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THE CAUCASUS & GLOBALIZATION
Ali MASIMLI
Ph.D. (Econ.), deputy of the Milli Mejlis (parliament) of the Azerbaijan Republic, member of the Milli Mejlis Standing Commission for
Economic Policy (Baku, Azerbaijan).
AZERBAIJAN AND THE WORLD FINANCIAL CRISIS
Abstract
This article takes a look at the nature and main features of the world financial crisis, the reasons for it, and why it became aggravated. It analyzes the influence of the world crisis on the financial, real, and social sectors of Azerbaijan’s economy. It puts forward possible development scenarios of the situation in Azerbaijan in the context of the world financial crisis. It examines the anti-crisis measures adopted by the government and the Central Bank of Azerbaijan, discusses ways to overcome the crisis, and offers several solutions aimed at reducing the risks of the crisis for Azerbai-
jan’s economy. The author believes that world oil prices, the duration of the financial crisis, and any extreme fluctuations in the national currency—the manat—will have the most profound effect on the scope of Azerbaijan’s economic problems. The government’s anti-crisis program should be implemented as soon as possible in order to minimize the influence of the world crisis on Azerbaijan’s economy and a transfer be made to the next stage in economic transformation, with the emphasis on institutional and structural reforms, in order to maintain the economy’s accelerated development.
THE CAUCASUS & GLOBALIZATION
I n t r o d u c t i o n
The world is in the throes of the worst financial crisis since the Great Depression. The crisis in the U.S. financial market and its rapid spread to the financial systems of many other countries by means of the domino effect is continuing at breakneck speed. Following the current financial crisis, the world economy returned to a quasi “global transition period.” State participation in today’s economy has increased dramatically and there is a growing trend toward a significant transformation in the corporate structure of the world financial market. An analysis of crisis history shows that the following rather inadequate alternatives are mainly resorted to in order to ensure rapid withdrawal from a crisis situation: first, accelerated withdrawal from the crisis through deflation and collapse; second, rapid withdrawal from the situation and its stabilization by means of hyperinflation; and third, rapid withdrawal from the crisis by instituting a partial default and currency devaluation. At present, the third alternative is mainly being applied in order to recover from the crisis as quickly as possible. However, emergency measures to overcome the consequences of the crisis have only ensured temporary stabilization, without eliminating the underlying causes. In this respect, questions regarding new sources of risks, strategies of the main economic players, as well as the economic policy of certain countries, including Azerbaijan, are moving to the forefront in order to ensure sustainable development in the conditions of the global financial crisis. Keeping in mind the scope and most likely prolonged nature of the world crisis, essentially new approaches and mechanisms must be elaborated for stabilizing the situation in the financial, real, and social sectors of the economy.
The Nature, Main Features, and Consequences of the World Financial Crisis
The history of the world economy shows that its development is cyclical in nature, periods of economic growth are followed by slumps and recessions. For almost two centuries the following pattern has been observed in the economic development of many countries: 7-11 years of stagnation, revival, and upswing, that is, tempestuous development, followed by a crisis. This process is usually accompanied by the accumulation of an enormous amount of unsold goods in the market, a drop in the price of many commodities, a production slump, bankruptcy of enterprises and banks, a rise in unemployment, and so on. Until the 20th century, crises inflicted only a limited number of countries, but later they began to acquire increasingly wider and deeper dimensions. According to specialists of the World Bank, as early as the mid-1990s, more than 90% of the planet’s population was drawn one way or another into the globalization processes. This is expressed in the dynamics of such economic indices as the foreign trade volume, foreign direct investments, and operations on the international financial markets. The economic potential of foreign exchange, credit, and financial relations has long exceeded the economic and foreign trade vigor of the largest countries of the world community. In recent decades, the role of international foreign exchange, credit, and financial relations has been rapidly growing. For example, at present, the cost index of world commodity trade amounts to only 5% of the world trade in foreign currencies.1 Whereas in 1986, the European money market amounted to 44.5 billion dollars, in 1996 it reached 834.1 billion dollars, in 2001 2,133.5 billion dollars, and in 2006 it was close to 2.5 trillion dollars,2 that is, in the last twenty years it has increased 56.2-fold.
1 See: K. Rudyi, Mezhdunarodnye valiutnye, kreditnye i finansovye otnosheniia, Moscow, 2007, p. 57.
2 See: Ibid., p. 145.
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At the current stage in world economic development, the expansion and intensification of financial relations are promoting the efficient development of national economies and are playing an immense role in accelerating world economic growth and raising personal prosperity. At the same time, practice shows that crisis phenomena in financial relations that unfold by means of the domino effect have a negative influence on the entire range of economic relations, particularly on the real and social sphere of the economy in many countries. This is graphically shown by the current world financial crisis. This crisis is more extensive than the crises of the past. The crisis, which began with the collapse of the U.S. mortgage loan market in 2008, rapidly spread to the financial systems of many countries of the world and is continuing its encroachment on the real and social sectors of the economy. According to the data of corresponding stock exchanges for May-October 2008, the index on Russia’s currency exchange (MICEX) dropped by 72%, in RTS by 65%, in China (Shanghai SE) by 40%, in Japan (Tokyo SE) by 29%, in Great Britain (London SE) by 28%, in France (Euronext Paris) by 28%, in the U.S. (NASDAQ) by 27%, DOW JONES IND by 24%, in Germany (Deutsche Boerse) by 25%, in Poland by 27%, and in Hungary by 22%. “By the end of 2008, the indexes of the world’s leading stock exchanges dropped by at least 40%. The damage to the stock exchanges of developing countries was even greater and their indexes fell by 50-75%. The decrease in global demand in the world commodity markets also led to an abrupt drop in prices. Here special mention should be made of the 4-fold drop in oil prices and the 2-2.5-fold decrease in the price of non-ferrous and ferrous metals and other commercial production during this period. As a result, many industrial enterprises greatly reduced or entirely halted their production. This slump inevitably led to a mass lay-off of employees in both the financial and industrial sectors. The worldwide financial crisis has put the economies of all countries without exception, including Azerbaijan, to serious tests.”3
Crises: Their Reasons, Aggravating Factors, and Different Manifestations
An analysis of the reasons for the emergence of economic crises carried out by economists of different profiles leads us to conclude that the conception of cyclic economic development is theoretically the most justified. The cyclic economic development emerges when the most vital macroeconomic ratios, such as production : consumption, demand : supply, real : financial sectors of the economy, are violated. The current financial crisis is often compared to the Great Depression of 19291933. The 2008 world financial crisis is indeed similar to the Great Depression in terms of the breadth and depth of the crisis phenomena. Nevertheless, whereas that crisis was generated by the overproduction of goods, the current crisis has resulted from the overproduction of debts. The current financial crisis is distinguished by both its depth and breadth, as well as its own special features. Whereas the crisis in the U.S. gained momentum as the result of surplus liquidity in the economy, in Russia, Ukraine, and other countries with an emerging economy it began as the result of a liquidity crisis. Some economists believe that the main reasons for the current world financial crisis are the extremely expansive monetary policy of the U.S. government; the existence of a huge imbalance in the world economy; the crisis in the U.S. mortgage loan market; the extremely small amounts of capital in U.S. companies and investment banks, and so on. Other economists believe that “the current crisis in the global financial system has three components.
3 Information of the Azerbaijan Republic Ministry of Finance, available at [www.maliyye.gov.az] (in Azeri); “Vys-tuplenie ministra finansov Azerbaidzhanskoi respubliki S. Sharifova na zasedanii Kabineta ministrov, posviashchennom itogam sotsialno-ekonomicheskogo razvitiia v 2008 godu,” Bakinskiy rabochii, 20 January, 2008, p. 3.
THE CAUCASUS & GLOBALIZATION
■ First, self-destruction of the U.S. pyramid of debt obligations.
■ Second, “virtualization” of financial operations provoking further distancing of the financial market from the real sector of the economy.
■ Third, devaluation of financial capital in conditions of a structural crisis in the economies of the leading countries due to exhaustion of the potential for economic growth based on the dominating technological mindset.”4
There are economists who associate the world financial crisis with the contradictions between property owners and managers ofjoint-stock companies, as a result of which banks began indulging in a very indiscriminate policy, handing out loans right and left, and with the movement of fictitious capital and rapid growth of speculative operations beyond the stock market. According to experts, “financial operations relating to material production account for only 2-3%, that is, 97% of liquidity is serviced by the financial sector, turning it into a ‘thing in itself.’ The contradictions swelled until they were fit to burst, which is precisely what happened.”5
It stands to reason that all of these factors set forth by different profiles of economists played an important role in the emergence and spread of the current financial crisis. Nevertheless, in our opinion, the current financial crisis is primarily of an extremely objective nature and is associated largely with the cyclical (crisis-stagnation-revival-upswing) development of the market economy. However, the dimensions of the current crisis are largely associated with geopolitical and military factors, on the one hand, and with ignoring the demands of economic laws and regularities, on the other, as well as the basic principles of the market economy, hence the severe punishment. It was opposition to the market processes that led to the difficult consequences both during the Great Depression in the U.S. in 1929-1933 and during the current world financial crisis. The following factors can also be named:
—incorrect economic policy, which during the past 20 years was mainly aimed only at repressing inflation;
—rapid rise in the imbalance between the financial and real sectors of the world economy;
—overproduction of the main world currency, the dollar, and loss of its status as the only world currency;
—huge amount of fictitious capital in the financial market;
—negative influence of speculative relations on the financial and commodity exchange markets;
—artificial increase in oil prices over a short period of time;
— surplus liquidity in the U.S. economy;
—behavior of transnational companies;
—bad management in the financial market;
—underassessment of risks;
—asymmetrical information about the activity of stock exchanges;
—decrease in investors’ confidence in emerging markets, and so on.
Consequently, it can be said that the current world financial crisis is quite natural and of an objective character both in essence and in content, while it is artificial in form, that is, to a certain extent it is “handmade.” Therefore it quickly spread throughout almost the entire world and is of an
4 Rossiiskiy ekonomicheskiy zhurnal, No. 9-10, 2008, p. 8.
5 Ibid., p. 11.
THE CAUCASUS & GLOBALIZATION
extremely destructive nature. According to the Russian Ministry of Finance, the anti-crisis measures total 2,045-2,145 billion rubles (approximately 68-70 billion dollars) or 5.2-5.4% of the GDP.6 While according to the Bank of England and the Russian Ministry of Economic Development, the level of government spending on overcoming the crisis in the bank system for October 2008 amounted to 10% of the GDP in Russia, 7-9% in the U.S., 25% in Great Britain, 19% in Germany, and 19% in France. But the anti-crisis measures and enormous financial resources were not enough to recover from the crisis. As a result, the mortgage crisis turned into a banking crisis and the banking crisis into an industrial crisis. The threat of a default arose not only in terms of the state’s external debt, but also in terms of the external debts of the private sector. Mass bankruptcies are threatening an increase in unemployment. Private capital is being replaced by government capital. Many exchange rates are dropping. Wages are being frozen, there are wage and pension arrears, and personal income is on the decline. Banks are raising interest rates on loans and mortgage programs are folding. In many countries of the world state investment projects are being cut back and there is the danger of a food crisis.
Azerbaijan’s Economy in the Context of the World Economic Crisis
In the context of the world financial crisis, Azerbaijan’s economy is showing sufficiently encouraging macroeconomic indices and, despite the crisis situation in the world, is continuing to develop at high rates. Whereas the growth in the world economy in 2008 compared to 2007 amounted to 2.5%, in the EU countries to 2%, and in the CIS to 5%, Azerbaijan’s economy grew by 10.8% last year, which is twice as high as the average growth rates for the CIS countries. It should be noted that such high rates were observed in conditions of an abrupt drop in world oil prices, which has an enormous impact on the country’s economy. Due to the successful development of the non-oil branches of the economy, the increase in the volume of the non-oil GDP amounted to 15.7% and to 7% in the oil sector. In 2008, Azerbaijan’s per capita GDP topped 5,000 dollars. Last year, this index amounted to 4,440 manats or 5,404 dollars. In industry, the production volume increased by 7%. Oil production increased by 4.6% and amounted to 44.5 million tons, while natural gas production rose by 50.4% and amounted to 16.3 bcm. The production volume of the processing industry increased by 7.4%, including production of the chemical industry by 34.2%, the metallurgical industry by 23.3%, and machinery and equipment by 7.9%.7
One of the serious consequences of the world financial crisis is the noticeable drop in investments in the national economies. But no serious problems have been observed in Azerbaijan in this respect. As in previous years, the Azerbaijani economy continued to receive sufficiently large financial resources in 2008. In 2008, 9,073.6 million manats (10,628 million dollars) were invested from all financial sources in the development of the country’s economy, which is 34.35% more than in
2007. Of the funds invested in basic capital, 30.9% or 2,805 million manats (3,286 million dollars)
6 See: A. Kudrin, “Mirovoi finansovyi krizis i ego vliianie na Rossiiu,” Voprosy ekonomiki, No. 1, 2009, p. 23.
7 See: IMF Report World Economic Outlook (WEO); “Sotsialno-ekonomicheskoe polozhenie stran SNG v 2008 godu. Obshchie itogi,” 3 February, 2009, available at [www.cisstat.org/rus/]; Macroeconomic Indices of Azerbaijan, State Statistics Board of the Azerbaijan Republic, 21 January, 2009 (in Azeri); “Vystuplenie ministra ekonomicheskogo razviti-ia Sh. Mustafaeva na zasedanii Kabineta ministrov, posviashchennom itogam sotsialno-ekonomicheskogo razvitiia v 2008 godu,” Bakinskiy rabochii, 20 January, 2008, pp. 3-4; “Vystuplenie predsedatelia pravleniia Natsionalnogo banka Az-erbaidzhanskoi respubliki E. Rustamova na zasedanii Kabineta ministrov, posviashchennom itogam sotsialno-ekonom-icheskogo razvitiia v 2008 godu,” Bakinskiy rabochii, 20 January, 2008, p. 4; Information of the Information Service of the State Oil Fund of the Azerbaijan Republic, January 2009, available at [www.oilfund.az/az] (in Azeri); Information of the Information Service of the National Bank of the Azerbaijan Republic, 12 January, 2009, available at [www.nba.az].
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went to develop the country’s oil sector, and 69.1% or 6,268.6 million manats (7,342.4 million dollars) to the non-oil sector of the economy. Compared with 2007, in 2008 investments in the non-oil sector increased by 81.3%.8
The revenue part of Azerbaijan’s budget for 2008 was executed by 102%.
In 2008, budget revenues rose by 79.2%, or by 4 billion 756 million manats (5.571 million dollars) and amounted to 10 billion 484 million manats (12,280 million dollars). Budget spending increased by 75.5% or 4 billion 594 million manats (5,381 million dollars) and amounted to 10 billion 680 million manats9 (12,059 million dollars). According to specialists from the International Monetary Fund (IMF), Azerbaijan’s state budget for 2009 will not suffer in the short term from the drop in prices in the world market.
Under the influence of the 2008 world financial crisis many countries have experienced a sharp drop in the national currency exchange rate, a deterioration in the payment and foreign trade balance, a significant outflow of capital from the country, and other negative phenomena. In contrast to other countries of the region, Azerbaijan has not experienced a massive capital outflow. In 2008, the manat exchange rate in relation to the leading world currencies remained stable, the manat-to-dollar exchange rate strengthened by more than 5%, while the manat-to-euro rate rose by more than 9%. Compared with 2007, the country’s balance of payments surplus doubled and according to preliminary estimates amounted to 18 billion dollars.10
In 2008, the Baku Interbank Exchange Market achieved the largest increase in tenders during the entire fifteen years of its activity. Whereby the volume of exchange tenders exceeded the turnover for 2007 by 517 million manats (629 million dollars) or by 34% and amounted to 2,051 million manats (2,495 million dollars).
Between August 2008 and 1 January, 2009 Russia’s international reserves dropped from 598 billion dollars to 427 billion dollars which is 1.2-fold less than the country’s total external debts.11 In Azerbaijan, however, the assets of the State Oil Fund of the Azerbaijan Republic (SOFAR) rose 4.3-fold by the end of2008, while the Central Bank’s foreign exchange reserves rose by 52.8%.12 Azerbaijan’s strategic foreign exchange reserves top 18 billion dollars, which is three times more than the country’s state debt, and twice as high as the total external debt, including the debt of Azerbaijan’s private sector.13
In 2008, inflation in Azerbaijan amounted to 20.8%, food prices rose by 28.6%, non-food prices by 11.5%, and tariffs on services by 11.4%. In 2008, compared with the previous year, the average monthly wage rose by 24.2% and amounted to 286 manats (335 dollars).14
8 See: “Vystuplenie ministra ekonomicheskogo razvitiia Sh. Mustafaeva na zasedanii Kabineta ministrov, posviash-chennom itogam sotsialno-ekonomicheskogo razvitiia v 2008 godu”; “Vystuplenie predsedatelia pravleniia Natsionalnogo banka Azerbaidzhanskoi respubliki E. Rustamova na zasedanii Kabineta ministrov, posviashchennom itogam sotsialno-eko-nomicheskogo razvitiia v 2008 godu”; Information of the Information Service of the State Oil Fund of the Azerbaijan Republic, January 2009; Information of the Information Service of the National Bank of the Azerbaijan Republic, 12 January, 2009.
9 See: “Vystuplenie ministra finansov Azerbaidzhanskoi respubliki S. Sharifova na zasedanii Kabineta ministrov, posviashchennom itogam sotsialno-ekonomicheskogo razvitiia v 2008 godu.”
10 See: “Vystuplenie predsedatelia pravleniia Natsionalnogo banka Azerbaidzhanskoi respubliki E. Rustamova na zasedanii Kabineta ministrov, posviashchennom itogam sotsialno-ekonomicheskogo razvitiia v 2008 godu”; Information of the Information Service of the National Bank of the Azerbaijan Republic, 12 January, 2009.
11 See: V. Mau, “Drama 2008 goda: ot ekonomicheskogo chuda k ekonomicheskomu krizisu,” Voprosy ekonomiki, No. 2, 2009, p. 11; Tsentralnyi bank Rossiiskoi Federatsii. Mezhdunarodnye rezervy Rossiiskoi Federatsii, 2 January, 2009, available at [www.cbr.ru/statistics/].
12 See: “Vystuplenie predsedatelia pravleniia Natsionalnogo banka Azerbaidzhanskoi respubliki E. Rustamova na zasedanii Kabineta ministrov, posviashchennom itogam sotsialno-ekonomicheskogo razvitiia v 2008 godu”; Information of the Information Service of the National Bank of the Azerbaijan Republic, 12 January, 2009.
13 See: “Vystuplenie predsedatelia pravleniia Natsionalnogo banka Azerbaidzhanskoi respubliki E. Rustamova na zasedanii Kabineta ministrov, posviashchennom itogam sotsialno-ekonomicheskogo razvitiia v 2008 godu.”
14 See: “Vystuplenie ministra ekonomicheskogo razvitiia Sh. Mustafaeva na zasedanii Kabineta ministrov, posvi-ashchennom itogam sotsialno-ekonomicheskogo razvitiia v 2008 godu”; Macroeconomic Indices of Azerbaijan, State Statistics Board of the Azerbaijan Republic, 21 January, 2009.
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The 10.8% increase in the GDP in 2008 is Azerbaijan’s safest guarantee against the negative effects of the economic crisis (see Table 1), since throughout the world an economic crisis is always preceded by a recession. Such high GDP growth rates show that there are not even any signs of a recession in Azerbaijan. The investment growth rates, as well as the fact that personal incomes outstrip inflation by 17 percent, also make it possible to draw similar conclusions.
Table 1
Indices of the Physical Volume of the Gross Domestic Product in CIS Countries (in constant prices)
2005 2006 2007 2008 2009 (forecast)
In % of previous year According to the forecasts of the CIS ISB According to the forecasts of the EBRD
Armenia 113.9 113.2 113.8 106.8 106-108 105.5
Azerbaijan 126.4 134.5 125.0 110.8 113-115 108
Belarus 109.4 110.0 108.2 110.0 109-110 102
Georgia 106.6 109.4 112.4 104* — 103
Kazakhstan 109.7 110.7 108.9 102.4 105 100.5
Kyrgyzstan 99.8 103.1 108.2 107.6 106-106.5 103.9
Moldova 107.5 104.8 103.0 107.6** 105-106 101.7
Russia 106.4 107.4 108.1 105.6 106-106.5 101
Tajikistan 106.7 107.0 107.8 107.9 107 105
Ukraine 102.7 107.3 107.6 102.1 105.5 95
Uzbekistan 107.0 107.3 109.5 109.4 107 105
On average throughout the CIS 107 108 108 105 105.5-106
* January-September 2008 compared with January-September 2007.
** January-September 2008 compared with January-September 2007.
S o u r c e: CIS Interstate Statistics Board (CIS ISB) [www.cisstat.org] and the European Bank of Reconstruction and Development (EBRD) [www.ebrd.org].
According to IMF specialists, in 2009 the growth in the world economy will amount to 0.5%, while the World Bank gives a forecast of 0.9%. The economic slump in the U.S. in 2009 will amount to 1.6%, and in the euro zone to 2%.15 According to the forecasts of the World Bank, in the conditions of the world crisis Azerbaijan will be able to retain its leadership among the CIS countries in terms of GDP growth. In 2009, GDP growth in Azerbaijan is forecast at a level of 10.4%. Although the
15 See: IMF Report World Economic Outlook (WEO).
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government of Azerbaijan plans economic growth in 2009 at a level of 18.9%, IMF specialists predict that the GDP growth rates will amount to 9.3%.16
The U.N. report World Economic Situation and Prospects 2009 notes that in 2009 Azerbaijan’s economy will grow by 14%. According to the forecasts of the CIS Interstate Statistics Board, economic growth in Azerbaijan will amount to 13-15% (see Table 1). For comparison’s sake, we will note that according to the forecasts of the World Bank for 2009, a 3% hike in the GDP is expected in Russia, 1.9% in Kazakhstan, 4% in Georgia, and 6.4% in Armenia, while according to the CIS ISB, in Russia growth will amount to 6.5%, in Ukraine to 5.5%, in Kazakhstan to 5%, and in Armenia to 6-8%. Nevertheless, the 2009 forecasts show a downward trend. As Table 1 indicates, according to the January forecasts of the European Bank of Reconstruction and Development, in 2009 GDP growth will amount to 8% in Azerbaijan, 5.5% in Armenia, 2% in Belarus, 3% in Georgia, 1.7% in Moldova, 0.5% in Kazakhstan, 3.9% in Kyrgyzstan, 10.5% in Turkmenistan, and 5% in Tajikistan. A 5% slump is forecast in Ukraine (see Table 1), 5% in Latvia, 2.5% in Lithuania, and 3.5% in Estonia. According to the forecasts of the Russian Ministry of Economic Development, in 2009 the country’s GDP will decrease by 0.3%, while inflation will amount to 13%. While according to the forecasts of the experts of Alpha Bank, the drop in the GDP in Russia in 2009 will amount to approximately 3%. This will primarily be related to the significant slowdown and decrease in consumption due to the deteriorated situation in households, the growing unemployment, the decrease in personal income, and so on. Against the background of all these predicted indices of the post-Soviet countries, Azerbaijan, even after a noticeable drop in GDP growth rate, remains one of the most dynamically developing countries.
Azerbaijan is recognized as one of the world leaders in economic reform and has the most rapidly emerging economy. But despite this Azerbaijan will also feel the negative consequences of the world financial crisis.
Influence of the World Financial Crisis on Azerbaijan’s Economy
According to international organizations, the world financial crisis has escalated into a broader economic crisis and will not leave one country on the planet unscathed. The current world crisis has not only placed banks and enterprises on the brink of bankruptcy, but a whole slew of countries as well. The chronology of the crisis’s development shows that it has already moved from the financial sector of the economy to the real and social segments and is accompanied by a production slump, a crisis of confidence among consumers, a decrease in jobs, and a drop in the population’s standard of living. Social cataclysms are spreading far and wide. Russia, Ukraine, and Kazakhstan of the postSoviet countries have suffered most from the crisis, followed by Latvia, Lithuania, Estonia, Georgia, Armenia, and Tajikistan.
Azerbaijan’s economy has become integrated into the world economy, so the processes unfolding in the world markets, depending on the level of integration according to the law of communicating vessels of a specific market into the world market, have an influence on Azerbaijan to one extent or another. During the second half of 2008, Azerbaijan’s economic development continued in unfavorable external conditions. Nevertheless, according to the estimates of specialists of the IMF, World Bank, and other international organizations, the Azerbaijani economy is one of the strongest and most crisis-resistant. There are several reasons for this:
Ibidem.
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First, Azerbaijan is not so dependent on the world financial system. Its securities market is not that well developed and this segment has not yet become sufficiently integrated into the world market.
Second, the conservative, whereby quite correct, government policy and the especially sensible policy of Azerbaijan’s banking system. Azerbaijan’s banking sector entered the crisis sufficiently prepared. Azerbaijan’s banks attracted loans from the foreign financial markets totaling around 2.5 billion dollars. This amounts to 25% of all banking obligations. In several countries this index reached 70% and at times even 90-100% of the GDP, which led to the destructive crisis and collapse. Azerbaijan’s banks managed to stabilize these loans at a level of only 25% of the obligations, which could not lead to serious consequences in the country’s banking system. In 2008, Azerbaijan’s banks settled some of the external debts—1 billion dollars, and in 2009 1.5 billion dollars will be settled.
Third, increase in the state’s role as the main customer of services in the private sector. In recent years, internal investments in Azerbaijan’s economy outweigh foreign investments. Whereas in the pre-crisis years the emphasis in financing the Russian, Ukrainian, and Kazakhstani economy was shifted from internal sources to external, in Azerbaijan, on the contrary, it was shifted from external sources to internal. Between 2003 and 2008, the volume of investments in Azerbaijan’s economy amounted to 38 billion manats (44.5 billion dollars), of which domestic investments accounted for 16 billion manats (18.7 billion dollars), or 42%, and foreign investments accounted for 22 billion manats (25.8 billion dollars), or 58%. Whereas in 2003, the share of internal investments amounted to 25%, in 2008 this index rose to 75%. In 2008, investments in basic capital amounted to 9,073.6 million manats (10,628 million dollars), while state investments amounted to 4.2 billion manats (4.9 billion dollars), or 46.3%. Almost 80% of these investments were made in infrastructure projects and 20% in social projects.17 This structure of investments significantly reduced the risks of crisis phenomena in Azerbaijan’s economy.
Fourth, a reliable leeway of 18 billion dollars has formed from oil revenue and the strategic reserves of the Central Bank of Azerbaijan. Along with this, on the eve of the world financial crisis Azerbaijan reached the highest level of revenue receipts from profit oil under the project for developing the Azeri-Chirag-Gunashli block of oil fields in the Azeri sector of the Caspian. In 2007, Azerbaijan’s share in the division of oil revenue amounted to 25%, while on the eve of the crisis it reached the 80% mark.18
This helped to increase SOFAR’s revenue and consequently the country’s strategic foreign exchange reserves. For example, according to SOFAR, at a price of 50 dollars per barrel of oil, the Fund’s revenue will amount to 9-10 billion dollars, while at a price of 70 dollars it will amount to 14 billion manats19 or approximately 17-17.5 billion dollars, which is enough to ensure Azerbaijan’s budget and foreign exchange stability for the next few years.
Fifth, Azerbaijan’s external and internal debts are lower than 10% of the GDP, which is much better than similar indices of the post-Soviet countries. Whereas in Russia the volume of international reserves lagged behind the total external debts by the end of 2008, in Azerbaijan strategic foreign exchange reserves were twice as high as the external debts.20
See: “Vystuplenie ministra ekonomicheskogo razvitiia Sh. Mustafaeva na zasedanii Kabineta ministrov, posvi-ashchennom itogam sotsialno-ekonomicheskogo razvitiia v 2008 godu,” pp. 3-4.
18 See: Information of the Information Service of the State Oil Fund of the Azerbaijan Republic, January 2009.
19 Ibidem.
20 See: “Vystuplenie predsedatelia pravleniia Natsionalnogo banka Azerbaidzhanskoi respubliki E. Rustamova na zasedanii Kabineta ministrov, posviashchennom itogam sotsialno-ekonomicheskogo razvitiia v 2008 godu”; Information of the Information Service of the National Bank of the Azerbaijan Republic, 12 January, 2009.
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But it should be noted that the above-mentioned factors do not mean that Azerbaijan is fully insured against the negative effects of the world financial crisis. The leeway formed by the extra international reserves can most likely fend off any strong pressure from the world financial crisis for several years. But this will not be enough if the world financial crisis becomes prolonged. An objective analysis of the influence of the world financial crisis on Azerbaijan’s economy is required and the following question must be answered: “How will the world crisis influence the macroeconomic indices, the financial, real, and social sectors of the country’s economy, as well as the activity of individual enterprises and the population’s standard of living?” This question can be answered in part by analyzing Table 2. The table shows that according to official forecasts of Azerbaijan’s government, in 2008, the GDP should increase by 18.2%. In the first half of 2008, the GDP growth trends corresponded to the official forecasts, while during the second half of last year the GDP growth rate dropped by almost half, or, amounting to 10.8%, was 7.4% behind the forecast index. This was largely related to the drop in the oil prices in the world market from 147 dollars per barrel in mid-2008 to 40 dollars per barrel at the end of the year. The share of the oil factor in Azerbaijan’s GDP amounts to approximately 60%, whereas if the price of one barrel of oil drops by 10 dollars, its cost will amount to 2.2-2.5 billion dollars. Deviations in the growth rates of industrial production are must greater, as much as four-fold. Instead of the forecast index of 24.8%, growth amounted to a mere 6%. Inflation reached to 20.8% with a forecast of 12-14%, whereby in conditions of a drop in world food prices of 24%, food prices in Azerbaijan rose by 29%. In the first half of 2008, the growth rates in agricultural production outdistanced the forecast indices, while in the second half of the year they lagged 2% behind and amounted to 6%.
At the same time, as Table 2 shows, positive trends in personal income also continued in 2008. Last year personal income increased by 37.8%, which is 8% more than the forecast indices.
According to the IMF and Standard & Poor’s credit rating agency, Azerbaijan’s economic potential and the economic policy being carried out in the country will make it possible for Azerbaijan to weather the crisis better than other countries. Nevertheless, the world financial crisis is expected to have a stronger influence on the country’s economy in 2009.
The analysis shows that the negative effect of the world crisis on Azerbaijan’s economy will largely be felt through the drop in world oil prices. As already mentioned, a one-dollar decrease in the price of one barrel of oil leads to a drop in the country’s GDP of 220-250 million dollars. Many of Azerbaijan’s leading economic indices are largely related to oil. So naturally Azerbaijan feels the negative consequences of an almost four-fold drop in the price of oil. An abrupt drop in the price of oil lowers fiscal revenue, decreases the flow of funds to SOFAR, and also has a negative effect on the flow of funds to other entities of the country’s economy. So the severity and dimensions of Azerbaijan’s economic problems will largely depend on the price of oil in the world market. From this viewpoint the world financial crisis and decrease in oil prices will slow down economic growth in Azerbaijan.
The instability in the world financial markets has forced many international investors to withdraw their resources from the markets of Russia, Kazakhstan, and other countries, as a result of which the cost of shares has begun to noticeably drop. Azerbaijan’s market has not suffered from these destructive trends. But Azerbaijan’s export enterprises have endured hardship from the external factors of the crisis. Export companies are experiencing losses due to the decrease in demand in the foreign markets, as well as from the rise in the manat exchange rate.
The world financial crisis has not had a significant effect on Azerbaijan’s banking sector. In
2008, Azerbaijan’s banks increased lending to the economy by 53.5%, and personal deposits rose by 29.6%.21
See: Information of the Information Service of the National Bank of the Azerbaijan Republic, 12 January, 2009.
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Table 2
Changes in the Dynamics of Macroeconomic Indices of the Azerbaijan Republic
Indices Official government forecasts for 2008 First half of 2008 in % of the first half of 2007 2008 in % of 2007 2007 in % of 2006
Gross domestic product 18.2 16.5 10.8 25
Industrial production 24.8 13.8 6 24
Agricultural production 7.7 10.7 6.1 4
Investments in basic capital 12.8 31.9 34.3 17.8
Retail goods turnover 14.8 14.9 16.1 15.3
Personal income 29.4 34.2 37.8 42.7
Average monthly wage 28 23.8 24.2 44.8
Inflation 12-14 20.2 20.8 16.7
Manat-to-dollar exchange rate -5 -3 -5.24 -5
S o u r c e: Information of the Ministry of Economic Development, State Statistics Board, and Central Bank of the Azerbaijan Republic, Main Macroeconomic Forecast Indices of the Azerbaijan Republic in 2008-2011, available at [www.economy. gov.az] (in Azeri); Macroeconomic Indices of Azerbaijan, State Statistics Board of the Azerbaijan Republic, 21 January 2009, available at [www.azstat.org] (in Azeri); Manat Exchange Rate in Relation to Foreign Currencies, available at [www.nba.az] (in Azeri).
Although Azerbaijani banks engage in an insignificant amount of external borrowing, the shortage of free resources has nevertheless forced several banks to partially cut back on lending to the economy for a certain amount of time. The liquidity crisis in the world markets has mainly affected Azerbaijan’s banking sector by limiting the issue of consumer loans and the opening of new credit lines for banks.
The real estate market, which is one of the most developed and rapidly growing sectors of Azer-baijan’s economy, has also suffered from the global financial crisis. According to the State Service for State Registration of Property of the Azerbaijan Republic, in 2008 there was a 1015% drop in price on all real estate property. In December 2008, apartment prices in the secondary housing market dropped to the level of 2007. The drop in prices is related to the passivity of the market, which is caused by the world financial crisis. Azerbaijan’s construction market is undergoing a period of reorientation. Since the end of 2008, companies have been leaving the market, unable to survive the slump period. In order to resolve their financial problems, some
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construction companies are lowering prices on housing, while others are carrying out different stimulating measures.
The influence of the crisis is also felt in the labor market. According to the data of the National Confederation of Entrepreneurs, in some branches of the economy, in particular construction, trade, the production and sale of household appliances, electronics, and furniture, some employees have had to be temporarily laid off. However, according to the results of the monitoring of the Ministry of Labor and Social Security of the Population of the Azerbaijan Republic, at the beginning of 2009 dismissal of employees in these branches was limited. According to the ministry, in 2008, 0.86% of the country’s citizens had their work contracts terminated. At 3,463 enterprises (where monitoring was carried out), approximately 2,000 employees22 out of a total of 244,000 had their work contracts terminated, which amounts to 0.8% of the employees. These data do not cover the entire labor market, but still give an idea about the trends in this important sphere of activity.
Due to aggravation of the crisis in 2008, the income of labor migrants working in Russia dropped by 37.5%. This also had an influence on the income of Azeris working in Russia. The decrease in the inflow of foreign currency via private transfers is having serious consequences. At the same time, according to the estimates of the Ministry of Labor and Social Security of the Population of the Azerbaijan Republic, if Azeris living in Russia return home and begin working as an employer, each of them who provides work for at least 5-10 people will make his contribution to the development of the Azerbaijani economy.
Development Scenarios of the Crisis Situation
Experts of the Davos World Economic Forum stated in their report The Future of the Global Financial System that the rapid development of the past two decades has come to an end. The world is experiencing a slowdown in economic growth and an increase in state intervention. This will significantly change the customary picture of the world economy. In the next 12 years, the development of the world’s financial system will unfold in keeping with one of the following four scenarios:23
1. According to the scenario of “financial regionalism,” economic development of the developed countries will continue to slow down, while the developing countries will begin to rapidly catch up with the developed countries. Energy security will become the key issue and the dollar and euro will lose their status as the only reserve currencies.
2. According to the most pessimistic scenario of “fragmented protectionism,” the recession will affect all the countries of the world without exception, they will be forced to dissociate from each other, taking exclusive care of their own interests.
3. According to the scenario called “re-engineered Western centrism,” the economy of the Western countries will retain its leadership and developing countries will take a long time to recover from the global crisis.
4. According to the most optimistic scenario called “rebalanced multilateralism,” the world economy will slowly gain momentum and the members of the world community will begin integrating. The significance of the economy’s global regulator will rise.
22 Ibidem.
23 See: Report of the World Economic Forum The Future of the Global Financial System, available at [www.
veforum.org].
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The influence of the world crisis on Azerbaijan’s economy will depend to a certain extent on which of the above-mentioned scenarios is followed. The short-term forecast of the development of the world economy by the main international organizations is still complex. Since the financial crisis has turned into a broader economic crisis, private demand throughout the world is on the decline. In these conditions, 2009 will be quite a difficult year for Azerbaijan’s economy. Low oil prices, unfavorable conditions in the international financial markets, a decrease in the flow of foreign investments, difficult access to cheap loans, and so on will lead to a slowdown in economic development. In so doing, we think the world crisis could have more acute consequences in the following cases:
1. If the price of oil continues to drop and reaches a level of less than 40 dollars per barrel for an indefinite amount of time.
2. If the world crisis becomes prolonged.
3. If the national currency, the manat, abruptly drops or rises in price.
4. If the government’s anti-crisis program is carried out much too slowly or in an unsatisfactory way.
Ways to Alleviate the Influence of the Crisis
The world financial crisis has revealed the need for all countries to carry out joint coordinated actions in order to overcome it. This idea was reflected in the Declaration of the G-20 Summit held on 15 November, 2008 in Washington. At this summit, six steps were put forward for overcoming the world crisis in the mid term. The states pledged to:
1) continue vigorous efforts and take whatever further actions are necessary to stabilize the financial system;
2) recognize the importance of monetary policy support, as deemed appropriate to domestic conditions;
3) use fiscal measures to stimulate domestic demand to rapid effect, as appropriate, while maintaining a policy framework conducive to fiscal sustainability;
4) help emerging and developing economies gain access to finance in current difficult financial conditions, including through liquidity facilities and program support;
5) encourage the World Bank and other multilateral development banks (MDBs) to use their full capacity in support of their development agenda;
6) ensure that the IMF, World Bank and other MDBs have sufficient resources to continue playing their role in overcoming the crisis.
These measures are important for achieving the joint objectives aimed at overcoming the world crisis. This was discussed in the last IMF reports24 and at the Economic Forum held at the end of January in Davos. At the same time, coordinated action among states in the macroeconomic sphere alone using traditional mechanisms of monetary policy will not be enough. This makes the drawing up and implementation of national anti-crisis programs all the more urgent.
[ See: IMF Report Global Financial Stability, bulletin on the state of markets, January 2009.
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In order to alleviate the effect of economic vulnerability factors and create foundations for continuing high growth rates in the future, the Azerbaijani government has drawn up a set of economic policy measures under its anti-crisis program. The main theses of the anti-crisis program were reflected in the speech of President of the Azerbaijan Republic Ilham Aliev on 16 January, 2009 at a meeting of the country’s Cabinet of Ministers on the results of 2008. He set forth the strategy for the package of anti-crisis measures: “To reduce to a minimum the influence of the world economic crisis on Azerbaijan and prevent this influence from spreading in all directions.” The anti-crisis program consists of two parts: the first part focuses on continuing and strengthening the measures carried out previously, the second on carrying out new measures relating directly to the crisis.
The package of anti-crisis measures25 announced by the president largely encompasses the provisions below:
1. Strengthening control over the consumer market in order to prevent an artificial increase in prices.
2. Strengthening anti-monopoly activity and eradicating non-conscientious competition.
3. Preventing illegal interference by the state.
4. Placing some of the foreign exchange reserves kept abroad in the most reliable and strongest local banks and using these resources via the banks only in the real sector of the economy. Ensuring reliable state control over investment of these resources in the real sector of the economy.
5. Drawing up a schedule of priorities for implementing the State Investment Program.
6. Strictly observing economic principles when implementing the State Investment Program.
7. Strengthening state control over the spending of budgetary funds.
8. Increasing assistance to export enterprises.
9. Increasing the volume of privileged loans for businessmen.
10. Increasing state support of agriculture.
The Azerbaijani government and Central Bank have efficiently adopted measures within their anti-crisis program in order to reduce to the minimum the influence of the world financial crisis on the country’s economy in order to prevent it from spreading in all directions and to create reliable foundations for restoring higher economic growth rates in the future. These measures made it possible to enter the crisis period with a well-balanced state budget, low level of external and internal debt, and large supply of foreign exchange assets. All of this testifies to the government’s sufficiently correct anti-crisis policy. But the key to success in the government’s anti-crisis activity will in all likelihood be an adequate assessment of and reaction to the risks of the world crisis and timely, systemic, consistent, and effective implementation of the anti-crisis program, on the one hand, and skilful coordination of the actions of the government and private structures—banks, enterprises, etc.—and society, on the other. Particular attention in the anti-crisis program should be given to the following:
1. In order to raise economic activity and stimulate accelerated development of the non-oil sector of the economy, taxes must be lowered, particularly profit tax, from 22% to 18%, and value added tax (VAT) from 18% to 14%. In the current conditions, a decrease in VAT could act as an efficient lever ensuring not only the accelerated development but also an increase in
25 See: “Zakliuchitelnaia rech Prezidenta Azerbaidzhana I. Alieva na zasedanii Kabineta ministrov, posviashchen-nom itogam sotsialno-ekonomicheskogo razvitiia v 2008 godu,” Bakinskiy rabochii, 20 January, 2009, pp. 1-2.
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its quality. “Whereby (as any reduction in taxes) it will ensure additional demand and, as a result, economic growth, the main recipients of the benefit from the reduction in VAT will be branches with high added value, which will make them the driving forces behind such growth, thus shifting the center of gravity from the primary goods branches to branches with a higher level of processing.”26
2. In order to support the liquidity facilities in the country’s economy in conditions of the world economic recession, the Central Bank of Azerbaijan adjusted its monetary policy beginning in October 2008. Important steps have been taken to exempt commercial banks from paying profit tax and lowering the discount rate. The discount rate of the Central Bank was gradually lowered from 15% to 5%. If the drop in inflation in the country continues and there is no increase in pressure on the exchange rate, the downward trend in the discount rate should continue and be synchronized with contemporary world trends.
3. With respect to the manat exchange rate, the government and Central Bank of Azerbaijan are faced with a complicated macroeconomic dilemma. In conditions of financial upheavals, stability of the national currency—the manat—serves as an important anchor for Azerbaijan’s economy. But, as the analysis shows, when the exchange rate of the currencies of Azerbaijan’s main trade partners drops, import is stimulated and the competitiveness of Azeri producers decreases. At present, it is expedient to maintain the stability of the manat in the broad sense. But as the price of oil drops, oil revenue and the amount of dollars in Azerbaijan decrease. In these conditions, artificial maintenance of the manat could be effective in the short term. At the same time, if we keep in mind that the non-oil sector of the economy accounts for only 3% of Azerbaijan’s export (whereby the global crisis has cut back the export potential of this sector of the economy and stimulated import), it is expedient to ensure a balance between maintaining the stability of the manat exchange rate and devaluating it to a certain extent in order to restore the competitiveness of goods in the non-oil branches of the economy.
4. As a result of the aggravated crisis, the recession has spread in many countries from the corporate sector to the social, that is, to the population. The first stage envisaged a cutback in investments, the second in wages, and the third in employment. Admittedly, Azerbaijan is not threatened with a recession in 2009. Moreover, the key priorities of the government’s anti-crisis program are to curb the increase in unemployment and create new jobs. The trends indicated that in 2009 a certain cutback in jobs is expected in the construction and several other industries due to the difficult financial conditions. It will be impossible to stop this process completely. So it is necessary to balance this process by creating new jobs, especially by increasing the support of small and medium businesses. Effective measures must also be adopted to alleviate the lay-off situation.
5. Azerbaijan’s economic history and socioeconomic reality show that the situation cannot be remedied by means of monetary and fiscal policy mechanisms alone. The current situation insists on a qualitative renewal of economic relations, reorientation of the economy into a new channel, and the carrying out of systemic structural and institutional reforms. Government support based on market principles should be aimed at accelerating diversification and modernization of the economy and developing agriculture and the processing and scientific-intensive branches of industry. Revenue from oil export must be invested in the development of refining, the petrochemical and gas industry, the food and textile industry, housing and transport construction, and service spheres, including
26 M. Ershov, “Krisis 2008 goda: ‘moment istiny’ dlia globalnoi ekonomiki i novye vozmozhnosti dlia Rossii,” Vo-prosy ekonomiki, No. 12, 2008, p. 24.
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the resort and tourist industry, thus creating a competitive, multi-vector, and self-sufficient economy. Special economic zones should be developed with as advantageous conditions as possible for local and foreign capital. The role of the human factor and innovations should be raised and effective measures taken for providing Azerbaijan’s economy with enough highly qualified employees and up-to-date technology. This will make it possible for Azerbaijan to modernize its economy and be less dependent on the fluctuation in world oil prices.
6. In recent years, several amendments to the legislation and certain practical changes have led to an improvement in some indices of the business climate in Azerbaijan. This is also reflected in the World Bank’s report, in which Azerbaijan has taken the lead in the reforms. At the same time, the research studies of several international institutions on the economic freedom index show that a transfer must be made to a new stage of economic reforms in order to achieve a radical improvement in the business climate and increase in economic freedoms.
7. In the current conditions, inflation must be curbed not only by monetary methods, but also by increasing the government’s anti-monopoly activity, raising society’s solvent demand, and stimulating the production of domestic high-quality and affordable commodities.
Accelerating the implementation of anti-crisis measures objectively requires maximum coordination among state structures, as well as transparent cooperation among the state, private sector, and society. Systemic and consistent implementation of the above-mentioned measures can minimize the negative consequences of the world crisis on Azerbaijan’s economy and ensure the predicted level of economic growth. Along with this, intensifying anti-monopolistic measures will raise the activity of businessmen, which is vitally important for reducing the effect of the global economic crisis on Azerbaijan, retaining the high economic development rates and, finally, recovering from the crisis with a stronger, renewed, and competitive economy.
C o n c l u s i o n
An analysis of the economic trends in Azerbaijan in the conditions of the world financial crisis shows that Azerbaijan’s economy will not be adversely affected by the first waves of the world financial crisis. In so doing, the low oil prices, unfavorable conditions in the international financial markets, reduction in the flow of foreign investments, difficult access to cheap loans, and so on, could lead to a slowdown in economic development. The severity of the economic and social problems will mainly depend on the duration of the world crisis and on the oil prices.
Timely and comprehensive implementation of the government’s anti-crisis program is needed to alleviate and eliminate the consequences of the world financial crisis on Azerbaijan’s economy. In order to achieve sustainable development, the country must transfer to a new stage in economic reforms where, along with monetary policy measures, special emphasis must be placed on structural and institutional reforms. The country should transfer to an innovation path of development, modernization of the economy, increase in the country’s competitiveness, and improvement in the standard of living based on these reforms.
