Enlightened public-private-partnership

Azerbaijan’s economy remains one of the fastest growing in the world, well ahead of the region. To its population’s and leadership’s credit, the World Economic Forum Global Competitiveness Report 2010 – 2011 ranks Azerbaijan 57th among 139 countries and second in the CIS, after Russia, for innovation, well ahead of its neighbours in the Caucasus and Central Asia.

In 2009, GDP growth was 9.3% and an estimated 4.3% in 2010, down from the 25-35% annually following the opening of the Baku-Tblisis-Ceyhan pipeline which unlocked Caspian resources for global energy markets in 2005.

With US$ 52 billion in GDP in 2010, strong oil prices, combined reserves between the State Oil Fund (SOFAZ) and the Central Bank topping an estimated US$ 26.5 billion, and inflation down to single digits, Baku is poised to anchor growth, innovation and advancement of a robust trade corridor for the Southern Caucasus and Caspian region.  Institution building, infrastructure, health and education are requisite priorities with non-oil sector development and reform.

On sound footing with record growth

The banking system has been put on sound footing with stronger reserve requirements, reporting standards and the creation of a national deposit insurance fund.  “There is growing confidence in the banking sector,” confirmed Chairman of the Board of the International Bank of Azerbaijan (IBA), Dr Jahangir Hajiyev, noting that, “Even during the height of the financial crisis, deposits increased.” The new requirements will help reduce the number of banks, currently at 47. “For our size of country, the number should be closer to twelve,” Hajiyev added. The Central Bank has targeted 15-20 to clip “pocket banks”, 200 earlier in the decade, in boutique banks flush with cash but with little transparency, oversight and banking experience.

IBA has grown to US$ 5 billion in assets, a record for Azerbaijan, and is the largest bank by far in assets, with 30% of banking capital, 42% of deposits and well-known reputation as “the JPMorgan Chase of the Caucasus region”. The bank has become a prime of example of what The Economist’s 2010 Emerging Markets Survey chronicles as the new giants, whose liquidity, low debt and ingenuity have become, most notably with China and India’s state-owned and commercial banks such as ICICI, historic game-changers in the new global growth and redistribution of resources, hastened by the financial crisis.

Emerging markets and state-owned banks such as IBA have become quiet heroes for adding resilience and stability to national and regional economies while adding torque to the former global bulge bracket banks that need capital and reliable new market access. “The World Economic Forum’s investment in launching the Global Growth Community (GGC) in China nearly five years ago proves how prescient the Forum continues to be in capturing global trends, even at the fortieth anniversary of Davos,” said Hajiyev, an advisory board member of the GGC Community and the first banking member of the Partnership Against Corruption Initiative (PACI).

IBA paid off US$ 1 billion clearing all syndicated loan obligations in late 2008 and 2009 with no outside or government help. In 2010, IBA exceeded targets of over US$ 300 million in new trade loans, with offers for more, including US$ 100 million led by Credit Suisse (and $111 million earlier in the year), US$ 45 million with the Islamic Development Bank (IDB) and International Islamic Trade Finance Corporation (ITFC) in June, and another US$ 130 million with a consortium including Citibank N.A., Commerzbank, Raffeisen Bank, Standard Chartered Bank and Standard Bank among others.

Prior investments have matured and are paying back dividends or are close to fruition. IBA’s $200 million financing for Azeri and Georgian sections of the Baku-Tblisi-Kars railroad will relink rail to London through Turkey for the first time since the 19th century. The Turkish Minister of Transportation recently announced the completion of Turkey’s portion by 2012, when the route will transport 1.2 million people and 3.5 million tons of cargo annually, increasing to 7.8 million people and 21.5 million tons of cargo by 2034.

Azerbaijan’s multi-directional energy diplomacy

With the myriad of energy negotiations over oil and gas pipelines, ports, storage tanks, new transportation logistics and hubs, Baku has become the dizzying epicentre from which to view the evolution of a new Caspian community of commerce. The political iconography was powerful at President Aliyev’s Caspian Sea Countries Summit in Baku in November, the fourth such meeting to move toward an endgame on the Caspian Sea’s status, littoral and shelf rights. That Summit was another chapter in Azerbaijan’s multi-directional and balanced diplomacy as the Presidents of Russia, Iran, Kazakhstan, Turkmenistan and Azerbaijan congregated in Baku. It is fortunate to have a President who worked as a younger man as the Vice President of the State Oil Company of Azerbaijan (SOCAR).

Baku’s leadership moved at blistering speed in 2010 to bolster relations with immediate and extended neighbours in Europe, to heal relations and agree transit fees with Turkey and create the political template necessary to transform the energy export environment for the Caspian and Black Sea community, eastward to China and Japan and westward to Europe. Azerbaijan and Kazakhstan have enhanced their dialogue also with Turkmenistan toward what will become, one hopes, the new golden triangle of the Caspian.
2010 also saw the discovery of a major new gas field, which BP will develop.  Even Kazakhstan’s chairmanship of the OSCE and hosting of the first Ministerial Summit in nearly a decade in Astana engaged Baku as a focal point, partly due to the unresolved status of the occupied territories of Nagorno-Karabakh.

Entrepreneurial climate: Dynamic and bearing fruit (literally)

The non-oil sector represents 38% of GDP, ranging from services (including communications and transportation), construction, agriculture and non-oil industry and manufacturing. The government and private sector have made strides in empowering a native entrepreneurial spirit and private-sector solutions. IBA has been able to perfect the model of Public Private Partnership (PPP) by adding finance, accountable management and global know-how to upgrade the results in order to turn around strategic sectors in agriculture, communications, construction and transportation. In agriculture, the government wisely privatized collective farms and substantial government holdings early in the decade. A powerful agro-industrial complex is developing. With food security and scarcity issues ahead, and significant shortfalls in Russia and the CIS, Azerbaijan, with planning, could easily leverage trade in the agricultural goods for which it is famous.

In less than a decade, the introduction of the first drip irrigation to the Caucasus region, underwritten by IBA and the US Export-Import Bank, has allowed cotton production to more than double, created thousands of jobs and helped ecologically to correct draining of water tables. IBA restructured silk production in northern provinces with similar success, innovation and job creation. In 2010, IBA announced the completion of Intertobacco, the result of 3-4 years financing for US and Italian entrepreneurs in Azerbaijan. With exceptional soil and climate conditions, carefully planned new facilities and management, the Virginia and Burley tobaccos is such high grade the company will be able to sell on international markets. Under the USSR, Azerbaijan was a major supplier of leaf tobacco to the Soviet bloc; farmers grew between 60,000 and 70,000 tons per year of semi-oriental tobacco.

Outside agriculture, Azerbaijan’s Gedabek gold and silver mine is producing and banking gold ingots in Switzerland, and repaying loans. In financial services, IBA’s model for both government pension accounts and salary accounts have extended online banking services and normalcy to elites and less privileged citizens with credit/debit cards, global-class online banking and bill payment, and kept monies working in the economy in line with industrialized nation standards.

Tradition, trade and tolerance

Azerbaijan’s business culture has been something of a best-kept secret in Moscow, as well as Berlin, Vienna and Delhi. Its comfortable culture of tradition, trade and tolerance made it a hallmark of the Silk Route and continue today. Author Parag Khanna’s description in How to Run the World: Charting A Course to the Next Renaissance [see article page 30] that the current world is “neo-medieval …the 21st century will resemble nothing more than the 12th century” and “a time when the world was genuinely western and eastern at the same time”, multi-directional and multi-polar, fits Azerbaijan to a “T”. Baku’s history as an East-West culture is unforgettably chronicled in the 1937 epic love story Ali and Nino by Kurban Said, a fitting successor to Montesquieu’s Persian Letters in its clever and enlightened dialogue on East-West cultural integration.

A recent visitor noted, “It is interesting to discover the history of Baku, the revolutions, the oil magnates. Earlier, the Jews from the Second Temple of Jerusalem (516 BCE – 70 CE) arrived here as a haven. Baku was and is a haven for many religions including Crusader knights returning form Palestine” and Zoroastrianism, another monotheistic religion from the region.

Eighteenth-century German anthropologist Johann Friedrich Blumenbach (who defined the term “Caucasian” based upon the “Mount Caucasus … and the most beautiful race of men”, sons of Noah on the Southern slopes of Georgia, would today surely be amused to see the full circle of history and commerce that leads the world back to the Caucasus.
One must admire the ability of the leadership, its civil servants, business leaders and the public to bring all this forward while acting for a over a century and half as trustworthy and responsible stewards of critical energy infrastructure.

Article by Lyndsay C. Howard