'Tech Savvy' Helps Belarus Find Foreign Capital, New Markets
Kenneth Rapoza, Forbes
24 November 2017, 19:33
If you build it, they will come.
Belarus is using global deluge-liquidity as a chance to entice more foreign capital, and build new private enterprises in a market known more as a hub for Viber and the gamers behind World of Tanks than for its supermarket giants. The latest slew of bond offerings shows a country trying to get away from its over-dependence on external factors and develop a private sector, in search of new markets.
Like all frontier lands, what happens when all of this liquidity dries up? Belarus is a big enough country, with twice the GDP per capita as Ukraine. A crashed economy leads to the kind of nationwide chaos that often requires Russian intervention.
“I think the distinctive feature of Belarus is its stable political situation, clear economic path, and an open foreign economic policy,” says Andrei Kobyakov, the country’s Prime Minister. That compares positively to other countries in Russia’s orbit, like Ukraine, going from one political crisis to another.
“The thing about Belarus is we have limited natural resources, no sea access and a high dependence on external factors beyond our control. We have to build constructive relations with the outside world…and build companies that sell to that world,” Kobyakov says.
Some 60% of Belarus’ economy is export-oriented, half of it to Russia and Ukraine. When Russia grows, Belarus grows.
“The main resources we have are Belarusians,” he says. They're hosting an "“Invest in Belarus" conference in Luxemburg on Friday. Investors will decide whether Belarus has the muscle and wherewithal to be more than just an occasional frontier bond market.
The government floated a eurobond in June and got $1.4 billion from foreign funds. Moody’s rates them Caa1, one of the lowest of the big three credit rating agencies and considered highly speculative grade. On Oct. 17, Belarusian supermarket chain Eurotorg did even better. They raised $350 million in five-year bonds priced in dollars. It was oversubscribed four-fold to around $2 billion on the B- rated credit. It was the first corporate bond ever to be fundamentally based on the wiles of the Belarusian economy.
“The economic recovery is gaining momentum and we thought it was a perfect opportunity for Eurotorg to capitalize on our market leadership and seize the day,” says company CEO Andrei Zubkou.
In Belarus, Eurotorg stands out. The economy is run by the state. Some 70% of the economy to be exact. Belarusian politics evolved slowly after the fall of Soviet communism. President Alexander Lukashenko has been running the country since 1994, a long-term reign that is not much different than other ex-Soviet states.
But for the World Bank’s Ease of Doing Business Index, they are better than Russia and Ukraine. For Transparency International’s Corruption Perception Index they are on par with China and ranked much better than Russia and Ukraine.
Moody’s says it no longer expects Belarus to need money from the International Monetary Fund. Capital from the Russian government, foreign lenders, and foreign companies are coming in. Eurotorg stands as a testament to that.
“There is a lot of global liquidity, but you’re not going to get money just by ringing some investor’s doorbell,” says Dmitry Gladkov, Eurotorg’s deal captain at bookrunner Renaissance Capital in London. “I think this bond offering sends a signal to the market about Belarus: for the right companies that are credible, market leaders, you will have access to the international market,” Gladkov says.
And while Eurotorg is the current star of the show, Belarus’ best brands are companies, co-founded or owned by Belarusians, like Wargaming and EPAM Services (EPAM), a NYSE-traded firm with $4.8 billion capitalization, founded by Arkady Dobkin, with offices worldwide, including Pennsylvania.
“I’ve been to Minsk recently and it’s not what you’d imagine,” says Gladkov, who traveled to Boston and New York this year for the Eurotorg roadshow. Over a third of those bonds were sold to Americans. “Today in Minsk, you’re going to hear Chinese and Brazilian Portuguese. You go out and there are contemporary restaurants and young hipster types and you see it all because of the IT sector,” he says.
Like many Eastern European countries, tech is their specialty. Thanks to the old Soviet system of education in the math and sciences, Belarusians are as tech savvy as the Russians that populate Silicon Valley. In Belarus, tech has become part of the domestic story.
!['Tech Savvy' Helps Belarus Find Foreign Capital, New Markets]( "'Tech Savvy' Helps Belarus Find Foreign Capital, New Markets")
Belarus: More Vibers, Please
For generations, the Belarus economic model has been based on Russian export demand and refining Russian oil. But over the last 10 years, they have focused on IT.
According to Ernst & Young, Belarus “managed to build a mature export-oriented software development industry” and became a significant player on the IT services market in Europe in just 10 years. Belarus is ranked No. 9 for best outsourcing shops in the Europe, Middle East, and Africa region.
Exports of IT services, like Viber, created by Talmon Marco of Israel and Igor Magazinnik from Belarus, quadrupled between 2010-16. In a world where start-ups and tech titans are part of this deep, global liquidity pool, the tech sector is helping Belarus be less dependent on Russia. Russia still accounts for nearly 40% of Belarusian exports, while the IT sector accounts for just 3.2% of exports. Last year, the sector helped make tech a larger part of the economy, accounting for 10.5% of services GDP and 5.1% of total GDP. By comparison, the digital economy accounts for just 3% of Russian GDP, RosTelecom estimates.
In August, Google bought Belarussian start-up AI Matter for an undisclosed sum. They are behind the Fabby app, a selfie imaging modification application for smartphones. They now own the intellectual property, which remains in Belarus. Google’s purchase comes roughly a year after Facebook made a similar move when it bought Masquerade, an image filter used in video chats.
In 2014, a division of IAC (IACI) bought Minsk-based app developer Apalon. The developing team is still there and have gone from a staff of 60 to around 300 in three years.
“Eurotorg is just a domestic story so no one around the world knows what it is,” says Alexander Martinkevich, deputy director of the Belarus Hi-Tech Park. “What is a country’s brand? For Germany, it’s Mercedes. For the U.S., maybe it is Apple today, or Google. In Belarus, we are popular because of Viber. Because of World of Tanks. And because of these products, we have become famous around the world to companies in-the-know. The real Belarus growth story is in IT and only in IT.”
The Hi-Tech Park (HTP), as they call it, is a special tax regime for IT companies that launched in 2006. Tech companies are exempt from corporate taxes, including value-added tax, and income tax. Employees of the resident companies pay a 9% income tax. Some 30,000 engineers are employed under the system.
There are 187 companies registered in the HTP system, accounting for 88% of the Belarus’s IT industry.
Renaissance Capital couldn’t say whether or not some of Belarus mid-cap international tech firms are looking to offer securities to the market. Still, the theme persists: in a highly liquid market, if you build something good and have a market, investors will come.
According to Martinkevich, the government is currently hammering out its strategy and possible regulations for blockchain and cryptocoin technologies.
Overall, higher and steady oil prices have been the main factor behind the economic recovery in Belarus. Russia's compliance with oil supply agreements in 2017 at 24 million tons guarantees additional budget revenues and supports GDP growth forecasts of 1.7%. That’s slower than the nearby Baltic states, which stand to compete with Belarus for tech talent.
“I’m surprised with how well Belarus’s economy did this year, but I don’t think any of this is a turnaround story yet,” says Mark McNamee, a senior analyst with the Frontier Strategy Group in London. He said FSG corporate clients have put more money to work in Belarus this year, mostly all of them were consumer-driven multinationals. “Eurotorg and tech are interesting stories, but there are huge structural issues in Belarus that need to be addressed,” McNamee says.
Martinkevich says they can attract tech talent from across the region. Speaking in a conference call taking place over Skype, a company many people believed Viber would kill, Martinkevich said, "I’m going to brag for a moment: we developed the best business plan for the IT industry because it’s not a physical place. It’s nationwide. It doesn’t matter where you set up your office. We have the brain power and you can see that the international companies that buy Belarusian companies are keeping their research and development teams here.”
Takeaways from PM Interview:
!['Tech Savvy' Helps Belarus Find Foreign Capital, New Markets]( "'Tech Savvy' Helps Belarus Find Foreign Capital, New Markets")
Prime Minister Andrei Kobyakov spoke about his country’s high tech development hopes. He says Belarus’s best models are in countries like Poland and in “start-up nation” Israel. For the most part, the country has economic stability, credit watchdogs say. It also has the engineering talents coming out of college. What it needs is a continued injection of domestic and foreign capital helping to prop up a nascent entrepreneurial class. From the transcription. Edited only for clarity.
On Belarus managing through two crises:
On Belarus promoting individual entrepreneurs:
On Belarus per-capita versus ex-Soviet states in Europe:
On Belarus’ IT hopes:
On Belarus and the Eurasian Economic Union:
On where the corporate money is coming from:
24 November 2017, 19:33
Belarus successfully floated its first-ever corporate euro bond as the country takes advantage of economic gains and the open spigot of global cash flow. (Shutterstock)
Belarus is using global deluge-liquidity as a chance to entice more foreign capital, and build new private enterprises in a market known more as a hub for Viber and the gamers behind World of Tanks than for its supermarket giants. The latest slew of bond offerings shows a country trying to get away from its over-dependence on external factors and develop a private sector, in search of new markets.
Like all frontier lands, what happens when all of this liquidity dries up? Belarus is a big enough country, with twice the GDP per capita as Ukraine. A crashed economy leads to the kind of nationwide chaos that often requires Russian intervention.
“I think the distinctive feature of Belarus is its stable political situation, clear economic path, and an open foreign economic policy,” says Andrei Kobyakov, the country’s Prime Minister. That compares positively to other countries in Russia’s orbit, like Ukraine, going from one political crisis to another.
“The thing about Belarus is we have limited natural resources, no sea access and a high dependence on external factors beyond our control. We have to build constructive relations with the outside world…and build companies that sell to that world,” Kobyakov says.
Some 60% of Belarus’ economy is export-oriented, half of it to Russia and Ukraine. When Russia grows, Belarus grows.
“The main resources we have are Belarusians,” he says. They're hosting an "“Invest in Belarus" conference in Luxemburg on Friday. Investors will decide whether Belarus has the muscle and wherewithal to be more than just an occasional frontier bond market.
The government floated a eurobond in June and got $1.4 billion from foreign funds. Moody’s rates them Caa1, one of the lowest of the big three credit rating agencies and considered highly speculative grade. On Oct. 17, Belarusian supermarket chain Eurotorg did even better. They raised $350 million in five-year bonds priced in dollars. It was oversubscribed four-fold to around $2 billion on the B- rated credit. It was the first corporate bond ever to be fundamentally based on the wiles of the Belarusian economy.
“The economic recovery is gaining momentum and we thought it was a perfect opportunity for Eurotorg to capitalize on our market leadership and seize the day,” says company CEO Andrei Zubkou.
In Belarus, Eurotorg stands out. The economy is run by the state. Some 70% of the economy to be exact. Belarusian politics evolved slowly after the fall of Soviet communism. President Alexander Lukashenko has been running the country since 1994, a long-term reign that is not much different than other ex-Soviet states.
But for the World Bank’s Ease of Doing Business Index, they are better than Russia and Ukraine. For Transparency International’s Corruption Perception Index they are on par with China and ranked much better than Russia and Ukraine.
Moody’s says it no longer expects Belarus to need money from the International Monetary Fund. Capital from the Russian government, foreign lenders, and foreign companies are coming in. Eurotorg stands as a testament to that.
“There is a lot of global liquidity, but you’re not going to get money just by ringing some investor’s doorbell,” says Dmitry Gladkov, Eurotorg’s deal captain at bookrunner Renaissance Capital in London. “I think this bond offering sends a signal to the market about Belarus: for the right companies that are credible, market leaders, you will have access to the international market,” Gladkov says.
And while Eurotorg is the current star of the show, Belarus’ best brands are companies, co-founded or owned by Belarusians, like Wargaming and EPAM Services (EPAM), a NYSE-traded firm with $4.8 billion capitalization, founded by Arkady Dobkin, with offices worldwide, including Pennsylvania.
“I’ve been to Minsk recently and it’s not what you’d imagine,” says Gladkov, who traveled to Boston and New York this year for the Eurotorg roadshow. Over a third of those bonds were sold to Americans. “Today in Minsk, you’re going to hear Chinese and Brazilian Portuguese. You go out and there are contemporary restaurants and young hipster types and you see it all because of the IT sector,” he says.
Like many Eastern European countries, tech is their specialty. Thanks to the old Soviet system of education in the math and sciences, Belarusians are as tech savvy as the Russians that populate Silicon Valley. In Belarus, tech has become part of the domestic story.
The CEO of Wargaming Victor Kislyi pictured on screen to the left. Kislyi won the Online Game of the Year for 'World of Tanks' in 2014. He is from Minsk. His company is based in Cyprus. Belarus wants more Kislyi-types. No corporate taxes for IT help. (Wargaming courtesy of HTP). Wargaming
Belarus: More Vibers, Please
For generations, the Belarus economic model has been based on Russian export demand and refining Russian oil. But over the last 10 years, they have focused on IT.
According to Ernst & Young, Belarus “managed to build a mature export-oriented software development industry” and became a significant player on the IT services market in Europe in just 10 years. Belarus is ranked No. 9 for best outsourcing shops in the Europe, Middle East, and Africa region.
Exports of IT services, like Viber, created by Talmon Marco of Israel and Igor Magazinnik from Belarus, quadrupled between 2010-16. In a world where start-ups and tech titans are part of this deep, global liquidity pool, the tech sector is helping Belarus be less dependent on Russia. Russia still accounts for nearly 40% of Belarusian exports, while the IT sector accounts for just 3.2% of exports. Last year, the sector helped make tech a larger part of the economy, accounting for 10.5% of services GDP and 5.1% of total GDP. By comparison, the digital economy accounts for just 3% of Russian GDP, RosTelecom estimates.
In August, Google bought Belarussian start-up AI Matter for an undisclosed sum. They are behind the Fabby app, a selfie imaging modification application for smartphones. They now own the intellectual property, which remains in Belarus. Google’s purchase comes roughly a year after Facebook made a similar move when it bought Masquerade, an image filter used in video chats.
In 2014, a division of IAC (IACI) bought Minsk-based app developer Apalon. The developing team is still there and have gone from a staff of 60 to around 300 in three years.
“Eurotorg is just a domestic story so no one around the world knows what it is,” says Alexander Martinkevich, deputy director of the Belarus Hi-Tech Park. “What is a country’s brand? For Germany, it’s Mercedes. For the U.S., maybe it is Apple today, or Google. In Belarus, we are popular because of Viber. Because of World of Tanks. And because of these products, we have become famous around the world to companies in-the-know. The real Belarus growth story is in IT and only in IT.”
The Hi-Tech Park (HTP), as they call it, is a special tax regime for IT companies that launched in 2006. Tech companies are exempt from corporate taxes, including value-added tax, and income tax. Employees of the resident companies pay a 9% income tax. Some 30,000 engineers are employed under the system.
There are 187 companies registered in the HTP system, accounting for 88% of the Belarus’s IT industry.
Renaissance Capital couldn’t say whether or not some of Belarus mid-cap international tech firms are looking to offer securities to the market. Still, the theme persists: in a highly liquid market, if you build something good and have a market, investors will come.
According to Martinkevich, the government is currently hammering out its strategy and possible regulations for blockchain and cryptocoin technologies.
Overall, higher and steady oil prices have been the main factor behind the economic recovery in Belarus. Russia's compliance with oil supply agreements in 2017 at 24 million tons guarantees additional budget revenues and supports GDP growth forecasts of 1.7%. That’s slower than the nearby Baltic states, which stand to compete with Belarus for tech talent.
“I’m surprised with how well Belarus’s economy did this year, but I don’t think any of this is a turnaround story yet,” says Mark McNamee, a senior analyst with the Frontier Strategy Group in London. He said FSG corporate clients have put more money to work in Belarus this year, mostly all of them were consumer-driven multinationals. “Eurotorg and tech are interesting stories, but there are huge structural issues in Belarus that need to be addressed,” McNamee says.
Martinkevich says they can attract tech talent from across the region. Speaking in a conference call taking place over Skype, a company many people believed Viber would kill, Martinkevich said, "I’m going to brag for a moment: we developed the best business plan for the IT industry because it’s not a physical place. It’s nationwide. It doesn’t matter where you set up your office. We have the brain power and you can see that the international companies that buy Belarusian companies are keeping their research and development teams here.”
Takeaways from PM Interview:
Belarus Prime Minister Andreu Kobyakov
Prime Minister Andrei Kobyakov spoke about his country’s high tech development hopes. He says Belarus’s best models are in countries like Poland and in “start-up nation” Israel. For the most part, the country has economic stability, credit watchdogs say. It also has the engineering talents coming out of college. What it needs is a continued injection of domestic and foreign capital helping to prop up a nascent entrepreneurial class. From the transcription. Edited only for clarity.
On Belarus managing through two crises:
The Great Recession and the Russian recession of 2014-2016...those aftershocks are still being felt. It was not easy. Our key objective was to keep the GDP level up. Wed didn't do mass layoffs in response to falling demand. But in turn, this required significant public investment to keep the real sector afloat. And we were forced to reduce capital expenditures on construction of public infrastructure. While this happened, we choose to stimulate exports, liberalized the business environment, managed to attract foreign investments, while maintaining the stability of our financial system.
"
On Belarus promoting individual entrepreneurs:
The Belarusian economy is in a stable recovery. We are supporting small and medium enterprises, reinforcing innovation, and strengthening our market institutions. All of these principles are now part of our national development program until 2020. It's our 'road map' for development. The main goal is...improving competitiveness and increasing social well being.
"
On Belarus per-capita versus ex-Soviet states in Europe:
We don’t want to compare Belarus to countries that recently suffered military and social turmoil. We are politically stable, and have a clear foreign economic policy. We are forced into international cooperation. We are moving forward by improving technologies in both management and production. I think the main resource we have is human capital, it's the Belarusian people.
On Belarus’ IT hopes:
Our starting point for our ICT-outsourcing was in 2005, with creation of the High Technologies Park – a Belarusian “Silicon Valley”. It has an excellent investment climate. Belarus has a lot of potential because of our higher education in engineering and math. The preferential tax regime allowed for the creation, over the last 12 years, of a powerful IT-cluster here with over 180 companies now, and so export of computer services for us has increased 30-fold during that 12 year period.
"
On Belarus and the Eurasian Economic Union:
The main advantage of the Belarusian economic zones, including the Great Stone Industrial Park, is the geopolitical position of Belarus: the country borders on the EU, whereas its membership in the Eurasian Economic Union guarantees investors access to a market of 182 million consumers.
Companies that are set up in the Park get a package of benefits like liberalized land ownership and currency exchange rules, construction regulation, labor laws, and customs. It has a one-stop-shop in providing complex services to corporate investors. The entry-level investment ceiling was lowered to 500 thousand euro to set up in there. And companies can acquire land for private ownership, we have engineering and construction of new facilities that are set to international standards. Companies get a special stabilization clause that protects them from any potential changes in Belarusian legislation, which could in theory worsen economic conditions.
On where the corporate money is coming from:
Over 50% comes from Western countries. Recent examples of foreign success stories were projects by the Lithuanian VMG Group and Arvi, Austrian Kronospan, Velcom, Raiffeisen, German Santa Bremor, Dutch Coca-Cola, Swiss Stadler Rail. The main principle is plain and simple – fair and transparent businesses can count on our support in the government. Over the last decade, we have seen withdrawal of around 10 multinationals on the Forbes Top 2000. But the most frequent reason for them leaving was a change in the company’s strategy against the backdrop of an economic downturn, and not just in Belarus, but in the region, if not globally."
