Sanctions give Belarus a headache

By bne IntelliNews August 25, 2014

Sergei Kuznetsov in Minsk -


Western sanctions against Russia are a headache for Moscow's closest ally Belarus. In particular, the financing of the Belarusian economy is under threat, while investment and exports are deeply tied to its giant neighbour.

In late July, the European Union unveiled new sanctions against Russian state-controlled banking giants Sberbank, VTB Bank, Gazprombank, Vnesheconombank (VEB) and Rosselkhozbank. EU nationals and companies are now barred from buying or selling new bonds, equity, or other financial instruments with a maturity of more than 90 days issued by these institutions. The US and several other nations have also targeted the largest Russian banks as part of the campaign to push Moscow to drop its alleged support for rebels in Ukraine. 

The Central Bank of Russia has promised to take "adequate measures" to support the lenders. Meanwhile, Gazprombank, VEB and Rosselkhozbank have already applied to the government for financial support. In particular, VEB requires up to RUB60bn ($1.65bn) annually to finance new projects and the support it offers exporters.

Russian banks currently own about 25% of the total assets of the Belarusian banking system. According to the International Monetary Fund (IMF), Russian subsidiaries in Belarus rely heavily on their parent companies for funding and capital, and "any weakening of the parent banks could have substantial spillovers." 

"The Belarusian authorities have a keen interest in shifting part of the burden for financing the national economy to banks with foreign capital, in particular, Russian banks. This is important because Belarus has significant external debt repayments to service," Alexander Mukha, a Minsk-based independent financial analyst, tells bne.

He adds that Minsk especially relies on Russian-owned banks to support agricultural enterprises and state programmes. "However, it's unlikely that the lenders will be able to increase their lending, because of current geopolitical tensions in the region," he suggests. "As a result of the western sanctions, some Russian banks will face a deterioration in access to international capital markets and an increase in the cost of foreign borrowing; this could lead to a rise in the cost price of resources for the local subsidiaries."

However, Nadezhda Ermakova, the governor of the National Bank of Belarus, tells bne the Russian-owned banks in the country "have not been affected yet" by the sanctions. "Parental banks are not ceasing to support the liquidity of their local subsidiaries... Russian banks are not withdrawing resources from the subsidiaries, and are not going to do so in 2015," she says.

At the same time, Ermakova admits that in some cases local units are suffering delays in transactions that go through EU and US banks, because of restrictions against Russian parental institutions.

In June, Belarus agreed a $2bn short-term loan from VTB Bank in order to beef up the country's depleted international reserves. Minsk expects to repay the loan at the expense of an intergovernmental loan negotiated with Russia. Ermakova hopes such facilities will remain open in the future. "However, currently, we don't need a new bridge-loans," she said.

Deep ties

However, Belarus' dependence on its neighbour extends well past financing; the economy's ties to the Russian economy run deep. The IMF has expressed concern that any substantial decline in Russian foreign direct investment (FDI) into Belarus caused by geopolitical turbulence could significantly affect the country's fragile balance of payments. Russia accounts for about 70% of FDI. The IMF also expects that "growth in Russia - the destination of 35% of Belarus' exports - will suffer as a result of sanctions, reduced confidence, and higher interest rates."

However, Minsk also has reason to be optimistic. Russia's ban on food imports from the US, EU and others will likely boost Belarusian exports. "We need to take advantage of the situation and make money," President Alexander Lukashenko said on August 15. Prime Minister Mikhail Myasnikovich says Belarus hopes to increase food supplies to Russia by 1.5 times in August - December. "Additional food supplies to Russia will be secured by increasing production at processing companies," he explained.

"Belarus should take this opportunity to improve its balance of payments," Ermakova agrees. In the first quarter, the current account deficit stood at $1.675bn, with problematic export revenues continuing to crimp Belarus' fiscal situation. That issue has been draining the country's international reserves for years, and they stood at just $6.2bn at the end of July.

There is already some evidence emerging that Belarus will also look act as a surreptitious middleman, re-exporting produce arriving from the West. Minsk, a founding member of the free trade Customs Union alongside Russia and Kazakhstan, obviously rejects those claims. "We need to coordinate our plans with Russia, so that they do not accuse us of disregarding their policy," Lukashenko insists.

Stanislav Bogdankevich, former governor of the Belarusian central bank, believes that the government will try to prevent food re-export to Russia. "However, some companies, in particular state-owned firms, could try to get extra profit in this situation," he tells bne.


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