Maksim Salahub Office Managing Partner maksim.salahub@sorainen.com

Hoping that most of you will receive this issue of our legal digest before the beginning of your well-deserved summer vacations, I would like to brief you again on the most notable events in the Belarusian business and legal environment.

Summer is a relaxing season but not for the government and businesses in Belarus in 2011.  While the former has been trying hard to counter negative trends in the national economy, the latter has faced severe challenges stemming from national currency devaluation and a multiplicity of exchange rates.

As before, we would like to offer for your attention a short overview of figures and facts:

• on 24 May 2011, the National Bank of Belarus devaluated the Belarusian ruble by 56%, but introduced a maximum trading margin of 2% of the official rate in all market segments;

• in several steps, the refinancing rate of the National Bank was increased from 12% to 20% within four months;

• the inflation rate during the first 6 months of 2011 was 36.2%;

• GDP in the first half of 2011 grew by 11% year-on-year;

• the negative  foreign  trade  balance  from  January–May  2011  exceeded  USD  2.6   billion  (approx  EUR 1.8 billion);

• Belarus received the first USD 800 million (approx EUR 556 million) loan disbursement from the Anticrisis Fund of the Eurasian Community, and used it to replenish national gold and currency reserves;

• the privatization campaign has become more dynamic, and we would like to discuss this matter in greater detail below.

Privatization in Belarus:  almost happening?
Belarusian Government protects its interests in strategic enterprises
Main Decree on investment agreements amended
Online registration of companies introduced in Belarus
IFC extends USD 10 million loan to Minsk Transit Bank

Privatization in Belarus:  almost happening?

On 21 March 2011, the Belarus Council of Ministers by Resolution No. 348 adopted a new privatization plan for 2011–2013. The plan concerns over 240 state-owned and state-controlled enterprises in various industries. Although the previous 2008–2010 plan, which covered over 600 enterprises, resulted in too few sales and more failed privatization auctions, the start of the new campaign looks more encouraging. Between 14 June and 15 July, the State Property Committee conducted 9 privatization auctions and contests, at which shares of over 60 companies were offered. The companies were mostly of small and middle size, located in smaller cities, and belonged to such diverse industries as production of furniture, industrial equipment, and construction materials, transportation services, clothing and footwear, food and drink. Shares in 10 of these companies (especially furniture producers and transport enterprises) have been sold successfully, in almost all cases to local investors.  Total proceeds received by the state from these sales exceeded 30 billion Belarusian rubles, which puts the average transaction price at the level of approx USD 0.5 million (approx EUR 0.35 million). Obviously, one of the success factors was the bidding price, which was announced before devaluation of the national currency and was not adjusted afterwards.

The State Property Committee says that it will actively continue offering state-owned shares in the remaining two quarters of 2011. Perhaps one of the challenges for foreign investors is the time factor.  Privatization auctions and contests are announced with only a few weeks notice, which leaves little or no time to get to know the target, conduct due diligences and make informed decisions on participation in privatization procedures. Published information about targets is quite scarce (net asset value and profit in 2010, business profile, number of employees, and some other data). In that light, it is advisable to approach the privatization authority before enterprises are officially put up for sale, try to select attractive targets and take more time to investigate opportunities.

Having noted an increased interest in metal-working enterprises among our clients and cooperation partners, we would like to offer you a short list of these companies contained in the current privatization plan (to open PDF file, please click here). Should you need more information on the matter, please do not hesitate to contact us.

Belarusian Government protects its interests in strategic enterprises

From January 2011, the moratorium on free trade of shares in companies acquired in the course of so called voucher privatization finally ceased to exist. However, the Belarus Government introduced new measures to protect its interests in relation to enterprises which it deems to be strategic.

Presidential Decree No. 1 of 11 March 2011 amended Decree No. 3 of 20 March 1998 on Divestment and Privatization of State Property in the Republic of Belarus, the main legal act on privatization.  The main novelty is that the second and all subsequent issues of shares by open joint stock crop-processing companies created in the course of privatization are possible only with approval of the President (which may be obtained upon the initiative of the Council of Ministers or municipal authorities). The second and all subsequent issues of shares by open joint stock companies created in the course of privatization and included in the special list of strategically important companies (the list is approved by the Council of Ministers) may be accomplished with approval of the State Property Committee or municipal authorities.

On 14 March 2011, the President issued Edict No. 107 amending Presidential Edict No. 677 dated 16 November 2006 On Certain Matters of Disposal of Assets Belonging to Municipal Property. This legal act granted municipal authorities (Minsk City and 6 oblast executive committees) a pre-emptive right to purchase shares in local strategically important companies and crop-processing companies acquired in the course of voucher privatization. These government bodies have 90 days to exercise or waive their pre-emptive right. Edict No. 107 has retroactive effect, regulating relations which came into existence from 1 January 2011.

Main Decree on investment agreements amended

Presidential Decree No. 10 dated 6 August 2009 On Creation of Additional Conditions for Investment Activity in the Republic of Belarus was amended by Decree No. 4 of 6 June 2011, which will enter into effect 2 months after official publication. The main novelties are as follows.

Investment agreements between business entities and the Republic of Belarus now need approval at either of two levels (previously there were three): either by ministries, state concerns, municipal authorities, the Executive Office of the President (where no special tax or customs incentives have been requested by the investor), or the President (where such special incentives are requested).

The list of mandatory terms and conditions has been expanded: now in addition to the subject of the agreement, term of validity, volume and period of investment, rights and obligations of the parties, body and procedure for dispute resolution, the investment agreement should without fail contain the term for implementing the investment project plus confidentiality clauses. An investment agreement may also be in a foreign language.

A more significant technical easement relates to construction projects: investors will be able to use foreign project documentation. If that project documentation is produced in accordance with foreign design and construction standards recognized in Belarus, then after conclusion of the agreement local fixation of construction objects may be performed in accordance with engineering and technical conditions and results of geological and geodetic surveys. In other cases, further adaptation of foreign project documentation will be needed. We would like to note that practical implementation of this new privilege may be difficult, considering significant differences between construction standards in Belarus and those in other countries.

Additional exemptions from taxes and other fees were also introduced:

• no fee is payable for removal of trees and other plants from the site of an investment project;

• no land tax or lease fee is payable for state-owned land plots provided for implementing an investment project during the period of design and construction of those objects, up until 31 December of the year following the year of completion of construction;

• no fees are payable to industry innovation funds throughout the period of validity of an investment agreement (otherwise such fees may reach over 10% of the company’s revenue);

• no VAT and profit tax is payable on free-of-charge transfer of permanent assets not completed by construction to the investor for implementing a project, and certain other exemptions.

Online registration of companies introduced in Belarus

On 27 June 2011, the President of Belarus issued Decree No. 5 introducing online registration of business entities.  The Decree will enter into effect from 1 September 2011. Online registration will exist as an alternative to regular submission of paper application, articles of the company when applicable, and other documents to the registration authorities. To this end, the official web portal of the Unified State Register of Legal Entities and Individual Entrepreneurs (www.egr.gov.by, not yet operational) is being created. At least at the beginning, contact with the system will be one-way:  registered articles of the company, registration certificate and other documents will be issued in paper form to the applicant when all registration formalities are completed.

When the new system is put into operation, Belarus may become one of the top three jurisdictions in the world where incorporating a  company  is  the  easiest  (according  to  the  World  Bank  rating).   Currently  it  holds 7th position.

IFC extends USD 10 million loan to Minsk Transit Bank

SORAINEN Belarus acted as local counsel for International Finance  Corporation  (IFC)  on  extension  of  a USD 10 million (approx EUR 7 million) loan to Minsk Transit Bank for energy efficiency, and small and medium enterprise (SME) financing. The purpose of the investment is to provide general support to the private sector in Belarus as well as to facilitate energy saving and GHG emission decrease initiatives.

Minsk Transit Bank is a fast growing Belarusian private mid-size bank dedicated to SME and retail lending. The Bank's main market is the city of Minsk, where according to the Bank's own estimates it holds approx 20% of the SME and retail market. Currently, Minsk Transit Bank operates 30 outlets in Belarus, including 15 outlets in the country's capital.

The SORAINEN team performed limited due diligence on the borrower, advised on the implications of Belarusian law for the terms of the loan agreement and issued a legal opinion.