Belarus: A Game of Bluff

Haggard faces, empty store shelves and long petrol lines are the images that are conjured when thinking about the current situation in Belarus. The central bank’s decision to devalue the rouble (BYR) by 40% took many foreign investors by surprise. Fortunately, the move was well anticipated by local households, businesses and banks. Therefore, there was very little economic disruption. With the exception of some hoarding prior to the increase in prices, the effects of the devaluation were negligible. It was clear that the monetary authorities had to do something with the currency. Belarus’s current account deficit peaked at 16% of GDP in 2010, mainly due to the heady pace of economic activity and a sharp rise in energy prices. The level of economic activity rose 7.6% y/y in 2010 and 12.3% y/y during the first quarter of 2011. Pre-election public sector spending and consumer credit expansion only made matters worse.  However, with the elections out of the way, the government began to put its economic house in order. Minsk launched negotiations with the Russian-led Eurasian Economic Community at the same time that it made overtures to the IMF. This strategy of playing the east against the west is often employed by the former members of the Soviet bloc. Unfortunately, it did not fare so well for the Ukraine and Georgia, but Belarus’s situation is different. It is playing a game of bluff with a strong hand in order to maximize the size of the jackpot.

With a GDP of about $40 billion and a population of less than 10 million, Belarus is a small country. However, it is an important transit corridor between Europe and Russia, with a well-educated population, a strong manufacturing base and modern infrastructure. To put things in context, the country has a service account surplus of a billion dollars due to the tolls and fees it generates from the transit of trucks and energy across its borders. Unlike most of its neighbours, Belarus is still largely a command economy, with almost 80% of the labor force employed by the government. Two state-owned banks dominate more than 70% of the financial sector, and the largest companies remain in the public domain. There have been some privatizations, with the sale of minority stakes in Beltransgaz, the pipeline that is used by Gazprom to export gas to Europe, and MTS, a major cellular service provider. Russia was the dominant participant in the privatizations, and it is anxious to gain a controlling stake in other sectors. However, Belarus is trying to maximize the selling price. The biggest prize is Belaruskali, the state-owned potash producer. Considered to be the second largest potash producer in the world, the company is valued at $30 billion or almost 75% of GDP. In addition to these assets, the government could also sell a stake in MAZ, one of the world’s biggest producers of heavy lifting equipment and trucks. This combination of sellable assets and a hyper-competitive exchange rate gives Minsk very strong cards when playing its hand.

Nevertheless, Belarus realizes that it must be careful not to overplay its position. Wedged between Europe and Russia, it has always been a pawn in the struggle between east and west. Some of the bloodiest battles of World War II took place within its borders, claiming almost a third of the country’s population. Belarus is actually an amalgamation of several Eastern European nations, with a strong Baltic ethnic identity. The name of the country translates into the White Russians, and it reflects the cultural differences with its neighbours to the east and south. Minsk clearly has a European feel, but it never made any pretensions of joining the European Union. It chose to remain well within the Russian orbit. Belarus is also a highly authoritarian regime, but with a competent and efficient bureaucracy. It lacks the rampant corruption and mismanagement that is common across so many emerging market countries. In its effort to sweep the presidential; elections, the government put itself in an economic bind. Nevertheless, Belarus is not in any danger of imminent default. The current account deficit should be cut in half after the recent devaluation and there are no major amortizations for the next two years. Most local analysts expect that the IMF will provide some sort of continuing support in order to preserve western influence. This game of bluff is mainly aimed at making the Russians pay reasonable prices for the assets that are up for grabs. This will give Belarus the resources it needs to meet its external obligations, while continuing with its modernization efforts. As time goes on, we can expect market conditions to normalize and spreads to tighten. Therefore, with sovereign bond yields north of 11%, we believe that Belarus provides one of the more interesting opportunities in the marketplace. It is time to pick up assets on the cheap before someone blinks.