INTERVIEW: Belarus - Europe's last dictatorship or last untapped mkt?

Ben Aris in London
December 1, 2008

Investors have just lost a lot of money by investing in assets that turned out to be riskier than they first seemed. Now they were turning out in droves to consider investing in a country that's quite clearly the riskiest place in Europe to invest. Yet they listened attentively as Belarus Prime Minister Sergei Sidorsky and other top officials reeled off the various attractions of their small republic in the north of Europe.

And they appeared seriously tempted by what they heard. Several foreign companies have already tested the water and found it to be warm. Others are looking at Belarus as the last place in Europe where the same spectacular quadruple-digit gains can be made from simple transformation – if you get it right.

"I came to see what they had to say," said one CEE investor, who preferred not to give his name. "Clearly, the country has a lot of problems to resolve. Clearly, the government is still pretty backward as far as understanding the needs of business. But just as clearly, the returns from a successful investment can be huge."

Belarus is opening up fast, but that process will go "step by step," insists Andrei Kobyakov, the deputy prime minister, who spent over an hour talking to bne and a handful of other journalists. "Don't push us. We are an independent-minded people and we don't like pressure. We have a tradition of resistance, but we are a regular European people. We understand what needs to be done – just we will do it step by step," says Kobyakov batting away the inevitable question about politics.

The conference will almost certainly be a historic landmark for the country, reminiscent of the first Russian Investment Forums that used to be held across the road at the Queen Elizabeth Conference Centre, where Russia's great and powerful showcased their country to the City in the 1990s.

This was the first time Belarus' elite has ventured out of Minsk (indeed, until a few months ago it wasn't clear whether all the officials would get visas a few months ago due to a EU travel ban). Kobyakov played point man to the money with a professional PowerPoint presentation that was stuffed with the sort of statistics that are the bread and butter of investment banking. Obviously the Minskovites have put a lot of thought into their pitch and are serious about bringing home some deals.

Stepping out

But the Belarusians have their work cut out to undo 10 years of pariah status. US Secretary of State Condoleeza Rice's label of the country as the "last dictatorship in Europe" has stuck and it will take a great deal of scrapping to sell investors the alternative strap line of the "last untapped market in Europe."

Surrounded by booming economies and sitting right on the EU's eastern border, reforms have been trickling down through the country for about two years. Some 60% of GDP for the small republic of just over 5m people comes from trade and simply dealing with western counterparties (even if they are Latvians or Lithuanians). This was enough to force things like recognisable book keeping on many Belarusian companies.

A row with Russia over the transit of oil and gas through Belarusian territory was the catalyst for the sudden pick-up in the pace of reform at the start of this year – but not the only reason. Minsk has also suddenly embraced the nettle of reform because after several years of double-digit economic growth, it can't continue growing at the same pace unless it starts to loosen the government's grip on the economy. "The time has come to lift the level of development of the economy. We need foreign investment as we can continue to develop without it, but we can go faster with foreign investment. Five years ago the problem was how to use what we had. Now all that potential left over from the Soviet Union has already been used up. Now we need to upgrade," says Kobyakov.

Minsk may be stepping out, but it's still walking with pigeon steps. The government is still on a steep learning curve and years of acrimony mean it is going to take time (years, perhaps) for the two sides to learn to trust each other. Nowhere is this more visible than in the slow pace of the negotiations with the International Monetary Fund (IMF) for a $2bn standby loan requested by Minsk in October. "The negotiations are not easy," says Kobyakov. "We don't need the money at any price… In fact we don't need the money at all. It is more of a cushion that we can use depending on how long this crisis goes on for."

The deal with Russia for another $2bn signed about the same time went much more smoothly and Minsk had already received the first $1bn tranche by the end of November, with a second one due in April. The government is now wondering what to do with the cash: either use it to support the currency or pre-pay for gas supplies.

Untouched banks

The economy may be small, but that has been Belarus' advantage in the current crisis. Almost completely cut off from the rest of Europe's finance system – the country has issued only one bond in the international capital markets - the local bank sector has been all but untouched by the global meltdown.

When asked whether the government had been forced to support the bank sector with cash, Kobyakov, bemused by the question, replied: "The government has decided not to directly support the bank system, but we are in the process of realising projects and the government participates in these as an investor… Our bank system is not the same as in the rest of the CIS. The main idea of the banks is to serve and support industry, so the banks are mediators that help the government realise its goals."

"Unlike our colleagues we don't throw money into banks that don't know what to do with it," says Kobyakov. "When we give money to a bank we know exactly where this money will go and what it will be used for."

In other words, the government uses the country's banks first and foremost as a giant treasury system, which offer traditional banking services as a side business. However, privately owned foreign banks have entered the country in a wave of acquisitions over the last year and even the local banks have been actively offering products like consumer loans and express credits. However, as the state owns the biggest banks in the country – state-owned Belarusbank is the 21st biggest bank in the CIS and towers over the other local banks – none of the banks had a chance to build up the liabilities that could have got them into trouble during the recent financial fracas.

Russian state-owned giant VTB Bank got the ball rolling with an acquisition in 2007 and several others, like Russia's Alfa Bank and Bank of Georgia, have bought banks, while Raiffeisen Bank has increased its stake in Priorbank. The share of foreign capital in the banking sector reached 22.5% of total assets in November and the government has already lifted its cap on foreign bank assets from 25% to 50%. "We want our banks to be more powerful, as the existing system doesn't have enough resources to meet the needs of the economy," says Kobyakov. "Some of the large enterprises here are not satisfied with working with just one bank. They need several. We need international partners who are big and strong and can bring their expertise."

Privatising brand names

The government's strategy for the time being is to promote exports and here Belarus has real comparative advantages. The Soviet leader Joseph Stalin broke up industries on purpose so one region would make the tyres, another car doors and a third bumpers. Directors of Soviet factories were told to load their production on trains, but had little idea where they were sent. Many of these trains actually ended up in Minsk, which was where the Soviet Union's best workers were found and so were responsible for the final assembly of many products. To this day, Minsk remains a world-beater in some industrial sectors. Its giant MAZ trucks are used in mines around the world and the Minsk fridge brand is as well known in the CIS as the Dutch maker of white goods Philips is in the west. "Our main goal is to support exporters, but not to subsidise them, as this is against the rules of the [World Trade Organisation]," says Kobyakov.

The export sector is the one place where the current crisis has touched the relatively closed republic. Trade financing deals used to be done with two months of prepayments. Now Minsk is being made to wait for up to two months after delivery of goods to get paid. Most of the money the state has poured into the banking sector – several trillion Belarusian rubles – has gone to cover trade financing deals for the country's main exporters and several leading western banks have cut their credit lines to Belarus companies. "We are currently reorganizing our trade financing to bring the business into the [western] banks we know, but we need money to cover the shortfall as it has caused us cash flow problems," says Kobyakov.

Exports are all well and good, but the state will keep the choicest sector for itself in the meantime. But what has got the investors most excited is the privatisation programme that will free most of the other sectors for private ownership. Several exciting industries like telecoms will go under gavel and transform some 500 companies into joint stock companies over the next three years. Foreign investors have been invited to participate – with out restriction – in the process. Given the international financial crisis is the plan still realistic?

"We adopted the programme this summer. Lets see how the crisis goes," says Kobyakov. The point of the programme is not just to earn money for the budget. It is important what price we sell these enterprises, but more important is who is going to buy these companies and if they can increase the productivity of the enterprise. We need investment and we need new technology. That's the goal."

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