Every cloud has a silver lining, or so the saying goes. For mandate-hungry investment bankers desperate to secure another multi-million dollar year-end bonus, the political woes of Belarus could yet prove to be an unexpected source of much-needed business in 2007. Not so much a silver lining then, more a gilt-edged opportunity.
The economic fallout from the spat over oil and gas prices between Belarus and Russia means that the authorities in Minsk are now facing up to the prospect of plugging a hole in the country’s finances with the help of funding from their one-time ideological foes in the west.
According to recent research by RZB economist Gerhard Lechner, the hike in prices demanded by Russian state gas company Gazprom – $105 per 1,000 cubic metres this year compared with just $47 in 2006 – will result in Belarus’s current account deficit ballooning from an estimated 2.1% in 2006 to a forecast 6% in 2007. Such a level would cause a sharp depreciation of the Belarusian rouble if the government of president Alexander Lukashenko were to fail to secure additional funds to prop up the former Soviet republic’s finances. Lechner believes the Belarusian rouble could drop by around 10% this year and by a further 10% in 2008. Losses accruing from the energy dispute with Russia could possibly total as much as $2.1 billion a year, equivalent to more than 5% of GDP, says Lechner. Corporates and households in Belarus are now facing up to the prospect of a doubling of the gas and electricity prices they paid in 2006.
Instability
Since economic stability has been crucial to the shoring up of popular support for the increasingly autocratic Lukashenko regime, the loss of cheap, effectively subsidized oil and gas imports from Russia threatens to wreak not only economic, but also political havoc in Belarus and fatally undermine the position of Lukashenko, widely dubbed Europe’s last dictator.
Previously, Belarus was largely conspicuous by its absence from the international capital markets. However, that is set to change in the coming months. Already the country’s largest financial institution, Belarusbank, has announced plans to issue at least $200 million of Eurobond debt, with probably a three-year tenor, the first such issuance from the country. In March 2006 state-owned Belarusbank was the first from the country to tap the international syndicated loan market, signing a €38 million six-month deal via bookrunner Bayerische Landesbank. Most recently it signed a $65 million financing in September via Bayerische Landesbank, Vneshtorgbank and Bank TuranAlem. Belarusbank, which is the leading player in the retail, corporate banking, credit cards and international trade financing markets in Belarus, already has a B– rating from Fitch. Vladimir Novik, the bank’s deputy chairman, tells Euromoney that it is in negotiations with Moody’s and Standard & Poor’s about the prospect of securing a further rating ahead of any Eurobond. He expects to award a lead management mandate for the issue in March, with a view to launching it by the third quarter. He adds that the proceeds of any Eurobond would be used mainly to expand the bank’s corporate lending activity. As 70% of Belarusbank’s corporate customers have dollar cashflows from their international trading activities the debut issue will be in dollars, says Novik. He adds that the bank is also looking to return to the international syndicated loan markets and is also considering a securitization of its credit card portfolio, once the appropriate legislation is in place.
First rating
Meanwhile the government itself is set to secure its first international credit rating in the second quarter of the year, a development that could pave the way for an inaugural Eurobond offering from the sovereign itself. Commenting on the issuance prospects for Belarusian entities, Stuart Culverhouse, chief economist of emerging market brokerage Exotix in London, says that given appropriately market-friendly terms and conditions, there could well be investor demand for Belarusian risk. “We’re seeing increasing appetite for lower-rated credits from emerging market debt specialists looking for higher yields,” says Culverhouse. He adds that two key concerns regarding Belarus on the borrowing front centre on the country’s foreign exchange reserves and its debt duration risk profile. At present foreign exchange reserves of about €1.4 billion equivalent cover less than one month’s imports and more than 80% of the country’s external debt is less than one month in tenor.
Finance minister Nikolai Korbut has already announced that Belarus is looking to secure up to $1 billion-worth of debt from the international syndicated loans market. According to Korbut, the country has already been in negotiations with banks in Russia, Switzerland, the UK and the US.
Ironically, given the recent political tensions between Belarus and Russia, Korbut said that one of the first moves to cover the financing gap in Belarus could be the issuance of up to Rb10 billion ($381 million) of bonds in the Russian fixed-income market.
As well as looking overseas for extra funds the Belarusian government is seeking to improve its financial standing by accelerating the sale of state assets. In early February, first deputy prime minister Vladimir Semashko said the government was discussing the privatization of leading enterprises such as the Motovelo motorcycle plant and heavy-duty plant machinery manufacturer Amkodor – both big foreign exchange earners. He added that Belarus was willing to offload loss-making firms to any private buyer willing to commit major investments to help turn them around. Such a decision signals the extent of the volte face by Lukashenko, who has said he is to completely reorientate the country’s economic and trade policies, switching from a pro-Russian to a pro-western stance. With the prospect of a union with Russia – at least one based on equality rather than subservience – now effectively dead in the water, in a thinly veiled attempt to shore up his position as president, Lukashenko has been forced into making an embarrassing political U-turn, and to adopt a line that runs contrary to the fiercely anti-western line pursued previously. With economic reality winning out over political rhetoric the question now is whether Belarus will be able to convince western investors of the merits of its investment story.
Unlikely hero
In the short term, at least, the answer seems to be yes. Given relatively low asset prices compared with those of its neighbours, Belarus could well prove to be an unlikely high-yield hero in 2007 and even amid the political spat with Russia it was able to secure new foreign direct investment. In late December, for example, St Petersburg-based Baltic Beverages Holding bought 30% of brewer Olivaria, purchasing a new issue of 36,711 common shares with par value of BR376,590 for $13.6 million. BBH also lent Olivaria, which has a roughly 10% share of the Belarusian beer market, $4.9 million to repay bank debt and to fund investment plans.
