Previous Quarterly Editions
Expropriation Risk: 56 55 56 57 Political Violence Risk: 42 40 40 43 Terrorism Risk: 48 46 46 46 Exchange Transfer and Trade Sanction Risk: 56 54 55 54 Sovereign Default Risk: 47 46 45 45
TREND ► OUTLOOK ►
The country’s crucial Shah Deniz 2 production project delivered its first commercial gas supplies to Turkey in July. Operated by a consortium including BP and costing 28 billion dollars, it is the first subsea development in the Caspian Sea and one of the largest subsea operations in the world. The gas it produces goes first to Turkey and then further into Europe via several linked pipelines that together make up the Southern Gas Corridor (SGC). Other pipeline networks will carry Azeri gas through Turkey to Greece, Albania and Italy via the Trans-Adriatic Pipeline, still under construction, by 2020. However, the day after the Shah Deniz 2 project officially opened, Azerbaijan suffered two consecutive nationwide blackouts that were the worst the country has experienced since 1991.
According to the state electricity company, Azerenerji, they resulted from an explosion at a power plant in the city of Mingachevir caused by a power surge due to unprecedented use of air conditioning in a period of exceptionally hot weather. Service on the Baku underground, which transports on average half a million people a day, was suspended and many riders had to be evacuated through the tunnels. The blackout, which in many cases was accompanied by water and gas cuts even in Baku city centre, quickly became a political issue given government claims to have invested five billion dollars in electricity infrastructure since 2004. President Ilham Aliyev publicly criticised the head of Azerenerji, charging him with negligence. BP said the blackout did not affect oil and gas production, which was supported by backup generators, but onshore production by SOCAR, the state oil company, was interrupted.
Government projections for GDP growth stand at a modest 1.5% for 2018 but could end the year higher given the rise in oil prices and the start of new gas exports. Although Chancellor Merkel met President Aliyev in Baku in August and affirmed Azerbaijan’s importance as an energy source for Europe, the European Parliament has again made it clear that the EU-Azerbaijan trade agreement will not be ratified until Azerbaijan improves its human rights record.
Although the presidents of the five Caspian littoral states signed an agreement in August, Azerbaijan is expected to join with Turkmenistan in resisting what they see as an Iranian attempt to increase its share of the seabed. Despite a new government taking office in Armenia, little progress is expected in the long-running dispute over Nagorno-Karabakh.
TREND ▲ OUTLOOK ►
With the country’s oil fields past the point of peak production, the government has been emphasising diversification away from the hydrocarbons sector. In 2017, the proportion of GDP produced in the non-oil sector increased by 2.6% year-on-year as Baku continued to invest heavily in tourism, agriculture and construction. However, oil and gas still accounted for more than 90% of total exports in 2017 and that figure is likely to increase this year with new gas exports through the SGC.
Meanwhile, foreign investors will remain deterred by the extent to which political decision-making and the control of economic assets is consolidated in the hands of President Aliyev’s family, as well as the general level of corruption and bureaucracy.
In July, two policemen died during a demonstration in Ganja, the country’s second-largest city, when some 200 people protested the arrest of a man accused of attempting to assassinate the mayor amid a surge of discontent following the major power outages. The presidential administration blamed “opposition circles” for taking advantage of the crisis and plotting a coup to seize power in the country that had foiled and suppressed. A wake of detentions followed, with several people killed while allegedly resisting arrest and others jailed for commenting on events in social media. Despite the unrest in Ganja, a rise in fares on public transport was implemented on August 1 even though it underlined for many people the growing mismatch between rising prices for basic goods and services and the falling value of wages and pensions. Although outbursts like the one in Ganja remain infrequent, failing infrastructure and rising living costs are increasingly being blamed on the presidency.
The government continues to use the threat of terrorism as a reason to clamp down on any expression of dissent. In mid-July, following the power outages and protests in Ganja, the authorities carried out an operation in the city of Sumgait against what it described as “radical religious groups” planning violent anti-government protests.
Special forces blocked access to the city centre, ordered shops and cafes to close, and stopped residents from filming or photographing the arrest of 18 people who were detained on charges of planning violent anti-government protests.
TREND ▼ OUTLOOK ►
Since moving to a managed float in December 2017, the manat has remained relatively stable, propped up by rising oil prices. However, the rate of dollarisation in the banking sector is still close to 75%. The full transition to the floating manat exchange rate regime is currently planned for 2020. The country’s largest bank, IBA, remains locked in a commercial dispute with Russia’s Sberbank in a High Court in London, with Sberbank seeking repayment of an outstanding loan of 20 million dollars with interest and IBA denying any liability.
The country’s foreign exchange reserves continue to recover, reaching 6.5 billion dollars by mid-2018 after being below four billion at the start of 2017. The assets of the state oil fund are expected to reach 60% of GDP by the start of 2019. Azerbaijan is still in a position to borrow externally despite a sub-investment credit rating, but 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