Will oil price decline impact development in Azerbaijan?

- Azerbaijan's development may be hampered by decreasing oil revenue.

By Andrew Jay Rosenbaum

ANKARA (AA) - Azerbaijan had been making a gradual transition to a more liberal economy. Turkey, as one of its most important trading partners, was getting the full advantage of the transition, particularly involved in the development of the Shah Deniz gas field in the Caspian Sea and the construction of the Trans-Anatolian Pipeline.

Now the sharp drop in the price of oil is slowing development in Azerbaijan, even though the economy is equipped to weather the shock.

 President Ilham Alliyev has succeeded in attracting a strong inflow of foreign investment into the country, which was instrumental in driving growth.

“Per capita income has grown rapidly in recent years, from $1,570 in 2005 to $7,861 in 2013, well above the per capita income of its neighbors,” said Ashwin Matabadal, an analyst with Rabobank in a note published in February 2014.

Then, as occurred in all countries that depend on oil exports, Azerbaijan has been hit by the sharp decline of the price of oil at the end of 2014. For the near future, the country’s gross domestic product has suffered as a result of the drop in the price of crude to nearly $40 per barrel from around $115 per barrel in June 2014.   

“The oil price is the essential channel linking Azerbaijan to the global economy,” said the International Monetary Fund in a report released in May 2014. “With the oil boom since the mid-2000s, export-to-GDP ratios have increased and remained highly concentrated on the oil sector (94 percent of total exports in 2013).”

But now, the oil price drop is pressuring the nation’s currency – the manat – and is hampering the development of a non-oil economy, which the IMF sees as key to the country’s future. Economic growth has slowed to 3 percent in 2014 from 5.8 percent in 2013, according to central bank statistics.

 The decline of the price of oil will affect every aspect of the country’s economy, explained Vugar Bayramov, an economist with the Center for Economic and Social Development in Baku, in a note published on Dec. 9. 

“The country’s exports have declined and both government reserves and household savings are negatively impacted," Bayramov warned. "This will also affect the services, banking and other sectors. There is also the cost of the central bank’s intervention in order to prevent the manat’s depreciation against the dollar.” 

Nonetheless, the relatively strong Azerbaijan economy is absorbing the shock.

Azerbaijan’s central bank spent only about 8 percent of its international reserves to defend the manat in December, according to Azerbaijan central bank statistics.

“Note that international rating agencies recently found the Azerbaijani manat the most stable and reliable currency in the CIS, in eastern Europe and in resource-rich countries,” the Central Bank of the Republic of Azerbaijan said in a note published on its website on Jan. 5.

In fact, according to the IMF, about 10 percent of the Azeri economy is now based on activities unrelated to oil exports.

“The potential for businesses to thrive is huge in Azerbaijan’s region and many opportunities have been overlooked for a long time,” said Neil McKain, head of the Baku office of the European Bank for Reconstruction and Development. “Building a strong SME sector is key to supporting sustainable growth and help build a diverse economy in the long run.”

For Turkey, Azerbaijan’s prosperity has been important. Turkey is the country’s sixth trade partner and the principle destination for Azeri exports.

The country, through its energy company Socar, has made a series of investments in Turkey. Socar built the Star refinery at Aliaga on the Aegean coast. The Azeri company also owns Petkim, a petrochemical company. Total investment in shared oil and gas projects is expected to rise to $45 billion by 2018, according to statistics from the Turkish energy ministry.

The Shah Deniz project will undoubtedly be profitable for Turkey in the long run, but rising costs and long lead times have slowed the project's development, energy analysts say.

Azerbaijan still faces challenges in reducing its reliance on oil sales, but the middle class in the country is growing rapidly, according to a report by the Asian Development Bank released in 2010.

This is the surest sign that Azerbaijan will develop a more diversified economy in the near future because a growing middle class is the surest driver of economic change.

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