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FOREIGN INVESTMENTS: FOCUSING ON DEBT
Maria Akulova
Summary
In 2013, inflows of foreign investments in Belarus remained insignificant. The official approach to privatization remained unchanged, which is why there were no privatization deals in Belarus in 2013. This attitude makes foreign loans the main source of foreign capital. Against the tough economic backdrop, the placement of Eurobonds in foreign markets becomes a real challenge, which encourages the authorities to explore the domestic debt market.
Some legislative moves were made to improve the business and investment climate of the country. Focus is placed on the protection of investors’ rights and guaranteed right of dispute settlement.
Trends:
• Raising external financing, mostly loans, turns out to be a major problem;
• Lack of progress in the privatization process;
• A new instrument to raise funding is explored - the authorities sell foreign exchange bonds in the domestic market while faced with problems in external markets.
In 2013, the government had planned to raise some USD 2 billion in net foreign direct investments (FDI), exclusively of foreign borrowing, and sell USD 2.5 billion worth of state assets. According to official statistics, FDI totaled USD 2.233 billion in 20131, meaning that the target was met. Moreover, FDI inflows grew compared with 2012, when they reached USD 1.442 billion1 2.
On the other hand, in 2013, the financial account balance reached a deficit of USD 8.135 billion, which compares to USD 961.2 million in 2012. Therefore, in 2013, foreign capital inflows were for the most part due to an increase in
1 Balance of payments, international investment position and gross external debt of the Republic of Belarus in 2013 (preliminary data); see http://nbrb. by/statistics/BalPay/Comment/2013.pdf.
2 Ibid.
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debts to non-residents. External liabilities went up by USD 7 billion in 2013 to USD 48.29 billion. The growth in external public debt was also quite alarming: as of 1 January 2014, external debt stood at 58.5% of GDP, or USD 39.124 billion. Given that on 1 January 2013, external debt stood at USD 33.766 billion, or 54.6% of GDP, we observe an obvious negative trend.
One should remember that Belarus will have to make most of the payments to service its external debt in 2013—2014. In 2014 alone, the country will have to pay USD 1.4 billion; therefore, the significant growth in the country’s external debt raises the question about sources to service the debt.
Foreign direct investments and privatization
The year 2013 did not see any FDI breakthrough for the Belarusian economy. As we said above, the country raised USD 2.233 billion in FDI in 2013. Of the total, reinvested profits of Belarusian companies amounted to USD 1.2 billion (accounting for 54%); joint-stock capital accounted for 26%, and debt instruments accounted for the remaining 20%.
The period under review is no different from the previous years when it comes to foreign investments. The macroeconomic imbalances, high devaluation expectations and the high inflation rate were discouraging both foreign and domestic investors. Specifically, the increased state stakes in two major confectioneries — Kommunarka and Spartak — which essentially resulted in nationalization of both producers, stopped some investors from working in Belarus. As a result, the country never met its privatization targets, and there were virtually no transactions to sell state assets. Nevertheless, there were some M&A transactions involving foreign capital. However, in most cases, both parties were privately-owned businesses rather than state-owned entities.
At the start of 2013, RTL-Holding, which owns the Rub-lyovski retail chain, purchased 78.5% in ZAO Nevel, paying a total of USD 3.3 million. In autumn, the chain expanded its presence in Belarus by buying a controlling shareholding in the Volgograd supermarket store for USD 6.7 million. Further, Ge-
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tin Holding, a financial holding, purchased 95.5% in Belarusian Bank for Small Business for approximately 4.87 million. At the end of the year, there appeared reports that the authorities had reached an agreement with a Russian investor to sell a stake in OAO Minsk Wheeled Tractor Plant (the producer will have an additional share issuance). Finally, a 99.5% shareholding in OAO Belgips was sold to Russia’s Volma corporation for USD 5.27 million.
Peculiar for the period under review, Belarusian investors stepped up their efforts to buy both local and foreign companies. Belarusian agricultural holding SZAO Servolux acquired 49.93% of shares in OAO Smaliavicy broiler plant for Br430.2 billion. Furthermore, in spring, joint Belarusian-German venture Santa Bremor purchased ZAO Russkoe more for USD 52 million.
OOO Evrotorg expanded its presence in Russia and increased the number of its POS to eleven. In the summer of 2013, the company acquired Fanipal-based Prevar to build up its meat-processing facilities. Finally, in September, the Alutech group bought German Gunther-Tore, a maker of sectional and rolling gates. The deal enabled the Belarusian producer to access the markets of Western Europe, Asia and Africa and secure a firm footing as a leading maker of gate components in Europe.
Portfolio investments
The difficult economic situation affected the market for portfolio investments. In 2013, Belarus continued advertising its debt instruments and negotiated opportunities for placing sovereign bonds in Europe, Singapore and China. The country held a series of road-shows in Germany, Switzerland, and the United Kingdom and Asian countries; however, the presentations of Belarus’ investment opportunities did not have the desired effect.
The situation with the debt instruments placed previously remains vague. The first half of the year turned out to be quite favorable for Belarusian Eurobonds with maturity in 2015 and 2018. In May 2013, the yields on Belarusian sovereign bonds hit the bottom — 5.83% for five-year bonds maturing in 2015
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(compared with a yield of 8.7% set during placement) and 6.19% for seven-year Eurobonds with maternity in 2018 (the original yield was set at 8.95%).
However, the conflict with Uralkali produced a devastating impact on the Belarusian debt securities, and yields hiked to 11.9% (five-year bonds maturing in 2015) and 11.46% (seven-year bonds with maturity in 2018). Once the conflict was resolved, the situation improved, and at the end of the year, yields settled at 7.55% and 8.5%, respectively, while prices stood at USD 101.2 and USD 101.4.
The difficulties that Belarus faced when trying to approach foreign markets encouraged the authorities to issue and place foreign exchange-denominated debt instruments in the domestic market. Back in December 2012, the first two issuances were floated, totaling USD 50 million. In January and May 2013, further issuances were placed, totaling USD 100 million. In September, another attempt was made to sell USD 100 million worth of state bonds to the public, but only USD 22.51 million worth of securities were placed.
The government pins its hops on using this debt instrument in the future. In 2014, the Finance Ministry of Belarus plans to borrow up to USD 900 million in the domestic market, of them USD 100 million from individuals and USD 800 million from companies.
Other external liabilities
Other external liabilities markedly increased in 2013, by an estimated USD 4,829.1 billion, while in 2012, they dropped by USD 578.5 million. Therefore, the share of other foreign liabilities in the total amount of foreign capital raised during the period under review amounted to 69%. Most of the funds were raised through external borrowing by the government and commercial loans.
In January and April, Belarus received the fourth and fifth installments of the EurAsEC Anti-Crisis Fund (ACF) loan, totaling USD 880 million. The country had expected to receive the sixth and final installment of the loan; however, the ACF Council decided to postpone the move for six months
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citing its disappointment with the way Belarus meets its obligations. As of today, ten out of 14 conditions are not met, of them five (including the privatization of at least USD 2.5 billion worth of state property annually) are the so-called ‘check’ parameters.
Other important loans include the USD 377.8 million export loan committed by Russia for the construction of the Belarusian nuclear power plant. Further, Chinese banks provided loans totaling USD 333.8 million, and the International Bank for Reconstruction and Development (IBRD) committed a USD 105.5 million loan to Belarus.
Privately-owned businesses encountered difficulties when raising capital domestically and had to look for external lenders. The А-loo group took a seven-year loan from the European Bank for Reconstruction and Development (EBRD) worth USD 10 million. It is planned that the money will be invested in the group’s network of filling stations. The EBRD also provided an eight-year loan to private company Kronospan for the construction of a woodworking facility, which will specialize in oriented strand board production.
ОАО Belarusian Metal Plant (BMZ) reached an agreement with the Eurasian Development Bank (EDB) and ОАО ASB Belarusbank to borrow USD 280 million for the construction of a small-section and wire mill. In the autumn of 2013, an agreement was reached between OOO Evrotorg and Sberbank of Russia for the Belarusian company to enjoy a USD 150 million credit facility, which will be used to build several shopping centers in Minsk. In December, ОАО ASB Belarusbank took another USD llO million syndicated loan from a group of Russian commercial banks.
Arrangements to raise foreign financing and improve investment climate
In the summer of 2Ol3, two legislative acts were passed to invalidate the Investment Code. However, the adoption of those two acts drew a mixed reaction from investors and the expert community, and so did some other legislative initiatives of the authorities.
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1. Law No.53-3 ‘On investments’ dated 12 July 2013
The law came into effect on 24 January 20143. The document expands the notion of ‘investments’, which now covers movable assets and real estate, rights and claims with appraised value and other entities of civil law rights having appraised value. The law spells out the main principles of investing, inadmissibility of interfering into investors’ private business and equality of investors’ rights, along with the protection of their rights in case of violations. Further, the law makes it possible for an investor to enjoy compensation for nationalized business in any foreign currency. In addition, under the law, efforts to resolve investment disputes will be governed by international instruments, and disputes will be settled not only in Belarus, but also in an arbitration court or the International Center for Settlement of Investment Disputes.
2. Law No.63-3 ‘On concessions’ dated 12 July 2013
The law came into effect on 26 January 20144. Concession contracts were available to investors even before the new law became effective; however, it was this new document that allowed concession agreements not only at the national, but also at the local level. Furthermore, the law guarantees that the state will not interfere with investors’ business and protects investors’ rights, specifically in case of legislative changes. In addition, the document allows settling disputes in international courts of arbitration. Finally, if an investor successfully implements a concession contract, it will have a chance to make a new concession agreement on special terms and without any tendering procedures.
These legislative acts therefore make adjustments to the investment environment of the country and essentially offer foreign and domestic investors equal rights. Over the last few years, the inequality between foreign and Belarusian investors was considered to be one of the most serious barriers to businesses eyeing the Belarusian market.
3 See: http://www.pravo.by/main.aspx?guid=3871&p0=H11300053&p1=1
4 See: http://www.pravo.by/main.aspx?guid=3871&p0=H11300063&p1=1.
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3. Resolution of the Council of Ministers No.241 ‘On some arrangements to facilitate the development of small and medium-sized entrepreneurship in the Republic of Belarus’ dated 30 March 2013
The document aims to increase the role of small and medium-sized business in the Belarusian economy5. The resolution comprises some of the approved development targets for 2013—2015 and a set of measures to reach these targets. One of the measures is the preparation of a bill to amend the law on privatization of state property and transformation of state unitary enterprises into open joint-stock companies. The bill envisages some arrangements to support private business; specifically, it bans any revisions of privatization results upon its completion.
As is known, the state annually sets itself ambitious privatization targets; however, the nationalization of the leading companies of the confectionery sector OAO Kommunarka and OAO Spartak, non-repayable transfer of a 21% stake in OAO Luch to the state and probable transfer of a controlling stake in OAO Krasny Pishchevik and OAO Keramin to the state alarm investors, who seem increasingly concerned about the way Belarus protects investors’ rights. Therefore, the resolution is designed to give foreign investors a clear signal that the situation has improved and the Belarusian economy remains an appealing investment destination.
Conclusion
The privatization plan for 2014 envisions sales of at least USD 4 billion worth of state assets. It is quite likely that in 2014, Belarus will have to say goodbye to some major state-controlled assets, as privatization remains virtually the only source of foreign financing, which is crucial for the national economy. The decision of the authorities to reduce the selling price of its shareholding in COOO MTS in late 2013 became indirect proof of changes in the official approach to privatization. The 51% stake in the cellular operator is currently available at USD 863 million (the
http://pravo.by/main.aspx?guid=3871&p0=C21300241&pl=l
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original price was set at USD 1 billion). Another signal indicating that the authorities are ready for privatization is the decision of the government to allow state companies to get rid of non-core assets. The move may increase the effectiveness of state assets and attract investors, who have repeatedly pointed to the lack of objectivity in price formation.
In 2014, Belarus will continue issuing and placing foreign exchange bonds in the domestic market. When it comes to Eurobonds, Belarus will attempt to raise up to USD 700—800 million by floating its debt securities via VTB Capital and Sberbank CIB. However, the final decision about new issuances will depend on the economic situation in Belarus and the world.
The problems accumulated in the national economy suggest that the pattern of raising foreign resources will change in 2014. The need for economic reforms remains in place and encourages the authorities to revise their attitude to the privatization process and regard it as an instrument that can facilitate the renewal of production assets and introduction of innovation, which are important prerequisites for enhancing the competitiveness of the Belarusian economy.
