Last year, international banks helped Belarus issue state bonds worth $1.25bn in London. In doing so, they came into potential conflict with their own ethical conduct policies and an increasingly sensitive investment climate, openDemocracy reports today.

Citi, Raiffeisen, Société Générale and Renaissance Capital assisted the Belarusian government in listing two eurobonds on the London Stock Exchange in summer 2020. All aside from Renaissance have published “environmental, social and governance” (ESG) policies that are supposed to guide their working practices and risk profiles, as investor and political pressure leads to more focus on climate and human impacts across the finance sector.

The stated purpose of the bonds was to refinance Belarus’ external public debt. The Belarusian Finance Ministry’s listing documents state that “none of the proceeds of the issue [...] will be used to fund activities or persons in violation of sanctions introduced by the EU, UK or the United States.”

But an investment climate increasingly sensitive to ‘ESG risks’ and a campaign by the Belarusian opposition have drawn attention to the fear that the funds are, in effect, supporting the regime, ruled by Aliaksandr Lukashenka since 1994.

Unlike other forms of corporate lending, with sovereign bonds, there is little information or restrictions on the final use of funds by states – and investors and banks are still getting to grips with environmental, social and governance risks when lending money to states, rather than companies.

Human impacts

Immediately after the forced landing of a Ryanair flight carrying a dissident journalist two weeks ago, Belarus’ bond price fell, and investors have reportedly come under pressure to sell the bonds on ESG grounds. The EU, US and UK have all placed new sanctions and restrictions on the country since the plane’s grounding, and appear to be considering further action. British MPs recently called for action over the Lukashenka regime’s ability to raise capital in London, including sanctioning the bonds.

But if you rewind to June 2020, when Belarus’ Finance Ministry listed two eurobonds for the first time on the London Stock Exchange, the picture was different. The Exchange called the transaction a “testament to the high level of investor demand in the Belarusian story”, and noted that “Belarus is keen to improve its ESG credentials.” The bonds, for $500m and $750m, are set to mature in 2026 and 2031 respectively.

“It is doubly honourable that [our] securities have been listed on the world’s leading stock exchange platform,” said Belarusian finance minister Yuri Seliverstau. “We hope that cooperation between our country and the London Stock Exchange will be continued.”

“The government is committed to implementing the [UN] 2030 Agenda [for sustainable development] and is heavily involved in the enhancement of all ESG aspects,” the exchange assured potential investors.

Indeed, on paper, Belarus presented a good opportunity for bond investors interested in yields – it had a reasonable debt-to-GDP ratio, a track record of debt management, decent export markets and seemed to be opening up to foreign investment. Investment firms such as Abrdn, HSBC, Franklin Templeton, Payden & Rygel, Amundi, BlackRock and PIMCO thus took advantage of Belarus’ listing on the prestigious London exchange, which was quickly oversubscribed.

But by that time, Belarusian law enforcement had arrested two prominent opposition figures – blogger Siarhei Tsikhanouski and banker Viktar Babaryka, whose candidacies to run for president in the 2020 election had both been refused. While Tsikhanouski faces up to 15 years for allegedly using his YouTube channel to call for violence against Belarusian law enforcement and “organising mass riots”, among others, Babaryka has been charged with money laundering, tax evasion and bribery. Both face up to 15 years in prison. The Belarusian authorities also opened a corruption investigation against Valeri Tsepkala, another potential candidate who fled the country in late July.

Along with arrests of bloggers and the dispersals of protests in May and June 2020, none of this information was reflected in the Belarusian finance ministry’s bond prospectus.

One prospective investor, Timothy Ash of Bluebay Asset Management, recalled that, as standard practice, the Belarusian Ministry of Finance invited potential bond subscribers to ask questions over Zoom prior to listing on the London Stock Exchange.

“When Belarus came to market, I asked the Ministry of Finance, you know, obviously in the context of demonstrations etc, what do they have in terms of an ESG strategy?” said Ash, who is senior emerging markets sovereign strategist at Bluebay, an investment management company. “And the response was: ‘what is ESG anyway?’ On that basis, we decided not to invest.”

The election itself on 9 August 2020 supposedly gave Alexander Lukashenka 80% of the vote in what is widely considered a fraudulent contest. Neither the UK, US or EU have recognised the result. In the aftermath, citizens sought fresh elections by taking to the streets, but were subject to an intense and cruel campaign of police violence, arbitrary detention and torture.

Footage from Akrestsina detention centre in Minsk shows police officers beating detainees on 11 August 2020. Source: Belsat

According to leaked medical reports obtained by independent outlet Mediazona, at least 1,406 people suffered violence, including torture, at the hands of Belarusian law enforcement in August and September last year. Three protesters died in encounters with the police during that time, and not a single official investigation has been opened into any act of police violence against protesters or passersby since August 2020.

Prominent opposition figures and regular people who became active in the protest movement have largely found themselves either under investigation – or leaving the country. The authorities later started a probe into an “attempted coup of state power” by members of Belarus’ opposition Coordination Council.

openDemocracy contacted the investment firms that hold Belarus’ bonds to ask about the ESG risk associated with the country, but all refused to comment. The London Stock Exchange also declined to comment.

openDemocracy contacted the Belarusian Ministry of Finance for comment on its ESG policy, but did not receive a response.

As the financial markets regulator, the UK’s Financial Conduct Authority has ultimate jurisdiction over the Belarus’ London listing.

Transforming Belarus

Under investor and political pressure, banks and investment firms have sought to promote their positive role in society in recent years, signalling their risk management strategies to investors, and the public, through a range of ESG policies and products.

Yet the sovereign bond market, which allows governments to raise funds from investors, is still developing its reaction to the ‘ESG wave’.

In 2020, the Principles of Responsible Investing, a UN-backed initiative that promotes responsible conduct for global investors, suggested that investors in sovereign bonds can engage informally with states, such as encouraging the release of ESG-related data and communicating investors’ ESG expectations.

“ESG is a trend, it’s the cool, hip new thing,” said regional financial and political expert Maximillian Hess, from the Foreign Policy Research Institute think tank. “But to make ESG really sustainable, we need to ensure that over the long term, there are ways to create costs for borrowers for not meeting their ESG obligations.”

openDemocracy asked the banks in charge of managing Belarus’ London listing – Citi, Raiffesen, Société Générale – for an interview to understand how they manage ESG risk on sovereign bonds, and what role they played in the issuance. (As Renaissance does not have a public ESG policy, we did not request an interview.) The three banks are signatories to the Principles of Responsible Banking, a set of UN-backed guidelines designed to encourage banking institutions to understand “their impact on people and the environment [...] across all [their] business areas”. All three declined to be interviewed.

Société Générale stated that it “does not comment on specific situations, deals or project” and could not offer any further information, or an interview.

The bank’s declaration on human rights states that it is “committed to the respect and promotion of human rights”, and that it is “aware of its role in preventing serious human rights breaches, both in its activities and for the risks directly associated to its purchases or its products and services”.

Raiffesen provided the following statement when asked about Belarus’ ESG risk via email: “The bond was issued well before the presidential elections. All legal and regulatory requirements were met. The bond finances the Belarusian state budget and was intended to support the country’s transformation.”

Citi, which also holds records and distributes payments for the bond, declined to comment. The group’s ESG policy states that “Citi strives to prevent impacts to human rights and seeks to do business with clients who share our commitment to respect human rights.”

When asked about the reaction from the banks, Nickolai Prakofyeu, a financial analyst with the National Anti-Crisis Management, a Belarusian “shadow government” exile organisation that aims to manage a peaceful transition of power in the country, said: “I expected more, especially from Citibank. They rely heavily on their reputation.”

Renaissance Capital, a Russia-based private investment bank, did not respond to a request for comment.

When asked about the banks’ possible ESG duties on Belarus’ bonds, Bluebay’s Ash said: “I would expect [the banks] to be passing on concerns of final investors and suggesting that their failure to address ESG concerns will either close them out from the market or greatly increase the country’s borrowing costs.”

ESG wave

Since the elections last year, the Belarusian authorities have prosecuted 471 people on political grounds, and 30,000 people have been detained across the country over the course of the protests, according to the Belarusian Viasna human rights centre.

The brutal treatment and arbitrary trials of political prisoners were symbolised recently when Stsiapan Latypau, an activist and forestry specialist, attempted to cut his own throat with a pen in a Minsk courtroom in early June. Latypau is being prosecuted for organising riots, resisting police and fraud, and claimed that he had been pressured into confessing to charges by the authorities.

The case of Raman Pratasevich, the dissident journalist who was arrested after the Belarusian authorities managed to divert his flight to land in Minsk, points to the authorities’ broader campaign against the media: 30 Belarusian media workers and bloggers are currently in jail or imprisoned. Many others have left the country.

In light of the ongoing repression, the Belarusian opposition has raised concerns about the lack of transparency on how the London bond proceeds are being used in Belarus.

Letters to banks and bondholders by prominent opposition figure Pavel Latushka, Belarus’ former minister of culture, from January 2021, seen by openDemocracy, state that the opposition Coordination Council ‘can give no assurance’ that a new Belarusian government ‘would honour all obligations of the current regime’.

This, the letters continued, includes ‘those [obligations] that are contrary to the interests of the Belarusian people and are used to finance the repressive machinery – such as the Belarus Bonds’.

Prakofyeu, from National Anti-Crisis Management, highlights that the funds raised via Belarus’ London bonds will have been blended with the country’s existing foreign currency reserves – making it hard to trace how exactly they are spent.

According to him, Belarus’ foreign exchange reserves were drawn on significantly in the second half of 2020, at the same time as the regime was spending heavily to suppress the post-election protest campaign. The country’s external debt also increased substantially over the same period, Prakofyeu says, when in fact, it should have decreased in the wake of the London listing, according to the original purpose of the bond.

For Prakofyeu, this is a clear sign that the bond proceeds could have been used to support the Lukashenka regime’s crackdown on protesters – and that aside from selling the bonds or delisting them, investors should at the very least be asking for details on how exactly the funds have been spent.

“Investment funds and bondholders could have already acted upon their right to request an audit of how the proceeds were used, but they’re not doing it,” Prakofyeu says. “But like with any company, you can’t prove it 100% until you see the books.”

When asked about investor and bank engagement on Belarus’ ESG risk, he says: “If the UK government had put proper sanctions on Belarus, we wouldn’t be in this situation. That’s what the investment funds are waiting for.”

There are broader concerns in the sovereign debt sector about the final use of proceeds when states in emerging markets, such as Belarus, raise funds internationally, explains Andrew Roche, managing director at Paris-based FINEXEM, which advises states how to restructure their external debt.

Often, Roche says, finance ministries do not give explicit details on how the money raised through sovereign bonds will be used beyond a “one or two line description” – in contrast to the transparency over corporate bonds, development finance and other instruments. Likewise, there are no obligations on the arranger or investor side to track how funds are used.

“For investment banks, more accountability over use of proceeds means more friction in the market. Until you link transparency over states’ use of bond proceeds to ESG ratings – and therefore risk – investors are unlikely to be interested in this issue.”

Roche continued: “ESG is ultimately another layer of credit risk assessment, but it can be geared to promote investment with positive environmental and social impacts.”

As part of its response to the Belarus crisis, European Union is apparently considering restricting Belarus’ access to Europe’s bond markets, according to a recent statement by German foreign minister Heiko Maas. But while outrage over Belarus’ ability to raise funds abroad has flared in the wake of the grounding of the Ryanair flight, no direct actions targeting the country’s eurobonds have been mooted.

“Unlike corporations, countries don’t go out of business,” said Bluebay’s Ash. “Sometimes you might have to deal with a new government, but even if the countries don’t pay it all back, they usually pay 60 or 70 cents (percent) back, so you still make a profit. Though the interest rates for bonds issued by emerging market countries are high, the investor still loses out if the bonds are suspended or if the country defaults.

“But countries hardly ever default. You get two or three countries a year who default and it’s usually the same players.”