Investors in Belarus face 'dictator dilemma', Putin may hold the key
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[August 14, 2020]
By Marc Jones
LONDON (Reuters) - Investors face a classic
'dictator dilemma' in Belarus - hold on to securities that benefit from
the status quo in a brutal regime, or sell them and sever their ties -
but which way they go may depend largely on Vladimir Putin's Russia.
Belarus's President Alexander Lukashenko, dubbed "Europe's last
dictator" and in power since 1994, claimed victory in a presidential
election last weekend with around 80% of the vote.
The announcement has triggered days of widespread protests and brought
threats of stringent Western sanctions.
While an end to Lukashenko's rule could be a long-term benefit for the
country, it would also come with the risk of an immediate debt crisis
that would hurt major investors.
Despite a violent crackdown on thousands of protesters, foreign money
managers have so far shown little inclination to sell their Belarus
bonds. And as recently as June they flocked to buy the country's new
dollar issues that paid juicy 5.7%-6.4% yields.
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 'Colour
Revolution'.
With workers from state-run Belarus factories now joining protests and
Russia's foreign ministry saying it thought foreign forces were
destabilising Belarus, Ash said Lukashenko's days could be numbered.
"The question now is what Lukashenko does - does he double down on the
use of force, or head to the exits in a helicopter?"
Belarusian authorities released detained demonstrators on Friday after
issuing a rare public apology in a bid to quell the protests, while
European Union foreign ministers meet later on Friday to discuss
possible new sanctions.
While no respectable investor would condone brutal police crackdowns,
election rigging or political intimidation, supersized firms such as
Ashmore, JP Morgan Asset Management, Fidelity, Goldman Sachs Asset
Management and Franklin Templeton all own Belarus bonds according to
Refinitiv data. None of them would comment on their positions.
Some investors said the upheaval has only added to Belarus's woes. The
IMF already forecasts a 6% economic slump this year and with more than
90% of its international debt in dollars, a currency collapse may open
the door to default - especially with $2.5 billion of bond payments due
by the end of the year.
Another major risk is that Lukashenko could throw in the towel and
Russian President Vladimir Putin could pull his support and financial
backing that remains in place despite worsening ties of late between the
two leaders.
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Belarusian President Alexander Lukashenko chairs a meeting on
topical issues in Minsk, Belarus August 12, 2020. Andrei Stasevich/BelTA
via REUTERS
Russia buys around 40% of Belarus's exports, provides it with
billions in bilateral loans and has traditionally given substantial
subsidies through preferential oil prices, estimated by the Centre
for European Reform to have been worth $100 billion between 2005-15.
VITAL BACKSTOP
Union Investments' portfolio manager Sergey Dergachev said Russia's
reaction was key with "an impact on bond prices and sentiment since
it is material for (the) future economic and political trajectory of
Belarus."
He holds some Belarus bonds and while he trimmed his exposure and is
watching what Lukashenko, opposition leader Sviatlana Tsikhanouskaya
and EU do next, he reckons "the risk of sanctions which might be
really harmful for investors, i.e a ban on (buying) newly issued
Belarus debt, is very, very low".
In any case, the decision could take weeks or months as it requires
all 27 EU members to agree.
So is it all pointing to a debt crisis? Well that depends.
Rating agency Fitch sees the government's budget deficit ballooning
to 4.3% of GDP and debt-to-GDP jumping to 50% from 42% last year,
though it could climb higher if the rouble capitulates.
Even at current prices, $2.5 billion of upcoming bond payments could
leave the government with little over $7 billion in hard currency
reserves by the end of the year - only enough to cover its financing
needs for around two months in a worst case scenario.
Nick Eisinger, principal, fixed income emerging markets at Vanguard
said the country faced a $2 billion-$3 billion external shortfall,
making it a priority to secure a delayed tranche of IMF aid.
"I just wonder without the Russian financial backstop where Belarus
should trade?", BlueBay's Ash said.
(Additional reporting by Tom Arnold and Simon Jessop in London and
Alex Marrow in Moscow, additional writing by Sujata Rao; Editing by
Hugh Lawson)
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