EurasiaNet Business & Economics - Azerbaijan’s “Black Saturday” Causes Pre-Election Jitters

BUSINESS & ECONOMICS

AZERBAIJAN’S "BLACK SATURDAY" CAUSES PRE-ELECTION JITTERS
Shahin Abbasov and Khadija Ismailova 9/27/05

A sharp drop in US dollar’s value against the Azerbaijani manat has rattled nerves as the country prepares for parliamentary elections.

On September 17, the exchange rate experienced its greatest period of volatility in over a decade, plunging in a matter of hours from a rate of roughly 4,500 manats per dollar to approximately 4,000-to-one. The drop caused many Azerbaijanis – who tend to keep their savings in dollars, and who often receive salaries that are pegged to the US currency – to panic.

Automatic Teller Machines (ATMs) were inoperable throughout Azerbaijan on the day of the crisis. On September 18, the country’s largest private bank, BankStandard, and other smaller concerns resumed ATM operations, but the network of the state-run International Bank of Azerbaijan, the country’s largest, remained inoperable a week later.

Shahla Babayeva, an accountant with one foreign organization in Baku, said that she lost more than $400 after she exchanged all her savings on September 17 out of fear that the dollar’s value would decline further. "For people getting salaries in US dollars it was really a tough moment. We thought that we had lost 15 percent of our salary in one day," Babayeva said.

The panic marked the first crisis in Azerbaijan’s currency market since 1994. Since then, Azerbaijan’s currency market has been comparatively stable, with the manat gaining about 5 percent in value against the US dollar every year. In the pro-opposition press, talk has recently surfaced about the manat becoming a convertible or "hard" currency. Over the past 10 days, the dollar regained much of the ground lost on September 17. The inter-bank exchange rate on September 27 stood at 4,591 manats per dollar. Officials, both before the crisis and after, have pledged to keep the manat at 4,500-4,600 to the dollar.

Since January, the manat had been steadily strengthening against the dollar. During the first eight months of the year, the exchange rate went from about 4,900 manats per dollar to 4,500-to-one. The fact that the manat made an equivalent gain against the dollar over a span of a few hours September 17 prompted some economic analysts to wonder whether the currency market was being manipulated.

Attention has focused on the government’s monetary policies. Ali Alirzayev, deputy chairman of the permanent parliamentary commission on economic policy, attributed the rate volatility to an increase in dollars circulating in Azerbaijan from increased oil revenues, combined with the government’s increased need for manats.

With Azerbaijan set to hold a potentially pivotal parliamentary election on November 6, the government is spending heavily in an effort to bolster its popularity. [For additional information see the Eurasia Insight archive]. At the beginning of September, President Ilham Aliyev ordered a substantial wage hike for some law-enforcement officers. Teachers also received a 30 percent raise. In July, the government increased the minimum wage to 150,000 manats, or approximately $33 per month.

Inglab Ahmadov, head of the Public Money Watch group, a non-governmental watchdog organization financed by the Open Society Institute–Assistance Foundation in Baku, said the government failed to anticipate the build-up in demand for the manat. [EurasiaNet operates under the auspices of the New York-based Open Society Institute]. While a large amount of oil revenue in US dollars enters the country, the government experiences increasing problems with maintaining the manat’s exchange rate. "On the one hand, the National Bank constantly needs to buy up US dollars. On the other hand, it has to take measures to control inflation," Ahmadov said. "Probably, it [the collapse in the dollar price] was a technical mistake. ... The National Bank failed to provide the needed amount of [manat] banknotes"

Some analysts also believe that a lack of coordination among government agencies charged with overseeing currency reform may have played a role in the September 17 crisis. The manat is scheduled to be re-denominated in January 2006, and starting October 1, goods will be priced in both the newly denominated manats and the existing version. Under the complicated system, in which prices are to be reduced 5,000 times, a kilogram of lamb would cost 1.75 manats, rather than 17,500 at present; and a loaf of bread would cost 20 gapiks, or cents, rather than 1,000 manats.

While some experts point to the government’s wish to link the manat to the dollar as the explanation for the re-denomination, others consider it a bid to gain votes for the ruling Yeni Azerbaijan Party. "These prices should remind people of the old good days of the Soviet period. That is why they are not re-denominating the AZM the usual way, by erasing zeros, but by changing the rate 5,000 times," said Zohrab Ismayil, an economic expert with ties to the opposition. Ismayil contends that the government is introducing the new rate in October in order to give voters the impression before the parliamentary elections that they are paying lower prices for goods. "It looks like pre-election propaganda rather than preparation for the re-denomination," Ismayil said.

National Bank Chairman Elman Rustamov has argued that the re-denomination is intended to protect the manat against counterfeit bills, and to enhance the banknotes’ appearance. Following the examples of Russia and Turkey, Rustamov said Azerbaijan had decided to re-denominate its currency while it was strong against the dollar.

Some experts believe ongoing power struggles within the government is a major cause of the dollar’s decline. "Why did it happen on a Saturday, when neither the National Bank nor the Inter-Banking Currency Exchange was open? When the exchange controls did not work and they were not able to react immediately?" Ahmadov said. "Maybe it was the collusion of several banks, related to powerful oligarchs [or] members of the government, in order to create problems for their rivals. The timing of the crisis worked perfectly in this respect."

Experts believe that the dollar’s fall worked to the advantage of importers, and to the disadvantage of local producers and exporters. The crisis, they point out, occurred after a statement by Farhad Aliyev, the minister of economic development who is involved in a long-standing dispute with the State Customs Committee, that the manat’s relatively strong value relative to the dollar hampers local enterprises and Azerbaijani exports.

Azer Mehdiyev, an expert at the Economic Research Center, said that the fact that all exchange points both dropped and raised the dollar’s rate within the same short timeframe indicates the degree to which Azerbaijan’s currency markets are dominated by the National Bank of Azerbaijan (NBA).

At a September 19 meeting, the NBA decreased the profit-margin rate for currency exchange offices from 3 percent to 2 percent, and pledged to punish all privately owned banks that violate that limit. That same day, the dollar climbed back to the 4,500-to-one manat exchange rate, and has shown no sign of making a substantial move since then.

Meanwhile, the NBA has canceled the licenses of 20 exchange points in Baku for their alleged role in the crisis, and has opened a telephone hotline to handle citizens’ complaints. Bank Chairman Elman Rustamov has promised that the NBA will make citizens’ losses good if they show the bank a receipt for exchange transactions made during the crisis. The bank has also ordered an additional 15 billion manats to cover the increased need. New banknotes are expected to arrive by mid-October.

The situation is settling down, but some experts believe exchange rate volatility is destined to hit again. While the rate seems likely to steady through the end of the year, Ahmadov is among the experts who believe that the manat will continue to strengthen. "In the long term, the [manat] will get stronger and stronger because of the increase in oil revenues," he said. "[S]ociety should be ready for that," he said.

Editor’s Note: Shahin Abbasov and Khadija Ismailova are freelance journalists based in Baku.

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