One wrong word from Lukashenko sends Belarus bonds into tailspin

In less than three hours, Belarus President Aleksandr Lukashenko learned a painful lesson in the language of bond markets.

After sparking a record selloff in the former Soviet republic’s bonds by raising the prospect of “restrukturizatsiya” -- Russian for restructuring -- of debt, Lukashenko attempted to restore investor calm by saying the word he really meant to use was “refinansirovanie,” or refinancing. While the clarification helped pare the size of the rout, the nation’s $1 billion of bonds due this August still lost 12.4 cents on the dollar, leaving the yield at 47.53 percent, three times higher than it ended Wednesday.

“The mounting uncertainty about the fallout from Russia’s financial crisis across the entire CIS region naturally increases investors’ sensitivity to negative news flow,” Nicholas Spiro, managing director of Spiro Sovereign Strategy in London, said by e-mail. “Volatility has returned with a vengeance.”

Russia’s worsening economic slump under the weight of sanctions over the conflict in Ukraine and sliding oil is hurting ex-Soviet nations like Belarus, which also borders Ukraine and sends about half of its exports to Russia. The Belarusian ruble has lost almost 30 percent of its value against the dollar this year, the biggest retreat globally, forcing the central bank to hoist interest rates to 25 percent on Jan. 9.


Debt Sustainability

In the two hours and 46 minutes between the headline about the original remark and that of its retraction, the 2015 securities posted the biggest one-day plunge since they were sold in 2010, sending the yield to a record high. While Belarus’s $800 million of January 2018 notes trimmed the size of the loss to 15 cents to the dollar after the president’s clarification, the yield on the debt remained 753 basis points, or 7.53 percentage points, higher at 20.19 percent by 6:06 p.m. in London.
Speaking in the capital, Minsk, Lukashenko, Belarus’s leader for more than two decades, said the nation has sufficient funds to pay back its debts in full. The country has the equivalent of about $5 billion of debt and interest payments to make this year, according to data compiled by Bloomberg.

“Please calm down,” he urged bondholders. “My wish was to refinance our debts - did I say this right? Refinancing our debt. I just said that we have to repay around $4 billion this year.”


Withdrawn Remark

The comment he retracted had gone like this: “This year, we need to pay $4 billion of our debts. If it’s hard, we’ll raise the question, start a dialog on restructuring this debt this year.”

The president’s slip up “brought again to the focus of investors that Belarus too, and not just Ukraine, has a debt-sustainability problem,” Michael Ganske, who helps oversee $7 billion in emerging-market bonds and currencies at Rogge Global Partners Plc in London, said by e-mail.

Ukraine will approach holders of its sovereign bonds to try to negotiate more favorable borrowing terms after finalizing a proposed loan package with the International Monetary Fund, Finance Minister Natalie Jaresko said Jan. 21. Its Eurobonds due one month after Belarus’s this year were trading at 59.46 cents to the dollar Thursday.


‘So Intense’

Belarus received $3.5 billion from the Washington-based IMF in 2009. A Russian-led $3 billion bailout in 2011 helped it emerge from a balance-of-payments crisis, with the government also ceding ownership of its gas-pipeline network to OAO Gazprom.

“Investors are concerned about the state of the Belarusian economy,” Andrey Vashevnik, who manages $25 million as the chief investment officer at R&B Investment Fund Ltd. in Moscow, said by e-mail. The currency slump is “why the reaction to Lukashenko’s words was so intense,” he said.

Lukashenko sought to distance himself from President Vladimir Putin, saying Belarus isn’t part of the so-called “Russian world.” The crisis in Ukraine, which has flared up in the past few weeks and left Putin with the prospect of a new wave of European Union and U.S. sanctions, may spread to Belarus, Lukashenko said.

The leader also threatened to consider leaving the Eurasian Economic Union if Russia fails to deliver on promises for the trade bloc, a key project for Putin. The union also includes Kazakhstan and Armenia, while Ukraine’s rejection of membership in favor of a European Union trade pact helped spark that nation’s deadly conflict.

“It appears Putin’s idea of a Eurasian Union is in tatters,” Max Wolman, who helps oversee $13.5 billion in emerging-market debt at Aberdeen Asset Management Plc in London, said by e-mail before Lukashenko backtracked on his earlier comments. “Maybe this is a way of Belarus leaving it and looking at the West for support as the president realizes Belarus can’t rely on Russia for support.”