Foreign Investments: Not only lure them, but make them work
Maria Akulova

Summary

When it comes to Belarusian efforts to attract foreign investments, the year 2010 looked a lot like the previous year. Foreign capital inflow kept growing at a slow pace; there were no major privatization deals, as the state is still unwilling to put up for sale large property units and is reluctantly ready to cede control only in insignificant enterprises.

Nevertheless, the year 2010 was marked by the country’s successful debut on European stock markets with issuing Eurobonds, listed at the Luxembourg Stock Exchange in summer. Furthermore, important steps were made to increase the investment appeal of the country: in 2010, the government abolished licensing of many business activities and lifted the ban on sale of shares of Belarusian joint-stock companies, a move contributing to a recovery of the domestic stock market.

Tendencies:

• FDI does flow into the country, albeit at a very slow rate; privatization is pursued on a case-by-case basis and looks like a forced measure rather than an instrument to introduce structural economic changes;
• New financial instruments are tested; the country enters international stock markets with its debut Eurobond issue;
• Loans still dominate in the structure of foreign financing;
• A number of regulatory documents are adopted to enhance the investment attractiveness of the country.

The state had pinned high hopes on the year 2010 when targeting external sources of financing. Belarus had planned to attract USD 5.6 billion in foreign investments, of them USD 2.8 billion, or exactly one-half, in FDI. By October 1, 2010, FDI inflow had reached USD 1.27 billion, which was short of the target1 . Against the first three quarters of 2009, when FDI inflow amounted to USD 1.22 billion, there was a slight increase in the share of FDI in the overall volume of external financing, to 26% from 23%; however, in January-September 2010, gross foreign investments shrank 5.3% year-on-year.

Also in January-September 2010, Belarus’ foreign liabilities expanded 16%, or by USD 3.533 billion, to reach USD 25.593 billion on October 1, 2010, or 48.8% of GDP. Although the country’s foreign liabilities stood only at USD 6.844 billion, or 18.5% of GDP, back in 2007, last year’s increase was well within permissible limits, especially compared with neighboring countries. However, it is not the amount of the debt that is alarming, but the growth rate. As of October 1, 2010, state foreign debt, including the debt of the government and corporate debts guaranteed by the government, was at USD 9.97 billion, an increase by USD 1.607 billion from the start of the year, or by 19.2%, and reached 19.5% of GDP (with the permissible limit previously approved at 20%). Since it will soon be time for Belarus to repay the loans it took in 2008 and 2009 and pay interests on Eurobonds, this pace is truly alarming, as it is not quite clear how the government plans to service this debt.

As is known, foreign investments in Belarus are divided into three categories – FDI, portfolio investments and other foreign liabilities of the country. Practice shows that now that the market of corporate bonds is underdeveloped, only the capital coming as FDI is capable of facilitating modernization and enhancement of competitiveness. The remaining types of financing aim at tackling other problems: they help improve the current situation and shore up gold and foreign exchange reserves with a view to further servicing the foreign debt and covering the balance of payment deficit.

The structure of foreign investments in the first three quarters of 2010 indicates that “other foreign liabilities”, that is credits and loans of the government and banks, as well as commercial loans, accounted for 54% of overall investments. FDI made up 26% of gross capital inflows in January-September 2010, and portfolio investments made up 20% of the total.

Foreign Direct Investments

The year 2010 did not see a breakthrough in Belarus’ efforts to lure FDI compared with the previous year: we already mentioned that Belarus attracted only USD 1.27 billion in FDI in the first three quarters of the year. FDI in Belarus may be split into two groups: Greenfield investment, or financing of enterprises and facilities built from scratch, and mergers and acquisitions. The latter currently dominates in Belarus. The relatively slow increase in FDI inflows in January-September 2010 may be attributed to a few factors. Firstly, the presidential election in late 2010 and likely economic reforms that were supposed to follow stopped potential investors from making hasty decisions. Secondly, relations with the Russian Federation remained cool as never before throughout the year. Given the direct dependence of Belarus on its eastern partner, the tensions increased investment risks and prompted investors to take a pause and see what happened. Thirdly, the government gave half-hearted consent to privatization transactions considering privatization only from the fiscal point of view. As a result, there were very few privatization deals.

The key M&A transactions included first of all the transfer of the fourth and final USD 625 million installment by Russian gas giant OAO Gazprom for the remaining 12.5% shareholding in OAO Beltransgaz. In the spring of 2010, Belarus sold a 52% stake in OAO Minsk watch plant to Swiss Franck Muller for USD 12.6 million. Russian OAO Katren paid some USD 30 million for a 51% stake in pharmaceutical company Dominantapharm.

Furthermore, Lithuanian distributor company Ipsun acquired a 90% interest in leasing company Belfin for USD 5 million. In the autumn of 2010, Danish brewery Carlsberg bought a 25% stake in Belarusian Olivaria brewery for USD 10 million and increased in shareholding in the company to 55% from 30%. OAO Gomelsteklo and German Hom Glass Industries AG reached an agreement on supplies of equipment for Gomelsteklo modernization worth a total of EUR 35 million. Finally, in late 2010, Turkish Turkcell transferred a USD 100 million tranche to Belarus under the 2008 agreement to buy an 8% stake in ZAO BeST.

When it comes to Greenfield investments, one of major transactions of 2010 was an investment agreement on the construction of a logistical center in Minsk worth an estimated EUR 15 million between Belgospischeprom concern and Cypriot Lebortovo Capital Partners Limited, inked in February. In summer, Lithuanian Vakaru Medienos Grupe in association with Swedish IKEA signed an agreement with Mogilev region administration on the construction of a vertically integrated woodworking complex in the free economic zone Mogilev, including factories making veneer and other products from wood chips with a total value of EUR 64.3 million. German Enertag and Minsk region administration in 2010 signed an agreement on the construction of a wind farm. In addition, Alutech and the International Finance Corporation (IFC) signed a deal to finance a EUR 22 million plant to make aluminum constructions in Belarus.

The III Belarusian Investment Forum in Frankfurt am Main held in November 2010 was also quite successful. Compared with the first forum of this kind in London back in 2008, the German forum saw not only many more projects and guests, but also more agreements. The fact that deals were signed in many sectors of economy proves that Belarus has lots of promising areas to develop in future. However, since most of the agreements signed during the forum were statements of intent, it will depend on the economic situation in the country, political and economic risks, as well as the general investment climate whether they will be successfully implemented. In other words, it will take time to see whether the investment forum was efficient or not.

As can be seen from the above, there were some sporadic successful transactions in 2010, however, the government never made up its mind to allow structural privatization of any large significant enterprises that truly interest foreign investors and instead put up for sale a few less substantial entities in a bid to “minimize losses”. The few attempts to privatize state-controlled enterprises were not successful, though. In order to get the final installment of the IMF loan under the SBA-supported economic program, the state opened competitive tenders to sell state stakes in five companies: OAO Bobruisk Engineering Plant (starting price set at BYR 16.75 billion), OAO VolMET (BYR 2.54 billion), OAO Barkhim (BYR 32.97 billion), OAO Lida casting and mechanical plant (BYR 12.26 billion), and OAO Rechitsa textile (BYR 23.9 billion). There were a couple of attempts to auction state stakes in those five companies, however, there were no bids from potential buyers.

Why were foreign investors not interested in the Belarusian companies? The main reason was, as always, the price, as well as long lists of additional conditions and requirements that buyers were supposed to meet. The price of state assets remains the main obstacle impeding fast privatization. Belarusian regulations disallow privatization of enterprises in which the market value of assets is below the balance sheet value, and, naturally, investors are not ready to pay pre-crisis prices for Belarusian enterprises given the current market situation, competitiveness of the companies that are currently “up for grabs” and risks inherent in Belarus, both economic and political. In addition to high prices, Belarus also demands that future investors preserve the number of jobs and the core activity of the companies in question and contribute considerable monetary and non-monetary assets to the development of the companies. As a result, potential investors were not interested, there were no bids, and the auctions were frustrated.

Two more issues that still remain undecided are the sale of OAO Belinvestbank and a shareholding in OAO Belaruskali. The government made up its mind on the bank long ago, whereas Belaruskali has always been the country’s contingency plan for the worst-case scenario: no one wants to give up one of very few blue chips. The government has not reached price agreements with investors on either project: OAO Belinvestbank was put up for sale at USD 530 million (the government cited its systemic role as one of Belarus’ five largest banks). However, BPS-Bank, which is larger than Belinvestbank, was sold for USD 280 million in 2009, so it will be very hard for the government to find an investor ready to cough up almost twice as much for a smaller bank. The same applies to OAO Belaruskali: in 2010, Belarus was ready to sell 25% in the potash maker for USD 6-7 billion, but there have been no specific proposals for concrete investors so far: potential buyers believe the Belarusian administration has set an unreasonably high price.

Portfolio investments

As for portfolio investments, the year 2010 differed radically from previous years: in summer, Belarus completed its debut placement of five-year Eurobonds totaling USD 1 billion with an average weighted coupon yield of 8.7% and biannual coupon payments2 . In addition, Belarus placed two-year bonds on the Russian market, worth RUR 7 billion, at a rate of 8.7% and quarterly coupon payments3 . Belarus clearly benefited from the new financing instrument, which enables it to borrow for long periods of time. The country’s entering the global stock market increased investors’ interest and awareness, which means further cooperation is facilitated, provided the country pursues the right economic policy.

However, buyers of Belarus’ debt securities on foreign stock markets are not supposed to demand structural reforms in Belarus; the only thing they are genuinely interested in is the profit, whereas loans extended by the International Monetary Fund (IMF) presupposed certain commitments of the borrower under the agreed programs. Since the Belarusian government is intimidated by any sort of change, this peculiar feature of deals with debt securities makes bond offerings a welcome instrument. The high price of borrowing through bond placement is a major disadvantage, though, because the coupon rate of 8.7% is quite high (especially given the fact that prior to its default, Greece placed its Eurobonds at a rate of 6.2%). Unfortunately, there are no indications now that prices will come down soon. On the contrary, the events that followed the presidential election of late 2010 will likely result in higher rates. The new seven-year USD 800 million Eurobond offering in January 2011 proved this: Belarus will have to pay coupons at a rate of 8.95%4 .

Other foreign liabilities

Other foreign liabilities decreased 30.5% year-on-year in January-September to USD 2.708 billion as of October 1, 2010. The chief channels of “other foreign liabilities” were inflows of foreign credits and loans (71.8%) and foreign trade loans (38.7%), whereas non-residents’ bank accounts and deposits with Belarusian banks, as well as “other liabilities to non-residents” shrank -1.8% and -8.7%, respectively, indicating outflows of investments.

Most of the foreign credits and loans were from commercial banks and the final installment of the IMF loan under an economic program supported by a Stand-By Arrangement, which reached USD 638.5 million. Commercial banks borrowed USD 1.241 billion, including USD 832.6 million in short-term loans. Significant loan deals concluded by Belarusian banks included a EUR 103 million subordinated loan to Belarusian ZAO Bank Trade Capital from Iranian Tejarat and two syndicated loans taken by ASB Belarusbank in early and late 2010, amounting to USD 60 million and USD 145 million. Both loans were taken in order to support- export-oriented Belarusian producers, credit domestic investment projects, finance modernization and upgrade of productions and construction operations.

In the first three quarters of 2009, Belarus observed a totally different trend, as banks’ liabilities under foreign loan agreements decreased by USD 322.8 million. This dramatic change in the situation with foreign loans is attributed to the policy of the central bank, which was insisting on commercial banks’ cutting their loan rates for companies. The demand was not unreasonable, because the National Bank had to take measures to encourage the real sector by facilitating lending by commercial banks. On the other hand, soft loans to inefficient companies and bankrupt ones increase both the burden on the banking system and the economy’s debt to banks.

Arrangements to attract foreign financing and improve the investment climate in 2010

Last year was not really rich in economic reforms or arrangements designed to encourage foreign investors. Nevertheless, some progress was reached, which means the situation may change for the better in the future.

1. Establishment of the government agency “National Investment and Privatization Agency”

On May 25, 2010, the Belarusian president signed ruling #273 on the establishment of the government agency “National Investment and Privatization Agency” (NIPA)5 . The objective of the new structure is to increase the efficiency of privatization in Belarus and promote constructive dialogue between potential investors and state authorities of Belarus, which is expected to increase the overall level of Belarus’ investment appeal internationally.

As of today, none of the NIPA objectives has been attained. Although the ruling was approved back in May 2010, the documents to flesh out the framework of the new agency are still discussed and reviewed by concerned authorities. Furthermore, it is not clear yet what the NIPA administration will be guided by when identifying state-run entities for sale, as it is the State Property Committee that is responsible for privatization now (however, it is no secret  that all decisions regarding privatization transactions in Belarus are approved personally by the president). Under the circumstances, the relevance of the newly established privatization champion is somewhat doubtful.

2. Abolition of licensing of some business activities

On September 1, 2010, the president signed ruling #450 on licensing of some activities6 . Given the propensity of the state authorities to exercise total control over all types of business activities in Belarus, the document is supposed to have a major positive impact on investment inflows. Starting January 1, 2011, the state considerably expanded the list of activities that businesses can engage in without taking out licenses. Licensing was abolished for woodworking, extraction of minerals, fishing and hunting business, auditing activities, travel services, transport and forwarding business, geodesic and map-making activities, and retail, except for retail of tobacco goods and alcohol. The president also abolished licensing of investment funds’ business, which is expected to foster the development of the financial and stock markets of the country.

3. Abolition of the moratorium on sale of shares.

On January 1, 2011, Belarus lifted the ban on sales of shares in joint-stock companies7 . The move will encourage the Belarusian stock market, which had remained passive in the past few years. Potential buyers of shareholdings in Belarusian companies are also expected to step up their efforts to grab larger stakes in most appealing businesses. Furthermore, the decision will result in an increase in domestic investments, because households, entrepreneurs and companies have been offered additional instruments to improve their well-being or gain additional profits through acquisition or sale of shares.

4. Directive #4 on liberalization.

Directive #4 “On the development of entrepreneurial initiative and encouragement of business activity in the Republic of Belarus”8 was adopted on the last day of the year. The document aims at enhancing the protection of investors’ and entrepreneurs’ property rights and will definitely boost business initiative in the country. The directive stipulates more liberal price-formation and labor compensation methods, preferential tax treatment of some activities or even abolition of taxation and reduction in the number of documents required to conduct business. On the other hand, some problems still remain. One of them is the implementation timeframe; besides, the directive fails to provide the stock market of the country with promised incentives, whereas the insurance market still expects equal treatment of state-owned and private insurers.

Forecast for 2011

Given the current uneasy situation, which is further aggravated by the events that took place following the presidential election in late 2010, experts agree that the year will be very tough. On the one hand, the discrepancies in Belarusian-Russian relations that entailed a reduction in support from the eastern neighbor make further concessional lending and supplies of resources at relatively low prices quite unlikely in the near future. On the other hand, the harsh response of both the US and EU to the events of December 19, 2010 and non-recognition of the election results that came later will definitely affect the investment attractiveness of the country.

Furthermore, the decision of the state to adopt the operational administration scheme at ZAO Pinskdrev in early 2011 became another controversial step increasing investment risks, as investors may have concerns about the real degree of investor protection in Belarus. The country should not expect many investors to come to Belarus and acquire or found an enterprise locally. Under the circumstances, foreign capital will only be interested in the so-called “blue chips”- larger strategic companies that form the backbone of the Belarusian economy, especially OAO Belaruskali, OAO BelAZ, OAO MAZ.

It looks like Belarus will have to sell at least one of them eventually, even if potential investors offer lower prices. Belarus will definitely continue offering Eurobonds on European and Russian markets. However, given the current attitude of the West to the Belarusian administration, the coupon yield of 8.7% of the debut Eurobond issue seems quite lucky, and further issues will prove much costlier. The chance is slim Belarus will be able to borrow from the IMF or any other international organization again, because Belarus failed to meet its commitments as soon as it received the final tranche of the loan, and in order to apply for a new loan, the Belarusian authorities will have to pursue the economic reforms that the West originally expected. Should Belarus wish to borrow from Russia or China, the country will very likely get into the area of influence of the creditor.

The Belarusian authorities will have to respond to very serious challenges in 2011. Although the situation still remains stable (it is not 2012, when the state will have to spend considerably to service the foreign debt), there is too little time left for the government to persuade investors to get back into the country. It looks like the government will have to make concessions to receive foreign financing, and further liberalization and economic reforms seem to be the best options for the authorities, or else they will have to put state property up for sale at giveaway prices. Last year’s arrangements to liberalize and develop the stock market will have a positive effect; however, as things stand now, they are simply not enough.