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Belarus forced closer to Russia as EU ties erode amid pressing sanctions

Protasevich

As EU sanctions on Belarus sovereign take effect this week, market players told GloblalCapital’s sister title GlobalMarkets that the measures may simply push the former Soviet state closer to Russia and further from the West.

Belarus is set to strengthen its ties with Russia — in particular, financial ones — following the latest wave of EU-led sanctions against the former Soviet state that came into force this week, observers have warned.

The sanctions, in response to the recent high profile arrest of Belarusian opposition journalist Roman Protasevich, target a number of Belarusian oligarchs, key economic sectors and sovereign debt. The sanctions on sovereign debt, which prevent the purchase or sale of new Belarusian securities and lending to Belarus, came into effect on Tuesday.

The package targets some of Belarus’s most lucrative sources of income, including its potash, petroleum and tobacco exports, aiming to hit President Alexander Lukashenko — in power since 1994 — where it hurts.

The EBRD stopped investing in sovereign and sub-sovereign projects at the beginning of 2020, with “no plans to do so for the foreseeable future”. However, the development bank continues to support private sector projects.

“Our concern is the continuing deterioration of the human rights situation in Belarus,” says Anton Usov, chief spokesman for Russia, Belarus, Central Asia and Mongolia at the EBRD. “We do not want to speculate on what the future holds for Belarus, but unlike in Russia we are still looking at selected private sector projects where there are clear benefits for small and medium-sized companies, female entrepreneurs and young professionals.”

The EBRD made a notable break from its historical lending relationship with Russia in 2014, following the Crimea Crisis.  But limited support from development banks in Belarus’s private sector is unlikely to compensate for the economic damage the latest sanctions will have.

“The most recent sanctions, which target both industrial sectors and individuals, will have a negative economic impact,” says Andreas Schwabe, senior economist, CEE at Raiffeisen Bank International. “They also affect Belarus’s activity in primary debt markets, as the sanctions prohibit issuance by the state and state-owned bodies, including three state-owned banks.

“Major categories of exports from Belarus are sanctioned, although there are some exceptions. This is a strong warning signal that EU sanctions can be tightened in the future, if needed.”

Stick and carrot

But Europe’s stance may be counter-productive, as the repeated use of the stick method will push the former Soviet country even further away from the democratic West and closer to its historical backer, Russia.

According to RBI, the bulk of Belarus’s wider public external financing, around $13bn of the total debt of $27bn, is owed to Russia and the Eurasian Economic Union.

Although, historically, Belarus has been financially dependent on Russia, it has also benefited from access to euro and dollar-denominated capital markets. That may be no longer, some fear. In fact, many investors have reduced their exposure to Belarus since volatility escalated in May.

“Belarus as a credit itself, for the yields on offer, is pretty good — the likelihood of it defaulting or restructuring is low,” says Richard Briggs, investment manager at GAM, which previously had exposure to Belarus but has since reduced it to zero. “But our issue is with sanctions — it is the reason we do not have any more exposure.

“Although the sanctions just target the primary market for now, there is an overhang that the next step could be secondary sanctions on existing bonds. Investors do not want to be stuck in a situation where secondary sanctions appear, and we are forced to sell at incredibly depressed prices.”

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