Newly Released Report, Belarus Business Forecast Report Q2 2010, Provides Detailed Company Analysis

Russian Policy Reversal To Be Key In 2010. Unlike its regional peers, Belarus achieved positive growth in 2009. However, we expect economic conditions within the country to remain fragile over the medium term. Belarus has been forced to pay higher export duties on oil bought from Russia which will likely bring to an end the country's lucrative re-export strategy and weigh on domestic demand as foreign capital inflows decline.

Furthermore, with an IMF financing agreement due to expire in mid-2010, Belarus will need to turn to international capital markets in order to finance its rising public sector borrowing requirement.

Indeed, risks to the stability of the country's balance of payments position will persist as we expect sustained pressure on borrowing via foreign banks over the medium term.

We expect relations between Belarus and Poland to remain strained over the short term as a result of Belarus' crackdown on leaders of the Polish minority. Furthermore, should Belarus continue to target the Polish minority harshly, the deterioration of relations between the two countries could jeopardise the broader relationship between Belarus and the EU over the medium term, which in the previous year had shown tentative signs of improvement. We continue to stress that Lukashenko is likely to only seek improved relations with the EU so long as it does not impact his domestic political position.

We anticipate the disinflationary trend in Belarus, which has been in play since February 2009, to come to an end in Q210. Having fallen to 5.9% y-o-y in February, we forecasTheadline inflation to rise back to 9.0% by end-2010, rising further to 9.5% by end-2011. Our view is based on the inflationary pressures that are expected to follow concomitant with Belarus's economic recovery.

We also point towards the fact that Russia will continue to reduce energy price subsidies to Belarus through to 2011, which will undoubtedly force Minsk to raise regulated energy prices. Finally, we believe that the devaluation of the currency back at the start of 2009 will begin to weigh on households and industry in the form of higher import costs.

The IMF stated that it had reached a staff-level agreement with Belarusian authorities on Febraury 17 2010 with respect to the final review of the country's Stand-By Arrangement (SBA). The review is expected to be considered by the IMF Executive Board towards the end of March, which will then release the fourth and final tranche of the IMF SBA loan (worth approximately US$700mn).

According to the IMF statement 'all structural benchmarks were met'. We expect the fourth tranche to be released at some point in Q210 accordingly.

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