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Azerbaijan

Summary Details:

  • iconS&P Rating: BBB-
  • iconMoody's Rating: Baa3
  • iconFitch Rating: BBB-
  • iconDepository Insurance: AZN 30,000
  • iconIncome Tax: 10%
  • iconCorruption Index: 126
  • iconPeace Index: 123
  • iconDate Modified: Jun-2015

Syndicated Analyses:

Global Conflict Tracker "Conflict Between Armenia and Azerbaijan" 29-May-2015:
Nagorno-Karabakh—the disputed region between Armenia and Azerbaijan—faces increased risk of renewed hostilities due to the failure of mediation efforts, escalating militarization, and frequent ceasefire violations. Although 95 percent of Nagorno-Karabakh is ethnically Armenian, it is internationally recognized as being part of Azerbaijan. The conflict over the secessionist territory officially ended with a ceasefire in 1993, following a six-year war, but recently flared up again. Since August 2014, minor skirmishes between Azerbaijani and Armenian troops have killed dozens of Azerbaijani and Armenian troops and also led to the downing of an Armenian helicopter by Azerbaijani forces in November 2014. Negotiation and mediation efforts, primarily led by the Organization for Security and Cooperation in Europe (OSCE) Minsk Group, have failed to produce a permanent solution to the conflict.
Azernews "Azerbaijan shifts to managed floating exchange rate" 02-Apr-2015:
The Central Bank of Azerbaijan put an end to the dollar peg for the manat in February that had held since mid-2011. The manat weakened by 33.5 percent against the dollar, and by 30 percent against the euro last month. Such pressure on the national currency has been ongoing for months as oil prices tumbled by more than 50 percent from summer 2014
The Central Bank reserves fell by nearly $1.13 billion in December and by $1 billion in January to stand at $12.68 billion, down more than 10 percent from 2014
Fitch Ratings "Azerbaijan Currency Devaluation to Hurt Banks' Capital" 25-Feb-2015:
The devaluation of the Azerbaijani manat will hurt banking sector capitalisation, Fitch Ratings says. The banks have large numbers of foreign-currency denominated loans and are exposed to losses on short FX positions. Greater dollarisation of the economy and banks' balance sheets mean that FX risks are likely to be significant for the sector over the medium term.
Several banks have booked considerable losses as a result of the devaluation and their own substantial open short FX positions. We estimate that some banks could have breached their regulatory capital adequacy ratios, but believe the authorities may introduce some regulatory forbearance to support banks' formal compliance, as was the case in Russia. 
Trend News Agency "Maximum interest rate on insured deposits increased in Azerbaijan" 24-Feb-2015:
Starting from February 24, the Azerbaijan Deposit Insurance Fund (ADIF) increased the maximum level of interest rate on insured deposits from 9 to 12 percent, the fund said
As of early February 2015, the insurance reserves of the fund amounted to 92 million manats. The maximum amount of insurance coverage for deposits in Azerbaijan is 30,000 manats. ADIF started operating on August 13, 2007. At present, 43 of the 45 banks operating in the country are members of the fund.
Reuters "Azeri central bank abandons currency peg to U.S. dollar" 16-Feb-2015:
The Azeri central bank said on Monday it had abandoned its currency peg to the U.S. dollar and would instead use a dollar-euro basket to manage the exchange rate of the country's manat currency. "A decision has been made to conduct a policy based on a mechanism of a dual-currency basket, which includes the dollar and euro," the central bank said in a statement.
FTSE Global Markets "S&P outlook for Azerbaijan revised to Negative" 30-Jan-2015:
Standard & Poor's Ratings Services revised its outlook on the Republic of Azerbaijan to negative from stable. At the same time, we affirmed the 'BBB-/A-3' long- and short-term sovereign credit ratings on Azerbaijan. The change is based on the view that the country’s fiscal and external balances will be hurt by the substantial drop in oil prices, though government debt levels remain very low. The outlook revision reflects S&P’s view that Azerbaijan's government might draw down its currently substantial fiscal buffers or accumulate general government debt more rapidly than what we had previously expected in order to compensate for significantly lower oil prices. “We affirmed the ratings because Azerbaijan's strong external and government balance sheets continue to support the ratings,” says S&P.
Fineko Informational & Analytic Agency "Over 500 manat income on deposits to be subject to income tax in Azerbaijan" 29-Dec-2014:
The Parliamentary Economic Policy Committee has considered today the amendments to the Tax Code of Azerbaijan, which cancels a zero tax rate for income on deposits for individuals. In the course of Committee’s meeting Deputy Tax Minister Natig Amirov has stated that the amendments stipulate the application of income tax for deposits exceeding 500 manat a year. Income for a smaller amount will be taxed at the rate of 0%,” Amirov said. Income tax on retail deposits is 10%.
Reuters "Azerbaijan sees fall in oil sector's contribution to GDP" 17-Oct-2014:
Oil-rich Azerbaijan has calculated next year's budget based on an oil price of $90 per barrel, down from $100 this year, and predicted a significant fall in the sector's contribution to gross domestic product. The draft 2015 budget approved by the government and submitted to parliament on Friday, foresees economic growth of 4.4 percent, up from 3.6 percent expected this year and down from 5.8 percent last year. But the oil sector is expected to decline to 34.9 percent of GDP from 40.4 percent in 2014.
Reuters "Fitch Affirms Azerbaijan at 'BBB-'; Outlook Stable" 26-Sep-2014:
Fitch Ratings has affirmed Azerbaijan's Long-term foreign and local currency Issuer Default Ratings (IDRs) at 'BBB-'. The Outlooks are Stable. The affirmation and Stable Outlook reflect the following key factors: Azerbaijan's sovereign balance sheet is one of the strongest of any rated sovereign and underpins the rating.
Azernews "Azerbaijan's strategic currency reserves exceed $54 bln in H1" 11-Aug-2014:
The total amount of the strategic currency reserves of Azerbaijan increased by 8.3 percent or $4.2 billion reaching to $54.4 billion in the first six months of 2014, the Central Bank of Azerbaijan (CBA) said in a report on monetary policy
Rapid growth of the currency reserves was the main factor for the formation of a strong macroeconomic buffer and reduction of sensitivity of the domestic economy towards external shocks.
U.S. Department of State "2014 Investment Climate Statement - Azerbaijan" 01-Jun-2014:
Azerbaijan has an underdeveloped financial services sector – of which banking comprises more than 90 percent – that inhibits economic stability, growth and diversification.
With around 45 private banks, Azerbaijan’s banking sector is fragmented; the fragmented structure reinforces oligarchic control of the economy and holds back private sector growth, as smaller firms find it difficult to finance expansion. Foreign ownership in the banking sector is limited to 50% percent ownership on an aggregate basis; currently there are around 22 banks in Azerbaijan with some investment by foreign capital.
Total banking sector assets were 26 billion USD as of January 1, 2014, with the top five banks holding almost 58 percent. The majority state-owned International Bank of Azerbaijan (IBA) accounts for approximately one-third of the country’s banking assets, but has had problems meeting minimum capital adequacy requirements. The Central Bank of Azerbaijan (CBA) has been focused on encouraging consolidation in the sector and, in August 2012, the CBA raised the minimum capital requirement from 10 million AZN (12.7 million USD) to 50 million AZN (63.7 million USD), effective January 1, 2014. However, the increase in the capital adequacy ratios failed to consolidate the banking sector as anticipated.
Pervasive corruption – including bribery of public officials – continues to be a major challenge for U.S. and other international firms operating in Azerbaijan. Although anti-corruption legislation is in place, corrupt practices permeate all spheres of public life. Officials from the lowest ranks of the civil service to the top echelons of government are believed to benefit from systemic corruption in the country. The Government of Azerbaijan recognizes that corruption is a problem but, to date, laws and regulations to combat corruption have not been effectively or consistently enforced. Azerbaijan has made modest progress in implementing a 2005 Anticorruption Law, which created a commission with the authority to require full financial disclosure from government officials.
In 2013, Azerbaijan’s modest improvements in combating petty corruption were reflect in the global anticorruption watchdog Transparency International, which ranked Azerbaijan 128 out of 177 countries on its Corruption Perceptions Index, up from 139 a year before. Popular opinion identifies the State Customs Committee as the institution of greatest concern to businesses in Azerbaijan, followed by the Ministry of Taxes – though the reputation of the tax authorities has enjoyed some improvement in the past year as corruption-reducing reforms have been implemented.
Economic diversification continues to be a stated goal of President Aliyev and the government, despite what appears to be diminished zeal for economic reform compared to a period of rapid reform from 2007 to 2009, which led the World Bank to name Azerbaijan as one of the top ten global reformers in its 2009 Doing Business report (71 of 189).
inefficient government bureaucracy, weak legal institutions, requests for illicit payments for cross-border transactions, and predatory behavior by politically-connected monopolistic interests hinder investment outside of the oil and gas sector and present challenges for U.S. companies. Azerbaijan has worked to improve its regulatory system over the past several years, but a continued lack of transparency and allegations of corruption remain key problems in this area.
While there are no state-owned enterprises that officially have been delegated governmental powers, companies such as the State Oil Company of the Azerbaijan Republic (SOCAR), Azerenerji (electricity) and Azersu (water) – all of which are closed joint-stock companies with majority state ownership and limited private investment – enjoy quasi-governmental or near-monopoly status in their respective sectors.
The Government of Azerbaijan officially welcomes foreign direct investment (FDI), but the recognition of its importance to the development of a robust and diverse economy still lags in some parts of the government.
Politically connected businesses benefit from government regulatory and other decisions to achieve effective control over lucrative sectors of the economy, and U.S. companies have been among those impacted. Powerful state-owned enterprises, such as the Azerbaijan State Caspian Shipping Company (CASPAR) and Azerbaijan Airlines (AZAL), have regulatory authority that they can exploit to block new entrants into the market – a clear conflict of interest. Major businesses are run by senior government officials or other politically-connected individuals who wield inordinate influence on the market economy; these monopolistic actors often exercise their political connections and economic power in a manner that discriminates against or unfairly burdens foreign investors or foreign-owned investments.
The State Oil Fund of Azerbaijan, established in 1999, had 35.8 billion USD in assets as of January 1, 2014, and is the world’s 24th largest sovereign wealth fund, according to the Sovereign Wealth Fund Institute.
There have been no known acts of political violence against U.S. businesses or assets, nor against any foreign owned entity.
Today.Az "Depositors of bankrupt bank in Azerbaijan compensated by over 88% of insured assets" 26-Jul-2013:
As of July 1 the Azerbaijani Deposit Insurance Fund (ADIF) has carried out compensation payments worth 13 million manats on insurance event dated July 16, 2012 in relation to OJSC Royal Bank's bankruptcy, the fund's report posted on its website on Friday said. The paid money paid for compensation makes 88 percent of the compensated sum.
Trend News Agency "Azerbaijani Royal Bank officially declared bankrupt" 02-Aug-2012:
Royal Bank has been declared bankrupt and bankruptcy proceedings began in accordance with the decision of the administrative and economic Baku Court 
The license for banking activities of "Royal Bank" has been eliminated by the Central Bank of Azerbaijan (CBA) on July 12. The closure of Royal Bank was officially recognized as insurance case, and moratorium was appiled to fulfill its obligations to depositors. In this regard, three of the agent bank - Muganbank, Bank Respublika, Agbank started paying compensation to the depositors of the bank. Compensation will be paid to 6255 depositors in the total amount of $17.223 million manat.
Wikileaks Global Intelligence Files "Who owns what in Azerbaijan" 15-Dec-2010:
Observers in Baku often note that today's Azerbaijan is run in a manner similar to the feudalism found in Europe during the Middle Ages: a handful of well-connected families control certain geographic areas, as well as certain sectors of the economy
As a result, an economy already burgeoning with oil and gas revenues produces enormous opportunity and wealth for a small handful of players that form Azerbaijan's elite.
Creation of financial structures and uncontrolled inflow of capital to those structures have become a popular way of money laundering in Azerbaijan. According to the calculations made by Turan, based on official information, over the last six months, the authorized capital of 11 banks belonging to the government officials has increased by 150 million AZN.
Wikileaks Global Intelligence Files "Economic Decision-Making Azerbaijani Style" 16-Mar-2006:
President Ilham Aliyev is the lead economic and political decision-maker in Azeraijan. Aliyev, however, makes most economic polcy decisions relying upon a small close group of business contacts and trusted government ministers.
Based on past and current economic policy decisions, one can conclude that President Aliyev and his close allies generally make key economic decisions based on their personal business and financial interests.
By all accounts, President Aliyev follows closely the macroeconomic situation and retains final economic decision-making power. While President Aliyev most certainly makes some economic decisions based upon his personal and family wealth interests, he has led GOAJ efforts to reduce poverty and increase the economic development of Azerbaijan's regions. He is widely rumored to be Azerbaijan's richest person and his wife Mehriban Aliyeva is from the politically powerful Pashayev family. While it is widely assumed that Aliyev controls vast assets, Aliyev is not linked either publicly or privately to any known business ventures in Azerbaijan.
To one extent or another, all of Azerbaijan's key decision makers are resistant to advice from the international financial institutions (IFI). Economic Development Minister Heydar Babayev is the most resistant to the International Monetary Fund and its past efforts to reform the economy, and especially its attempts to privatize the state-owned International Bank of Azerbaijan. Babayev also has criticized the role of the European Bank of Reconstruction and Development for its investments in mid-tier banks, such as Bank of Baku and UniBank.

Banks table:

Size RankSort DescBank NameSort DescAssets in thousands AZNSort DescProfits in thousands AZNSort DescS&P RatingSort DescTop RateSort DescView
1International Bank of Azerbaijan9,198,76825,510N/A5.75%View
2Kapital Bank1,375,34367,859B-6%View
3Xalq Bank1,268,02742,791N/A3%View
4Bank Standard1,200,0000N/A11.5%View
5AccessBank1,054,46140,436N/A3%View