NEW WAVE

The series of important reforms in Azerbaijan continued at the end of May with the mass decriminalization of economic crimes, decisions regarding the acceleration of the privatization of state facilities and so on. All this is ultimately aimed at accelerating production growth in the non-oil sector against the backdrop of the tangible fall in oil revenues.

Decriminalization and legalization

So, most of the local experts have already called the order signed by President Ilham Aliyev on the application of amendments to the Criminal Code an "economic amnesty" because these amendments make it possible to avoid criminal liability and allow those whose actions will no longer considered a crime after the law takes effect to gain freedom.

According to most of the articles that concern economic crimes, the amount of the fine has changed. If these articles currently indicate a specific amount, after the amendments take effect, it will be replaced by a fine proportionate to the harm caused.

For example, now the penalty for the illegal use of a trademark, which caused considerable damage, is 1,000-5,000 manats. In the amendments, this amount is replaced by "a fine that is 2-4 times higher than the damage cause (profit made)".

In addition, according to the current law, many economic crimes that result in damage in the amount of 1,000 to 7,000 manats entail criminal liability, but after the amendments, this amount increased to 20,000-100,000 manats. In particular, the law applies to such crimes as

illegal businesses, illegal organization and holding of lotteries and sports betting, deliberate evasion of repayment of debt, illegal use of a trademark, deliberate and fictitious bankruptcy and many others. Also, if under the current legislation, the concept of "crimes committed with large damage" in a number of articles implied damage in the amount of more than 7,000 manats, the amendments increase this amount to 100,000 manats.

One of the important amendments concerns false entrepreneurship. It is about creating an enterprise or another legal entity without the intention to do business, but for the purpose of getting loans, getting rid of taxes or extracting other benefits. By law, false entrepreneurs, in addition to a fine of twice the amount of damage (income earned), could also be jailed for up to 6 months.

Now, if the offense is committed for the first time, it is possible to avoid criminal liability in case of full compensation for the damage or complete transfer of funds earned from the false entrepreneurship to the state budget.

Also, there are many innovations in the punishment of those who love to evade customs duties and taxes - the amount of the fine and the term of correctional labour have been reduced.

Undoubtedly, the announcement of the economic amnesty is a significant event to stimulate private sector development in Azerbaijan. It must be said that a number of post-Soviet countries, including Russia, Kazakhstan and Ukraine have resorted to this practice, and the results are certainly positive.

Economic experts expect a similar effect in Azerbaijan, stressing the fact that it is impossible to legalize illegal entrepreneurship, on the contrary, it leads to the reverse process. And only such stimulating measures can be productive. "An economic amnesty is a major step towards mitigation by the state, and it is very important especially given the onset of the post-oil period. I think the process will continue for the benefit of business," said economic expert Vuqar Bayramov.

Experts also believe that the economic amnesty is likely to be followed by a large-scale amnesty of capital, which implies the full legalization of illegally earned money in exchange for the transfer of some of it to the state budget. In general, there is enough experience of successful money-laundering mechanisms in the world, and one of them is the example of neighbouring Turkey, where five successful amnesties have been implemented. The legalization process was first launched in 1998, which ushered in a new economic era.

The "release" of large "legal" sums on the market will significantly expand the volume of domestic investment, which will eventually lead to an increase in the number of industrial and other enterprises.

Another effective way to use legitimized money can be the active involvement of local entrepreneurs is the new wave of privatization, which is about to take place in Azerbaijan.

Privatization boom

It should be noted that President Ilham Aliyev announced a new round of privatization in January of this year, and on 19 May 2016, the president signed a decree "On additional measures to improve the process of privatization of state property".

According to the decree, state property is privatized by the decision of the head of state. The Cabinet of Ministers was instructed to prepare in two months and submit a new version of the law "On the privatization of state property", in which the value of privatized state property is formed in view of its market price. Also, the government was instructed to annually present the head of state with proposals on the list of state property to be privatized together with the draft state budget for the next year.

It should be noted that during the latest privatization, local and foreign investors did not see the so-called "blue chips" on the list of companies put on sale. The state still controls enterprises in the sphere of transport and communications: CJSC Azerbaijan Airlines, CJSC Azerbaijan Railways, CJSC Azerbaijan Caspian Shipping Company (Kaspar), LLC Aztelekom, the Baktelekom production association, LLC Azerpost, LLC Azermarka and other societies.

Of course, businesses and distribution networks such as JSC Azerisiq, JSC Azerenerji, JSC Azersu, JSC Irrigation and Water Management and other companies may cause a lot of interest among foreign and local investors.

We should consider separately the situation with the privatization of SOCAR. It is clear that the country's leadership is unlikely to decide on the privatization of enterprises extracting and processing oil and natural gas. But the SOCAR structure includes the Azerkimya and Azeriqaz production associations, which may be handed over for privatization in case of interest from foreign and local investors.

It must be noted that it is necessary to find portfolio investors for these companies, since, according to Energy Minister Natiq Aliyev, in order to bring the power distributing network in line with international standards, the industry requires an investment of 4bn dollars. "In this system, there are a lot of losses, and in case of privatization, physical persons are unable to afford such large investments required for this sphere. Only large companies are able to do that," the minister of energy said.

Most likely, companies active in the telecommunications sector can be privatized. Foreign investors are very willing to invest in this sector, and success in this sector is largely dependent on investment and modern management. And local investors may be interested in the privatization of JSC Azerxalca created by a presidential decree on 5 May 2016.

But success in the development of the non-oil sector will be achieved due to the privatization of not so much "blue chips" as companies located in the regions and primarily due to the capital of Azerbaijani citizens. Therefore, not only the State Committee for Property Affairs, but also local executive authorities should play an active role not only in privatization, but also in attracting investment from local and foreign investors. They are primarily interested in the revival of the production at existing plants or building new ones, since it is not only new jobs, but also transfers to local budgets.

In any case, it is too early to wait for a serious increase in state incomes from privatization this year. Last year their sum reached 24.082m manats against the forecast of 29m manats, i.e. 17 per cent less. But already in 2017, the new "privatization" stage can become an important source of revenues for the budget.

In general, as noted above, the listed innovations are just another phase of major economic reforms in Azerbaijan, which are highly valued by international financial institutions too. In particular, it was stated by the president of the European Bank for Reconstruction and Development (EBRD), Suma Chakrabarti, at a meeting with President Ilham Aliyev in Baku. He also said that the EBRD is also ready to continue to support private sector development in the country. "70 per cent of the Bank's investment is in the private sector of Azerbaijan. Currently, 8 of the 9 projects financed by the Bank in Azerbaijan are projects in the non-oil sector," Chakrabarti said.

At a meeting with the head of state, the head of the IMF mission to Azerbaijan, Mohamed el Gorchi, noted the actions of the Azerbaijani government aimed at minimizing the risks caused by the global economic crisis.

At the same time, he stressed the need to pay attention to the current situation in the banking sector of Azerbaijan. In this regard, he expressed the readiness of the IMF to support the government of Azerbaijan, including with technical assistance. For his part, President Ilham Aliyev said that "the sharp decline in oil prices on the world market, of course, affected the incomes of Azerbaijan. However, fiscal consolidation as well as reforms aimed at diversifying the economy seriously reduced the potential risks."

In short, the determination of the authorities together with the willingness of international organizations to accelerate economic reforms and ensure the fastest possible results for the elimination of the negative effects of lower oil prices can be a good tool for making new crucial decisions that can significantly expand the economic prospects of the country.