Institute for War and Peace Reporting | Giving Voice, Driving Change

Azerbaijan Privatisation Row

The Azerbaijani government is defying international pressure to sell off the largest bank in the region.
By Rufat Abbasov

The International Monetary Fund and other international organisations have voiced concern that Azerbaijan is dragging its feet over privatisation of the country’s main bank – a key requirement for transition to a market economy


But the Azerbaijani government is standing its ground and reviewing its early promises to sell off its controlling stake in the bank.


The row centres round the International Bank of Azerbaijan, IBA, which is the largest bank not only in Azerbaijan but in the entire south Caucasus. The IBA has enjoyed monopoly control of a number of state-sector transactions, for example handling payments for energy and water supplies and issuing pensions. As the dominant bank, it is the sole conduit for many credit lines through which international lenders support local enterprises.


It is also the principal shareholder of Azerbaijan’s main insurance company.


The Azerbaijani state, in the shape of the finance ministry, currently owns 50.2 per cent of the bank, with 10 per cent belonging to its employees and the remaining 40 per cent to private investors.


With Azerbaijan set to receive billion-dollar revenues from the Baku-Tbilisi-Ceyhan pipeline in the next few years, the dispute over this major financial asset encapsulates the wider discussion about how much state control there should be in the economy as a whole.


Last year, Azerbaijan’s late president Heidar Aliev signed a decree authorising the sale of part of the government’s stake in the bank and it was announced that at least 20 per cent of the shares would be sold to the European Bank for Reconstruction and Development, EBRD.


The EBRD and the government signed a memorandum on the proposed sale last June, and it was provisionally agreed that the state would sell off the remaining 30.2 per cent of its shares by the end of 2004.


However, the two sides then failed to agree both on the price of the sale and on the form of payment. Economic development minister Farhad Aliev said his government was prepared to receive payment for the shares only in cash. “We cannot agree to the EBRD paying us out of the dividends it receives after buying the bank,” he said.


As a result, the projected privatisation was delayed until next month, although many now doubt that it will take place at all. This has alarmed the International Monetary Fund, IMF, which says it is worried that the process is being dragged out.


Reno Harnish, the US ambassador in Baku, told journalists that Azerbaijan’s banking system needed competition and transparency. “It’s in the interests of Azerbaijan to improve the situation in the banking sector, to complete privatisation here and improve legislation so as to strengthen competition in the market. After that happens big banks like Citibank and Bank of America may move here.”


“The privatisation of the IBA is going more slowly than the government and IMF hoped,” Basil Zaboyko, head of the IMF’s Baku office, told IWPR. “As long as the IBA keeps its monopoly and remains a state bank, it will be impossible to create an effective and competitive banking system in Azerbaijan.”


John Wakeman-Lynn, deputy head of the IMF department responsible for Azerbaijan went further, saying that, “The banking sector cannot serve as an effective source of financing for the private sector, especially small and medium-sized businesses. Without a banking sector which can support small and medium-sized businesses, it is impossible to achieve a rise in the number of jobs, which is what the government and the president want.”


However a number of experts say that neither the government nor the IBA want the privatisation to go ahead, at least in its current form. Asker Mamedov, deputy head of the IBA’s board, said that a better way to support the banking sector would be to look at ways of promoting the growth of commercial banks in Azerbaijan.


Mamedov said that his bank was already financing a number of small and medium-sized projects throughout Azerbaijan.


Farhad Aliev said that instead of a 20 per cent stake in IBA, the EBRD might be offered shares in another private bank, or in Azerbaijan’s other state bank, BUSBank, which is currently owned 100 per cent by the state.


Gubad Ibadoglu, an independent economist, said he saw no reason why the government should privatise the IBA when it was serving its economic interests very well.


Ibadoglu proposed that a new import-export bank should be set up, similar to the United States’ Ex-Im Bank. “It could finance export and import projects as Ex-Im Bank does in the US, Turkey and Japan. That way, the government would not lose control over a bank that is going through stable development, while avoiding deepening dependence of the banking sector on foreign capital through the privatisation of the IMF.”


Zahid Mamedov, another economist, said he could understand the government’s position. “It is one of the most profitable state institutions,” he said. “Not every firm has annual profits of 40 per cent, as the IBA does. By prolonging the privatisation process, the government wants to get as much of the profits as it can.”


Rufat Abbasov is a correspondent with Olaylar newspaper in Baku; Nurlana Gulieva is a correspondent with Echo newspaper.


More IWPR's Global Voices