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Caucasus calling

The Azerbaijan government is keen to use its geostrategic location and growing resources wealth to establish its status as a regional hub, and the financial sector is eager to play its part, reports Philip Alexander.
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The Baku-Tbilisi-Ceyhan (BTC) pipeline, which takes Azerbaijan’s oil directly to European markets without running through Russian-controlled networks is already transforming the country’s economic fortunes. For Heydar Babayev, Azerbaijan’s minister for economic development, this is only the first step in taking full advantage of the country’s position on the Caucasus crossroads between the oilfields of central Asia and Iran, southern Russia and EU applicant Turkey.

Two new transport arteries are already under way, namely the Baku-Tbilisi-Erzurum (BTE) gas pipeline that will serve a similar purpose to BTC, and the Baku-Tbilisi-Kars (BTK) railway project. According to Mr Babayev, the railroad link is of regional importance as it will enable Chinese goods to “reach the European market faster and cheaper”, without relying on Russia’s own underdeveloped rail network.

With the rail route between Turkey and Georgia already well established, Mr Babayev says that only about 46 kilometres (km) of entirely new network are needed and he estimates the cost at no more than $200m. Turkey is already “taking responsibility to construct the undersea tunnel” for train passage to Europe, and Mr Babayev is “100% certain” that the project will go ahead.

He has maintained this confidence in the face of political tensions. Mr Babayev says that foreign banks were initially reluctant to help with financing, under pressure from the EU officials who feared that BTK would intensify the regional isolation of Armenia. This is a reminder of the challenge that Azerbaijan faces in promoting regional integration in an area that is not short of divisions. In addition to the Nagorno-Karabakh dispute, there are separatist conflicts of varying intensity in Georgia and the southern Russian states of Chechnya, North Ossetia and Daghestan.

It is also a difficult task to maintain at least cordial relations with all potential partners, including Russia, the US, the EU and Iran (where there is a significant Azeri minority) at a time of significant tensions between these powers. Ziyad Samadzade, chairman of the parliamentary standing commission for economic policy, says: “We base our policy on mutually beneficial relations with neighbours and we try to maintain equal relations, but our main partner is Europe and the EU.”

Diversifying supply

The BTE pipeline is more welcome in the EU, where Russia’s temporary cuts in gas volumes pumped through Ukraine during disputes between the two countries have prompted an urgent search to diversify gas supplies. But Azerbaijan needs to supplement its own gas resources with exports from Kazakhstan and Turkmenistan through a trans-Caspian pipeline.

Relations with Turkmenistan have improved since the new Turkmen president, Gurbanguly Berdymukhamedov, came to power in February 2007. Earlier in 2008, the two countries reached a deal on a disputed debt owed by Azerbaijan for gas delivered in the 1990s but Turkmenistan has yet to commit to supplying BTE.

Mr Babayev insists that the project is “economically feasible”. The financial case for Turkmenistan is certainly compelling. To date, Turkmen gas has been sold to Gazprom at $100 for every 1000 cubic metres (m3) rising to $150 this year, but Gazprom can then earn as much as $250 for every 1000m3 when the supplies are sold on to the EU itself.

Mr Babayev accepts that the Turkmen authorities have their own geopolitical balancing act to consider but he is confident that he can help their decision by pushing ahead with the infrastructure itself. He says: “It is our responsibility. By starting the new project, we will actually create the attraction for these countries. I know they understand the importance of alternative routes of supply very well.”

Regional role

Azerbaijan’s banks are also waking up to the attraction of a regional role. Eldar Ismailov, chairman of the Azerbaijan Banks’ Association and a founder of the cross-regional Transcaucasus Development Bank (TDB), points out that petrodollars have reversed Azerbaijan’s investment position.

Less than a decade ago, inward foreign investment was urgently sought to overcome the shortage of local capital. “Today, Azerbaijan’s banks are trying to participate in business abroad with their own capital… the banking system has a good base for its development,” he says.

Because of its key transit role for Azerbaijan’s trade, Georgia is already a major destination for Azerbaijani investment. In addition to TDB itself, International Bank of Azerbaijan (IBA) opened a subsidiary in Georgia in 2007.

IBA chairman Jahangir Hajiyev says: “IBA is deeply involved in all the projects going through Georgia, and in the last quarter of 2007, the bank declared a profit there for the first time.” IBA was the first Commonwealth of Independent States (CIS) bank to open a subsidiary in Russia using its own capital, headquartered in Moscow and with offices opening in Yekaterinburg and St Petersburg.

Mr Hajiyev says that Kazakhstan and possibly Ukraine are the next likely destinations. Because the Azerbaijan government is intent on developing non-oil exports, Mr Babayev points out that trade ties with the larger CIS states, especially Russia and Kazakhstan, will become increasingly important.

For Mr Ismailov, this is just the beginning of an ambitious plan to make Baku a financial centre for the Caucasus region, in a role that he compares to Luxembourg in the EU. “This is not a fantasy”, he says, although he acknowledges that there are significant hurdles. He adds: “First you have to determine which region we are talking about, for instance, do you include Iran or the central Asia countries? There is no dignified or concrete picture of the region and its borders – its geography in the post-Soviet era is always changing.”

In practice, Mr Ismailov believes that the pro-market Organisation for Democracy and Economic Development (GUAM) created in 2001 is a good starting point. This originally had five members but in an example of Mr Ismailov’s changing geography, Uzbekistan subsequently pulled out (possibly under Russian pressure) leaving Georgia, Ukraine and Moldova as participants alongside Azerbaijan.

In May, Azerbaijan’s Ministry of Foreign Affairs and the Banks’ Association are playing host to a conference on GUAM development strategy, at which a statute will be signed creating a co-ordinating council for the member states. Mr Ismailov says: “There is also the possibility of establishing a GUAM investment fund, based in Baku.” He is confident that the other GUAM members, as well as Turkey and some central Asian states, are coming to understand the value of using Baku as a regional financial hub and source of credit, given its geopolitical position and hydrocarbon resources.

Globalisation process

Mr Ismailov recognises that although Azerbaijan has entered the global economy as a source of hydrocarbons and its financial sector is increasingly globalised, “technologically and in other fields and sectors of the economy, Azerbaijan is not well integrated, it has just started to integrate”. According to Mr Samadzade, the government’s “political will” to join the World Trade Organisation (WTO) stems from the recognition that Azerbaijan needs to step up that integration, increase the competitiveness of the non-oil sector and “make an active contribution to globalisation”.

A vital fifth round of multilateral negotiations with WTO members begins on May 6 and Baku’s regional partners could again prove useful. Ukraine acceded to the organisation at the start of 2008, and existing members Moldova, Georgia and Turkey have already signed bilateral trade deals with Azerbaijan, strengthening its negotiating position.

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