LONDON (Reuters) – Investors face a classic ‘dictatorial dilemma’ in Belarus – hold on to securities that take advantage of the status quo in a brutal regime, or sell them and close their bonds – but whichever way they go, for largely dependent on Vladimir Putin’s Russia.
PHOTO PHOTO: Russian President Vladimir Putin discusses the environmental situation in the city of Usolye-Sibirskoye in the Irkutsk region during a video conference meeting with officials at the Novo-Ogaryovo state residence outside Moscow, Russia July 30, 2020. Sputnik / Alexei Nikolsky / Kremlin
The President of Belarus, Alexander Lukashenko, called “the last dictator of Europe” and in power since 1994, demanded victory in a presidential election last weekend with about 80% of the vote.
The announcement sparked days of widespread protests and threats of severe Western sanctions.
While putting an end to Lukashenko’s rule could be a long-term benefit for the country, it would also come with the risk of a direct debt crisis that would hurt large investors.
Despite a violent outburst on thousands of Protestants, foreign money managers have so far shown little inclination to sell their Belarus bonds. And as recently as June, they flocked to buy the new dollar spending that paid juicy returns of 5.7% -6.4%.
On Thursday, however, the pressure on Lukashenko appeared to intensify, and BlueBay’s veteran emerging market strategist Tim Ash wrote that the situation felt like Ukraine in 2014 at the time of its ‘Color Revolution’.
With workers from Belarusian factories in Belarus now taking part in protests and the Russian Foreign Ministry saying it thought foreign troops were destabilizing Belarus, Ash said Lukashenko’s days could be counted.
“The question now is what does Lukashenko do – does he double down on the use of force, or does he go to the exits in a helicopter?”
Belarussian authorities released arrested protesters on Friday after issuing a rare public apology in an attempt to stop the protests, while foreign union ministers met later on Friday to discuss possible new sanctions.
While no respectable investor would condone brutal police misconduct, election rigging or political intimidation, super companies such as Ashmore, JP Morgan Asset Management, Fidelity, Goldman Sachs Asset Management and Franklin Templeton all have bonds in Belarus according to Refinitiv data. None of them would comment on their positions.
Some investors said that the upturn only added to the misery of Belarus. The IMF is already forecasting a 6% economic downturn this year and with more than 90% of its international debt in dollars, a currency collapse could open the door to default – especially with $ 2.5 billion in bond payments coming through by the end of the year.
Another major risk is that Lukashenko could throw the cloth and draw Russian President Vladimir Putin’s support and financial support that remains in place, despite the lost ties of late between the two leaders.
Russia buys about 40% of Belarus’s exports, provides billions in bilateral loans and has traditionally provided substantial subsidies through preferential oil prices, estimated by the Center for European Reform between 2005-15 $ 100 billion .
Graph: Belarus’s bonds and currencies are struggling here
VITAL BACKSTOP
Union Investments portfolio manager Sergey Dergachev said Russia’s response was important with “an impact on bond prices and sentiment, as it is material for Belarus’s future economic and political career.”
He holds some Belarus bonds and although he cuts his exposure and looks at what Lukashenko, opposition leader Sviatlana Tsikhanouskaya and the EU are doing next, he considers the risk of sanctions that could be really harmful to investors, or a ban on buying ) of newly issued Belarus debt, is very, very low. ”
In any case, the decision can take weeks or months, as it requires all 27 EU members to agree.
Graph: Belarus’s foreign exchange reserves are set here
Does that all point to a debt crisis? Well, that depends.
Rating agency Fitch sees the government budget deficit balloon to 4.3% of GDP and debt-to-GDP jump to 50% from 42% last year, although it could climb higher if the ruble capitulates.
Even at current prices, $ 2.5 billion in forthcoming bond payments could leave the government with just over $ 7 billion in hard currency reserves at the end of the year – just enough to cover its financing needs for about two months in a worst case.
Nick Eisinger, chief executive, emerging markets of fixed income at Vanguard said the country has an external deficit of $ 2 billion- $ 3 billion, making it a priority to secure a delayed tranche of IMF support.
“I’m just wondering without the Russian financial backstop where should Belarus trade?”, Said BlueBay’s Ash.
Graph: the ruble of Belarus has fallen despite interventions
Additional reporting by Tom Arnold and Simon Jessop in London and Alex Marrow in Moscow, additional writing by Sujata Rao; Edited by Hugh Lawson
.
