What Are investors' fears in Belarus and What reforms are Needed?

Belarusian forum "Broadening the Horizons: Investment, Finance, development", Minsk (photo:BISS)

On September 29-30, 2016, an investment forum "Broadening the Horizons: Investment, Finance, development" was first held in Minsk. As noted by Andrey Kabyakou, Prime Minister of Belarus, one of the goals of the event was to establish dialogue between Belarusian authorities and the international community of investors to better understand their apprehensions and wishes, and further improve Belarusian investment policies. 

According to Belarusian Prime Minister, Belarus has already organized similar forums in New York, London, Vienna and Istanbul. However, this has been the first time to bring such format of public discussion of Belarus’ investment potential to Minsk. The Forum brought together representatives of both Belarusian structures and foreign financial institutions, Belarusian and foreign private sector, as well as representatives of the civil society.

EU is interested in making investments in Belarus

Andrea Wiktorin, Head of the EU delegation to Belarus, noted that the Belarusian forum presented a timely opportunity for dialogue: "It is a good time now to establish dialogue between the state institutions, international community, international financial institutions and the private business sector". After EU sanctions were lifted from Belarus, the European Investment Bank could bring funds to the country. Vassilis Maragos, Head of General-Directorate for Neighbourhood and Enlargement Negotiations of the European Commission, the fact that the European Investment Bank launched its activities in Belarus is of significant benefit, especially for the funding of infrastructure projects and medium-sized enterprises.

"In other words, we’re working with your government, with your authorities in order to attract private investors. And I think this can happen in the industry sector, in the conduction sector, but also in infrastructure sector, where we also need complete reforms, opportunities for Public-Private-Partnership so that we have new investments, new job opportunities for the Belarusian citizens – a common result of strengthening your economy in the framework of the EU-Belarus cooperation", explained the representative of the European Commission.

However, even though European officials are ready to support the flow of EU investments to Belarus, the international community of investors still treat Belarus with caution.

What Are investors' fears in Belarus?

Thomas Mirow, Senior Advisor of "Rothschild Group"

The necessary technical conditions for direct foreign investment in Belarus are there, but foreign investors are taking their time.

Thomas Mirow, Senior Advisor of Rothschild Group and former president of the European Bank for Reconstruction and Development (2008-2012), explains that such behavior is due to the difficult situation on the international markets: "Countries are in difficult situations all over the world, and so are companies. So everyone is very prudent with big investments. But it’s necessary to lay the ground now. Investors are shy, everyone is very cautious nowadays because of the situation in general and in the economy in particular. This means that Belarus needs to undertake additional efforts, particularly in the form of providing a secure business environment". The main necessary conditions to ensure private investments in Belarus, according to Mr. Mirow, include the inalienable rule of law and guarantees to investors that their capital investment will be protected.

You will not attract investors by organizing one investment forum, emphasizes Francis Delaey, Head of European Bank for Reconstruction and Development Office in Belarus. According to him, investors will come to the country only when they are convinced that they will be able to make a long-term profitable investment in a transparent and predictable environment. At the same time, the Forum helps foreign and local investors better understand opportunities in Belarus. The EBRD representative in Belarus  believes, if the Belarusian government commits to structural reform, this could become a good signal for the international investment community: "I think it’s very important for the government to confirm its commitment to structural reforms that are currently pending. And I think the credibility of the authority, as well as the credibility of this commitment to reform will be enhanced if there is also an IMF programme accompanying those structure reforms."

At the moment, the EBRD is working on pre-privatization of the state-owned Belinvestbank in cooperation with the National Bank of Belarus. According to Dzmitry Kalechyts, Deputy Chairman of the National Bank of Belarus, Belarusian government will gradually reduce its stake in various sectors of the economy: "Where it is efficient, the government will stay, but where it brings no benefits, the government will go. The same goes for the banking system: the government is gradually reducing it stake in a number of banks. In our opinion, launching a programme with the International Monetary Fund will definitely enhance opportunities for the inflow of investment into the country, including the banking sector. We are considering the Extended Fund Facility (IMF)". 

At the moment, the National Bank of Belarus intends to sell the former Russian "Bank Moscow-Minsk", where it is currently the majority shareholder. "The National Bank can see that it is ineffective to combine the functions of the regulator and the bank owner. We are negotiating with international financial institutions. We are ready to launch the procedure for selecting a financial adviser who will help us find (persuade) a strategic investor, which means that the government is really determined to privatize the bank", shared Ihar Lihagrud, Chairman of Bank Moscow-Minsk.

What can you privatize in Belarus?

"When we started to work (in 2013), it was clear that Belarus was not ready and did not want large-scale privatization, similar to what was going on in neighbouring countries", Ona Rainite-Bodard, Advisor of the World Bank project in Belarus and the National Agency of Investment and Privatization, told the guests of the Forum. In her opinion, Belarus is different from other countries, in that small and medium-sized businesses here have not yet created enough opportunities to "absorb" the labour force which will appear in the course of mass privatization.

"So at the time we are talking about case-by-case privatization scenarios", says Ms. Rainite-Bodard, "about step-by-step or individual privatization". It is in this vein that the National Agency of Investment and Privatization of Belarus is implementing a "pilot" project in cooperation with the World Bank to privatize 8 companies, which have already received approval from Belarusian authorities as suitable for investment. According to Ms. Rainite-Bodard, Belarus is steadily earning a better reputation: "Climate investment climate here is improving, the reputation of Belarus is getting better. We support the opinion of the Western countries of the European Union: we are looking for an investor who will step in with the whole financial risk, but who sees the future for development of this company – and not only near future, but long-term future." In her opinion, one of the goals of the large-scale mass privatization is to quickly boost the budget, while step-by-step privatization focuses on attracting new technologies, know-how, long-term development, thus also helping increase profits in future.

"The National Agency of Investment and Privatization of functions as the privatization body only for these 8 companies", emphasized Anna Karnievich, Head of accounting and disposal of shares of the State Property Committee of Belarus. "The State Property Committee of Belarus is open for dialogue with investors", noted Ms. Karnievich.

State property in Belarus consists of property of national significance (which is controlled by the State Property Committee) and communal property (which is subject to regional executive committees and city executive committees). "We deal with many companies. Surely, it is not like we have a queue waiting at the door, but we still get quite a lot of interest", said Anna Karnievich, Head of accounting and disposal of shares of the State Property Committee of Belarus. According to her, there is an open call for consultants who will help realize the programme of institutional development of the state-owned "Belarusbank". "When we are performing privatization, we get no help from external actors. The only situation when that happens is when we are selling a very large company, for example, when we were selling "Beltransgas", we invited not only consultants but also international valuation companies. This is done at the buyer's initiative, but our Belarusian companies perform their own valuations at the same time, and then we bring it all to the common denominator", explained Anna Karnievich.

Belarus has not been put on the investment map of the new markets

"Belarus? Are you serious?" - this is how potential investors react to the proposition to invest in the country, says Giovanni Salvetti, Head of Russia and CIS, Rothschild Global Advisory. In his opinion, the investors are cautious of the "unknown territory", but a positive privatization example of a medium-sized but notable state company could become the signal for investment: "It is like opening a restaurant: when you open a restaurant, you need to offer something attractive. First, one investor needs to do one or two deals to say: 'Wow, I will be investing in Belarus, it is good company, and they made me some money'. You don’t have to sell at the top price the first time. You have to make a deal so that the investor will be happy. The others will come after that".

The expert is convinced that Belarus has companies that would make for an impeccable investment, and the country has great potential. For comparison, Slovakia, where the population is two times smaller, has four times more investments per capita.

Competitiveness as the key to markets

In the opinion of Ron Kopicki, the World Bank consultant, Belarus does not have enough time for privatization as it is a long-term development instrument (preparing a good deal, finding a strategic investor and finally selling the enterprise at the market price can take up to several years): "Improving competitiveness is critical. You’ve been a little too careless. Your market is collapsing, I mean the Russian Federation, it is not what was 3 years ago. The European Union is close to you effectively, so you can sell your products. So you have got to learn quickly, because it takes a very long time to privatize and enterprises and you don't have much time. You have got to learn to work, you have got to learn to protect yourself, with your hands, kick box, even fight. Whenever the attack comes, you will be ready."

In the opinion of the expert, privatization cannot be a goal in itself; it is just one of the ways of developing the private sector, but there are other ways: "You can do it with contracts, you can associate, you can affiliate, you can re-integrate, re-define productive activities - contractually. You can do joint ventures, which create specific associations between two or more companies. Market your share," - added the consultant.