THE ROLE OF THE FINANCIAL SYSTEM IN A TRANSITIVE ECONOMY

The rapid development of financial relations, which we have observed in the recent period, promotes a growing interest within society in identifying the role of the financial system in the economy, mechanisms of its influence on economic growth, causes of differences in the level of the development of financial systems and their structure in various countries.

Specifically, like in other centralized economies within the USSR, in Russia and Azerbaijan the financial systems are still owned, through inertia, mainly by the state. They have a less diverse system of elements and functions compared to well-established market economies where financial corporations and institutions functioning according to market laws play a far greater role. This is the reason why the financial system, considered as a scientific category, is not always clearly interpreted in various sources. For example, English-language sources interpret the financial system as a system of economic relations and institutions related to the redistribution of money between creditors and borrowers (in the macroeconomic meaning of these terms, i.e. between economic subjects that have free monetary assets and economic subjects that need this money). For example, Western sources use different terms to identify these two main types of financial systems (markets): "bank-based financial system" and "market-based financial system"; "relationship-based financial markets" and "arm's length financial markets", or shortly, "bank-based" and "market-based". 

The structure, functions and mutual ties between the links and elements of the financial system in various countries have their own specific features and depend on the economic development and political system of the state.

Let's examine the economic dynamics, comparative equivalence and the decree of the influence of the "market-based" stock markets of Russia and Azerbaijan on the development of the process of transformation in the economy. The formation and development of stock markets were mainly pre-determined by the direction and pace of the development of state economic reforms. In our view, this was the main cause of the differentiation of securities based on their risk degree and liquidity. The mechanism of the state regulation of the securities market also plays an important role here.

Azerbaijan and Russia are regarded as transit economies, and their main feature is the situation in which their comparatively young stock markets, which formed after the collapse of the Soviet Union, emerged. This means that the experience of securities emission by private organizations appeared in these countries only after the state started building its own sovereign economy, forming a relevant legislative base. The first step towards the development of stock markets in both countries was privatization, which provided the economy with emissive papers - corporate shares. Despite the differences in choosing the direction and methods of privatization, its main instruments are securities: in Russia - privatization cheques (vouchers) and in Azerbaijan - privatization shares.

These instruments, which were in essence the first securities, played a decisive role in forming stock markets.

In Russia, privatization cheques boosted the establishment of cheque investment funds which failed to affect significantly the quality of privatization due to its high pace of development. They have now been withdrawn from circulation. The situation in Azerbaijan was different - cheque investment funds were not efficient and could not influence the development of privatization because the population did not trust them from the very beginning, and at the same time, privatization shares are still considered to be securities.

Another important circumstance that still pre-determines the degree of the influence of the stock market on macroeconomic processes is that in Russia, the process of privatization involved, first of all, oil sector enterprises, whereas in Azerbaijan these enterprises are still regarded as strategically important and are not liable to privatization. This explains why, despite investors' equal interest in the securities of oil sector companies, Azerbaijan staked, as experience shows, on non-oil sector enterprises, namely the food and construction industries that are capable of demonstrating a rapid growth. In Russia, the pace in sales is set by the prices of the shares of companies like LUKoil, Surgut-neftgaz and so on. Depending on the rise and fall in prices for such securities, the situation on the stock market can change several times a day.

The applied method of privatization can be regarded as a shortcoming of the Azerbaijani model of privatization. Its essence is that if investors do not claim an enterprise during its partial privatization, its value is reduced stage by stage from 90 per cent of its authorized capital to 75, 50 and then 25 per cent. This causes a situation when some shares of the privatized enterprise are bought by one investor at money and cheque auctions for their initial price, while other potential investors sensibly wait for the price to change on this scale. It is clear that this has a negative impact on state budget revenues and the investment attractiveness of the real sector of the Azerbaijani economy.

In Russia, the process of privatization has gone through several main stages and in principle, has been completed.

The problem of the structure of the securities market in Azerbaijan deserves special attention (see the picture). In 2007, corporate bonds worth 42 million manats (a 100 per cent growth) were released 12 times. The volume of the placement of short-term government bonds totaled 160 million manats and trebled in comparison with the same period of the previous year. At the same time, the volume of the placement of the short-term notes of the National Bank of Azerbaijan totaled one billion manats (a 100 per cent growth). By the end of 2007, the share of operations involving state securities at the Baku stock exchange accounted for more than 90 per cent. At the same time, the share of foreign investors in this segment of the market has already exceeded 50 per cent, which allows the IMF to recommend corrections to the yield of state securities. Along with that, statistics show that there is also a need to develop the sector of corporate securities, which may become an effective instrument in the fight against inflation because corporate financial instruments could mobilize free money reserves. Moreover, a growth on the market of shares and corporate bonds would eliminate the increasing differences in the development of national economy spheres and make it possible to level disproportion in the development of the oil and non-oil sectors of the economy.

In conclusion, we would like to note that there are all grounds to expect that Azerbaijan's financial system will actively integrate into the world financial system. This is promoted by the policy of ensuring "transparency" on the stock market, liberalizing the economy, lifting all restrictions on capital operations and so on. However, apart from the influx of investments, development of the infrastructure and so on, it is also necessary to draw attention to the other side of the coin. Experience shows that the infiltration of foreign players into the financial markets of CIS countries increases their transparency only to some extent. After the non-residents take control of the market, the process of increasing transparency comes to a standstill and is often cancelled as was the case during the complete absence of non-residents from the market. The financial system does not get the long-awaited financial support for its development because its pace of growth also falls. If non-residents take control of the financial system, they do their best to keep the status quo.