bne:Invest in Azerbaijan - October 2014

bne:Invest in Azerbaijan

Content: 4 Top Story 6 Interview 9 Feature 11 Sector 13 Economics & finance 19 Chart 20 News in brief

Follow us on twitter.com/bizneweurope www.bne.eu

October 2014

AZPROMO is the main partner of the bne:Invest in Azerbaijan newsletter. www.azpromo.az

Azerbaijan-UK forum seeks to attract more UK investment in non-oil sectors On October 2, AZPROMO, in collaboration with the United Kingdom Trade and Investment (UKTI), organized the Azerbaijan-United Kingdom Business Forum at its headquarters in Baku. The forum gathered representatives of more than 60 companies from Azerbaijan and the UK to discuss ways to replicate the close collaboration in the energy sector that exists between the two countries with partnerships in technology, education, transportation, manufacturing and consulting.

In his welcoming speech, AZPROMO President Rufat Mammadov noted that the UK is one of the oldest and the largest foreign investors in Azerbaijan. The great majority of British investment in Azerbaijan, which amounts to $19bn, is concentrated in oil and gas. However, the $500m that British companies have invested in the country’s non-energy sectors so far put the country as the second largest foreign investor in Azerbaijan’s non-oil economy. “The British

Azerbaijan Export & Investment Promotion Foundation

Multilateral strategic partner

bne:Invest in Azerbaijan October 2014

Page 2

For Peter Felton, Business Development director at Telent Technology Services, a company specializing in the installation and management of communication networks and control systems for rail, metro and road transportation, this was the first visit to Baku. “Given our experience in managing subway stations and communications He proceeded to outline some of the recent improvements in Azerbaijan that facilitate foreign networks in the UK, we are looking to engage with the companies involved in the expansion investment, such as macroeconomic stability, of the Baku Metro. Beyond that, we hope the reduction in red tape, the simplification of to establish links with other companies in legal procedures for doing business and the Azerbaijan and, further down the line, to use protection of foreign investment. Thanks to Azerbaijan as a springboard for investing in other the continuously improving policy framework, Azerbaijan now ranks among the top countries in countries in the region,” he said. the region in the World Economic Forum’s Global The University of Westminster is looking for Competitiveness Report and the World Bank’s partners for its joint degree Bachelor’s and Doing Business ranking.

Master’s programmes. The schemes would Mark Higgins, UKTI International Trade Advisor, enable students to complete some of the agreed on the importance of encouraging British coursework at Azerbaijani universities, and the rest in London. “We also run a Tempus investment in Azerbaijan’s non-oil sectors. project, an European Union-funded scheme, in “Whilst organizing this event, I deliberately collaboration with the Baku State University. avoided oil and gas, focusing on other sectors,” We are looking to build on this cooperation, he said. which gives us a good foothold in this market,” Jon Pike, director of Internationalisation at the He identified the UK-Azerbaijan High Tech Forum, which took place in June in London, as a University of Westminster, added. breakthrough event that opened up opportunities Azerbaijani-British relations go back to 1991, for cooperation in technology and information and are characterized by frequent diplomatic and communications technology, or ICT. “The interactions and collaboration in multilateral investment in high-tech in Azerbaijan is set organisations, such as the Council of Europe, to reach $4bn in the coming years. There is the Organization for Security and Cooperation innovation in Azerbaijan, and it may be possible in Europe (OSCE), and the EU’s Eastern for UKTI to showcase it to the British market.”

Partnership.

Reflecting the investment agencies’ drive to Trade and investment constitute the core of diversify links away from oil and gas, the 13 bilateral ties and were cemented by BP’s early British companies present at the forum were investment in Azerbaijan, whose 1994 production looking for partners in education, technology, sharing agreement with the Azerbaijani state for consulting, transportation and manufacturing. business community is the largest in Azerbaijan.

We at AZPROMO welcome British investors in the non-oil economy, and we believe that there is great potential to further diversify bilateral trade and investment,” Mammadov said.

Azerbaijan Export & Investment Promotion Foundation

Multilateral strategic partner

bne:Invest in Azerbaijan October 2014

Page 3

the Azeri-Chirag-Guneshli field was dubbed “The Contract of the Century.” BP is also an important stakeholder in the expansion of the Shah Deniz gasfield and in the three pipelines that will carry Azerbaijani gas to Europe.

sign that business ties are branching out from the energy sector. And Higgins welcomed events like the Business Forum, which he called “unique opportunities” to start long-term relations. “The delegates present had such a great experience, that we hope they will go back to the UK and While recognizing BP’s monumental influence on talk about the opportunities in Azerbaijan to the development of the energy sector and of the their peers. Hopefully, they will bring their economy of the Caspian country in general, both procurement chain on their next visit and AZPROMO and UKTI are keen to take economic relations will expand from there,” Higgins said. relations to the next level.

Mammadov said that over 540 companies with British capital are registered in Azerbaijan, a

The only magazine covering business, economics, finance and politics in the dynamic new markets of Emerging Europe and the CIS.

Eastern Europe: Russia, Belarus, Ukraine, Central Europe: Estonia, Latvia, Lithuania, Poland, Czech, Slovakia, Hungary, Southeast Europe: Slovenia, Croatia, Serbia, Romania, Bulgaria, Turkey, Moldova, Albania, Bosnia, Macedonia, Montenegro, Kosovo, Eurasia: Kazakhstan, Georgia, Armenia, Uzbekistan, Kyrgyzstan, Turkmenistan, Tajikistan, Azerbaijan, Mongolia.

What you need to know

Sign up today for a free month trial of all our services

Azerbaijan Export & Investment Promotion Foundation

www.bne.eu

Multilateral strategic partner

bne:Invest in Azerbaijan October 2014

Page 4

Top story

PASHA Bank represents Azerbaijan at Sibos 2014 PASHA Bank wrapped up a busy September by taking part in the fifth edition of the Sibos conference, which was held in Boston on September 29 to October 2. Once again, the bank was the only company from Azerbaijan and the Caucasus to represent the region and its banking sector at the event.

largest banks, financial institutions and financial industry suppliers attend to debate the latest industry issues and trends, and to meet other industry professionals.

Among the topics discussed at Sibos 2014 were the changes in the financial sector, the influence of technology on finance and the development of PASHA Bank’s attendance at the annual Sibos new financial services. Discussions were divided conference was for the fifth consecutive year. The into theme-based streams that lasted between annual conference, exhibition and networking one and four days, and covered issues related event for the financial industry organised by SWIFT to compliance, corporate banking, investment sees thousands of delegates from the world’s management, market infrastructures and

Azerbaijan Export & Investment Promotion Foundation

Multilateral strategic partner

bne:Invest in Azerbaijan October 2014

Page 5

technology. The guest speaker at this year’s event was Bill Gates, chairman of Microsoft, who delivered a speech at the final plenary session on his foundation’s work to enhance financial inclusion in the developing world. His bottom line was that digital payments platforms could help lift millions out of poverty, while presenting an opportunity for the hundreds of banks in attendance.

busy month for the bank, which included the announcement of impressive half-year financial results, the incorporation of e-signatures into its online banking operations, and the commercial launch of its Visa payWave contactless payment terminals.

On the back of a fast growing banking sector in Azerbaijan, which saw total assets rise 11% in the first six months of the year, PASHA Bank posted According to Farid Akhundov, Chairman of PASHA operating income up 6% on year to $34.95m as Bank’s Executive Board, “Sibos is a very important loan growth remained strong, increasing its gross portfolio by 10% to $490.27m from the year before. event for PASHA Bank. As well as helping us The effective provision rate on the portfolio was to establish new business relationships with 3.3%, compared with a year-end 2013 rate of 6.2%. the leading companies in the banking sector, PASHA Bank remains one of Azerbaijan’s largest Sibos allows us to learn from the experiences lenders, growing its total assets by the end of first of the world’s best banks and to adopt best half to above $1bn for the first time, mainly due to practice principles in our operations. As the only increased activity on customers' accounts.

Azerbaijani bank in attendance at Sibos 2014, we are proud to represent not only ourselves, but The goal for the remainder of the year is to build also our country in Boston. In addition to being the trade finance portfolio for corporate clients up a platform for discussing industry issues, this to $183m by capitalizing on the bank’s cooperation has also been an excellent opportunity for us to showcase Azerbaijan’s economic achievements.” with international financial institutions and its access to a broad range of financial instruments.

PASHA Bank’s participation at Sibos capped a

Azerbaijan Export & Investment Promotion Foundation

Multilateral strategic partner

bne:Invest in Azerbaijan October 2014

Page 6

Interview

Baku counts down to the June 2015 European Games With less than 250 days left until the opening ceremony of the European Games in Azerbaijan, the Baku European Games Operations Committee (BEGOC) is hard at work to deliver an event budgeted at more than $8bn, complete with what it describes will be the most spectacular show in Azerbaijan’s history.

“This is going to be the most fantastic show ever staged in Azerbaijan, one that will make the Eurovision song contest seem like a small, local event,” BEGOC Chief Operating Officer Simon Clegg tells bne of the opening ceremony, while refusing to reveal any of the acts. However, the

appointment of Dimitris Papaioannou, the artistic director of the Athens 2004 Olympic Games ceremonies, as the artistic director of the Baku 2015 opening ceremony speaks volumes about the intent to stage a show to remember.

BEGOC has expanded significantly over the last two months, from 670 to 900 employees, reflecting a pickup in the pace of the preparations.

Clegg cites time pressure – BEGOC only had 30 months to deliver the event – as the key aspect that differentiates these games from large-scale sporting events elsewhere. “Our preparations are time sensitive, and we have to compress

Azerbaijan Export & Investment Promotion Foundation

Multilateral strategic partner

bne:Invest in Azerbaijan October 2014

Page 7

will complement the budget allocated by the Azerbaijani state. The committee is seeking to sign on up eight official partners that would benefit from branding and advertisement at all the competition venues. So far, six companies have agreed to sponsor the event in this capacity, The Azerbaijani government is in charge of ensuring that the 18 venues in which competitions including Azerbaijan Airlines (AZAL), P&G, Tissot, Nar Mobile, as well as SOCAR and BP. Clegg noted will be held are ready for the June 2015 event. All eyes are on the National Stadium, a 65,000-person that accommodating both energy giants as part of venue and on the athletes’ village. The government the PR exercise “required a bit of creativity on our part,” but that it was important for them both to will take advantage of the occasion to inaugurate a new airport terminal and upgraded subway and sponsor the event, in their capacity as Azerbaijan’s state oil company and its largest foreign investor bus systems. respectively.

Conversely, BEGOC will be responsible for In addition to the official partners, BEGOC will everything related to the organization of the collaborate with a number of official supporters, games. Attracting high-quality athletes was whose contribution and rights will be less than an important first step, Clegg contends, and it those of the partners, and who will not receive was accomplished by ensuring that 16 of the 20 branding at the venues. participating sports can use the Baku Games as a qualifying or ranking event for the Rio 2016 The government has already altered its Olympics. immigration policy to waive the visa requirement for all participating athletes and officials in lieu Negotiating with broadcasters was the next of an accreditation card. In addition, all foreign step, and is an ongoing process. So far, the spectators will receive visas upon arrival based on broadcasters for Turkey, Romania, Hungary, proof of purchase of tickets. Some 6,000 athletes Belgium and Germany have been announced, and 3,000 officials from the National Olympic and negotiations are being held with a number Committees of Europe have confirmed their of other countries. While the games will be a participation in the games, which Clegg believes European event, Clegg wants to ensure that it is will be the “second most important event in the broadcast all over the world, from Australia to history of Azerbaijan after the signing of the South America. contract of the century in 1994,” referring to deal The total budget for the event has not been made with an international consortium to develop the public. However, an October 2013 announcement giant Azeri, Chirag and deepwater Gunashli (ACG) oilfields. revealed that Azerbaijan’s 2014 state budget had provisioned $7.7bn for the event, $1.25bn of which would be allotted to BEGOC for hosting the event, Clegg expects the vast majority of spectators from abroad to be friends and family of participating according to Eurasianet. athletes. Given this, the majority of the 900,000 tickets on sale will be marketed at the local Partners population. The ticketing policy has not been made BEGOC’s two-tiered sponsorship scheme some elements that are typical of multi-sport events, like transportation, accommodation, the accreditation process or dealing with the international media.”

Azerbaijan Export & Investment Promotion Foundation

Multilateral strategic partner

bne:Invest in Azerbaijan October 2014

Page 8

public yet, but Clegg assures that pricing will be reasonable. “We recognize that there is not a huge culture in this country of buying tickets for events outside football and pop concerts. We have had to be very reasonable with our prices,” he explained.

either to work in future sports events in Baku, internationally, or to be better positioned to provide leadership and management roles in other sectors,” he said.

Clegg concedes that this is the biggest sporting event he has organised and that the time pressure, coupled with the fact that the brand of the European Games depends on BEGOC’s delivery, is “daunting, but exciting.” An avid sportsman and former CEO of the British Olympic Association, his take on leadership at BEGOC is to mould his management style to the local culture to maximise results.

Clegg’s definition of what would constitute a successful first edition of the European Games encompasses various aspects. His main goal is to create a great experience for athletes, because “sports should always be about the athletes.

I would want the athletes to go away with a fantastic experience of Baku and of the European Games.” He also wants to create a tradition of the European Games after Baku, and is hopeful that the competition will be held regularly after 2019.

Conversely, he expects that the 1,600 staff that BEGOC will hire by the beginning of the games and the 12,000 volunteers will walk away with new skills and an appetite for volunteering in sporting and other types of events. Azerbaijan will host a Formula 1 event in 2016, the Chess Olympiad, the Islamic Games, and, having bid twice for the Olympic Games, it may ultimately host the event in 2024 or 2028. “We are up-skilling the workforce,

Lastly, he is hoping to achieve President Ilham Aliyev’s goal of showcasing Azerbaijan’s development to the rest of Europe and to the world, and to move sports up the social agenda in the country. “Sport in itself is a basic human right as recognized by the UN, and the staging of sport will help move sport up the social agenda, it will create interest in sport and will give greater access to sport in Azerbaijan,” he concluded.

Azerbaijan Export & Investment Promotion Foundation

Multilateral strategic partner

bne:Invest in Azerbaijan October 2014

Page 9

Feature Azerbaijan’s Islamic leasing sector set to grow despite regulatory uncertainty Islamic financial institutions in Azerbaijan are hopeful about the passing of the country’s first legislation that will regulate the leasing sector and address some of its operating constraints.

Meanwhile, leasing companies are benefitting from a clampdown on consumer lending.

Worth an estimated $318m, the leasing sector in Azerbaijan has been growing despite the frequent changes in regulations in recent years. The sector is fairly consolidated, with six of the existing 23 leasing companies commanding more than half of the market. Of the top players in the market, only two – Standard Leasing and Uni Leasing – are part of bigger financial groups, Standard Bank and sector that includes the likes of International Bank of Azerbaijan (IBA).

UniCredit Group respectively.

According to Ansar’s General Manager, Jafar Babayev, Sharia-compliant leasing is designed to better protect the lessee than in conventional leasing. “In order to avoid charging interest in Islamic leasing, the price of an asset cannot be agreed in advance. The conventional lease is a three-party agreement between the seller, the lessor and the lessee. In Islamic finance, we sign Ansar Leasing, a company who’s sole shareholder the agreements separately, because we buy the is the Islamic Corporation for the Development of assets independently from the seller. We then sign a separate agreement with the lessee,” he the Private Sector (ICD), a fully-owned subsidiary explains. of the Islamic Development Bank, was the first company to introduce Sharia-compliant leasing to Azerbaijan. The company started operations in The fact that the lessor is the owner of the asset gives greater freedom to the lessee, such 2009 and is part of an emergent Islamic finance The Central Bank of Azerbaijan’s restrictions on consumer lending, and particularly on vehicle loans, this year has boosted the portfolio of leasing companies. However, there are fears the central bank could enforce tighter regulations on vehicle leasing next, in an effort to reduce the number of automobiles in the Azerbaijani capital of Baku.

Azerbaijan Export & Investment Promotion Foundation

Multilateral strategic partner

bne:Invest in Azerbaijan October 2014

Page 10

as ending the agreement at any point without suffering any penalty. In total, Sharia-compliant leasing results in five separate agreements, with clear stipulations about the ownership, payments and liability for the asset.

Azerbaijan does not have a legislative framework for Islamic finance yet, which complicates the operations of Sharia-compliant financial institutions. One issue that affects both Islamic banks and leasing companies is the mandatory nature of the value added tax (VAT) that they have to pay for the assets they purchase, coupled with the prohibition to charge clients VAT. In the case of Islamic leasing, VAT is a major obstacle to securing more large corporate clients, who still prefer conventional banking loans to Islamic leasing.

However, Babayev is hopeful. The International Bank of Azerbaijan is currently working on a draft legislation proposal for Islamic finance, which will be forwarded to the central bank and the government next year. By the end of 2015, it is expected that Azerbaijan will pass the legislation, which will entail changes to the banking, tax, and customs laws to accommodate Sharia-compliant financial institutions.

Passing the legislation would enable Azerbaijan to consolidate its internal Islamic finance sector and to expand it to other markets in the Commonwealth of Independent States (CIS).

Given its proximity to established Islamic financial markets like Iran and the countries in the Gulf Cooperation Council (GCC), its experience in Islamic finance and its relations with the CIS

make Azerbaijan uniquely positioned to serve as a role model and a springboard for investment for Islamic finance in the region.

“The country has a vast experience in dealing with foreign Islamic financial institutions. Meanwhile, Islamic finance in other Central Asian countries like Uzbekistan, Turkmenistan and Tajikistan is virtually non-existent. Given Azerbaijan’s experience, long-standing relations with the GCC, and its human capital, we could become a bridge between the Middle East and the CIS,” Babayev explains.

In the meantime, Ansar is making the best of the existing situation. Since January, the company increased its portfolio by $3.8m, up to $16.5m, and raised the contribution of vehicle leasing to its disbursements to 30%. In addition to vehicle leasing, Ansar also leases assets for the services, manufacturing, agriculture, real estate and construction sectors. While competition is low – Ansar is only one of two Islamic leasing companies in Azerbaijan - Babayev explains that, “less than 10% of our customers come to us because we are Sharia compliant. The majority are attracted to the advantages we offer, such us low markups, our experience and our facilities.”

Looking ahead, the team at Ansar is working on a business plan for 2015-2017, which aims to double the company’s market share from 5% to 10%.

As for the changes awaiting the sector, Babayev expects that, “more regulations should also bring more rights for leasing companies, such as the waiving of our VAT duty.”

Azerbaijan Export & Investment Promotion Foundation

Multilateral strategic partner

bne:Invest in Azerbaijan October 2014

Page 11

Sector explains GSK’s interest in Azerbaijan as being prompted by the “positive developments in healthcare, particularly in the last seven to eight years. We believe that in the next five years the system will change dramatically in order to meet the targets of Vision 2020.”

Investors look to Azerbaijani healthcare as challenges persist The 20th Azerbaijan International Healthcare Exhibition (BIHE), the largest event of its kind in the Caspian region, took place between September 25 and 27 in the Azerbaijani capital.

The exhibition attracted 147 companies from all over the world, which showcased their solutions in a market that Frost& Sullivan has described as “a very attractive ground for global healthcare investors.”

Azerbaijan is indeed a good investment destination for healthcare providers, pharmaceutical companies and manufacturers of medical equipment, because domestic production of medicine and equipment is limited. This has prompted multinationals like Novartis, GSK and Aspen Pharmacare to open representative offices in Baku.

Ceyhun Alibayov, GSK’s director in Azerbaijan,

Unlike some of its neighbours, Azerbaijan did not start reforming its healthcare system straight after independence in 1991. As a result, the country preserves the framework of the centralized Soviet model of healthcare. However, the sector has seen a revival in recent years, and it was boosted by a tenfold increase in public spending on healthcare over the last decade, which reached $789m in 2013. Since 2005, the Ministry of Health has launched 11 programmes worth $500m to modernize the healthcare system, and to correct problems such as regional discrepancies in the access to healthcare and the shortage of medical personnel.

Last year alone, the government built and renovated 81 medical facilities, 38 of which are located outside Baku. At the same time, the existing infrastructure was consolidated so as to maximize its efficiency. An overhaul in 2011 reduced the number of hospitals from 756 to 516. As a result, hospital beds per 1,000 people were reduced from a high of nine beds per 1,000 people in the mid-1990s to five beds, a number that is comparable to the European average.

The move led to an increase in their use from 82 days per year in 2003 to 249 days ten years later. Conversely, the development of strategies for dealing with priority areas like oncology, renal insufficiency, diabetes, thalassaemia, hemophilia, infant and mother mortality, and

Azerbaijan Export & Investment Promotion Foundation

Multilateral strategic partner

bne:Invest in Azerbaijan October 2014

Page 12

immunoprophylaxis have been instrumental in improving the quality of medical services.

The number of patients soliciting medical services has also increased by 65% in the last decade, signaling that Azerbaijanis are more knowledgeable about and more willing to resort to medical services than in the past. The country’s young population, half of which is under 35 years of age, is likely to continue to demand improvements in the medical sector, such as universal healthcare. At the moment, Azerbaijanis cover 62% of the cost of medical care out of pocket (OOP); 70% of that is spent on medicines and 30% on medical services. The prevalence of disease has also changed in the last decade, as chronic ailments and communicable diseases like tuberculosis have been taken over by lifestyle diseases and traffic accidents as the main causes of death.

Azerbaijan imports 60% of its pharmaceuticals.

More expensive branded drugs are purchased from Western Europe and the US, while generics are purchased from Russia, Iran, Turkey, India and Ukraine. There is no domestic production of medical equipment, which is imported based on the same two-tier quality criterion as pharmaceuticals.

The Ministry of Health is currently working on a one-price reference system for pharmaceuticals,

which, according to Elshad Abdullayev, general manager of one of the largest pharmaceutical companies Avromed, will lead to mandatory health insurance as the next step. He is optimistic about the benefits of mandatory health insurance on pharmaceutical distributors and the population.

“On the one hand, it will drive the demand for pharmaceuticals up. On the other hand, people will be more inclined to regularly visit their doctor, which in turn will lower the prevalence of diseases,” Abdullayev says.

Alibayov is also positive about the plans to institute mandatory medical insurance. “The pharmaceutical sector will grow and people will have access to the necessary medication,” he says.

While the Azerbaijani state is working on a comprehensive reform of its healthcare system, problems like the shortage of medical staff outside the capital, together with the reduced number of hospitals and clinics in the regions will persist and will have to be addressed as part of this reform.

In the meantime, Azerbaijan is receiving help and technical assistance from international organizations like the World Bank and the International Development Association (IDA) to train its medical staff in rural areas and to build primary care units in villages and hospitals in provincial towns like Sheki.

Azerbaijan Export & Investment Promotion Foundation

Multilateral strategic partner

bne:Invest in Azerbaijan October 2014

Page 13

Economics & finance Azerbaijan banking sector’s assets up by quarter in 8M14 year-on-year to $30bn The assets of Azerbaijan's banking sector have rise from AZN18.92bn ($24.12bn) over the first eight months of 2013 to AZN23.55bn ($30.02bn) as of September 1, 2014, according to the central bank of Azerbaijan, a rise of just under a quarter (24.5%).

Just over two thirds (67.9%) of the assets in the banking sector are due to loans given to clients and worth AZN16bn. Most of the rest is due to investments (AZN2bn) and deposits (AZN1.6bn).

The bulk of the liabilities Park deposits (AZN10.17bn) as of September 1, 2014, but these are growing slightly slower than the overall assets of the sector and were up by 20.5% in the same period of 2013. Loans and deposits from the financial sector, on the other hand, I growing faster than they were banking assets and were worth AZN8bn by September 1, up by 28.7% the central bank said.

The central bank also said the capitalization of Azerbaijan's banking sector increased by 22.11% in August 2014 compared to August 2013 and amounted to AZN3,749 as of September 1, 2014.

Azerbaijan has a total of 44 banks, which now all – bar two -- meet the increased minimum capitalisation level of AZN10bn. There are 22 banks with foreign capital. The share of foreign

capital ranges from 50 to 100% in seven of them, while up to 50% in 13 banks. There are also two local branches of foreign banks.

However the consolidation of the sector is on the cards after the central bank increased the minimum capital requirements earlier this year to AZN50bn, which comes into effect before the end of this year.

As part of the state's economic diversification program it has been encouraging banks to lend to the real economy. Commercial lending was up by 19.7% between January and August of this year compared to the same period year earlier to a total of AZN17.3bn, of which 73.3% was lent in the national currency and the rest in foreign currency.

Despite the economic slowdown across the region banks in Azerbaijan are not suffering unduly from non-performing loans (NPLs): the bad loans of the entire sector totalled AZN938.8m, or 5.4% of total assets, but this is a small absolute increase of AZN764.8m from the same period a year earlier, but on par proportionally with last year's result (5.3%).

However, the sector's NPL numbers do not include the bad loans from the troubled Aqrarkredit, a non-banking credit institution. If these are counted in then NPLs were up by 22.8% year-on-year in the same period.

Some half of the entire banking sector assets are in the state-owned bank of International Bank of Azerbaijan, which accounts for a third of all loans made in the country by itself (AZN6bn, or 34.5% of total loans).

Azerbaijan Export & Investment Promotion Foundation

Multilateral strategic partner

bne:Invest in Azerbaijan October 2014

Page 14

Azerbaijan leads the CIS in

EBRD predicts Azerbaijan to

terms of FDI per capita

enjoy lowest inflation rate in CIS

Azerbaijan attracts more foreign direct investment (FDI) per capita than any other country in the Commonwealth of Independent States (CIS), according to Administration Chief of Azerbaijan's Economy and Industry Ministry Samir Veliyev.

The European Bank for Reconstruction and Development (EBRD) said that Azerbaijan will enjoy one of the lowest inflation rates in the Commonwealth of Independent States (CIS) this year at 1.6%, in its economic forecasts released in September.

Investment ties with Germany have been especially fruitful, with much of the investment going into trade, financial and technical corporation.

The government is more pessimistic and predicts an inflation rate for the full year at 3.5%. However the EBRD looks like it's closer to the mark as inflation over the first eight months of this year was only 1.4%, according to the state statistics committee of Azerbaijan.

"Today, 177 German companies are operating in Azerbaijan. They participate in ongoing projects in our country as contractors, and the total amount of German investment made in Azerbaijan's economy is approximately $760m.

Over the past years, a positive dynamics is also observed in the trade between the two countries," Veliyev said according to reports.

Last year the trade between Azerbaijan and Germany increased by quarter to reach a total of $2.2bn. Over the first half this year trade increased again by 15%, according to reports.

The International Monetary Fund (IMF) is like the government more pessimistic and predicts 3.5% in 2004 rising to 4% in 2005. Both these results would be an increase on Azerbaijan's inflation of 2.4% in 2013.

The EBRD went on to say that the growth rate of GDP in Azerbaijan is predicted at 3% in 2014.

"The slowdown in economic growth is due to a temporary decrease in the volume of oil production in the country, which led to a decrease in the GDP forecast to 3 percent in 2014-2015," the EBRD noted.

"Investment worth over $174bn was made in Azerbaijan's economy during the period of independence, and half of this amount accounted for the foreign countries," he added.

The EBRD believes another reason behind the decline of the forecast of GDP growth in several Eastern Europe and the Caucasus countries is the Ukrainian-Russian crisis.

Azerbaijan Export & Investment Promotion Foundation

Multilateral strategic partner

bne:Invest in Azerbaijan October 2014

Page 15

About fourfold increase

Gold, currency reserves of

recorded in corporate

Azerbaijan comparable to its

securities market

GDP

The total turnover of transactions on all instruments on the Baku Stock Exchange (BSE) in January-September 2014 stood at AZN7.366bn, or by 1.4 times more compared to the same period of 2013, BSE reported.

Gold and currency reserves of Azerbaijan are comparable to the GDP of the country, reports AzerNews.

The volume of the state securities market hit AZN4.061bn (a decrease by 7.38%) during the reporting period and the turnover of corporate securities market totaled AZN3.3bn.

ADB assigns $350m to develop infrastructure in Azerbaijan The Asian Development Bank says it will assign $350m for the development of transport infrastructure in Azerbaijan over the next three years.

Azerbaijan has been investing heavily into transport infrastructure in the hopes of making itself a logistics node for the region. The state sponsored the construction of a new port, regional airports across the country have received investment and a massive road building campaign is underway.

This was announced in the bank's new strategy of cooperation with Azerbaijan for 2014-2018 approved by the ADB Board on September 30.

Vice-Speaker of the Parliament Valeh Aleskerov made the remark at a meeting of the Standing Commission of the CIS Interparliamentary Assembly on culture, information, tourism and sport in Baku.

"Azerbaijan is an independent state in all respects," Aleskerov said. "It is a small country, but a great power. Gold and currency reserves of Azerbaijan are comparable to the country's GDP, and public external debt is only 8% of GDP."

Azerbaijan's external public debt up 5% to $4bn Azerbaijan's public external debt increased by just under 5% to reach a total of AZN4.988bn ($3.9bn), or 8.5% of GDP, according to Azerbaijan's finance ministry.

Maturities on this debt is extremely long: two thirds of the borrowing (62%) has a maturity of 10 to 20 years, and a third (30%) has maturity that is longer than 20 years. Less than 8% of the country's foreign external debt has maturities of less than 10 years.

Azerbaijan Export & Investment Promotion Foundation

Multilateral strategic partner

bne:Invest in Azerbaijan October 2014

Page 16

The breakdown of the sources of this borrowing at these enterprises will take place by late 2014 or early 2015," Trend news agency quotes the includes: IMF Special Drawing Rights 10.8%; minister as saying.

60.6% in dollars, 24.3% in euro, 2.3% in the Japanese yen, 0.8% in the Islamic dinar, 0.5% in Saudi Riyal, 0.5% UAE dirham, and 0.2% in Kuwaiti dinar.

Azerbaijan to invest $20bn in

A large proportion of this debt has been lent by international financial institutions, such as the World Bank the EBRD, Asian Development Bank and the Japanese international Cooperation Agency with the bulk of the proceeds being ploughed into economic reform programmes, infrastructure, reconstruction of power plants, and improvement of water supply among other things.

Turkey with the construction of the TANAP gas pipeline Azerbaijan will increases total investment into Turkey to $20bn after the construction of the Trans-Anatolian (TANAP) gas pipeline is complete.

TANAP, developed by SOCAR in collaboration The state has done next to no commercial with Turkish Botas and the Energy Company borrowing, however this year, Azerbaijan debuted on international capital market with its TPAO, will transport Shah Deniz's gas to the Turkish-Greek border from eastern Turkey. first foreign currency bonds worth $1.25bn.

Azerbaijan prepares for privatisation of two state telcos Azerbaijan’s Minister of Communications and High Technologies Ali Abbasov confirmed that two state-owned fixed line telecoms operators – AzTelekom and Baku Telephone Production Association (BTRIB) – will be merged, transformed to a joint stock company by mid2015, and then privatised. If the deal goes ahead it will be one of the largest privatisations in the country's history.

"In the near future it is expected to attract a consulting company to conduct an audit. We expect that the change in the ownership form

The initial capacity of the pipeline will be 16bn cubic meters of gas each year. TANAP will link up with Trans-Adriatic (TAP) pipeline on the Turkish-Greek border. About 6bn cm of gas will be delivered to Turkey and the rest to Europe.

The costs of the TANAP project are estimated at $10bn-11bn.

In addition to the pipeline Azerbaijan intends to invest into the supporting petrochemicals industry in Turkey, and in particular the Petkim Petrochemical Complex and the Star refinery, as well as a new container terminal and a power plant, which is necessary for the further development of Petkim, according to SOCAR Vice-President of Economic Issues Suleyman Gasimov.

Azerbaijan Export & Investment Promotion Foundation

Multilateral strategic partner

bne:Invest in Azerbaijan October 2014

Page 17

Draft law to set up credit

Azerbaijan's sovereign wealth

bureau submitted to the

fund SOFAZ expects to receive

Azerbaijan's government

$200bn in the coming years

With Azerbaijan's emerging middle-class class growing and consumer borrowing rising rapidly the government has decided to set up credit bureau. A draft law to establish the legal framework for a credit bureau was submitted to the government in September.

Azerbaijan sovereign wealth funds SOFAZ is expecting to accumulate some $200bn in the coming years, according to Executive Director of SOFAZ Shahmar Movsumov.

growth in 2014 at 4.5%

SOFAZ was established in 1999 with assets worth $271m.

The fund collect parts of the country's revenue and from oil exports and the money is used to invest The Central Bank of Azerbaijan has drawn up the into the development of the Republic. Movsumov draft law and delivered to the Cabinet of Ministers, so the fun continues to finance projects such as reports the Project of Azerbaijan-Central Asia the Baku-Tbilisi-Kars railway and rehabilitation of Financial Markets Infrastructure (ACAFI). the Samur-Absheron irrigation system, amongst many other projects. “We expect that in practice it will mean reaching the final stage of legislative framework The assets of SOFAZ increased by 4.86% since the establishment process, which in its turn will start of this year as of July 1, 2014 and has a total activate practical steps on organization of the first of $37.6bn of assets under management. credit bureau synchronized with establishment of the legislation�, ACAFI said.

SOFAZ has invested $2.2bn in Southern Gas Corridor Closed Joint Stock Company in the long term by purchasing the bonds of the company, which issued bonds worth $917,320,800 and IMF forecasts Azerbaijan's GDP $1,246,355,000.

The International Monetary Fund (IMF) forecasts Azerbaijan's GDP growth at 4.5% in 2014 and 4.3% in 2015.

This was noted in a report on the prospects for development of world economy - World Economic Outlook - published on IMF's website on October 8.

According to the fund's previous forecast, released in June, the GDP growth of the country was predicted at 5% in 2014 and 4.6% in 2015.

Third issue of debt securities placement for Southern Gas Corridor begins The State Committee for Securities registered the issue prospectus of interest-bearing book-entry

Azerbaijan Export & Investment Promotion Foundation

Multilateral strategic partner

bne:Invest in Azerbaijan October 2014

Page 18

registered unsecured bonds of the Southern Gas Corridor CJSC in the amount of $101.12 million, the Baku Stock Exchange (BSE) stated Sept.23.

of the emission. PSG-Broker LLC is the underwriter of the placement.

The turnover period is 10 calendar years, with Some 1.011.200 bonds with a nominal value of the yield of 6 month Libor +1 percent. Payment of $100 each have been issued within the framework interest will be carried out every 6 months.

The only magazine covering business, economics, finance and politics in the dynamic new markets of Emerging Europe and the CIS.

Eastern Europe: Russia, Belarus, Ukraine, Central Europe: Estonia, Latvia, Lithuania, Poland, Czech, Slovakia, Hungary, Southeast Europe: Slovenia, Croatia, Serbia, Romania, Bulgaria, Turkey, Moldova, Albania, Bosnia, Macedonia, Montenegro, Kosovo, Eurasia: Kazakhstan, Georgia, Armenia, Uzbekistan, Kyrgyzstan, Turkmenistan, Tajikistan, Azerbaijan, Mongolia.

What you need to know

Sign up today for a free month trial of all our services

Azerbaijan Export & Investment Promotion Foundation

www.bne.eu

Multilateral strategic partner

bne:Invest in Azerbaijan October 2014

Page 19

Chart Azerbaijan’s gas output reached record level in August Azerbaijan’s gas production took off in 2006 as gas in 2013, which was up 11.3% from 26.8bn cm output at the Shah Deniz gasfield was ramped up in 2012. In 2004 it was just 5.6bn cm. and this has continued to rise to the point where August saw output reach a record level.

A further gas surge is expected when the second phase of the Shah Deniz field, one of the world's The State Statistics Committee reported that gas largest gas-condensate fields with reserves production in August was a record 9.4bn cubic estimated at 1.2 trillion cm, is completed in metres (cm), bringing January-August production 2018. The gas produced at the second stage of to 20.2bn cm, up 5.4% versus the year-earlier Azerbaijan's Shah Deniz field development will period. be the main source for the EU’s Southern Gas Corridor, which envisages the transportation of Azerbaijan plans gas production to be 28.8bn cm the Caspian gas to Turkey and other European for this year. Azerbaijan produced 29.5bn cm of markets.

Azerbaijan Export & Investment Promotion Foundation

Multilateral strategic partner

bne:Invest in Azerbaijan October 2014

Page 20

News in brief

Azerbaijan has invested a total

Azerbaijan looking to build a nuclear power station Azerbaijan is studying the possibility of building a nuclear power station in the Republic, according to Deputy Minister for Communications & High Technologies Elmir Velizadeh.

"First of all, it is planned to construct a special reactor for research. Then, issues of creation of nuclear power plant will be studied," he said, according to reports.

A nuclear power station was planned for Baku in the 1980s, however the collapse of the Soviet union prevented plans being fulfilled.

Azerbaijan Airlines receive two Boeing-787 Dreamliners this year

of $54bn into developing oil and gas sector Azerbaijan has invested a total of $54.4bn into the development of the awning gas sector since independence, the head of SOCAR (State Oil Company of Azerbaijan) Rovnag Abdullayev said in an interview in September.

SOCAR is working with over 25 companies from 15 countries on 18 PSAs (Production Sharing Agreement), he said. In addition the company is involved with 37 joint ventures and 7 alliances established by SOCAR and its subdivisions in almost all areas of the oil and gas sector of the country.

Currently the two biggest projects the companies involved in the development of the Azeri-ChiragGuneshli oil and gas field block and Shah Deniz condensate field are developed in collaboration with foreign partners.

Azerbaijan increases fruit

Azerbaijan Airlines (AZAL) will receive two Boeing-787 Dreamliner aircraft by late 2014, AZAL deputy head Sabir Ilyasov told reporters September 24.

production

Fruit production in Azerbaijan has increased over the past seven years, the State Statistics The company is currently working on the financing Committee reported. of the new aircraft.

A 26% increase was recorded in the fruit and At present, AZAL fleet consists of "Boeing 757berries production in Azerbaijan from 2007 to 200", "Boeing 767-300", "Airbus 319", "Airbus 2013. 6.77m tons of fruits and berries were A320", "Airbus A340-500", "Embraer ERJ 170produced in Azerbaijan in 2007, while in 2013 the 100LR" and "Embraer ERJ 190-100" aircraft. production grew to 8.5m tons.

Azerbaijan Export & Investment Promotion Foundation

Multilateral strategic partner

bne:Invest in Azerbaijan October 2014

Page 21

Azerbaijan's Internet penetration doubles in five years, e-commerce growing The number of Azerbaijani citizens with the access to the Internet has doubled over the last five years, according to Deputy Communications and High Technology Minister Iltimas Mammadov.

Some 70% of the population is online and broadband penetration is 50%. The country now ranks 63rd in the world in terms of the number of Internet users and 24th when compared to the other emerging markets. Azerbaijan ranks above both Russia (50th) and Turkey (69th) in terms of the penetration of broadband per hundred inhabitants.

of investment into renewable energy, according to the head of the State Agency for Alternative and Renewable Energy of Azerbaijan Akim Badalov.

As part of the state policy to diversify the economy and wean itself off oil, the government has been ploughing money into renewable energy sources: AZN100m ($127m) has already been spent. The State Agency for Alternative and Renewable Energy Sources plans to launch a project with a total capacity of 300 megawatts, said Badalov in September, focusing on the generation of solar, wind, geothermal waters, small rivers and biomass energy.

And the state has already completed one project: a wind energy station with a total capacity of 50 megawatts is completed in Yeni Yashma. Preparatory work for seven solar power plants is already underway, which should be operational in late 2014- early 2015, he added.

The volume and turnover of Azerbaijan to e-commerce is also increasing rapidly, expanding at an annualized growth rate of 17% in money terms. Last year e-commerce companies generated In addition there are less well developed revenues of AZN920m, up by 6.8% year-on-year. plans to build stations generating electricity from biomass in Shaki and Siyazan regions of The mobile phone penetration in the country Azerbaijan, making use of the waste products stays at the level of 110%, thanks to its three from cattle and chickens raised locally. main mobile operators. The number of mobile broadband connections in Azerbaijan is 43.9 per Currently alternative energy sources make 100 people, and on this basis, the country stands up less than 1% of total energy produced in at 46th place in the world.

Azerbaijan and the country has little in the way of hydropower generation facilities. The government plans to build up to 100 alternative Azerbaijan invests over $120m energy objects in the next 5 years.

in renewable energy

The government has also been trying to encourage foreign investment into the sector by offering extensive exemptions from customs Best known as a petroeconomy, Azerbaijan is trying to change all of that with AZN100m ($120m) duties and other taxes.

Azerbaijan Export & Investment Promotion Foundation

Multilateral strategic partner

bne:Invest in Azerbaijan October 2014

Page 22

In addition to investments into renewable energies the government has also been spending money on improving energy efficiency.

All of the countries of the former Soviet Union are famously profligate with the use of energy, particularly the energy producers such as Azerbaijan. Equipment for improving energy efficiency and alternative and renewable energy are exempt from customs duties and VAT on imports for 10 years by decision of the Cabinet of Ministers since April 25, 2014.

The share of solar energy in the total volume of alternative energy of Azerbaijan is estimated to reach 40 percent by 2020. The share of alternative energy sources is planned to increase to 20 percent of the total volume of energy consumption in Azerbaijan by 2020, which requires AZN7bn ($8.9bn) of investment.

Azerbaijan's Shipping Company expands fleet Azerbaijan's Caspian Sea Shipping Company (CSSC) has expanded its fleet by buying several new ships in keeping with the government policy to invest in to transport and make the country a logistics hub for the region.

CSSC has added a Singapore-made towingsupply vessel that can serve the major offshore oil and gas projects in the Azerbaijan sector of the Caspian Sea. The company has also bought a dry cargo vessel produced in Russia with a deadweight of 5,490 tons.

Azerbaijan Caspian Shipping Company was established by a presidential decree in October 2013.

Azerbaijan prepares to announce tender for second

Azercosmos capital surpasses

satellite construction

$80m

The Azerbaijani Ministry of Communications and High Technologies is preparing a the tender as part of the Azerspace-2 telecommunication satellite construction project, Azerbaijani Deputy Minister of Communications and High Technologies Iltimas Mammadov told reporters Sept. 25.

Azerbaijan's government has increased the registered capital of the Azerbaijan's Space Agency Azercosmos from AZN40m ($50.9m) to over AZN63m ($80.3m).

"At present, the ministry determines the technical parameters to which the satellite must correspond," he said.

Azercosmos has already launched one Telecom satellite and is in the process of organising a second launch.

As part of the capital increase, the total number of shares of the agency increased from two million units to 3,180,530 units at a nominal value of each share at AZN20 ($25.4).

Azerbaijan Export & Investment Promotion Foundation

Multilateral strategic partner

bne:Invest in Azerbaijan October 2014

Page 23

Earlier, it was reported that Azercosmos finished 2013 year with AZN8.1m ($10.3m) profit and AZN554,000 ($706,272) income from sales.

The plant, located in Azerbaijan's second largest city, is engaged in the assembling of Minsk tractors and trucks.

Belarus, Azerbaijan need to

Currently, Ganja Automobile Plant is assembling 6-7 tractors, 3 MAZ automobiles and other machineries per day.

step up mutual trade Belarus and Azerbaijan should work harder to build up mutual trade, Belarus President Alexander Lukashenko said as he met with Foreign Minister of Azerbaijan Elmar Mammadyarov on 6 October, BelTA has learned.

The plant also produces tractor trailers, communal machinery, and snow removal equipment. The assembly of communal machinery is conducted as part of an agreement concluded with the German Haller Company.

In the first nine months of 2014, the plant “The trade of $300m and even $500m is insufficient produced 1,008 tractors of various brands, 731 hanging equipments and 15 tractor trailers. for our countries,” the head of state said.

Overall, this year's production is 50 percent more compared to last year.

“We would like Azerbaijan to become a manufacturing hub for many goods which can be sold across the region,” the Belarusian leader said. He noted that Belarus attaches great attention to developing the production of the most Georgia increased its imports popular Belarusian equipment in Azerbaijan. of Azerbaijani oil According to the President, it is also important as Azerbaijani companies always support such Georgia imported 174,610 metric tons of oil and projects financially. “It is great: no need to seek and ask for loans. They can get funds locally. This petroleum products worth $158.55m from Azerbaijan in January-August 2014, the Georgian National is also profitable for financial institutions that Statistics Services foreign trade report says. provide funds for such projects and producers themselves,” the head of state said.

Oil and oil products from Azerbaijan in JanuaryAugust amounted to 26% of a total import volume of Georgia in this category of products, the report says.

Ganja Automobile Plant to

assemble 1,400 tractors, 300 trucks in 2014

Georgia has imported oil and oil products in the amount of $611.08m since early 2014, the report says.

Ganja Automobile Plant will assemble 1,400 tractors In annual terms, the volume of Georgian imports and 300 trucks for communal waste removal in 2014. of natural gas from Azerbaijan in value terms

Azerbaijan Export & Investment Promotion Foundation

Multilateral strategic partner

bne:Invest in Azerbaijan October 2014

Page 24

declined by 0.6% (in quantitative terms, supplies increased by 2,200 metric tons in oil equivalent or by 1.3%).

Nato reaffirmed Azerbaijan's territorial integrity and expressed support for the country in the final declaration of the Nato summit held in Wales on September 4–5.

Kazakhstan, Azerbaijan,

The 30th Article of Declaration says Nato will continue to support the efforts towards a peaceful settlement of the conflicts in the South Caucasus based on the principles and norms of international law, the UN Charter and the Helsinki Final Act, as well as "the partners' right to make an independent and sovereign choice in foreign and security policy, free from external pressure and coercion".

Uzbekistan, Turkey to establish common tourist project Baku, with the financial support of the Standing Committee for Economic and Commercial Cooperation of the Organization of the Islamic Conference (COMCEC), as well as the Ministry of Culture and Tourism of Azerbaijan, has held a seminar in the framework of international archaeological tourism project called "Cities of the common cultural heritage."

Azerbaijan has been in a long standing dispute with Armenia and claims it illegally occupied 20% of Azerbaijan's internationally recognized territory, including Nagorno-Karabakh in the early 1990s.

The UN Security Council has passed four resolutions on Armenian withdrawal from the The project provides for studying of cultural and archaeological tourism potential, identifying regions Azerbaijani territory, but they have not been enforced to this day. with similar cultural heritage in Kazakhstan, Azerbaijan, Uzbekistan and Turkey. It is planned to create a joint tourist project which will bring New port capacities to come together these countries.

The project's goal is to achieve sustainable tourism development within COMCEC, to strengthen cooperation between public and private sectors in the field of tourism and attract more tourists to the region.

online in 2015-2016

Nato backs Azerbaijan’s

The construction of the ferry port is nearly completed at this part of the government's diversification strategy and investments into transport in the hope of making the country and regional logistics hub. The shipping lanes that the ferry port will open up will improve trade ties, particularly with the Middle East.

territorial integrity Azerbaijan is trying to carve out a neutral place between the various antagonists in the current European conflict.

A nearly built ferry terminal on Azerbaijan's Caspian coast will come online sometime in the next two years, according to Azerbaijani Deputy Transport Minister Musa Panahov.

Azerbaijan Export & Investment Promotion Foundation

Multilateral strategic partner

bne:Invest in Azerbaijan October 2014

Page 25

The minister said that there are also plans for a dry cargo dock and Ro-Ro terminals.

The new port is being built in Alat settlement located 65 kilometers south of Baku. Its construction, which began in November 2010, is carried out in three stages.

The launch of the modified Southern Gas Corridor The construction of the second branch of the Baku–Tbilisi–Erzurum gas pipeline began on 20 September in Baku. Azerbaijan announced the official inauguration of the construction of the Southern Gas Corridor.

The presidents of Azerbaijan and Bulgaria, the prime ministers of Georgia, Greece and Montenegro, the energy ministers of Turkey, the United Kingdom and Italy, and a US representative were all present at the ceremony.

Anatolian route TANAP running through Turkey and the trans-Adriatic gas pipeline TAP from Greece to Italy as part of the new gas supply route to Europe and Turkey.

Along with TAP, Azerbaijan has an overwhelming majority of shares in the planned infrastructure, and will have full control of it. In turn, Nabucco, the project the EU was lobbying for and which for years was seen as a key element of the Gas Corridor, will not be built.

The infrastructure currently being planned would make it possible to export small amounts of Azerbaijani gas (10 billion m3 annually starting from 2019) to the European market and would in this context fulfil part of the assumptions of the EU’s Southern Gas Corridor concept devised in 2008.

Azerbaijan together with Turkey are the main constructor of the new gas export and will control the greater part of the infrastructure being built. The EU is not participating directly in the project.

There are plans to build the second branch of the Baku–Tbilisi–Erzurum gas pipeline, the trans-

Azerbaijan Export & Investment Promotion Foundation

Multilateral strategic partner