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Belarus Cites Russian Relations as Key Debt Risk

Belarus sees turbulent relations with Russia, its source of oil and gas supplies, and the slow speed of structural reform as key risks for potential investors, according to a preliminary prospectus for its maiden eurobond.

The land-locked country's representatives are meeting investors in Europe this week to discuss a eurobond issue of up to $1 billion organized by BNP Paribas, Deutsche Bank, RBS and Sberbank.

The preliminary prospectus, a copy of which was obtained by Reuters on Wednesday, dedicated seven pages to the risks of investing in the former Soviet republic — more than twice as much as Russia did for its April eurobond. Belarus has been hard hit by the recession in key trading partners Russia and the European Union, which together buy some 75 percent of its exports but halved purchases in 2009.

Minsk needs cash but also hopes the issue will open up the global capital markets for its companies. "Investment in emerging markets like Belarus involves a high degree of risk and investors should exercise particular care in evaluating the risks involved," said the document, dated July 9.

It cited "a narrow export base, reliance on imports, fiscal and current account deficits, low currency reserves, reliance on foreign loans and investments and changing political, economic, social, legal and regulatory environments."

On the eurobond market, Belarus faces competition from Ukraine, which already has a history of such issues, and is expected to price a $2 billion issue this week.

However, Minsk has the advantage of higher ratings — Standard & Poor's rates Belarus foreign currency long-term sovereign debt "B+," higher than the "CCC+" it has on Ukraine.

The $50 billion Belarus economy stagnated in 2009, and the government hopes for a recovery this year with growth of 11 percent to 12 percent, helped by an improved global backdrop.

But higher charges for Russian oil and gas — subjects of bitter rows, featuring supply stoppages and even the threat of cut-offs in onward supply to Europe — are expected to weigh on finances.

The higher prices could increase the current account deficit by up to $2 billion, Belarus said in the prospectus.

"A deterioration in Belarus' relations with Russia could adversely affect the supply of energy resources to Belarus and Russian investment in Belarus, and therefore have a negative effect on Belarus' economy," the prospectus said.

The document also acknowledged "complex" relations with the EU and the United States, but said improving ties was a foreign policy objective as "Belarus aims to attract more foreign investment and to further integrate into the world economy."

Domestically, Belarus pledged to continue stabilization measures and support the banking system, while the central bank is expected to press on with gradual rate cuts.

Minsk also acknowledged it faced a challenge in reducing the state's direct role in the economy.

"Progress on such reforms to date has been slow and reforms of this nature are likely to be politically unpopular," the prospectus said. "The extent to which Belarus will be able to attract broad scale investment in the absence of significant political reform is uncertain. Further borrowing from the IMF, the International Bank for Reconstruction and Development and other international financial institutions may also be conditional on such reform."

President Alexander Lukashenko faces elections next year and needs cash to keep raising state wages and pensions, as promised.

Belarus in April received the last tranche of a $3.5 billion IMF loan agreed at the end of 2008, and has said it will not ask for a new credit.

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