Newsroom: Article

Emerging Market De(bt)velopments

Fuelled by its considerable energy resources, Azerbaijan’s economy is flourishing, at least so it seems. Since the separation of the republic from the Soviet Union, western oil companies have stumbled over each other to seek exploration agreements in the promising newly independent country, with BP as the most successful western operator since 1994. Not all oil exploration projects have lived up to their expectations, which in some cases have been inflated. Nevertheless, the recent high energy prices have sparked renewed interest in Azerbaijan’s energy industry, including more recently its deepwater gas fields. Due to its increasing oil production, Azerbaijan’s real GDP is set to expand from $19.9bn in 2006 to $25.9bn in 2007, an estimated growth of 30%. The high oil prices and the increasing export volume have also led to a state budget’s surplus in 2006 of 0.5% of the real GDP instead of the targeted small deficit. The outstanding external debt of Azerbaijan amounts to $1.98bn in 2006, which is about 10% of its real GDP. Although the outstanding external debt has decreased over the past years, it is estimated to grow to around $2.5bn in 2007. Despite these encouraging numbers Azerbaijan still has some serious risks that foreign investors need to consider.

As in most oil-rich developing nations, the first signs have emerged of ‘Dutch Disease’, the de-industrialisation of a nation's economy that occurs when the discovery of a natural resource raises the value of that nation’s currency. To prevent this, the International Monetary Fund published their recommendations to the government of Azerbaijan in the beginning of 2007. One of these recommendations is to scale down the expenditure in 2007 to support disinflation.

Another serious obstacle that hinders trade and investment in Azerbaijan is the corruption and the unreliability of the Azerbaijan state as a contract partner. For foreign investors, dealing with the Azerbaijan government is risky. Since 2005 several new examples have emerged where the Azerbaijan state or their representatives have been accused of reneging on contracts or have allegedly committed an outright fraud. Several investors have sought redress by going into international arbitration such as a major Turkish electricity company which held the contract for power distribution in Baku. Other European foreign investors have also experienced a hard confrontation with the Azerbaijan government. A Dutch metal company was faced with a unilateral termination of a 25year management contract for the national aluminum company. A Maltese bank was defrauded by the ministry of communications for $4.5m and a Dutch energy company claims that the government has expropriated its local company without compensation.

These examples show that while the current economic growth of Azerbaijan may seem very attractive for foreign investors, one has to be aware of the risks of dealing with the country’s government. Maintaining a good relationship with President Ilham Aliyev and his entourage is said to be a prerequisite for operating effectively in most sectors but, given that inner circle loyalties are subject to opportunistic change, certainly no guarantee against unexpected or outright unlawful government behaviour.

For Azerbaijan debt solutions, brokerage requests or more information on specific debts, debt conversions and restructurings, please contact:

Omni Bridgeway Emerging Markets BV
Tobias Asserlaan 5, 2517 KC
The Hague, The Netherlands.
Tel: (+31) 70 3384343, Fax: (+31) 70 3523469
Raymond van Hulst on vanhulst@omnibridgeway.com
Heleen Rijkens on rijkens@omnibridgeway.com

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