2017 January 12 ( Saturday ) 10:48:51
- SOME ECONOMIC EVENTS OF DECEMBER
- PRELIMINARY RESULTS OF PAST YEAR
- FINANCIAL SYSTEM
- FUEL AND ENERGY SECTOR
- POLITICAL BACKGROUND
01 - The agreement for the acquisition of 66% of the shares of the Greek company DESFA by SOCAR was finally terminated.
02 - Non-banking Credit Organization CJSC Aqrarkredit submitted a list of three properties pledged in the International Bank of Azerbaijan for a loan, and put them up for sale.
- Silk Way Airlines delivered 1.5 million saplings of mulberry tree from China to the Ministry of Agriculture.
07 - The Asian Development Bank (ADB) allocated a loan to Azerbaijan CJSC Southern Gas Corridor in the amount of $ 1 billion. ADB also provided a credit of 500 million dollars to Azerbaijan to preserve social spending, job creation and economic diversification.
- President Ilham Aliyev signed a decree approving the strategic roadmaps for economic development up to 2025.
- The main buyer and seller of foreign currency to the population, Amrah Bank closed all its offices for foreign exchange transactions.
08 - The procedure of foreign currency transfers to foreign bank accounts tightened. One won’t be able to transfer more than $ 1 thousand for 1 working day and $ 10 thousand a month.
- A two-day international seminar on "Simplification of the regional transit trade" completed.
09 - The head of the International Bank of Azerbaijan Elmar Mammadov was released from his position.
10 – Oil extracting countries outside OPEC joined the OPEC decision to cut production in these countries by 600 thousand barrels per day.
13 – The President of CJSC Azerbaijan Airlines Jahangir Askerov received the delegation headed by the Chairman of Qatar’s Civil Aviation Administration Nasser Abdullah Al-Turki Suba.
14 - The creation of the Azerbaijani low-budget airline Buta Airways, a subsidiary of AZAL, was announced.
15 – The US Federal Reserve decided to raise interest rates to 0.5-0.7%
22 – The Council of Asian Infrastructure Investment Bank Directors approved a loan for Azerbaijan in the amount of $ 600 million to finance the construction of the Trans-Anatolian gas pipeline (TANAP).
23 - SOCAR and BP signed an agreement on development of Azeri-Chirag-Guneshli until 2050.
27 - Baku hosted a meeting of the Azerbaijani-Iranian commission for economic cooperation.
28 - President Ilham Aliyev approved the law on the State Budget for 2017, adopted by the Parliament on 16 December.
- The Ministry of Agriculture announced the theft of part of the funds intended for farmers in the Zardab region.
PRELIMINARY RESULTS OF PAST YEAR. The year was difficult – this is already well known. It is important that 2017 should start the way out of the crisis. If the economy shrinks further, pressure on the budget will start with all the ensuing consequences. During the first 11 months of 2016 the volume of GDP in Azerbaijan amounted to AZN 54 billion 433.1 million, which in comparable prices was 3.9% less than in the same period last year. The reason for the decline of the economy is the decline in production in the construction sector at 27.9%, which is emphasized in the SSC report. The share of the construction sector in the GDP structure was 10.3%. However, there is nothing surprising about the fact that deepening financial problems in the first place impacts the most sensitive economic sectors - real estate, construction, and banking. But here, of course, a correction is needed on the own wrong actions of the banking sector, which can provoke a new round of crisis.
Rising prices, a marked reduction in the budgets of the last three years and the crisis in the banking sector were too visible to hurry up with the optimistic judgment on the future of the economy. Inflation for the 11 months amounted to 12.1%. Food inflation went up to 20%, and tens of thousands of jobs were closed. Inflation is especially dangerous for three reasons. Economists say that after 5% inflation the accuracy of the statistics seriously falls. Second, high inflation does not let businesses conduct effective planning of their activities. Finally, only a decline in inflation leads to lower interest rates in the economy. The three factors are enough to "kill" foreign investor interest in the work in the country.
Economic growth by 1-1.1% in 2017, as planned by the government, would be almost an event for the economy, because it would mean the beginning of a way out of the crisis. But, if we exclude the prayer on rising oil prices, the economy has not enough prerequisites for growth. Azerbaijan's economy is poorly diversified in comparison with Russian and Kazakh economies. For the foreign portfolio investors, for example, the Russian stock market is interesting because, in contrast to Azerbaijan, they actually operate there. Therefore Azerbaijan today has to rely only on foreign loans and direct investments in the oil sector, as they just do not go into other sectors. It is also clear that no measures for attracting investment will work until a certain stabilization of the exchange rate, although the notion of the real exchange rate of AZN has already fairly "devalued": you can only talk about trends and nothing portends growth of the rate yet.
Throughout December there was a discussion of a strategic roadmap, according to which economic development is clearly divided into three stages - until 2020, from 2020 to 2025 and for the period after 2025. Many foreign observers have noted that this map would be great during the big oil money period. But this time has been lost, and now we have to remember that only one implementation of the road map to 2020 will require an investment of 16 billion dollars. The sum is almost prohibitive now. Nevertheless, many of the provisions of the road map seem quite feasible. Some base was prepared for this even by the economic decisions in 2016. But other points, for example, the restoration of heavy industry, primarily metallurgy, seem to be ‘painfully’ known. Talking about the revival of industry has been unsuccessful for 20 years. There were also attempts at privatization and transfer of enterprises under foreign control. More or less successful was the establishment of Baku Steel Company. But after the change of ownership the company led an aggressive policy to establish control over the whole steel industry, and the government countered that with the creation of a state-run steel company. This strange experience of competition (more at the top), too, was unsuccessful. Today it is also interesting to remember how eager such a 'whale' of metallurgy industry as Mittal was on our market for decades. At one time he was even going to open a representative office in Baku. He was never admitted to our market, although magnates of such a level usually think in terms of the regional market. The lack of emphasis on the regional market is one of the weakest points of the strategic plan. Now, in 2017 we again talk about the rate in the mining industry and the establishment of a metallurgical complex in the same Sumgait. The most realistic point of this section of the roadmap seems to be the production of oil equipment, where Azerbaijan has great experience.
Here we stop our discussion of the roadmap. It has already entered into force, and to discuss its individual points we have the whole coming year. In the end, this is the case having certain indicative points, which can help assess the real results of the development of industries.
In the meantime, it is necessary to get out of the current crisis, where there will be a lot of reefs, especially in the first half of the year. It seems that inflation will continue to grow, despite predictions that it will be one-digit. Already quite confidently we can predict 15-20% increase in gasoline and diesel prices. During the year there will be new decisions of the Tariff Council on raising utility prices. There are very dense rumors about raising subway fares, and the Tariff Council, as always, says such applications have not come. These and other factors will result in double-digit inflation.
Again called as a spell are the main obstacles to the movement of the economy forward - corruption, monopolies, and lack of competition. Something is being done in all these directions. Several monopolies have been limited. The Ministry of Economy of Azerbaijan was among the first to comply with the requirement of the recently updated law on combating corruption. According to the Ministry, an internal control department has been established in it to coordinate information on offenses submitted to the authorized bodies. The January decision of the President on cash payments, bearing a distinctly anti-monopoly and anti-corruption character, was also expected. Now, strict limits are set on cash transactions over a certain amount, and it is much more difficult to obtain the same ‘kickbacks’ in public procurement.
Of course, it is noticeable that all ministries and agencies have become more active. But it is still difficult to judge if their functionality has increased and whether their work has become more efficient or transparent. Sometimes it seems that the ministries are once again ready to take on as many economic functions as possible. It was noticeable that the country’s authority created the State Committee for the Procurement of Agricultural Products under the Ministry of Agriculture and almost immediately withdrew it from the Ministry’s subordination. During the year, we also saw that the Ministry of Transport kept almost no economic function. We could suggest that it would be even a good thing for another influential Minister. The Ministry would be focused on regulatory functions, political lobbying of projects and the preparation of legislation. This function is actually performed by the Ministry of Energy today.
The government's attention to transit, tourism and agriculture continues unabated. After all, these are the areas where we can expect quick cash returns, especially in currency. In the tourism sector the government set up the Tourism Development Board. In transit most of the decisions on freight rates are ready. But most attention was paid to agriculture. A number of new structures that should support the sector have been created. According to the roadmap, it is already expected to set up the Agricultural Insurance Fund in 2018, which will provide both differentiated and mandatory insurance. The creation of agro-business incubators is planned, and agro-industrial parks are already operating. But this does not include the regeneration of industries hopelessly abandoned in the nineties. President Ilham Aliyev instructed the Ministry of Agriculture to expand orchards of hazelnut seedlings and plant new hazelnut orchards, since its exports may bring currency revenues. At the beginning of 2015 hazelnut orchards covered 32,700 hectares. And according to calculations of the Ministry of Agriculture, they will double. Azerbaijan has just received 1.5 million saplings of mulberry bush for silkworm breeding from China. Such examples of returning to the traditional areas of agriculture are becoming more and more - from the sharply increased cotton production in 2016 to the creation of goat breeding farms.
FINANCIAL SYSTEM. By December, all without exception - the IMF, the World Bank, and the government talked about the same – the year ends on the background of a significant crisis in the entire financial system of the country. Without overcoming it, the implementation of the provisions of the strategic roadmap seems to be very problematic. If we talk specifically about the performance indicators of the banking system, then, according to the expectations of the end of the year, the banking sector decreased by about a quarter. Assets of the banking system declined by about 10%, the volume of bank loans - by a quarter, and deposits of the population – by 22%. The losses of the banking system expanded threefold. At the same time the national currency for the year fell by 20%. CBA, in turn, warns that in 2017 the country expects a deficit of $ 5 billion in capital flows. The severity of the situation lies in the fact that the deficit is observed both on the current account balance of payments and on the movement of capital.
Not surprisingly, the government proposes to concentrate on the problems of this key sector of the economy. And to start it, probably, it is necessary to answer a simple question: who "leads" the entire process. It is still difficult to judge the outcome of the competition between the Financial Market Supervision House (FMSH) and the Central Bank of the country, which lasted almost an entire year. They were equated in the status of Legal Person of Public Law. Still at the beginning of the year CBA sharply increased its authorized capital to 500 million manat. And FMSH still accelerated the process of liquidation of banks, which CBA long hesitated to do. Already in the summer the Financial Stability Council with a higher status, chaired by the Prime Minister, was created. In any case, the appearance of a coordinating body is a return to "arbitration" functions of the Cabinet in the economic bloc. It will help to find a balance both between economic agencies, which sometimes secretly conflicted and between departmental and state interests. We must assume that some of the recent presidential decrees are the result of proposals of this Council.
The Central Bank, for example, had three goals in the past year - regulating the balance of payments, saving foreign exchange reserves of the country at a critical level, and ensuring the international competitiveness of the national economy. To keep the exchange rate of AZN CBA donated 20% of the reserves and the past year's currency reserves decreased from $ 5 billion to $ 4 billion. However, after February, it actually left the foreign exchange market, keeping only deposit auctions to sterilize the AZN supply and the so-called "double" auctions. The international competitiveness of the national economy was not ensured. For 11 months the foreign trade turnover decreased by 23.4% - 347 million dollars. The balance of payments was not regulated either. In the first nine months of 2016 the deficit in the current account balance amounted to 1.1 billion dollars, whereas before the transition to a floating exchange rate the deficit was 222.5 million dollars.
But in the current economic circumstances it is difficult to imagine how CBA could solve these problems effectively. A tool to influence economic growth for it is only the level of refinancing and lending to the economy, primarily through banks. But it is having problems here. In 2016, it certainly became a lender of last resort. It provided a start support to IBA by a 30-year loan of 1 billion manat. It covered two-thirds of the obligations of the Deposit Insurance Fund to return money to the depositors of ten closed private banks (a total of 722 million manat). It also gave other loans under government guarantees. But its capabilities are not limitless.
It is no coincidence that the recent decree of the President instructed the Ministry of Finance to repay the loans raised by public joint stock companies and enterprises from the Central Bank at the expense of the remainder of the single treasury account of the state budget and the Guarantee Fund for loans raised under the state guarantees. If these funds are not sufficient for full repayment of the debt, the free remainder of the CBA profits for 2015 will be used. According to the Law of Azerbaijan ‘On the Central Bank’, its profit shall be transferred to the state budget. The decree also noted that the right to request funds for these loans was transferred to the Ministry of Finance.
The reason for the search of foreign exchange funds by CBA outside the foreign exchange market is that in the next two years it will experience a great need for them to meet external obligations and execute investment projects. According to estimates of the economist Rovshan Agayev, 85% of the enforceable public debts in 2016 were in foreign currency, and in 2017 this figure will reach 95%. The external debt repayment will require 1 billion US dollars, which is 2.1 times more than the planned budget spending on health care, the expert said. According to him, there are few countries like Azerbaijan, 10% of whose budget is sent to cover the public external debt. Behind all this there is a strategic task not to let the economy slide to the level where it would be forced to ask IMF for loans in order to maintain its financial system.
2016 was also marked by extreme volatility in the currency market. Since a flexible AZN exchange rate was declared, many tools have been incorporated to stabilize the AZN exchange rate. But only once during the year the manat exchange rate to the dollar tended to increase when multiple channels of foreign currency supply were involved in the late summer. Since the fall the market began to shake. While the market needed $ 1.2-1.5 billion, there was always a deficit of dollar supply. As a consequence, the AZN rate was falling. By the end of the year the official exchange rate already reached 1.7 manat per dollar. The ‘black market’ bloomed last but not least due to the banks themselves, which displayed part of their dollar-denominated assets in this market, and also because the banks re-directed any AZN funds to the purchase of dollars. By the way, CBA’s extreme caution about increase in the money supply is caused not only by the anti-inflation concerns, but, apparently, also by fears that the banks will convert AZN into USD, again reinforcing the dollarization of the economy (for deposits, it is 75%). In mid-December, the head of CBA Elman Rustamov announced that in 2017 the country would completely convert to a floating exchange rate of AZN. He also promised that in the near future the Central Bank would publish its program regarding this transition, noting only that it will require close coordination and decision of macroeconomic and structural problems.
Throughout 2016 huge steps were taken to harmonize the monetary policy. Already in the middle of the year, steps were taken to combat large loans. From now on, if a bank gives out a loan in excess of 5% of its assets, it is possible only if the decision is approved by an independent auditor. Of course, this decision was prompted by the scandalous collapse of the International Bank of Azerbaijan, which extended large loans left and right. If the decision had been made before, IBA would have avoided many current problems. So it remained unclear if the role of the Ministry of Finance (as a body controlling the bank) and CBA, which constantly had to monitor the deterioration of the bank’s assets, in the collapse of IBA was intentional or not. There is a version that all the problems of IBA were generated by the fact that a state-owned bank is easier to plunder than a private one, because the private owner would never allow anyone to ruin him. The firm determination of the state to complete the privatization of IBA probably comes from that. It will be announced in 2017, and to sell the bank at a reasonable price it is necessary to bring it into a decent look. The head of the Financial Market Supervision House (FMSH) even offered to split IBA into two banks.
The authorized capital of IBA is 641,200,000 manat. The share of the Ministry of Finance in the bank’s capital remains at 54.96%. .In February 2016, it was decided to increase the shareholders' capital of IBA by 500 million manat. It is significant that this decision was not executed in a timely manner. But its capital will be certainly increased, the more that it is also provided by the presidential decree on the application of ‘On the State Budget for 2017’ Act.
On July 15, 2015 the decree ‘On measures of improvement in relation to the preparation for the privatization of state-owned shares of OJSC International Bank of Azerbaijan’ was signed. For the purposes of this decree the state CJSC non-bank credit organization Aqrarkredit was given the problem assets of IBA worth over 5.6 billion manat. Instead, IBA received money in the same amount from the state budget and through the placement of bonds in the Central Bank. From time to time the channel was launched for the immediate repayment of the external debt of IBA. Aqrarkredit also started the process of privatization of some collateral objects formerly owned by IBA.
The banking system can be criticized for the fact that in good years it did not pay enough attention to the real sector. Now the boomerang returns. It is characteristic that the banks authorized to issue mortgages gathered in the Association of Banks of Azerbaijan and expressed their concern with the planned demolition of houses pledged as collateral for mortgage. But the state is forced to do it, because it is necessary to support the construction work in the country to ensure GDP growth.
Another interesting aspect is that CBA and FMSH began to listen more to advice and recommendations from others. E.g. noticeably more active was the Association of Banks of Azerbaijan. AmCham recommends return to the provisions of Basel II and believes that it can help banks to survive during the severe economic crisis, particularly in the development of risk culture among the management staff, development of the right tools and the liquidity and capital management. But of course, it is provided a clear development of the minimum capital requirements, new minimum standards for risks and, most importantly, greater transparency in the promulgation of the banks’ reporting. In addition, AmCham recommends mastering hedging tools to offer debtors in foreign currency refinancing in the national currency based on the current exchange rate. AmCham also recommends passing the law ‘On credit bureaus’, which will protect the interests of consumers and will reduce the risks of financial institutions. Similar suggestions are also made by independent economists, including the creation of a financial ombudsman. A more stable and predictable banking sector will have a positive impact on the social and economic situation in the country.
It is clear that the configuration of the country's banking sector is changing. It is unclear how many banks will remain, and many banks have already heard the calls of FMSH and have begun to increase their capitalization by the shareholders themselves. Banking circles do not exclude future association of Azer-Turk Bank and the International Bank of Azerbaijan. By the way, it is very unfortunate that at the time a development bank was not separated from IBA, although the idea was talked about: it was primarily IBA itself that objected to that.
In terms of personnel IBA and Azer-Turk Bank act as partners. In December, the head of IBA E. Mammadov was dismissed, and H. Ahadov from the same Azer-Turk Bank was appointed in his place. Without going into details, we should note that the change of management has begun; in particular, it regards the recent rotation in Bank Respublika.
A separate problem began with the growing foreign debt. According to Turan IA, President Ilham Aliyev approved the rules on external and domestic debts of legal entities belonging to the state (except for structures, where 51% of the shares or equity is owned by the state). According to the rules, legal entities belonging to the state every year up to June 1 should report to the Ministry of Finance on their plans on loan agreements for the next year. The Ministry within 30 days should analyze the application. Without going into the criteria of effectiveness of borrowing and their compliance with the current economic situation, we should note only that the Cabinet of Ministers, after consultation with the President, before September 15 has to determine the maximum loan for legal entities belonging to the state in the national currency. And the Ministry of Finance every year until January 30 has to provide information to the Cabinet of Ministers on compliance with the maximum level of obtaining loans by legal entities belonging to the state. In all this there is a tacit recognition of the fact that the bad loans of banks appear not only due to the fault of individuals who used the consumer loans, but also to a large extent due to state-owned enterprises.
The domestic debt of the country is also becoming very expensive (in 2014 - 2.5% of GDP, the forecasts for 2016 and 2017 are 13% and 25% of GDP, respectively). By the way, the December 27 Baku Stock Exchange auction on placement of state T-bills for a period of 1 year recorded a record level of profitability - 20.99% per annum. The economic authorities of the country are in need for borrowing.
The long-awaited opening of a credit line of $ 500 million by ADB on Countercyclical Support Facility (CSF) in December should be also called a success of the financial sector. It is a part of anti-crisis measures, which as a whole are estimated at 1.4 billion dollars. This is one of the few large loans, which is directly aimed at improving public sector effectiveness, ease of doing business and competition. It has a clearly expressed social orientation. A source in ADB stressed that the plan will cover 3.7 million people and will provide increase in the public sector wages, pensions and support for families with low incomes.
FUEL AND ENERGY SECTOR. As always, the end of the year was marked by numerous decisions and agreements in the oil and gas sector. Some of these were expected, the others - unexpected. But, on the whole, the industry evolved according to the optimistic scenario, which was marred only by the final break of the agreement on the privatization of the Greek gas distribution company DESFA. Work on the three key projects of Shah Deniz-2, TANAP and TAP is already underway, but parallel to the search for financial sources to cover Azerbaijan's share in these projects. The situation is unique because loans are sought at the time of financial crisis, which is a difficult task. But in December, things began to improve. ADB provided a $ 1 billion loan to JSC Southern Gas Corridor (SGC) and a partial guarantee of credits attracted under the SGC project. Another $ 400 million dollars of credit was allocated for the project of the Southern Gas Corridor by the World Bank. Asian Bank for Infrastructure Investment (ABII) credited the same TANAP project at $ 600 million.
The total cost of the TANAP project is $ 8.6 billion, but due to lower prices of raw materials it has decreased in comparison with the previously planned cost by almost $ 3 billion. Of these, $ 2.1 billion is allocated by the borrower, $ 600 million - by ABII, $ 800 million – by the World Bank, $ 2.1 billion – by other financial institutions (the European Investment Bank and the European Bank for Reconstruction and Development), and $ 3 billion - by other commercial loans. “Given the fact that Azerbaijan's share in TANAP is 58%, of the total amount needed for the project $ 4.98 billion accounts for Azerbaijan. Something is achieved, but the search for credit is not easy. This is evidenced by the recent announcement by SOCAR that in case of complications, 8% of its stake in TANAP will be given to the subsidiary SOCAR Turkey Energy, which has a good market capitalization.
The problem is that the time is running out - already in 2019 both TANAP and TAP must be prepared. Of course, the country accumulates external debt, which is a big problem for the economy. But there was no other way out: the economy is still under pressure of unilateral oil industry development and still more than 86% of exports are generated by the oil and gas sector. To compensate the negative fact of growth of Azerbaijan’s external debt a new influx of investments in the sector is required.
SOCAR, of course, cheered up in December due to the rising oil prices after the non-OPEC countries decided to reduce oil production. The reductions should amount to 600,000 barrels a day and a half of that will be provided by Russia. These agreements are not legally binding, but there is probably an unspoken consensus on the matter. The market as if waited for this, and futures began to rise in price, at times reaching 58 dollars. These market expectations are clear. The conventional theory that low oil prices are not beneficial only to oil-producing countries it is not true, for low oil prices slid throughout the commodity price series, and this directly concerns also the economies of oil importers. The increasing US Federal Reserve rate (up to 0.5-0.75%) also did not affect seriously the oil market, the more that the next increase in the Fed's discount rate will be in the middle of 2017. But the firm belief that the trend of rising oil prices is stable will only appear when the price will be over $ 60. It is necessary to take into account the fact that the US is not yet actively involved in oil and gas exports, though Trump has already given the go-ahead for this.
In the last ten days of December the head of BP Dudley met with President Aliyev and discussed with him the prospects of BP work after 2024. A few days later it became clear what specific agreements were reached at this meeting. On December 23 in Baku SOCAR and the International Operating Company (AIOC), operated by BP, signed an agreement on the principles of further development of the oil fields Azeri-Chirag-Guneshli until 2050. The protocol of intent was signed by SOCAR President Rovnag Abdullayev and BP Regional President for Azerbaijan, Georgia and Turkey Gordon Birrell. Present at the signing ceremony, Executive Director of BP, Bob Dudley said it was a great day for Azerbaijan, SOCAR and AIOC, and ‘BP is proud to be part of this long-term partnership.’ After a few months on the basis of these agreements the final version of the contract will be ready.
The new project envisages investment of more than $8 billion in the ACG project. As a result, in the field Azeri it is planned to build another major production platform and the creation of subsea infrastructure. The first oil from the new platform is expected in early 2021.
This decision was quite unexpected. After all, the term of the PSA on Azeri-Chirag-Guneshli, signed in 1994, expires only in 2024 and the signing of the contract could be carried over to a later date – especially because there were also attempts to separate agreements with BP, in particular, deepwater gas production at ACG, which is estimated by geologists at 300 bcm. SOCAR often talked about the fact that these contracts will be of a fundamentally different legal nature. And now it turns out that the PSA on ACG is extended until 2050.
To date, ACG has produced about 3 billion barrels of oil at a total investment in the project is 33 billion dollars. But the daily production is reduced and is today 620,000 barrels, while the estimated reserves of the field are about 1 billion tons of oil. The new agreement provides for the development of deep layers of deposits that have not yet been developed. There are no precise data on the recoverable reserves of the deep layers yet. According to experts, we can talk about hundreds of millions of tons of oil.
Turan IA’s analysts believe there are several reasons why the new contract is needed by Azerbaijan today. Firstly, it opens up the possibility of an inflow of foreign investment in the project. Secondly, after the conclusion of the new contract the production at ACG will stabilize at the level of 24-25 million tons per year, starting from the next decade. This is very important from the standpoint of stable foreign exchange earnings in the State Oil Fund of Azerbaijan.
The interest of the foreign companies to sign the new contract before completing the first one has been somewhat different. Until 2025, energy prices are forecast as low. That is, for extracting companies investing in exploration is associated with very high risks. The ACG project has been carefully studied for more than 20 years and the host country itself is comfortable for them in terms of the least political and economic risks. Investment in the ACG project has always brought good dividends to the shareholders. So the planned transaction will be mutually beneficial.
On December 21, the State Oil Company signed a licensing agreement for the construction of the Baku gas processing and gas chemical complex (SOCAR GPC). This project was actually separated from the ambitious SOCAR OGPC, which is clearly too large and expensive for crisis times. The agreement was signed with a group of highly reputable foreign companies - Technip, Univation, Axens, and SinopecTech, and gives the right to use their technology. The oil and gas sector is the only sector of the economy, which is actively attached to Western technology. The plant will be built 15 km south of Baku, and it will be capable of processing 10 bcm of gas. It will also produce 610,000 tons of pyrolysis resin and 600 thousand tons of polyethylene. And here we can talk about a bunch of industry: semi-finished polyethylene will be delivered to SOCAR Polymer Company, which by that time will be constructed in Sumgait. SOCAR GPC will come into operation only in 2022, and the investment required for the project will amount to $ 4 billion. So the next five years will be a time of all-out hunt for foreign investment. SOCAR has already started the search for investors for the enterprise.
INFRASTRUCTURE. It would seem that in the past ten years most of the questions related to the infrastructure development of the country were decided. But it is a great illusion, because the issue of infrastructure development for the economy is always a constantly changing target. It has its "eternal" question: whether, for example, infrastructure development should follow the rise in economic activity in the country, or, on the contrary, it must stay ahead of economic development and push it. Most economists still tend to the first, and the question itself is not as vacuous as it may seem. A classic example for thought is the Azerbaijani electricity production. Today it does not know what to do with excess capacity, and neighboring Georgia has already exported more than 2 billion kWh of electricity to the neighboring countries. Demand for electricity in the country is provided usually only by rise in sectors with new businesses opening. When the power system works at its partial capacity, the cost of electricity production grows. In addition, in the previous period the industry accumulated a foreign debt of $ 2.4 billion. In these circumstances, the government has only one and the simplest solution - to raise tariffs, which we witnessed in December.
Generally, the rich years may have been "light years" for corrupt officials, but they did a disservice to the country's infrastructure itself. The feverish desire to make money as quickly as possible led to the fact that the fate of the project, the question of its quality, or the payback did not seriously worry anyone. The amortization period was very short: built, forgotten and passed on to the next project. As reported, Azerenergy accumulated large capital assets and large debts together with them. The same can be said of Azersu, into which $ 10 billion was invested and which is still relentlessly squandering the country's most important resource - water. By the way, Turan IA for the entire second half of last year was unsuccessfully suing the organization, demanding from it (based on the law on the media) information on how and for what amount of money they purchased water meters, and why the process of their universal implementation, which began in 2007, still has not been completed.
Meanwhile, the started radical change in the entire world economy poses new and unexpected challenges, including infrastructure requirements. According to a known Azerbaijani expert, which he shared in the media, the possession of or the ability to create a new type of infrastructure (the basic foundations of special quality) will be the main key to success in the new world order. Here we need not just basing on the fixed assets of new and emerging technologies, but also the amortization period for these funds for up to a century. This is time for expensive and hard money, and it imposes its demands on infrastructure and other projects. “Most likely, there will remain no more than two really strong free-convertible currencies in the world. Their power will be based on the control of natural resources (possession of those resources), a high level of human capital and fixed assets with amortization calculated on centuries,” he suggests (in Azerbaijan there still is a working object with the amortization of a hundred years - Shollar water pipeline supplying water to Baku).
So far we have talked about the utilities infrastructure. But infrastructure problems emerge everywhere. They should also include the introduction of mandatory health insurance (MHI): the government started a pilot development of this system in two administrative regions of the country. It is a very positive fact. Another thing is that like any other major project the MHI project will meet serious structural problems. And the establishment of this system even within small regions is a big question. The fact is that MHI becomes effective only when 70-80% of the employed population works legally, unemployment is low, and earnings of working people are at such a level that the collected premiums can cover the normal medical expenses. Maybe it is right that the introduction of MHI is started from disadvantaged provinces, where only 25% of the population works legally and has very low salaries. If this works, it will be wonderful. And if it does not work, it will also be a useful negative.
While our banking system is floundering in the current crisis, the global banking infrastructure is predicted huge changes. Online banking or crypto currency seemed exotic a short time ago. But they are already in practice. Such authority as German Gref argues that the entire banking system will be fundamentally different in nature in ten years, and it will change the whole architecture.
But the government is still more likely to focus on issues of the day. Throughout the year, we saw how the government was trying to promote a transport infrastructure, which in these difficult financial conditions can bring about real money. Passenger traffic in AZAL markedly increased. Even a bridge was built between Iranian and Azerbaijani Astara (element of the corridor North-South), which already has a financial impact. The first test container transportation through Azerbaijan from India, China, and Iran was carried out. The Caspian Shipping Company became prompter. It set up a joint engineering company with Odessa Marine Engineering Bureau. In autumn this joint venture submitted a project order for the construction of two ferries such as Ro / Pax and two tankers.
Nearest expectations are associated with the onset of the Baku-Tbilisi-Kars railway, which will bring to the treasury tangible revenues from the transit of goods. The minimum expected traffic flows are projected at the level of 5 million tons per year. The acceleration of these works is endlessly discussed at the political level: in December the Foreign Ministers of Azerbaijan and Turkey met on the subject. It seems that this time the construction is indeed coming to an end. On the Turkish section construction works are finishing. Georgia arranged test drives of locomotives operating on diesel fuel, up to the complete electrification of the entire road. At the Akhalkalaki station the shift of freight cars of 1,520 mm standard for the Turkish narrow-gauge line of 1,435 mm was tested. There was also an experiment of passing a multi-ton container from car to car by a 40-ton crane.
Four years ago, Intelligent Transport Management Center (ITMC) announced the completion of work on the project of deployment of car parks in the city of Baku. Then it was said that 160-170 paid underground and aboveground parking lots will be required and part of this program has already been implemented to unload roads of the capital. The state is ready to put up the biggest underground garages for privatization, and it is important not to fall into the former sins here by selling them for a pittance to "their own" people. Of course, we can approximately observe some improvement in the urban transport, which is commonly transferred to the card payment system. The streets have been unloaded to an extent.
In 2013, we talked about the creation of 3-4 taxi parks in Baku, but by then it was clear that the majority of privatized taxi parks in Baku had changed their profile. The market began to develop quite spontaneously and to date we can talk about a serious increase in competition in this transport sector. The competition was based on the optimization of taxi transportation, with a vivid example of Uber Company operating in Baku. But apart from this, the choice of taxi services has become much broader (so-called London Taxis and Services 189 and 188). The attempts to apply counters failed; the companies mostly prefer to announce the cost of the route in advance. And they should also pay the taxes. But surprising is that the emerging fiercely competitive market began to disturb the authorities. The Transport Department of the Executive Power of the capital came up with the idea to introduce common fares in taxis. And it is clear why: the big companies created by monopolists no longer withstand competition and suffer losses. So an old temptation appears to try to remove the competitors from the market administratively. But it should not be done in any case. The competitive environment should be encouraged wherever it occurs.
POLITICAL BACKGROUND. The attempted coup in Turkey, the war in Syria, the terrorist attacks in Belgium, France, Germany and Turkey, the ongoing war in Ukraine, the presidential election in the United States intensified the uncertainty of foreign background. Yet it is difficult to say whether the situation in Syria is moving towards the end of civil war. Perhaps for the first time in recent history, we see the conflict, which resulted in not only millions of refugees into neighboring countries and Europe, but also in the generation of such a monstrous structure as ISIS, which shakes the political situation in many countries far beyond the war zone. Now we can say only one thing. With the capture of Aleppo it became apparent that Russia, Turkey and Iran are going to decide the fate of Syria. But Trump has not yet become President with full powers, and the reaction to this fact of the United States is not yet clear.
These complex events - above all, the coup attempt in Turkey and the deteriorating economic situation - have brought the country's leadership to the solution to provide a new consolidation of power, and in the autumn of 2016 Azerbaijan passed a constitutional referendum. Its positive result strengthened the position of President of the country and established the institution of Vice-presidents. Everyone expected the immediate implementation of the referendum results, but no steps in this direction followed. So far, only the possibility of structural changes in the government has been enshrined.
Many experts believe that 2017 will be intense, not only in economic but also in political terms, and it will be a year of strengthening the contradictions within the government itself. In narrowed access to capital the contradictions aggravate logically and inevitably. In part, we have witnessed a crisis of the system, when the eyes of society suffered the collapse of the largest state bank of the country. Around the same time, it was found that MNS – a body designed to protect the security of the country became a den of racketeer generals fleecing enterprise. The trial of the leaders of the largest divisions of the Ministry of Communications has revealed a picture of this corrupt pyramid, which rises to the minister, and, most likely, can continue. There is nothing surprising - it all was guessed long ago. Still amazing is routine with which the defendants talk about corruption mechanisms in the seemingly developed ministry of the country. All of this can be seen as the fight against corruption, and can be considered a crisis of power - the choice depends on the angle at which to consider these events.
In 2016 the authorities did not make steps towards the creation of independent structures - democratic institutions based on the civil self-governance. The poor condition of the independent democratic press and civil society are under constant pressure from the authorities. Justice remains the most sensitive issue of the Azerbaijani society. This was particularly noticeable against the background of large-scale reform of the judicial system in Kazakhstan and the recent Putin's meeting with the representatives of civil society.
The need for change in the judicial system is also important because any external investor always looks at the judicial system. It is for him as an indicator of the opportunity to work in the country. And such an indicator can in fact become a political process. Making graffiti on the monument to the leader of the country is probably not good, but it is not the most terrible crime in this terrible world, even if someone is deeply offended by this. And ten years of imprisonment for this offense in general is beyond comprehension. Everyone in the country - from the government to ordinary people - understands that this is a youth political escapade, a challenge. It happens everywhere in the world, and the maximum sentence for such an offense, even if it is qualified as hooliganism, can make a couple of months or a few months. But the activists were accused of quite a different guilt to punish them harder. But their last word still made the trial political in nature, and they have become political prisoners.
MAIN ECONOMIC INDEXES
Main macroeconomic indices
XI- 2015 %
XI - 2014 %
Gross Domestic Product
Money incomes per capita (in AZM)
Turnover of Goods by Transport, comm. (in mln Tons/km.)
Export ($ mil.)
Import ($ mil )
Average monthly salary ( from the beginning of the year, (in AZN)
Index of Consumer Prices
GROSS DOMESTIC PRODUCT IN OIL AND NON-OIL SECTOR
2016 compared with 2015, as a percentage
Gross domestic product
− oil sector
− non-oil sector
STRUCTURE OF GDP BY INDUSTRIES IN 2016, %
PRICE AND TARIFF INDEXES
In November 2016 compared with November 2015
January- November 2016 compared to January- October 2015
Consumer price Index
Producer price index
The price index of agricultural producers
Transport, Postal tariffs
STRUCTURE IMPORT AND EXPORT (I-XI 2015/ I-XI 2016)
CAPITAL INVESTMENTS BY FUNDING SOURCES (%)
In January-November 2016, million manat
Compared with the same period last year (in comparable prices),%
Share of total, %
Including funds of enterprises and organizations
NUMBER OF EMPLOYEES IN INDUSTRY SECTOR
CRUDE OIL AND NATURAL GAS PRODUCTION
Types of products
Produced in January-November 2016
A comparison last year,%
The presence of the finished product on 01.12.2016
Crude oil (including condensate), tons
Natural gas, million cubic meters
RELEASE THE MAIN PRODUCTS OF THE OIL INDUSTRY
Types of products
Produced in January-November 2016
A comparison with the period last year,%
The presence of the finished product on 01.12.2016
Car benzinb th. Tons
Gasoline for use in oil and himicheskyo industry, thous. Tons
Kerosene, thousand thous. tons
Diesel fuel, thousand thous. tons
Fuel oil, thous. tons
Lubricating oil, thous. tons
Bitumen, thous. tons
Petroleum coke, thous. tons
ELECTRICITY, GAS STEAM
Types of products
Produced in January -November 2016
In comparison with the previous year,%
Inventories of finished goods on 12/01/2016
Electricity million. Kilowatt-hours
DYNAMICS OF PRODUCTION IN THE MANUFACTURING INDUSTRY in 2016
Compared with the previous period,%
Total in manufacturing
non-oil processing industry
DYNAMICS OF PRODUCTION OF CONSTRUCTION MATERIALS
TABLE OF TRANSFERS FROM THE PETROLEUM FUND TO STATE BUDGET
Transfers mln. manats
Share in the revenue part of the budget (%)
2016 – 9 months
2017 – forecas
37,5 – forecas
CREDIT INVESTMENTS IN THE ECONOMY (billion manat)
DEPOSITS OF THE POPULATION
November 1, 2015 million manat
Compared with last year's period,%
Deposits of population – total
in national currency
in foreign currency
TRADING VOLUME AT THE BSE (mln.AZN)
RATE OF GROWTH POPULATION`S INCOME, AVERAGE SALARY AND INFLATION (mln. AZN)
AZN RATES TO USD AND EUR
COMPARISON OF BARRELS OF CRUDE OIL BRENT AND AZERI LIGHT YEAR ($)