Belarus Belligerence Belabors Russia Relief Rollout

As the EU and US toughen sanctions on Belarus after the “state-sponsored hijacking,” Russia will continue to ride to the rescue and demand its own ransom.  Sanctions were imposed last year after the disputed presidential election and the Lukashenko administration’s violent crackdown on dissidents. The US, EU, Britain, and Canada imposed travel bans and asset freezes on nearly 100 officials and 10 state-owned companies with further action in store this week. The human rights/democracy pariah status also cut Minsk off from the international capital markets despite the absence of formal debt buying prohibition, and Russia stepped in as the biggest creditor to its neighbor. At year-end 2020 Russia loaned Belarus USD 500 million and provided debt relief for loans that Minsk owed to Russian state-owned enterprises.

The day after the Ryanair flight was forced to land so that the founder of an opposition media outlet could be arrested, Belarusian bonds and the ruble sank. Already lacking access to international market borrowing, earlier this month Lukashenko approved RUB 100 billion of bond issuance in Russia over the next two years. Russian banks with local units already own about half of Minsk’s USD 18 billion of foreign debt.  State media reported the National Bank’s gold and foreign currency reserves stood at USD 7.3 billion at the beginning of the month, up 4.9% from April, largely on an uptick in gold as citizens bought USD 349 million of FX last month. The National Bank reported in January that gold accounted for 40% of reserves.  During the massive and violent protests immediately after last year’s election, residents withdrew USD 1.4 billion in August, with total FX outflows USD 1.9 billion for the full year, according to the Finance Ministry.

Despite close ties to the Kremlin and frosty relations the past decade with the West, the Belarusian economy remains highly dollarized as citizens distrust the 24-year-old authoritarian regime erratic exchange rate and monetary policies failed IMF programs tried to correct.  In 2020 the government issued the equivalent of USD 580 million of bonds, of which only 20% were denominated in BYN and the rest in USD.  About half were sold on the Belarusian Currency and Stock Exchange. In an effort to raise more hard currency, the government plans to start issuing retail bonds in USD through state-owned bank branches.

Earlier this month Fitch Ratings re-affirmed its B grade with a negative outlook, noting that “vulnerabilities that have been elevated by the post-election political crisis pose risks to macroeconomic and financial stability.”  The economy only contracted 0.9% last year despite the pandemic and political turmoil and rebounded by the same amount in Q1 on low base effects. However, growth is now likely to stall from the imposition of further sanctions which will further deter trade and investment. The halting of European flights and targeting of critical tractor and potash exports, with 20% of the global market, in the latest punishment round will further pressure foreign reserves.

After servicing nearly USD 900 million in external debt obligations in Q1, some USD 2 billion is payable through year-end.  However, nearly half is due to Russia and a further quarter to China with both likely to provide assistance or not press immediate claims. Beijing continues to proclaim solidarity with the incumbent, and to uphold $1 billion industrial park investment.  According to press reports, Putin and Lukashenka will meet this week for the third time this year, as the latter continues to press for lower oil prices from Russia for economic relief.  Putin meanwhile continues to push Lukashenka toward closer economic integration as an anchor member of the Eurasia economic union also with Armenia and Kazakhstan. An actual merger timetable could finally materialize with the duel debt/sanctions anchors weighing more heavily on bond prices and authoritarian endurance, especially if a full European investor holding exclusion adds ballast.

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