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Belarus presidential elections worry investors; central bank’s independence under threat again- Russia, CIS and CEE Weekly Comment

Newly issued Belarusian sovereign Eurobonds continue to trade with wide spreads on mounting investor concerns ahead of the 9 August presidential elections. A peaceful transition of power in the style of the 2018 Armenian ‘Velvet revolution’ is the most desirable but nearly impossible outcome for the country which has been under the strong grip of Aliaksandr Lukashenka for the last 26 years, agreed most of the experts polled by Debtwire.

The crackdown on political opponents and civil activists is already in full swing and the government is prepping suppression measures against expected massive protests.

More than a hundred protesters and political  leaders were detained across the country last month with many still remaining in prison, including ex-banker Viktar Babaryka, one of the major challengers in the upcoming elections against Lukashenka, his 30-year old son Eduard Babaryka and popular blogger Siarhej Cihanousky, whose wife Sviatlana had to enter the presidential race instead of him.

“This is definitely a much more active pre-election campaign than ever before,” said Julia Kockaja, a journalist from Minsk, adding that protests had previously happened only after elections. Belarussian elections, which have never been recognised as free and  democratic by international observers, are held every five years and have always been won by Lukashenka.

“It was hard to collect signatures needed for the registration of presidential candidates during the coronavirus pandemic, so campaigners would set up tables in the city and people would queue up to put their signatures for all candidates - not one, for all of them,” Kockaja continued. “It doesn't matter who [wins] anymore as long as it is not Lukashenka.”

The opposition campaign started to gain momentum when Babaryka, who was the CEO of Belgazprambank- a subsidiary of Russian Gazprombank- for 20 years, announced in May his intention to run for president

Independent exit polls rate Lukashenka’s approval at an unprecedently low 3%, prompting a very popular meme “Sasha 3%” in local social media.

There will be no independent observers for the 9 August elections and the central election committee said it would not have a press center or a running tally of votes on election day.

The results will be announced the following day, Monday, when people are back to work and less able to protest, Kockaja noted.

Weighing sanctions 

A Moscow-based credit analyst sees two possible scenarios after the elections. “Lukashenka staying in power with no major protests happening, in which case spreads on Eurobonds should tighten; and Lukashenka staying in power after crushing the protestors, which will send the spreads even wider,” he said.

There will be no peaceful revolution, he thought.

“Lukashenka has nowhere to go, he will fight until the end. [Ukraine’s former president] Viktor Yanukovych did not dare ordering fire on Maidan [in 2014] and he lost the power, the money, everything - hiding in Russia now,” the analyst said. “Lukashenka saw a lesson there and will fight back hard if he needs to. He will crush protests with brutal force and Belarusian special services are well prepared for it.”

If the government ends up using violence against peaceful protesters, Belarus might face international sanctions again, similar to those imposed after the December 2010 presidential elections, agreed the analyst and a London-based portfolio manager. Belarus was cut out of the international markets following a brutal crackdown on the opposition during the 2010 elections.

That will push Belarus closer to Kremlin's influence and its economy even more dependent on Russia, according to the Moscow-based analyst and an analyst in Kyiv.

“Lukashenka will find himself in the same situation as Yanukovych, when nobody wanted to fund the government and only Putin gave him a loan,” commented the analyst from Kyiv.

But the West, which prefers to have Belarus as a buffer state, may be more lenient with sanctions to allow Lukashenka some way out of Putin's hands, the analyst from Moscow and a second London-based portfolio manager agreed.

Belarus priced its USD 500m 6.125% long five-year and USD 750m 6.375% long 10-year bonds at 98.799 and par respectively at the end of June. Mid-price Z-spreads on both the 2026s and 2031s have widened by 43bps to 590bps and 609bps respectively, according to IHSMarkit.

The country’s curve has been trading tighter than Ukraine, but it broke the ceiling at the end of June, according to the Moscow-based analyst.

Industries  keeping the country afloat 

Putin mounted economic pressure on Lukashenka for closer integration between the two countries early this year halting Russian oil supplies to Belarus for a short period.

Russia had been supplying energy resources to its smaller land-locked neighbour at subsidised prices until 2019 when it stopped waiving export energy fees for Belarus. The move cost Belarus USD 330m last year.

The countries are yet to determine further cooperation, but Belarus may receive a USD 60m–70m compensation from Russia for the increased cost of energy supplies by the end of 2020.

Belarus has no alternative energy supplies and until now only managed to purchase singular oil tankers from other countries, said Vadzim Iossub, a Minsk-based senior research analyst at Alpari Eurasia.

Export of oil refining products along with potash fertilizers amount to nearly 50% of the country’s total export revenues, Iossub noted, adding that the refining sector suffered during Spring due to the collapse of oil prices and reduced demand from Europe.

Another sector that keeps local economy afloat is the so-called Belarus Hi-Tech Park, a special regime offering a variety of tax benefits for its residents, Iossub continued. While the initiative contributes to the economy by paying salaries and renting offices, its ultimate beneficiaries are registered elsewhere in Europe, he added.

Belarus has also benefited from developing a gambling industry after Ukraine and Russia shut down their casinos, the Moscow-based analyst said. It is hard, however, to ascertain what contribution the industry, owned by businessmen close to the government, is making to the state budget, Iossub noted.

The country is a known exporter of agricultural products, mostly to Russia, pumping hard currency into the budget but the sector itself might actually not be cost-effective, Iossub said.

Central  bank’s independence under threat 

Belarus is the only country in Europe that has not introduced a nationwide lockdown amidst the coronavirus pandemic. As a result, its January-to-May GDP only contracted by 1.8%, less compared to neighboring countries.

“That GDP calculation, however, includes stocked goods produced during the period that have not been sold. Cooperation chains have been disrupted during the pandemic and borders were closed and it remains to be seen when and how those products will be sold,” Iossub noted.

The IMF projects that the Belarusian economy will shrink by 6% by the end of the year and start a slow recovery in 2021-2022.

The National  Bank of the Republic Belarus has been implementing a balanced monetary policy since 2015 keeping the Belarusian ruble rate stable. However, the president has recently held a bankers' meeting and instructed them to cut down the refinancing rate and made the central bank responsible for the timely payment of salaries at enterprises.

“This is an intervention into monetary policy that could end badly and cause devaluation of the currency. This has happened many times before in the history of independent Belarus, which holds the record for the highest devaluation and inflation among former Soviet republics,” Iossub cautioned.

The central bank projects inflation rate to reach 5%-6% by the end of 2020, but the analyst thinks it will be 6%-8% if the monetary policy remains reasonable.

haBelarus needs to honour around USD 4bn each year of external debt payments, of which the government can pay a quarter from the budget, leaving it with USD 3bn of annual funding needs, according to the analyst.

The country’s international reserves fell sharply from USD 9.243bn in January to USD 7.787bn in March but they have been climbing back up and are now at USD 8.195bn, of which USD 4.45bn are kept in hard currencies. The central bank plans to maintain a minimum of USD 7.3bn through 2020.

Fitch forecasts that the general government debt will increase to 49.6% of GDP (including 7.7% in government guarantees) by the end of the year, from 41.9% in 2019. The adjusted general government budget deficit will reach 4.3% of GDP in 2020, as compared to surplus of 1.6% in 2019, the rating agency said in its May research note.

Belarus is rated B by both S&P Global Ratings and Fitch and B3 by Moody’s.

By Alesia Sidliarevich, Associate Editor, CEEMEA, Debtwire and Laura Gardener Cuesta, Senior Reporter, CEEMEA, Debtwire. 

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