UPDATE 2-Belarus bonds slump as Western allies tighten sanctions

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By Marc Jones

LONDON, June 21 (Reuters) - Belarus's government bonds tumbled on Monday as the European Union, the United States, Britain and Canada imposed co-ordinated new sanctions on Alexander Lukashenko's government after last month's forced landing of a Ryanair flight in Minsk.

The allies called on Belarus "to end its repressive practices against its own people" and to cooperate with investigations into the grounding and the arrest of a journalist and his girlfriend on board.

Belarus's 2031 dollar-denominated bond slumped as much as 4 cents, or nearly 5%, in its biggest fall since the peak of global market COVID angst in March last year. A 2031 bond issued last June matched the fall to hit a record low before making a small recovery late on.

Hard-currency sovereign bonds make up nearly a third of Belarus' $18.5 billion external debt. It has a relatively low debt-to-GDP burden of just over 40% but the worries are that sanctions may mirror those in Russia or even Venezuela, where international investors are banned from trading the bonds.

Tim Ash at fund manager BlueBay, which didn't buy last year's Belarus bond, said it was "hugely impressive and impactful" to see co-ordination between the EU, the United States, Britain and Canada.

"These sanctions are now definitely surprising on the hawkish front."

Support from Russia has provided a cushion for Belarus following the geopolitical backlash over its disputed 2020 election and Lukashenko's bloody crackdown on protests. Yet this increased reliance on long-time ally Moscow for funding has also raised some risks for investors.

"More and more investors will look at the relationship between Russia and Belarus," said Trieu Pham, an EM debt strategist at ING.

"The more Belarus is isolated from the West, it will depend on more financial support from Russia and that will drive the pricing on Belarusian euro bonds."

BLACKLISTED

The latest round of sanctions since last year's disputed election takes the EU's tally of Belarusian lawmakers, officials, judges and military commanders targeted to 166 people, including 78 who were blacklisted on Monday.

Britain, the United States and Canada added individuals to their sanctions lists, although it was not immediately clear if those now blacklisted in Belarus would all be subject to the same travel bans and asset freezes across all countries.

The United States said it hit people with top jobs in the Lukashenko government including the ministry of internal affairs and the ministry of information.

The EU targeted Defence Minister Viktor Khrenin, the transport minister and the air force commander, as well as judges, lawmakers and officials.

Britain's sanctions included measures against London-registered BNK Ltd, which negotiates contracts for exports of Belarusian oil products.

Belarus's government bond prices have now slumped nearly 15% this year. Monday's losses left the benchmark 2030 and 2031 bonds down at around 87.5 cents having been above par as recently as February.

While individual sanctions have not had the impact the West has sought, the EU hopes that sanctions now under preparation will hit Lukashenko harder.

EU leaders are set on Thursday to consider provisionally-agreed sanctions on key industries such as oil, finance, potash and tobacco, which were approved by EU experts late last week.

Restrictions on the Belarusian financial sector are set to include a ban on new loans, a ban on EU investors buying bonds on the primary market and a ban on EU banks providing investment services.

EU export credits will also end, although private savings will not be targeted. Securities in circulation and traded between fund managers are not expected to be hit, but sanctions on the secondary market could come at a later stage.

"Like in Russia you know sanctions are coming, you just don't know how harsh," said Aberdeen Standard Investment's portfolio manager Viktor Szabo. "If it is secondary market sanctions then it's game over".

(Reporting by Marc Jones and Karin Strohecker, additional reporting by Susan Mathew in Bengaluru, Graphic by Rodrigo Campos in New York, editing by David Evans and Gareth Jones)