CAPITAL APPROACH

Azerbaijan recently marked the 10th anniversary of its stock market - one of the key instruments of the financial sphere. As a rule, it is customary to make laudatory speeches on anniversaries, however, alongside clear achievements, the capital market still continues to encounter a whole series of problems which must be mentioned in summarizing results.

As with the real estate market, stock exchanges were also at the epicentre of the recent world economic crisis. The significant decline in share prices in fact caused financial difficulties in all corners of the world. The crisis hit the exchanges much earlier than it did the real economy. Therefore, the markets grew in strength much earlier.

Azerbaijan's stock market, despite its youth, has already experienced all the "beauties" of world integration, trying to solve external problems alongside domestic processes aimed at development and consolidation.

Reforms continue

Today no-one doubts the stability of the Azerbaijani economy. The recent world crisis demonstrated that it is resistant to various upheavals. The country's sovereign ratings are changing for the better and have become investment-friendly for the first time (according to the Fitch rating agency). All of this allows us to say that Azerbaijan's stock market has quite high potential. If we look at the stock exchange statistics, we can see how it has grown in 10 years. For example, in 2001 turnover on the stock exchange stood at only 88,000 manats, while in 2008, it reached a record 9.5 billion manats. However, in 2009 turnover dropped to slightly more than 3 billion. The decline was caused by global developments which resulted in foreign investments fleeing Azerbaijan in the first half of 2009. Investors withdrew 250 million dollars from the government bond market and 1.7 billion dollars (20 per cent of currency assets) from the banking sector. "However, this had insignificant impact on the country's securities market owing to the appropriate preventive measures taken," said Samir Sarifov, Minister of Finance, commenting on the situation.

Capital markets serve not only to provide companies with additional financing, but also create the conditions for accessing cheap and long-term financial resources, which is very important in the post-crisis period.

Currently, the basic elements are in place for the capital market to work actively in Azerbaijan as is the legislation and infrastructure necessary for complex trade and financial mediators. There are also the primary factors for institutionalizing demand and supply on the market, which is explained, especially in recent years, by the high rate of growth in business revenues.

On the other hand, business activity in the country has been growing at a fast rate in recent years; this has made it possible to form groups of companies ready to enter world capital markets. This creates a need for major investment resources. All these aspects constitute the primary basis for the development of the securities market in Azerbaijan. Today, the main task is to turn opportunities into results and to engage the capital market more actively.

To this end, according to Rufat Aslanli, chairman of the State Securities Committee, work is under way to improve legislation and market infrastructure, strengthen regulatory potential for financial stability, ensure a balance between risks and stimulate demand and supply on the securities market and, the main task, to carry out educational work.

Currently, a plan of measures is being implemented in each of these spheres, and it is notable that international organizations are ready to help us.

Revenues are higher and interest is greater

In international experience, stock exchanges in various countries emerged under state privatization programmes, namely - to ensure the issue and a "secondary" market of shares "privately owned" by state enterprises. Thus the stock exchange should consist mainly of a "secondary" market, but such processes are not yet observed in Azerbaijan. The expansion of the scale of privatization of the state parcel of shares could provide a strong incentive for supporting enterprises themselves and the national capital market. In this case, enterprises will not depend on one investor, but on participants in the market, thus it will be possible to ensure the transparency of state enterprises.

Meanwhile, since the market is dominated by government securities, the slightest change in the volume of this financial instrument has an impact on the whole market. In nine months of 2010, the market in government securities declined by 2.59 times, year on year, amounting to 1,036.508 million manats. This was affected by an almost twofold decline in operations concerning Ministry of Finance government bonds and by a decline of 2.99 times in repo-operations, while the number of deals fell by 2.38 times and 1.33 per cent respectively.

In nine months of this year, the corporate market continued to grow, mainly via the increased issuing of bonds. The market in corporate securities increased by 23.75 per cent compared with the same period of last year, totalling 314.669 million manats. This is explained by a growth of 2.46 times in the volume of operations in corporate bonds, while the number of deals increased by 2.3 times.

On the other hand, the financial potential of local participants in the securities market has been growing in recent years, and there are credit organizations whose investment portfolio is approaching 12 million dollars. Stock exchange investors include foreign physical persons, which demonstrates the growing interest in Azerbaijan's securities market.

At the same time, the expanding circle of buyers of government bonds has yet to increase operations there; this is explained by the low profitability of these instruments - due to a fall in the rate of inflation. For example, in 2010 the profitability of short-term government bonds issued by the Ministry of Finance has fluctuated between 1.4 and 4 per cent, while in 2008, it exceeded 11 per cent per year, although the head of the State Securities Committee, Rufat Aslanli, believes that 2010 has seen some growth in the profitability of government bonds. Specifically, short-term government bonds have been growing since September 2010. The profitability of 35-day bonds increased from 1.15 to 1.46 per cent, while that of 364-day bonds more than doubled - about 3 per cent. Aslanli also confirmed that the growing profitability of short-term government bonds boosts demand for them.

Problems and tasks

A factor often deterring the active development of the corporate market is the fact that local companies lack full information about the advantages of the local securities market, where you can obtain free monetary funds at low rates of interest. Moreover, while deciding to issue bonds, a company should be ready for the fact that potential investors will be able to access information about its financial-economic indicators. Unfortunately, not all companies in the country are ready for this yet.

Currently, about 99 per cent of securities issued in Azerbaijan are in paperless form, which makes it possible to sell them on organized markets. It must be noted that even markets with a long history of development have taken a long time to issue paperless securities, which does not have a positive influence on the development of these markets. According to Aslanli, in Azerbaijan it is planned to carry out a number of reforms directed at ensuring efficient and safe activities by improving the roles and positions of existing market institutions.

It is also planned to take measures to form investment companies with professional staff, effective operational management systems and appropriate financial resources, to offer investors and issuers complex financial services.

Great attention is also paid to the institutional development of the exchange and improving its commercial system. Last year, brokers were given the opportunity to operate from remote terminals. This year, among the main tasks are the modernisation of the commercial system, integration with the depository system of the National Depository Centre to improve the electronic documentation of turnover between users and brokers and the acceleration of operations. In parallel, work is under way to improve the quality of other services supplied to users, such as the system of calculation for exchange deals and the disclosure of exchange information. To ensure more effective work, the National Depository Centre has introduced a "one-window" system, which has significantly reduced the length of procedures. Work is now under way on a programmed integration of the commercial system of securities into the national payment system of the Central Bank in order to improve trade infrastructure, and it is planned to complete this process by the middle of 2011.

On the whole, we can say with confidence that problems caused by the global crisis are now behind us. For this reason, it is now high time to take measures directed at the further development of the stock market. Specifically, it is necessary to create the required infrastructure, ensure the effectiveness of the stock market, increase the potential of participants in the financial market, expand the number of instruments used on the financial market and develop a mechanism for collective investment.

In this regard, special hopes are pinned on the law "On investment funds" which is being considered by parliament. Officials at the State Securities Committee believe that the establishment of investment funds in Azerbaijan will lead to institutional changes on the country's stock market and deepen the market. Investment funds help new instruments to access the market, which will assist the expansion of supply on the stock market. Such opportunities encourage companies and corporations which need investment to enter the market; this, in turn, requires them to be more transparent and bring their activities in line with international standards. The establishment of investment funds also helps to intensify the activities of professional participants in the securities market - brokers, dealers and register holders - and will bring the condition of services in line with market requirements, i.e. with the growing volume of operations, the cost of transactions will fall.

Further, the State Securities Committee has begun developing a new generation law for regulating the securities market which will meet modern standards. The adoption of such a law will help to form an optimal legislative base for Azerbaijan's securities market and define types of financial instruments, the rights and duties of professional participants in the securities market and the regulator's role in the securities market.

Either way, experts are sure that the absence of defaults in the country's stock market today and the emergence of positive dynamics in the government and corporate securities sector testify to a good future for Azerbaijan's capital market.

This is a remarkable event for Young & Rubicam, which opened its first representative office in the Caucasus, and for the ADVERT agency, which gained access to the international experience of the network, unique instruments and brand new products of Young & Rubicam. This is another example of the company's development strategy "Best Alone, Better Together", to which Young & Rubicam has been adhering for many years, choosing partners for the development of the network in various regions and new spheres of the communication business.

Young & Rubicam was founded by Raymond Rubicam in 1923 and is the world's first advertising agency set up by a creative person. Currently, it is one of the world's leading advertising and information agencies in the field of developing creative solutions, carrying out surveys of consumers and marketing communications. The agency has 195 offices in 98 countries.

Young & Rubicam has done a lot of things for the first time in the world: the first colour TV commercial, the first research department at an advertising agency, the first website developed for a customer, the first agency to have used cable TV and the opening of the first international advertising agencies in Russia and China. More than 15,000 people are working for the agency around the world. One of the main qualities of the agency's global strategy is its aspiration to freedom of art which brings real success to its projects. Raymond Rubicam used to say that not only the client, but also the agency should like a job, and that's when real creativity is born.

"We are sure that joint efforts by Young & Rubicam and ADVERT may give an impetus to the development of the creative component of the advertising business in Azerbaijan. Our cooperation should become the key to the success of our clients on the Azerbaijani market. This is what we see as the main task of the company's development," said Hamish McLennan, Global Chief Executive Officer of Y&R Advertising  (HQ New York). Our interest in the Azerbaijani market is not accidental. The rapid development of the economy, political stability, rich culture, loyalty to traditions and Azerbaijan's quick integration into the world community - all this is attractive enough for investment and joint creative labour, McLennan said.

"With our successful experience in developing Young & Rubicam agencies in Russia, Ukraine and Kazakhstan, we are also confident in the success of our cooperation in the Caucasus. The ADVERT agency is already successfully cooperating with a number of international network clients of Young & Rubicam, which indicates the high level of creativity and service on the whole," said Yuriy Pashin, the president of the group of companies in Russia, Ukraine, Kazakhstan and Azerbaijan.

"Creativity has existed in Azerbaijan since time immemorial: the cave paintings in Qobustan are world famous evidence for this. Surprising culture can only be developed. Thanks to the experience and instruments of such a successful global network as Young & Rubicam, Azerbaijan's ancient culture, enriched with modern international experience, is taking another step in its creative development," said Mehrac Mahmudov, the head of the BANNER group of companies.