Azerbaijan Tightens Currency Controls as Oil Feeds Crisis

Updated on
  • Lawmakers approve 20% fee on some foreign-currency outflows
  • Economy reeling after slump in oil, two devaluations in 2015

Azerbaijan, which devalued its currency twice last year, is imposing restrictions on the movement of capital, rolling out the most severe measures yet as authorities try to cope with the fallout from collapsing oil prices.

Lawmakers in the capital, Baku, approved measures proposed by central bank Governor Elman Rustamov on Tuesday, ranging from a 20 percent fee on foreign currency exported for investment abroad to fully insuring bank deposits. The manat has lost more than 50 percent against the dollar in the past year and is trading at a record low after the central bank relinquished control of its exchange rate on Dec. 21, prompting many Azeris to withdraw savings.

The third-largest oil exporter in the former Soviet Union moved to a free float last month after burning through more than half of its foreign-currency reserves as its economy reeled from the recession in Russia and plunging energy prices. President Ilham Aliyev on Monday promised measures to restore trust in the national currency and consolidate the banking system to spur economic growth.

“People should know that the central bank, other government agencies are in a position to prevent the manat from falling sharply,” Rustamov said in televised comments, adding that the country currently has almost $40 billion in reserves. While the situation in the currency market is “stable” for now, the economy still needs to adapt to an oil price of $25 to $30 a barrel and preserving foreign-currency assets is a priority, he said.

Deposits, Dividends

Other steps approved by parliament include the abolition of a tax on dividends and interest paid on retail bank deposits. The central bank governor also said Azerbaijan may allow repayment of dollar loans of as much as $5,000 at the manat’s pre-devaluation exchange rate of 1.05 per U.S. currency. The plan to subsidize borrowers may require $250 million, which the government has yet to find, Rustamov told reporters in Baku. 

The changes were needed to “help maintain economic stability,” Rustamov was cited as saying by the news service APA. Five to seven banks may merge as Azerbaijan looks for ways to consolidate the industry, according to Rustamov.

The manat was down 3.4 percent at 1.6350 against the dollar as of 5:28 p.m. in Baku. Government 2024 dollar bonds climbed for a second day, sinking the yield 19 basis points to 6.306 percent.

Confidence Lost

“The Azeris seem to be in a lot of difficulty here -- with their efforts to grapple pressures on the exchange rate reflecting a broader loss of confidence in the authorities’ management of the situation,” Tim Ash, head of emerging-market strategy at Nomura International Plc in London, said by e-mail. “They now have much less ammo to hold the line and undertake damage limitation elsewhere in the system.”

To cope with the currency shortage, Azerbaijan last week limited the sale of foreign exchange to bank offices and booths at airports and hotels. While the nation’s wealth fund Sofaz and the central bank have sold almost $700 million in recent days to support the manat, State Oil Co. of Azerbaijan announced a plan on Monday to buy back $500 million of Eurobonds due in 2017.

Hundreds of people staged rallies across the country last week to protest rising consumer prices and poverty. At least 55 protesters were detained after clashes with police in the town of Siyazan, north of the capital. The authorities have blamed two opposition parties and “religious extremists” for organizing the rallies. The opposition rejected the claim.

Corruption, Privatization

Aliyev told his government to look into opportunities to borrow more money abroad and prepare a “comprehensive” privatization plan to draw in foreign and domestic investors, according to comments on his website. The Azeri leader, who succeeded his late father and took office after elections in 2003, also pledged to trim government institutions and step up the fight against corruption.

Illicit capital outflows in Azerbaijan totaled $95 billion in 2004-2013, which is almost a third more than its economic output in 2013, according to a report last December issued by Global Financial Integrity, a group that studies financial flows. That ranked it 17th in the index of 149 countries, which compared average capital flight.

(Updates with central banker's comments in fourth paragraph.)
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