Several foreign companies in Azerbaijan have decided that it's not
worth waiting for the next oil boom.
By Khazar Akhundov and Leila Amirova in Baku (CRS No. 127, 2-May-02)
The atmosphere at a meeting scheduled next week between foreign
businessmen based in Baku and President Heidar Aliev is likely to be
strained. In recent months, as complaints about corruption and
bureaucracy have mounted, foreign investors have been leaving town.
While in public they cite the main problem as delays in anticipated
oil revenues and the small size of the local market, privately some say
that investing in Azerbaijan is extremely difficult, when the rules of
the game are not the same for everyone.
Two prominent banks have recently shut their operations in
Azerbaijan, following the lead of several other Western companies. These
blows to the country's foreign investment prospects are all the more
striking because they come, just as work is scheduled to begin on the
Baku-Ceyhan oil pipeline - a project that could make Azerbaijan
extremely wealthy in five years' time.
The biggest casualty has been the international bank HSBC. The bank
said the recent crisis in Argentina, which caused it to lose almost one
billion US dollars, had been a major reason for closing a number of its
smaller branches, including its Baku office, which was shut down in
March.
However, Charles Mason, manager of HSBC's Baku branch, also listed
local reasons for the closure, saying that the bank's early expectations
for Azerbaijan had not been borne out. "We analysed the business
possibilities for commercial banks in Azerbaijan and it turned out that
the volume was too small for our bank," he said.
HSBC in Baku had customer deposits worth 50 US million dollars. The
bank lent only 13 million dollars in its six years in the country. Real
development in the non-oil sector could be anticipated only in seven to
ten years, Mason said, and the bank had decided it could not wait that
long. The next closure was that of Rota Bank, which had a different set
of complaints. It said it was finding it impossible to keep up with the
growing demands of the Azerbaijani national bank to increase Rota's
authorized reserves. It said that it would not be able to function
effectively, since all its efforts would have to be directed to
increasing its capital.
Despite their different size and character, the two banks' decisions
reflect a common trend in the bank sector. According to the chairman of
the Association of Banks of Azerbaijan, Zakir Nukayev, "this is a
reduction in the number of narrowly specialized banks, banks with one
client or one form of activity."
HSBC arrived in Azerbaijan during the oil boom of 1996-8. The bank
counted on three years of working without profit; however its main
client, BP moved its main contract work out of Azerbaijan, leaving HSBC
to handle only less important office work. The main reason for Rota Bank
shutting down is the contraction by Caspian Trans Co., the oil transit
company, which virtually set up the bank.
Over-optimistic expectations for the oil sector caused another
veteran of Baku business, the British oil company Ramco, to pull out of
Azerbaijan last year. The company decided to cut short its work
developing the Muradkhanly oil field because not enough oil was found
there. It also sold its 2.0825 per cent stake in the Azeri-Chirag-Guneshli
field for 150 million US dollars.
Two other oil-sector companies, Flour Daniel and Consafe, have also
left Azerbaijan because of a lack of orders.
The business downturn was a hot topic of discussion at a conference
hosted by the United Nations Development Programme in Baku in April. The
head of Azerbaijan's economic development ministry, Farhad Aliev, named
low profit margins and a narrow local market as the main reasons why
companies were leaving the country.
The deputy prime minister, Ali Hasanov, told the German and British
ambassadors that, "according to official data, the number of
companies leaving is not great and none of them have declared the real
reasons they are cutting short their activity."
Hasanov brushed aside hints about what is the most common complaint
of Western businessmen in Azerbaijan - its high levels of corruption and
excessive bureaucratic obstacles.
Yet many experts say the business shutdowns have little to do with
economics. Gubad Ibadoglu, chairman of the commission on economic and
social issues for the opposition Musavat party, cited the lack of a
normal climate for business and investment and protectionist policies by
the government towards "selected companies" as reasons for
investors' coolness.
Ibadoglu said that foreign companies were frightened off by a process
whereby some companies divided up the market, with the support of
"interested" government officials. Western firms also have to
compete with local businesses from the black economy, which, according
to some estimates, cover 40 per cent of production in Azerbaijan and
have an annual turnover of 500 million US dollars.
It was this shadow economy which forced the international cigarette
company RJ Reynolds Tobacco out of the Azerbaijani market, according to
one of its managers, who asked not to be named.
The banking sector has had problems attracting deposits from a
country where the local currency, the manta, enjoys low levels of trust
and the industrial sector is weak. According to Ogtai Akhverdiev, head
of the economics and investments department in the Azerbaijani
government, short-term bank loans made this year comprised 80 per cent
of the total, while long-term credits for industry were only 20 per
cent. Gubad Ibadoglu estimates the proportions as being 97 and three per
cent respectively.
Two other economists, Ali Masimov and Nazim Imanov, say that for the
investment climate to improve there have to be changes in customs
regulation, a lowering of tax rates and much greater transparency in the
privatisation process.
Leila Amirova and Khazar Akhundov are correspondents for Nedelya
newspaper in Baku.
