Russian pressure and recession liberalize Belarus

LIKE OTHER STATE officials in Belarus, Vasily Matyushevsky, deputy chairman of the national bank, is breaking free from his country’s reputation for Stalinist isolationism.

"Unlike other countries of the world we are privatizing banks, not nationalizing them," he says. The global crisis could hardly have extended state intervention in Minsk. The public sector already accounts for more than two-thirds of the Belarusian economy and the banking system is little more than a policy instrument.

Alexander Lukashenko, Belarus’ all-powerful president for the past 15 years, seems to be trying to shore up his influence by playing Russia off against the west, while simultaneously cultivating friendships with such countries as Iran, Venezuela, China and India.

"Belarus has a multi-vectoral foreign policy," is how foreign minister Sergei Martynov explains the approach to Euromoney.

Despite a rapprochement with the EU and Russia’s financial and economic problems, the balance is tipping in favour of Russian buyers in Belarus’s privatization programme. But neither Russia nor the west is prepared to allow Belarus to continue acting like a communist state.

Financial services are at the forefront of privatization in Belarus, partly thanks to Belarusian bankers’ relatively sound understanding of capitalism. Banking is already Belarus’s most liberalized sector; there are 27 privately owned banks.

Four state lenders have about 75% of banking assets. However, Matyushevsky tells Euromoney that by the end of the year the government plans to offload controlling shares in two of the top-five Belarusian banks: BPS and Belinvestbank. Another official says BPS is working on the sale with state-owned Russian lender Sberbank, which, according to the national news agency, is also negotiating a loan of $2 billion to the Belarusian state. Since 2003, Austria’s Raiffeisen has had a controlling stake in Priorbank, the third-largest lender.

Matyushevsky last year mentioned to reporters that Commerzbank was a possible buyer of Belinvestbank but the partial nationalization of the German lender will make such acquisitions harder to justify to its shareholders.

Belarusbank and Belagroprombank, respectively the biggest and second-biggest bank, are officially on sale, although the state will maintain majority stakes. Officials most frequently mention Russian agricultural lender Rosselkhozbank when talking about a buyer for Belagroprombank.

Gazprom and a Soviet capitalist disaster

Closer links between Russia and Belarus, including currency union and even federation, were suggested during the early years of Lukashenko’s rule, which has been characterized by its nostalgia for the Soviet Union. As Russian nationalism became resurgent under Vladimir Putin, however, Lukashenko’s influence in this relationship began to wane. Higher prices were demanded for the hydrocarbons that Russia supplies to Belarus, and in January 2007 Gazprom turned off the gas tap, demonstrating its muscle.

As part of the new price deal, Belarus handed over part of its national pipeline company (ABN Amro advised on the deal). Moscow-based state lender VEB also acquired a controlling stake in its Minsk-based equivalent, Belvnesheconombank, the sixth-largest lender in Belarus.

Prices for Russia’s oil and gas exports to Belarus were doubled in 2007. Price increases continue this year and will last until 2011 when Belarus will have to pay market rates. This is of crucial significance for Belarus, not least because Russian energy subsidies have underpinned Lukashenko’s system of guaranteed employment and rising income, and in turn his political support.

Perhaps in a sign that Lukashenko wants to extract more from his country’s links to Moscow, Belarus has not yet recognized the independence of Abkhazia and South Ossetia. And although the Belarusian government says this is unrelated to the decision not to recognize Abkhazia and South Ossetia, at the end of March the European Union agreed to include Belarus in its Eastern Partnership, a programme of closer ties with countries along Russia’s western and southwestern borders. So Belarus, it seems, is getting closer to the west – coming in from the cold, as it were.

"In the 21st century, in a globally interdependent economy, you cannot solve problems by economic sanctions"

Sergei Martynov

"Involvement of Belarus in the Eastern Partnership gives the Eastern Partnership a whole new dimension. It makes it new," says foreign minister Martynov. The programme envisages free trade agreements, increases in financial aid and help with institution building, among other measures. "The prospect of a free trade zone is of much interest to us," Martynov says.

As the regional crisis hits home, however, Lukashenko’s Belarus looks even more vulnerable and even more needful of help from the west and Russia. The country’s exports contribute more than 60% of its GDP. Since autumn, its exports have fallen more rapidly than its imports and the worst-hit market has been Russia, the destination in 2008 of 32% of Belarus’s exports (44% went to the EU).

Government figures show volumes of exports to Russia in January and February were 37% down on the same period last year. The overall volume of Belarus’s exports has fallen by about 30% since the beginning of the year, and prices for Belarusian goods, especially petrochemicals, have fallen.

Growth in the banking sector of up to 50% fuelled GDP growth rates averaging almost 10% over the past few years, with inflation similarly around 10% or higher. Belarus’s official unemployment figure of about 1% might be misleading as state-owned companies are putting shorter working weeks into effect, and introducing more holidays for their staff.

The government’s hopes for slow economic growth this year might be optimistic. Standard & Poor’s expects economic growth to be nearly zero, and some independent Belarusian economists say production is falling. The ratio of banking assets to GDP is only about 50% in Belarus, compared with about 80% in Ukraine. But few would suggest Belarus is worse hit than Ukraine, whose economy has shrunk by about one-third.

Nevertheless, Belarus’ international reserves of about $4 billion are sufficient to cover only just over a month’s imports, and the current account deficit rose to 7.4% of GDP in 2008, compared with a roughly balanced current account three years earlier.

Before the crisis, general government debt in Belarus was about 10% of GDP, mostly bilateral loans – most frequently from Russia. According to an August 2008 Raiffeisen report, 13% of the banking sector’s balance sheet was from foreign funding. Most lending to Belarus was short-term.

Since September, the energy and export crisis has been combined with an almost complete halt to international commercial bank lending to Belarus. Furthermore, although the authorities are taking measures to increase the use of local currency, in Belarus about 40% of banking assets and about one-third of deposits are in foreign currency, a level that increased rapidly towards the end of 2008, forcing the central bank to shore up the currency.

Belarus has thus been driven to seek immediate financial aid from whoever can give it – even crisis-stricken Russia and the IMF. In better times Lukashenko dismissed the IMF as a bunch of swindlers. At the same time, Belarus is apparently being pushed to accept foreign direct investment through bank privatizations.

The IMF is disbursing $2.46 billion in stages until early 2010, subject to quarterly reviews. Russia agreed to lend $2 billion for 15 years in November 2008, of which half has already been received. This is in addition to the $1.5 billion that Russia lent Belarus in December 2007.

China, another important trade partner and perhaps a less demanding creditor, has helped by providing Belarus’s central bank with an exchange rate swap for the equivalent of $2.9 billion this March.

Friends abroad

Belarus is proud of its increasing links with the governments of Iran and Venezuela. These links help insulate the country from energy price rises and economic and political sanctions imposed by the west because of perceived political repression perpetrated by the Belarusian government. Iran and Venezuela provide Belarus with enhanced energy security as well as new export markets. Belarusian oil company Belorusneft already extracts oil in Venezuela, for example and it has an agreement to do so in Iran.

Last autumn, the US Treasury suspended sanctions that had been imposed at the beginning of 2008 against two subsidiaries of Belneftehim, Belarus’s oil-refining and chemicals company. Sanctions against a third arm of Belneftehim remain in place. A ban on Lukashenko travelling in the EU was suspended last year, although largely symbolic EU and US asset freezes aimed at Belarusian officials including Lukashenko are still in place.

"In the 21st century, in a globally interdependent economy, you cannot solve problems by economic sanctions. It doesn’t work," Martynov says.

In Venezuela, Belarusian firms are building plants to make trucks, dumper trucks and tractors. Similar projects are planned for Iran. Iranian company Samand has started producing cars in Belarus.

Closer banking ties with Venezuela are being developed. State-owned Iranian bank Tejarat is establishing a subsidiary in Belarus.

As Belarus is an important importer of manufacturing components, export credit agencies are also helping the country avoid harsh loan conditions precipitated by rising energy costs and shrinking export markets. These lenders are increasing their lending to Belarus and the maturities of their loans in a bid to support their own manufacturing bases during the recession.

Earlier this year, Germany’s Euler Hermes covered a €100 million indirect loan to Belarusian glass company Gomelsteklo. Belagroprombank is the go-between. By the end of March, meanwhile, Belarusbank had attracted loans covered by export credit agencies worth $50 million in 2009, and it was negotiating loans worth a further $100 million. In the whole of 2008, Belarusbank’s loans covered by export credit agencies were $100 million, according to Vladimir Novik, one of Belarusbank’s board members.

Belarus itself is expanding lease programmes abroad to stimulate sales of its goods, especially in Russia.

Belarus’s role as a regional assembly line dates from Soviet times. It produces everything from computers to refrigerators.

The cornerstones are automobiles, as well as petrochemicals and fertilizers, worked up from the hydrocarbons going via Belarus from Russia to the EU. Belarus produces 6% of the world’s tractors and 30% of the world’s dumper trucks – a crucial source of employment in the country. More than 30% of the gas and more than 40% of the crude oil exported to the EU from Russia flows through Belarus, much of it refined in Belarusian facilities.

However, Gazprom and the financial markets crisis will do more than US sanctions to loosen Lukashenko’s grip on power and the economy. State companies’ success was predicated on healthy export markets in Russia and the EU as well as cheap energy and well-educated people. As energy costs rise the firms’ bloated workforces will be costlier to maintain. And in the long term some firms will face a more serious challenge from the increased number of production facilities in Russia and neighbouring states being built or sponsored by western companies such as Volvo.

"Our task is to not allow rises
in unemployment and decreases in wages and to prevent
the deterioration of the
wellbeing of the people"

Tatyana Starchenko

"In a recession or slow recovery there will be no room in Russia for firms less competitive on price and quality," says Daniel Krutzinna, associate partner at local investment firm Uniter.

Many state firms have also received vital support in the form of bank loans subsidized and encouraged by central government – in effect part of the companies’ reward for adhering to government growth targets.

Belarusian banks apparently enjoy high capital adequacy ratios: 20% in the case of Belagroprombank, and 15% in the case of Belarusbank. According to the IMF, aggregate capital adequacy in Belarus was 16.5% in September, and in December the government recapitalized its four largest banks with an equivalent of $1.4 billion.

According to the IMF, reporting methodology in Belarus means that banks’ balance sheets might not be as healthy as they appear to be. For example, contrary to international norms, prolonging or restructuring a loan does not have an impact on its classification.

A recent report quoted a central bank source as saying that problem loans made up 2.07% of total assets on March 1, having risen by 0.4% during the first two months of the year. As banks move closer to international reporting standards and the effects of the recession close in, balance sheet dangers will show. The overall loan-to-deposit ratio of Belarusian banks is already high, while provisioning against non-performing loans is relatively low.

Retail customers might find it harder to repay their loans thanks to IMF recommendations for slow public-sector wage growth, as well as by the inflation caused by January’s 20% devaluation of the Belarusian rouble (another IMF recommendation). Real public-sector wages will fall slightly this year.

Another cause for concern is the drop in real estate prices. One bank executive reckons property prices have fallen 30% to 40% since the beginning of the year after they had roughly doubled in Minsk over the past two years. A government target for developers to construct 10 million square metres of housing every year until 2011 would further increase supply.

Extra guarantees for bank deposits implemented on January 1 will protect banks from a run on deposits. Lowered central bank reserve requirements in place since November might make continued credit expansion more of a possibility.

But as the IMF and others impose conditions on Belarus, and as the state banks become weaker or more profit-driven, state-owned companies will be less likely to get cheap quasi-government loans.

The last stage of socialism

The IMF wants Belarus to wean its banks and companies from directed lending so the country can move to more market-led development. Belarus has told the IMF it will decrease the level of public investment this year. But the political will for this might be lacking. "As a citizen, I can’t see I get better service from the private banks," says Tatyana Starchenko, deputy economy minister. "Our task is to not allow rises in unemployment and decreases in wages and to prevent the deterioration of the wellbeing of the people."

Government-guaranteed loans to collective farms and subsidized mortgages might therefore continue as long as they can, and the IMF will be happy if such finance is transferred to the state budget.

But Belarus has already committed itself to amending laws so the government can no longer increase its deposits with the state-owned banks. It has also committed itself to removing ceilings on rouble lending rates to corporates.

Deputy foreign minister Vladimir Amarin tells Euromoney that this year Belarus decreased the overall tax burden on the economy by 1.3% of GDP (about $1 billion). Such moves will reduce the scope for the government bank recapitalizations that supported state-directed growth schemes. In recent years, Belarus has paid an annual rate of about 1% of its GDP for bank recapitalizations.

One possibility being studied by the authorities is an agency to collect from the banks the government-directed loans to state development programmes. The agency could then be used for new funding of such schemes, according to the IMF. But this new funding could only be put in place if the government and the agency had the money.

Whatever the will of Lukashenko or the IMF, those banks not owned by the state are already comparatively independent from state plans. The chairman of Priorbank is reputedly adept at balancing the demands of Lukashenko and Raiffeisen, while Belvnesheconombank has the privilege of being owned by Russia’s VEB.

As loans from Russia bail out Belarus, for some observers it is unclear how open the bank privatization bidding process can be. If more banks fall into Russian hands, lending in Belarus will be increasingly directed by Putinism and profit rather than guaranteed employment.

It is probably too late to adapt state industrial firms’ management to reduced export demand and market prices for energy and finance. After the banks are sold, Lukashenko might therefore be forced to sell off the government automobile companies and refineries, even before Russia completely removes energy subsidies in 2011.

For the west, the worry is that Belarusian workers and their companies, tractors and dumper trucks are being gradually pushed into an ever-closer union with Russia – perhaps part of the reason why Belarus is in the EU’s Eastern Partnership.



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