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FOREIGN INVESTMENTS: BELTRANSGAZ AND SOMETHING ELSE
Maria Akulova
Summary
The foreign investment pattern observed in 2011 remained almost unchanged from previous years. Most of the foreign direct investment (FDI) inflow last year was formed by a single large property sale. The government continues to perceive privatization only from the fiscal point of view, which curbs the growth in the inflow of foreign capital into the economy. The financial downturn complicated the search for investors. The situation stabilized as late as mid-autumn through efforts of the National Bank of the Republic of Belarus. Amendments were introduced to the taxation system with a view to encouraging investment processes.
Trends:
• Foreign capital procurement rates remain low;
• Privatization focuses on the sale of medium-sized and small enterprises; only sporadic large transactions are allowed;
• Commercial and state banks start floating bonds to raise funds;
• Amendments are introduced to the tax code in order to encourage investors.
In 2011, the government planned to attract about USD 6.5 billion in FDI, and the privatization of state property was supposed to account for almost half of the total. The privatization plan for 2011 — 2013 includes 178 state-owned enterprises. The state managed to attract some USD 4.1 billion in 2011, which is 37% short of the target1. Compared with the year 2010, when FDI receipts totaled USD 1.35 billion, Belarus showed an impressive growth, as FDI inflows trebled. However, this increase was caused exclusively by the sale of OAO Beltransgaz. When it comes to state property sale, state shareholdings were sold in only 38 enterprises, almost 20% of the original plan.
Overall, foreign investment inflow in Belarus in 2011 amounted to around USD 10 billion (based on preliminary estimates), up from USD 8.1 billion in 2010. At the same time, the country's gross external debt expanded 20%, or by USD 5.6 billion in 2011 (again, based on
See: http://nbrb.by/statistics/BalPay/Comment/2011_3.pdf.
preliminary estimates), to reach USD 33.96 billion, or 69.5% of GDP as of January 1, 2012. This considerable external debt growth was mostly caused by substantial foreign borrowing in 2011 — the country had to take new loans to stabilize the economic situation. Another important factor contributing to the increase in external debt was the devaluation of the national currency in October 2011, which resulted in a slump in GDP in the U.S. dollar equivalent. Of major concern is also the increase in external public debt, which went up an estimated 21.7% in 2011. External public sector debt thus expanded to about USD 12.3 billion as of January 1, 2012, or 25.2% of GDP (the critical threshold having been set at 20%) from USD 10.1 billion on January 1, 2011, or 18.1% of GDP. Importantly, starting 2012, Belarus will have to increase its spending to service its external public debt. In 2012 alone, public debt servicing expenses will have to reach USD 1.6 billion, and the figure will markedly increase in 2013 — 2014. Therefore, the rapidly growing external debt has moved the search for sources to service it higher on the agenda for Belarus.
Some serious changes were registered in the structure of borrowed funds. The share of FDI rose to 41% from 17% of the total, while portfolio investments accounted for only 9%, down from 15% in 2010. Finally, other external liabilities, i.e. borrowing by the general government and banks, as well as commercial loans, accounted for 50% of the total amount, going down from 68% in 2010. We have to keep in mind, though, that the modifications in the structure of external debt were mostly caused by the sale of the remaining 50% in OAO Beltransgaz, resulting in the increase in the share of FDI in total borrowed funds to 41%.
One conclusion that we can draw here is that Belarus still regards privatization as a purely fiscal instrument instead of treating it as a mechanism to renew fixed assets and enhance the competitiveness of the national economy.
FDI and privatization
The economic crisis of 2011 proved serious enough to discourage foreign investors. The multiple exchange rates observed throughout the year, soaring consumer inflation and macroeconomic instability prompted investors to adopt a cautious attitude to the Belarusian market. The situation seriously complicated business planning and efforts to map out a coherent business development strategy, which naturally increased investment risks and disillusioned investors.
Other factors obstructing inflows of foreign investments in the county include the lack of motivation in the administration of enterprises, absence of a concerted position on the value of assets and methods to evaluate them, and expensiveness of foreign consultants and mediators capable of boosting the efficiency of raising foreign capital and the privatization process. Finally, the state continues treating privatization only as an instrument to replenish state budget funds, which also impedes negotiations with potential investors.
There were a few features common to all transactions to sell state property in 2011:
• the process took a lot of time;
• most of the property was sold to local investors, meaning that there were no large foreign buyers in the market;
• the majority of the deals had a single bidder, which did not allow the state to hold proper auctions and raise the initial price of the assets;
• the state was unwilling to sell controlling stakes and instead passed off sales of minority shareholdings as active privatization;
• finally, most of the enterprises put up for sale were either inefficient or loss-making, which naturally discouraged investors.
Nevertheless, the government managed to interest foreign capital in some of its assets. Topping the list of M&A deals with foreign investors is Beltransgaz, in which the Belarusian government sold the remaining 50% to Russian natural gas giant Gazprom in November 2011. Belarus not only received USD 2.5 billion in proceeds, but also inked contracts with the Russian monopoly for natural gas supplies in years to come — at USD 165.5 per 1,000 cubic meters in 2012, and in 2013 — 2014, at the price that Russia's Yamalo-Nenets Autonomous District will be paying plus transport costs. Given the current price for European gas consumers, at USD 400 per 1,000 cubic meters, one can be certain that Belarus managed to make the most of its Beltransgaz sale.
In August, Russian GMS holding acquired 100% of the additional issue of shares in Bobruisk Engineering Plant (BMSZ), thus securing a controlling stake of 57%. The transaction cost USD 9.6 million. Also in 2011, Carlsberg Group increased in shareholding in Pivzavod Olivaria brewery to 67.8% as a result of a series of transactions, including a public repurchase offer. Finally, in December, the EBRD
bought 35% in Alternative Digital Network via management company Zubr Capital.
When it comes to Greenfield investments, the following should be mentioned: the 2014 World Ice Hockey Championship, scheduled to take place in Minsk, brought about a series of contracts for the construction of hotel facilities in 2011. Qatari Armed Forces contracted the construction of a hotel and sports complex in Minsk worth USD 90 million. Latvian Akva NMP signed a contract for the construction of a smaller hotel in the town of Braslav, worth an estimated EUR1.5 million. Furthermore, Minsk city administration signed an agreement with Blue Eagle Private Equity B. V., the Netherlands, to have three hotel complexes worth a total of USD 60 million built in Belarus. Also, Iran's Semega holding will invest USD 150 million in the construction of a five-star hotel in Minsk. Agorabel developer signed an agreement for the construction of a USD 12 million hotel in the vicinity of Minsk airport. Czech Republic's PDW-group plans to invest EUR 50 million in the creation of a transport and logistical complex, an air carrier and a center to service aircraft in Vitebsk. Estonian BelGreenline plans to contribute EUR 11.5 million in a production of wet wipes for displays in Grodno, and joint Belarusian-Polish venture OOO Trade-logistical center Zhdanovichi has concluded a contract with Minsk region administration for the construction of an agricultural and food-processing center near Minsk with investment requirement estimated at EUR40 million.
In August, the National Investment and Privatization Agency (NIPA) in association with the World Bank (WB) will carry out the privatization of eight business entities. The list includes Baranovichi concrete components plant, BeIsantekhontazh-2, Avtomagistral, Construction and assembly trust № 8, Belgazstroy, Medplast, Confa and Minsk Margarine Plant.
The World Bank in collaboration with the Belarusian government has decided to allocate USD 5 million for the pilot privatization project. The preliminary phase was completed in the period September to December 2011, and during the same timeframe, financial consultants made their bids to take part in the project. In March or April 2012, the consultants will be assigned specific entities to support the privatization process and assist in making transactions. The project, if successful, is expected to produce a positive impact on Belarus' investment profile.
Portfolio investments
The unfavorable economic climate of 2011 prevented Belarus from placing bonds internationally, while in 2010 it used to be a handy instrument to raise foreign capital. In January 2011, the country issued USD 800 million worth of seven-year Eurobonds and placed them at a rate of 8.95%2. This was the only chance for Belarus to float its bonds in 2011, because the ongoing crisis made this instrument inefficient, causing the government to look for alternative possibilities to borrow abroad. The multiplicity of exchange rates and absence of a clear program to stabilize the macroeconomic situation resulted in a plunge in Belarus' dollar bonds from mid-March to early October. The price of Belarus' Eurobonds maturing in 2015 fell to USD 69.47 from USD 96.39, pushing the yield up to 20.6% from 9.78%, and seven-year 2018 dollar bonds behaved in a similar fashion, with prices falling to USD 69.21 in early October from USD 92.43 in mid-March and yields soaring to 17.1% from 10.53%.
The reports that the central bank would introduce a uniform exchange rate for the ruble starting mid-October and pursue a stringent monetary policy helped reverse the process at international trading platforms — by late December, the price of the sovereign Eurobonds maturing in 2015 had risen to USD 86.89, and yields had dropped to 13.48%, and the figures for the 2018 Eurobonds were at USD 86.56 and 12.15%, respectively. As for the two-year Russian ruble-bonds floated in Russia, they had dropped to RUR 85.98 by mid-October, but settled at RUR 93.01 at the end of the year, whereas yields had gone down to 17.51% by late December from their peak of 25.42% in mid-October.
On the other hand, the hard search for financing caused Belarusian commercial banks to issue debt securities to raise capital. In May, Sombelbank placed PLN30 million worth of two-year bonds at a rate of 11%. December 2011 was marked by a substantial growth in the market for corporate and government bonds, as many commercial banks, including state-controlled Belarusbank, Belinvestbank, Belagroprombank and Development Bank of the Republic of Belarus, and private banks BPS-Sberbank, BTA Bank, Bank Moscow-Minsk, Belvnesheconombank and Belgazprombank, floated their bonds. Also at the end of 2011, the government issued
See: http://www.cbonds.info/by/rus/emissions/emission.phtml/params/id/ 14035.
BYR 4.7 trillion worth of zero-coupon bonds, which must have been distributed among the portfolios of commercial banks.
Other external liabilities
In 2011, the share of other external liabilities in overall borrowed funds went down to 50% from 68% in 2010. Most of borrowed capital was formed by the government's external liabilities and commercial loans. In June 2011, an agreement was signed for Belarus to take out a USD 3 billion loan from the EurAsEC Anti-Crisis Fund. The country agreed to receive the loan in three installments — USD 1.24 billion in 2011, USD 800 million in 2012 and USD 1 billion in 2013. To receive all the three tranches, Belarus has to comply with a set of terms — to tighten its monetary and credit policy and privatize at least USD 2.5 billion worth of state property every year. Furthermore, in November 2011, Sberbank of Russia and the Eurasian Development Bank signed an agreement to extend a USD 1 billion loan to OAO Belaruskali for 12 months. The former bank is to provide 90% of the total, and the latter will commit the remaining 10%. The loan is provided against a security of the Belarusian government and a 51% stake in Naftan oil refinery.
Belaruskali was granted a loan, because it remains the country's most liquid and profitable asset making regular foreign exchange injections in the state budget, while the country itself saw its borrowing capacity affected by the downgraded sovereign credit ratings. Once a company takes out a loan, its value goes down if the state should want to sell it as a state asset, and the terms of borrowing via a commercial entity are less favorable than lending terms offered to the Belarusian government.
Also last year, Belvnesheconombank took a RUR 3.5 billion syndicated loan from Russia's AKB Svyaz-Bank, VTB and Globex-bank — that deal became the largest external borrowing by a commercial bank ever.
Arrangements to attract external financing and better the investment climate
In 2011, just as in previous years, there were no landmark reforms that could have enhanced Belarus' investment image. Nevertheless, several legislative initiatives were passed with a view to improving the situation.
(1) Decree № 4 "On creating additional conditions for investment activity in the Republic of Belarus". Decree No.4, adopted by the Belarusian president on June 6, 2011, introduces amendments to Decree № 10 "On creating additional conditions for investment activity in the Republic of Belarus" dated August 6, 20093 and enables domestic developers to make use of project documentation designed abroad without adapting or adjusting it provided that it meets international and domestic construction standards. Also, the document offers full VAT offset options for the acquisition of merchandize, patents and proprietary rights. The decree exempts investors from transfers to innovation funds and land lease fees for the period of design and construction.
(2) On December 19, 2011, the House of Representatives of the National Assembly passed the bill "On amendments to the Tax Code of the Republic of Belarus''4, which envisages a reduction in the property tax rate to 18% from 24%. Amendments will also affect profits from sale of proprietary innovation products and capital in excess of par gained as a result of the initial offer of securities not subject to taxation.
Conclusion
The 2012 privatization plan targets USD 2.5 billion privatization proceeds, which will suffice for the country to receive another installment of the EurAsEC loan; however, because privatization is still considered a purely fiscal instrument, no critical changes from previous years should be expected in this domain. There may be some sporadic large transactions to sell state property with a sole purpose of meeting the requirements of the EurAsEC bailout fund. The state will continue emphasizing the sale of small and medium-sized state assets.
Belarus managed to increase its gold and foreign exchange reserves to a new all-time high of USD 7.9 billion in 2011, the only problem being that most of the increase was from new loans, except for the Beltransgaz deal. This means the existing debt was simply refinanced. In 2012 alone, the country will have to make substantial payments to service its external debt (USD 1.63 billion, which
3 See: http://pravo.by/main.aspx?guid = 3871&p0 = pd0900010&p2 = {NRPA}.
4 See: http://house.gov.by/mdex.php/,6888,31442......0.html.
includes USD 705.9 million to pay interests and USD 924.1 million to pay off the principal).
In 2013, Belarus will have to pay more than USD 3 billion. Both figures differ a lot from what the country had to pay earlier (USD 628.9 million in 2011, USD 757.3 million in 2010 and USD 273.5 million in 2009). In order to get out of the debt pit, Belarus needs to revise its approach to privatization as soon as possible to make use of it as an instrument to renew fixed assets and introduce innovative solutions, capable of enhancing the competitive power of the national economy.
However, the current economic policy suggests that efforts to attract foreign capital into the national economy will remain feeble, showing no change from the previous years, while the need to revise the approach to the foreign investor has become desperate. Therefore, the country needs to embark on economic reform and work out a strategy for a more flexible asset sale in order to increase its investment appeal, attract foreign capital and stabilize the economic situation. Otherwise, Belarus will have to focus on the debt option, which could have grave consequences very soon.
