Graham Stack in Minsk -

Belarus is staying true to its tradition of bucking trends. In the 1990s, Belarus stuck to state ownership and dirigism, while its neighbours embraced privatization and the free market. And in 2008, with the world's stock markets in freefall, Belarus is about to finally launch its stock market, and expects share prices to soar when trading takes off.

"Stock market participants here are like sprinters waiting on their starting blocks," says Valery Kalazhenko, deputy head of the Belarus Ministry of Finance's Securities Department, responsible for regulating the stock market. "Everything is ready and in place, all they are waiting for is the starting gun."

An equity market has been a long time in coming in Belarus. The Belarus Currency and Securities Exchange (BSCE) is 16 years old, but in 2007 share trading comprised a miniscule 0.7% of trading volume, with the lion's share trading in state securities. And yet, says Kalazhenko, there are formally over 3,000 public companies in Belarus as a result of the mass privatisation launched in 1992.

But that privatization effort was mothballed just as it began to roll. The state imposed a moratorium on the selling of shares obtained by the public for their privatization cheques. And following a backlash against market reforms symbolised by Alexander Lukashenko's rise to power in 1994, the state introduced a "golden share" rule for privatized companies, giving it the right to intervene in company management in a wide range of scenarios. As a result of these two measures, says Kalazhenko, "although all the necessary infrastructure for the stock market has been created, there has until now been nothing to trade."

This all changed in 2008. On January 23, the government passed a programme on "Development of the Equity Market 2008-2011," envisaging the emergence of a fully-fledged stock exchange. Implementation of the programme started almost immediately, says Kalazhenko, with a presidential decree in February abolishing the state's golden shares, which he calls "a revolutionary step."

The government followed up by slashing capital gains tax from a prohibitive 42% to a profit tax level of 24%, and then with the abolition of the moratorium on alienation of shares held by the population as of June 1. "These measures will ensure development of a Belarusian stock market," claims Sergei Tinnikov, deputy head of the BCSE. "All that is required is for them to be fully implemented."

False start

Instead of a big bang, however, the June date proved to be a false start. Similar to the hesitant steps it is making toward some democratization, the Lukashenko administration, while liberalizing the economy, is also intending to keep control of its "commanding heights." As a result, a list is still being drawn up of around 150 strategic companies that will be excluded from exchange trading, at least in the initial phases. And until the list appears, the moratorium remains in effect. "We're all waiting for this list to appear," says Tinnikov. "Only when it does, will the market will take off."

However, even when the list does appear, it will only mark the start of phasing out the moratorium over three stages. Firstly, this year the moratorium will only be lifted on companies where there is either no state stake, or the state owns over 75%. Then in 2009, shares will be admitted to trading for companies where the state owns over 50%. Only in 2011 will the shares of companies where the state is only a minority shareholder start to trade. "This is to allow our colleagues in the State Property Fund time to optimize the state holdings," explains Kalazhenko, indicating the state is likely to increase its stake to a majority one in companies it wishes to retain control over.

Added to this is the fact that key Belarusian companies such as petrochemical giant Belneftekhim and potash giant Belaruskali, accounting together for around 40% of budget revenues, are state unitary companies yet to be corporatised. "But there remain a huge number of companies where the state is already a majority shareholder," says Tinnikov, "and these will be free for trading very shortly."

In fact, according to Tinnikov, while potential blue chips remain in state hands, too many run-of-the-mill companies will list on the exchange, many of them of little interest to investors. This is partly a legacy of the mass privatization in the 1990s. It is also due to the government's decision in the interest of transparency to close the over-the-counter (OTC) market. As of June, all share trading must take place via the exchange. "We don't need 1000 companies, we only need 100 good companies that are interesting for investors," Tinnikov says. "We are not very happy about the decision to end OTC trading, since it means we will have far too many companies on the exchange."

Not only will there be a huge number of companies, but also a huge number of shareholders. According to Kalazhenko, a legacy of the 1990s mass privatization is that there are around 1.5m shareholders in Belarus, out of a population of just 10m. "Our stockbrokers are currently occupied fulltime with entering shareholder data into their systems," says Tinnikov.

The government is thus not only concerned with retaining control over strategic companies, but is also intent on avoiding a rerun of the chaotic Russian mass privatization of the 1990s that saw companies bought for pennies. Banning OTC trading is intended to stop the workers selling company shares too cheaply, especially to company management, says Kalazhenko.

Another problem is that over the last decade and a half, many shareholders have forgotten they have shares deposited at the central depository. Former workers may have died without their heirs knowing about their shares, and many Belarusians have emigrated. "Companies may find it difficult to get a quorum for their shareholders' meetings," says Kalazhenko.

In addition, with such an overhang of shares, Kalazhenko and Tinnikov are concerned lest punters divest their shares too quickly and too cheaply in the initial phase, before the market has formed realistic prices. "We say - wait, don't be in any rush to sell. Prices will rise," says Tinnikov. "But many people will think 'a bird in the hand is worth two in the bush,' and sell their shares straight off for easy money. In general, people here have no experience with the share market, and do not regard shares as a form of investment that will grow in value over the long term."

Bluish chips

Most analysts say that share prices will be way undervalued at the start and are set to soar initially. With the Belarusian economy powering ahead at 8-10% growth per year, and seemingly immune to the global financial crisis so far, most companies are profitable.

However, with around 1.5m small shareholders looking to sell, it is still not very clear who is going to be buying. "We have very few structures that are potential investors," admits Tinnikov. "Banks and insurance companies are not allowed to work on the stock market because of the risks, and the population is used to keeping money in the banks. And, most significantly, in Belarus there is still simply no such thing as a collective investor, although legislation is being considered."

Tinnikov also expects Belarusian private capital to buy heavily into public companies. "Belarusian oligarchs will emerge - this is simply how business develops, capital concentrates. Up to now, the state has held this development back, but, as we say in Russian, 'money goes to where money is'."

Management ownership is also a possibility - but, as Kalazhenko emphasizes, management can buy shares in "their" companies only via the exchange and after six months notice to ensure transparency. Far from welcoming the development, Tinnikov says Belarusian factory directors are often disconcerted by the process. "Factory directors have little experience in dealing with minorities, and they are worried about what will happen with such a wide dispersion of shareholders. If large groups compete for control of the company, will they change management?"

Moreover, state companies still get cheap credits from state banks, meaning the stock market does not figure in their plans for raising finance. "But," says Tinnikov, "the state will stop or restrict cheap credits, and then the only option is to IPO, change communication with shareholders, do everything that is completely natural in the West, and even in Russia."

Tinnikov is expecting foreign investors to arrive. "Russians, Ukrainians, our neighbours, will buy stakes in companies they know because they work with them." Kalazhenko emphasizes that foreign investors are also perfectly free to trade on the exchange. "The system is totally open for non-residents. You just need to open an account in the depository, and buy shares and bonds. There's no need for approval, except when buying banks. There are only questions of tax and currency to handle, and there is very good earning potential."

Neither Tinnikov nor Kalazhenko believe that the Belarus stock market is going to be a major regional player in the near future. But they believe it will be interesting for foreign investors as a safe haven as Russia and Ukraine nosedive. "In five years time, it won't not a large market here, even compared to Ukraine, but there we should reach $2bn-3bn annual turnover." says Tinnikov. "There will be 20-30 companies with good trading volume. Not fully blue chips, but certainly somewhat blueish."

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