Less than three years ago, Belarus was an economic basket case and political pariah. Its key trading partner and main source of funding, Russia, was in crisis. The Belarusian rouble was in freefall, inflation was well into double digits and FX reserves were at rock bottom.
Four-year Belarusian sovereign Eurobonds were yielding 20% and there were serious questions over the finance ministry’s ability to manage a $1 billion redemption in August 2015.
A return to international markets looked particularly remote because compliance-conscious western banks fought shy of involvement with a country whose president, Alexander Lukashenko, was under European and US sanctions for persistent human rights violations.
In this context, it was a minor miracle that in late June the sovereign was able to raise $1.4 billion of Eurobond funding at rates and in maturities that would have been unthinkable just two years ago.
A $600 million 10-year tranche was priced to yield just 7.625%. Privately, several emerging market bankers said they wouldn’t touch it with a bargepole at those levels. Yet investors lapped it up. The issue was handsomely oversubscribed and the long-dated tranche traded up three points in the days after the sale.
Subsequent reports suggested that at least two state-owned banks and one government agency were planning to follow the sovereign into the market. There was even talk of Belarus’s first-ever corporate Eurobond, following a roadshow in London by local retail giant Euroopt.
On paper, it is an impressive turnaround. Yet the question of whether bond buyers are really convinced by Belarus’s macro story or are simply desperate for anything that offers a modicum of yield in a world of ultra-low interest rates remains an open one.
Certainly much has changed in Belarus since the dark days of late 2014. The currency has stabilized after a move to a more flexible exchange-rate regime, and inflation is hovering just above 6%. The government has settled a long-running dispute with Russia over the price of raw materials for its large oil refineries, boosting exports and unlocking $1 billion in bilateral loans. Hard-currency reserves have also been boosted by the release of funding from the Russia-backed Eurasian Economic Union (EAEU).
Economic management has improved dramatically. The practice of upping public-sector wages by as much as 50% a year, a cornerstone of government policy until 2014, has been ditched. Price controls and production targets for state-owned enterprises, which still account for more than half the economy, are being abandoned.
The state-dominated banking sector is being restructured. Directed lending, which at one point had all but paralyzed the system, is being gradually phased out, with legacy loans being transferred to a new development bank. This contributed to a substantial decline in borrowing costs for Belarusian companies and individuals. Average lending rates for local-currency loans fell from 32.2% in January 2016 to 19.1% a year later, according to researchers at Raiffeisen Bank International.
Last year, the authorities even allowed the IMF to look into the books of public-sector banks as part of a sector-wide stress test and asset-quality review. Local bankers have suggested that this may have been seen as a form of insurance.
“They wanted the IMF to know what the situation was, in case things went really bad and they had to call them in to help,” says one.
Nevertheless, it was a big step for a country that is opaque and resistant to outside scrutiny. Policymakers also transferred chunks of non-performing loans to a newly created bad bank, in line with IMF recommendations.
There have also been signs of reform in other areas. Rigorous visa restrictions have been relaxed. The regulatory environment for private-sector firms has been improved. In 2014, Belarus ranked 82nd in the World Bank’s Doing Business report. This year it had jumped to 37th place, ahead of not only Russia and Hungary, but also Belgium.
Yet in some respects, little has changed in the country. Lukashenko still rules with an iron hand and a Soviet mindset. A much-vaunted unemployment rate of 0.9% is only achieved by bloating the payrolls of sclerotic state-owned firms.
An attempt to massage the figure still further by imposing a penalty for unemployment, the so-called social parasite tax, had to be abandoned after sparking rare mass protests in February and March. The efficiency with which the demonstrations were put down, however, clearly showed that Lukashenko has lost none of his authoritarian predilections.
It also exposed the political calculations behind the lifting of sanctions against Belarus by the EU and US last year, which was widely seen as a reward for Lukashenko’s refusal to support Russia’s interference in Ukraine rather than any change in the regime’s approach to human rights.
Of course, for investors this is not necessarily bad news. Along with a good track record of debt servicing, which Belarus does indeed have, the key things fund managers look for in frontier markets are growth and stability.
For Belarus, the former remains a distant dream. The economy is expected to contract again this year and growth rates are forecast to remain below 1% until at least the end of the decade.
However, Belarus undoubtedly does have stability – at least in the sense in which it is usually used by emerging market investors: namely, a country with an established authoritarian regime that has long since seen off any meaningful opposition and hasn’t yet run out of money.
Combined with a yield of more than 7%, it is a winning formula in a yield-hungry world.