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Economic review

2017 April 10 ( Monday )  15:04:57
Print version
Русский Azərbaycan



06 - The official two-day visit to Iran of Azerbaijani President Ilham Aliyev began.

08- CJSC Southern Gas Corridor carried out the second issue of bonds of 1 billion US dollars under 5.8% of profitability.

09 - Under the chairmanship of First Vice-President Mehriban Aliyeva, a meeting was held on housing provision for IDPs and refugees settled in hostels in Baku and Sumgait.

    - The International Extractive Industries Transparency Initiative (EITI) issued a statement on suspension of Azerbaijan's membership due to its inability to protect civil society.

    - The State Oil Fund of Azerbaijan, in turn, announced its withdrawal from this structure.

10- The National Assembly of Azerbaijan today approved amendments to the law on labour pensions.

 - A Russian Eugene Pavlov, member of the Bombardier Company suspected of corruption in concluding deals in several countries, including Azerbaijan, was arrested in Sweden for two weeks.

14- The European Bank for Reconstruction and Development (EBRD) in cooperation with the Food and Agriculture Organization of the United Nations (FAO) and the Association of Milk Producers of Ukraine organized the First Caucasian Milk Congress in Tbilisi.

     - President Aliyev started his visit to France, timed to the 25th anniversary of the adoption of the diplomatic relations between France and Azerbaijan.

14-15 - after a two-day meeting of the Fed, the key rate rose from 0.50-0.75% to 0.75 -1%.

17 - Azerbaijani parliament approved government's report for 2016.

      - The Association of the Packaging Industry of Azerbaijan was established in Baku.

24- The Central Bank of Russia decided to reduce the key rate by a quarter of a percent.

27 - GUAM member countries (Georgia, Ukraine, Azerbaijan and Moldova) signed a protocol to the agreement on the Free Trade Zone between the participating countries, prescribing the creation of a working body for GUAM coordination in this direction.

   - Fitch Ratings affirmed the long-term foreign currency rating assigned to the Eurobonds of the Azerbaijani CJSC Canub Qaz Dehlizi (CQD, South Gas Corridor) at the level of BB +.

28- Saatli hosted the all-Azerbaijan meeting on cotton growing with the participation of President Ilham Aliyev.

30- The OPEC/NOPEC Vienna Deal to reduce oil production is meaningless: the investments of Exxon Mobil, RD Shell and Chevron are dropping the cost of shale oil to $ 20 per barrel.

31 - A meeting of the Ukrainian-Azerbaijani working group on cooperation in the energy sector was held in Kiev.

- Heads of railway bodies of Azerbaijan, Georgia and Ukraine met in Baku.

 FOCUS OF THE MONTH. In January, it might seem that everything in the economy was gradually returning to normal. At the end of the year, a strategic road map was promulgated, according to which the economy will have to live in the coming decade. Oil prices went up. Exports of oil in January-February decreased to 3.4 million tons (-8.97% yoy), but increased in monetary terms - by $ 1.387 billion, or 1.48 times more than a year earlier. In February 2017, the non-oil sector of Azerbaijan retained the status of motor of the national economy, which was returned in January, although last year it was the epicenter of the crisis - the economic downturn in it was 1.42 times stronger than in the economy as a whole.

According to the State Statistics Committee of Azerbaijan, by 1 March 2017, Azerbaijan's non-oil GDP amounted to 5,704.1 million manat, which was 2.3% higher than in January-February 2016. The oil GDP for January-February was estimated at 4,338.5 million manat.

Some small companies began to export. Great efforts have been made to restore financial stability in the economy, and this has also been achieved: the banking sector has recovered a bit. In the first two months of the year, the economy grew by 0.4% (0.2% in January).

And yet, all these indicators, declaring about growth, remained so far within the limits of statistical error. And in 2017, judging by the first quarter, apparently, it will also be difficult. Too many problems have accumulated in the management of the economy itself to wait for quick results.

Moody’s International recently conducted an interesting comparison of the economies of Azerbaijan and Kazakhstan. As it was expected, the share of the oil factor in the nominal GDP, export and budget of Kazakhstan was significantly lower than in Azerbaijan (see Appendix). Of course, Kazakhstan's economy was initially more diversified than the Azerbaijani economy. Above was also the level of development of state institutions that were formed in the years of independence. And it allowed reacting more effectively to unfavorable economic factors.

It may seem a bit strange that the banking systems of the two countries were approximately in the same situation. The possible explanation here seems to be that both countries have failed to create a reliable banking system that resists unexpected shocks. The forecast for the banking systems of both countries is "negative", since the share of problem loans is 25% of the total volume of loans issued in Azerbaijan and 37% in Kazakhstan.

The state debt of Azerbaijan is higher than that of Kazakhstan, but both countries have enough space for fiscal maneuver. Over the period from 2014 to 2016, Azerbaijan's debt in relation to GDP grew to about 30% as a result of government direct support to the banking sector. The debt of Kazakhstan in relation to GDP for the same period grew by less than 10 percentage points.

Moody's forecasts the growth of the economy of Kazakhstan in 2017-2018, respectively, by 2.5% and 2.6%, Azerbaijan - by 1.1% and 1.9%. In other words, there will be no big growth of economies in the oil-producing countries of the CIS and it is necessary to adjust to a long and patient work in the economy.

It is also interesting that Moody's stressed the availability and transparency of Kazakhstan's state statistics. It is appropriate to note that interest in statistics after the devaluation in general has increased sharply in all oil-producing countries. Devaluation has introduced some inevitable distortions in statistical data and increased the possibility of statistical manipulation. In Russia, the Minister of Economy expressed even frank discontent with the quality of statistics and the result of this, as expected, could be the transfer of the Russian Statistical Committee to this agency. But in the economic community itself, the attitude to this decision is extremely ambiguous. Most experts agree that it is necessary to preserve the independence of the statistical department, and its transfer to the Ministry of Economy will make the statistics even more subjective. By the way, Azerbaijan is also thinking about reforming the statistics, and a search for financial resources is underway for this project.

Apparently, the practice of closed statistical data and selected statistics for society should be minimized. Some closed data, probably, exist in every economy, but you cannot turn this privacy into practice. A classic example of this is CBA's reluctance to publish data on the country's international investment position or reluctance (or inability) to conduct monthly reviews of the country's balance of payments. In addition, the data on the balance of payments often reach the economic community in a truncated form. That is, we must open everything that allows the business community and society as a whole to have an idea of ​​the real situation in the economy.

Transparency is extremely important today. At one time, many things were spoiled by amendments to the law on commercial secrecy, which closed access to information about the owners of companies. A doubtful precedent of the commercial sector arose for any reason. Although, in fact, this is a double-edged sword, since without extensive information on the owners of companies or the balance of their enterprises, for example, you cannot get on the listing of the stock exchange and borrow on it. Since the beginning of this year, a growing number of companies have been seeking to participate in the stock market, and this process is likely to be further spurred by the problem of obtaining loans from banks. Since last year, they constantly talk about an IPO in the stock market. And all these institutions have to provide complete information about themselves.

Speaking about transparency, we should especially note the circumstance that the months of corruption litigation (in various ministries and departments) have shown the astronomical volumes of the assets of the accused. But what is surprising - so far there has been no information that some part of the stolen funds was confiscated in favor of the treasury. Such a closed game makes us think that it is a question of redistribution of assets in the ruling economic elite of the country. Let's say that the trials are still going on, and it's too early to talk about this. But, let's note, for example, the fact that there is not the slightest information on how Agrarkredit manages the collateral assets of IBA (what is sold, at what price, or when). But such a mystery is needed only in one case: when the value of the collateral is artificially lowered to enable stronger economic players to buy it more cheaply. Loopholes for corruption are incalculable.

Well, many people believed the government would periodically inform the public about the implementation of the strategic road map for the development of the economy, which was presented very pompously in the autumn of last year. So far, there is complete silence, although, given the economic crisis, the society had the right to rely on constant "summaries" of the state of affairs in the sectors. Strictly speaking, all this lack of transparency was the basis for serious disagreements between the Azerbaijani government and the International Board of EITI. The latter suspended Azerbaijan's participation in the Extractive Industries Transparency Initiative, and SOFAZ, after making a good face in a bad game, announced Azerbaijan's withdrawal from this initiative. EITI believes there is no open society or a proper attitude to civil society in Azerbaijan, and the government believes there is full order here. And, of course, such situations raise suspicions among investors and undermine their desire to invest in Azerbaijan. (And what is most surprising is that early April they created their own Azerbaijani Commission on Transparency in Extractive Industry which promises to widely and regularly inform public on the usage of the oil revenues.)

Against the background of the ambiguous economic situation, the government's intention to solve problems that do not require an immediate solution might seem unexpected. But it is possible that these decisions, like no others, reflect the country's transition to a post-oil era. In March, submitted by the Ministry of Labor and Social Protection, serious amendments were made to the law on pensions. They provide for a step-by-step increase in the retirement age for men from 63 to 65, and for women from 60 to 65. The amendments will enter into force as early as July 1, 2017. They try to soften the blow: the retirement age for men until 2021 will annually increase by six months, and for women - until 2027, annually for six months. In addition, the concept of "the basic part of the pension" is abolished. And the same 110 manat will now be called the minimum pension. The Minister of Labor Salim Muslimov tried to immediately make demographic justification for the raising of the retirement age. According to him, there is a tendency towards aging in Azerbaijan: statistics show an increase in the number of people under the age of 14 in 1990-2016 by 8.3%, and an increase in the number of those over 65 by 67.3%. At the same time, the share of the population over 65 years old has grown during this time from 4.8% to 6.2%.

The pension system is a headache in many states. Today, almost no one remembers that until the thirties of the last century there were no pensions at all. In developed economies, pension funds have become an essential element of macroeconomic policy, since they generate long money. Azerbaijani business estimates pension reform only through the burden of compulsory insurance contributions to the budget. We do not think at all about the concepts of long money. There are no private pension funds in the country, either. But it seems that, when there is little money in the economy, the government starts to look for ways to a non-subsidized functioning of the pension system.

Meanwhile, the government already today has problems with the valuation of pensions - a pension cannot be less than the subsistence level. In Azerbaijan, it is still less than this indicator. Within the mandatory joint system, all contributions to the pension fund are immediately channeled to cover current pension liabilities. Secondly, the average pension is 20% of the average wage in the country. Meanwhile, according to the terms of the social charters recognized by Azerbaijan, it should not be less than 40% of the average salary.

Finally, many economists criticize this innovation as a departure from international standards. By these standards, after retirement, a person should be able to receive a pension for at least 12 years. In the developed countries of the world and Japan, the average life expectancy is 80-83 years. Therefore, the retirement age is 65-67 years there. According to the UN estimates, the average life expectancy in Azerbaijan is 70 years. Therefore, in Azerbaijan, the standard for obtaining a pension (at least 12 years after retirement) will certainly not be fulfilled. Life expectancy in Russia is also 70-72 years, but the retirement age for men is 60 years, and for women it is 55 there. That is why attempts to increase the retirement age in this country are constantly encountering resistance - and not only by the society, but also by the social bloc of the government.

The economist Rovshan Agayev believes the raising of the retirement age to 65 years in Azerbaijan will negatively affect the demographic situation in the country and will have social consequences. For example, it will be difficult for these people to find work. According to Agayev, the raising of the retirement age means refusing to take on the social burden and problems of the older generation. In addition, after two devaluations of the national currency, the government has not carried out indexation of salaries and pensions.

But the most unacceptable is that the country's economic authorities have no interest in broad pension reform, which implies the creation of a funded pension system with the stimulation of this process by the state. Sometimes, in order to stimulate such savings, the government resorts to decisive measures. In Russia, we recall, there has already been experience of co-financing of a funded pension system by the government. Until 2015, it was possible to join the corresponding program, and then the state doubled the additional contributions of citizens to the funded pension. The program had some chances for expansion, but its credibility was undermined after in times of crisis the government temporarily “froze” accumulation accounts in order to use these funds in the economy. According to a recent new initiative in the Russian government, everything is tied to the income tax: the more a person pays for pension, the lower his income tax rate, and vice versa. Those who do not want to participate in this will pay income tax at a rate of 15 percent. If you allocate 10 percent for accumulation, the income tax will go down to 10 percent. The current 13 percent rate will continue for those who save four percent of their salaries for pension. That is, it is some kind of analog of the “voluntary-compulsory” system.

The National Association of Non-State Pension Funds (NAPF) believes that maneuvers with income tax are not enough for citizens to start saving themselves for pension. Citizens could be motivated by state co-financing: another 2% to 3% from the budget could be added to 6% from the salary for the future pension. They believe that if the state itself invests in the system, citizens will trust the new system more. And it is quite possible, if budgetary opportunities are found for this purpose. And people must not be punished by a fine through the growth of income tax, if they simply do not want to participate in this pension program.

Pension system in Azerbaijan remains undeveloped both financially and institutionally. In addition, it is “equalizing” in its nature while all accumulated funds are spent to pay current pensions. Transit to the cumulative pension scheme was supposed to begin in 2015, but it never happened. At the same time government employees as in many other countries are highly paid and at the time they retire they will be receiving pension that is huge share of their last salary (60-70%). And then it has its social casus. Highly paid private sector employees contribute significantly (both individual and employer contributions) and in fact pay for a high pension of government employees. Yet, once private sector employee retires he will be receiving the same pension as most of the population (and usually it is a base pension plus 2 manats for each year of employment). From time to time there are suggestions to increase employee’s contribution to the pension fund by 7-8% (it is now 3%) and to reduce social tax for an employer.  At the same time the only objective here is to reduce tax burden for businesses. To the employers’ regret this idea has never been realized.

Shortly, the pension system in Azerbaijan is reflective of all contradictions of the economic system. And, mostly, of its inertia. 

FINANCIAL SYSTEM.  According to statistical data, the affairs of the financial sector seemed to be developing quite well. The payment balance of the country for the last year has just been published (see Appendix), in which it is possible to see many signs of stabilization of the financial system. The current account deficit grew six-fold to $ 1.363 billion, while the financial account decreased 4-fold to $ 2.761 billion. But on the whole, the general deficit of the balance of payments totaled 539 million dollars, 20 times less than in the previous year. Many economists drew attention to changes in the balancing item of the balance of payments. While in 2015, 2 billion dollars of unaccounted capital was withdrawn from the country, according to the results of 2016, on the contrary, unaccounted capital of $ 3.6 billion was imported into the country. This largely helped to reduce the balance of payments deficit and, as these funds bypassed the banking system, economists believe that it is most likely private capital, withdrawn back to the country in connection with the financial crisis.

The balance of payments is still a success. The withdrawal of money from the economy really stopped. According to some estimates, while in 2015 residents withdrew from the country in the form of cash currency and deposits about 6.2 billion dollars of currency, then in 2016 this figure was only 4.7 million dollars.

The current situation has created conditions for the transition to the so-called floating exchange rate of the manat. In any case, the unstable course was over, and the banks sighed more freely.

Note also that in March, financial markets calmly met the expected decision of the Federal Reserve System (FRS) to raise the discount rate by 0.25 percent.

Although this year there are two more increases in the Fed's key rate, most market players believe that its current growth has already been taken into account by stock exchange players, as well as its growth in the future. Now the value of financial assets corresponds to the Federal Reserve rate of 2-2.5% per annum. In other words, financial markets will be more restrained to respond to the growth rate by another 1-1.5 percent. A sharp increase in the dollar and the corresponding fall of the euro below parity is expected only in early 2018.

The analytical group of the agency Report believes that for a number of reasons (stabilization of the balance of payments, compression of the money supply, reduction of imports into the country, sterilization measures of the CBA), the official dollar exchange rate in Azerbaijan in the first half of the year may fall below the level of 1.65 AZN / USD. And the cash exchange rate of the dollar, due to the expected influx of foreign tourists in the upcoming summer, may fall even to 1.60 AZN / USD).

This optimistic expectation is overshadowed by several circumstances. The rise in oil prices to $ 60 (which was the mood in January) is still very problematic. The dollarization of the economy cannot be brought down either. Finally, crediting of the real sector practically stopped: a number of banks increased interest rates on deposits in AZN, which means the growth of the cost of the loan.

In the medium term, there are more serious problems. The era of cheap money, apparently, comes to an end. Even the world's foreign exchange reserves began to decline. For governments, this is a signal that investment in the country should be attracted today, without delaying it for later. Financial analysts believe that by 2022 the Fed will bring the discount rate to 5-6.5%. The dollar / euro exchange rate will fall to 0.85 USD / EUR by 2020, the price of oil will be up to 25-30 dollars / barrel, and gold will fall in price to $ 850 per ounce. Against this background, it becomes realistic to achieve the dollar's rate in Azerbaijan as 3.00-3.50. This is not very good news, and we need to prepare for these times.

As we see from these predictions, in the medium term, the correlation between oil prices and the value of the dollar will become even more obvious. The task now is not to end the exchange rate policy with a dependence on the price of oil - it is impossible. But the Central Bank can manage the situation so that the volatility of the exchange rate is below the volatility of oil prices. The head of the Central Bank of Russia called this one of the achievements of the financial authorities, and this is difficult to argue with. Strictly speaking, the Central Bank of Azerbaijan should also strive for this.

Despite some achievements in stabilizing the financial system, the policy of the Central Bank of Azerbaijan has never been subjected to such sharp criticism as in the first quarter of this year. The CBA is criticized by all - deputies, advisers in the presidential apparatus, independent economists, and the media. MPA Vahid Ahmedov thinks that if national Banks’ current policy of rough tightening of money supply and credit shortage continues after few months real sector of the economy can start slowing down. Two MPs work on their own plan of avoiding banking crisis.

Some miscalculations of monetary policy in the past two years are quite obvious. It is difficult to explain, for example, why the CBA hesitated with the increase in the discount rate when it was already obvious that devaluation was inevitable (see Appendix). According to the time intervals, in which the discount rate changed, it is easy to see that the CBA was clearly late - the devaluation shock at that time already affected all neighboring countries. In this regard, a curious remark addressed to the CBA was made by the well-known Russian economist Sergei Hestanov: “If it was my will, I would raise the rate for a short time at once to 50 percent per annum. For braking lending, it's all the same – 17 or 50 percent. And the ruble would fall more slowly.” Of course, the devaluation was inevitable - and we have already written about the reasons for this. But it is still unclear why immediately after the first devaluation, the CBA actually canceled the open currency position of the banks, creating for them ample opportunities for currency speculation, and in addition lowered the refinancing rate from 3.5% to 3%. Although at that very moment it was possible to close currency positions, suspend the expansion of banks' refinancing and raise the discount rate. Later, restrictions were imposed on the open currency position - of 10%. And today FIMSA announces that it will be reduced to 3%. In short, there were many chances to stop the financial element. But it was during this period of acute crisis that the CBA increased the refinancing of banks from 3.2 million manat to 6.2 billion manat.

A recent detailed article on the website tells interestingly how the exchange rate policy of the CBA determined the behavior of investors at different stages of the economy. So, at the beginning of this decade, during the boom of oil revenues, the high rate of AZN and the growth of NER (Nominal Effective Rate) and RER (Real Effective Rate), imports grew, and investors in the country went into the sphere of services and production of goods for the population. And in the new round of exchange rate policy, the economy was not able to take advantage of the competitive opportunities that devaluation gives, because against the background of higher prices for equipment imports and credit hunger, the profitability of enterprises declined. (It is noted that in 2015-16 investments from domestic sources fell by 20%, and the volume of non-payments increased to 25.5 billion manat).

Today, the CBA seems to let AZN start free floating, but within the framework of inflation targeting it squeezed the money supply so much that it's time to talk about the demonetization of the economy. But the amount of money in the economy cannot be less than it is necessary for a simple reproduction of the economy. The reduction in the amount of money is automatically accompanied by a reduction in investment and, subsequently, in production. And when it is impossible to expand production, enterprises simply inflate prices. Then the demand in the country falls, the costs increase even more and inflation begins to grow due to that again. Economists consider this another problem that the CBA ignores.

By the way, almost for the first time in the above-mentioned article we meet with a reference to the SNA (System of National Accounts). According to the SNA, the population's savings in 2014-15 amounted to 1.5 billion manat. But at the same time, 17.9 billion dollars were bought at auctions. It is clear that we are talking about the shadow capital, which was exported abroad.

Experts today ask quite reasonable questions: if the CBA is so enthusiastic and holds deposit auctions on such a scale, then why is the possibility of credit auctions of the CBA not even theoretically discussed? However, such steps were always alien to the economic authorities, be it between banks for the allocation of budget funds or the competitive allocation of investment projects of the budget (all this, of course, in good budget times).

The neighboring countries behave much more flexibly. The problem of debts remains, and in Georgia the dollar credits were larified. In Azerbaijan, only some banks have decided to do this, and even then with notable reservations. In Russia, the head of the Central Bank of Russia, Elvira Nabiullina, was praised by the President for having clearly and consistently led her own line during the devaluation shock. Carrying out the same inflation targeting policy, she accurately names inflation targets: by the end of the year, inflation in Russia was 5.42%, today - 4.5%, target - 4%. It is convenient when the policy of the Central Bank is transparent and then even the recent reduction of the refinancing rate by only 0.25% is perceived as a gift to the real sector. We deliberately leave aside such technological achievements of the Bank of Russia as the creation of a national payment system or the dynamic activity of the stock market.

Of course, the actions of central banks are criticized all over the world and there are always polar positions on their policy. The same Elvira Nabiullina is criticized for the doctrine of non-interference in exchange rates, believing that this programs the entire economy for uncertainty. Or she is criticized for trying to maintain a budget rule that allows automatic change in the budget policy during the reduction or slowdown in the growth of oil prices, thereby absorbing exchange rate fluctuations when oil prices change. But it is because of this that the volatility of the rate in Russia turned out to be significantly lower than the volatility of oil prices.

The main reproaches to central banks everywhere in the CIS are the same - high interest rates and lack of credit - cheap and long. But that's all probably not soon. At the end of March Moody’s International came forward with another assessment of the situation in Azerbaijan. The agency claims the currency risks in the country are protected. According to the agency, the manat is weakening against the backdrop of continued high demand for currency and low confidence in the society towards a stable economy of the country.

Summing up the different positions, we note those where there is a consensus of thought. Everyone agrees that it is a strong exaggeration to call the current exchange rate policy a free establishment of the rate, and urge to modestly call it a managed rate. In fact, everyone calls on the CBA to fulfill both its tasks - combating inflation and the struggle for economic growth. Virtually everyone in one voice names not only positive, but even belated decision to limit the cash flow in the economy. It was it that “heated up” the speculative mood in the foreign exchange market throughout 2016. Formally, the amount of cash from the beginning of the crisis has decreased by half, but a significant part of it was in a closed, shadow turnover. The latest currency auctions show that banks now do not always have the cash to buy dollars. And all this is thanks to the introduction of a tax on cash withdrawal from bank accounts and a limit on the use of cash, when cash spent beyond the limit is taxed. The business was dissatisfied with this uncomfortable decision for it. But for the economy this is a step in the right direction.

In mid-March, a meeting of the Board of the Central Bank of Azerbaijan was held. It still decided to leave the discount rate at 15%. The message of the CBA notes that the decision was made taking into account the primary positive trends in the macroeconomic sphere and the emerging new expectations.

The Board of the Central Bank believes that the use of a new mechanism of currency auctions and the elimination of the margin limit between the commercial and official exchange rate has balanced the foreign exchange market. (Margin in March fell fantastically). It also notes that, thanks to these measures, in February 2017, the inflation rate declined compared to January, and with the continuation of the current trends, it was possible to achieve one-digit inflation by the end of this year. More interesting than these vague inflation predictions is the expected amendment to the Law on the Central Bank that will result in withdrawal of the Bank’s ability to centralized credit with government guarantees, which is in fact credit servicing of large state monopolies.       

The media became more confident about their financial problems. In March, the same Report criticized SOFAZ for the loss of $ 0.9 billion as a result of the placement of assets in volatile currencies, as well as for excessive expansion of the placement of these assets in shares.

The Financial Market Supervisory Authority (FIMSA) in March developed and submitted a draft of new prudential norms to the members of the Association of Banks of Azerbaijan. New rules for classifying assets and forming reserves for possible losses, rules for determining and regulating an open currency position and rules for managing credit risks were discussed during discussions with the banking community, as the very configuration of banks changed. However, this body is a constant subject of criticism due to a number of circumstances. First, it clearly exceeds its own powers and, in particular, overstates the powers of the Deposit Insurance Fund, making it a liquidator of closed banks. Secondly, FIMSA has recently made an extravagant idea to withdraw good assets from bad banks and accumulate these healthy assets in certain "bridge banks", and then sell the latter to foreign investors. It is known on banks of bad assets in the world practice. But FIMSA's new offer is a novelty and bank lawyers are already criticizing the legal failure of this idea exceeding the authority of this body.

FUEL AND ENERGY SECTOR. March was disappointing about the OPEC / NOPEC deal on oil production reduction. Contrary to expectations, Russia was able to cut production only to 182,000 barrels a day - it's almost half the amount promised. Azerbaijan fulfilled its obligations without much effort. But almost all of these efforts to reduce supply in the market were offset by the growing production of shale gas in the US and the growth in oil reserves. OPEC / NOPEC are going to hold a second meeting in Vienna in summer to extend the agreement to reduce oil production. However, the Vienna deal, even with its success, may lose all meaning. These weeks it became known that the giants of the world oil industry, Exxon Mobil, RD Shell and Chevron, are going to enter the market of shale oil, which was previously represented by small private companies. They are able to collapse the cost of shale oil to $ 20 per barrel.

The Director of the Russian VEB Gorkov considers a price of $ 60 per barrel in general unattainable today. More flexible is Vitol Group Europe CEO Russell Hardy. He stated directly that it is worthwhile to focus on $ 60, which would now suit many OPEC countries. He believes that the group of exporters, which seeks to clear the global surplus of reserves, should, despite everything, continue efforts to reduce production if they do not want prices to be left at a mark of $ 50 per barrel. In this regard, he expects the Vienna OPEC / NOPEC deal on production reduction, expiring on July 1, will be extended.

The situation looks very uncertain. Optimists have generally slowed down: many analysts expect that oil prices will return to $ 70 per barrel not before 2019.

The most pessimistic position was taken by the Chairman of the Board of VTB Bank Andrey Kostin, who is convinced that this year it is possible to expect a drop in oil prices to $ 40. The reason for this is the new policy of Trump, which plans to remove restrictions from the energy sector, which will be followed by the growth of world oil production. The Russian budget, in his opinion, will withstand this situation, since it is formed at an oil price of $ 40 per barrel. There will also be no significant weakening of the ruble. It will drop to a maximum of 62-64 rubles per dollar by the end of the year, especially as the government itself talks about the revaluation of the ruble. Recall that the price of $ 40 per barrel is also laid in the Azerbaijani budget.

The ruble strengthened from the beginning of the year, but it began to weaken after the prices for oil. Russian analysts believe that the current increased ruble was generated by a new export - the active export of grain and other goods not connected with the commodity sector. The ruble has also become an interesting investment for foreign portfolio investors, who take loans in Western banks at low interest rates and invest with profit in the Russian stock market.

Expectations of the oil market are very well illustrated by the behavior of traders. In the past month, short positions on futures became significantly larger than long ones. And this means that investors have doubts about the medium-term growth in oil prices.

In late March, oil prices really went down sharply. But as always in these cases, so-called verbal intervention began to work, which became an element of pricing in this volatile market. After OPEC's statement that it will continue the policy of reducing oil production after July 1, when the current agreement expires, prices have gradually gone up, but already not to $ 58.

The state oil company tries not to notice the problems, aiming at solving priority problems. Separate setbacks, such as the frustrated deal over the Greek DESFA, Vitol’s victory in the March tender for the acquisition of a large network of gas stations in Turkey (which was also aimed at by SOCAR), or temporary problems on TAP, do not reduce the overall activity of the company. In the strategic plan, all the attention of the state oil company is directed to the implementation of the project of exporting Azerbaijani gas to Europe.

In BP, by the way, there was a change of leadership, and instead of Gordon Birrell, the position of the regional director for Azerbaijan, Georgia and Turkey was taken by Gary Jones. On the eve of his departure from the post, Birrell said that although production at ACG is falling, his company is doing everything to maintain a stable production level there. In addition, exploration work was started in the shallow water of the Absheron archipelago, stipulated by a special agreement between BP and the government. 90% of all works were completed at Shah Deniz-2, where 12 wells were drilled, and 3 of them have already been cleaned. He also stressed that more than 93% of works on the South Caucasus Pipeline (SCP) have been completed in Azerbaijan and Georgia. So far, more than $ 15 billion has been invested in the expansion projects of SCP and Shah Deniz-2 alone. This gives an approximate idea of ​​how long it takes to wait for the project to be completed. Already at the end of this year, gas is expected to be pumped into SCP. So here everything goes according to schedule, excluding the possible problems with the construction of TAP, where the route of the gas pipeline entered a territory with planted age-old olive trees, which must be temporarily transplanted to another location. This is really a complex and necessary environmental work, but judging by the scale of the protests, it is possible to suspect the involvement of some external forces. It is not by chance that this protest movement has been led by Beppe Grillo, a famous comedian and MP, whose party holds 22% of seats in the Italian parliament. Grillo is known for his sympathy for Russia, and for Russia it would be quite good if the Azerbaijani gas was late with the arrival in Europe; so there is a hidden struggle for the market.

There are also features of the present moment of the industry development. The more often SOCAR goes to foreign markets for borrowing, the more it puts in order its assets in order to deal with its own market value. This is one of the conditions for obtaining loans at an affordable price. SOCAR, in particular, instructed one of the professional companies of the Big Four to perform an assessment of the SOCAR Trading business as of June 30, 2016. According to its results, SOCAR Trading, the trading house of SOCAR, announced a 4-fold increase in its value. The fair value of SOCAR Trading as of June 30, 2016 was named at $ 1.15 billion, while the same company estimated it at $ 310 million as of June 30, 2012.

The company also indicated that the growing dependence of SOCAR Trading on third-party sources of raw materials, coupled with active business development in North America, Africa and the Asian markets, will contribute to a consistent increase in volumes and profitability in subsequent years. One can add here the fact that SOCAR's trading subsidiary stops renting tankers from Palmali and has purchased seven tankers from this company.

At the insistence of the leadership of SOCAR, Ernst & Young conducted an external audit of the SOCAR unit Azerigaz. According to its results, huge losses were detected in Azerigaz networks, the provision of contracts to unscrupulous companies, and the purchase of gas meters at inflated prices and without holding relevant tenders. Against similar abuses in Azersu, Turan IA has been fighting in courts for a year, demanding a response on non-transparent tender procedures for the purchase of meters, but so far it has been inconclusive.

There is a constant assessment of the situation in the electric power industry. According to S & P audit estimates, in December 2016 Azerenergy increased tariffs by approximately 33% to compensate for the 50% increase in gas prices purchased from a single fuel supplier, SOCAR. The audit company does not expect the tariffs to be revised in 2017 and believes the recent increase in tariffs did not affect the financial results of Azerenergy. “We expect the company’s operating activities will be profitable, but the activity as a whole is unprofitable, which is associated with significant financial expenses and losses from revaluation of foreign currency (at the end of 2016, the share of foreign currency debt was about 85%),” S & P said in a statement. By the way, it is for the sake of economy that Azerenergy uses fuel oil more and more, and from April 1 it began its duty-free import to Azerbaijan.

Today, the company Azerishyg is looking for an external auditor, as this is one of the conditions for granting credit assistance from ADB and the government.

Phenomena of this kind are encouraging. Although they are dictated by pragmatic considerations (the same as receiving external loans), they help maintain the overall level of transparency in these largest companies in the country.

INFRASTRUCTURE. Once again the timing of the launch of BTK was announced. From the Turkish side, it was reported that the Baku-Tbilisi-Kars (BTK) railway would begin operating two months later. The head of the railway of Azerbaijan clarified this issue, specifying that this will happen in August-September, as, according to the Turkish side, there are 10-15% of works left, which the severe winter frosts in Kars prevented. In April, the issue will again be discussed with the Ministry of Transport of Turkey. We have already got used to these expectations.

But the work on the Azerbaijani sector of BTK continues. On April 14, 2015, in order to implement the second stage of the Azerbaijan Railways Reconstruction Project, Azerbaijan Railways and the Czech Moravia Steel Company signed an additional agreement to the export contract on the logistics and overhaul of the 600-km Baku - Boyuk Kesik railway section. The implementation of the new project began in late October 2015 and to date 230 km of the railway have been repaired.

Most of all, Azerbaijan itself is in a hurry with the implementation of strategic transport projects. In March, it became known that the country will take up most of the cost of building a bridge over the Samur on the Russian-Azerbaijani border. Previously, Azerbaijan took over all the expenses for the construction of the bridge that connects Astara, Azerbaijani and Astara, Iran, and on March 3 a test train passed through the new bridge. Moreover, Azerbaijan promised to find means for the construction of the Resht - Astara railway section.

The government fully understands the profitability of transit and is ready to add efforts to accelerate the implementation of such projects. According to the results of the mission of the Asian Development Bank, it became known in Baku that ADB is likely to join the financing of the North-South corridor. The amount of the loan will be known after April 15, when ADB will publish its loan plan for the year. Attempts are also continuing to expand the list of countries that could become potential transit participants through Azerbaijan. Last month, such an agreement was concluded with Uzbekistan, which would like to take advantage of the South Caucasus corridor, including for cargo transportation from Afghanistan through Uzbekistan. The GUAM countries came to a preliminary agreement on the creation of the Free Trade Area, which in case of implementation will inevitably encourage the growth of traffic flows and the facilitation of the customs regime between these countries. This month, railway workers from Ukraine, Georgia and Azerbaijan also met: they already discussed in detail the issue of accelerating the flow of goods through this transit corridor. In constant mode, Azerbaijan purchases diesel locomotives - diesel locomotives were purchased from Kazakhstan this month.

And there is a bit more good news. ADB is likely to lend to Azerbaijan for another project called the Automated System of Customs Procedures. It will be implemented within the framework of the large infrastructure project Careca for the Central Asian Region (CAR). And this is another point in favor of the development of transit through Azerbaijan.

Another important decision of the month is connected with an attempt to restore the growth rate of housing construction in the country. As in Russia, we are talking about the elimination of dilapidated housing (“Khrushchev type”), in return for which 35-storey houses will be built, in which residents will receive equivalent living space. After the start of the State Housing Agency, this is the second vigorous attempt to give a new impetus to housing construction in the country. Of course, conflicts cannot be ruled out connected with the payment of temporary compensations to the residents of the relocated houses. The experience of previous years, where there were many corruption cases in the demolition of old housing, should prompt the government to be very cautious in this matter. You can also expect that these houses will be built quickly to cut budget costs. The only thing that should be somewhat embarrassing is the number of floors of the alleged high-rise buildings. It has long been forgotten that many architects recently considered optimal the construction of high-rise buildings in Baku with nine, or a maximum of sixteen floors. Capitalism takes its toll again here.

POLITICAL BACKGROUND. Political life was boiling around Azerbaijan. Russia cannot agree with the Western coalition on joint actions in Syria. The American leadership, for the time being, simply ignores the Kremlin's constant signals that it is ready for cooperation in order to quickly restore peace in Syria. There is even talk that Russia, wanting to find a point of contact with the US, plays up to the Kurdish militia in Syria, even despite the fact that this has a bad effect on its relations with Turkey. Russia is trying to solidify its position in the Middle East. In any case, it has already become active in another tormented Arab country - Libya, where it is actively negotiating with two of the three political forces that claim to be the legitimate government of this country.

It is increasingly difficult to distinguish when Russia's actions are dictated by considerations of current domestic policy (the notorious consolidation of society in the face of a common enemy), and where they are prompted by long-term considerations of Russia's foreign policy. The Russian political scientist Nikolay Zlobin has precisely noticed that in the Russian foreign policy there is a lot of disorder, fussiness which stirs to its perspective alignment. Iran, Russia and Turkey seemed to be able to put together a semblance of a coalition to resolve the Syrian crisis. It would seem that the United States already said it is ready to reconcile with the figure of Assad, but it is not possible to reach agreement between the conflicting sides. It involves too many players and political ambitions.

Now Russia is also trying to follow the old American doctrine: the United States has the right to defend itself wherever there is a threat to its national interests. Strictly speaking, the Crimean problem and the permanent conflict in the southeast of Ukraine have emerged, but the solutions are not yet visible. The very situation when an economically unstable country tries to play politics in all directions seems to be gambling, but not very pragmatic. Until recently, Russian politicians said that Russia, having fulfilled the key tasks for establishing peace in Syria, will leave this country. But it is still present in Syria, trying to be the arbiter of political forces in Libya, building new relations with the Balkan countries and behind the scenes being involved in political conflicts in Old Europe. In reality, it is increasingly bogged down in this game, which, in the final analysis, is an attempt to destroy the unipolar world order.

Other issues on the political agenda are also seen behind all current conflict points. Too broadly understood was the term of the right of nations to self-determination. The destructive potential here is obvious: separatism and isolationism have again revived in Europe. Distinctively erased is the brink of the term terrorism. An in-depth discussion is going on between countries with long experience of authoritarianism and Western democracies, where elections and the shift of power is one of the main attributes of the state. To the east of the European borders, the conservation of power becomes a sign of the time. Erdogan, judging by press reports, intends to lead Turkey until 2029. Until 2024, Vladimir Putin wants to rule Russia. A number of autarkic rules in Central Asia are aimed at long running the countries. It is possible, apparently, to expect the castling of power in Azerbaijan in 2018. This contrasts sharply, for example, with the recently launched Trump Presidency. The President of the most powerful world power, elected for only 4 years, nevertheless feels himself in a new post, not quite confident, realizing that he was confronted with a democratic system of checks and balances.

Prospects for a peaceful settlement of the Karabakh conflict seem increasingly doubtful. The main task of external players, who assumed the role of arbitrator, today is only to prevent a large-scale conflict from breaking out. Apparently, the statements of March seem to work for this same task. The American co-chair of the Minsk Group said in March that the key to resolving the conflict was almost found. Paris is again ready to assume the functions of an intermediary and organize a meeting of the Presidents of Armenia and Azerbaijan. Lavrov makes calm statements.

But it is Armenia that persistently avoids the negotiation process. Military rhetoric is more important, especially since a year has passed since the April war, which shook the status quo in Karabakh. The current explanation for this is obvious – elections in Armenia and the difficult transition of this country from the presidential form of government to the parliamentary one. In these same months, the presidential vertical of power is strengthening in Azerbaijan. Armenia, of course, would like to use this contrast in a purely propagandistic way. But hardly anyone in the world took the April 2 elections as Armenia as movement towards democracy. This whole game is started solely with the goal of Sargsyan’s ruling Armenia as long as possible, now as Prime Minister from the ruling party. His party won the parliament “with the help of a purse and violence,” as former Armenian President Robert Kocharian said. Will the peace talks resume now, after the elections?

And in Azerbaijan, from now until the presidential elections of 2018, apparently, the appointment of First Vice President Mehriban Aliyeva will be discussed. And comments on this matter will multiply. For someone it is nepotism and the beginning of castling in power, and for someone it is a gender victory of Azerbaijan: is not it wonderful if a woman becomes a president in a Muslim country? Among the many arguments in favor of this appointment, a consideration of one democrat-emigrant (it is reported in the analytical review of Turan) flashed: no matter whether authoritarian or democratic, it is important that the rule of law is respected. We can understand this position: authoritarianism was repeatedly successful during crises in various countries. But, firstly, such cases are always marked by the high historical responsibility of the authoritarian ruler of the country, and this is a matter elusive. In the standard situation, the rule of law in such regimes can only be imitative and half-hearted, since objectively the very rule of law undermines the foundation of authoritarianism.




Main macroeconomic indices



mln. AZN

II - 2017 

I I- 2016 %



mln. AZN

II -2017

II - 2016 %

Gross  Domestic Product

10 042,6


7 888,7


Industrial Production

6 539,3


4 308,9


Agricultural Production





Money incomes per capita (in AZM)





Turnover of Goods by Transport, comm. (in mln Tons/km.)





Capital Investments

2 093,7


1 834,9


Trade turnover

4 926,0


4 258,2



1 215,6


1 145,9


Export  ($ mil.)

1 222,9




Import  ($ mil )










Average monthly salary ( from the beginning of the year,  (in AZN)





Index of Consumer Prices









January-February 2017 compared to January-February 2016, the percentage



Gross domestic product




− oil sector




− non-oil sector




* 2016 figures are determined based on final data










In February 2017 compared with January 2017

January-Fevruary  2017 compared to January-February 2016

Consumer price Index





Producer price index





The price index of agricultural producers





Transport, Postal tariffs





Postage rates





Communication services








In January-February 2017 

Compared to the previous year, in percent *)

Nominal income of the population, mln. AZN



For each, Manat



Disposable income, mln. Manat



For each, Manat



*)  In 2017, the indicators were defined on the new information.






In January-February 2017, million manat

Compared with the last year (in comparable prices),%

Share of total, %


2 093,7



Including funds of enterprises and organizations

1 616,2






Bank loans


2,1 d.


Budget resources


2,5 d.


Extra-budgetary funds







Funds of  population




Other tools







In January 2017
сompared to December 2016, interest rates

January 2017
сompared to January 2016, the percentage

Produced- total









Electricity, gas, steam



Water, waste disposal





Types of products

Produced in January-February 2017

A comparison last year,%

The presence of the finished product on 01.03.2017

Crude oil (including condensate), tons

6 353,4






the marketable

6 345,9






Natural gas, million cubic meters

4 737,4




2 549,2


the marketable

3 257,5




2 549,2




Types of products

Produced in January-February 2017

A comparison with the last year,%

The presence of the finished product on 01.03.2017

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


3,3 d.


Bitumen, thous. tons




Petroleum coke, thous. tons


3,9 d.




Types of products

Produced in January-February 2017

In comparison with the previous year,%


Inventories of finished goods on 03/01/2017


Electricity million. Kilowatt-hours

4 196,8








3 793,2



Wind power




Solar Stations







Compared with the previous period,%


Total in manufacturing

non-oil processing industry

























January -September



January -October



January -November



January -December
















current operations

-1 363.4

Foreign trade balance

4 206.3

services balance

-3 154.5

Primary income balance

-2 472.0

-Investment income repatriation

-2 152.9

Secondary income balance


capital account


Financial account

-2 761.5

financial assets

7 244.4



xaricə direct investments

2 573.6

Investment portfolio


financial instruments


-Other investment

4 715.8

Net financial liabilities

4 482.9



- The attraction of direct investments

7 323.6

- involved in the repatriation of investments

-2 824.0

- portfolio investments


- other investments


Balancing items

3 625.8

Overall balance of payments (in the reserve Change in assets; "+" Increase, "-" decrease)


 Note: The balance of payments in calculating the actual average price of crude oil was $ 42 ($ 48 for the same period last year).







Februrary 1, 2015 million manat

Compared with last year's period,%

Deposits of population – total



Besides that:

in national currency



in foreign currency












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