Weekly actual topics in Azerbaijan (jan. 23-28)

Investments in Azerbaijan give great effect

Foreign investors show great interest in Azerbaijani economy. The data of the State Statistics Committee testify to this. According to it, the total amount of foreign investment in Azerbaijani economy in 2011 amounted to 2.515.96 billion manat, or 3.2 percent more than in 2010. The major share of foreign investment was directed into the oil sector a few years ago. But at present, Azerbaijani non-oil sector is also a very attractive sector for foreign investors, for example the construction of three five-star brand hotel in Azerbaijan last year.

According to the official statistics, the investments in Azerbaijani oil sector hit 23.2 percent of all capital investments in the country's economy in 2011 compared to 30.3 percent in 2010, 27 percent - in 2009 and 30.9 percent - in 2008. In 2011, about 9.8115 billion manat (76.8 percent) was invested in the Azerbaijani non-oil sector in 2011, or 39.4 percent more than a year earlier. About 2.964.9 billion manat was invested in the oil sector or 1.1 percent less than in 2010.

It should be stressed that at present, about 70 percent of foreign investments invested in Azerbaijan are direct. These are new technologies, additional capital, the increase in production volume, manufactured goods, the purchase of new technologies or improvement of management and new jobs for Azerbaijan. These are the expansion of production and sales markets by getting additional revenue for foreign investors.

The main motivation of foreign direct investments is foreign investors' desire to place capital in the country where it brings maximum profit. Therefore, Azerbaijan meets this task. It meets all the conditions on which the country is considered to be attractive in terms of investments: a dynamic economy, one of the largest consumer markets, rich natural resources, unique geographic location, an attractive tax system, the policy of broad state support and a stable socio-political system. It is known that many foreign companies that invested money in Azerbaijan repaid it a hundredfold.

According to the Azerbaijani State Statistics Committee, about 84.2 percent (2.117.5 billion manat) of foreign investments in Azerbaijan's economy fell to the investors from Great Britain, US, Japan, France, Norway, the Czech Republic, Turkey and Korea in 2011. For many years, Great Britain continues maintaining its leading position. Its share in total foreign investments last year was 44.6 percent, while their own investments - 1.122.8 billion manat. Investments, in particular, are made in oil and gas sector. Great Britain intends to invest in Azerbaijani financial sector, the sector of the construction industry, etc.

The investment projects in agriculture, processing industry in agriculture, tourism, the construction sector, communications, transport and logistics are attractive for foreign investors in Azerbaijani non-oil sector.

According to the concept of the country's socio-economic development for 2012 and the next three years, significant jump is expected to be in the inflow of foreign investments in Azerbaijan's economy this year with an average annual growth rate of 41.5 percent. So, in 2012, the foreign investments to the amount of 4.013.4 billion manat are expected to be made in the country in 2012, about 5.303.7 billion manat in 2013, about 6.089.4 billion manat in 2014 and 6.606.9 billion manat in 2015.

Azerbaijan develops Islamic financing

Azerbaijan may soon become a regional Islamic financing center and play a significant role in boosting cooperation in Islamic banking with Persian Gulf and Central Asian countries.

Islamic financing is one of the fastest growing segments of the global financial services industry worldwide. At the same time, interest in Islamic finance as a source of investment is high in our country. Many countries' interest in Islamic finance is associated with different factors, the foremost of which is the desire to attract liquid resources from the Middle East and Southeast Asia and a certain demand for financial products in accordance with Sharia law by local Muslims.

Today, Azerbaijan actively introduces Islamic financing. The independent authority of the International Bank of Azerbaijan (IBA) on Islamic banking will start its work in March, which plans to present six Islamic banking products to the market during the first phase.

The Islamic Corporation for the Development of the Private Sector (ICD) is also in talks to create the first Islamic insurance company in Azerbaijan, Takaful, which is popular in Europe, particularly in the UK. European and Central Asian countries are considered experts in Islamic financing. Most of Takaful's customers are non-Muslims in countries where the Islamic insurance market is the most developed in the world.

Ansar Leasing, organized on Islamic principles and established by the ICD, has successfully operated in Azerbaijan for three years. During this period, the company has formed a portfolio worth $15 million and the company plans to draw about $6-$7 million from its founder to expand operations. Some Azerbaijani private banks are also starting to expand the range of Islamic financing tools, introducing Ijarah (leasing) and Murabaha. One such bank is TuranBank, which plans to introduce these tools with the financial support of the Islamic Corporation.

Another bank, Nikoil, is actively introducing deposit products, which include Wadia yad Daman.

Evidently, Azerbaijani banks' interest in Islamic products is growing gradually. The amount of money that enters the market through this channel is very small in Azerbaijan, since many issues related to Islamic financing have not been yet addressed. Therefore, the successful development of Islamic finance on the domestic market will depend on the further improvement of legislation, regulatory prudential norms, and supply and demand. In the near future, it may become a subject of debate.

By developing Islamic financial infrastructure, Azerbaijan may indeed attract investments and financing from the Islamic capital market, not only from Arab countries. Alternative financial tools can be provided for Azerbaijani investors in this way. Also, the number of practicing Muslims who cannot and do not want to use traditional financial services is growing in Azerbaijan. Islamic financial tools can become the channel through which their assets can be involved in the economy.

SOCAR and Central Asian markets

Besides supplying to Afghanistan and Georgia, SOCAR may enter the market of oil products in Central Asia. Kyrgyz President Almazbek Atambayev and SOCAR president Rovnag Abdullaev met last week. They agreed to start construction of a refinery in Kyrgyzstan with a capacity of 2 million tons per year. The expected period of putting a refinery in operation is late 2013. The estimated cost is $ 150 million. According to the agreement, a group of SOCAR specialists will be sent to Kyrgyzstan in February to explore the construction of a refinery and to start the company's activity in the fuel-energy sector of the country. Why Kyrgyzstan?

Production of oil products in Kyrgyzstan (thousand tons):

2006

2007

2008

2009

2010

2011

Petrol

9,8

13,6

12,8

9,9

14,7

13,5

Diesel fuel

31,3

51,6

59,9

48

39,6

27,4

Black oil

42,1

55,5

58,9

39

43,2

41,9

Source: the Kyrgyz national statistics committee

Import of oil products in Kyrgyzstan (thousand tons):

2006

2007

2008

2009

2010

Petrol

324,2

434,9

509,1

523,3

423,8

Kerosene

396,2

408,7

505,1

630,3

320,9

Diesel fuel

136,2

289,1

194,2

219,9

247,9

Black oil

1,7

43,7

41,7

128,3

128,5

Source: the Kyrgyz national statistics committee

Comparing the ratio "production-import", we find out that the share of imports of oil products was 89 percent in 2010 without taking into account the import of kerosene. Then Kyrgyzstan's interest almost entirely dependent on imports, from one country - Russia (more than 90 percent of total imports) and SOCAR's position, which can begin developing a new, unsaturated and dependent oil market become clear.

The growing shortage of oil products and increasing prices, the problems with railway transportation from neighboring countries, periodic bans on exports from Russia and Kazakhstan, due to various circumstances, the introduction of export duties for oil suppliers to Kyrgyzstan from time to time are objective and subjective factors threatening energy security one way or another.

The minimum demand for oil products in Kyrgyzstan is 1.5 million tons per year with own production of 80,000-90,000 tons. The government intends to increase oil production and refining capacity. Speaking at the press-conference in Bishkek on the eve of New Year, President Atambayev briefly expressed this thought: "Kyrgyzstan must extract its oil and gas. If we have our own oil, why can not we provide ourselves with a diesel fuel?"

According to Kyrgyz experts' forecast, the oil reserves in the country range from 300 to 500 million tons.

The construction of a new refinery may be one of the measures for strengthening Kyrgyzstan's energy security. SOCAR has another opportunity for making profitable investments and increasing its foreign assets.

Rate in Azerbaijan remains without changes

The central banks in many countries prefer to reduce the rate in terms of the growth of the debt crisis in the euro zone and thereby slowing the world economy.

The European Central Bank keeps the basic rate, by reducing it from 1.25 percent to 1 percent on December 8, 2011. This level is a record low level since the financial crisis of 2009, when the rate also remained at the level of one percent. It should be stressed that the International Monetary Fund (IMF) called for the European Central Bank to lower the refinancing rate in early October last year if the downside risks for the economic growth are not diminished.

The U.S Federal Reserve System decided this week to keep the rate in the range of 0-0.25 percent per annum and keep it at this level until late 2014. The Israeli bank lowered the bank rate as of February by 0.25 percent - to 2.5 percent.

The committee on monetary policy of the Georgian National Bank also decided in late 2011 to reduce the refinancing rate by 25 basis points to 6.75 percent.

At present, the Azerbaijani Central Bank (CBA) does not see any need to revise the rate. The parameters of interest rate corridor, including the rate will be adequately regulated by the CBA, depending on the situation in the economic cycle and the financial markets.

The rate in Azerbaijan was revised last time in early May 2011. According to the CBA board decision, the rate has been increased from 5 to 5.25 percent since May 6, 2011. The decision was made to increase the rate because a process of rapid growth in balance of payments and foreign exchange reserves is observed. The potential sources of money growth are being expanded.

The decrease in the central bank's rate is considered by credit institutions and non-bank organizations as a signal for targeting to the expansive policy of the central bank. The increase in the rate serves a signal to conduct the restrictive monetary policy.

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