The collapse in oil prices combined with the necessary quarantine measures related to the coronavirus pandemic has caused damage to the Azerbaijani economy, which will be extremely difficult to overcome even in favorable macroeconomic scenarios.
Between the beginning of January and the end of March, the price of Azerbaijani oil has fallen by almost 3 times. If Azer Light’s crude oil was worth $ 71.2 a barrel at the beginning of the year, it had fallen to $ 26.01 at the end of March. The reasons for this were both a decrease in the global demand for fuel due to the quarantine and the threat of the spread of the coronavirus, and the emerging global crisis of overproduction (which is an incomplete echo of the events of 2008), as well as the war of the prices between Saudi Arabia and Russia.
The depth of the oil crisis and the difficulties in overcoming its consequences are highlighted by the fact that even if Russia signed an agreement to reduce oil production with OPEC (in fact with Saudi Arabia), the price of “black gold” did not substantially increase. The oil market is expected to stabilize more or less only by the end of the current year, and only if there are no other negative factors.
However, in early May, there was some increase in the price of Azerbaijani oil: in Turkish Ceyhan, Azer Light now costs $ 28.49 per barrel and in the Italian port of August the fuel of the same brand costs $ 29. , 5 each. URALS brand oil prices are also showing growth – now costs $ 27.4 a barrel, up $ 4.84.
At the same time, given that the peak of the coronavirus pandemic in the world has not yet been passed, quarantine measures are underway and Brent reference oil is still falling in price (for the last time – by $ 4.52 ), it is obvious that the increase in prices for fuel produced in Azerbaijan – locally.
It should be noted that this type of dynamics is fundamental for Baku, since it is the export of oil that provides the highest revenues for the Azerbaijani budget.
In 2019, oil accounted for over 75% of total revenue from foreign supplies. Therefore, despite strong statements made personally by Azerbaijan President Ilham Aliyev and other government officials in the republic, it was not possible to diversify the country’s economy and substantially reduce its dependence on oil. And this, given the negative experience for the 2014-2015 crisis for Baku, when Azerbaijan has already faced all the “spells” of a sharp drop in oil prices.
A remarkable fact is that in 2015 the share of oil exports was 85% and, apparently, some diversification measures were taken, however, the reduction in the share of oil was largely due to an increase the supply of natural gas. The fact is that, on the one hand, prices for the latter are also rapidly falling, and on the other it is also a dependence on a natural resource, although on the other. Other Azerbaijan export items are currently extremely insignificant. These are mainly agricultural products, which represent just over 3%.
The phenomena of crisis and their first news led to the immediate purchase by the masses of the population of Azerbaijan of dollars and euros, because the prospect of another fall of manat has become evident. Until now, the latter’s course has been supported by the authorities with petrodollar reserves by all means, but these efforts cannot be applied forever or even for a long time. Already, among Azerbaijani economists, rumors are growing about the need to devalue the national currency.
This measure has several advantages: it is a strong increase in the competitiveness of Azerbaijani products and, consequently, a probable increase in the level of exports. On the other hand, this could eventually destroy Azerbaijan’s banking sector, which is already going through difficult times: direct state administration has been introduced in several banks in the country.
In particular, the Central Bank of Azerbaijan was forced to introduce direct management in 4 banks in the country: NBC Bank, AGBank, Amrah Bank and Atabank due to the risk of collapse of the national banking system. In addition, a sharp drop in manat will affect the prices of imported products, including a range of essential goods and even food. Therefore, most Azeris will immediately feel the negative consequences of both the oil crisis in general and a controversial measure such as the devaluation of the national currency.
The current situation is extremely difficult for Azerbaijan, also because its budget for 2020, on the one hand, includes the oil price of at least $ 55 and, on the other hand, significant expenses for the social sphere. As a result, a negative balance of the state’s state budget of 8% is expected, which is a critical indicator.
To cover the liquidity shortages, the aforementioned foreign exchange reserves will be involved, of which at the moment in Azerbaijan, according to official data – $ 51 billion. This is not such a large figure, since it is from these reserves that Baku’s state debts are serviced, as well as the debts of Azerbaijani state companies. To make a comparison, the Norwegian Oil Fund, also an exporter of energy, has been able to accumulate about a trillion dollars since 1990.
Indirectly, the difficult situation for modern Azerbaijan was recognized by its president Ilham Aliyev – this happened during his conversation with the country’s new attorney general, Kamran Aliyev, when the president noted that hydrocarbons are losing their importance – both economic and geopolitical. Society has taken this sentence quite unequivocally – as a sort of “promise” of a deteriorating standard of living, which is currently taking place.
One cannot fail to note the most important negative factor for the Azerbaijani economy – perhaps equally significant problems with oil prices – the coronavirus pandemic COVID-19. The spread of the disease in the republic was officially registered in February of this year and by March people had already started dying from it. To date, there are more than 600 cases of infection and around 20 deaths in Azerbaijan, but these data are clearly underestimated.
In some regions of the republic, tests for COVID-19 are not performed at all. This applies in particular to places of compact residence of the Talysh ethnic minority. According to Talish activists and public figures, despite the lack of diagnosis and, therefore, adequate treatment, of thousands of their compatriots, their areas of residence are in a real blockade – the entry and exit from there are extremely difficult.
At the same time, it is precisely in the regions of the Talysh, particularly in Lankaran, that planes are often sent from countries with the most dangerous level of coronavirus spread: Turkey and Iran. Therefore, Ilham Aliyev’s regime, on the one hand, is trying to put pressure on the Talysh, putting them under even greater control, and on the other, to panic among the ranks of the dangerous disease.
Interestingly, the state of emergency has not been introduced on the territory of Azerbaijan, but the state imposes many restrictions on citizens: the land borders with neighboring countries are closed, schools, universities, theaters, museums, cinemas do not work, events mass are canceled.
Furthermore, since March 24, there has been a tightening of the so-called “special quarantine regime”, which provides for an absolute ban on leaving home for people over the age of 65, isolation of the Absheron peninsula (it is the most the country’s largest – Baku and Sumgait), the suspension of intercity buses and a taxi, and even the blocking of work on the Baku subway.
The country has no malls and large stores. Subsequently, the government completely prohibited citizens from leaving their homes for no particular reason, which they had to send in the form of SMS messages to special numbers, then receive the appropriate permissions.
We have serious doubts about the compliance of the above measures with the Constitution of the Republic of Azerbaijan, however, in the context of the authoritarian rule which has been habitual and ongoing throughout the country’s recent history, this style of response is quite obvious.
It is obvious that both the restrictive and the quarantine measures and the consequences of the arrest of a number of businesses and transport require significant funding, which Azerbaijan is already actively spending. Then, on February 27, an operational headquarters was created under the government of the country, which immediately requested around $ 6 million to implement these measures.
Another structure appeared on March 19: the Coronavirus Support Fund, which has so far accumulated over $ 65 million. In addition, on March 1, the President of Azerbaijan issued a decree, under which approximately $ 500 million will be allocated from the state budget to eliminate the economic consequences of the coronavirus. This is only the beginning and obviously Baku will have to spend a lot more.
Furthermore, there is already evidence that payments agreed by the authorities do not reach citizens. At least 600,000 people who have lost their livelihood will need to receive $ 112 a month. However, in reality, the needy are many times more, however, while working in the shadow sector of the economy, these people cannot claim anything. However, the indicated amount expected for payments to “official” employees is clearly too small, since the minimum wage in the country is $ 147.
The expected financial assistance and preferential loans to entrepreneurs, in turn, seem poorly conceived and the companies that receive them are selected, often spontaneously, or based on the personal interest of various government representatives.
Given that even without coronaviruses at current oil prices, Azerbaijan is losing at least $ 1 billion, its overall and consequently geopolitical financial losses are likely to be global.
Baku, however, is looking for a way out of this situation and is also making progress in this quest. For example, an agreement has almost been reached with the European Bank for Reconstruction and Development, which has promised Azerbaijan $ 250 million in investments in the development of renewable energy, telecommunications, agriculture and transportation.
Relevant topics were discussed during recent virtual negotiations between President Ilham Aliyev and the head of the EBRD Suma Chakrabarti. Most likely, Azerbaijani leadership will try to carry out similar actions by the Asian Development Bank. At the same time, Baku will not ask the IMF to provide him with a subsidized loan in relation to the coronavirus.
Currently, the situation in Azerbaijan is developing and exists in two realities: the official one and the one that takes place in practice. From the point of view of the former, the country is in a difficult position due to oil and coronavirus prices, however, having a sufficient stabilization fund and taking all the necessary quarantine measures, as well as attracting additional funds from abroad , is able to minimize the consequences of these difficulties. In this reality, there is no state of emergency in Azerbaijan and only a few hundred people have been infected with the coronavirus.
Indeed, the situation is much more complicated and critical: Baku has in fact introduced state-of-the-art measures, isolated and illegally, entire regions, and oil prices and financial losses are now such that it is a big problem for the Republic. to find funds it should cover a negative balance. The population awaiting social concessions is likely to be disappointed in a state that is unable to supply them fully and not to mention ethnic minorities, whose situation has worsened again and the degree of radicalization is likely to increase.
In these realities, Azerbaijan’s leadership could help a long-proven method: military rhetoric and aggressive actions on the line of contact with Armenian troops in Nagorno-Karabakh and on the border with the Republic of Armenia. However, coronavirus has also been recorded in Azerbaijani military units, doing their actions, to put it mildly, riskily.
Therefore, from a serious socio-political turbulence, Azerbaijan can currently be saved only with a delay until oil prices rise and the pandemic is eliminated. It seems that if we are talking about six-month forecasts – one year, Baku will have sufficient funds – the only question is their rational and timely use, with which it should be noted that the authorities of the republic have always had serious problems.
Anton Evstratov
Original article: World Geostrategic Insights 15/5/2020
