**3. Belarus-China: the channels to avoid the "debt trap"**

The first Chinese tied loans came to Belarus in 2005. It all started with the establishment of the BeST mobile operator; later, the reconstruction of Minsk TPP-2, Minsk TPP-5, the construction of three cement plants, the installation of steamgas units at Bereza, and Lukoml regional electric power plants, the reconstruction of a section of the M5 highway, the electrification of the railways, the purchase of locomotives, and the launch of a national satellite, and others followed. The list can be continued: all data was regularly collected (often administratively) by the Government of Belarus from subordinate organizations and sent to the Chinese. As a result, the sample of tied Chinese loans provided to the Belarusian government, or under its guarantee, increased from \$35.3 m in 2005 to \$543.1 m in 2009.

From 2010 to 2012, the tied lending cooperation became better structured, due to the opening of the first large-scale credit lines by China to Belarus. In December 2009, Eximbank of China provided a commercial credit line of \$5.7bn to the Belarusian Government and, in March 2010, the China Development Bank launched an \$8.3bn commercial credit line. In June 2010, the Chinese Government approved a \$1bn preferential credit line, and, in September 2011, another \$1bn preferential credit line followed. The terms of the two Chinese banks' commercial credit lines were market-based: a 6-month LIBOR interest rate of +3–4.5%, management fees and liabilities of 0.3–0.7%, an 8–15 loan term with a preferential period of 3–5 years, and a Sinosure insurance premium of 6–7%. Those credit lines were, in fact, quite competitive in the international financial market: in terms of rate, terms, and insurance. To compare, we'll recall July 26, 2010 when Belarus issued \$600 m of its debut Eurobonds at 8.75% with a maturity date of August 3, 2015. At that time, Chinese tied loans were cheaper, and were provided for a longer term. In addition, an important advantage of Chinese loans was that Sinosure insurance was half as cheap as that of Western insurers: i.e. German Hermes offered it at a rate of 10–12% for Belarus. The terms of the two open preferential credit lines from China were more attractive: the interest rate of the former made 3%, of the latter — 2%, with loan terms of 15 years and a preferential period of 5 years, without insurance. All preferential, and some of the commercial, loans were taken from those credit lines. The number of projects financed by tied Chinese loans increased in Belarus from 1 in 2007 to 5 in 2011. Accordingly, the amount of tied loans began to grow. In 2011, the sample size made \$417.9 m, in 2012 — \$488.5 m, in 2013 — \$1.1bn, and in 2014 — \$699 m.

#### *Belarus-China: Avoiding the "Debt Trap" DOI: http://dx.doi.org/10.5772/intechopen.96858*

In May 2015, Chinese Chairman Xi Jinping paid a state visit to Belarus, giving new impetus to the credit cooperation between the two countries. As part of his visit, Xi Jinping announced the opening of two more credit lines to Belarus: \$4bn commercial and \$3bn preferential. The preparation for that visit, and the administrative provisioning of the open credit lines, resulted in the situation that, in 2015, the number of credit agreements between Belarus and China reached 9: the maximum signed between the countries per year.

In the new era, Belarus had to repay previously raised tied Chinese loans. Problems with cement sales resulted in the inability of the Belarusian cement plants, modernized at the expense of Chinese loans, to repay their loans independently; their obligations were assumed by the Belarusian Government. The Dobrush Paper Mill also faced problems with a Chinese loan, and the Government provided support for debt repayment. As a result, the debt guaranteed by the Belarusian state to China was growing, and it was necessary to repay it from the Belarusian budget. In this regard, Belarusian state agencies began discussing the need to move away from the path leading the country into a "debt trap", and also to improve the project financing model. Those discussions were fueled by the concern that tied Chinese loans were leading to an increase in Chinese imports. Accordingly, the Belarusian experience of avoiding this "debt trap" developed through several channels:

1.moving away from tied loans as part of state debt management;

2.moving away from tied loans as part of import reduction;

3.transition from tied loans to untargeted credits; and

4.transition from credit cooperation to direct investment liaisons.

#### **3.1 Moving away from tied loans as part of state debt management**

The main reason for tied loans' influencing the state debt was a gap in the financial flow of investment projects: between the cash flow from the implemented project and its external state-guaranteed obligations, which the Government eventually began to finance. Of more than 30 investment projects implemented in Belarus in 2005–2019 on account of Chinese tied loans, the Government financed external obligations from the state budget for at least five. In addition, only a few investment projects achieved the planned revenue, value added, net income and exports, arousing doubts with regard to the mechanism of project realization and their system of business planning.

Problems in investment projects began to arise due to the poor quality of business plans, pre-project marketing research, forecasts of selling prices, underestimation of sales markets, competitors, the lack of legal and audit opinions or constructive dialog between the customer and the contractor, the occurrence of additional work after the initial project stage, the implementation of complex projects involving inexperienced state organizations, and the lack of expertise and control. That practice was typical not only for Chinese projects but also for others implemented as part of the Belarusian economy's modernization. Among the additional factors that aggravated the situation with the foreign currency state debt were the fall in export revenue in the traditional Russian market, and the chronic devaluation of the national currency.

Since 2012, the Government's external debt portfolio saw peaks in state debt payments. They were smoothed out by refinancing old external loans with new credits - both external and - more expensive - internal. An increase in the state debt followed. For example, in 2012, a new external loan of \$1.44bn was raised to repay \$1.5bn and, in 2013, the return of \$2.5bn was financed by \$1.82bn external loans. In 2014, a new external loan of about \$2bn was raised to pay for \$2.7bn. New loans attracted from the domestic market were more expensive: their rates were 2–3 times higher than the repayable old external loans.

Moving away from tied loans did not envisage a ban on borrowing from China. It assumed a reduction in the number of new investment projects financed by tied Chinese loans, and an improvement in the terms of borrowing: the transition from attracting loans on commercial terms to preferential, from Government-guaranteed to non-guaranteed, from tied to unrelated.

Changes began developing along those paths and, since 2015, the number of new investment projects — financed by Chinese Government-guaranteed loans - has decreased 9-fold — to a single project per year. Since 2016, the amount of annual new Government and guaranteed loans attracted from China has halved, and, starting from 2018, the Government of Belarus ceased attracting new tied loans from China on commercial terms. Projects funded directly by China without a guarantee from the Government of Belarus were registered. Previously, there was the single example of Beltelecom, a company which purchased Chinese equipment using China Development Bank loans, without a guarantee from the Government. However, the situation changed, and, on April 25, 2019, the Belarusian Railway signed an agreement to attract 65.7 m Euros from Eximbank of China, under the guarantee of Belarusbank, rather than the government. In 2018, the Belarusian Government raised a preferential loan to finance a single project, while the preferential loans previously attracted to finance two projects in 2017 were canceled. Moreover, from 2017 to 2019, Belarus attracted two loans from China that were not related to project realization, and, as a result, the share of Chinese loans in the overall external state debt, and external debt guaranteed by Belarus, decreased slightly over the year: from 26% in early 2017 to 23% at the beginning of 2018. In 2019 China was among top three lenders of Belarus with amount of \$3bn, to compare – Eurobonds \$6bn, and Russia and Eurasian fund \$11bn.

Of course, the move away from tied Chinese loans did not happen immediately. Moreover, that was politically at odds with the proposal announced in May 2015 by Xi Jinping to open new credit lines for \$7bn. In addition, in accordance with their business plans, some Belarusian state-owned enterprises, such as MAZ, Grodno Azot, and others, continued to apply to the Government for state guarantees, and to Chinese banks for loans to implement their projects.

At the same time, for various reasons, the withdrawal from tied Chinese loans in Belarus began. Firstly, it was not Chinese companies that started winning tenders. Some, such as Slavkali, then passed a part of the work as a subcontract to China. Secondly, the Government of Belarus became stricter in its examination of the issue of state guarantees. Thirdly, the attractiveness of Chinese tied commercial loans began to decline due to the gradual growth of the base LIBOR rate (by 2.47%) from 2015 to 2018, as well as the appearance of alternative loans from international organizations (EIB, IBRD) with a longer term (up to 20–25 years), and a lower rate (1.6–2.6%).

#### **3.2 Moving away from tied loans as part of Chinese import reduction**

To answer the question of whether the withdrawal from tied Chinese loans can help reduce imports from China, it's better to look at the specifics and structure of the latter in Belarus.

As regards Chinese imports, more than 60% of goods come to Belarus from third countries. At the same time, these imports have steadily remained at this level

#### *Belarus-China: Avoiding the "Debt Trap" DOI: http://dx.doi.org/10.5772/intechopen.96858*

for a long time. According to the General Customs Administration of the People's Republic of China, and the State Customs Committee of Belarus, in 2006, imports of Chinese goods from third countries to Belarus totaled \$332.9 m, or 60.7% of all imports of Chinese goods; in 2017, the figure stood at \$1,905.3 m (67%), and in 2018 — \$2,111 m (64.8%).

Imports of Chinese goods from third countries are mainly explained by logistics chains (deliveries via the Baltic ports, Russia), contracts concluded by Belarusian importers with regional representatives, dealers of Chinese companies in the EU, Russia and so on. This statistical detail is important to understand, since tied loans usually finance direct imports from China, which is no more than 40% of all Chinese imports.

The structure of Chinese imports in Belarus is highly diversified. In 2018, the country exported 884 products from China out of 1,172 supplied from around the globe (in 2008 this was 854 out of 1,149, in 2017, 871 out of 1,169). Given the absence of an official classification, Chinese imports can be divided into the three following groups.
