Previous Quarterly Editions
Expropriation Risk: 53 53 53 55 Political Violence Risk: 42 40 43 39 Terrorism Risk: 43 43 43 42 Exchange Transfer and Trade Sanction Risk: 54 53 52 55 Sovereign Default Risk: 43 44 44 48
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The state of Azerbaijan’s economy remains heavily tied to its hydrocarbon resources, and this leaves it very exposed to fluctuations in oil prices. The steep fall in world prices in March 2020 underlined again the importance of diversification, something that President Ilham Aliyev has publicly called for repeatedly, but oil and gas production still account for more than 70% of government revenues and around 90% of exports. Following the extensive cabinet reshuffle in October 2019, which saw the replacement of the prime minister by the president’s personal economic advisor and the dismissal of the long-serving head of the presidential administration, Aliyev called parliamentary elections nine months before they were formally due. In the snap elections, held in February 2020, his ruling Yeni Azerbaijan party secured 65 seats in the 125-member parliament, with a host of small parties and independents loyal to the government taking almost all the rest. As with the appointment of younger men to government positions in October 2019, the election of a younger parliament was presented as a step to accelerate reform, but no quick change in that direction is likely. Rather, the president has removed unpopular old elites in order to strengthen the hold on power enjoyed by his party and his family. The government’s diversification efforts continue to centre on tourism and transportation, two areas in which the president’s family have substantial interests. However, both have been heavily hit by the COVID-19 pandemic, with the Azerbaijan F1 Grand Prix cancelled and the UEFA Euro 2020 competition, for which Baku was to host several group games and a quarter-final, pushed to summer 2021. Revenue expectations from flights, hotels and other aspects of the hospitality sector have already been hit hard. Normally, the announcement in March 2020 by SOCAR, the state oil company, that an assessment undertaken with Norway’s Equinor shows the Karabakh offshore field in the Caspian Sea to hold more than 60 million tonnes of crude would have been a significant boost. However, the fact that it will not be feasible to develop the field if prices stay depressed for any length of time after their collapse in March 2020 underlined again the economy’s vulnerability. Azerbaijan needs the price for crude oil, to which gas prices are usually linked, to be above 55 USD a barrel in order to balance its budget. When the price falls to 30 USD or below, as it did in March 2020, the impact is harsh, but Azerbaijan’s oil sector is at particular risk from the virus-related drop in global demand because its light grade of oil is used particularly in the aviation sector, which has all but ceased operations, and because it is harder to store than heavier grades. In March, the government rolled out a bailout package worth almost 600 million USD to mitigate the impact of the pandemic on employment and the business sector. At the same time, it set up the Coronavirus Response Fund, asking government ministries and businesses to donate to it. By the start of April 2020, the fund had collected some 50 million USD. The government imposed a lockdown to slow the spread of the virus, although it allowed some government employees and parts of the oil sector to keep on working. Estimates from the Asian Development Bank in early April 2020 suggest a contraction of less than 1% this year, a figure that has been tempered by the relative strength of the country’s oil sector before the crisis.
The country’s opaque bureaucracy remains a central reason for the slow growth of the non-oil sector, but another is the extent to which it is dominated by a small group of government-connected companies that remains untroubled by a tame judiciary. It is not clear how far the changes that will result from the current crisis will loosen their grip on the economy. In the energy sector, the Hungarian company MOL signed an agreement with Chevron in late 2019 to buy a 9.6% stake in the BP-led Azeri-Chirag-Guneshli (ACG) consortium that runs the country’s largest offshore oil field. MOL now holds the third largest stake in ACG. Although the restructuring of the country’s largest bank, IBA, has been completed, earlier hopes of starting its privatisation this year now look optimistic. Yet a need for revenue may tempt the government to push forward if at all possible.
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The government is using the tight quarantine rules put in place to slow the spread of the pandemic as a means to suppress political opposition. In a March 2020 speech, Aliyev called the opposition a ‘fifth column’ and ‘national traitors’, accusing them of taking advantage of the pandemic to sow panic. Days later, the authorities arrested three opposition figures, including Tofig Yagublu, a leading figure in a coalition of opposition groups, on charges of ‘hooliganism’. The ban on protests in central Baku looks set to continue beyond the outbreak.
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The government is introducing mandatory religious education courses in universities this year in an effort to control and propagate a moderate Islamic narrative. Similar classes may be extended to primary and secondary schools. The government has become more selective in using the threat of terrorism for domestic purposes as this is in danger of undercutting its effort to develop tourism as a key sector of the economy.
After inflation fell to 3% and the manat enjoyed a period of relative stability, the central bank was able to cut its benchmark rate to 7.5% by the end of 2019. In January 2020, the bank completed the transition to a floating exchange rate regime. The move came against the background of recovering oil prices but their sudden collapse in March 2020 has led to widespread concerns about a devaluation of the manat. The central bank initially intervened to prevent this, and by using its foreign reserves and the country’s national oil fund it was able to keep the manat stable into early April 2020. However, there is a limit to the viability of this strategy given the need to fight the combined impact of falling oil prices and the virus.
Even prior to the collapse of oil prices, the budget deficit had been expected to widen to 3.3% of GDP in 2020, up from 2.5% in 2019. As revenue from oil falls sharply while social spending rises, the deficit is now likely to be substantially bigger. Similarly, the cost of restructuring IBA was expected to push the debt-to-GBP close to the legal limit of 30% this year, but it now looks likely to go over that figure. While Azerbaijan remains capable of borrowing externally, its international financing is increasingly concentrated in institutions that are not Western led and this trend may well continue.
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