Dear CCI Friends,
Those of you who watch Russia’s immediate neighbors may be wondering what will happen as Belarus heats up for change.
Chris Weafer, Russia’s top expert on their financial realm, as recognized by the Financial Times, The New York Times and numerous international papers and pundits, sends the following report on Belarus.
It sounds like the situation will be handled without major conflict.
Sharon Tennison
Center for Citizen Initiatives
Belarus: The investment case is also in transition
By Chris Weafer
Macro-Advisory actively covers macro-political and business trends in Belarus. We prepare deep due-diligence studies of key industries and help our clients identify investment and growth opportunities while also providing clarity about risk.
Transition has started. While the timing and sequence are uncertain, it appears obvious that the process of political transition has started. The question is when, and how, the elites and security forces will act. Moscow can be expected to exert a great deal of influence, a fact not lost on the protestors who have avoided blaming Moscow. Moscow will be dealing with the country’s elite and not the opposition groups.
Belarus is not Ukraine. It is a mistake to view what is happening in Belarus as similar to what happened in Ukraine. The two cases are fundamentally different. What is playing out in Belarus, or will play out in the near future, is more comparable to what happened in Armenia or Uzbekistan. Moscow is also treating it as such. The idea that Russia may, for example, send in the military to annex Belarus, is simply wrong. That scenario is being talked about in neighboring east European states and is viewed as posing a direct threat to their sovereignty. It is a factor weighing on the currency and adding to the perception of investment risk. As reality displaces these concerns in the coming months, asset prices and investor concerns should adjust.
Investment opportunities. The government had already accepted that the economy needs to diversify and planned several measures to attract investment. If there is political change, this process will likely accelerate and be helped with aid from the EU and Moscow.
Change scenarios. In this report, we look at several scenarios for political change, or status quo, and what these may mean for investors. Regardless of whether Lukashenko stays or leaves office, in whatever circumstance, the investment case has now changed. If Lukashenko manages to stay, then the risk premium will continue to rise and investment in Belarus assets will be less appealing. If he goes, and socio-political stability is restored, then assets, and opportunities, will be a whole lot more appealing.
Focusing on existing trends. The key growth industries are already clear and have been growing in recent years. These include agriculture and food processing, especially dairy; transport & logistics; technology; consumer areas (including fast growth e-commerce); and machinery.
Relied on stability for too long. The problem for Lukashenko is that he relied on emphasizing stability over change for far too long. He missed the fact that the country’s population, especially the young, want better living conditions and improved job opportunities.
Domestic stability but externally vulnerable. The domestic economy has been relatively stable thanks to government support. But, because of the external vulnerabilities, especially the reliance on subsidies from Russia and transit oil, the headline numbers have been very volatile.
Relatively well-managed economy. Belarus is not like Ukraine; hence the protests are quite different. There is no major wealth gap, no high-profile oligarchs or obviously egregious corruption. Real wages and real disposable incomes continue to grow, even this year.
Facing large debt repayments. Belarus has a low debt burden, relative to GDP. But it needs to repay or refinance almost US$4 billion of debt this year and over US$3 billion next year. It will need to borrow. But that may now be difficult, or expensive, without political changes.
IMF aid may also depend on political changes. The country is also engaged in talks with the IMF and the EBRD. But, given the fact that Lukashenko fired the previous government for advising the adoption of austerity measures favored by the IMF, it seems impossible that new money will be granted while he is president.
Ruble looks vulnerable to further weakness. The Belarus ruble has lost 8% against the US dollar since the election and is down almost 21% year-to-date. The near-term trend will be influenced by political events. If the protests end, the ruble should recover some of that lost ground while, if the situation deteriorates further, the ruble will add to recent weakness. The medium to longer term outlook is for a weakening trend as the government (new or old) will need to boost competitiveness.
Covid-19 decline, but emerging risk. The country experienced a high rate of infections and deaths, peaking in May. Recently the rate fell sharply. But there are concerns that the mass-protests may lead to a second pike in infections later this month.