OIL FOR MANATS? THIS IS REAL!

The unfavourable situation observed in the world's financial markets prompts Azerbaijan to think carefully about its policy on development and to evaluate more carefully the risks posed by new projects. At the same, notwithstanding the fact that many local financial institutions have not been operating very long, they clearly remain unfazed by the changes taking place in the world banking sector; on the contrary, they continue to expand cooperation with their counterparts abroad.

Foreign experts confirm this. Executive Vice-President of the Association of Russian Banks (ARB), PhD in Economics, Prof. Anatoliy Milyukov shared his views with R+ about the current state of the Azerbaijani and Russian banking sectors as well as the impact of the crisis on the country's overall economic development. 

In your opinion, have Azerbaijan and Russia managed to fully avoid the adverse impact of the world financial crisis?

Neither Russia nor Azerbaijan became embroiled in the global financial crisis for clear historical reasons. We have a more favourable position in this respect. But this may not last long and so both countries have to figure out how to use all the resources at their disposal to boost their banking sectors. In particular, all CIS countries, including Russia, Azerbaijan, Kazakhstan, Georgia and others, should work out more effective systems for the exchange of information, resources and credit policies in order to support one another while avoiding the crises that have hit countries around the globe. And this is quite possible.

However, this is by no means the only way out. To develop the banking system, banks in CIS countries should aspire to cooperation with Western banking institutions which have considerable financial reserves and 300 years of experience in the field. The banking systems of CIS states have vast potential for development in this direction, especially because banks are complex mechanisms which cannot be created overnight. But I believe that Russian and Azerbaijani banks have accomplished much over 15 years and are currently at a certain stage of maturity, although they are still need further growth.

What do you see as the main problem for CIS banking systems, especially those of Russia and Azerbaijan?

Today, the main problem facing banks operating in the entire post-Soviet area, including those of Russia and Azerbaijan, is their strength and resource base. I am well-versed in the growth of assets in the Russian banking sector. But what I learnt while in Baku is that the assets of Azerbaijani banks are growing at a rate of 50 per cent at most. 

There is also another criterion, which is to compare the growth of bank assets with growth in Gross Domestic Product (GDP). In European countries which have developed market economies the ratio ranges from 200 to 400 per cent. In Russia, the figure is no more than 60 per cent, while in Azerbaijan it is 12 per cent. This is the cause of banks' sluggish activity during the allocation of loans for large-scale production projects. The banks are weak in this respect and are unable to disburse loans. But banks need long-term, so-called "lengthy" credit, rather than short- and mid-term credit. They may apply to overseas banking institutions, especially given that there is an attractive investment climate in both Russia and Azerbaijan and foreigners trust us. However, this makes local banks dependent on other countries, and any turbulence in the financial markets has an immediate adverse impact on indebted banking systems. 

What is the way out?

The solution is the same for all CIS countries exporting oil and gas - to diversify the use of incoming petrodollars. They should not just stash the funds away for a rainy day and invest the lion's share in Western securities (as happens in Russia) but should also use them to support their banking system. In doing so, we will increase the level of credit, both mid-term and long-term, and the allocation of credit to production facilities in the non-oil sector. We will also achieve a flow of domestically-made goods to the market and thus curtail hikes in inflation.

During a meeting with newly-elected President, Dmitri Medvedev, members of the Russian Union of Industrialists and Entrepreneurs (RUIE) bureau offered to consider selling strategic exchange goods, and gas in particular, for roubles (Russian currency) in the first ten days of April. According to the media, the president backed the RUIE's initiative, and bureau members promoted the issue as "a measure aimed at turning the rouble into a global currency". But how will the growing demand for roubles affect the Russian economy, especially given that Russia is also planning to set up an oil and gas exchange that will conduct transactions in roubles?

In this case, we are talking about enhancing the image of the Russian rouble, which should be established as an international currency. This is state policy and has been repeatedly mentioned by Russian President Vladimir Putin. The idea of turning Moscow and the whole of Russia into an international financial centre is currently gaining ground, and the country will host an international exchange. This can be achieved only provided that we gradually turn the rouble into an international currency. But a high profile for the rouble is not enough. We are aiming to bolster the rouble and, at the same time, to sell hydrocarbon resources for roubles; this is certainly related to the falling rate of the US dollar. Both of these developments can be achieved. The fact that the rouble is strengthening rapidly is certainly logical because the country's economic power is also strengthening while the dollar slumps and keeping the dollar rate artificially low is simply impossible. We understand what losses we are incurring as the rouble strengthens and exporters are very unhappy. But the central bank has vowed to pursue a credit policy that will allow us to curb hikes in the value of the rouble. In my opinion this can be done, but it won't last long. Thus maintaining the rate is one of the challenges, while another is the way oil and gas should be traded with resource-hungry Europe. In any case, with such a robust rouble, a transition to accounting in the currency is necessary, as Russia has so much to lose, as do many other oil and gas exporting countries. 

In Azerbaijan, the falling dollar rate has increased public confidence in the national currency, and bank deposits in manats are growing. A process of de-dollarization has started. One may conclude that Azerbaijan, just like Russia, will soon be able to sell its "black gold" for manats or some other currency.

That's true, but I am firmly convinced that the dollar may still appreciate, let me explain why. True, the US economy is currently experiencing tough times and the dollar rate is falling. The image of the American currency has sustained such damage that it may soon be excluded from the general reserve of currencies. The objective reasons for the depreciation of the American currency are evident. But there are also some subjective reasons. How else would you explain the persistent silence of the Federal Reserve and very low-key stance of the US authorities towards the falling popularity of the dollar? The point is - I can confidently say  - that this state of affairs plays into the hands of the United States; first of all, due to the corresponding decrease in the value of its huge foreign debt. Furthermore, a weak dollar increases the economic opportunities of the United States, which is reaping hefty profits from the slump in the rate of its currency. I therefore concur with my colleagues who say "be patient, do not rush to get rid of your dollars and exchange them for other currencies such as the euro, pound or Japanese yen". 

The term "Dutch disease" is being widely discussed…

In my view, it is no longer relevant to our countries. True, just like Russia, Azerbaijan is receiving tremendous profits from the export of its energy resources. But we should point out that we are trying to diversify the financial reserves available to the greatest extent. For example, a State Oil Fund has been established in Azerbaijan. This allows us not only to accumulate petrodollars but also to channel them into strategically-important infrastructure projects, etc. Thus, the mistakes once made by Holland and other countries whose economies depended so much on raw materials are no longer a danger, for the simple reason that one always learns from others' mistakes. 

Are Russian banks planning to expand their presence in Azerbaijan's market? 

A number of Russian banks are currently, and successfully, expanding their networks of subsidiaries abroad and Azerbaijan's market is extremely attractive in this respect. This is illustrated by the analyses of Russia's internal banking systems regularly conducted by the Association of Russian Banks, which show that banks are drawn to Azerbaijan. For example, the dynamically developing international financial group, VneshTorgBank, especially its VTB bank, is ready to establish representation in Azerbaijan. And this is just the beginning. 

What is the main factor behind the emergence of Russian banks in our country?

Undoubtedly both cooperation in the finance sector and the joint participation of Russia and Azerbaijan in major projects, including those involved in the exchange of electric power and transport projects. If any given country cooperates with another in strategic fields, this draws in the banking and finance sectors as a whole, especially given that there is a construction boom in Azerbaijan. Leave aside the construction sector, let's just say that the country's economy is developing. Moreover, I was surprised to discover that Azerbaijani banks offer their clients interest rates on deposits which are unknown in Russia - around 12-22 per cent, and even 23 per cent - not to mention interest rates on the allocation of loans! Why shouldn't one earn from that difference? That's one point. 

Another point is that, based on the same logic, Western banks are being drawn to Russia, remembering that interest rates on deposits in economically-developed countries are at a level of two to three per cent, which we would describe as laughable, due to their stable economies and very low inflation. 

What is your personal assessment of the development of Azerbaijan's banking sector? 

Having listened attentively to all the reports delivered at the Banks and Finance 2008 exhibition by representatives of the Azerbaijani banking sector, I came to the conclusion that this area of the national economy is developing dynamically and the population's deposits are growing in geometric progression. This is an extremely interesting phenomenon, which suggests that people have started to trust the banks with their money. I think this is also driven by the rising income of the population. Confidence in banks and citizens' well-being are the primary conditions for successful functioning of the banking system. I therefore hope Azerbaijani bankers maintain this trust, as it lies at the heart of further success and prosperity.