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AZERBAIJAN


  
  

 

Key Economic Data 
 
  2003 2002 2001 Ranking(2003)
GDP
Millions of US $ 7,124 6,090 5,600 102
         
GNI per capita
 US $ 810 710 650 146
Ranking is given out of 208 nations - (data from the World Bank)

Books on Azerbaijan

REPUBLICAN REFERENCE

Area (sq.km)
86,600

Population
7,868,385

Principal ethnic
groups
Azeri 90%
Russian 2.5%
Armenian 2%
Dagestani 3.2%
other 2.3

Capital
Baku

Currency
Azeri Manat

President
Ilham Aliyev



President
Ilham Aliyev
 


Update No: 308- (29/08/06)

The key problem for Azerbaijan remains the unresolved issue of Nagorno-Karabakh. With one and a half million Azeris being refugees from the 20% of Azeri territory also occupied by the Armenians to link the enclave to Armenia proper, the pressure on Baku to find a way out is enormous.

Pessimism reigns over Karabakh peace process
All sides remain pessimistic about the peace process over Nagornyo-Karabakh, despite a visit by the newly appointed American negotiator to the region intended to breathe new life into negotiations. Revelations about the latest peace deal leave the conflicting parties still far apart.
Matthew Bryza - who was appointed as the United States co-chair of the OSCE's Minsk Group on Karabakh in June - visited Karabakh, Armenia and Azerbaijan during late July. He said little in public following his meetings, but some saw his trip as a sign. Washington, at least, is determined to move the process along despite recent setbacks.
He arrived unaccompanied by his French and Russian co-chairs on the Minsk Group, a month after the three had delivered an unusually blunt report to the OSCE, which presides over negotiations on the Karabakh dispute, signalling that the current peace process had stalled.
The co-chairs said they had "reached the limits of our creativity" and put the onus on the leaders of Armenia and Azerbaijan to carry the peace process forward. 
"We remain ready to assist," said the statement. "As mediators, however, we cannot make the difficult decisions for the parties. We think the parties would be well-served at this point by allowing their publics to engage in a robust discussion of the many viewpoints on these issues."

Blunt speaking by Bryza
Before arriving in the region, Bryza broke with precedent by giving an unusually frank interview to Radio Liberty in which he revealed details of a peace agreement that the two sides had been discussing over the past two years. The two presidents, Ilham Aliyev and Robert Kocharian, rejected the deal in two meetings this year.
Under discussion has been a phased withdrawal of Armenian forces from the Azerbaijani territories around Nagorno-Karabakh, a referendum on the status of Karabakh itself, and the deployment of a peacekeeping force. 
In their report to the OSCE, the negotiators issued a stark warning of what was at stake if the process collapses and the deal is not accepted, "Ultimately, it is the two sides that will be held accountable by their peoples and by the international community if their actions lead to war and not peace."

Preparing for peace or war?
Since the failed Rambouillet summit between the two presidents in February, the two sides have, at least in public, displayed little flexibility, with the war option being discussed with increasing frequency in the Azerbaijani capital, Baku.
President Aliyev said in February that the talks were at a "dead end," and more recently, that further negotiations in the current framework were "hopeless" - a verdict that Minsk Group co-chairman Bryza described as "not helpful."
The Minsk Group's appeal for the two presidents to "prepare their publics for peace and not for war" is being given little emphasis in Baku, where the options seem to be dwindling. Azerbaijan has one huge advantage over Armenia - its large and growing oil revenues from abroad, coming from its Caspian Sea production, where reserves are 31bn barrels of oil. Export is now made by the Baku-Tbilisi-Ceyhan pipeline, operable from May. Aliyev's idea is to spend them on his army and prepare for or threaten war. 
But Azerbaijan's military is rated by many Western analysts as both weak and in a state of structural torpor due to years of neglect by the late president Heydar Aliyev. One of the few distinctive differences between father and son is the money now being lavished on the military sector.
Military expenditures in Azerbaijan for 2006 were slated to rise to some US$600 million, but President Aliyev said publicly on 31 July that the actual figure would rise to US$700 million, an announcement that came a day before the arrival of the OSCE's Bryza.
Even the lesser figure represented a doubling of the 2005 defence budget. Aliyev says he wants Azerbaijan's military spending to equal the total government budget for Armenia. 
Having a large military - or at least a large defence expenditure programme - may serve not so much as a platform for a future war, but rather as a bargaining chip. This strategy would be consistent with Baku's approach thus far, promising a number of rewards for Yerevan if Nagorno-Karabakh is returned to Azeri control.
Analyst Leila Aliyeva believes that the burgeoning military establishment will be used as an implied threat or a deterrent. "Most of the politicians here think that not the actual war itself, but rather the mere existence of a strong army, might be a deterring factor."
When combined with the government's economic carrot-and-stick approach to negotiations, the modernized military might begin to look like a very real threat, although an Armenian Foreign Ministry source told ISN Security Watch in February, "We defeated Azerbaijan in war twice. Do they really want to try again?" Of course Armenia had substantial help from Russia, who will inevitable be sucked into any future conflict, once again.

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The following is a very revealing and interesting article by an Azeri economist:- 

Microfinance in Azerbaijan 
By Chingiz Mammadov 

Background 
The origin of microfinance in Azerbaijan may be traced to "perestroika" when, for the first time since Lenin's short period of "new economic policy" at the beginning of the 1920s, Soviet authorities decided that the development of private entrepreneurship was not hostile to socialism and started to provide loans to develop small businesses. 
It proved wrong: Socialism along with the Soviet Union itself vanished. However, with the fall of the state the necessity to return state loans disappeared as well. 
The following period of turmoil and the gradual transition to a market economy did little, if anything, to improve financial discipline in the sphere of microfinance. To further worsen the situation, some international relief organizations that came to Azerbaijan in response to the humanitarian crisis caused by the war with Armenia over Nagorno-Karabakh, began providing microfinance services. 
These organizations, more familiar with typical relief situations, did not follow "best practice" microfinance and their eventual failure furthermore deteriorated financial discipline. Microfinance started to become more rigorous in 1997-1998 with the arrival of international NGOs such as FINCA, ADRA, and Shorebank. 
These NGOs, who are microfinance specialists with programs worldwide, launched microfinance programs in Azerbaijan. These programs helped spur other "best practice" microfinance institutions. During the past 5-6 years the number of microfinance institutions (MFIs) in the country has steadily increased making it one of the more active participants in the process of economic development. 
The activities of MFIs in Azerbaijan contributed to the economic development within the framework of poverty reduction strategy. Currently, altogether, MFIs in Azerbaijan cover about 40 regions out of 70. The number of active clients is more than 22,000. So far, MFIs in Azerbaijan have contributed to poverty reduction in the regions by provision of microfinance loans exceeding US$30 million to its vulnerable population. 
For some regions, such as those located close to Nagorno- Karabakh where the majority of Internally Displaced Persons (IDPs) are, or for Nakhchivan, which as an autonomous exclave is isolated from the rest of the country, microfinance programs are crucial in satisfying the basic needs of the people. 

Policy 
The majority of microfinance institutions use the solidarity principle to issue loans to groups of clients. In group lending the number of clients within the group varies from three to 25 though most groups have 10 to 15 people. Most organizations follow mixed gender policies, though there are some that think that separate-gender policies are more effective. Overall, female participation in microfinance has been quite successful. In some programs, 80% of clients are women. 
For solidarity group loans the minimum loan size fluctuates from organization to organization depending on the type of business, varying from US$50 to US$250. The maximum amount of the loan is US$30,000. As reported by MFIs working in Azerbaijan, the average repayment rate is 98-100%. 
However, some MFIs, such as ADRA in Nakhchivan, complement group solidarity with collateral. The range of collateral is very broad - from jewelry to livestock to household items to real estate. The law requires the registration of collateral and registration fees vary depending on the total amount of collateral. For the value of collateral up to about US$2000, the fee is US$10; between US$2000 to US$5000, US$22, and above US$5000, US$62. ADRA reached an agreement with regional authorities to register collateral at the ADRA's office without the need for notary services. Otherwise, paying a US$10 registration fee for loans starting at US$200 would be too expensive. 
Among AMFA members the rates of interest on declining capital vary from 1.5% to 5% and for flat rates from 1.5% to 4%. The lending periods are closely linked to the business plans and vary from 1 to 24 months. In turn, the target population depends on the philosophy and vision of the particular organization. For instance, some organizations like ACDI/VOCA have focused on local populations while others, such as FINCA, Normicro LLC, Oxfam - "Finance for Development", Save the Children, and World Vision targeted refugees and Internally Displaced Persons and locals. Some, like ADRA and IOM functioning in Nakhchivan or NHE operating in the second largest city Ganja, work in one selected area. IOM, in addition, in following its institutional mandate, focuses on seasonal migrants and potential migrants. 

Azerbaijan Micro-finance Association (AMFA) 
While there is competition between many of these MFIs, common interests such as the necessity to improve the overall environment for microfinance in the country, dissemination of best practices, and support in solving problems shared by all MFIs, along with a still large untapped market, have lead to increased cooperation. One example was the First Azerbaijan Microfinance Conference held in Baku in October 2001, which was organized by a number of MFIs. As a result of this conference, in December 2001 nine local MFIs with the support of international NGOs and Mercy Corps-Azerbaijan established the Azerbaijan Microfinance Association (AMFA). 
There are currently 11 AMFA members, 10 of which provide direct microfinance services, including the original nine members ACDI/VOCA, ADRA, FINCA, NHE, NRC, OXFAM, IOM, SCF, and WVI, plus Mercy Corps, which, by the virtue of being the umbrella grant manager for Azerbaijan Humanitarian Assistance program (AHAP) channels USAID funds to two microfinance projects managed by Save the Children and ADRA . The last member is the Danish Refugee Council, which joined AMFA in January 2003. 
Besides AMFA members, microfinance services in Azerbaijan are currently provided by Shorebank, Azerbaijan Microfinance Bank (AMFB), the Agricultural Development and Credit program created by the Government of Azerbaijan with the loan taken from the World Bank, and the Rural Investment Foundation (RIF) LTD, a non-banking credit institution financed by EU. Shorebank, AMFB, RIF are, in many ways, acting as banks rather than microfinance institutions. Many AMFA members, such as ACDI/VOCA, also share similarities with banks in that they offer individual lending services. AMFA members have provided several thousand dollars worth of individual loans. 

Challenges 
The major problem facing micro-finance in Azerbaijan is that there is no special law on micro-finance in the country. Therefore, all micro-finance activities are regulated by the Civil Code and the "Law on Banks and Banking Activities". To conduct micro-credit activities an institution has to obtain a license from the National Bank; the issuance of which is governed by the Regulation of the National Bank. This regulation requires that to get a license an institution should first be registered as a legal entity with the Ministry of Justice. 
However, an "amendment" made recently to the "Law on B&BA" says that along with political parties, state agencies and local authorities, "non-commercial organizations cannot create credit organizations" (Article 16.1). In turn, the Civil Code of Azerbaijan lists non-commercial organizations (public unions and funds) as non-governmental organizations (Article 3 of the Civil Code; "Law on NGOs (Public unions and Funds)" of June 13, 2000). Thus, this amendment does not allow international NGOs to establish credit organizations in Azerbaijan. 
At this time, micro-finance organizations have only one viable option - to be registered as local limited liability companies (LLC). This means that they are considered purely commercial entities with no development or social agenda. Additionally, while micro-finance institutions used to pay about US$110 to get a license from the National Bank, micro-finance institutions now have to pay the commercial fee of approximately US$5400. AMFA's advocacy efforts have already resulted in better understanding of microfinance by the government agencies, and currently AMFA is negotiating with the government the possibility to lower the amount of registration fee for MFIs. Another challenge for micro-finance services in Azerbaijan is the non-friendly taxation environment. 
Currently, MFIs are obligated to pay all taxes applicable to other for-profit structures and commercial enterprises including profit taxes that are based on outdated profit calculations. 
When AMFA was created in December 2001 only three members were registered with the Ministry of Justice and had a license from the National Bank. However, the advocacy efforts of AMFA members have been rewarded and now only two AMFA members are not registered, one of which - Save the Children - is close to registration. IOM is the only organization that has yet to register and it has an unusual situation in that as a diplomatic mission it is extremely unusual for it to manage an LLC. IOM is still analyzing how to incorporate the LLC requirements into its overall structure and get approval for this unusual step. 
Meanwhile, AMFA itself remains unregistered as AMFA's registration was postponed until all AMFA members are registered. Thus, taken overall, AMFA and its members were able to build a solid foundation on which further advancements are possible. 

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ENERGY

SOCAR expects 8% drop in oil to Novorossiisk 

The volume of Azeri oil pumped through the Baku-Novorossiisk pipeline in 2006 will amount to about four million tonnes, which is eight per cent less than last year, a source in the State Oil Company of the Azerbaijani Republic (SOCAR) said, Interfax News Agency reported.
"Azerbaijan plans to transport at least four million tonnes through the Baku-Novorossiisk pipeline in 2006. As of July 1, 2.6 million tonnes has been transported through the northern pipeline, and by the end of the year we plan to transport another 1.4 million tonnes. However, oil transport volumes by SOCAR have not yet been finalised, everything will depend on what volume Azerbaijan International Operating Company reserves for itself," the source said. The source said that AIOC (the operator of the Azeri-Chirag-Gunashli fields) should retain a certain volume of oil transport through the Baku-Novorossiisk pipe. "We believe that the Baku-Novorossiisk pipeline, despite some transitory losses, should be kept, to have an alternative export route. This is the only route bypassing Georgia, and not only SOCAR, but AIOC also should support the work of this pipeline," the source said. 
The company also believes that the cost of maintaining the pipeline should be split between SOCAR and AIOC shareholders. "At the moment AIOC compensates the upkeep costs for the northern pipeline with reimbursement of Azeri-Chirag-Gunashli expenditure, it said.

AIOC doubles oil production at Chirag, Gunashli 

Azerbaijan International Operating Company (AIOC), the operator for Azeri-Chirag-Gunashli fields, produced 12.013 million tonnes of oil from Azeri and Chirag fields in the first seven months of the year, an increase of 98 per cent from the same period last year, a company source said, Interfax News Agency reported.
Production from Chirag totalled 4.26 million tonnes of oil in the period and production at Azeri totalled 7.75 million tonnes. Production in July totalled 1.972 million tonnes, including 557,300 tonnes from Chirag and 1,415 million tonnes from Azeri.

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FOREIGN LOANS

World Bank to provide 500m Euro for highway projects 

The World Bank is ready to provide Azerbaijan with 500 million Euro to implement highway projects, the country's deputy transport minister, Musa Panakhov, said Interfax News Agency reported.
"The bank is ready to invest these resources in renovating federal highways. The World Bank has proposed financing the continuation of the Baku-Shemakhy-Muganly highway. The bank is also ready to participate in renovating the Yevlakh-Beilagan-Balaken highway to the Russian border and from Beilagan to the Iranian border," Panakhov said. These projects have an estimated cost of 300 million Euro, he said. "But the bank has proposed 500 million Euro to rebuild these highways," he said. The World Bank is also showing interest in financing a project to improve Baku's transport infrastructure, Panakhov said. "The bank offered us a grant to design a project to improve Baku's transport infrastructure. We have until the end of the year to decide on the grant and we will start designing the project next year," he said.

UniBank gets 1 mln GarantiBank loan facility 

Azerbaijan's UniBank has received a loan facility of one million Euro from Garantibank International N.V., UniBank said recently, Interfax News Agency reported. 
The facility will support documentary operations - confirmation of letters of credit and guarantees - and will enable UniBank to obtain from Garantibank International N.V. confirmation of guarantees and letters of credit with terms of up to one year. UniBank has borrowed approximately 40 million Euro from international financial institutions to date. The European Bank for Reconstruction and Development (EBRD) owns 15 per cent of UniBank. Germany's DEG is also a shareholder. The bank was ranked number 457 by assets in the CIS and the fourth biggest of just over 40 Azerbaijani banks in the Interfax-1000: CIS Banks rating for the first half of 2005. 

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MINERALS & METALS

RusAl to finish preparing feasibility study 

RusAl, one of the world's top three aluminium producers, plans to finish the preparation of a preliminary feasibility study for the construction of an aluminium plant in Azerbaijan by the end of 2006, the company said in a release, New Europe reported. 
"RusAl has yet to make a decision on the start of the construction of an aluminium plant in Azerbaijan. The company is interested in considering possibilities for the construction of a plant in the country and continues to hold talks with the Azerbaijani government on this issue. RusAl is also working on preparations for a preliminary feasibility study and will make a decision on the expediency of carrying out such a project based on the results of the study," the release says. Azerbaijani Economic Development minister Heidar Babayev said recently that his ministry had received an official letter from RusAl confirming the decision to begin carrying out the project in Azerbaijan. Other subjects the two sides still need to talk about include the issue of where aluminium produced at the plant will be shipped if the plant is built, the issue of providing the plant with gas and electricity at advantageous prices and other issues related to taxation, Babayev said.

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