Azerbaijan’s finances are a footstep away from the “red button”

The Azerbaijani authorities’ decision to restructure the debts of the International Bank of Azerbaijan (IBA) is to be implemented by late Aug 2017. A few days ago, the major shareholder of the bank, Azerbaijan’s Finance Ministry, met with the bank’s foreign investors in London so as to discuss with them how to do this.

According to the plan, the $3.4bn debt is to be exchanged for new government bonds with a 20% discount. The Azerbaijani authorities are sure that the foreign shareholders will accept this plan and have even pointed out that there will be no sovereign guarantees for the IBA.

This means that they are going to solve the bank’s problems by just pushing the “red button” – by shutting it down and not paying any compensation to its shareholders and depositors. This may look like blackmail but the problem is that the closure of the bank will not be good for Azerbaijan. The IBA felt bad in late May because of unstable oil prices and low manat rate. The Finance Ministry said that economic problems were the key source of the bank’s debts. But the fact is that the bank owed almost as much in 2016.

Last year, the Azerbaijani authorities even planned to declare the bank bankrupt. The Wall Street Journal said then that it was an attempt to avoid claims by foreign creditors and to save Azerbaijan’s crisis-stricken economy. It is clear why the Azerbaijani authorities are acting like this. In 2015, the IBA lent the ailing SOCAR as much as 1.29bn AZN.

“The bank’s stability is vital for us as it provides our economy with vital services,” Azerbaijani Finance Minister Samir Shafirov said in 2016. He meant that any crisis at the IBA would imply crises for other Azerbaijani banks.

According to Azerbaijan’s Financial Market Control Chamber, today, five big Azerbaijani banks are facing capital-related problems. One of them, Atabank, is the operator of the national business support programs, and is closely related to the Aliyev clan: it is part of AtaHolding, controlled by Vice President of Azerbaijan, the President’s wife Mehriban Aliyeva.

The IBA is also close to the Aliyev clan. It is the key sponsor of the Heydar Aliyev Foundation, where Mehriban Aliyeva is President and her daughter Leyla is Vice President. Former National Security Minister Eldar Mahmudov has caused a lot of damage to the IBA by appointing his relative Jahangir Gajiyev as the bank’s CEO.

“Mahmudov and Gajiyev have transferred to offshore zones as much as $5bn-10bn. Today, both are facing criminal charges. But Mahmudov has not been summoned to court so far. Gajiyev has confessed that he acted by Mahmudov’s orders. But the latter is still free. The answer is simple. He is haggling with the Aliyev regime: he wants immunity in exchange for the stolen money,” Azerbaijani oppositionist Arif Yunusov told EADaily.

It was then that the IBA, the heart of Azerbaijan’s economy, collapsed. “As a result, our economy and especially the bank sector are facing serious problems. Some of our leading banks are on the verge of bankruptcy,” Yunusov said.

In late May 2017, Moody’s said that it no longer trusted either the IBA or the Azerbaijani Finance Ministry and that their problems might be much deeper than they seemed to be. “The crisis came in Feb 2015, when declining oil prices caused a 35% fall in AZN rate. Food prices soared and lots of people, especially, those in the country, who had borrowed money for wholesale trade, proved unable to repay the loans. Many of them went into the streets to express their protest but the authorities dispelled them. Oil prices were low throughout 2015 and that was a heavy blow on the Azerbaijani economy. It was then that the authorities first asked their people to ‘tighten their belts.’ Over 30,000 people were fired. But it was official statistics,” Yunusov said.

Musa Ibragimbekov, specially for EADaily