Potential new EU-led sanctions against Belarus following the grounding of a civilian airliner in its airspace could reduce export earnings and lead to further drains in already-modest net central bank international reserves, S&P Global Ratings said in a report entitled "Stronger International Sanctions Could Exacerbate Belarus' Economic Vulnerability And Increase Its Dependence On Russia."
Broader sanctions would require a coordinated EU position and it is not certain that they will materialize. Should these further isolate Belarus, its economic fortunes will depend even more on Russia’s willingness to provide support.
S&P Global Ratings has a 'B' rating on Belarus, with a negative outlook.
On May 23, Belarusian authorities grounded an over-flying civilian aircraft and arrested a regime critic. In response, the U.S. and EU are considering new, more comprehensive sanctions on the regime. The package under consideration is more significant than measures adopted over the past 12 months. “If implemented, the proposed sanctions could have adverse implications for Belarus' already-fragile economic, balance-of-payments, and financial stability. The continued standoff with the EU/US and limited financing options will likely further expose Belarus to Russia's willingness to provide support. Over past years this support has actually been gradually diminishing and it remains to be seen if Russia will fully offset the drain on Belarus' external liquidity from additional sanctions,” reads the report.
No imminent refinancing risks to Belarus' commercial debt is seen by the S&P researchers. “The government is due to repay $1.1 billion in foreign currency debt by year-end 2021, with almost the entire amount already covered by loans from Russia, Russia-controlled development institutions, and domestic issuances. Despite the government's external debt redemption profile being relatively heavy beyond 2021, it remains dominated by official loans from Russia and China (over 65% on average in 2022-2023). The first sizable principle repayment on Belarus' Eurobond ($800 million) comes due in early 2023, giving the government time to prepare the refinancing plan. Apart from additional credit lines from bilateral lenders, Belarus could also use its access to Russian capital markets.
“The broader public debt profile remains vulnerable,” the authors conclude. “Almost all of Belarus' debt stock (over 90%) is denominated in foreign currency, making it highly sensitive to exchange rate movements. Total foreign debt payments amount to 20%-30% of the central bank's international reserves annually beyond 2021 against a background of limited financing options apart from bilateral lenders, primarily Russia.
Funding from China is typically linked to specific projects, so new lines might not cover more than general budget and refinancing needs. Meanwhile, we believe that international capital market access will likely remain closed to Belarus for the foreseeable future, particularly in light of the new sanctions. At $7.3 billion at the beginning of May 2021, the central bank's foreign exchange reserves are 20% lower than at the end of 2019,” reads the report.
Pursuant to the authors of the report, despite the stated political support and the recent disbursement of the second $500 million (0.8% of GDP) tranche of a $1 billion bilateral credit line agreed upon last year, over the past few years, Russia's financial support to Belarus has actually declined gradually. This has been partly from changes to oil taxation in Russia, which effectively downsized energy subsidies to Belarus, but also by frequent disputes between the two countries. In some instances, these disagreements have resulted in delayed disbursements of previously agreed funding lines.
The researchers also note that, under last year's refinancing agreement, Russia has so far offered no new funding to Belarus. It, therefore, remains to be seen if Russian support will fully offset the drain on Belarus' external liquidity from additional sanctions. Given the diminishing room for maneuvering Belarus' authorities face, S&P researchers believe, Russia could make lending arrangements conditional on political concessions that Belarus had previously been unwilling to accept. The alternative path, reaching an agreement with the EU on economic and political reforms in exchange for funding and investments (as proposed by the European Commission on May 28), seems even more remote.
