The June view of economics

World economy has not stabilized yet and cannot reach growth. There are many pre-crisis expectations. Reduction of oil prices in the past months did not cause total and sharp reduction of exchange rate. Although in Russia it constituted 12%, in such countries as Norway USD rate went up by only 3%, which means that Norwegian Central Bank made a decision in favor of exporters. The same thing happened here, because the USD rate was supported by the Central Bank of the country.

Approach to many economic processes has become tougher and there is not much place left for optimism. SOCAR’s geographic expansion is a reaction to the reality. The structure of the oil and gas market keeps on changing and SOCAR minimizes its risks. In particular, SOCAR is ready to fully refuse of import of hydrocarbons. During the past years Azeri Light oil brand deliveries reduced. The country is forced to use dumping – in particular, price of Azerbaijani gas for Turkey will be 12% below price of Russian gas. One can suppose that gas price for Europe will be also lower.

As one can see from the tendencies of economic development, the government is going to increase investment into economy at its own expense. In Russia 60% of capital is invested into economy by the state. During last year this figure reached almost 69% in Azerbaijan. During five months this year growth of investments into the main capital totaled 4473.4 million AZN with the pace of growth of 128.3%.

The government is encouraged by the fact that strengthening of the role of the government in economy is the world tendency. The logic here is to distract the society from corruption for a while. Private business is unable to implement huge projects anyway. The government is a poor manager and this has been proved by the experience of many countries. By launching big projects the government involves the whole economy, including private sector, into the economic process. Mobile small and medium business is looking for niches at the foreign and domestic markets. The government has an ideal picture and it has a possibility to invest capital into economy. China is a good example here. The state planning has another advantages here – development of inter-branch balance in the economy and registration of multiplicative effects in economy

But this is theoretical picture. In our country big capital is related to the government and private capital is divided between big holdings, which are mainly owned by the officials. For this reason there is no a clear border between state and private capital. President has just signed the law on reception of information, which has finally blocked access of media and publicity to information about such companies. Big economic organizations try to oust minority shareholders from the game. This has just happened at Bakelectrogaynag enterprise, which is a part of Baku Steel Company. The enterprise is allegedly owned by Araz Agalarov. The main owners of Capital Bank with the share of 99.8% try to get rid of about 150 remaining minority shareholders of the bank. This is a simple, but a good example of concentration of capital.

One should divide between state investments into modernization and expanding of production and investments into the new projects. Our economy emphasizes the second factor. The government’s advantage is availability of the development institutions. But they are weak and are unable to do a lot of things. The National Fund for Entrepreneurship Support can hardly respond to the financial demands of entrepreneurship, but it works pretty good. But the state program of industrial development, which is able to regulate the processes, has not been formulated yet. It is surprising that BSE intends to triple its production and is going to build a new plant on Hovsan district. The aluminous plant in Ganja is aimed at expanding of production. There are no raw materials for these projects and implementation of such projects should be careful. In the 1990s it was planned to produce aluminum on the basis of Dashkesan alunites to lessen dependence on the imported bauxites. Famous Mital, which has opened its own representation in Baku, cannot join our metallurgic market.

There is no a clear structure of the policy of industrial development. For instance, in China trade, commerce, technology and science are viewed as a single chain. This is also reflected in the name of the Ministry. Reference to the size of economy is baseless here. Turkey, which creates analogue of the Chinese Ministry, and several other small economies, which have export niches, also positions themselves like this.

The country’s gross domestic product (GDP) increased during 5 months and constituted 0.7%. Growth in the non-oil sector is estimate at 10.5% with the oil industry decline by 6.5%.The agrarian sector, which increased by 7.1%, was a noticeable source of growth this time. The producing industry produced goods worth 11.6 billion AZN (77.5% of industrial products), oil refining – worth 790.8 million AZN, chemistry – 91.4 million AZN, production and distribution of power and gas -792.7 million AZN. All these sectors are controlled by the government. Therefore, during five months local private sector produced industrial products worth approximately 1.6 billion AZN (or 10% of the entire industrial production), the main part of which falls to the food industry ( 1 billion AZN). Here supply already exceeds the demand. But this means that the agrarian procession – through improvement of quality and increasing labor productivity – should break into the foreign markets.

During five months foreign trade turnover increased by 2.5% - up to 414.4 billion. A specific weight of the state sector constituted 95% ($10.2 billion) of export. Export totaled $10.7 billion AZN, up 1.4% against the same period last year. Specific weight of the private sector in export was very low. However, the tendency remains stable – import grows faster (growth by 5.9%), than export. Of the entire volume of imported goods worth $3,674.7 million 21% ($771 million) fell to the state enterprises.

Azerbaijan has become a big investor abroad and it is not accidental that many countries in crisis try to build economic relationships with Azerbaijan. In June Portuguese Foreign Minister visited Azerbaijan. Azerbaijan has a positive balance of investments with many countries. According to the Ministry of Economic Development, at present Azerbaijan numbers 1106 companies with Turkish capital and there are about 1000 Azerbaijani companies in Turkey. Turkish investments in Azerbaijan total approximately $1.9 billion, investments of SOCAR and other Azerbaijani companies in Turkey - $4.5 billion. Till 2018 SOCAR’s investments will be increase up to $17 billion. It is accidental that the Union of Azerbaijani Entrepreneurs (TAIB) has been established in Turkey as well as in Azerbaijan. The companies’ breaking into the foreign markets improves the country’s rating and expands possibilities of the companies. But there are certain problems here. The current process of investments is very wide. Washing out of state assets in favor of private people is not ruled out here. In addition, one needs a strict control over movement of money resources.

There are only several fields in the country, which ensure development of the non-oil sector. One of them is agriculture. According to the State Statistical Committee of the country, since early year production of plant growing products increased by 23.1% and cattle-breeding products – 5.4%. Considering the season, Azerbaijan satisfies 90-101% demand of the country in fruit and vegetables, such as potatoes, cabbage, onions, cucumbers, tomatoes and etc. Production of meat totaled 173,200 tons or up 3.4% against the same period last year. The yield of milk totaled 700,000 tons (+7.2%), production of eggs – 495 million (+12.2%). By July 2, 2012 the country already gathered 1,584.2 tons of crops (+24.1%). Total harvest could reach 2.7 million tons. The grain fund has already started purchasing grain from the farmers at 230 AZN per 1 ton.

However, the situation is worse with the technical cultures. In May 2012 237,800 tons of tea was picked, this is down 13.8% against the same period in 2011. This year the cotton arable lands reduced by one third and reached 29,300 hectares.

Economists believe that only 30% demand of agriculture in subsidies is satisfied. In US, which is associated with development of new technologies, 30% more resources in invested into development of agriculture, than in other fields. The institutional problems of the field are even more important, than subsidies. The farms’ enlargement should become real. The agrarian manufacturer should be insured, but insurance of agricultural credits could be even more important. One should increase the irrigation works under a strict state control. Development of farms is hindered by slowly growing procession.

The hopes are pinned on the information sector. The Ministry of Communication and Information Technologies said recently that from 2012 to 2022 $3.6 billion will be invested into the IT and communication industry. $1 billion will be invested into the space industry, creation of ground and wireless communication and development of e-government. Another $500 million will be spent for development of the regional innovative zone and $100 million into the digital TV. The idea of creation of free innovation zone is under discussion for many years, but this has not happened yet. The only experience of creation of the technological zone is the Sumgait industrial park, but it has been created for one field and one company. The appetites of the Ministry of Communication and IT have been growing and it is going to launch three satellites to the orbit. Ministry proves that this will be a good commercial project: with the investments of about $200-300 million, income from rent of the satellite will be $600-650 million. At present Ministry of Communication and IT asks 350 million AZN from the Oil Fund for the program “Fiber-Optical Cable to Each House. Ministry explains that it is necessary to increase cost of Aztelecom company for its further advantageous privatization. This was under discussion for the last 12 years. Ministry also promised to remain average annual growth of the industry at the level higher than 20% (during five months growth constituted only 116.5%).

The immovable market is also waiting for the changes. Central Bank hinted to such a possibility in the previous months and said that a new mortgage program is under preparation. Right now we see just infrastructural changes in this sector of economy. There is a need to revise the law on evaluation activities to avoid carelessness during evaluation of property. The Cabinet of Ministers approved the land prices 10 years ago and they should be changed. Some amendments were introduced into the law on land lease, according to which if the land is removed from the leaser, then the government could pass it the land plot with the same size and quality. The leaser is paid a compensation for the expenses spent for the land. The problem of construction companies tricking the citizens-shareholders is under discussion. Their number doubled up to 14 in 2012. It is also offered to privatize the houses, construction of which has not been finished. Some countries toughen the restrictive measures against the background of situation at the world immovable markets. One can see an intention to blockade the wasteful character of modern economy, Since January 1, 2013 Switzerland will have additional limitations for purchase of the second house and this decision was made at the referendum.

The growth by 0.32% was noticed at the immovable property market in May 2012, said Nusret Ibragimov, General Director of IBA Consulting. Since early year growth is estimated at 5.62%. May showed that prices at the market change differently. In May the secondary market ad a 0.6% growth and the primary market had a 0.5% decline. The reason of the opposite tendencies in two sectors of the immovable market is that the secondary market has become active at the expense of relatively cheap apartments, which is the object of mortgage. With the excessive supply at the primary market, construction of houses at the primary market continues.

In May average cost of 1 sq.m. of housing in the newly-built high-rise houses decreased by 0.2%. The prices dropped by 0.5% against the same period last quarter, by 3.3% against January 2012, by 2.3% against last year and by 31.3% against September 2008 (that time average cost of 1 sq.m. was 1,194 AZN). In May 2012 number of newly-built high-rise houses and construction companies was 420 and 150, respectively. Situation at our immovable market is the same like at the Russian one. The analysts explain a relatively small growth of prices for immovable property as compared to Russia (6% of annual growth in 2011) by a more intensive change of the ruble quotation in Russia. Our analysts believe that prices at the market are dictated rather by monopolies and unfair competition, than by increase in the money supply. It is also important that our immovable market is supported by the Azerbaijanis living in Russia. According to some estimates, before the crisis they purchased 65 out of 100 sold apartments in Azerbaijan, but after the global crisis this figure dropped to 20.

Struggle against corruption announced by the government has brought no results. Many countries, including Azerbaijan, keep secret various economic information. Our parliament introduces the amendments to the laws limiting access to information about owners of joint stock companies. The general plans containing information about land plots and their evaluation is kept secret in Ukraine. Ukrainian publicity demands putting of the town-building projects for public discussion. We are expected to have the same problems as soon as the town-building code is adopted. The specialists are concerned about the fact that new objects of infrastructure have no passports. This does not allow evaluating quality of the projects and costs for servicing infrastructure in the years to come.

The key issue of economy remains change of economic relationships in the country. The anti-monopoly struggle, which envisages struggle against further accumulation of capital, is a part of it. Expanding of the field for competition, the Code of Competition, against appeared to be beyond discussions. Almost all entrepreneurs complain even not about the judicial system, but mainly the customs. Real anti-corruption struggle should start from this important link of economy and it demands only political will. The current state commission for anti-corruption struggle, which almost fully consists of the officials, also cannot be trusted. The Forum of Intelligentsia has recently initiated creation of an independent corruption commission.