Foreign Investments: Old strategy for raising capital remains in place

Maria Akulova

Summary

In 2014, inflows of foreign investments in Belarus remained insignificant. Privatization was still regarded only as a fiscal instrument, which is why there were no significant privatization transactions.

Foreign loans were the main source of capital. Given the passiveness of investors and discontent of business, the authorities had to postpone decision-making on the bill to enhance the role and control of the state in joint-stock companies.

Trends:
General information

In 2014, the government had planned to raise some USD 3.5 billion in foreign direct investments (FDI), including USD 2.5 billion from sales of state property and net FDI, and the remaining money from foreign and domestic loans. However, the original target was never reached. FDI totaled USD 1.833 billion 1 in 2014, a decrease by 18% from 2013, when FDI amounted to USD 2.446 billion. Overall, the country raised USD 4.1 billion in foreign investments in 2014, a lot less than in 2013 (USD 7.6 billion.)

Gross external debt expanded by approximately 9.4% in 2014; it stood at USD 39.6 billion as of 1 January 2014 (54.4% of GDP) and went up to USD 40.1 billion 12 months later (52.8% of GDP). External public debt increased by approximately 5.6% in 2014: as of 1 January 2015, it stood at 17.2% of GDP, whereas the threshold had been set at 25%. In value terms, external public debt went up to USD 13.1 billion from USD 13 billion in 2013.

Belarus had to make most of the payments to service the loan taken as part of the Stand-By Arrangement back in 2009–2010. In 2014, the country paid about USD 1.2 billion to the IMF. Payments under foreign loan agreements totaled USD 4.1 billion in the first three quarters of 2014.

The structure of foreign investments in Belarus in 2014 shows that most of the investments (56.1%) were formed by “other external liabilities,” i. e. borrowings by the government and banks, as well as various commercial loans. FDI accounts for 44.4% of the total, and portfolio investments have a minor share of 0.1%.

Foreign direct investments and privatization

In 2014, the country raised USD 1.833 billion in net FDI, whereas the original target for the year was USD 2.5 billion. 2 The structure of borrowed funds is quite indicative. The government had planned that the money would be raised by the real economy through privatization of state assets managed by various ministries and concerns. However, this way, only USD 81.6 million worth of investments was raised. Most of FDI (USD 1.44 billion) was received by privately-owned companies.

As in previous years, reinvested profits of Belarusian companies became the main source of FDI in the Belarusian economy. In 2014, they amounted to USD 873.6 million (48% of the total). Joint-stock capital contributions reached USD 617.4 million (33.7% of total FDI). Transactions with debt instruments accounted for the remaining 18.6%.

According to Belstat, the share of FDI in industry reached 12.2% in 2014. 3 The trend has remained unchanged – a few years ago, industry accounted for 10% of FDI. This level appears to be very low, given that one of the top priority objectives of the national economy is to create new high-technology enterprises and upgrade the manufacturing sector.

When it comes to privatization, the government did not manage to stick to its original plan in 2014. According to Belstat data, sales of state-owned shareholdings in joint-stock companies (that constitute more than 10% of respective authorized funds) generated USD 15.8 million in revenues for the state budget. The lack of active efforts to sell state property should be attributed to changes in the government’s attitude to privatization.

The most active privatization phase in Belarus was registered in 2008–2011; however, qualitative changes were introduced to the privatization procedure in 2012, and the number of privatization deals dwindled. The reintroduction of preapproved privatization lists and extension in the decision-making procedure for each asset brought the number of transactions with state property almost no nil. Moreover, according to H. Kuzniacoŭ, chairman of the State Property Committee, the lengthy preparation of an asset for privatization discourages investors, which turn to more exciting opportunities beyond Belarus.

Some of the sporadic transactions with state property in 2014 included the sale of the state-owned shareholding in OAO Belgips to Russia’s Volma, which acquired 99.5% in the company for USD 5.27 million. Further, Russia’s state-run bank VTB bought the remaining 2.63% in ZAO Bank VTB (Belarus), thus increasing its stake in the Belarus-based subsidiary to 100%. The minority shareholding was worth an estimated USD 2 million. Belarusian-Polish COOO Conte Spa acquired the remaining 19.39% in OAO Brest Hosiery Plant from the state, paying BYR 39 billion.

Throughout the year, the authorities were making numerous efforts to invigorate the privatization process, but to no avail. One example is the attempts by the authorities to sell state shareholdings in major enterprises; however, no potential investors appeared to be interested.

Specifically, a new competitive tender was held to sell the 51% shareholding belonging to the state in COOO MTS, a mobile carrier. The state has tried to sell the asset since 2011, but the price remains the main stumbling block. In 2008, investors criticized the declared price of the shareholding, at USD 1 billion. In late 2013, Belarus cut the price to USD 863 million; however, the asset did not appeal to any investor, either, because everyone had expected that the price of the Belarusian subsidiary would correspond to the market multiplier of the valuation of Russia’s OAO MTS. The attempt to sell a blocking shareholding of 25% plus one share in OAO Grodno-Azot at a price of at least USD 414 million failed as well: not a single bid was received.

Private companies proved to be more successful when it came to deals with foreign investors. In 2014, landmark transactions in the IT sector – which is currently the main generator of foreign exchange for the country – were finalized. Mobile app developer Apalon was acquired by U. S.’ IMindspark for an estimated USD 80–100 million and Russian Mail.ru Group bought the MAPS.ME service from Belarusian MapsWithMe GmbH for approximately USD 30 million.

Lithuanian capital has played an increasingly important role in the Belarusian Greenfield segment. Lithuanian ARVI announced plans to spend about EUR 70 million on the construction of an animal feed mill in the Mahilioŭ Region and farms to breed and fatten turkey, as well as on the reconstruction of the Baranavičy Protein Plant. Another Lithuanian company, Modus Group, is planning to invest EUR 10 million in the construction of a solar electric plant in Belarus. Finally, Capital City is planning to invest approximately USD 70 million in the construction of a sports and recreation facility and a multiuse complex in Minsk.

Belarusian investors in foreign assets were also active in 2014. The National Bank of Belarus bought a 100% stake in OAO Bank Moscow–Minsk for USD 55.7 million. Wargaming exercised its option to buy 1 million U.S. depositary receipts of China’s KongZhong for USD 5.94 million, thus increasing its share in that company to 8.6% from 6.7%. Finally, direct investment fund Zubr Capital acquired a blocking shareholding in SoftClub for USD 14 million.

Portfolio investments

Despite active advertising and a road show at the end of 2013, there were economic reasons that stopped Belarus from floating its sovereign bonds in Europe and Asia. Throughout the year, quotes on previously floated Eurobonds remained volatile.

The first half of the year proved to be quite favorable. Most probably, the image of the country improved owing to the 2014 IIHF World Championship in Minsk, which is why prices of Belarusian Eurobonds increased, and yields dropped. In June and July, the yields on Belarusian sovereign bonds hit a new bottom—5.09% for five-year bonds maturing in 2015 and 6.06% for seven-year Eurobonds with maturity in 2018.

However, the oil crisis, deterioration of Russia’s relationship with the world community, direct dependence of Belarus on its eastern ally, and the depreciation of the national currency affected Belarus’s debt securities. As a result, the yields on Belarusian Eurobonds hiked to 19.19% for five-year bonds maturing in 2015 and 11.87% for seven-year Eurobonds with maturity in 2018. The increase in rates prevents Belarus from floating new Eurobond issues. Back in autumn, the country considered placing USD 1–1.5 billion worth of 10-year bonds; however, in the current context, this debt option seems too costly.

In 2014, Belarus continued borrowing domestically by issuing state securities for households and corporate entities. The Ministry of Finance had planned to borrow some USD 900 million (USD 100 million from individuals and USD 800 million from companies); however, it managed to sell only USD 335 million and EUR 60 million worth of bonds. In 2015, the government will continue borrowing in the domestic market, because foreign debts are still too expensive.

Other foreign liabilities

In January-September 2014, other net external liabilities increased by USD 1,432.7 million and accounted for 48.5% of all foreign liabilities. Borrowing by the government and commercial loans accounted for the bulk of other external liabilities.

In December 2013, an agreement was signed with the government of the Russian Federation on an additional loan of up to USD 2 billion for up to 10 years. In late June 2014, the money was transferred to Belarus and used to increase the country’s gold and foreign exchange reserves by USD 1.1 billion. Some of the money was used to pay for previous loans.

Belarus had expected the sixth and final installment of the EurAsEC Anti-Crisis Fund’s loan amounting to USD 440 million. However, because Belarus had failed to comply with several requirements of the special stabilization program, the final installment was postponed until 2015.

Finally, in December 2014, Belarus and the China Development Bank signed an agreement on the opening of two long-term credit lines for 15 years totaling USD 1 billion. It had been planned that the funds would be used to finance investment projects in various sectors of the national economy and support small and medium-sized business.

As for foreign borrowing by companies, there were some important transactions. BPS-Sberbank and Sberbank of Russia opened credit lines for the two Belarusian oil refineries totaling EUR 150 million. The Eurasian Development Bank (EDB) approved three-year credit lines for OAO BelAZ and OOO Alutech amounting to USD 75 million and USD 25 million, respectively.

Sberbank of Russia opened two credit lines for RUP Belorusneft worth a total of EUR 74 million and a USD 50 million credit line for OOO Tabak-Invest. Belarusbank continued raising syndicated loans and signed agreements for a total of EUR 133 million worth of loans. Belarusky Narodny Bank took a USD 12 million loan from the EBRD and a USD 6 million loan from the IFC for up to four years.

Arrangements to raise foreign financing and improve the investment climate
  1. 1. Law No.231-З Concerning the securities market of 5 January 2015. On 17 December 2014, the lower chamber of parliament, the House of Representatives, adopted the bill Concerning the securities market, and the upper chamber, the Council of the Republic, adopted it on 18 December 2014. The law will come into effect on 10 July 2015. 4 The document regulates the procedure for issuing and circulating securities and includes requirements for professional traders, as well as measures to prevent information leaks.
  2. 2. The bill Concerning amendments to the law of the Republic of Belarus Concerning privatization of state property and transformation of state unitary enterprises in open joint-stock companies was postponed. In the summer of 2013, the bill on privatization, which envisaged a more important role of the state in joint-stock companies through the introduction of a state representative, successfully passed its first reading. It had been planned that the state would be able to influence decision-making even in companies where it owns a minority stake. The business community of the country and foreign investors slammed the bill then. Because the document might have affected potential investors, the bill never passed its second reading. It will most likely do so in 2015.
Conclusion

According to resolution of the Council of Ministers No.1238 of 24 December 2014, privatization will generate at least USD 850 million 5 in revenues in 2015. Ideally, it is planned to sell state shareholdings in about 60 assets, including OAO Mogilevkhimvolokno, OAO Horizont, OAO BATE, COOO MTS. However, chances to succeed are slim, because the factors that slow the privatization process remain in place.

On the one hand, the price that the state has set for the assets in question differs a lot from their market value. On the other hand, most of the assets offered for sale are loss-making, which is another important reason why investors are discouraged. An additional factor that reduces the already slender chances of success is the situation in Russia, which has always been the main source of investments for Belarus. In 2015, Russian investors will be passive, as they will focus on internal problems.

In 2015, the government will continue floating foreign exchange-denominated bonds in the domestic market. At the same time, it is highly unlikely that Belarus will float Eurobonds to raise foreign capital due to the difficult financial situation in Belarus and high associated risks.

Further worsening of the economic situation suggests that it will be even harder to raise foreign financing in 2015 than in 2014. Only flexible decision-making in the preparation and sale of state assets, as well as a change in the attitude to foreign investors can increase the country’s investment appeal; otherwise, Belarus will only have foreign loans to fall back on. However, it will be increasingly harder to borrow in 2015 compared with previous years.