bne:Invest in Azerbaijan - August 2014

Multilateral strategic partner Azerbaijan Export & Investment

Promotion Foundation

Azerbaijan and Iran increasing scope for

trade and investment

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Content: 3 Top Story 5 Corporate statement 6 Feature 8 Sector10 Economics & finance13 News in brief

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August 2014 www.bne.eu

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In August, Baku hosted the Azerbaijani-Iranian business forum for 2014. Organized by Azerbaijan Export and Investment Promotion Foundation (AZPROMO), the forum aimed to highlight growing investment opportunities and boost trade relationships between the two countries.

Around 50 Iranian companies involved in trade and production, agriculture, engineering, construction and transport took part in the event. A similar

event last year yielded a series of cooperation agreements between business associations from both countries.

This year, the Confederation of Entrepreneurs of Azerbaijan and Iran's Chamber of Commerce agreed to set up a working group to improve information exchange about the import-export activities between the two countries. That will assist in forecasting future market needs, in




expanding investment potential and improving the trade turnover. The move is also hoped to boost existing supply and demand between the two countries.

“Existing trade relations do not correspond to the potential," Azerbaijani Minister of Economy and Industry Shahin Mustafayev told delegates at the forum, "We believe that there are great opportunities and this potential must be used."

Azerbaijan-Iran total trade turnover reached $94.12m in the 6 months ending in June 2014. Of that, $76.81m was Iranian imports, while Azerbaijan exported $17.31m worth of goods to Iran.

The previous year’s figures, according to Iran’s Customs Administration, had indicated a more optimistic outlook, with the total trade turnover between the two countries reaching $470m ($448m and $22m respectively).

According to the figures from the Azerbaijani ministry of economy and industry, to date, Iran has invested $382m in Azerbaijani fixed assets, of which $105m is in the non-oil sector. In 2013, Iran invested a total of $158m in fixed assets in Azerbaijan.

According to the ministry’s latest statistics, there are 390 Iranian companies currently operating in

Azerbaijan. Most of them are involved in banking, the food industry and insurance sectors.

Feathering investment opportunities in other economic sectors – including energy, finance, tourism and ICT - the minister urged entrepreneurs from both countries to zero in on enhancing the common partnership in these fields by growing the existing cooperation and establishing new opportunities on both sides.

Similar sentiments were voiced by the chairman of the Tehran Chamber of Commerce, Industries, Mines and Agriculture, Yahya Ali Ishaq. According to Mr Ishaq, the existing trade turnover between the two countries is too little.

“There are big companies in the field of science and consulting in Iran. They are interested in cooperation with Azerbaijan. There also are a lot of companies in the field of construction, petrochemicals and food industry in Iran” he said. The chairman also stressed the greater potential for common work between the two countries in the oil and gas sector.

Within the framework of the forum, AZPROMO and Organization for Investment, Economic and Technical Assistance of Iran (OÍETAÍ) signed a Memorandum of Understanding.

August 2014




Baku European Games Statistics

Next year Baku will play host to the first ever European Games, where more than 6,000 athletes from 19 different countries will compete in 16 Olympic disciplines as well as pioneer three non-Olympic sports.

Athletes are already in training for the games, the biggest sporting event the country has every hosted that will also serve as a qualifier to the 2016 Olympic Games that will be held in Rio de Janeiro, Brazil, for nine disciplines: archery, athletics, beach volleyball, cycling, shooting, swimming, table tennis, taekwondo and triathlon.

Azerbaijan beat out rival bids from Turkey and Russia and won the right to host the competition in December 2012 from the European Olympic Committees (EOC), which is co-organising the event together with the Baku European Games Operations Committee (BEGOC).

The build up kicked off last month in Cannes, France, launched as part of the Azerbaijani Culture week in France by Azerbaijan’s First Lady and Chair of the Organising Committee for the European Games in Baku Mehriban Aliyeva. The high-calibre event was set to promote the games

Top story

August 2014




in Europe and raise general awareness about Azerbaijan.

“It was an emotional moment for us, watching the fireworks in Cannes to the sounds of Azerbaijan’s national music. We wanted to demonstrate there’s a long tradition of beautiful classical music written by our composers over the last two centuries. This is Azerbaijan’s chance to show off its culture”, Azad Rahimov, Azerbaijani Minister of Youth and Sports and the Chief Executive Officer of Baku 2015 told bne.

The government is hoping that the games will help put the country on the mind and is part of its wider efforts to attract foreign investment. Rahimov says the games are not just about athletics, but also an opportunity to introduce Azerbaijan as a sports tourism destination to fans around the world.

“The idea of starting European games has been around for a while, but its biggest obstacle has always been finding a slot in a tight schedule of all the European championships and in between all the events in generally in Europe during summer – a truly challenging task," Rahimov says, adding that he hopes to quite literally put Baku on the map. “With just 22 years after we gained the independence, positioning ourselves on the map of Europe is very important for us. It can be difficult at times to pinpoint or to explain in a conversation exactly where we are, as some will immediately associate us with Asia, or Middle East and even Oceania! We believe the games will not only help to bring Europe to Baku, but will also bring Baku to Europe”.

In preparation several of the countries sports stadiums will be renovated, although it is not clear what they will be used for after the games are over. Likewise, the government is due to invest heavily into hotels to ensure there are enough beds to accommodate the visitors. And then there’s transport infrastructure, says Rahimov and how much needs to be done in such short space of time, leaving Baku little choice but to hire the best experts: “We haven’t got time for lengthy research and tenders, we simply hire the best we can find”.

Transport, including the most optimal route for flow of the games traffic is overseen by Greek architect Panas, which was also involved in London 2012 Olympic preparations and was the head of transport for Athens’ Olympics. The bus system is being scrubbed up and the drivers are being taught English.

However, the biggest headache for visitors and the stickiest problem for the government is the visa regime. "We have a structure in place of how we hope to run this, which is similar to what other countries do during such events," says Rahimov.

In general the regime will be eased. Visiting sports fans can apply for a visa at their local Azerbaijani embassy; use their ticket as a de facto visa at their point of entry into the country; or get a visa at the Baku airport on arrival. However, the issue is still being discussed by parliament and a final decision will be made soon, says Rahimov.

August 2014




Pasha Bank issues its second quarterly economic review

Pasha Bank, one of Azerbaijan's largest banks, has published its second quarterly review covering Azerbaijan's economic performance during the first half of 2014. In January-June of 2014, the economy continued to grow thanks to a huge surplus of the external sector and on-going fiscal consolidation. The non-oil economy was the main driver of overall growth and all industries of the non-oil sector contributed to the growth positively. Elman Eminov, Head of Pasha Bank's economic research division, commented: "Reduction of investment spending from the budget, expansion of domestic food production, and consumer lending cooling by the central bank has decreased imports, and as a result the non-oil external deficit has improved a bit. In addition, inflation has remained in single digits and this is expected to remain stable for the remainder of the year. In general, a robust macroeconomic position opens wide opportunities in successful management of rebalancing government and private demand." Ahmet Ustmen, head of Pasha Bank's investment

banking & treasury department commented: "The first successful placement of Azerbaijani government bonds in the international capital markets at the beginning of March 2014 could stimulate further international interest in Azerbaijan's domestic capital markets. In addition, the recent prudential measures taken by the Central Bank of Azerbaijan could intensify market-based financing. In line with its domestic and regional expansion, Pasha Bank is contemplating to play an active role in supporting this process, especially in debt capital markets." Pasah Bank's quarterly reports are developed by in-house economists and reflect Azerbaijan's key dynamics, including trends in the domestic financial and banking system, key policy changes and growth forecasts for the year. The reports are available in both Azerbaijani and English and allow existing and potential customers to closely monitor macro and micro-economic trends affecting their business objectives.

Corporate statement

August 2014




Choosing between east and

west, Azerbaijan keeps its

options open

Russia, emboldened by its success in attracting some of the former Soviet states into a Eurasian Economic Union (EEU), has been courting Azerbaijan in a bid to bring this oil and gas-rich nation back into its fold. Moscow fears Azerbaijan, which in the past was part of the "Guam group" of Georgia, Ukraine, Azerbaijan and Moldova, will follow the examples of the other members of that group, which in June all signed EU free trade and association pacts.

Baku has so far resisted the Kremlin's courtship, openly rejecting Russian officials' hints that Azerbaijan would eventually join its Customs Union, which is due to become the Eurasia Economic Union (EEU) at the start of next year.

In early June, Russian Economic Development Minister Alexei Ulyukayev suggested that Azerbaijan's membership of the EEU "remains a subject of discussion." But the comment was

quickly dismissed by Azerbaijani Economy and Industry Minister Shakhin Mustafayev who said Azerbaijan was not considering membership of any bloc – either the EU or the EEU. According to Azerbaijan's Statistics Committee, in 2013 the country's trade with the Customs Union (comprising Russia, Belarus and Kazakhstan) stood at $3.1bn, compared with $15.3bn for the EU.

Two weeks later on June 18, after a meeting with his Azerbaijani counterpart in Baku, Russian Foreign Minister Sergei Lavrov backtracked, by saying that "there was no formal" invitation to Azerbaijan to join the Customs Union or EEU. However, he added: "We've always noted that we will welcome any of our partners who show interest in joining the CU or EEU."

Still, opinions within the country remain divided, but the bias seems to be staying out of the Customs Union and EEU.

"I believe Azerbaijan should refuse to join the EEU," former adviser to the Azerbaijani president, Vyafa Guluzade, told the Mediafax news agency. "The project under the name of the Eurasian Union, in my opinion, aims not at integration between CIS [Commonwealth of Independent States] countries, but at the restoration of a post-Soviet empire in the former Soviet space."

Fikret Garbadansky wrote on Minval.az that the Kremlin is trying to compensate for its failure in Ukraine with "victories" elsewhere. "Relative failure in Kyiv outraged Moscow, which will try to compensate with victories in other Guam countries whose potential of resistance is much lower," he said.

Feature

August 2014




The leader of the Azerbaijani opposition party Musavat ("Equality"), Isa Qambar, told Mediaforum.az that the EEU didn't have "any prospects from the point of view of politics and economy" and didn't "promise any good" for Azerbaijan. "We believe Azerbaijan should speedily integrate into the Euro-Atlantic space and take specific decisions and serious steps to join the EU and Nato," he said.

These comments reflect wider public opinion in Azerbaijan about integration with the EEU: according to the "EDB Integration Barometer 2013" study conducted by the Eurasian Development Bank's Centre for Integration Studies, support for Eurasian integration in Azerbaijan is the lowest among CIS countries at 37%, while opposition is the highest at 53%.

August 2014




Azerbaijan automotive

production quintuples

Car production in Azerbaijan increased five-folder in the first half of this year to a total of 1,510 units, according to the state statistics committee.

With the appearance and growth of a middle class in Azerbaijan car production has been

soaring in recent years. Three times more cars were produced in the first six months of this year than in all of 2013 alone when the country made 424 cars, which was down by a fifth on the production volume a year earlier.

The production of trucks is also growing, albeit it at a slower rate: Azerbaijan produced 159 trucks, up 8.2% year-on-year, reports Azernews. In 2013, Azerbaijan produced 246 trucks, or 52.8% more than in 2012.

However, in connection with the ongoing growth of the agriculture sector tractor production has also been ballooning, up 70.8% in the first six months to equal the production volume for all of 2013, or 709 units.

Azerbaijan has two factories producing motor vehicles - the Nakhchivan and Ganja automobile plants.

Sector

August 2014




EIA issues new report on

Azerbaijan's energy sector

As Azerbaijan gears up for the second annual "Azerbaijan & Caspian Sea Oil & Gas Week" on November 19-21 at the Four Seasons hotel in Baku, the US Energy Information Administration (EIA) released a new report on the country's energy sector, which highlighted its growing importance as a natural gas supplier.

"Azerbaijan, one of the oldest oil producing countries in the world, is an important oil and natural gas supplier in the Caspian Sea region, particularly for European markets," the EIA said in the report released August 2. "Although traditionally it has been a prolific oil producer, Azerbaijan’s importance as a natural

gas supplier will grow in the future as field development and export infrastructure expand."

However, oil production is starting to slowing, says the US agency that compiles and analyses energy information. Oil production in Azerbaijan increased from 315,000 barrels a day (b/d) in 2002 to 1.0m b/d in 2010. However, production has declined since then, falling to 932,000 b/d in 2012 and 881,300 b/d in 2013. The EIA projects Azerbaijan’s oil production will decline to about 852,000 b/d in 2014.

The operators of Azerbaijan’s main producing field, the ACG field, expected peak production to reach 1m b/d, but production at this field has so far failed to reach its target, as – much to the Azerbaijani government's chagrin – production problems have affected ACG output in the past couple years because of technical problems.

With ACG failing to meet ambitious output expectations, the onus is falling on new projects, including BP's Chirag Oil Project (COP), to boost Azerbaijan’s slowing oil production. COP, authorized by the government in 2010, is planned to increase oil production and recovery from the ACG field through a new offshore facility at the West Chirag platform. COP began producing oil in January 2014 and was producing an average of 66,000 b/d in 2014, according to BP. The platform has a capacity of 183,000 b/d.

August 2014




S&P sees Azerbaijan's GDP

exceeding $100bn by 2017

The rating agency Standard & Poor’s, in an August 1 report that affirmed Azerbaijan's 'BBB-' rating, predicted the country's nominal GDP would exceed $100bn in 2017.

The S&P report forecasts that in 2014 GDP will rise 4% to reach $78bn, with a similar rise in 2015 taking it to $84bn. In 2016 GDP will grow 3.8% up to $92bn, and in 2017 rise 3.6% up to $101bn.

Over the long term, S&P said that higher gas production should support economic growth and compensate for the stagnating oil production. It noted that the major new second phase of the Shah Deniz gas field is expected to come onstream in 2018, and for the first time will bring gas directly from Azerbaijan to Europe. For this to happen, major new gas pipelines will be built. In late 2013, the final gas pipeline route was determined that will involve building the TANAP pipeline through Turkey, which will link up with the Trans Adriatic Pipeline that will transport the gas from Greece via Albania and the Adriatic Sea to Italy and further to Western Europe.

""We project a modest slowdown in [Azerbaijan's] economic growth to about 4% in 2014-2017 from 5.8% in 2013, due to stagnating oil production, gradual weakening of oil prices to about $103/barrel in 2015-2016, and decelerating growth

rates in the non-oil sector," S&P said. "We think that lower public-sector capital spending will further slow economic growth. Nevertheless, we anticipate that GDP growth will be supported by a substantial inflow of investment into the development of new oil and gas fields, in conjunction with last year's increase in public-sector salaries and other social-related expenditures."

As such, Azerbaijan's GDP per capita will likewise continue to grow from $8,290 in 2014 to $10,292 in 2017. "Long-term GDP per capita growth of about 3.0% is in line with that of Azerbaijan's peers, although the country's wealth levels remain relatively low," S&P said.

In affirming the country's 'BBB-/A-3' long- and short-term sovereign credit ratings with a stable outlook, S&P noted it reflects the view that Azerbaijan's general government net asset and external creditor positions are solid, despite some gradual weakening from the previous several years when the country experience rapid oil-related revenue growth. "Although we expect the general government budget to start running deficits and accumulating debt, we anticipate that the overall fiscal profile will remain strong over the next couple of years," said.

It added, however, that the ratings are constrained by Azerbaijan's modest economic wealth levels, generally weak institutional and governance effectiveness, and limited monetary flexibility.

Economics & finance

August 2014




Foreign investment into

Azerbaijan up by 20% in first

half of this year to over $3bn

The total volume of foreign investments made in Azerbaijan's economy increased by 18.9% year-on-year to top AZM2.6bn ($3.3bn) in January-July 2014, the Azerbaijan's State Statistics Committee said.

Some 79.8% of fixed investments was made by foreign companies from the UK, Norway, US, Turkey, Japan and France.

The UK continues to be the biggest investor into Azerbaijan accounting for a about a third of all the capital invested (31.7%), or $1bn.

The Norwegians are next more important investors, also largely investing into the oil and gas sector, accounting for 17.9%, of $593m. Turkey is also amongst the fastest growing investors in Azerbaijan and put $300m into the country in the first half of this year.

Amongst the international financial institutions the World Bank was the biggest investors, with $90m, or 2.7% of the total. The Asian Development

Bank (ADB) is also active and allocated another over $26.4m into projects in Azerbaijan in January-July.

Domestically fixed investment was also growing. A total of AZM9bn ($11.25bn) was invested domestically, a 3% rise year-on-year in the period, with just over 70% of the amount invested into domestic companies. Of these 65% went to state-owned companies with the remained invested by private enterprise.

The government is actively directing investment at the non-oil and gas sector as part of its drive to diversify the economy. Over AZM5.6bn ($7bn), or 61.9% of the funds invested in the fixed capital, went towards the development of non-oil sector, significantly more than the AZM3.5bn ($4.4bn) invested into the oil industry sector in the same period.

All in all Azerbaijan has attracted a total of $83.8bn worth foreign investment between 1995 to 2013, of which $35bn was invested into the non-oil sector.

The nominal GDP growth stood at 4.3% and GDP per capita increased by 1.1% and exceeded AZM3,621 ($4,526) in the reported period.

August 2014




Azerbaijan's total trade

turnover down 10% over the

first half of this year

Azerbaijan's trade with its 137 foreign trade partners slowed in the first half of this year to a total turnover $18bn, down 9.53% year-on-year,the State Customs Committee said.

According to the Customs Committee, Azerbaijan's merchandise exports increased by 10% on year in June, while imports decreased by 25%. For the first half, however, total exports fell by 6% on year, while imports declined by 20%. The growth in exports in June was mainly driven by agricultural products and minerals (crude oil, natural gas, and oil products).

About 4,676 legal and physical entities were involved in foreign economic activities in the reported period, some 3,107 of which were legal entities and 1,569 physical entities.

Export were worth $13.25bn, which is 4.44% less compared to the same period of 2013, while imports were $1.22bn of private sector imports and another $3.47bn of corporate (mainly state) entities.

The share of the public sector in export operations was estimated at $12.47bn (mainly oil), the private sector at $659.57m and physical entities' share stood at $115.65m. Imports exceeded $4.88bn in January-July, which is 20.97% less compared to the same period of 2013.

Azerbaijan's consolidated budget posted a surplus of 5.7% of GDP in the first half compared with 5.2% in the year-earlier period and 3.6% in the first quarter. Almost flat expenditure, along with slightly higher revenue were the main factors behind the surplus. On the revenue side, non-oil revenues increased by more than 17% from $3.8bn in the first half of 2013 to $4.5bn in first half of 2014.

August 2014




Azerbaijani space company

enters Afghan TV broadcasting

market

Azerkosmos OJSC signed a contract with the Afghan Payvastun (APMC) media and communications company to broadcast the Batur TV channel through the "Azerspace-1", according to the company's report, Trend reported.

Batur TV is the first Afghan TV channel that will be broadcasted through the national satellite of Azerbaijan.

The signing of this agreement is of great importance in terms of entrance of Azerkosmos in the Afghan television market.

Azerbaijan to increase size of

insured deposits

The Azerbaijan Deposit Insurance Fund (ADIF), which provides insurance for bank deposits in banks, announced that it is ready to consider increasing the sum of insurance coverage for a single deposit, which has stood at AZM30,000 ($37,500) since 2009, Azernews reported.

Only deposits with the maximum AZM30, 000 ($37,500) and the annual interest rate of 10% or less are paid-off by ADIF to the protected depositors of banks which provide insurance coverage.

Tony Blair to advise on TAP

Former British prime minister Tony Blair is to advise the consortium behind the Trans Adriatic Pipeline (TAP), the final leg of a 2,000-mile gas pipeline that will carry gas from Azerbaijan through Turkey and into Europe.

EBRD, Unibank to provide loan

to Azerbaijan's oil-service

company

The European Bank for Reconstruction and Development (EBRD) and Azerbaijan's Unibank will provide a loan worth $10m to Dalgidj LLC for the expansion of the company's activities, Trend reported.

"The loan will be used for the acquisition of a new remotely operated vehicle (ROV) and the construction of a new warehouse," EBRD said on August 1.

World Bank allocates $150m

for expansion of water supply

The World Bank's Board has approved a $150m loan to improve and expand Azerbaijan's water supply, the bank said on its website in July.

The additional financing will be spent to improve the quality and reliability of the water supply and

News in brief

August 2014




to expand water supply and sanitation services in selected regional centers in Azerbaijan.

The Azerbaijani government will contribute $83m to the project, which will run to the end of 2017.

"The project primarily targets the population of secondary towns and suburban villages, which are mostly rural and more vulnerable. The provision of basic public infrastructure services, such as reliable piped water supply and sanitation, would have a significant impact on the livelihoods of the rural population, and contribute to World Bank Group's twin goals to reduce poverty and promote shared prosperity," World Bank Director for South Caucasus Henry Kerali said.

Azerbaijan's gross international

reserves up 8.4% to $54bn at

the end of first half of this year

The world is still wallowing in the after effects of the 2008 crisis, but Azerbaijan has managed to maintain its cash-cushion of hard currency reserves.

The country's gross international reserves were up by 8.3% year-on-year in the first half of this year, or by $4.2bn to $54.4bn as of July 1, the Central Bank of Azerbaijan (CBA) said in a report on monetary policy on the results for January-June 2014.

This is equivalent to a whopping three-years of import coverage, whereas most countries keep a mere three months of import cover as their cash reserve.

"As in previous years, the external position of the country was at an acceptable level. As a result, positive developments in the foreign sector affect the dynamics of the foreign exchange reserves, which continued to increase this year," the report modestly says.

Indeed if anything the strong inflows of petrodollars is a headache for the central bank, which sterilized a total of $967m in the first half of 2014, keeping the cash out of the economy least it stoke inflation or drive the value of the currency up.

"With the balance of payments in the currency market supply exceeding, demand thereby strengthens the national currency. The central bank continued the exchange rate policy within the framework of bilateral targeting of dollar / manat in order to ensure a balance between supply and demand", the report says.

Since the beginning of the year, the manat rate against the dollar has not changed, entrenching by 0.03%. The dynamics of the nominal bilateral exchange rate of manat affected the changes in the real bilateral exchange rate.

Azerbaijan invested $89.9m in

Georgia in 2013

Azerbaijan continued its investment programme into neighbor Georgia as the two countries continue to build up their partnership.

Azerbaijan is the fourth largest investor in Georgia in 2013, according to the Georgia's National Statistics Office (GeoStat).

August 2014




The Netherlands ranks first in foreign direct investments (FDI) with a 16% share in the total foreign investments in the Georgian economy. It is followed by Luxembourg (15%) and China (10% ).

Azerbaijan increases quota in

IMF

Azerbaijan has committed itself to increasing its contribution and quota to the International Monetary Fund (IMF), which will increase both its prestige as well as its clout in the international oganisation.

"The country now ranks 65th in the world by the size of its economy, compared to 1995, when it ranked 124th," Head of Azerbaijan's Central Bank (CBA) Elman Rustamov, said addressing the event. He also noted that Azerbaijan's nominal GDP per capita has doubled every five years since 1995 and that the country ranks 39th in the global competition index out of 188 countries. Azerbaijan joined the IMF on September 18, 1992, and its quota currently amounts to about $248m.

Azerbaijan rank 4th in per

capita GDP among CIS states

The fast growing economy, driven by petrodollars, is trickling down to the people who are now the fourth best off in the Commonwealth of Independent States (CIS) in per capita terms.

Azerbaijan per capita GDP was up to $7,812 in 2013, according to the World Bank's database, from $7,394 a year earlier, which places the country 67th among world countries and 4th among CIS states after Russian Federation ($14,612), Kazakhstan ($13,172) and Turkmenistan ($7,987).

Surprisingly this makes people in Azerbaijan better off than the darlings of the east, the Baltic States, but well behind the leader, ($111,000 per capita), which is the richest in the world on a per capita basis.

August 2014

bne:Invest in Azerbaijan - August 2014

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