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Sanctions on Belarus sovereign debt show up ESG blind spot

Beautiful winter view of the old town. Minsk. Belarus.

Asset managers should not need to be told not to buy dictatorship bonds

The US government hit Belarus with financial sanctions last week that prohibit US investors from buying or trading new Belarus sovereign debt with a maturity longer than 90 days. But with investors having spent this year extolling the virtues of ESG investing, surely few of them were holding it anyway.

That is perhaps wishful thinking. A quick search on Bloomberg by one fund manager turned up a list of international asset managers that, according to recent SEC filings, hold quite a lot of Belarusian sovereign bonds, actually.

Those investors all have pages on their websites touting their focus on the environment, social issues and governance. But it seems easier to talk the talk than to walk the walk — especially when one is being tempted with a spread of more than 800bp over US Treasuries.

Even now, they may not be forced to sell. The new sanctions curb the buying of new bonds, not the holding of old ones.

Would these US accounts with a penchant for Belarusian risk have participated in a hypothetical new offering from the country if they were not forbidden from doing so? We may never know.

And perhaps there is a meaningful distinction to be made here. While any contact with a bond from a tainted issuer is distasteful, trading paper in the secondary market is different to providing an ethically dubious government with fresh funds — funds that could be used to finance an orchestrated migrant crisis on EU borders or human rights abuses.

In May, there was much hand wringing as Belarus forced a Ryanair flight off its flight path from Greece to Lithuania to make a premature stop in Minsk so that the government could arrest Belarusian journalist Roman Protasevich, who was on board.

The country’s 2030s dropped seven points that week to around 90. This week they are in the low 80s.

But was that price action a result of funds rethinking their ESG policies, or merely concern about the obvious direction of travel of Belarusian spreads as the likelihood of sanctions increased? One does not need to be the most cynical observer to suspect that it was the latter.

Syndicate bankers have said in the past that sovereigns tend to get a freer pass from investors than other issuers on ESG considerations. This applies especially to environmental considerations, but other violations are increasingly entering the debate.

The banks themselves should also already have been rethinking whether they want to help Belarus raise funds. Can a bank that runs a book for Belarus right now really claim to have ESG credentials?

They have had long enough to grapple with the issue. Back in 2011 — a completely different era in terms of ESG — UK state-owned bank RBS severed ties with Belarus after being put under pressure by campaigners from Index on Censorship and Free Belarus Now.

At that time, the British press brought the bank's work on the syndication of a Belarusian bond to the attention of a wider audience with headlines such as 'RBS helped bankroll Europe's last dictator', which ran in the Independent.

The dictator the newspaper was referring to was President Alexander Lukashenko, who remains in power 10 years later.

If banks and funds cared about ESG as much as they profess to, last week’s fresh set of sanctions on new Belarusian sovereign debt would have merely formalised internal restrictions that were already in place. Such sanctions should be toothless.

That the US believes the sanctions are needed is a clear indication that ESG considerations among EM funds are still largely lip service.

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