel­op­ment.

I would like to note that the Be­laru­sian econ­omy has been demon­strat­ing ro­bust growth in the re­cent decade and avoided a ma­jor re­ces­sion dur­ing the cri­sis year of 2009.

At the same time, “the en­ergy shock” caused by a sharp rise in en­ergy prices was ag­gra­vated by con­tracted de­mand for Be­larus­made goods abroad dur­ing the global fi­nan­cial and eco­nomic cri­sis. The govern­ment man­aged to pre­vent a dras­tic de­cline in liv­ing stan­dards, shut­down of com­pa­nies and mas­sive lay­offs by fo­cus­ing on the do­mes­tic mar­ket. How­ever, this re­quired con­sid­er­able re­sources, in­clud­ing ex­ter­nal bor­row­ing, which was highly detri­men­tal for the coun­try’s bal­ance of pay­ments.

The mis­bal­ances be­came even more pro­nounced in the early 2011 fol­low­ing an en­ergy price hike in Jan­uary (our coun­try imports 100% of nat­u­ral gas and over 90% of oil) and in­creased car im­port in Q1. The lat­ter was trig­gered by a rise in car im­port du­ties from 1 July 2011 in line with Be­larus’ Cus­toms Union obli­ga­tions.

Car im­port in June hit an all-time record of $644.4 mil­lion. In H1, the fig­ure ex­ceeded $2 bil­lion, up three times over the same pe­riod a year be­fore. Car im­port ac­counted for 60% of Be­larus’ non-food imports. Over the six months 2011, it con­trib­uted 45% to the coun­try’s trade deficit.

Due to these fac­tors alone the im­port soared by $3.5 bil­lion ($1.3 bil­lion was spent on cars, $0.7 bil­lion on gas and $1.5 bil­lion on oil), which widened the gap in the for­eign trade bal­ance of the coun­try.

The par­tial blame for the in­sta­bil­ity of the ex­change rate goes to the mild mone­tary pol­icy ac­com­pa­nied by sig­nif­i­cant credit ex­pan­sion in 2009-2010. The pol­icy was aimed to min­i­mize the im­pact of the global fi­nan­cial and eco­nomic cri­sis on the Be­laru­sian econ­omy. A con­sid­er­able in­crease in salaries and a con­sump­tion-stim­u­lat­ing bud­get pol­icy trig­gered de­val­u­a­tion and in­fla­tion ex­pec­ta­tions. All these fac­tors al­to­gether ex­ac­er­bated the sit­u­a­tion on the do­mes­tic currency mar­ket.

In March 2011 the National Bank re­frained from currency in­ter­ven- tions in or­der to pre­serve gold and for­eign currency re­serves. This gave rise to the mul­ti­tude of ex­change rates across var­i­ous seg­ments of the currency mar­ket.

The mul­ti­tude of ex­change rates threat­ens plans to en­hance the com­pet­i­tive­ness and in­no­va­tion po­ten­tial of the national econ­omy, and the large-scale eco­nomic lib­er­al­iza­tion stip­u­lated in Pres­i­den­tial Di­rec­tive No. 4. If we put this is­sue on hold, we risk in­cur­ring even greater losses and will find it more dif­fi­cult to come back to sus­tain­able eco­nomic growth.

There­fore, in late Au­gust this year we de­cided to bal­ance out the ex­change rate. To this end, we held an ex­tra trad­ing ses­sion at the Be­laru­sian Currency and Stock Ex­change in mid Septem­ber. The par­tic­i­pants of the trad­ing ses­sion could freely buy or sell US dol­lars, euro, Rus­sian rubles and other cur­ren­cies.

All those will­ing to buy or sell for­eign currency will be able to do it at the currency ex­change. The ex­change rate will be shaped purely by the mar­ket; the govern­ment is not go­ing to bol­ster the ex­change rate. Be­larus has opted for a clean float.

Float­ing Be­laru­sian Ru­ble

At present, the world knows two ap­proaches to the for­ma­tion of the ex­change rate. The first is based on a sys­tem of float­ing ex­change rates. More and more coun­tries fa­vor this ap­proach. How­ever, there are those who stick to a fixed ex­change rate pol­icy. Over­all, about one third of the coun­tries around the globe use some va­ri­ety of fixed ex­change rates, while two thirds pre­fer float­ing ex­change rates.

The float­ing ex­change rates are used by the over­whelm­ing ma­jor­ity of de­vel­oped coun­tries (ex­cept for the EU mem­ber states), and de­vel­op­ing economies (Afghanistan, Bo­livia, Costa Rica, Ethiopia, Ghana, Ja­maica, etc) and economies in tran­si­tion (Ar­me­nia, Azer­bai­jan, Kaza­khstan, Kyr­gyzs­tan, Moldova, Mon­go­lia, Ro­ma­nia, Ta­jik­istan, Ukraine, Uzbek­istan, etc).

Ex­perts be­lieve that this op­tion boasts a num­ber of ad­van­tages.

First of all, the currency mar­ket knows bet­ter than the govern­ment what the ex­change rate should be.

Se­condly, the coun­try gets more op­por­tu­ni­ties to pur­sue an eco­nomic

pol­icy it wants, as float­ing ex­change rates mit­i­gate ex­ter­nal shocks.

Thirdly, float­ing ex­change rates are greatly ben­e­fi­cial for for­eign trade, be­cause they give a com­pet­i­tive edge to ex­port­ing com­pa­nies.

Fourthly, float­ing ex­change rates dis­cour­age spec­u­la­tive deal­ings with for­eign cur­ren­cies, be­cause they lead to a win-lose sit­u­a­tion when some prof­i­teers will gain only if oth­ers lose.

At the same time, the tran­si­tion to the float­ing ex­change rate is as­so­ci­ated with some risks. In par­tic­u­lar, the float­ing ex­change rate may pro­pel in­fla­tion if it gets more flex­i­ble. This means that to min­i­mize po­ten­tial risks, we need a pro­gram com­bin­ing a tough mone­tary and fis­cal pol­icy and struc­tural eco­nomic re­forms (these mea­sures should be clear and con­sis­tent; they should pro­vide clear-cut guide­lines for both eco­nomic op­er­a­tors and house­holds).

There­fore, we have come up with an ac­tion plan for the rest of 2011 and the year 2012 which should mark the start of a bal­anced eco­nomic growth.

The fol­low­ing tar­gets have been pri­or­i­tized:

• a struc­tural bal­ance of the econ­omy by means of di­min­ish­ing govern­ment’s in­ter­fer­ence in the re­dis­tri­bu­tion of fi­nan­cial flows. To this end, we will re­duce emis­sion of money for govern­ment pro­grams and re-chan­nel re­sources into high­tech and ex­port-ori­ented projects;

• an in­ter­nal eco­nomic bal­ance by means of mak­ing salaries com­men­su­rate with la­bor ef­fi­ciency, and via re­duc­ing ma­te­rial and en­ergy in­ten­sity of pro­duc­tion;

• a for­eign eco­nomic bal­ance by means of shift­ing a fo­cus from the do­mes­tic mar­ket to the over­seas mar­ket with ex­port grow­ing faster than im­port.

New Ap­proaches to Govern­ment Pro­grams

In the pre­vi­ous decade the national econ­omy con­sid­er­ably ex­panded on the back of gen­er­ous govern­ment in­jec­tions made both di­rectly via the bud­get and in­di­rectly via bank loans to im­ple­ment govern­ment pro­grams. The funds ear­marked for govern­ment pro­grams rose from 3% of GDP in 2005 to 25% of GDP in 2010.

Money emis­sion was widely used to ac­com­mo­date the in­creas­ing num­ber of govern­ment pro­grams, as Be­larus’ own eco­nomic re­sources were in­ad­e­quate. That was aimed to tackle most press­ing so­cio-eco­nomic is­sues, like tech­no­log­i­cal back­ward­ness caused by con­sid­er­able cap­i­tal con­sump­tion, and so­cial is­sues that ac­cu­mu­lated dur­ing the pe­riod of “the trans­for­ma­tional shock”.

How­ever, we were not happy that in­vest­ments grew faster than GDP, be­cause the bulk of in­vest­ments was made up by in­stal­la­tion and con­struc­tion works. Back in 2006 they ac­counted for 42% of cap­i­tal in­vest­ments, while in 2010 their share rose to 50.6%.

At the same time, the share of in­vest­ments into ma­chines and equip­ment went down from 47% in 2006 to 38.1% in 2010, the low­est over the last decade.

The ac­cel­er­ated eco­nomic growth was backed up by grow­ing in­vest­ments into tra­di­tional in­dus-

tries and an in­crease in house­hold in­comes by means of govern­ment pro­grams. No won­der, the do­mes­tic de­mand grew faster than pro­duc­tion. In 2000-2010 the coun­try’s real GDP dou­bled, while the do­mes­tic de­mand ex­panded three­fold. The ex­port soared 3.4 times, the im­port 4 times.

Thus, we need to re­vise our ap­proaches to govern­ment pro­grams, re­duce the govern­ment reg­u­la­tion of the national econ­omy and fo­cus on most strate­gic projects.

At present, 98 govern­ment pro­grams are im­ple­mented in Be­larus; most of them are set to run in 20112015. The most cap­i­tal in­ten­sive in­dus­tries are agribusi­ness and con­struc­tion. This year we have op­ti­mized and stream­lined the cur­rent govern­ment pro­grams. The Coun­cil of Min­is­ters adopted Res­o­lu­tion No. 490 of 13 April 2011 “On fi­nanc­ing govern­ment pro­grams” to put a cap on bank loans for the agribusi­ness. The fi­nanc­ing was cut by Br10.4 tril­lion.

Re­stric­tions on fund­ing of govern­ment pro­grams are also en­vis­aged in a mem­o­ran­dum signed by the Govern­ment, the National Bank of the Repub­lic of Be­larus and the Eurasian De­vel­op­ment Bank. In ac­cor­dance with the doc­u­ment, the Govern­ment is to en­sure that in 2011 net credit ex­ten­sion for pro­grams from govern­ment re­sources will not ex­ceed 4% of GDP.

How­ever, in or­der to pre­vent de­te­ri­o­ra­tion in liv­ing stan­dards, all govern­ment so­cial pro­grams will re­main a pri­or­ity and will not be cur­tailed even at this time of fis­cal aus­ter­ity.

In par­tic­u­lar, the Coun­cil of Min­is­ters of the Repub­lic of Be­larus is­sued Res­o­lu­tion No.883 on 30 June 2011 “On some is­sues re­gard­ing hous­ing pro­grams in 2011” di­rect­ing to al­lo­cate Br1,863.8 bil­lion worth of additional cred­its to ful­fill hous­ing con­struc­tion tar­gets. The govern­ment will make sure that the cost of one square me­ter of new hous­ing will not be re­vised up­wards for cit­i­zens in need of bet­ter hous­ing.

We should stop us­ing emis­sions to fund govern­ment pro­grams if we want to sta­bi­lize the econ­omy, en­sure a sin­gle ex­change rate and con­tinue sus­tain­able so­cial and eco­nomic de­vel­op­ment.

Sup­port­ing New Ideas

The ma­jor­ity of coun­tries pro­vide as­sis­tance to key in­dus­tries. By the way, the newly in­dus­tri­al­ized coun­tries that have sig­nif­i­cantly ad­vanced in their de­vel­op­ment owe their eco­nomic suc­cess not only to im­prove­ments in mar­ket in­sti­tu­tions but also to a well-bal­anced pol­icy to sup­port cer­tain in­dus­tries.

In Be­larus state sup­port is pro­vided to in­di­vid­ual enterprises to help them smooth out cur­rent fi­nan­cial prob­lems.

This ap­proach does not help con­cen­trate pub­lic funds on the sec­tors and pro­grams which are most im­por­tant for the coun­try’s econ­omy. In­stead in­vest­ments are dif­fused and be­come in­ef­fi­cient. In fact, govern­ment funds are chan­neled not only into enterprises that im­ple­ment large in­vest­ment projects or new tech­nolo­gies (it is in these cases that the money re­ally works en­sur­ing re­turns to the state), but of­ten into poorly-per­form­ing and in­sol­vent com­pa­nies un­able to achieve a break-even po­si­tion even with the help of govern­ment funds.

More­over, the ex­ist­ing mech­a­nism of state sup­port be­came an ob­sta­cle to im­prov­ing com­pet­i­tive­ness of do­mes­tic enterprises. The Econ­omy Min­istry con­ducted an anal­y­sis which shows that in 20062008 a num­ber of state-owned enterprises re­duced the share of exports de­spite re­ceiv­ing more govern­ment fi­nan­cial as­sis­tance.

In 2011 the govern­ment is­sued Res­o­lu­tion No. 490 on 13 April 2011 to re­duce sub­si­dies to agri­cul­tural or­ga­ni­za­tions for the pur­chase of in­dus­trial ma­chin­ery and equip­ment for con­struc­tion, ren­o­va­tion and mod­ern­iza­tion of pro­duc­tion fa­cil­i­ties in 2011-2015 from Br4,900 bil­lion to Br2,200 bil­lion. This, in fact, prompted the in­dus­try to in­ten­sify ef­forts to ex­pand into new mar­kets and in­crease exports.

The anal­y­sis also con­firmed the need to change the terms of pro­vid­ing state sup­port. The govern­ment sup­port should be of­fered to those com­pa­nies that have won the ten­ders to im­ple­ment pro­grams in the pri­or­ity eco­nomic ar­eas rather than to those in dire straits in or­der to help them ad­dress their cur­rent is­sues.

As part of the new pro­pos­als on the terms of pro­vi­sion of govern­ment sup­port to in­dus­trial com­pa­nies, the Pres­i­dent signed De­cree No. 231 on 6 June 2011 “On some mea­sures to stim­u­late the growth of highly-ef­fi­cient enterprises.”

This in­stru­ment spells out the mech­a­nisms for pro­vid­ing govern­ment sup­port to highly-ef­fi­cient enterprises work­ing in pri­or­ity in­dus­tries and cuts off ac­cess to this sup­port for in­ef­fi­cient enterprises.

The de­cree is in­tended, on the one hand, to en­cour­age com­pa­nies to achieve high qual­ity per­for­mance: in­crease value added, re­turn on sales and share of in­no­va­tive prod­ucts, in other words, to im­prove their com­pet­i­tive­ness. On the other hand, it cre­ates an en­abling eco­nomic environment for in­vest­ment projects with high value added, which will con­trib­ute to the national econ­omy growth, re­duce its en­ergy and ma­te­rial in­ten­sity.

The lists of such com­pa­nies will be ap­proved by the Be­laru­sian Govern­ment in con­sul­ta­tion with the head of state. By the way, in 2011, 38 com­pa­nies of var­i­ous forms of own­er­ship took ad­van­tage of this doc­u­ment.

I would like to em­pha­size that the de­cree would help cre­ate high­tech in­dus­tries in­clud­ing those of V and VI tech­no­log­i­cal par­a­digms that pro­duce new-gen­er­a­tion goods (with lower en­ergy and ma­te­rial in­put), and im­ple­ment tech­nol­ogy to man­u­fac­ture com­pet­i­tive prod­ucts with high value added.

Price Fac­tor

The price hikes in the consumer mar­ket this year were pri­mar­ily the re­sult of mone­tary fac­tors. Grow­ing prices in for­eign mar­kets had a sig­nif­i­cant im­pact on in­fla­tion in Be­larus. Be­larus is an open econ­omy, and there­fore the rises in prices in global com­mod­ity mar­ket gen­er­ate price hikes in the do­mes­tic mar­ket.

With a sig­nif­i­cant share of imports in pro­duc­tion costs (59% on av­er­age in Jan­uary-june 2011), com­pa­nies com­pen­sate their in­creased costs by ris­ing prices for their end­prod­ucts. In the eight months from Jan­uary to Au­gust 2011 prices for in­dus­trial goods were up by 67.0% (9.1% in the same pe­riod in 2010).

The uncer­tainty in the currency mar­ket made im­porters in­clude pos­si­ble ex­change rate risks into whole­sale prices.

In ad­di­tion to these fac­tors, the re­tail prices in Be­larus were af­fected by the in­creased de­mand for Be­laru­sian prod­ucts in the neigh­bor­ing re­gions be­cause of the wide gap in prices. This sparked panic buy­ing on the do­mes­tic mar­ket and price hikes for reg­u­lated food items.

In or­der to con­tain price growth for food sta­ples and non-food prod- ucts and to pre­vent the com­mod­ity deficit in the do­mes­tic mar­ket, the Govern­ment adopted a se­ries of prompt mea­sures to sta­bi­lize the sit­u­a­tion in the consumer mar­ket. For ex­am­ple, the Govern­ment ex­panded the list of so­cially im­por­tant goods the prices for which are reg­u­lated, put a cap on trade mar­gins from 12 to 30% on a large num­ber of food prod­ucts, and im­posed re­stric­tions on the ex­port of cer­tain goods. The Govern­ment is con­tin­u­ously mon­i­tor­ing the prices for food and non­food prod­ucts, and also the ac­tiv­i­ties of mo­nop­o­list com­pa­nies.

Tak­ing into ac­count the ef­fort to op­ti­mize the eco­nomic con­di­tions and the ap­proaches spelled out in Di­rec­tive No. 4, we un­der­stood that re­stric­tive ad­min­is­tra­tive mea­sures to “freeze” prices at a time of their con­tin­ued growth in the global mar­ket and on­go­ing prob­lems in the currency mar­ket could have the op­po­site ef­fect. They could badly af­fect fi­nan­cial po­si­tions of busi­nesses, pro­duc­tion and im­port of cer­tain goods and cre­ate their deficits, in­crease shadow turnover and lead to other neg­a­tive con­se­quences. In this sit­u­a­tion it is im­por­tant to keep the consumer mar­ket man­age­able, and to pre­vent un­con­trol­lable price growth.

It should be noted that the cur­rent prob­lems are tem­po­rary, and their im­pact will be grad­u­ally weak­en­ing as the eco­nomic sit­u­a­tion is get­ting back to nor­mal, the Be­laru­sian ru­ble ex­change rate sta­bi­lizes, the mul­ti­ple ex­change rates are elim­i­nated and for­eign currency be­comes avail­able and the mar­ket is sat­u­rated. This will be achieved through co­or­di­nated poli­cies in pric­ing and tax­a­tion, in­come and wages, an­timonopoly reg­u­la­tion, the sat­u­ra­tion of the consumer mar­ket, in­clud­ing by means of pur­chase and com­mod­ity in­ter­ven­tions. The sit­u­a­tion with prices will de­pend on how ef­fec­tively these levers of eco­nomic pro­cesses are en­gaged.

Exports Should Ex­ceed Imports

In Jan­uary-july 2011 the deficit of for­eign trade in goods and ser­vices (ac­cord­ing to the bal­ance of pay­ments method­ol­ogy) was $2.65 bil­lion.

How­ever, it should be noted that the pos­i­tive trends in for­eign trade that emerged in pre­vi­ous months are strength­en­ing. Ex­port growth be­gan to ex­ceed im­port growth. For the seven months the gap was 10.8%, and is ex­pected to reach 16.4% at the year-end. At the same time in July this year, we had a for­eign trade sur­plus, some­thing we had not had in many years.

Ex­cess growth of exports over imports is mainly due to two fac­tors: the de­cline in do­mes­tic de­mand due to the changes in the national currency ex­change rate and bet­ter sales prospects for our prod­ucts in for­eign mar­kets. As a re­sult, the Govern­ment ex­pects a sig­nif­i­cant in­crease in the share of man­u­fac­tured exports in to­tal pro­duc­tion, from 46.5% in 2010 to 60% in 2011. This will boost exports by at least $4.6 bil­lion com­pared with the pre­vi­ous year.

It is ex­pected that at the year-end 2011 the vol­ume of for­eign trade will ex­ceed the pre-cri­sis level of 2008 by 10% in terms of exports and by about 10% in terms of imports. As a re­sult, the year-end deficit of trade in goods is pro­jected to drop to $7-7.8 bil­lion.

In the medium term, the Govern­ment will im­ple­ment the National Ex­port Pro­mo­tion Pro­gram in 2011-2015. It is based on the mea­sures to re­dress the struc­ture of exports by re­duc­ing the share of pri­mary com­modi­ties and in­crease the sup­ply of high tech­nol­ogy, in­no­va­tive and so­phis­ti­cated prod­ucts. In gen­eral, we plan to rad­i­cally change the sit­u­a­tion and get the for­eign trade in a sur­plus po­si­tion.

*** It is clear that there are no pain­less sce­nar­ios of over­com­ing the present eco­nomic dif­fi­cul­ties. The tight mone­tary and fis­cal poli­cies will slow down the eco­nomic growth. How­ever, if we do not elim­i­nate the ac­cu­mu­lated im­bal­ances in the econ­omy, the coun­try will have fewer levers to min­i­mize risks in the fu­ture as most economists are rather pes­simistic in their fore­casts for the global econ­omy de­vel­op­ment.

In H1 2011, car imports to Be­larus

ex­ceeded $2 bil­lion, con­tribut­ing

45% to the coun­try’s trade

deficit

A sharp rise in en­ergy prices in early 2011 ag­gra­vated Be­larus’ eco­nomic mis­bal­ances

In mid Septem­ber Be­larus started a

tran­si­tion to the float­ing currency

ex­change rate

The first three-star ho­tel opened in the cen­ter of the re­sort town of Naroch. The ho­tel boasts com­fort­able rooms that can ac­com­mo­date 99 peo­ple. The ho­tel was ren­o­vated in line with the govern­ment pro­gram to pro­mote the Naroch re­cre­ation area in 2011-2015

Pro­tos, Mogilev

District, has in­stalled a new Fin­nish line to pro­duce welded beam fit­ted with

the Us-based Lin­coln Elec­tric equip­ment. The com­pany was the first in Be­larus to turn out this type of prod­ucts boast­ing a high ex­port po­ten­tial

The Ru­dakovo green­house com­plex, Vitebsk District, has launched Be­larus’ first tomato sort­ing line with the ca­pac­ity of 10 tonnes per hour. The line can sort veg­eta­bles by color and size. Trad­ing out­lets of Be­larus and Rus­sia have al­ready ex­pressed in­ter­est in Ru­dakovo toma­toes

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