Previous Quarterly Editions
Expropriation Risk: 55 56 57 55 Political Violence Risk: 40 40 43 43 Terrorism Risk: 46 46 46 44 Exchange Transfer and Trade Sanction Risk: 54 55 54 54 Sovereign Default Risk: 46 45 45 44
TREND ▼ OUTLOOK ►
The news in December that two major US oil companies are selling their stakes in the consortium that manages Azerbaijan’s largest oil field, Azeri-Chirag-Deepwater Gunashli (ACG), came as a blow to the government. ExxonMobil, which is now selling its 6.8% stake, and Chevron, selling a stake of 9.6%, have both been with the ACG consortium for 25 years. Both have presented the sale as part of their normal review of global assets but the government’s renegotiation of terms with the consortium in 2017, which reduced their stakes in favour of the state oil company, will have played a part. BP is also pulling out of the Baku-Tbilisi-Ceyhan oil pipeline. However, BP does still remain a key foreign investor in Azerbaijan, regarding its Caspian projects as a priority for the company in the short and medium term, and it is planning new exploration for oil and gas this year and next. Oil remains central to the economy, with the government keen to join international efforts to raise global prices. It lowered daily production by 20,000 barrels to 776,000 barrels from January, in line with the agreement reached by the OPEC+ group of producers in December. Despite the volatility in the oil market throughout 2018, the government has based this year’s budget on an oil price of 60 dollars a barrel, up from 55 dollars in 2018. While attempts to diversify the economy are beginning to bear fruit, 75% of state revenue still comes from hydrocarbons, and this figure will only increase as gas exports grow. Transport infrastructure projects, such as the opening of the Baku International Sea Trade Port Complex in May and the construction of the Kars-Igdir-Nakhchivan railway, for which the tender is expected to be announced in the first half of 2019, are among Baku’s strategic priorities as they develop the economy while deepening Armenia’s regional isolation. Friction with Armenia remains a central preoccupation in Baku. Despite a new government in Armenia and marginally improved formal dialogue, both countries have increased their military budgets for 2019. Azerbaijan is concentrating on diversifying its arms suppliers, most recently negotiating to purchase short-range anti-aircraft missile systems from France. In 2018, it acquired Belarussian-produced rocket systems and Israeli-made tactical ballistic missiles, together with Turkish air-to-surface cruise missiles developed for use against heavily defended, high-value targets. In Baku, these moves have been justified as a response to Yerevan’s acquisition of Russian-made Iskander missiles, which provide Armenia with the capability to hit strategic targets deep within Azerbaijani territory.
In late 2018, President Ilham Aliyev reiterated his commitment to strengthening Azerbaijan’s armed forces, and the emphasis on the country’s defence posture is linked with the government’s political strategy. Meanwhile, macroeconomic stability has continued to improve, helped by the gradual recovery in oil prices and prudent fiscal and monetary policies. Inflation, which reached 13% in 2017, fell to 6% in 2018 and the government expects it to be below 4% by the end of 2019. With higher oil prices, Azerbaijan's current account balance has been in surplus since the second quarter of 2017, and the outlook remains positive. Stable oil prices and greater export volumes from the Shah Deniz 2 field that finally began operations in mid-2018 could push the current account surplus above 10% of GDP in 2019.
Efforts to diversify away from hydrocarbons are gaining traction, although the non-oil sector is unlikely to contribute more than 4% of GDP in 2019. The government is investing heavily in tourism, agriculture and construction, and a series of reforms in construction permitting, tax payments, border trade, property registration and access to credit helped it rank among the top 10 improvers in the World Bank’s Doing Business 2019 report. However, the consolidation of political decision-making and control of economic assets in the hands of the Aliyev family, coupled with more general corruption concerns, will continue to deter investment. In 2018, the government faced new cases in the International Centre for Settlement of Investment Disputes alleging indirect expropriation.
TREND ► OUTLOOK ▼
The government continues to use the threat of terrorism to crack down on any expressions of dissent, although it is increasingly employing charges of defamation for the same ends. In a January 2019 ruling, the European Court of Human Rights ordered Azerbaijan to pay almost 17,000 euros to investigative reporter Khadija Ismayilova in connection with a blackmail campaign against her. The court ruled that Azerbaijan failed in its duty under the European Convention on Human Rights to investigate acts which seriously violated Ismayilova's privacy and to protect her freedom of expression. Also in January, a series of hunger strikes drew attention to the imprisonment of an anti-corruption blogger on changes of defamation. Mehman Huseynov was sentenced to two years after he accused the police of abuse and torture during his time in custody.
The government has become more selective in using the threat of terrorism for domestic purposes as it seeks to develop tourism as a key sector of the economy. The protests that followed power outages in Ganja in mid-2018, which the authorities blamed on radical religious groups, have not been repeated.
Since moving to a managed float in December 2017, the manat has remained relatively stable, propped up by gradually recovering oil prices and continuing interventions by the central bank. The full transition to the floating exchange rate regime is currently planned for 2020. In December 2018, the country’s largest bank, IBA, lost its appeal in a London court against the forced restructuring of the 20 million dollars of debt it owes to Russia’s Sberbank.
TREND ► OUTLOOK ►
Foreign exchange reserves amounted to 5.5 billion dollars at the end of October, an increase of 6.5% year-on-year, and are projected to reach 6.7 billion dollars by the end of 2019. While Azerbaijan remains capable of borrowing externally despite a sub-investment credit rating, its international financing is increasingly concentrated in non-Western institutions as other lenders worry about the weak banking sector, poor governance and the continuing dependence on hydrocarbons.
Return to contents Next Chapter