Azerbaijan: Dark Side of Housing Boom

Friday, 21 November, 2003

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Gulnaz Gulieva

As the oil rush of the Nineties subsides, Azerbaijan is facing another boom, this time in housing development.

The capital Baku has turned into a giant construction site, providing the suppliers of raw materials and equipment with lucrative contracts.

But the burst of construction activity in the capital has also raised questions about its legality. There are growing claims that some sections of the industry acted as a cover for widespread money laundering.

Mehman Aliev, of the Turan news agency, said illegal funds that could no longer be taken out of the country were flowing into the building sector.

Overseas banks have become more vigilant than before about money laundering as a result of the international offensive against extremist groups and their cash flows.

As a result, money has been invested locally, with parts of the building sector serving as a prime target. "That's why we are having this construction boom in Baku," Aliev said. "Real estate is a safe investment and it's always in demand."

The government begs to differ, though it concedes that there are some illegal practices involved.

Ragim Guseinov, of the economic development ministry, said his staff had studied the construction services market this year. His analysis was that some property developers were using barter deals, offering housing to suppliers and contractors in exchange for their services and supplies.

"This type of deal is illegal but developers practice it all the same," he said.

Rufat Aslanly, head of an anti-laundering team at the National Bank, said there were two separate aspects to the question of illegality in the trade - laundering money and financing political extremism.

Azerbaijan has been worked closely with a dedicated Council of Europe, CoE, committee, tracking money-laundering and funds earmarked for extremist organisations, and has won praise for its efforts.

"Azerbaijan is fairly advanced in terms of deterring terrorist cash flows," Aslanly said, adding that parliament had already adopted a resolution on the financing of militant organisations.

But money laundering remains a greyer area. Baku has passed no law on the issue and it will take time to prepare one. Georgia launched a legislative initiative in 2001 but took two years to bring it before parliament.

Nor are all parties agreed on the need for a law. Vahid Ahundov, a government economics advisor, said it could be premature, as tighter supervision and stricter banking rules might scare off investors.

But Aslanly insists legislation is imperative. "Whether we want it or not, this is where the international community is headed," he said. "We can't look away and feign ignorance."

Once regulations to combat money laundering are in place, steps must be taken to begin financial monitoring. The National Bank already has a division that does this, tracking down three bank accounts belonging to backers of extremist groups - though Aslanly said these accounts had been empty and inactive for four or five years.

The scale of money laundering in Azerbaijan is not serious by international standards. Aslanly pointed out that "no serious" money laundering can take place in an economy where the GDP is less than seven billion US dollars.

There are also many ways to launder money, avoiding the banks. They include gambling businesses, betting offices and the use of other financial intermediaries such as brokers, real-estate companies and jewellery dealers.

But Aslanly said these outlets accounted for only 20 per cent of the money laundered in Azerbaijan, as banks remained the priority. "Most of the properties are being built in Baku with bank loans," he said.

Banks and developers are sometimes affiliated, with the same founders and partners and the patronage of government figures.

One difficulty in monitoring the flow of questionable money in Azerbaijan stems from the inheritance laws adopted in 1995, which forbid investigation of the provenance of inherited property or funds.

"No one has the right to question where money you want to invest came from," explained Aslanly. "If someone inherits a large sum and invests it or starts a business the state will never challenge its origins."

Aside from the issue of financial corruption, the authorities have other worries concerning the housing boom, namely the high prices charged and an excess of demand over supply.

To ease people's access to the new housing, the National Bank is pushing for a new law facilitating mortgages with the support of the government. According to Ahundov, "Mortgages are a crucial economic incentive and we intend to go through with this legislation." The law is now under review in the president's office, due back in parliament by the end of the year.

To make the legislation work, a chain of mortgage-lending institutions will be set up and a follow-up law on mortgage lending banks passed next year.

Under the proposed programme, commercial banks will offer low-interest medium or long-term loans to clients, enabling people on lower incomes to get on the private property ladder for the first time.

A typical potential customer might be Rustam Mamedov, 27, a computer programmer working in Baku, who said it had been impossible to get a bank loan to buy a home so far.

Mamedov, who has been shopping for housing in the capital for some time, said he had asked various banks for mortgages without success. "Apart from the fact that housing is expensive I cannot take out a loan because the banks want it back so soon and charge enormous interest," he said.

Construction companies in Baku typically offer new apartments at between 200 to 2,000 dollars per square metre. Clients make a down payment of 10 to 40 per cent of the price and pay the balance in instalments. This practice has proved a success in Baku, where new residential complexes sell out very quickly.

But Ragim Guseinov, of the economic development ministry, wants developers to build smaller apartments, which are affordable for middle-income customers. "There is a bull market in Azerbaijan for single-bedroom flats which typically cost between 10,000 and 12,000 dollars," he said.

Mortgage lending is seen as a lucrative, low-risk investment opportunity and the National Bank believes many investors will want to get involved. "We have sufficient domestic resources to establish mortgage banks," Aslanly said.

"Mortgage lending is a prime instrument to tap the nation's financial potential. Construction is already booming in Baku. Mortgage lending will give a powerful boost to the industry."

Gulnaz Gulieva is a correspondent for the Caspian Business News weekly in Baku.