Belarus Update - EU Sanctions to Hit External Trade Balance, Budget

The recently introduced sanctions will inevitably hurt the Belarusian economy, constraining the country's GDP growth, external position and budget. They will also have an effect on the country's sovereign Eurobonds. However, the impact will be mild, as the restrictions were not as tough as some had feared. The financial sanctions do not pertain to outstanding Eurobonds; they will only affect bonds issued after June 29. Moreover, the ban on imports of potash and oil products excludes some oil products and potassium chloride used in fertilizers (which accounts for most of Belarus's potassium exports). Still, the sanctions could shave up to 2 pp from GDP growth this year and will widen the budget deficit, although we do not see any risks to external debt repayment, as we expect the country to continue receiving financial backing from Russia. We think Belarus's Eurobonds should be able to trim their losses in the near term. The EU has announced a new set of sanctions against Belarus including: (1) a prohibition on trade in petroleum products, potash and goods used for the production of tobacco; (2) restricted access to EU capital markets and a ban on providing insurance and re-insurance to the Belarusian government and public bodies and agencies; (3) restrictions on the sale and transfer of military or dual-use equipment, technology or software that can be used to monitor or intercept internet and phone communications; and (4) a halt to EIB disbursements and payments under existing agreements, while EU member states will be required to take actions to limit the involvement of their development banks. However, details that were provided on the restrictions indicate that the new restrictions on Belarusian exports exclude some oil products and potassium chloride used in fertilizers, while the financial restrictions will only apply to the primary market (for instruments issued after June 29, 2021). Still, this round of measures is by far the strictest that has been imposed on Belarus by the EU or the US in recent history, as it has a direct impact on the country's external trade.