Weekly actual topics in Azerbaijan (Mar. 16-20)

Analysis Materials 27 March 2015 10:40 (UTC +04:00)

Rating of confidence towards Azerbaijan

International rating agencies, amid global instability, continue to keep focus on the situation in not only developed countries, but also the emerging markets, including those in the CIS area.

A rating assessment, as is known, is a criterion that determines the reliability of both the country and the institutions operating within it. So, maybe the most important reliability indicator, and, so to say, the solidity indicator, is the country's place in an international rating.

Rigging results in such ratings is unlikely possible, as they are drawn up by international rating agencies based on lots of factors.

Among the most reputable rating agencies in the world there are Moody's, Fitch Ratings and Standard & Poor's. They have been around for many years, they have huge experience, and their credibility is endless.

The data from these international rating agencies make it possible to understand what countries are the most profitable, stable and reliable to cooperate with, that is, which markets are profitable to invest or lend money.

These agencies assess not only the risks of countries, but also the risks of banks, corporations, and also, evaluate a possible economic effect from the issuance of bonds and other securities.

Earlier, the Fitch Ratings once again affirmed Azerbaijan's investment rating at "BBB-" with stable outlook, thus demonstrating the economic stability potential and maintaining high confidence of international community.

Despite the negative impact of lowering oil prices on world markets on fiscal and foreign currency position of Azerbaijan, the measures undertaken by the government of the country help to reduce the possible risks for public funds and strategic currency reserves, which will make it possible to retain the position of Azerbaijan as a strong external creditor.

Simply put, Azerbaijan at the expense of its own efforts will be able to finance not only the needs of the domestic market, but also to continue to invest in projects' implementation abroad. By the way, as Minister of Energy of Azerbaijan Natig Aliyev said in a brief video comment on the results of the EBRD-hosted Caspian Corridor Conference in London, Azerbaijan is able to self-finance all energy projects that should be implemented until 2020.

At the same time, he was talking about such a large-scale project as the Southern Gas Corridor, which provides for transportation of gas from the Caspian region through Georgia and Turkey to European countries.

In addition to that, today Azerbaijan can easily attract credit resources from various foreign financial institutions given the high ratings assigned to it by three internationally recognized rating agencies, the opinion of which influences large funds.

Some $750 million drawn by SOCAR (State Oil Company of Azerbaijan) from the international capital markets by placing its own bonds testify to this. The rate on them is slightly more than 6.95 percent as opposed to the previous two issues of bonds, but the fact that SOCAR could attract such a large amount for 15 years testifies to great confidence in the energy projects implemented by Azerbaijan.

This also allows determining the fair value level of loans for the company. SOCAR's such activity in terms of instability in the world markets indicates that for the company it is not just prestige that is important, but also the value of money, which it draws.

Correct "rate"

Fitch has also supported the Azerbaijani government's actions on the manat rate depreciation.

"The weak exchange rate will soften the blow on oil revenues in the manat equivalent, while the government will reduce the infrastructure costs from a very high level by holding back the implementation of non-essential future projects," Fitch analysts said.

"This combination must prevent the significant state budget deficit in 2014 with a surplus of 2.9 percent of GDP," according to Fitch.

Thus, the adjustment of the exchange rate of manat will allow to avoid the considerable reduction of assets of the State Oil Fund of Azerbaijan (SOFAZ). The transfers from SOFAZ account for over a half of the state budget revenues and strong dollar will allow it to save over $3 billion.

SOFAZ can save even more funds given the plans of the country's government to revise the budget forecasts that are based on the oil price of $90 per barrel, while the average price has remained at $60 since early 2015.

This is while from 2016, the expected rise in oil prices and stabilization of oil production in Azerbaijan will allow to increase the country's revenues and accordingly to speed up the economic growth. Fitch analysts presume that maintaining the domestic political stability and other factors will positively affect the improving of Azerbaijan's rating in the future as well. It is very important for the country, since as the important element of the general program for maintaining relations with investors, rating allows to improve Azerbaijan's general investment attractiveness.

TANAP takes Azerbaijani gas another step closer to Europe

Azerbaijan and Turkey, two countries that are not members of the EU, are currently doing much more for Europe's energy security than many member states of the Union.

Today has become extremely important for the European gas market and another confirmation of the importance of Azerbaijan in this issue. The Turkish province of Kars hosted laying the foundation of the Trans-Anatolian Gas Pipeline (TANAP).

TANAP plays one of the major roles in the Southern Gas Corridor, which aims to address the issue of diversification of gas supplies to Europe, as well as enhance the energy security of Turkey.

This is in fact the second important step of Azerbaijani gas towards the EU. The first one was made during the foundation laying of the Southern Gas Corridor in Baku September 20, 2014.

At the initial stage, the capacity of TANAP will be 16 billion cubic meters of gas per year with the possibility of further expansion up to 31 billion cubic meters. At the same time, about six billion cubic meters will be delivered to Turkey, and the rest to Europe. TANAP construction will take a little over three years. The pipe laying will start in early April, and commissioning of the pipeline is planned in 2018. The project cost is estimated at $10 - S11 billion.

Thus, the first gas via Southern Gas Corridor will reach Turkey in 2018, and after the completion of the Trans Adriatic Pipeline (TAP) around the beginning of 2020 the gas will go to Europe. The cost of the entire Southern Gas Corridor project is estimated at nearly $45 billion.

Today's event proves once again: Southern Gas Corridor is a real project, and no one should have any doubt about its success.

At the same time, the Russian project Turkish Stream in no case can be considered an alternative to TANAP, as experts and officials say in one voice.

This is also confirmed by today's announcement that the company BOTAS has refused to sign an agreement with Gazprom about the 10.25 percnt discount for Russian gas supplied to Turkey, despite the fact that Russia is the main supplier of natural gas to Turkey.

It looks very symbolic that it happened on the day of laying the foundation of TANAP.

Both of these events suggest also that Azerbaijan and Turkey are now much closer to Europe than Greece, which still cannot define its role in the Southern Gas Corridor and still "casts an eye" in the direction of Turkish Stream, which is still a paper project.

Azerbaijan, Turkey make EU energy dreams come true

Azerbaijan and Turkey in a very short period of time were able to demonstrate to the whole world how in having the desire and making concerted efforts, one can implement a major project, which is very important not only for these two countries, but also the whole of Europe.

On March 17, the Turkish province of Kars hosted laying the foundation of Trans-Anatolian Gas Pipeline (TANAP). This event is very difficult to overestimate, because never before has the EU been so close to the cherished goal of diversifying energy supplies to its market.

Start of construction of TANAP is proof of the commitment of Azerbaijan and Turkey to the task, their reliability as a manufacturer, supplier and transporter of gas.

TANAP is a very important part of the Southern Gas Corridor project: it will ensure the delivery of gas from the Azerbaijani Shah Deniz field through the Georgian-Turkish border to the western border of Turkey, opening the way for hydrocarbons to the European market.

Start of construction of TANAP marks a new milestone in the EU's energy security.
"The start of construction of TANAP is a new stage in the diversification of gas supplies to the EU," analyst of Eurasia Energy Observer business intelligence newsletter Andrej Tibold told Trend.

He said that against the background of cooling relations between the EU and Russia, the role of the TANAP construction project in the context of European energy security has been further enhanced. The analyst said that the value of the project is that it will help to ensure the supplies of strategic gas volumes to the EU countries.

Nevertheless, the Southern Gas Corridor project, as part of which the TANAP project is being implemented, is designed for delivering gas not only from Azerbaijan, but also from other countries to Europe. The possibility of increasing the capacity of both TANAP and the Trans-Adriatic pipeline (TAP) will allow involvement of other sources, for example, Turkmenistan, to the Southern Gas Corridor project and thereby expand the EU's diversification list.

Another important point is that the sides are implementing the project in accordance with the set deadlines. Azerbaijani gas will be delivered to Turkey via TANAP in 2018 and after the completion of construction of TAP gas will be delivered to Europe in early 2020.

Currently, the Southern Gas Corridor project is the only real alternative for the EU. By giving it the opportunity to significantly strengthen its energy security, with Azerbaijani gas that will be delivered to European countries, which are now largely (but some of them - completely) dependent on Russian supplies.

The initial volume of Azerbaijani gas to be delivered to EU is small - 10 billion cubic meters per year. However, given the relatively small demand for gas in such countries as Bulgaria (about 2.6 billion cubic meters) and Greece (3.6 billion cubic meters), gas supplies from Azerbaijan are really vital and will help halve the import of Russian gas by replacing it with new alternative volumes.

Will Azerbaijan seize on idea of de-dollarization?

The idea of creating a single financial and banking space in CIS countries gains relevance in the light of increasing risks in the global economy.

Earlier, presidents of Russia, Belarus and Kazakhstan talked about the possibility of creating a monetary union as a first step.

"By working shoulder to shoulder, it is easier to respond to the external financial and economic threats, protect our joint market," said Russian President Vladimir Putin. He has already instructed the Central Bank and the government to study this issue and come up with a solution by September 1, 2015.

Apparently, at present, the main issue is to work out a unified monetary policy and to start using regional currencies - Russian ruble, Kazakh tenge and Belarusian ruble - in mutual payments.

The next step can be the creation of a single currency, however, the states haven't reached an agreement on this issue yet. Nevertheless, previously, there were ideas about introducing a new currency called the euras or using the ruble as a single currency.

The economic feasibility of this initiative is in doubt as all national currencies in the region, including the Russian ruble are quite weak. The share of ruble in the world economy is very low, while dollar and euro have considerable shares in the Russian economy.

Nevertheless, starting the use of national currencies in mutual payments is real and will depend on the level of economic relations between the countries.

There has been talk about the necessity of expanding the use of national currencies in the payments among the countries of CIS and Caspian Sea region from the beginning of the global financial and economic crisis.

If before the crisis, the payments with national currencies in CIS countries were within 5 percent and other transactions were carried out with dollar or euro, the situation has changed now.

Today, over 20 percent of the payments are carried out with national currencies and given the ongoing instability in the world economy, continuation of West sanctions against Russia, this figure will increase.

Meanwhile, the "currency war" has already reached the British pound, which dropped to $1.4635 on March 18, its lowest level since June 2010.

Much lower exchange rates were recorded only in June 2009 - $1.4347 per pound. This allowed the euro, the exchange rate of which to dollar has been dropping in recent times, to rise slightly.

The dollar started rising as a result of the decrease in oil prices starting from mid-2014. This increased the pressure on the national currencies. Therefore, some countries started to think about reducing the dependence of their national economies on the US dollar.

Dollar or manat

Azerbaijan, which has been keeping its currency stable for a long time, succeeded to prevent the dollarization of 70 percent of manat money supply with the sharp correction of the exchange rate of manat on February 21, 2015.

The agiotage related to the purchase of the dollar in the foreign exchange market of Azerbaijan, began in late 2014 and increased after the transition to a bi-currency basket when the Central Bank of Azerbaijan abandoned manat's beg to the US dollar as of Feb.16, which gave a certain impetus to the exchange rate of the national currency.

Today the dollar plays an important and quite objective role in foreign trade transactions of Azerbaijan, given that 92 percent of the country's export accounts for the oil and gas sector.

In addition, in February 2015, for the first time in the history, the United States became a major trading partner of Azerbaijan with a total turnover of $665.42 million (imports from Azerbaijan stood at $199.36 million, export - $466.05 million). Thus, it also became the main supplier of goods to the country.

The Top 5 of the country's leading foreign trade partners included the United States, Italy, Germany, Russia and Turkey as of the first two months of 2015.

The circulation of the dollar, except for the payments in the sphere of trade and payment for services is free within the country. This means the population is free to make a choice while storing their savings in banks or attracting loans.

The loans in foreign currency amounted to 27 percent of the total volume of credit investments of Azerbaijan's banking sector, while nearly 52 percent of the deposit base consists of savings in foreign currency. This is while 48.7 percent of deposits were in foreign currency a year ago.

If the Central Bank didn't change the exchange rate of manat by 34 percent at one gulp, we could expect total dollarization of not only bank deposits, but also the population's savings outside the banks.

On the other hand, given the devaluation of national currencies in neighboring countries, maintaining the exchange rate of manat unchanged would undermine the competitiveness of Azerbaijani goods in foreign markets and the situation would deteriorate for the local businesses that provide the domestic market with their products.

Even in the current situation [rise of the dollarization level], Azerbaijan does not intend to use the experience of some countries in Latin America, where governments of Bolivia and Peru tried to forbid the population and businesses to convert deposits into foreign currency. As a result of this policy, funds from banks were taken to foreign countries and entered the shadow economy.

The Azerbaijani government increases confidence in manat with stimulating methods, by increasing the guarantees on deposits, which in turn leads to an increase in interest rates on manat deposits.

There are also plans on expanding the volume of mortgage lending, which is also carried out in the national currency. Increase is observed in the volume of concessional lending to business entities in manats.

Private pension funds can also serve as drivers of the domestic source of funding. It should be noted that it is planned to speed up the creation of private pension funds in the country.

Expanding the use of the national currency not only domestically but also in the relations with foreign partners, will also allow increased confidence in the manat. Given the government's measures to develop non-oil sector of the economy and increase the production of goods for export, it is quite feasible.

At the same time, banks can also serve as institutions stimulating the use of national currencies through the system of financial support and lending as part of the development of trade, economic and investment ties with countries with which Azerbaijan closely cooperates.

But this does not mean that Azerbaijan intends to abandon the dollar, in which the component part of the country's strategic currency reserve is concentrated.

It is also impossible due to the fact that today, Azerbaijan is the initiator and participant of large-scale projects in the region, both in the sphere of energy and transport and the implementation of these projects will allow to strengthen the country's role in the world economy.

Azerbaijan will play a central role, both as a gas supplier and as a transit country. Moreover, the country intends to be recognized as a supplier of non-oil products in the future as opportunities for the export of non-oil products will expand with Azerbaijan's accession to WTO.