CRISIS TEST

Unfavourable forecasts about the development of the economic crisis that has engulfed the world force even business rivals to coordinate their efforts to counter its effects. As we know, problems on the financial markets have now affected the economy of leading countries and it is expected that developed countries will face a slowdown in their rates of growth and, in some cases, a recession. The rate of economic growth will also slow down in developing countries.

Rating agencies and analytical services are now in deeper trouble as their analyses did not stand up to the test of a crisis, as proved by the bankruptcy of leading "rating" enterprises and financial institutions. Unthinkable and even pointless projects have now become popular in the struggle against financial chaos, while statements about the need to reconsider the whole global system of economic relations are becoming more frequent and more confident.

"We will raze the old world to the ground and then…"

"The directors of the main financial institutions of leading countries have met repeatedly in this campaign. CIS ministers of finance have also held a meeting. A further meeting will take place soon in St Petersburg, where I think it is necessary to consider changes to the whole financial system, because the IMF, according to rating agencies, is helpless in such force majeure situations," Anatoliy Kazakov, chairman of the coordinating council of the Financial-Banking Council of the CIS (FBC of the CIS), said recently in Baku. He said that some believe the crisis in the world economy may last another year.

Director of Russia's Vneshtorgbank and president of the Financial-Banking Council of the CIS, Andrey Kostin, also thinks that the crisis clearly reveals a system fault in the current financial architecture. It is becoming clear that the world economy depends greatly on one player, albeit a global player. "Most experts do not doubt that this situation will change significantly. Most likely, the economy will no longer be dominated by one financial system," the head of the council said, while addressing the international conference "The Financial Markets of Commonwealth Countries: Development and Integration", held in Baku in October. It is now clear how strong an influence the world crisis has on the prices of the principal exports of the Russian, Azerbaijani and Kazakh economies, especially oil, he said. "Proceeding from this, the rate of growth will inevitably fall across the whole post-Soviet area, and there is also a danger that national currencies may be devalued," he said.

"Today we need to decide what sort of role the CIS countries and their financial institutions will play in the post-crisis world. I think that it is extremely important to expand economic interaction within the framework of the Commonwealth here, including by accelerated financial integration," Kostin pointed out. He also said that it is necessary to speed up efforts to create currency and financial markets for CIS countries, expand relations, especially in the financial sector, to develop cooperation between banks and to increase the number of joint investment projects.

So, Russian financiers are unanimously promoting the idea of turning Russia into a new, powerful, financial-economic centre of the world. They are also trying hard to prove that it is more profitable to carry out transactions between CIS countries in national currencies and to create a single payment system for the CIS. "Against the background of the unstable euro and dollar, Russia is going to make the rouble a reserve currency," Kazakov said. A further aspect is the creation of the first CIS financial centre in Russia. According to the secretary-general of the Financial-Banking Council of the CIS, Pavel Nefedov, the International Financial Centre in Moscow will open by 2020. The main aim is to prevent the negative affects of world financial crises. "It is quite possible that several such centres will be set up in the CIS, and Azerbaijan is a candidate for this role," he said. According to the head of the coordinating council of the FBC of the CIS, Anatoliy Kazakov, it is necessary to create a new infrastructure for such centres and they should be based in skyscrapers. It is necessary to introduce favourable conditions in order to secure an influx of capital and so on.

The crisis is under control

The successful implementation of these projects will yield clear "benefits" - an economic alliance in today's world is much more powerful than a political one. The question is whether Russia's proposals are beneficial and whether it is necessary to become economically dependant on it in order to survive the crisis.

Let us start by saying that Azerbaijan may be regarded as one of the rare islands of stability in a "crisis-stricken" world. Kazakov himself admitted that the crisis has had insignificant impact on the financial market of our country. "Kazakhstan and Ukraine were the first to be affected as the volume of foreign borrowing there exceeds 50 per cent. Russia and Belarus have also been affected, but Russia has a powerful stabilizing fund and gold and currency reserves," Kazakov said.

According to the chairman of the board of the National Bank of Azerbaijan, Elman Rustamov, there is no fundamental basis for the financial crisis to have an influence here. The macroeconomic situation in the country is stable and foreign liquidity, against the background of world liquidity problems, is 17 billion dollars, while the foreign debt, including the debts of the private sector, does not exceed 8 billion dollars. "This means that liquidity is double the sum of debt. As for micro-influence, for example, on the banking sector, the only problem here could be foreign debt of 2 billion dollars, one billion of which belongs to the International Bank. There are no problems with the payment of this debt. This process is still continuing," he said.

As for concerns about the country's currency reserves, accumulated in the NBA and the State Oil Fund, Rustamov said that Azerbaijan has adopted the most conservative model for running them. "We deposit our assets in the central banks of the leading states of the world and international financial institutions with state status. Of course this reduces their profitability, because many central banks have cut interest rates. But today the main purpose in managing reserves is not to make them profitable, but to preserve them," Rustamov said.

For individual depositors, the NBA is mulling additional security measures in order to return their money if a local bank goes bankrupt, for example, by increasing the size of deposits insured by the Azerbaijani Deposit Insurance Fund (ADIF) (Starting from 1 January 2008, deposits of up to 6,000 manats are fully insured by the Deposit Insurance Fund). We have to say that depositors are already investing their money in various banks in order to insure themselves against negative developments. Currently, the Fund's guarantees cover 97 per cent of people with bank deposits.

Again, these are only precautions, because Azerbaijani banks are not experiencing a crisis that could lead them to bankruptcy, said Azad Cavadov, executive director of the ADIF. "The assets of the country's banking system total just 8 billion manats, of which 1.7 billion manats are the deposits of private individuals. This is a very small sum for our state. Azerbaijan receives much more money from the oil and non-oil sectors of the economy than the total sum of deposits," he said.

Is the game worth the candle?

This all gives rise to strong doubts about how useful the ideas of the Russian financiers would be for Azerbaijan. In principle, there is no economic imperative here. The head of the Association of Banks of Azerbaijan (ABA), Eldar Ismayilov, said that the economy of Russia itself is not yet ready for such a step. "If we take the CIS, 15 per cent of trade turnover is carried out with Russia and 12 per cent with Central Asia and the Caucasus. This is quite a low figure for such projects. And the main trade is in raw materials. Moreover, Russia itself conducts most of its export and import financial transactions in dollars, because all oil contracts are written in dollars, and oil is Russia's main export. Yes, they can say we will sell it for roubles, but will they be able to buy anything?" said the ABA head.

This does not mean, of course, that we should not be seeking cooperation and thinking about ways of tackling this situation, however, it is not enough to rely solely on good intentions. "Banks are a driving gear, and they look for free, cheap money and invest it into more expensive projects, making a profit from this margin. How will they do this if the economy is, in fact, not ready?" he said.

No-one in the world doubts that agreements on the main principles of a new global currency system, specifically the Jamaica Agreement, which replaced the Bretton Woods system of gold and currency reserves, have now become obsolete. Now 92 per cent of mutual settlements in the world are conducted on the basis of the two-currency basket - dollar-euro, but it seems that this system is not viable either.

Thus it is important to introduce a new international currency to replace the failed SDR. "The Nobel Prize winner in economics, Robert Mundell, has suggested that it should be called Intor and calculated on the basis of a dollar-euro-yen basket and also, possibly, the Chinese yuan. If this project is implemented, there will be absolutely no need to create a single payment system in the CIS," the ABA head said in conclusion.

In principle, the government circles are in no hurry to respond to the proposal of their Russian counterparts. "The most important thing for us is to ensure national interests. With this condition, we are interested in any technical project and we are ready to participate in it," Rustamov said, diplomatically evading a direct answer.

As for a financial centre, the current stable economic situation in Azerbaijan and the dynamics of growth in the banking sector allow our country to bid for the establishment of such a centre in Baku. For example, the main indicators in Azerbaijan's banking sector have increased by 9-10 times over the last five years. According to Rustamov, the assets of the banking system account for more than 60 per cent of non-oil GDP, while banks' foreign debt - only 18 per cent of their total obligations. Moreover, 25 per cent of the population's consumption is financed by bank loans, while the proportion of inactive loans is only 2.5 per cent of the credit portfolio. Since the beginning of this year, the credit portfolio of banks has increased by 42 per cent, while the volume of the population's deposits is increasing by 50 per cent per year. Azerbaijan has the strongest banks in the South Caucasus. Of course, a financial centre is quite an expensive and demanding project. But if Azerbaijan manages to maintain a stable rate of economic development and begins to implement this idea, then we will not have to worry about the post-petroleum future of our country…