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Emerging Markets

ESG hand-wringing over Belarus is too little, too late

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Following the international outcry over the forced landing of a Ryanair passenger plane carrying a Belarusian dissident, some emerging markets investors are said to have had sudden doubts about the ESG characteristics of Belarusian sovereign bonds. What took them so long?

As of Friday — before the government intercepted flight FR4978 from Athens to Vilnius, triggering a diplomatic incident and bringing EU sanctions crashing down on itself — the country’s 6.2% February 2030 bond had been trading at 94.029.

On Monday morning it dropped to 90.90. As of Tuesday morning, it was at 91.59. Not a huge sell-off, but clearly some investors found the incident distasteful. Observers quickly started to use the term “ESG”.

It has been obvious, though, that President Lukashenko’s administration has been falling short of international governance standards for some time, especially since the presidential election of August 2020.

The vote took place shortly after the country had sealed a successful dollar bond offering, to which US and European investors subscribed so enthusiastically that it was priced inside fair value. Citi, Raiffeisen Bank International and Société Générale were the bookrunners, with Renaissance Capital as joint lead manager.

Just weeks later, members of the Belarusian opposition were arrested on false charges or forcibly exiled, while police used “excessive and indiscriminate force” to quell peaceful demonstrations, according to Amnesty International. The arrests numbered in the tens of thousands and many of those taken into custody were “tortured or otherwise ill-treated,” the human rights organisation said.

In fact, the warning signs had been visible well before that, as demonstrated by the fact that the EU has imposed an increasingly tightening sanction regime on the former Soviet Union state since 2004.

Even after the troubling election scenes last year and a modest sell-off in the bonds, investor appetite had not weakened enough to push them down below the 90s.

“It’s a question of timing and how much do you plug your nose. If you are going to invest in EM, you have to consider ESG vs total return,” a buy-side analyst told GlobalCapital at the time, noting that Belarus was “not a standout” in the world of EM sovereigns.

That may be true — take the murder of Jamal Khashoggi, for example — but it doesn’t explain why a group of investors that had been happy to hold Belarusian government bonds until a few days ago suddenly decided they were too hot to handle.

The underlying ESG concerns with Belarus are the same as they were last week, the only difference being that they have now been thrust into the spotlight by behaviour so reckless it was bound to turn the country into an international pariah.

Part of the rationale behind socially responsible or ESG investing is that it incentivises good behaviour with the promise of lower funding costs.

Another way of looking at it is that irresponsible or poorly governed borrowers are inherently riskier, and that it is in investors’ own interests to shun them.

Investors that held Belarusian debt until Sunday and decided to sell after seeing the headlines cannot claim to have been guided by either of these principles.

In the first case, they failed to send a clear signal to Belarusian authorities after their unacceptable conduct in the election, effectively giving Lukashenko carte blanche to do as he pleased.

In the second, they were caught off guard by the shocking but predictable outcome.

Committed ESG investors are always asking issuers for more data. In the case of Belarus, the facts and the direction of travel were plain for them to see — but were ignored.

Absorbing more risk, be it ESG-related or not, is part and parcel of investing in emerging markets. That is the name of the game.

But those that until this week had holdings in Belarusian bonds cannot now invoke high-minded ESG concerns as the reason for the sell-off. It’s much too late for that.

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