A FRIEND IN CRISIS IS A FRIEND INDEED

For many years the traditional agenda of the Baku International Bank Conference of CIS member states has included a variety of topics on how financial institutions of the Commonwealth countries can support each other in politically and economically turbulent times. Quite recently, banks struggled together with the impact of the global financial crisis, and before they even recovered from its effects, new problems arose - the Russian-Ukrainian crisis and Western sanctions against Russia, including against the Russian financial market. And to top it all the Bank of Russia decided to allow the rouble to float freely by abolishing the existing mechanism of exchange rate policy. Even though all these factors are directly related to the banking system of Russia most of all, there is no doubt that they affect the financial markets of all CIS countries even indirectly. It is not surprising that at the 7th International Banking Conference in Baku, this topic was one of the most talked about.

I must say that among the CIS countries, Azerbaijan is the least affected by the worsening economic situation in Russia. This list also includes Kazakhstan and Turkmenistan, an analyst at Moody's Investors Service, Mariya Malyukova, said at the conference. According to her, in these countries, the cumulative impact on export revenues, foreign direct investment and remittances from Russia account for less than 5 per cent of GDP. "The most vulnerable due to the deteriorating economic situation in Russia are Tajikistan, Kyrgyzstan, Belarus, Armenia and Uzbekistan (the cumulative effect of more than 10 per cent of GDP). Georgia has an average impact from 5 to 10 per cent of GDP," she said.

According to her, the "safety cushion" in this situation is gold reserves. It is noteworthy that Azerbaijan has the best the ratio between reserves and the upcoming payments on foreign debts. Moreover, only Azerbaijan and Uzbekistan have a "stable" outlook for the banking sector, whereas in other countries, the forecast is "negative".

This situation regarding the banking sector of the country is justified and understandable. According to the General Director of the Central Bank (CBA) Rasad Orucov, who spoke at the conference, the loan and investment potential of Azerbaijan's banking sector has doubled over the past two and a half years, i.e. since the decision to increase the minimum capital requirements for banks fivefold. The ratio between the assets of the banking sector of Azerbaijan and non-oil GDP increased from 62 to 78 per cent. Since the beginning of 2014, the assets of the sector have grown by 15 per cent, credit investments - by 15 per cent and deposits - by 9 per cent.

According to Orucov, it is precisely the decision to increase the minimum capital requirements for banks to 50m manats that allowed them to improve the quality of services offered and increased competition on the market. By the way, the effectiveness of this CBA decision was confirmed at the conference by the chairman of the International Bank of Azerbaijan (IBA), Cahangir Haciyev, who noted that, according to Moody's, in the next 12-18 months, banks in Azerbaijan will continue to benefit from a favourable operating environment, stable asset quality and adequate capital reserves.

Therefore, the stable development of the banking sector of Azerbaijan attracts market participants from other CIS countries. A member of the Board of Directors of the Central Bank of Russia, Mikhail Sukhov, noted that CIS markets may attract money for major companies - not only Russian, but also Azerbaijani. "We believe that financial and banking cooperation between our countries has great potential. Now there is a situation when there are new opportunities and when given the limited external sources we can use our potential in the best way," he said.

According to the chairman of the CIS Executive Committee, Sergey Lebedev, now a search is under way for optimal forms of economic cooperation within the CIS, and the key role is given to a free trade regime. The chairman of the Coordinating Council of the Financial and Economic Council of the CIS, Anatoliy Kazakov, also noted that the turnover between Russia and the Caspian countries in 2013 amounted to 33bn dollars, which does not correspond to the existing potential. Therefore, there is a need to create a Caspian Economic Union and search for new strategies for economic and financial cooperation. "In recent months, trade and economic relations between Russia and Azerbaijan have been expanding. Banks are institutions that know their customers and can render additional assistance through financial support and credits in developing trade in agricultural products, which will actively develop in the current environment," he said. At the same time, according to Kazakov, we can talk about the formation of additional financial channels for attracting investments. "The expansion of trade between the two countries can and should be accompanied by the development of investment opportunities," he added.

According to Sukhov, Russian banks in Azerbaijan actively support trade and economic relations between the two countries. "It is clear that the number of banks that participate in the financial and economic ties is primarily related to the volume of business between the two countries. Now it is about 11 Russian banks, and this small figure shows the potential for growth, especially as the change in economic conditions enables banks to provide new products," said the deputy chairman of the Central Bank of the Russian Federation.

In support of this, during the conference an agreement was signed on cooperation between the IBA and Russian Roseximbank, one of the key points of which was the use of national currencies. "The transition to settlements in foreign trade in roubles and manats, especially in the current circumstances, will have a positive impact on trade, economic and political relations between Russia and Azerbaijan," said the chairman of the Eximbank board, Dmitriy Golovanov. 

According to him, this will reduce currency and political risks both for banks and exporters in the implementation of mutual export operations. He offered similar cooperation to other Azerbaijani banks as well.

We must say that this is not the first year that the introduction of a single currency in the CIS area is discussed during the conference, however, there is still no consensus among market participants on this aspect. And this year, such a proposal was made by a member of the Board of the National Bank of Tajikistan, Ashurboy Soliyev, who believes that we need a unified strategy for exchange rates so that the currencies of CIS countries do not suffer from the volatility of global prices for raw materials.

In addition, the participants in the conference discussed the situation around the remittance market, which experienced some changes in relation to the situation with Russian operators. For example, according to the director general of the Finance and Banking Council of the CIS, Pavel Nefidov, the market of remittances de facto lives its own life and is actively growing despite some geopolitical problems caused by the current processes. "On the other hand, there are some problems because one of the largest operators of the market, the Migom system, has gone bankrupt. Another system - Contact - also had some problems, although it is now beginning to actively recover its positions," he said.

In short, no matter how independently and confidently the banking markets are developing in each of the CIS countries, the presence of close economic and trade relations and joint financial interests definitely makes them vulnerable to common problems. Therefore, participation in solving problems of partner markets is not only an indicator of friendly relations, but also a purely business necessity. Discussions and decisions taken within the framework of the Baku International Banking Conference can provide effective support for financial markets, which were affected by the recent political and economic crises.