- Slumping crude prices drain reserves, prompt devaluations
- President Aliyev faces worst unrest in a decade as prices jump
For Azerbaijan, plunging foreign reserves and two currency devaluations last year provided a stern test for the energy-reliant nation. For its long-time leader, the economic and political challenges are just starting.
President Ilham Aliyev is on unfamiliar ground, facing a crisis that turned the manat into the world’s worst performer last year. He’s now confronted by the worst dissent in more than 10 years as prices surge in the Caspian Sea nation of 9.5 million that his family has ruled for more than four decades. The rumblings in Azerbaijan show the issues facing oil dynasties as currencies from Riyadh to Abu Dhabi come under pressure from crude’s slump to a 12-year low.
“The president has no experience of dealing with a crisis of this kind -- he’s become accustomed to living standards and real wages rising year after year,” said Alex Nice, an Economist Intelligence Unit analyst covering Azerbaijan. “Dependence on oil is similar in scale to Saudi Arabia, but Azerbaijan has smaller sovereign reserves.”
With an economy as reliant on oil as Iraq and Venezuela, the Azeri currency’s first annual loss against the dollar in more than a decade has sheltered government finances while stoking consumer prices and driving up poverty. Inflation may reach 15 percent this year, according to Standard & Poor’s. Costs of imports such as food and drugs have jumped.
The president is using a carrot-and-stick approach to maintain order. In a country where protests are rare and unsanctioned rallies are punishable by heavy fines, riot police have been sent to quell nationwide demonstrations blamed on “religious radicals” and the secular opposition. The unrest is the worst since clashes in 2005 after disputed parliamentary elections.
About a thousand people rallied outside the ruling New Azerbaijan Party’s office in the country’s second largest city of Ganca on Friday, demanding jobs. Police detained several of them, according to video shared on website of Meydan TV, a Berlin-based pro-opposition online television channel.
At the same time, Aliyev signed more than 20 decrees in January alone to raise salaries and pensions. This year’s government spending plan will increase by 2 billion manat ($1.2 billion), Finance Minister Samir Sharifov said Jan. 28. Expenditure will still be down on 2015.
That may not be enough to extend an unprecedented economic expansion. An oil boom helped gross domestic product grow an average 13.5 percent a year in 2003-2012, during which time per capita income soared to $8,000 from $900. GDP will contract 1 percent this year, while the per capita indicator will fall almost half to $4,100, according to S&P, which predicts the budget will remain in deficit through 2018. S&P cut Azerbaijan to junk last month, the nation’s first-ever sovereign downgrade. Moody’s Investors Service followed on Feb. 5.
To counter the economic pain, the Azeri authorities have shuttered one in six banks and met the International Monetary Fund and the World Bank last week over a potential $4 billion loan, according to reports by the Financial Times and the Interfax news service. Aliyev says Azerbaijan doesn’t need financing from the lenders.
“We need to understand that Azerbaijan’s oil era is over,” said Qubad Ibadoglu, a visiting professor of economics from Baku at Duke University who worked for more than 10 years at the Economic Studies Center research group, based in the Azeri capital. “We can’t defend the manat because we couldn’t build a diversified economy in time.”
The currency’s woes may be only part of the issue, according to Gabriel Sterne, head of global macro research at Oxford Economics Ltd. in London.
“I’m not sure you can blame the protests on the depreciation,” he said. “The root cause is probably the new grim reality of deteriorating finances and poor governance. Depreciation is just a symptom.”
Aliyev, who took over from his late father after a disputed election 13 years ago, described graft as a “malady” in a televised cabinet meeting last month, pledging action to eradicate it. Azerbaijan ranked 119th of 168 nations in Transparency International’s 2015 Corruption Perceptions Index, alongside Russia and Sierra Leone. Property rights and judicial independence were rated 101st of 140 countries in the World Economic Forum’s latest Global Competitiveness Report.
In October, Aliyev dismissed National Security Minister Eldar Mahmudov before firing top security officials accused by the General Prosecutor’s Office of corruption, abuse of office and meddling in businesses. Mahmudov, who has no lawyer and is unreachable having effectively been placed under house arrest, has never commented on the allegations against him. Aliyev said last month that “no one’s untouchable.”
Economically, Azerbaijan may have the resources to battle on. Besides $4.4 billion of reserves, its sovereign wealth fund contained $33.6 billion on Dec. 1. After the manat’s depreciation, that’s equivalent to about 100 percent of 2015 GDP, according to S&P.
The devaluations have so far been enough to balance out the decline in oil prices, helping shield the oil fund and the budget, according to Krisjanis Krustins, an analyst at Fitch Ratings, which has Azerbaijan at its lowest investment grade.
“The government has the resources to make a determined defense of the currency,” Krustins said.
The bigger challenge may be to maintain the fabric of the political system. Police last Monday stopped a protest by shopkeepers in the nation’s third-biggest city of Sumqayit, with similar demonstrations also held in Baku.
Aliyev faces the “near-impossible task of how to buy off very different groups of discontented citizens,” Thomas de Waal, a senior associate at Carnegie Europe, Belgian-based a research group, said last month.
The president “has never been the dominant monarch his father was, more of the pivot at the center of the elite, the ‘first amongst equals,’ and arbiter of disputes amongst top officials,” according to de Waal. “Cracks are now appearing in this structure.”