**CHAPTER IV - BANKING AND CURRENCY**

 

The Azerbaijanibanking system is small, underdeveloped and plays a minimal role in theeconomy, which mostly functions on cash. Azerbaijan=s banking system is a two tiered one, withthe National Bank of Azerbaijan (NBA) operating as a regulatory agency, mostrecently imposing tightened capitalization requirements on the country=s commercial banks, and in general ensuringthat the Azerbaijani banks met not only capital adequacy, but also short andmedium term liquidity and minimum risk and capital requirements.  Minimum capital requirement for all newbanks is now $5million.  

 

Second tier banksare dominted by four state-owned banks dating from the Soviet era and about 70private commercial Azerbaijani banks, and six foreign-owned banks.   

 

The most popularbanks among Western business people for use by their locally-based businessesare the International Bank of Azerbaijan, the healthiest state-owned bank, orBritish Bank of the Middle East's Baku branch, a subsidiary of the HSBC Group.Both of these have correspondent relationships with U.S. banks. Westernbusinesses generally use local banks only for payments.   Of the four state-owned banks,only International Bank is a fully-functioning commercial bank. The other threeare going through a World Bank-designed restructuring program, and are unableto lend money.   The number ofprivate banks declined following the increase of minimum capital. Some of thestronger ones do business with foreign companies, and have correspondentrelationships with U.S. banks. These include Rabitobank and Demiryol Bank.

 

**INTERNATIONALFINANCING**

 

The InternationalMonetary Fund is in operation and has offices in Baku.  Planned IMF programs for 1999 includestrengthening the regulatory framework for the issuance, registration andtrading of corporate securities.  Asecurities commission was established in December 1998.  Up until then there had been no stockexchange or other capital markets. 

 

The World Bank andThe European Bank for Reconstruction and Development ( EBRD) are both  active in financing publicinfrastructure projects in Azerbaijan. The World Bank=sInternational Finance Corporation (IFC) alone has approved over $230 million ininvestments in oil and gas projects, but also in bottling facilities, privateand public banks, and equipment leasing.    EBRD has been operating in Azerbaijan since1994, and had by beginning 1999, committed $225 million in project financing inoil, electric power, municipal utilities, transportation and financialinstitutions.   The EuropeanUnion, through TACIS, has been actively supplying technical assistance inAzerbaijan. 

 

**U.S.International Financing and Assistance**

 

The U.S. SpecialAdvisor to the President for Caspian Affairs, a new position highlighting U.S.focus on that area, has set out a U.S. policy in the area, including andespecially Azerbaijan: strengthening independence and prosperity of the Caspiancountries, supporting U.S. commercial opportunities there, free flow of oil andgas from the regions (for U.S. energy security, and use of economic prosperityand linkages to resolve regional conflicts.  In line with this policy, the U.S. opened early in 1999, aCaspian Finance Center in Ankara, Turkey to coordinate U.S. efforts to assistU.S. investors in the Caspian area, including Azerbaijan.  Representatives of the Overseas PrivateInvestment Corporation (OPIC), U.S. Export-Import Bank, and the U.S. Trade andDevelopment Agency (TDA) are now permanently stationed at the new Center.  All three agencies will assist U.S.investors in virtually any civilian sector.

 

OPIC  has been fully exempted from therestrictions of Section 907 of the Freedom Support Act (restricting U.S.assistance to Azerbaijan) and is fully open for business in Azerbaijan in thethree traditional OPIC areas for emerging markets: finance, political riskinsurance and investment funds. OPIC had by end 1998, 14 registrations for new projects there.  OPIC through its Investment Fundsprogram has supported a new $92 million Caucasus Fund, a private equity fundthat will invest in smaller projects in Azerbaijan and elsewhere in theCaucasus, concentrating in real estate, agribusiness, transport and services -not oil and gas.  

 

 

Effective October1998, U.S. EximBank opened its doors to support of short and medium termsovereign financing in Azerbaijan. Eximbank=s loan guarantee program covers repayment oftwo to five year commercial loans, and is used to support capital purchases inthe public sector, to which Azerbaijan has also committed its full faith andcredit.  Repayment is guaranteed upto 85% of the value.  Usuallybuyers must work with banks or financial institutions that have a MasterGuarantee Agreement with Eximbank.  In the short term, Eximbanks=s export credit insurance program will support sales of consumer goods,raw materials and spare parts, also agricultural commodities and capital goodson terms of six months to a year. Eximbank as of yet, remains closed to private sector transactions inAzerbaijan, but has signed a limited Project Incentive Agreement for structuredfinancing arrangements, under which loan repayment can be accomplished throughoffshore collateral accounts.  

 

The TradeDevelopment Agency is now actively considering the financing of a number of feasibilitystudies in Azerbaijan.

 

**CURRENCY**

 

In fall 1998, theRussian ruble crisis resulted in intervention and a tightening of liquidity bythe ANB to keep the exchange rate and restore confidence in the manat.  In succeeding months, the manat hasgradually appreciated , due in part also to heavy inflows of foreigncurrency.  

 

There are norestrictions on converting or transferring funds associated with an investmentinto a  freely usable currency andat a legal market clearing rate.  Nor is there difficulty in obtaining foreign exchange at more than sixhundred different foreign exchange shops throughout Baku.

 

 Enterprises with a foreign capital sharemay freely transfer profits from their business in

 Azerbaijan to their home country with nocharges. The average delay for remittance of

 investment profits is two to threebanking days.   

 

Foreign investorsmay be required to put 15 to 25 per cent of their operating capital into a

 "reserve fund" which cannot bewithdrawn from the country while operations are ongoing in

Azerbaijan. The GOAZhas frozen bank accounts of companies which have not met all their tax

obligations.

 

The Baku InterbankCurrency Exchange holds interbank auctions of foreign exchange. It alsohas  conducted auctions of Treasurybills for the Ministry of Finance. Development of a secondary  market in T-bills has been prevented bythe GOAZ's reliance on thirty-day bills.