Weekly actual topics in Azerbaijan (June 18-23)

Analysis Materials 25 June 2012 15:39 (UTC +04:00)

Dollar, euro and manat

Throughout the month, the euro in Azerbaijan has been moving steadily downward, leaving behind a record bar in one manat for one euro. The lowest exchange rate for this period was recorded on June 1, when one euro was 0.9701 manat.

According to the Central Bank of Azerbaijan, as of June 19, the official exchange rate of manat compared to the euro was 0.9907 manat to one euro.

There are two reasons for this: first - growing concerns about the financial problems of Spain and the second - the uncertainty due to the formation of a new government in Greece. Both factors have a negative impact on investor confidence, which pulls down the EU's single currency.

As for its American counterpart, the official rate of manat compared to the dollar, set by the Central Bank, has remained stable for almost two weeks and is at 0.7858 manat to one U.S. dollar.

However, dollar which is stable in Azerbaijan also tends to fall on world stock markets. Thus, according to indicators of international stock exchanges, the U.S. dollar on Tuesday, declines compared to the euro and yen before the next meeting of the Federal Reserve System (FRS) on Wednesday and amid the fact that the leaders of the G20 are going to focus on solving financial problems in Europe. In particular, the expectations that at a meeting on Wednesday, the U.S. Federal Reserve may introduce new measures to stimulate the U.S. economy weaken the dollar.

In order to save its economy during the peak of the financial crisis, Western governments have resorted to the well-known recipe - the expansion of crediting at low interest rates. As a result of the "active monetary policy," the decline has slowed slightly, but at the cost of almost incessant devaluation of major currencies - the dollar and the euro. The movement of their exchange rates began to resemble race with one another. Sometimes one "runner" goes first, sometimes another. Previously, everything was clear: the dollar was unmoved as a rock, while the euro, yen, pound and other currencies fluctuated around it in different directions. But now that the "rock" has moved from a place, a traditional landmark was lost, and the mood of investors towards both currencies is reduced.

As a consequence, Azerbaijan observes now strengthening of the Azerbaijani manat compared to the world currencies. At the same time as a result of inadvertent strengthening of manat domestic economy may well lose from increased imports, which mostly will negatively affect the state of the local manufacturer engaged in the manufacturing industry.

Unmanageable inflation level in Iran

Rampant inflation has swept the Iranian consumer market (over 10 per cent per year), which is a serious economic problem for the country. The official inflation rate in Iran has increased compared to last year, almost doubling to reach 22.2 per cent.

There are a number of generally accepted economic theories as to the causes of inflation, but Iran has developed its own socio-economic conditions of its occurrence. The primary cause of the price leap in Iran was the cancellation of government subsidies for energy and some food for the population last year which led to a multiple increase in the price of gasoline, diesel fuel, gas, water, electricity and bread.

It was followed respectively by a price increase of Iranian food. These increased for almost all products such as milk, mutton, beef, beans, vegetables and fruit. According to the Central Bank of Iran, the price of mutton and beef rose 0.5 per cent, chicken - by 3.7 per cent, tomatoes - 33 per cent, cucumbers - by 15.4 per cent, onions - 6.4 per cent, zucchini - by 8.7 per cent and the local rice - by 4.1 per cent in just last week alone.

In addition to consumer goods of local production, imported goods also became more expensive in Iran. Almost all foreign trade transactions carried out by Iran in the recent period are made by record high prices due to financial difficulties and international sanctions.
Statistics of the Central Bank of Iran also point to the excess of the growth rate of producer price index over the growth rate of consumer prices. At the end of last year according to official statistics, the index of producer prices (PPI) was 34.2 per cent, while the consumer price index was at 21.5 per cent. It means that inflation was higher in the manufacturing sector and this trend continues in 2012.

It is known that the sanctions ban on the sale of equipment, technologies and services to Iran's energy sector and even a ban on new investments in this sector have led to higher costs of doing business for Iranian companies and manufacturers to 30 per cent.

Every increase in prices in this country becomes a signal to the growth of wages and costs which in turn causes a further rise in prices. For example, salaries of civil servants were increased by 15 per cent in late June - early July to neutralise the situation with high prices in the country. Such a decision in turn, further supports the level of money supply that will cause the inflation.

According to forecasts, inflation in Iran will continue for at least two or three years. The latest report of British publication The Economist says growth in consumer prices in Iran is projected at 23.6 per cent in the current Iranian year of 1391 (21.03.12-20.03.13).

Turkey-France: economic truce encouraged

The warm meeting between Turkish Prime Minister Recep Tayyip Erdogan and new French president Francois Hollande today in Brazil became a good end to the absurd story between the two powers with the recognition of the so-called "Armenian genocide".

The Lower House of the French Parliament adopted a bill criminalising the denial of the so-called "Armenian genocide" on Dec 22, 2011. Senate (upper house of the French Parliament) voted for the adoption of this law on January 23, 2012. Some 127 senators voted for, while 86 - against. The bill demands a year's imprisonment and a fine of 45,000 euro for denying the so-called "Armenian genocide".

Armenia and the Armenian lobby claim that the predecessor of the Turkey - Ottoman Empire had committed the 1915 genocide against the Armenians living in Anatolia, and achieved recognition of the "Armenian Genocide" by the parliaments of several countries.

This awkward situation can be considered absurd for the reason that flared up passions due to the recognition by the French Senate of the bill criminalising denial of so-called "Armenian genocide" in the end was successfully resolved in favor of Turkey - France's Constitutional Court declared the law unconstitutional and violating freedom of speech. However, relations between Turkey and France were damaged to the extent that Ankara has introduced a range of sanctions against Paris, accompanied by breaking off both economic and political relations.

It should be recalled that sanctions included a recall of the Turkish ambassador from France, freezing all bilateral economic, political and military talks, the ban on the use by French military aircraft and ships of air bases and ports in Turkey without a special permit, cancellation of a joint Turkish-French meeting on economic issues, abolition of all military exercises with France.

To mark the start of a new stage of relations between the two countries, Turkey is preparing to lift a number of sanctions imposed on France. And if the political relations between countries can be restored easily and relatively quickly, it is not easy to revive economic ties: joint investment projects stand idle, trade links get broken, the provision of counter economic services stops. For this reason, Turkey had been taking a wait and see stance on the issue of economic sanctions against France and had not been in a hurry with making them tighter, limiting economic cooperation at the level of negotiations.

There is a pleasant fact that the period of Turkish sanctions against France was short and completed without developing fully. The Turkish export statistics indicate that if France was fifth in the top 10 trading partners before the sanctions were imposed, it dropped only by
one step in the period from January to May 2012, becoming the sixth honorary partner where Turkey mainly delivers its textile products and appliances.

The entrepreneurs of both countries believed that the populist decision of French politicians will be rejected, because the deterioration of Turkish-French relations will not benefit any party.
Turkey has a large number of French companies in the areas of banking, power enginnering, motor-car construction, retail trade, cosmetics and pharmaceuticals. French companies EDF, GDF Suez and Areva plan to participate in the construction of a nuclear power plant in Turkey.
The volume of investments of 350 Turkish companies operating in various sectors of the French economy is $500 million.

The economic potential between the two countries has not been exhausted. The resumption of relations between the two countries will give an impetus to the further development of Turkish-French economic cooperation.

Is Fujairah oil pipeline a panacea?

The Fujairah pipeline built around the Persian Gulf taking UAE oil to the Indian Ocean was launched earlier.

By itself, this fact would have attracted attention only as an extension of pipeline infrastructure and the emergence of a new route to diversify supply of hydrocarbons from the Gulf region, and no more.

Pipeline capacity is quite modest by the standards of Middle Eastern volumes of production and export, the length - the same way. That is, it could have been considered a commonplace project not making radical changes in the overall picture of trade and transportation of oil in the Middle East.

This pipeline whose construction project was implemented by the Chinese company China Petroleum Engineering & Construction for a short time, has a length of 360 kilometers, capacity - 1.5 million barrels per day in total exports of the UAE at 2.5 million barrels, according to BP data for 2011. The project cost was approximately $ 2.7 billion.

All of this would be so, if we were talking about the peace-time and the absence of military-political confrontation in the region between the West and Iran. Once a possible outbreak of hostilities, and as a consequence, the implementation of the threat to block the Strait of Hormuz , through which nearly forty percent of the world's oil is exported is mentioned, the significance of this oil pipeline takes assumes a different meaning, and it turns into an important strategic site, which will allow to partially reduce the pressure in the "corked bottle of Hormuz," until it is opened again.

And yet, it would be naive to pin great hopes on it, with the view that Fujairah is an excellent military target. The war, if it starts, will be cynical and no rules on both sides will be followed. Iran, driven into a corner, will have a dozen reasons to destroy or damage the pipeline.

The importance of oil in the other: this is a pioneer oil pipeline. It is likely to be followed by construction of a second, third, etc. Arab countries of the Gulf need to diversify routes of supply of hydrocarbons in any case, regardless of whether someone threatens today or tomorrow to block two-kilometer "throat" of the Strait of Hormuz or not. They thus will be able to eliminate vulnerability in their energy security. And not just in their own.