bne:Invest in Azerbaijan - December 2014

bne:Invest in Azerbaijan

Content: 3 Top story 5 Corporate statement 6 Interview 8 Feature 10 Sector 12 Economics & finance 14 Chart 15 News in brief

December 2014

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Baku industry conference wraps up Azerbaijan's “Year of Industry” The Azerbaijani Ministry of Economy and Industry, in collaboration with the United Nations Industrial Development Organization (UNIDO) and the German Federal Enterprise for International Cooperation (GIZ), hosted the Baku International Industry Conference on November 26-27.

The event gathered over 300 participants from Azerbaijan and abroad to discuss trends in industrial policy, technology, and industrial parks or clusters as a way of promoting industrial development. This was the culmination of the

Azerbaijani administration's efforts to grow the non-oil economy this year by decreeing 2014 as the “Year of Industry”.

The action plan for the development of industry in Azerbaijan stipulated, among other things, the hosting of an international industry conference in Baku. The guests – who included high-profile attendees such as Montenegrin Minister of Economy Vladimir Kavaric; Iranian Minister of Industry, Mining and Trade Mohammad Reza Nematzadeh; and the regional directors of

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the European Bank for Reconstruction and Development (EBRD) and the European Investment Bank (EIB) – were welcomed by Azerbaijani Minister of Economy Shahin Mustafayev.

Noting the rising importance of developing countries in global industrialisation, Minister Mustafayev said that: “Special attention is being paid to the development of industry in a period of rapid economic growth, and 2014 was declared the ‘Year of Industry’ in Azerbaijan. The reforms carried out this year successfully delivered largescale infrastructure projects, and continuous improvements in the business environment, enhanced the government’s support for the private sector and political and macroeconomic stability, and have created favorable conditions for the formation of a strong industry in the country.

Economic diversification is one of the priorities of our economic policy at the moment. [...] I am sure that the conference will give an impetus to fruitful discussions on the key trends in industrial policy and the establishment of new partnerships.”

The conference could not have come at a better time, as plunging oil prices have resulted in a 1.7% decline in the energy sector this year and have given a new sense of urgency to the need for economic diversification away from energy.

Estimated at $35.6bn, Azerbaijani industrial production dropped in the first ten months of the year, while non-oil industrial growth was recorded at 6.3% in the same period. Extractive industries, including mining, account for over 77% of Azerbaijan's industrial production, although manufacturing is becoming increasingly important, and accounts for over 15% of industrial output thanks to the production of food and beverages, tobacco, textiles, chemicals, clothing and metallurgy.

The Sumgayit Chemical Industrial Park, Azerbaijan's first such zone, was inaugurated in 2013 and has so far attracted the attention of potential investors from various countries including Germany, France, Japan, Saudi Arabia and other.

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Top story

Russia gas plans raise questions over Azerbaijani gas exports through Turkey The offer by Russian President Vladimir Putin on December 1 to re-route Russia's stalled 63bn cubic metre a year (cm/y) South Stream gas pipeline through Turkey appears to have taken Ankara by complete surprise.

After Russian gas exporter Gazprom arbitrarily slashed the volume of gas it was sending through Turkey's western import line the week before, Turkish officials were warning of a major confrontation and possible gas shortages.

However, the projected pipeline would pose competition to Turkey's other ongoing gas transit projects: namely, the 31bn cm/y TANAP pipeline that Turkey is developing in partnership with Azerbaijan to carry Azeri gas to Europe, and construction of which is slated to begin next year, and Turkey's more nebulous plans to transit gas from the Kurdistan Region of Northern Iraq to Europe.

Tip top TANAP Turkish Energy Minister Taner Yildiz confirmed December 2 that the only agreement inked with Moscow was one to "discuss" the possibility of developing a new form of the South Stream project.

Instead, Putin offered to supply Turkey with 14bn cm/y of gas through the new line in place of the gas it currently receives via Ukraine, and to transit the almost 50bn cm/y remainder for export to He also confirmed that Turkey had no intention Europe via a new gas hub to be developed on the of doing anything to jeopardize TANAP or the Turkey-Greece border. development of Azerbaijan's Shah Deniz gasfield, which will supply that pipeline. "We are partners in Russia's rationale is clear: it is committed to Shah Deniz and TANAP – these are very important building a new line to bypass the troublesome projects for both Turkey and the European Union," Ukraine and having been refused permission to he said, referring to long-standing EU support run South Stream across Bulgaria, it has turned to for the development of a southern gas corridor Turkey as an alternative route. through Turkey to compete with Russian gas.

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However, Shah Deniz will supply only 16bn cm/y to the 31bn cm/y TANAP, and with no clear idea on where the remaining 15bn cm/y will be sourced from, questions have been raised over whether the pipeline can be operated profitably.

than offshore alternatives.

Development of all these fields will be costly, but with no requirement to meet the costs of developing TANAP, the gas from them should still be competitive with South Stream gas.

The same question may have occurred to Russia.

Kurdish Oil Minister Ashti Hawrami said in November that gas exports to Turkey were possible as soon as 2017, while Botas has confirmed that a planned 20bn cm/y capacity line According to BP – the main shareholder and operator linking existing transit infrastructure to the Iraqi of Shah Deniz, which has agreed in principle to take border could be completed in less than a year, a 12% stake in TANAP, along with Azerbaijan's Socar opening the prospect of transiting Kurdish gas to (58%) and Turkey's Botas (30%) – the unfilled capacity Europe. is not an issue. "The whole South Caucasus value chain can operate profitably using the 16bn cm/y from And with ongoing talks between the Kurdistan (the second phase of ) Shah Deniz II," a spokesperson Regional Government and the Iraqi central for BP Turkey tells bne IntelliNews, confirming that government in Baghdad going well, a deal the 16bn cm/y of Shah Deniz gas has already been between the two allowing for gas exports appears sold, which guarantees the viability of both Shah to be more a question of "when" rather than "if".

Deniz and TANAP, as well as the planned Trans Adriatic Pipeline (TAP) which will carry the gas from Already financially committed to TANAP and politically the Turkey-Greece border to Italy. committed to transiting Kurdish gas – at least partly in hope of leveraging economic cooperation with the Yet how the remaining 15bn cm/y of TANAP will KRG into a permanent settlement with Turkey's own be filled is still unclear. Both Socar and BP have fractious Kurdish minority – the appearance of South signalled that they want to fill that capacity with Stream presents Ankara with a difficult choice. gas from other Caspian fields, while Shah Deniz's newest shareholder, Malaysia's Petronas, is Support all the gas transit projects and risk one or more thought to be interested in supplying the line with failing as European gas prices fall through oversupply, gas from a field it is developing in Turkmenistan. or reject one and risk antagonising the backers.

However, with European gas markets still not seeing any surge in demand as the Eurozone economy continues to struggle, both will face stiff competition from cheaper options.

With the bulk of the Turkish economy located in the northwest of the country, and relying on Russian gas for both heat and power, Ankara cannot have failed to notice the threat implicit in Gazprom's still-unexplained cuts to gas supplies.

Which in turn raises the questions of just how far Moscow is prepared to go in pressuring Ankara Kurdish questions, Turkish options to facilitate this new version of South Stream. Too Foremost amongst possible cheaper options is much pressure and Moscow risks both alienating gas from the Iraqi region of Kurdistan, where potential gas buyers and forcing Turkey to turn to onshore development costs are considerably lower the already available alternatives.

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Corporate statement news portal. At the end of the course, selected participants will visit the offices of leading media organisations in the UK, and meet with prominent business journalists.

PASHA Bank and British Council to support local journalists

The programme will be implemented in cooperation with the UK's Thomson Foundation, which is one of Europe's biggest media organisations empowering thousands of journalists worldwide to generate and sustain a diverse media and working in over 100 countries.

Meanwhile, PASHA Bank Georgia was awarded the Bank of the Year award by President Giorgi Margvelashvili at the Caspian Energy Forum 2014.

The recipient of the prize, Chairman of the Board PASHA Bank, in partnership with the British Shahin Mammadov, said that: “This year’s Caspian Council Azerbaijan, launched a training Energy Forum was a platform for discussing programme for Azerbaijani business journalists. different aspects of the Georgian economy, This is the last of a series of initiatives PASHA including how to attract more investment into the Bank has undertaken to promote good quality country. The event did not exclusively focus on the business journalism in the Caspian country, energy industry, with the ways the financial sector and fair and professional reporting in business could be better integrated across the Caspian reporting. The previous such training programme region being another key area of discussion. took place in 2011.

PASHA Bank Georgia is proud to support Georgian business and contribute to its development. I The goals are to strengthen professional strongly believe that the Caspian Energy Forum competencies and skills by tailoring the training to 2014 was another step towards achieving our the needs of the journalists. common goal of growing the Georgian economy and strengthening the relationship between The British Council and PASHA Bank selected 11 Azerbaijan and Georgia.” journalists representing news and broadcasting agencies in Azerbaijan, including but not limited PASHA Bank opened its Tbilisi office in 2013 and is to AzerTaj, Trend, Lider TV, Regional TV, Banco. eyeing a further regional expansion in the coming az, Fins.az, Gun.az, ANS TV and E-Government years, starting with Turkey.

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Interview announced the launch of our new brand Sazz, and new WiMAX technology services. At Bakutel 2011 and 2012, we announced the expansion of our services to the Absheron Peninsula and into Ganja, the second largest city in Azerbaijan and Mingechevir region. At Bakutel 2013, we announced the introduction of our new private line service called Skyport, for business customers who need reliable high speed internet… And this year, we presented a new wireless technology, TDD LTE, which has the capacity to deliver data transmission speeds of up to 100 megabits per second (Mbps). We plan to deploy this technology in our network in 2015."

Azqtel plans to launch 4G LTE wireless internet services in 2015 Azqtel – a veteran of Bakutel, Azerbaijan’s expo that brings together international ICT companies – has a long-standing allegiance to the event, as it was at the one in 2010 that the telecommunications company launched its 4G wireless internet services under the orangecoloured brand SAZZ, which has since become very popular among young Azerbaijanis.

Speaking about how his company has taken advantage of Bakutel, Jayhun Mollazade, CEO of Azqtel, notes that: "This is the fifth year that Azqtel has participated at Bakutel. We have used this forum to learn about new technologies we can deploy in our network and to introduce new services. For example, at Bakutel 2010 we

Launched in 2007, Sazz specialized in WiMAX technology early on, deploying it in 2008. The technology can achieve speeds of up to 10 Mbps, higher than the average broadband speed in Azerbaijan, but still beatable. For that reason, Azqtel is testing the ten-times faster 4G TDD LTE technology, which it will introduce next year starting with the capital Baku and gradually into the 13 regions that are covered by SAZZ's WiMAX network at the moment.

Standalone internet dongles constitute the majority of the company's business, and Mollazade is realistic about their future. Speaking about the shift towards smart phones and tablets in Azerbaijan, he expects, "dongles to continue to be a useful part of this market in the near future, but they will eventually be replaced by smart phones, tablets and other technologies."

The three large mobile operators in Azerbaijan – Nar Mobile, Azercell and Bakcell – also offer 3G and 4G internet dongles, and are a force to be reckoned with, as they bundle products with other

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mobile services to gain more market share. SAZZ, on the other hand, has used its specificity as an advantage, and has introduced benefits like a five-day trial period, which is unique in Azerbaijan, to stay afloat. Mollazade believes that making it in the Azerbaijani ICT sector comes down to the basic "good quality services and good, around the clock customer service."

Nonetheless, Mollazade sees Azerbaijan as an attractive investment destination for ICT companies like his, which is a joint venture between foreign investors and Transkaspian Telecom LLC of Azerbaijan. "We have been investing here since 2005, and have increased our investment year-to-year. We expect to continue at this rate for the foreseeable future."

That said, competition is becoming fierce, as the number of internet users in the country surpasses 5mn, and telecom and internet providers fight to capture the remaining 4mn. The incumbent Azercell has seen its market share eroded by the other two companies, according to Mollazade, but "the increase in competition is good for consumers, as it results in lower prices and better quality services."

In an environment that espouses innovation, and where new technologies like fibre to the home (FTTH) are constantly being introduced, Azqtel invests resources and time into the research of new technologies, according to Mollazade. In 2013, the company introduced a very reliable internet service for business customers, and, looking ahead, it has its eyes on deploying TDD LTE for the first time in the Caspian country by the end of next year.

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Feature Azerbaijan's banking sector puts in strong and stable growth

would… increase the number of financial instruments and products."

Consumer lending accounted for 41.1% of total loans in the first ten months of this year, with trade and services ranking second at 14.4%, loans to the real sector of the economy were in third place at 11.5% of the total, while loans to industry were in fourth place with 9.9% of the total.

With the rest of the world grappling with a slowmoving banking crisis, the banks in Azerbaijan are flourishing, catering to the demands of a rising middle class. The credit and investment capacities of Azerbaijan’s banking sector have doubled over the past two and a half years, the central bank says. And the banks are busily reinvesting their profits to promote growth. The banking sector assets as a Azerbaijan has been enjoying something of a proportion of GDP has increased from 62% in 2010 credit boom this year. The year started with loan to 78% as of September, equivalent to AZN3.8bn growth rising by 40% month-on-month in January, ($4.9bn), the central bank reports. Boosting the leading to fat rise in profitability. But the central size of the sector is a key part of the government's bank stepped in in the second half of the year to efforts to promote economic diversification. In cool lending and head off a potential consumer general, the banking sector’s assets have been credit bubble. growing by around 20% a year in the last two years.

The Azerbaijani banking sector reported healthy profits over the first nine months of this year after total lending grew by just under 20% on year to a total of AZN17.6bn ($22.5bn), of which threequarters of the loans (73.6%) were denominated in the national currency, the manat. Of the country's 44 banks, 38 made collective profits of AZN348.5m ($445m), while the losses of the remaining six banks was only AZN31m, reports Trend.

However, lending remains geared towards the simpler products and the consumer; banking is playing a role in financing the growth of industry, but this is still far from its potential. "Demand is either absent or negligible for many types of banking products because of the simple structure of the economy," head of the Baku Interbank Currency Exchange (BBVB), Farhad Amirbayov, said in a recent interview. "Industrialization

Rating agency Moody's confirmed its stable outlook for the country's banking system of Azerbaijan earlier this year, saying: "Against the backdrop of negative forecasts for the other countries, it is estimated by Moody's that over the next 12-18 months, Azerbaijani banks will continue to benefit from a favourable operating environment, stable assets quality and adequate capital reserves.”

Azerbaijan has not wholly escaped from the impact of the global problems, nor is it immune from problems associated with fast growth. Nonperforming loans (NPLs) were up 0.1% from the previous year to AZN973, or 5.5% of the total – still considered a manageable level.

Consumer lending in particular has been growing fast as the middle class start to leverage their incomes, but the Central Bank of Azerbaijan (CBA)

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has moved to cool lending by increasing prudential than 3%," Rustamov said. rules, to head off an nascent consumer credit bubble that has afflicted other countries in the The CBA is working to further improve the stability former Soviet Union in the past. of the sector and to encourage consolidation.

Credit was getting out of hand earlier this year, However, the structure of the loans is stable, with so the CBA stepped in to hike prudential rules to only 20% of the total being short term and the rest cool things off and the credit growth rate fell from long-term, of which only 4% are overdue. And the 40% to 29% from July onwards. Unsecured private share of long-term loans is growing faster than lending and car loans in particular were targeted. the short-term loans.

Consumer loans are still growing, but at a slower rate than loans to businesses, says the CBA. Demand for foreign currency remains a feature of the banking sector, as the population still want Among other initiatives to promote business to keep part of their savings in hard currency. The lending, the European Bank for Reconstruction and CBA has allocated $1.5bn to the local market to Development (EBRD) expanded its highly successful finance exchange operations, which has helped small business loan programme in November with keep the exchange rate stable. a $125mn credit line to local partner banks.

Foreign interest Azerbaijan’s growing banking sector is becoming increasingly attractive to foreign investors.

Azerbaijan already has 22 banks with foreign capital, of which seven have more than 50% of foreign capital, and another two banks that are foreign branches of Russian banks.

In November, Azerbaijan’s cabinet ordered the drafting of a banking code in the next six months, according to a decree signed by President Ilham Aliyev. The banking code was first suggested in 2003 as part of the reform of the banking system that came into force on April 1, 2004, but remained pending since.

CBA chairman Elman Rustamov told the Caspian European Club forum in October: ""[International banks] are showing an interest in the Azerbaijani phenomenon and the reasons behind its sustainable economic development."

However, the big change comes into effect at the end of this year when the minimum capital requirement for banks will be increased to AZN50m. This is a five-fold increase from the AZN10m that banks were required to have when the decision was made in 2010. At that time only a quarter of Azerbaijan's banks met the requirement, but over the last four years almost all have managed to increase their capital to meet the new requirements.

Rustamov went on to reassure delegates that the fall in oil prices would not negatively impact the sector, as the state's minimal external debt and hard currency reserves worth 74% of GDP provide an enormous cushion against tumbling crude prices and problems elsewhere. Russia's woes are also having little affect on the country. "Azerbaijan is among the countries which will experience the smallest impact of these sanctions, since the country's dependence on Russia's economy is less

The CBA estimates that five to six banks will not meet the new requirements and will either have to close or be sold. However, as these banks account for less than 1% of the total sector assets, the CBA chief Rustamov believes the rest of the sector will easily absorb them.

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Sector reasons, the hopes for economic diversification and stability in Azerbaijan are closely linked to the developments in ICT.

Bakutel showcases ICT innovation in Azerbaijan; AzerCosmos buys 2nd satellite

Hailing from 23 countries, this year's 250 exhibitors competed to showcase their products and services. Repeat exhibitors like Azvirtel, Azercell, Azerfon, Azqtel, Aztelekom, Bakcell, BestComp, Caspel, SINAM, Microsoft Azerbaijan, Softline, Ultra and SINAM accounted for 40% of this year's participants, while country pavilions representing 19 different countries and first-time comers like HDL technology provider SIP, network security provider Arbor Networks, Schneider Electric, Finland's Tecnotree and Switzerland's Smartlink made up the remainder.

The largest Azerbaijani telecom providers, Azercell, Bakcell and Nar Mobile, vied with each The 20th edition of the annual information and other to introduce innovations like augmented communications technology (ICT) conference reality, mobile health, M2M technologies, LTE and exhibition Bakutel at the Baku Expo Center Advanced (LTE-A), virtual supermarkets, and on December 2-5 wrapped up another year of themed gaming zones based on simulations of the significant changes and growth in Azerbaijan’s ICT Baku 2015 European Games. sector.

Bakutel 2014 also attracted some high-level The developments in ICT are great news for the visitors and delegations that held meetings oil-rich country at a time of volatility in the global with Azerbaijani officials, including President energy market; oil prices in December sank to Ilham Aliyev, on the sidelines of the conference. their lowest levels in five years, and far beneath These included the new secretary-general of the the Azerbaijani government's $90/barrel reference International Telecommunication Union (ITU), rate for the 2015 state budget.

Houlin Zhao; a delegation led by the British Parliament and Prime Ministerial trade envoy to The Azerbaijani ICT sector has been growing the region, Charles Hendry; and Iranian Minister at rates of 25-30% a year for the last decade, of Communication and Information Technologies according to the European Bank for Reconstruction Mahmoud Vaezi. and Development (EBRD)'s Transition 2014 report, becoming the second largest destination for foreign In space direct investment (FDI) in the country. For these The highlight of the event pertained to the

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aerospace industry – the signing of a deal between the Azerbaijani space agency AzerCosmos and France's Airbus for the purchase of a second low-orbit satellite, Spot 7, to be called Azersky.

The deal means Azerbaijan joins 19 other nations that operate 50 such satellites, according to Azerbaijani Minister of Communications and High Technology Ali Abbasov. In an interview with Euronews, Bruno Bertolini of Airbus Defence and Space noted that the remote sensing satellite will generate images that, "will be used on a daily basis by organisations and companies in Azerbaijan and the wider Caspian region, for mapping and environmental purposes, to manage environmental risks, to help oil and agronomic companies plan ahead, and to follow and update geographic data based on space imaging."

The largest consumer of technology in the country, the government has launched a flurry of initiatives in recent years to promote e-government, centralised library, medical and educational platforms and transparency, which have generated contracts for the rising number of local and international IT companies. Microsoft, HP, Ultra and BestComp are frequent participants in government tenders for such programmes.

The Azerbaijani Service and Assessment Network Service (ASAN) is the most important project launched as part of the e-government campaign, and has enabled the introduction of electronic visas and the streamlining of tax payments and other state duties. Launched in 2013, ASAN is a one-stop-shop where citizens and residents can register for tax purposes, retrieve or make changes to their identity cards, renew driving licenses, register marriages, deaths and divorces or solicit residency permits. The centres are cashfree, as all payments must be made online, thus limiting opportunities for graft. Appointments booked online also reduce the need for queuing,

and the status of an application filed at one of ASAN's offices can also be traced online. The Ministry of Taxes cooperated with ASAN to design an electronic signature, ASAN Imza, that was launched this year and that can be used to digitally sign documents using a secure mobile technology.

Other public initiatives that have contributed to the development of an innovation-based economy in Azerbaijan are the High Tech Park, a technology incubator that has approved 24 applications to date; and the IT University, which opened its doors to students in 2013, and an IT fund to train and fund future innovators.

In the private sector, growth this year has been driven by mobile data in telecom and systems integrators, mapping companies and application developers in IT. All three established telecom providers have introduced 4G in the capital Baku, and are rolling out the service in the regions, where 3G is prevalent. Furthermore, companies like Bakcell are eyeing technologies like LTE Advanced as the next technology to replace 4G. The speed of mobile data in Azerbaijan, which, according to Ookla's Netindex, averaged 6.86 megabits/second and 2.26 megabits/second for incoming and outgoing traffic respectively between April and July 2014, is very similar to that of broadband, which may explain why 30% of Internet users access it exclusively on mobile devices.

A budding category of IT companies like GoldenPay, which launched its one-stop-shop payment service www.hesab.az in 2011, for bills, taxes, and more recently, insurance and travel arrangements; Caspian Navtel, a real-time mapping and GPS service that caters to individual users and freight companies, and Simbrella, which designed the country's first taxi application, are thriving and contributing to technological development in the Caspian country.

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Economics & finance Azerbaijan economy in Jan-Sep - slower, but still solid The slowdown in Azerbaijan’s growth continued in the third quarter, with a contraction of agricultural output and falling oil extraction combining to leave GDP growth at 2.5% y/y in the first nine months of 2014. The weak agricultural activity undermined non-oil GDP, which retreated from 10.4% y/y growth seen in the first nine months of 2013 to 6.0% y/y in the same period this year. Oil GDP fell 2.0% y/y on lower oil extraction and refinery activity in the first half of the year. Falling oil prices have affected both exports and budget revenues.

“However, international reserves remain strong and the government is ready to revise the budget if the oil price changes significantly. The government’s cautious position is reflected in its draft 2015 budget, which is based on oil at US$ 90/ bbl, with the government willing to adjust it further in the event of continued oil price weakness,” says Galt & Taggart in a research note.

Azerbaijani central bank to invest $1bn in Asian stocks The Central Bank of Azerbaijan (CBA) is planning to invest $1bn in Asian securities markets, AzerNews reported on November 20 citing the bank’s Deputy Chairman Avtandil Babayev. Half of the allocated sum will be invested in the Chinese market and will be administered directly by the CBA. Three foreign companies – Anamundi, Eastspring Investments and Western Asset Management – will manage the remaining $500mn focusing on Indonesia, Malaysia, Singapore and South Korea’s markets.

According to the report, Babayev stated that the central bank will also increase its foreign exchange reserves.

As the Central Bank pursues an intervention policy “aimed at the redemption of foreign currency from the market and increasing foreign exchange reserves, we plan to increase the volume of interventions to $1.5bn by the end of this year”, he was reported as saying.

At the end of September, the CBA’s foreign exchange reserves amounted to over $15bn, 6.29% up from the end of 2013.

Fourth Azerbaijani insurance company gets its licence suspended The State Insurance Supervision Service has suspended the licence of the Era Trans Sigorta insurance company, AzerNews reported on November 26 citing a report issued by the institution.

Era Trans Sigorta is the fourth company whose licence was put on hold by the supervisory service operating under the Ministry of Finance in 2014.

According to the report, the company did not meet the minimum capital requirements set by law, as well as due to other irregularities. Azerbaijan’s legislation requires a minimum capital of ANZ5mn ($6.3mn) for non-life insurers. The company has now six months to amend the irregularities. As of October 31 Era Trans Sigorta, operating since 1994, collected premiums worth AZN414,945 ($528) with payments for AZN 1.02mn($1.3mn).

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In 2014 the insurance supervisory service suspended the licence of three other companies, Royal Sigorta, Gunay Sigorta and Basak I'nam Sigorta Sirketi. The licence of Royal Sigorta was completely revoked in early September due to its failure to meet the minimum requirements set for capital, while Gunay Sigorta regained its licence.

Basak I'nam Sigorta Sirketi’s licence was held off and is said to be taking measures to increase its capital.

Azerbaijani foreign exchange reserves up 7% y/y in 9M 2014 Azerbaijan’s strategic foreign exchange reserves increased by 7% y/y, or $3.5bn, in the first nine

months of 2014, pushing the total amount to $15bn, AzerNews wrote on November 25 citing a report by the Central Bank of Azerbaijan (CBA).

The review on the monetary policy in JanuarySeptember 2014 states that the country’s forex reserves are sufficient for covering import of goods and services for three years and are expected to reach $15.5bn-15.7bn by year-end.

According to the report, the growth favoured the strong macroeconomic buffer, safeguarding the domestic economy against external shocks.

Between January and September foreign investment exceeded $4.5bn, accounting for 29.6% of total investment.

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Chart Azerbaijan improves slightly in corruption index All Central Asian and South Caucasus countries improved their standings on Transparency International's 2014 Corruption Perception Index (CPI), except for Turkmenistan.

The CPI ranks countries based on how corrupt their public sector is perceived to be and it scores countries on a scale from 0 – perceived to be highly corrupt, to 100 – perceived to be very clean

as Kazakhstan. Ahead of it in the CIS region are only Georgia, Armenia and Belarus.

Behind Azerbaijan are the rest of the CIS states: Kyrgyzstan (136), Russia (136), Ukraine (142), Tajikistan (152), Uzbekistan (166) and Turkmenistan (169).

With a score of 52, Georgia – 50th in 2014, up four notches from 2013 – ranks highest in the CIS region. Georgia also scored higher than a number of EU member states, such as the Czech Republic, Slovakia, Croatia, Bulgaria, Greece, Italy and Romania.

RUPTION RUPTION CEPTIONS CORRUPTION EX 2014 CEPTIONS eastern europe and central asia PERCEPTIONS EX 2014 Europe al AsiaINDEX 2014 Azerbaijan moved up one place to 126th place from last year and remains a middle-ranking country in the region with a score of 29, the same

Eastern Europe and Central Asia Country/Territory Score | Global rank

n Europe ral Asia Eastern 95%Europe Eastern Europe & Central Asia Average score 33/100

4

100

Very clean

& Central Asia of countries score below 50 out of 100

33/100

ption Perceptions Index measures Score: 0 100 evels of public sector corruption in Very clean Highly corrupt Very clean erritories around the world. To see the o: www.transparency.org/cpi

4

Country/Territory Score | Global rank Moldova 35/100 | 103/175

95% 95%

Eastern Europe of countries score & Central Asia Global below 50Eastern out ofEurope 100 Average score & Central Asia Average score 43/100 Average score 33/100

Georgia 52/100 | 50/175

The FYR of Macedonia 45/100 | 64/175

Georgia 52/100 | 50/175

Turkey 45/100 | 64/175

Montenegro 42/100 | 76/175

The FYR of Macedonia 45/100 | 64/175

Turkey 45/100 | 64/175

Serbia 41/100 | 78/175

Bosnia and Herzegovina 39/100 | 80/175

Montenegro 42/100 | 76/175

Armenia 37/100 | 94/175

Serbia 41/100 | 78/175

Bosnia and Herzegovina 39/100 | 80/175

Georgia The FYR of Macedonia Turkey Montenegro SerbiaRussia Bosnia and Herzegovina Country/Territory Albania Kosovo Belarus Azerbaijan Kazakhstan Kyrgyzstan | 50/175 | 64/175 | 64/175 | 76/175 | 78/175 Global rank 33/100 | 110/175 Score |33/100 | 110/175 52/100 31/100 | 119/175 45/100 29/100 | 126/175 45/100 29/100 | 126/175 42/100 27/100 | 136/175 41/100 27/100 | 136/175 39/100 | 80/175

Albania Kosovo Belarus Azerbaijan Kazakhstan Kyrgyzstan of countries score Moldova Albania Kosovo Azerbaijan29/100 | 126/175 Kazakhstan 27/100 | Kyrgyzstan Moldova below 50Ukraine out of 100 33/100 | Uzbekistan 110/175 33/100 | 110/175 31/100 | 119/175 Belarus 29/100 | 126/175 136/175 35/100 | 103/175 Tajikistan Turkmenistan | 110/175 31/100 | 119/175 29/100 | 126/175 29/100 | 126/175 27/100 | 136/175 | 103/175 26/100 | 142/175 23/100 | 152/175 35/100 18/100 | 166/175 33/100 17/100 | 169/175 33/100 | 110/175

Armenia 37/100 | 94/175 Armenia 37/100 | 94/175

Russia 27/100 Russia | 136/175

27/100 | 136/175

100

#cpi2014

Ukraine 26/100 | 142/175

Ukraine

Tajikistan 26/100 | 142/175 23/100 | 152/175

Tajikistan Uzbekistan 23/100 | 152/175

18/100 | 166/175

Uzbekistan Turkmenistan Turkmenistan 17/100 | 169/175 18/100 | 166/175

17/100 | 169/175

The 2014 Corruption Perceptions Index measures

uption Perceptions Indexlevels measures the perceived of public sector corruption in Source: Transparency International 175 countries/territories the world. To see the levels of public sector corruption around in full results to: www.transparency.org/cpi territories around the go world.

To see the to: www.transparency.org/cpi

RUPTION CEPTIONS EX 2014 CORRUPTION eu and western europe RRUPTION PERCEPTIONS estern Europe Country/Territory Score | Global rank

Denmark 92/100 | 1/175

Azerbaijan Export & Investment Finland Norway PromotionSweden Foundation 89/100 | 3/175 87/100 | 4/175 86/100 | 5/175

Switzerland 86/100 | 5/175

Netherlands 83/100 | 8/175

Luxembourg 82/100 | 9/175

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News in brief Prices of agricultural products up by 2.6% in Azerbaijan in October

to boost the use of energy resources for small and medium-sized enterprises (SMEs), local businesses and households, according to a press In October producers’ prices of agricultural products release issued on November 25. increased by 2.6% compared to the previous month, according to data released by Azerbaijan’s State The main objective of Energocredit is to help Statistical Committee on November 6. local financial institutions promote sustainable energy investments by their clients and to demonstrate the technical and financial benefits Azerbaijan to build nuclear of such investments for private businesses and households. reactor by 2020 Azerbaijan plans to construct a nuclear reactor with a capacity of 20 MW by 2020, AzerNews reported on December 4 citing the National Nuclear Research Centre’s (NNRC) chairman, Adil Garibov.

Energocredit is part of the Caucasus Energy Efficiency Programme (CEEP) which EBRD launched in 2007 with the aim of helping industrial and residential clients reduce their energy intensity and make greater use of renewable energy sources. Energocredit is also The NNRC applied for a required licence to the supported by grant funding from the European Union International Atomic Energy Agency (IAEA) and plans Neighbourhood Investment Facility, the Austrian to announce the tender for the construction in 2015. Federal Ministry of Finance as well as by the EBRD Shareholder Special Fund. These grants will be used In an effort to diversify its energy supply, oil for technical assistance and investment incentives for and gas-rich Azerbaijan has been exploring successful sub-projects. renewable energy sources, including nuclear power. The NNRC, operating under the Ministry The EBRD has deployed a team of international of Communications and High Technologies, was consultants to provide support to local banks, established with a presidential decree in May firms and households with a dedicated technical 2014 and is due to be fully operational by 2015. package. This support will enable companies and homeowners to make the transition from using inefficient equipment and technologies towards EBRD launches $125mn better-performing, more energy-efficient facilities, which will gradually reduce energy bills over time. credit line for energy use for

Azerbaijani SMEs The European Bank for Reconstruction and Development (EBRD) launched a $125mn credit line to local partner banks in Azerbaijan

Three local banks, DemirBank, Muganbank and AccessBank, have already benefited from the programme. AccessBank has directed resources it borrowed from the EBRD towards improving the energy efficiency of its head office building

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while DemirBank and Muganbank will on-lend their EBRD funding to local firms and retail clients to finance energy efficiency projects.

Azerbaijan places bonds for $252.2mn for Southern Gas Corridor

($1.8mn) to finance start-up projects in IT, the Azerbaijani media report citing the country’s Communications and High Technologies Ministry.

About AZN560,000 ($713,558) is grant support to 31 projects (out of 194 submitted), while AZN900,000 ($1.14mn) is in credit financing of two larger projects.

The Fund gives small, medium and large loans – small range between AZN10,000 and AZN50,000 The Southern Gas Corridor closed joint-stock (over three years), medium between AZN50,000 company (CJSC) has placed 2.522mn bonds at to 500,000 (up to five years), and large between the nominal value of $100 each for a total of AZN500,000 to AZN5mn (up to 10 years). The $252.2mn, AzerNews reported on November 28 citing the Baku Stock Exchange. PSG-Broker LLC interest rate of the loans will not exceed 5% per annum. Grants range between AZN10,000 and is the underwriter of the placement AZN300,000.

The bonds have a 10-year maturity period, with a yield of six-month Libor +1%. Interest will be paid Only 5 banks are currently authorised finance start-up projects – Pasha Bank, Bank Respublika, every six months.

Demir Bank, Rabita Bank and Bank BTB. This is the fourth bonds placement by CJSC since The fund was established in 2012 under Azerbaijan's President Ilham Aliyev signed a decree on establishing the company on February the Ministry of Communication and High Technologies, to develop and support small 25, 2014. The company was set up to manage enterprises through investments, grants energy projects specifically connected with the second stage the giant Shah-Deniz gas field and and credits with low interest loans as well as investing with direct acquisition of equity the expansion of the South Caucasus Pipeline, Trans-Anatolian (TANAP) Pipeline and the Trans- shares in the authorised capital of legal entities Adriatic (TAP) pipeline. The State Oil Fund of the operating in ICT. Funded projects focus mainly on Republic of Azerbaijan, SOFAZ, provides an equity e-payment, software applications, air navigation system, e-government, e-commerce, as well as financing for the CJSC. projects in education and healthcare.

The previous three bonds placement amount to $917mn, $1,2bn and $101mn.

Azerbaijan allocates $1.8mn for IT start-ups

Azerbaijan to launch two new petrochemical plants by 2020

Azerbaijan’s Oil, Gas Processing and Petrochemical Complex (OGPC) will open two new gas processing and petrochemical plants in Azerbaijan’s State Fund for Information Technology Development is allocating AZN1.46mn 2020, AzerNews reported on November 20 citing

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OGPC’s official Orkhan Jafarov.

According to Jafarov, head of the organisation and control department, the project's feasibility study sets estimated costs at $17.1bn, including accrued interest on loans received during the construction work.

The plants are expected to produce around 3mn tonnes of petrol and nearly 3.6mn tonnes of diesel fuel per year, both meeting the Euro5 standards. In addition, the plan is to produce about 1.7mn tonnes of A-1 jet engine fuel. The gas processing plant would have an annual capacity of 10bn cubic metres. The products are aimed for both export and domestic use.

Vugar Bayramov, CESD’s chairman, estimates that at the current average real estate prices of $500 per square metre, “about $15bn would be required to improve the living conditions of all citizens in Azerbaijan”.

The 2009 housing code included a social housing programme which, according to CESD, remains yet to be implemented. According to Bayramov, about AZN400mn ($509mn) would be enough to kick off the programme.

The Azerbaijani government is seeking a new strategy for the development of mortgage lending. The draft of the 2015 state budget allocates ANZ50mn ($63mn) as mortgage support, up by 25% from last year. Several Oil products are now produced by two refineries MPs proposed to increase the support up to in the capital, Baku, with a total capacity of 20mn AZN100mn ($126mn). tonnes per year. The state-owned oil company, In 2011, the government established the SOCAR, owns both refineries.

Azerbaijan Mortgage Fund (AMF) under the umbrella of the country’s central bank to facilitate access to mortgages for families with Azerbaijani housing stock up by 30% over the last 20 years; financial difficulties. In addition to budgetary financing, the mortgage fund places bonds and still not enough proceedings are used to issue loans as part of conventional mortgage.

Azerbaijan’s housing stock increased by 30% The maximum amount of a conventional mortgage over the last two decades reaching 166.4mn square metres, AzerNews reported on November is ANZ50,000 ($63,000) at a rate of 8% and a maturity of 25 years, while a social mortgage is 21 citing the Centre for Economic and Social Development (CESD). Experts maintain that granted at a 4% interest and for 30 years. The despite the trend the housing stock remains low initial payment under the social mortgage is 15% of the cost of housing, five%age points lower than for the country’s 9mn people. the downpayment on a conventional loan.

According to the Baku-based think-tank, about one third of the country’s households is in need As of October 1, the AMF issued 15,425 mortgage loans amounting to AZN613.89mn ($782mn). of better housing conditions. As an average of 14,000 apartments are put on the market yearly, the centre estimates that it will take about 60 years to meet the demand for housing.

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Trump Hotel Collection to open luxury hotel in Azerbaijan’s Baku Donald Trump’s Trump Hotel Collection is developing a new luxury hotel in Azerbaijan’s capital Baku slated to open in June 2015. The towering 33-storey building, designed by Londonbased Mixed Design and developed by Azerbaijani developer Garant Holding, resembles the mast of a sail and it will feature 72 residential suites and 189 hotel rooms. The residences, ranging from 84 to a staggering 890 m2, will be available on a long-term lease basis.

for the expansion of the South Caucasus Pipeline through Azerbaijan and Georgia. The cost of the entire Shah Deniz project is estimated at $28bn.

“This is one of the most difficult and complex energy projects, which will strengthen the geopolitical positions of Azerbaijan and Georgia,” Garibashvili told journalists.

Shah Deniz-2 is schedule to start supplying gas to Turkey in 2018 and to southern Europe in 2019.

Discovered in 1999 about 70km offshore in the Azerbaijan sector of the Caspian Sea, the Shah Deniz field is one of the world's largest gascondensate fields with gas reserves estimated at 1,200bn cubic meters. Shah Deniz fields (1 and The structure will cover 20,000 m2 in the central 2) are operated by a BP-led consortium including Nasimi district, and it will be surrounded by gardens, fountains and park paths. Neither Trump Turkey’s TPAO, Azerbaijan’s state-owned SOCAR, nor the developer has commented on the price tag. Russia’s Lukoil, and Iran’s NICO. On October 13, Norway’s Statoil phased out of the project and sold its remaining 15.5% stake to Malaysia’s Baku’s historical centre is a Unesco’s World Petronas for $2.2bn as part of asset sales to Heritage, but the Trump tower will join an ever shore up returns to shareholders. Likewise in increasing number of skyscrapers dotting the May, France’s Total sold out its stake in the gas Caspian sea skyline. field stating it would focus on operating projects rather than holding minority stakes.

Transport terminal for Shah Deniz opens Georgian port

On November 23 Georgia’s Prime Minister Irakli Garibashvili, inaugurated the new transport terminal of the Shah Deniz-2 gas pipeline in the Black Sea port of Poti in western Georgia. The terminal, which will create about 100 jobs, will transport the pipes and other equipment required

In June 2013 the Shah Deniz consortium announced the selection of the Tran Adriatic Pipeline (TAP) as the main route for transporting its gas to Italy, Greece, and Southern Europe. The TAP’s construction is planned to start in 2015.

Its initial capacity of TAP will amount to 10bn cubic metres per annum with the possibility of expanding it to 20bn.

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