Foreign Investment: Only loans remain

Maria Akulova


In 2015, the low demand for state assets and lack of flexibility and interest in expediting the privatization process remained the key reasons behind the absence of progress in sales of state property. Foreign loans remain the main source of investment, which is mostly spent to refinance current debts and therefore lead to a further increase in the amount of debt, instead of encouraging reform and efficiency gains.


Plans and implementation

The failed attempts to raise foreign financing in previous years had prompted the authorities to elaborate modest and vague investment plans. In 2015, Belarus had planned to raise at least USD 1.875 billion in Foreign Direct Investment (FDI). Further, the country had expected a USD 500 million loan from Russia. Overall, the government had worked out a package of active measures to raise approximately USD 3 billion to replenish the gold and foreign currency reserves. Privatization of state property became a low priority and was named a ‘recommendation’ rather than a ‘target.’

The plans failed, though. Belarus managed to raise USD 1.568 billion in FDI in 2015,1 down by 16% from the level recorded in 2014, when FDI in Belarus reached USD 1.862 billion. As in previous years, most of FDI in Belarus was formed by reinvested incomes of foreign owners (USD 1.1 billion), rather than the appearance of new players and technologies in the market (USD 208.5 million).

In 2015, foreign investment in Belarus totaled USD 1.249 billion, down from USD 4.141 billion in 2014. The gap was due to the fact that in 2015, Belarus redeemed its debut 5-year Eurobond issued in 2010.

Gross state debt edged down by approximately 1% in 2015, from USD 13.1 billion as of 1 January 2015 (17.3% of GDP) to USD 13 billion as of 1 January 2016 (23.7% of GDP). The situation clearly deteriorated, despite the reduction in the amount of the external state debt in absolute terms. Total external debt went down by 4.5% to USD 38.3 billion on 1 January 2016 from USD 40 billion on 1 January 2015.

In 2015, some USD 4.8 billion was paid to service foreign debts (including final payments to the IMF, China, Venezuela, and Russia, in addition to Eurobond redemption). Export duties on oil and oil products accounted for a portion of this amount, while the rest was provided by new borrowing.

FDI and privatization

As we mentioned above, net FDI inflow amounted to USD 1.568 billion in 2015, while the target had been set at USD 1.875 billion. Some important conclusions can be drawn from the analysis of the structure of FDI raised.

First, unlike in previous years, the state ceased to rely on privatization due to its nonexistent dynamics and lack of demand for state property from potential investors. Privatization of state property essentially received the status of “doable, albeit optional.”

Second, as before, reinvested incomes of Belarusian companies remained the main source of FDI in the Belarusian economy. In the fourth quarter, they amounted to USD 1.1 billion (73%). Foreign investment in the form of equity capital reached USD 279.3 million (18%), while transactions with debt instruments accounted for the remaining share, at USD 143.6 million (9%).

According to BelStat, in 2015, the share of FDI channeled in the manufacturing sector reached 11.7%.2 Insufficient level of investment in the manufacturing sector still remains. Poor equipment is the main obstacle to the effective and competitive development of the sector, and there is a strong need for upgrade. More active FDI inflows have sufficient potential for simplifying and speeding up these processes.

Privatization turned out to be completely frozen, although back in 2014, the authorities claimed at least USD 850 million worth of state assets would be sold. The government had been recommended to make a list of companies, in which the state was ready to sell its shareholdings. As a result, in April 2015, a list of 60 joint-stock companies, in which the state is planning to sell its stakes at auctions or through tenders, appeared on the website of the State Property Committee. However, the way the process was described — “performance of activities aimed to sell” — suggests that the privatization campaign will hardly be intensified.

Small and medium companies were supposed to be sold at auctions, whereas major strategic enterprises were expected to be sold following tendering procedures. The State Property Committee never managed to expand its autonomy in privatization-related decision-making. The president still has the final word when it comes to sales of state property.

The list of assets appeared to be quite diverse and included enterprises controlled by various concerns. In 86% of the companies on the list, the state was planning to sell its entire stakes, ranging from 6% to 99%. In the remaining 14% of the companies, the state was willing to keep a certain amount of shares (OAO BATE, OAO Horizont, OAO Mogilevdrev, etc.).

Interestingly, selling prices were not announced. The price-formation formula is the maximum level based on the market and balance sheet value of an enterprise as of 1 January of the year of sale (following a respective approval by the head of state). Privatization of virtually any asset was subject to specific terms and conditions that an investor is supposed to meet after it buys the property (guarantees of additional investment, unchanged number of jobs, wages, and core activities, etc.).

The vagueness of the selling price, numerous additional requirements, as well as the long decision-making process for each asset affect investors’ interest in state property. No wonder not a single asset on the list was sold in 2015.

The demand for Belarusian state property was further undermined by the likelihood of a new privatization law. According to the bill on privatization, the state will be playing a more prominent role in the management of joint-stock companies irrespective of the shareholding owned by the government, i.e. essentially reinstated the “golden share” right. Severe criticism by international organizations and the business community led to the withdrawal of the bill from the parliament.

The only successful privatization-related development recorded in 2015 was the agreement between the Belarusian government and the European Bank for Reconstruction and Development (EBRD) on potential sale of a controlling stake in state-owned OAO Belinvestbank to a strategic investor by 1 January 2020. The asset is worth an estimated USD 400 million. The EBRD agreed to purchase a shareholding (25% plus one share) by investing in the bank’s equity and subscribing to its shares. In late 2015, the EBRD extended a USD 50 million loan to OAO Belinvestbank as part of the privatization agreement. The EBRD is expected to purchase a blocking stake in Belinvestbank in 2016.

M&A transactions in the private sector were scarce. The most significant one is the deal involving Aliaksiej Alieksin, the owner of oil trade, travel, and brewing companies — Belneftegaz bought 65.8% in MTBank, which used to be controlled by SMH direct investment fund. The U. S. investment fund Horizon Capital still owns the remaining 34.4% in the bank. The amount of the transaction was not announced; however, based on external estimates, it reached approximately USD 70 million.

In the summer of 2015, Veles-Mit, another company controlled by Alieksin, paid BYR 34.3 billion for a state shareholding in Haradzilava farm in the Maladziečna District. The company was thus entitled to build two pig farms on the lands belonging to Haradzilava (an estimated EUR 70 million will be required). Finally, another business of Alieksin’s, MamasD, headquartered in Latvia, signed an agreement with the European Union to take a EUR 1.5 million loan to open a salmon and trout processing line.

Last year, another Belarusian businessman, Vital Arbuzaŭ, actively invested in various projects beyond Belarus (United States, Southeast Asia). In 2011, he established FVC, a venture capital fund, to search for and promote promising projects. Over the five years since its inception, FVC has provided financing for approximately 76 projects, of them 25 received capital in 2015. So far, FVC has invested a total of USD 400 million in its projects.

The fund focuses on mature startups operating in healthcare, corporate finance, and mobile applications. FVC is a leading venture capital investor in Southeast Asia. Furthermore, in 2015, the fund became a co-owner of the new venture capital fund FIVC, which will focus on supporting IT startups in South Asia, Southeast Asia, the United States, Europe, and Israel.

Also in 2015, important M&A deals in the IT sector included the acquisition of the U.S.-based assets of Alliance Global Services by EPAM Systems (for USD 51.3 million) and purchase of a 6% stake in EPAM Systems by the American institutional investor Vanguard Group for USD 170 million.

In the Greenfield segment, the Polish construction holding Unibep and the Belarusian public utility company Aqua-Minsk signed an agreement to build a tennis center. Investments in the facility are expected at EUR 28.6 million.

The largest Polish producer of construction mixes Grupa Atlas, which already had operations in the Belarusian market, launched a factory making expanded pearl-stone and announced plans to finance the construction of a paper mill.

Finally, the Ministry of Finance provided BYR 85 billion from the MTiK innovation fund for the construction of a new aircraft repair plant near Minsk, which is supposed to be completed by 1 January 2018.

Portfolio investment

The authorities had hoped to raise foreign financing in 2015 by offering debt securities in foreign markets; however, loans appeared to be too expensive because of the economic difficulties domestically.

In early 2015, yields on Belarusian 5- and 7-year Eurobonds reached new highs (late January) — 46.1% on the issue maturing in 2015 and 19.3% on Eurobond maturing in 2018, up from 5.1% and 6.1% in January 2014.

The economic situation proved to be more stable later in 2015, and the government pledged to pay all its debts in time, thus bringing down the pressure on the two Eurobond issues. In August, the country redeemed its 5-year Eurobond, which, alongside the improvement in Belarus’s relationship with the West and beginning of a more substantive dialogue with the World Bank and the IMF, resulted in a decrease in yields on 7-year Eurobonds, all the way down to 6.4% in December 2015.

In 2016, Belarus will be able to successfully refinance its debts if the situation in the domestic money market remains favorable, along with external economic factors.

Other foreign liabilities

In 2015, the Belarusian government borrowed USD 2.2 billion, the main sources being Russia (73%) and China (24%). Some USD 1 billion was spent on repaying foreign liabilities, including debts to the EurAsEC, the IMF, Russia, and China. The net increase in the foreign debt liabilities of the Belarusian authorities thus amounted to USD 1.2 billion.

Throughout the year, Belarus continued talks with the IMF over a new lending program envisaging the borrowing of approximately USD 3 billion. However, the unwillingness to meet the Fund’s demands and put in place structural reforms, including the transformation of the utilities sector, discontinuation of subsidies to state companies, and reduction of the burden on private business, became a major obstacle, and the deal was not signed.

In spring, Belarus applied for a USD 2.1 billion credit line from the Eurasian Fund for Stabilization and Development (EFSD). In 2015, no decision was made, though; however, in February 2016, Russian Ambassador Alexander Surikov said in a statement that the loan would be provided. The official confirmation was received in late March. The new loan will be used to refinance previous loans, not to implement reforms, though.

Arrangements to raise foreign financing and improve the investment climate

As was mentioned above, the bill introducing amendments to the Law of the Republic of Belarus ‘Concerning privatization of state property and transformation of state unitary enterprises into open joint-stock companies’ was withdrawn. The cancellation of the bill, which envisaged a stronger role of the state in the management of the national economy, marks a positive shift that will benefit business and potential investors.

The main barriers to foreign investment include the situation with property rights and independence of decision-making. The bill could further affect the poor investment appeal of the country.


Belarus plans to raise at least USD 1.35 billion in net FDI in 2016. Also, the government hopes to borrow USD 3 billion from foreign sources. Foreign lenders will only take positive decisions to lend to Belarus if the authorities show their eagerness to reform the economy, especially the public sector. Any reduction in support for state assets will result in either bankruptcy of enterprises or intensification of efforts to sell them.

In early 2016, the State Property Committee published a new list of enterprises subject to privatization. The new list presents state assets as entities that are potentially ready to change ownership, rather than property prepared for sale. However, on the other hand, most of the assets on the list must be sold via a competitive tendering procedure, meaning that investors will need to meet a series of conditions. This is a major barrier preventing effective sales, amid ambiguous property valuation procedures.

Two important cues encouraging investors to show more interest in foreign investment are Decree No. 84 ‘Concerning the issue and circulation of shares with the use of foreign depository receipts’ and Decree No. 85 ‘Concerning the taxation of some revenues.’ The former entitled open joint-stock companies to float and sell their shares in foreign markets, while the latter extends the period of tax relief applied to revenues from transactions with Belarusian corporate bonds. These documents are therefore designed to make it easier for foreign investors to access the Belarusian market.

Overall, economic imbalances and deterioration of foreign terms of trade create additional obstacles to foreign capital. However, this situation may have potential to force the Belarusian authorities to implement structural reforms, which will produce a positive impact on foreign investors’ operations in Belarus.