Experts: Belarusbank, Belinvestbank and Belagroprombank May Face Problems With Payments

How will the sanctions affect the work of the Belarusian state-owned banks?

Beyond the reputational costs, European restrictions against state-owned Belarusbank, Belinvestbank and Belagroprombank may cause problems with payments, reports Naviny.by.

Some restrictions in the financial sector are among the sectoral sanctions, adopted by the EU on June 24 in response to continuing violations of human rights in Belarus, as well as repression of civil society, democratic opposition and journalists.

Thus, it is forbidden to provide, directly or indirectly, investment services, purchase, sell or contribute to the issue of securities and money market instruments with a maturity of more than 90 days, issued after June 29, 2021, by Belarus - its government, state agencies, entities and departments, as well as Belarusian credit and other organizations with more than 50% government stake, organizations or bodies, acting on behalf of or at the direction of certain legal entities. In particular, this applies to Belarusbank, Belinvestbank and Belagroprombank.

After June 29, it's also forbidden to directly or indirectly enter into or participate in any agreement on granting new loans or credits with the maturity of more than 90 days with the Belarusian government, government agencies and companies of the mentioned banks.

Restrictions apply to the access to the EU capital markets for the Belarusian government and public financial institutions. Insurance and reinsurance of the Belarusian government and Belarusian state bodies and agencies will be banned.

The European Investment Bank will stop any payments under agreements in the public sector. The European Union countries will also have to limit Belarus' participation in multilateral development banks to which it belongs.

Foreign currency payments may get caught up for a long time

How will the sanctions affect the work of the three Belarusian state-owned banks? Let's analyze with experts.

According to Vadzim Iasub, senior analyst at Alpari Eurasia, the sanctions could affect those customers of the three banks that participate in international payments.

"Things specified in the sanctions document are one thing, but it's a different aspect of how things may happen in practice," he suggested.

For example, Iasub notes every bank has a compliance service, a kind of internal control over a company's compliance with the law. "This service monitors the activity of the bank to make sure that it does not accidentally become involved in operations related, for example, to money laundering or terrorism financing. It also checks for the bank to strictly comply with all the restrictions because there are penalties for bypassing the sanctions".

When one of the blacklisted banks sends a foreign currency payment, the correspondent bank or the bank receiving that payment "will have a red light on the computer," Iasub explains.

"I do not think that compliance officers, especially in large banks with hundreds of thousands of payments a day, are eager to get into all the details: what is banned and what actions it may cause against banks subject to sanctions," said the expert in a comment for Naviny.by. - It's easier for them to block a payment not to compromise the bank".

Of course, the beneficiary bank may ask for additional documents on transactions, but "the list of these documents has no limitations. This clarification can take up to six months. That is, the payment may get stuck for a long time.

The same applies to payments in the opposite direction. The red light starts blinking at the sending bank or the correspondent bank, and the payment is either blocked or a protracted investigation begins. In the end, the money also hangs up.

"The practice of sending and receiving money, at least - from and to Europe - will show how widespread this approach will become," stressed Vadzim Iasub.

He notes the de facto Belarusian state banks, mentioned in the sectoral sanctions, "haven't received any loans from European banks since last August". "Now, the sanctions have made it de jure," said the analyst.

The expert also notes that the Belarusian state-owned banks may suffer from side effects. When a bank becomes toxic, its customers reflect on the necessity to cooperate with this bank. Do they need this kind of problem?

Iasub concludes that the negative effect can be "disproportionately greater than that fixed in the form of sanction restrictions".

State-owned banks may experience a "negative information shock.»

Sanctions can hurt the reputation of the Belarusian state-owned banks, says senior researcher of the Center for Economic Research BEROC Dzmitry Kruk. Moreover, they can affect the entire banking system of the country.

"The EU financial sanctions prohibit the conclusion of new contracts, which can provide loans. Banks with the prevailing state capital fall within these sanctions. Belarusbank, Belagroprombank and Belinvestbank are listed as such. According to the majority of gross indicators, their share in the banking system is 55-60%, so the impact of sanctions will be relevant to the entire system," the expert noted in the commentary to Naviny.by.

However, speaking of a direct negative impact on the value of liabilities and liquidity in foreign currency, this effect is unlikely to be very large in scale. It spreads over time, the analyst says. Among other things, this is since the sanctions imply the continuation of previously concluded contracts.

According to the analyst, a negative information shock will be a greater consequence of the sanctions.

"The news that the largest Belarusian banks are under sanctions will inevitably connote threats to their stability and solvency, which may intensify the outflow of customers' funds," believes Dzmitry Kruk.