Unleashing Currency Hedges in Belarus: Navigating the Financial Landscape
Navigating economic volatility: Is it wise for businesses to mitigate currency risks in the year 2025?
The Belarusian markets are venturing into the realm of hedging tools, and it's evident that companies are becoming increasingly interested in managing currency risks. In the face of volatile exchange rates, inflationary pressures, and limited international financial instruments, hedging strategies are more valuable than ever for Belarusian importers, exporters, and businesses with foreign currency revenue. A well-crafted approach can safeguard budgets and pave the way for financial stability.
Currency Risk Hedges: A Beginner's Guide
Before delving into the market landscape, it's essential to understand the basic concept of currency risk hedging: a method used to safeguard businesses from potential losses caused by currency fluctuations through specialized financial instruments or strategies. The primary purpose of hedging is to fix the cost of currency obligations or receipts and reduce uncertainty in financial outcomes.
Here are some popular instruments for currency risk hedging:
- Futures: Standardized contracts for buying or selling currency at a future date through an exchange.
- Options: The right (but not the obligation) to buy or sell currency at a certain price in the future (on an exchange or over-the-counter market).
- Forwards: Agreements between two parties to buy or sell currency at a fixed price.
- SWAP deals: An exchange of currencies with an obligation to reverse the exchange at a later date on agreed terms (used in interbank trading).
- Currency time deposits: Fixing the yield in foreign currency through bank deposits.
In Belarus, currency risk hedging is still in its infancy. Despite exchange trading availability, there are few specialized hedging tools. Mostly, it's individual solutions provided by banks, such as forward deals and SWAP deals, for limited clients.
Pricing the Hedge: A Cost Breakdown
Usually, the cost of hedging on the futures market depends on the current level of interest rates in the national currency, which are often high. If the currency's interest rates are high, such as the Russian ruble at 21% annually (as of April 2025), hedging is comparatively expensive.
The cost is partially made up of expenses on ruble resources. Traders should account for the fact that hedging is usually structured through two transactions: SPOT (buying or selling currency currently) and a forward contract (for future transactions). The cost of the forward contract includes expenses on ruble resources.
Should Importers Hedge?
Given the volatility in exchange rates, inflation, and sanctions restrictions, it's essential for importers to consider opening hedging positions to secure financial stability.
Reducing Hedging Costs: Creative Collateral Strategies
Some brokers offer the opportunity to reduce hedging costs by using high-liquidity assets as collateral for trading on the futures market. In addition to cash, federal loan bonds, like OFZ-PD 26234 with a maturity date in July 2025 (yielding around 20.77% annually), can serve as collateral.
Hedging vs. Bank Overnight Deposits
For short-term liquidity management, bank overnight deposits and exchange-traded instruments such as bonds from reliable issuers can work synergistically. While bank overnight deposits are safe for short-term placement with limited returns, exchange-traded instruments like Belarusian market bonds offer flexible placement terms and the potential for higher yields (tax-free), ranging from 12.5 to 21% annually, depending on the investment term.
Exchange Repo Service: The Smart Choice for Short-term Liquidity
Exchange repo with a central counterparty is a convenient tool for managing short-term liquidity, serving as an analog of a bank overnight, but through the exchange. With the introduction of a central counterparty, repo transactions have become more straightforward: calculates can be made through a single broker, and there's no need to find and coordinate a second transaction participant.
The entry threshold for repo transactions is manageable, making them accessible even for medium-sized businesses. The key advantage is the ability to achieve higher yields (on average, 19-20% per annum) compared to bank overnight deposits.
For larger companies with significant account balances, a bank overnight might still be more profitable due to additional costs associated with exchange transactions like brokerage commission and clearing fees.
Strategic Instrument Selection for Longer Liquidity
Legal entities have various exchange-traded instruments to choose from when managing longer liquidity, depending on their objectives. Many clients opt for Ministry of Finance of the Republic of Belarus bonds (WGBO) and corporate bonds issued by entities like "Aigensis," "Activlizing," and "AVANGARD LIZING."
When in Need of Emergency Funds: Can You “Repo” Your Bonds?
Not all bonds are suitable for repo transactions. Typically, only the most liquid securities, such as Ministry of Finance bonds (WGBO), are used for repo.
Margin Lending: A December-in-July Option
Some brokers provide liquidity support through margin lending, a service accessible to legal entities. Conditions for margin lending are negotiated individually, taking into account collateral parameters, limits, and acceptable risk levels. If there's interest, they can discuss the possibility of connecting margin financing, considering the business's tasks and current market conditions.
In theory, margin lending is possible on the Belarusian market, although it has yet to occur in practice. Nonetheless, if clients express interest, they're ready to explore options and find a suitable solution, given its economic feasibility for the company.
Navigating the Belarusian Currency Landscape
Stay informed, diversify revenue streams, utilize hedging instruments, and maintain cash reserves in multiple currencies to cushion against unexpected market movements. Adopting these strategies can help businesses effectively manage currency risk and protect against potential shocks in the Belarusian market.
- In Belarus, importers are advised to consider hedging positions due to the volatile exchange rates, inflation, and sanctions restrictions.
- Some brokers offer the opportunity to reduce hedging costs by using high-liquidity assets as collateral for trading on the futures market, such as federal loan bonds like OFZ-PD 26234 with a maturity date in July 2025.
- For short-term liquidity management, exchange repo with a central counterparty can offer higher yields (on average, 19-20% per annum) compared to bank overnight deposits.
- Legal entities have various exchange-traded instruments to choose from when managing longer liquidity, depending on their objectives, such as Ministry of Finance of the Republic of Belarus bonds and corporate bonds issued by entities like "Aigensis," "Activlizing," and "AVANGARD LIZING."
- Margin lending is a service accessible to legal entities in theory, although it has yet to occur in practice in the Belarusian market, but if clients express interest, brokers are ready to explore options and find a suitable solution, given its economic feasibility for the company.
