Previous Quarterly Editions
Expropriation Risk: 47 47 48 54 ▲ Political Violence Risk: 57 57 59 59 ► Terrorism Risk: 42 40 40 40 ► Exchange Transfer and Trade Sanction Risk: 64 64 64 64 ► Sovereign Default Risk: 47 47 47 37 ▼
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Government's commitment on climate policy Weakest 1 2 3 4 5 Strongest
The government has committed under the Paris Agreement to cut greenhouse gas emissions (GHG) by 35% in the period to 2030 (compared to the 1990 base year). The objective is to be achieved by increasing the share of renewable energy in total energy consumption by 20% and improving energy efficiency by 20%. Key measures include the replacement of distribution networks and transmission lines, the improvement and modernisation of existing technologies in electricity and thermal energy production, and the implementation of activities to raise population awareness on energy efficiency.
In the oil and gas sector, which accounts for the bulk of greenhouse gas (GHG) emissions in Azerbaijan, the government aims to make the Heydar Aliyev Baku Oil refinery complex compliant with EURO-5 standards in producing diesel and gasoline. Established in 1953, the refinery has been undergoing extensive modernisation and upgrade since 2016, with the final third phase due to be completed by 2025. However, while diesel and gasoline production may become cleaner, the large-scale expansion of the refinery’s processing capacity (to 7.5 billion tonnes per annum) will on balance increase the country’s GHG emissions.
To meet its Nationally Determined Contributions (NDCs) on climate, the government has proposed to modernise gas pipelines and gas distribution systems as well as minimise gas leakages during the production and processing of hydrocarbons. The government has characterised its NDCs as “highly ambitious” and emphasised that its ability to meet its commitments may be impeded by the “massive plunder of natural resources and other wealth” in the Nagorno-Karabakh enclave and the adjacent regions -- which until the 44-day war in 2020 were under Armenian control -- and by any decline in oil prices (although it gave no indication as to how low the price would need to fall for the government to renege on its obligations).
Forecasting models based on inventories defined under the Inter-governmental Panel on Climate Change project that in the business-as-usual scenario -- which adopts no drastic measures to cut GHGs -- Azerbaijan fails to meet its commitment of 35% GHG cuts. Even in the scenario in which Azerbaijan implements all currently planned measures, reductions are unlikely to exceed 29.7% by 2030. The only scenario in which Baku would be able to meet its Paris Agreement goals is if it adopted more significant mitigation measures, mirroring those of the European Union. However, Baku is not politically ready to do so and focuses instead on increasing its hydrocarbons production and export capacity.
Azerbaijan became a gas exporter to Europe when gas from Shah Deniz-2, part of the Southern Gas Corridor, reached Greece and Bulgaria in December 2020. Gas supplies via this route are expected to double to 10 billion cubic metres (bcm) by the end of 2022. In line with the recently signed agreement, Turkey’s BOTAS will purchase 1.7 bcm on a long-term contract, while the remainder will travel further into Europe, predominantly to Italy, where gas prices at the hub rose sharply in recent months.
Baku is actively exploring options for expanding the Southern Gas Corridor from the current annual capacity of 16 bcm so that it can increase revenue from gas exports. To offset the natural output declines at the Azeri-Chirag-Guneshli (ACG) oil fields, a USD6 billion investment in the next phase of ACG is being carried out, with first production expected from the new Azeri Central East (ACE) platform in 2023. ACE is expected to produce over 300 million barrels of oil over its lifetime and secure thousands of jobs. Ensuring the project’s timely completion, particularly at a time of high oil prices, takes precedence in the government’s priorities list over the implementation of the Paris Agreement.
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The government remains outspoken about its intention to reward ‘friendly’ countries with reconstruction contracts. Following Turkey’s active support in the 44-day war against Armenia, Turkish construction, mining and energy companies have signed dozens of significant contracts to assist in the reconstruction of Nagorno-Karabakh and adjacent regions.
Expropriation risk for companies already operating in Azerbaijan remains low; however, new contracts will go predominantly to Turkish firms. Israeli and Pakistani companies may also benefit as their governments supported Azerbaijan throughout the military conflict.
Issues related to living standards, administration of justice and property have been the most outstanding reasons for citizen resentment. Notably, groups of young war veterans have voiced their disillusionment with the authorities’ handling of welfare benefits. Although protests over economic hardship and justice issues reflect building discontent, the Aliyev regime’s popularity is high following the victory in the war and many citizens choose to write directly to the office of the president to have their concerns addressed.
To stave off the deterioration in living standards following COVID-19 lockdowns, President Ilham Aliyev has signed a decree to raise salaries, pensions and social benefits for 1.8 million vulnerable citizens by up to 40%. The currently rising international price of oil will enable the government to pay the benefits, thus partly alleviating social discontent, while the authorities will continue to overlook occasional issue-specific protests so long as they do not in any way target the president and his immediate family.
Air-based entry has been eased, with more direct flights opening to and from Baku. However, following the Russian/Ukraine conflict starting in February 2022, the authorities have suspended all flights to and from Russia commencing since March. Land borders have remained sealed since mid-March 2020 due to COVID-19. This has partially alleviated terrorism concerns.
In November, Azerbaijan’s Defence Ministry reported that seven of its soldiers had been killed and 10 wounded in border clashes with Armenia near Nagorno-Karabakh. Baku and Ankara have characterised the incidents as Armenia’s “large-scale military provocations” and “acts of terrorism”. Yet security checks, previously prevalent throughout the major cities, and regular inspections for improvised explosive devices of vehicles entering supermarkets in Baku, have now been largely removed. The authorities will continue to control the situation by preventing mass gatherings.
The manat remains pegged at 1.7 to the US dollar. Hard currency reserves from state oil fund SOFAZ were used to support the manat during the period of low oil prices and the economic downturn during the COVID-19 pandemic. These pressures have disappeared given the trajectory of rapidly rising prices of Brent and Azeri Light oil. As of January, Azerbaijan’s foreign exchange reserves totalled USD52.1 billion (up from USD49.9 billion in January 2021). Risks of a disorderly devaluation remain low.
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Azerbaijan’s financial system remains fragile, as demonstrated by the collapse of the country’s four top banks in 2020, strong dollarisation, liquidity problems and high lending rates. Nonetheless, Baku is well-placed to balance its budget as it needs an oil price of around USD53 per barrel, and oil prices are currently double that.
The additional revenue that Azerbaijan will receive from the record-high oil prices, which partly resulted from the Russia/Ukraine crisis and the efforts by Western states to sanction Russian hydrocarbons, and the gas revenue which Azerbaijan has started to receive from SCG exports, will contribute to economic stability.
Meanwhile, although Azerbaijan remains capable of borrowing externally, its international financing is increasingly concentrated in institutions that are not Western led.
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