OUT-OF-POCKET EXPENSES

The fall in oil prices in the world markets, which has led to certain problems in the economy of Azerbaijan, too, is increasingly linked to political conditions and another division of the spheres of influence by the leading superpowers. The government also leans towards this conclusion.

Thus, according to Minister of Finance Samir Sarifov, the cheapening of oil is associated with a significant increase in oil production, in particular, in the United States.

At the same time, the OPEC countries have not cut their production, which led to an excess of supply over demand in the market. However, "political games, contrary to economic logic, cannon be ruled out," Sarifov said.

Anyway, because of the reduced revenue from the sale of Azerbaijani oil in the world markets, the government was forced to look for new sources to fill its coffers. The existing financial reserves of Azerbaijan may become such a source, provided they are placed more profitably both outside and inside the country.

For a long time, the Azerbaijani government has strictly followed the recommendations of international financial institutions (IFIs) regarding the placement of foreign exchange reserves, namely, the need to invest in securities of high reliability, not below the investment grade. In addition, IFIs did not allow investments of available funds in the oil and gas sector so as not to deepen the dependence of the country's economy on oil price fluctuations in the world markets.

Since the beginning of the year, the management of the State Oil Fund of Azerbaijan (SOFAZ) began to change the geography of its investment portfolio, shifting the focus from developed countries to developing ones to increase the yield from asset management. There is no talking about a sharp change of policy in this case, however, as the Fund continues to invest at a level not below investment grade BBB.

Meanwhile, the government seems to have decided to opt out of the recommendation not to invest in the oil and gas sector. This is clearly corroborated by the information that the State Oil Company of the Azerbaijani Republic (SOCAR) is getting ready to borrow 1.8bn manats from the Central Bank of Azerbaijan (CBA) and, according to SOCAR president Rovnaq Abdullayev, the Azerbaijani government has already given the green light to the deal.

It should be noted that the CBA is going to profit appreciably from lending to SOCAR even at a discount rate of three per cent per annum, set on 13 July 2015, given that the income from managing the CBA's foreign exchange assets does not exceed one per cent.

The State Oil Company, which last floated 15-year Eurobonds worth 750m dollars at 6.95 per cent per annum at the year start, will not come off a looser either. Due to low oil prices, the financial circles have considerably increased the current cost of borrowing for oil and gas companies, and according to foreign media, it now stands at 10 per cent per annum. With regard to SOCAR, the interest rate on its borrowed funds increased from 4.75 per cent per annum in 2013 to 6.95 per cent per annum in early 2015.

In the case of attracting these 1.8bn manats overseas, interest rates on the loan to SOCAR would be at a level of eight to nine per cent, meaning that the annual payments on the loan would be in the range of 150m-160m manats. The CBA's decision to issue a loan to SOCAR has actually allowed the government to save this amount, as the company is 100-per-cent owned by the state.

Despite the doubts of some experts regarding the market suitability of this decision, we must not forget that it is adopted against the background of an unstable and unusual situation in the world economy, which requires an adequate response by the government. Therefore, the Azerbaijani government's wish to protect domestic economic interests is quite logical and justified.

It should be noted that the "lion's share" of the forthcoming loan will be allocated for the modernization of the Heydar Aliyev oil refinery, which will allow it to produce high-quality Euro 5 standard petrol and diesel fuel by the end of 2018. This, in turn, will make it possible to fully meet the domestic demand for high-quality petrol and stop its export.

The Azerbaijani government will probably find more than one project to be implemented with the use of the country's foreign exchange reserves (by way of reference: the SOFAZ investment portfolio amounted to 35.7bn dollars in the first half of 2015, the CBA's currency reserves - to 7.3bn dollars on 31 August 2015). Of course, we are only talking about companies which are wholly owned by the state. In particular, in addition to SOCAR, there are Azerbaijan Railways CJSC, Azerenerji JSC and others. Given the difficult conditions in the global markets, the financial resources accumulated at the cost of Azerbaijani oil should work primarily for the country's economy. Azerbaijan's economy needs cheap loan capital more than the developed countries, in whose securities the bulk of the strategic currency reserves of SOFAZ and the CBA are invested. In the current situation, however, Azerbaijan's funds placed at an interest of one per cent per annum are loaned to Azerbaijani state companies at no less than seven per cent per annum. Then why provide foreign banks and financial institutions with extra income?

The new economic policy of the Azerbaijani government, which is geared towards meeting the needs of local companies in cheap borrowed resources, is the key to sustained and stable development of the national economy in such a troubled situation in the world markets.