Lucas Romriell of Galt & Taggart -

Six months ago, investment bankers were confidently pitching Belarusian companies on the virtues of privatization and capital markets. State-run was out, private was in. Now, with western governments privatizing their own banks and credit markets in the worst state since the Great Depression, it seems a more measured approach to privatization and capital market development could be wiser than many bankers had thought.

The government is serious about entering the global community, reforming its economy and accessing international markets. Investors may have been disappointed in July when the government postponed publishing a list of strategically important enterprises that it would liberalize stock trading in, but it has announced a three-year privatization plan and relinquished its right to a "golden share" in firms. The amount of foreign capital in the banking sector grew from 10% in January to roughly 24% by February. And deals involving mobile phone operator BeST, the Belarusian Bicycle Factory and Lido Brewery prove the state is serious about welcoming foreign investment.

Capital gains and dividend taxes have been cut from 40% to 20%, while taxes on interest income from both government and corporate bond issuers was eliminated. Trading in these assets is carried out by well capitalized banks and volumes were a substantial $3.47bn in the first quarter. Corporate fixed-income issues are still small, but grew by 4,590% in the first quarter to $155m. Of equal importance, the government has carried out a series of reforms that gave it a place on the World Bank's "ease of doing business" rankings and there is a healthy open dialogue with investors. The "golden share" rule, which gave the government a deciding vote in certain enterprises, was annulled (in actuality, this affected 11% of enterprises) and a list of 147 companies that could be privatized was published.

Preventing fire sales

The most controversial reform of the securities market was a decision on July 17 that all trades must be registered on the exchange between two professional brokers. The difference between trades must not exceed 20%. The purpose of this is to prevent the wide-scale fire sales of assets that took place in Poland, Ukraine and Russia. Also, trades either higher or lower than 20% of the price of the previous transaction are prohibited.

Of 65 registered capital market participants, few of them are very active. Most transactions are simply one buyer registering a transaction with another. Mainly, this is because most volumes offered are piecemeal sizes of $5,000 or less. Building a book in Belarus takes deeper pockets than most local brokers have and more time than most investors are interested in spending. Equity trading volumes this year were $90.64m by the end of the second quarter, suggesting a downturn from last year's privatization-driven total of $4.74bn.

But the law preventing transactions off the exchange is a double-edged sword. Whereas it prevents the stripping of Belarusian assets at low prices, it also makes it impossible for some individuals to sell their shares, as the cost of the trade is higher than the value of the small packages they are trying to sell. Preventing brokers and investors from buying discounted assets protects the value of companies, but it also makes it more difficult for portfolio investors to make the bold leap into a new market. They want a discount for the additional risk they are prepared to take.

A lack of clarity over taxation regarding ADR/GDR programmes makes it difficult for companies to enter the international markets. Tax laws don't specify if tax must be paid on the ADR issue or on the local shares that have been used to create the programme. Belarus would do well to sort out this problem in advance, before they encounter the same conflicts that arose with Bank of New York in Moscow, or have the same difficulty that Ukrainian investors have had in receiving their dividends. Lastly, there is a vague law still on the books preventing podozretelny zdelky, or "extraordinary transactions" or "unusual transactions." The wording is dangerously ambiguous.

Overall, there is a future for Belarusian companies and the local equity market, but we are still a few years from seeing significant volumes. Six months ago, investors and bankers would have been crying in their beers over that news. Now, it looks like it might be okay if we have to wait a little longer.