Foreign Investment: Growing uncertainty

Maria Akulova

Summary

In 2020, the IT sector continued to show stable development, generating investment demand for its projects and products. However, the national political crisis strongly affected Belarus’ investment attractiveness in comparison with other countries of the region. Until the crisis is overcome, investment plans will be most likely put on hold, competitive businesses will be transferred to foreign jurisdictions, and the availability of capital markets for Belarus will reduce substantially.

Trends:

In 2020, Belarus reported a total of USD 2.95 billion in foreign investment against USD 2.4 billion in 2019. The influx of foreign capital was largely thanks to operations with portfolio investments (USD 1.38 billion in net borrowing).

The negative trends observed in 2019 caused by the growing debt burden on GDP persisted. Belarus’ external public debt rose by 8.1% in 2020 to 30.9% of GDP, or USD 18.6 billion as of January 1, 2021, to compare with USD 17.2 billion (26.6% of GDP) in 2019. The gross external debt grew by 6.4% to USD 42.2 billion as of January 1, 2021 against USD 40.7 billion as of January 1, 2020.

Foreign direct investment, M&A and venture capital market

Belarus planned to raise USD 1.7 billion in foreign direct investments (FDI) in 2020.1 The plan was not fulfilled, according to the factual data. Last year, FDI amounted to USD 1.39 billion,2 up 9.3% from 2019, when they totaled USD 1.27 billion.

The composition of the raised funds is worthy of note. Reinvested earnings of Belarusian enterprises accounted for 72% of total FDI to compare with 49% in 2019; foreign investments in the form of shareholders’ equity amounted to USD 290.5 million (20.9%), down 33.3% year on year (USD 440 million); operations with debt instruments made up 7%. This means that potential investors showed much less interest in Belarus in 2020.

The most attractive areas in terms of FDI were the manufacturing industry (39.0%), trade (15.6%), financial sector (13.5%), and information and telecommunication (9.1%). The continuing increase in the number of transactions and the amounts channeled into the IT industry indicates stable investment interest over the past few years (around 33% of the entire M&A market in 20193). However, 2020 saw a 20% year-on-year decrease in FDI in the sector due to the global economic recession largely caused by the COVID-19 pandemic and the internal political crisis.

A number of deals with state-owned assets were closed last year. In spring 2020, Cyprus-based Beristore Holdings Limited owned by Russian businessman Said Gutseriev bought 98.83% of Paritetbank. The amount of the deal was not disclosed. It is known that the authorities were willing to sell the stake for USD 50 million.

In summer, the Brest Regional Executive Committee sold 89.7% of the Brestskoye Pivo brewery to Bulgarian Multitrade Group for USD 2.5 million. The buyer undertook to spend at least 25 million Belarusian rubles (BYN) on modernization of the production facilities.

In autumn, the Brest Regional Executive Committee sold the GORYN multi-unit agricultural enterprise to Polish Rolnik canned fruit and vegetable producer for BYN 9.3 million.

The largest deal in the M&A market was closed in Gomel, where Mesto Vstrech company acquired 100% of ZARKO Shopping Center (Gurman Plus ALC) for USD 3.77 million. Belgips OJSC got a new owner in spring. Russian Volma sold its 50% stake to German DEG Group. Turkish Welfare Association took control of Life telecom operator through the purchase of 26.2% of Turkcell’s shares.

In the financial sector, Bulgarian Euroins Insurance Group AD bought ERGO Insurance Company in spring.

Zubr Capital Private Equity Fund bought a minority stake in Myfin Group, an IT platform for banking products, in February. The transaction amount is presumably within the range of USD 5 to 10 million, which is usual for the Fund. In summer, the company added Realt.by real estate add classifier to its portfolio.

Alexander Moshensky bought 50% of Ukrainian Ekotekhnik Velyka Dobron, producer of electric energy from renewable sources, for an undisclosed amount, which was the largest acquisition outside the country.

In the greenfield investment sector, an agreement was reached between Canadian SOCALCO SARL and the National Agency of Investment and Privatization of Belarus to register Belmatch LLC in the Vitebsk Free Economic Zone. The company will produce match sticks. The estimated investment amount stands at USD 4 million.

Several important deals took place in the IT sector, which has been developing dynamically in recent years, being one of the key economic growth drivers and providers of foreign exchange to the budget. Exports from the High Technology Park (HTP) totaled over USD 2.7 billion (4% of GDP) in 2020. IT companies accounted for 6.2% of GDP in 2019, and the authorities expect the industry to increase its contribution to GDP to 7.5% in 2025.

In December, Israeli Moon Active Holding acquired mobile game developer Melsoft Games. The amount was not disclosed. It is presumably around USD 0.5 billion. MGVC Fund, the investment division of MY.GAMES, bought minority stakes in Belarusian Appyfurious and Purple Games mobile application studios with a control option. ASBIS Enterprises IT distributor acquired a 40% stake in Belarusian Clevetura LLC startup (intuitive keyboards developer) for USD 584,000. Australian Aristocrat Digital bought a stake in the Belarusian Neskin Games game studio. The details of the deal remain unknown.

In 2020, venture capital financing totaled USD 36 million, down 21.8% against 2019 (USD 45.6 million);4 85% of the financing went to software related projects. Media and health care were in the top 3 target areas as well in 2019.

The last year’s largest deal was closed by workflow automation software developer PandaDoc, which raised USD 30 million for the electronic signatures segment. One Peak Partners, Rembrandt Venture Partners, Savano Capital Partners and Microsoft were the anchor investors of that round

Video processing app developing startup Vochi received USD 1.5 million in seed investment from Genesis Investments capital fund of Ukraine. Stringershub media startup raised USD 500 000 from Angels Band and Insta Ventures in a seed round. Blinger.io startup, which optimizes support for business clients of large companies through messengers, raised USD 330,000 from Admotad Invest startup studio for product development and entry into international markets.

Mobiwise startup (promotion of educational content) received USD 200,000 from Angels Band business angels to enter foreign markets. EduDo educational startup (short educational videos portal) received USD 170,000 from investclub.vc at the pre-seed stage for putting its product on the market.

BelVEB bank provided USD 3 million to ARTOX to expand the functionality of its 103.by medical mobile application. The deal is unique for the Belarusian banking sector, because property rights to trademarks were stipulated as transaction security instead of an equity stake in the company.

Belarusian Bulba Ventures re-invested USD 2.2 million in the Russian-Singaporean Gero biotech startup, which was one of the few deals in foreign markets. The funds will be used to develop an AI platform for analyzing genetic and clinical data.

Portfolio investments

In June, Belarus placed USD 1.25 billion in Eurobonds in two tranches: bonds worth USD 500 million at 6.125% per annum maturing in 2026, and a tranche totaling USD 750 million at 6.325% per annum maturing in 2031. Financial stagnation in global markets caused by the COVID-19 pandemic, as well as Belarus’ good bond payment history generated high demand and made it possible to lower the initially planned yield. Also, domestic FX and ruble-denominated government bonds worth USD 463.3 million and BYN 300.0 million, respectively, were placed in 2020.

The banking sector tried to solve the problem of access to the capital market by placing corporate bonds to a total of around USD 820 million in all currencies, a 23.4% decrease from 2019. The corporate segment also raised extra funds by offering its own securities. The total annual placement stood at USD 131.5 million, down 57.3% year on year.

The debut placement of corporate bonds on European markets deserves attention. Belarus’ largest retailer Eurotorg was the first Belarusian corporate issuer to successfully enter the London Stock Exchange. In autumn 2020, the company placed a USD 300 million Eurobond issue maturing in 2025 with a coupon rate of 9%. In June, the company placed another RUB 5 billion bond issue maturing in 2026 with a coupon rate of 9.45% on the Moscow Exchange.

Other foreign liabilities

Other external liabilities increased in 2020 by USD 152 million. The general government sector acted as the largest borrower. USD 1.64 billon were allocated to repay the external public debt, of which the main part was used to pay off debts to the government and banks of the Russian Federation, banks of China, and the Eurasian Fund for Stabilization and Development (EFSD).5

In autumn, Belarus borrowed USD 500 million from the EFSD for a pandemic response program. The loan was used to prevent a budget deficit. An agreement with the Russian government on a USD 1 billion loan for 2020-2021 payable in Russian rubles was signed in December.

Belarus also received a USD 126 million loan from the Export-Import Bank of China and around USD 78 million under programs of the European Bank for Reconstruction and Development, International Bank for Reconstruction and Development and Nordic Investment Bank. EBRD’s support was expected to be much more significant, but the bank had to suspend all programs of support for the Belarusian government sector due to the political crisis that followed the August 2020 presidential election in the country.

As in the previous year, Belarus did not hold talks with the IMF on a new lending program in 2020.

Measures to raise external funds and improve the investment climate

Draft strategy for attracting of foreign direct investments for the period to 2025.6 The Council of Ministers presented a draft strategy for FDI attraction for the period to 2025, which sets long-range goals, particularly to improve the investment climate and accelerate FDI influx, build up infrastructure, use public-private partnerships, and enhance the efficiency of the investments utilization. According to the draft, Belarus expects FDI to increase to at least USD 3 billion in 2025. The country is supposed to be among the top 30 states with the best business climate in the Doing Business rating, and get into the Venture Capital and Private Equity Country Attractiveness Index of Ernst & Young.

Council of Ministers’ draft resolution on the Foreign Investment Council.7 The draft provides for the appointment of a Foreign Investment Council (FIC), which will replace the current Foreign Investment Advisory Council (FIAC) formed in 2001. The FIC will not report to the government, but to the president alone, which, the government hopes, will reduce bureaucratic difficulties and increase flexibility, motivation and efficiency in attracting FDI to the country.

Conclusion

For the first time in recent years, the authorities did not make a plan to attract FDI. This is a direct consequence of the significant deterioration of the investment attractiveness of Belarus in 2020 compared with the countries of the region.

Business surveys show8 that the effects of the COVID-19 pandemic, coupled with the internal political crisis that broke out after the presidential election of August 9, 2020 produced a devastating impact not only on the image of Belarus, but also on the economic health of a considerable part of already functioning agents: 69% of companies assessed their situation as bad; nearly 40% attribute their difficult economic situation to the political crisis; 50% believe that if this crisis is overcome rapidly, gradual recovery may be achieved in 2022 at the earliest.

In the current situation, businesses will strive for survival, preservation of the status quo, and withdrawal of their funds, rather than expansion or growth investing. A study of sentiment in the IT sector, the most dynamic and attractive industry for investment, showed that only 33% of startups have no plans to leave the country,9 while most of them are either thinking about that, have started relocating, or have already moved to a foreign jurisdiction.

Foreign investors are reluctant to operate in Belarus due to high political and economic uncertainties, the crisis of confidence and property right protection issues.

Placements of Eurobonds are also unlikely in 2021 due to the possible reputational damages. Bond issues are only possible at extremely high rates for Belarus, which makes them inexpedient. The resumption of cooperation programs with international financial institutions, such as the EBRD, is also only possible once the political situation in the country has stabilized.

The floating of foreign exchange-denominated government bonds on the domestic market would be one of the revenue sources, but, because of the economic recession and a decline in demand, the receipts will also be smaller than in previous years.

Under the circumstances, quick recovery from the domestic political crisis would be a priority task. This would accelerate economic recovery and gradually restore economic agents’ trust in the actions of the state. Otherwise, the economic recession may take a long while with an outflow of human capital and growing economic distrust, which is fraught with direct risks to the financial stability and investment attractiveness of Belarus.