Countries in Russia’s orbit are losing twice over

Low oil prices have sent Russia’s economy into a recession, and countries on its periphery are being dragged along for the ride as the slump affects both oil exporters and countries that rely on trade and aid from Russia.

Azerbaijan and Kazakhstan have many things in common: not only are their budgets almost entirely dependent on oil exports, but during the years of prosperity (which lasted up until 2013) they made few attempts to reform their economies, preferring to spend on consumption. When falling oil prices ended the prospects for continued rapid economic growth, the central banks of both countries reacted in the same way: by floating their currencies – the tenge in Kazakhstan, and the manat in Azerbaijan. This led to a sharp decline in the value of both currencies and to huge social discontent. In 2016 the governments of both countries will have to take decisive steps in order to remedy the situation. Reforms cannot be put off any longer.

The decline in oil prices exposed previous neglect

Since the beginning of the year, a wave of protests sparked by the dire economic situation has been sweeping through Azerbaijan. People are protesting against price increases and are demanding a solution to unemployment. In order to put out the fire the president has made several quick decisions to appease the revolt: taxes on bread were lowered, salaries, pensions and benefits were raised, and a ban on food exports was introduced.

That marks a stark change for a country which as recently as the middle of the previous decade had the highest GDP growth rates in the world – from 26.4 per cent in 2005 to 32 per cent in 2006. The year 2005 was not accidental – it marked the launch of the first section of the Baku-Tbilisi-Ceyhan pipeline with a capacity of 1 million barrels a day, allowing the export of virtually all of Azerbaijan’s oil production (the pipeline completely bypasses Russian territory).

The country’s good fortune lasted as long as oil prices remained at about USD100 per barrel. When prices started dropping a year and a half ago, the fragile foundations on which the economy was based were brutally exposed. Azerbaijan made a mistake typical of countries that suddenly begin to develop rapidly and forget that the situation could easily be reversed. Revenues from oil exports were not invested – they were mainly spent on developing Baku, including the construction of giant mosques.

Azerbaijan is currently extracting 867,000 barrels of oil per day, making it the 63rd largest of the world’s oil producers. Sales of oil and gas account for 95 per cent of exports, 70 per cent of budget revenues and 40 per cent of GDP (in 2015 it amounted to USD75bn dollars). Low oil prices have crushed the budget, as a result of which on December 21st, the central bank announced a transition to a floating exchange rate. Since then, the price of the manat is to be determined by the market. The freeing of the exchange rate caused the manat’s value to fall almost immediately by 48 per cent in relation to the dollar.

In mid-January, the head of the central bank announced the imposition of a 20 per cent tax on capital exported from the country. The regulations apply to foreign direct investments, real estate purchases and the opening of foreign accounts. The government is considering the introduction of further restrictions: a total ban on the export of capital and foreign exchange.

President Ilham Aliyev, in power since 2003, recently asserted that despite temporary difficulties, the situation was under control and that the manat was one of the world’s most stable currencies. He said this even after the first devaluation in February 2015, as a result of which the manat fell by 34 per cent against the dollar.

Prospects

The country’s bankruptcy does not seem likely at this point, although it cannot be completely ruled out.  The Silk Road Reporters  website quoted economist Natig Jafarli from the opposition party Real, who warned of a rise in unemployment and the possible collapse of several banks – the value of savings of Azerbaijan’s citizens fell by half in just one day, and many of them will not be able to meet their obligations to the banks.The government has already asked the banks that they take on the costs of restructuring loans denominated in US dollars. “The state still does not have a clear programme to fight this crisis,” says Jafarli.

Azer Mehdiyev from the Centre for Assistance to Economic Initiatives pointed out that the government is provoking additional panic by not addressing the country’s problems openly, but only confronting the people with decisions that have already been made. “The panic is aggravated by the fact that decisions are made in secrecy and are kept secret from the Azerbaijanis, they are not subject to debate and are made on a day-to-day basis,” he said.

Azerbaijan is becoming increasingly isolated from the West, it is being criticized for violating human rights and European standards, while the country itself is criticizing the West’s rapprochement with Iran. “The vision of the world promoted by the authorities is getting closer to that of Russia,” writes Alexandra Jarosiewicz from Poland’s Centre for Eastern Studies (OSW).

According to Jarosiewicz, there is a risk of an increase in Azerbaijan’s susceptibility to pressure from Russia, which is rebuilding its position in the Caucasus.

The problems of Azerbaijan could also be relevant for Poland. The country has so far depended on oil exports, but is becoming increasingly involved in the sale of gas, among others, to the countries of the European Union. The possibility of purchasing gas from Azerbaijan would clearly reduce Poland’s dependence on supplies from Russia. The second issue is the possibility of direct cooperation of Polish companies with operators from Azerbaijan. Deputy Prime Minister Janusz Piechociński made great efforts in that field in 2014 and 2015. In 2014, the Polish Ministry of Economy included Azerbaijan in the group of countries seen as priority targets for Polish economic expansion and the goal of increasing trade turnover to USD1bn within two or three years seemed entirely realistic.

Russia’s ricochet

The source of the problems that have hit Kazakhstan lies not only in the decline in oil prices, but also of metals, which are its main export commodities. The country is the ninth largest exporter of oil in the world and accounts for 3.7 per cent of global exports. Its total oil reserves are estimated at 30 billion barrels. Right now Kazakhstan is only producing about 1.6 million barrels per day. In order to increase production it is necessary to develop new oil fields. The majority of extraction in Kazakhstan (like in Russia) comes from mature oil fields, which means that the state has to gain access to new deposits before the existing ones run out.

Kazakhstan was hit hard by Russia’s deteriorating. The demand for Kazakh goods, especially coal, fell heavily as Russia was the only major customer of that product.

In the last two years, the central bank devalued the tenge twice: for the first time in February 2014 (the tenge fell by 20 per cent against the dollar) and then in August (a decline of a further 28 per cent). The transition to a floating exchange rate regime was supposed to be a move pre-empting an interest rate hike in the United States and an attempt to strengthen Kazakhstan’s trade position against other countries. The tenge is still losing value: while in the summer of 2015 the exchange rate was KZT186 per USD1, by the end of the year it fell to KZT338 per USD1.

The situation is not optimistic, but there is a real chance for a reversal of the negative trends. At the end of November, on the eve of the 25th anniversary of the country’s independence, President Nursultan Nazarbayev presented the details of a programme entitled “Plan of the Nation. One Hundred Concrete Steps”. Under the plan, Kazakhstan is supposed to enter the group of the world’s 30 most developed countries. The idea is to follow in the path blazed by one of today’s most successful developed countries – Singapore. “Kazakhstan is undertaking one of the most ambitious projects for the development of an efficient state,” said Herman Gref, the chairman of the Russian Sbierbank.

The project involves combating corruption, the creation of something akin to a civil service corps, where competent officials are employed instead of figureheads appointed for political reasons, as well as greater transparency in the decision-making process and increasing the citizens’ confidence in the justice system. In a country in which career paths are primarily dependent on family ties to influential decision-makers, the announcement of such changes feels like a revolution. The plan was developed with the participation of foreign advisors to Nazarbayev: the members of the Independent International Advisory Board include former British prime minister Tony Blair, former German president Horst Kohler and former Polish president Aleksander Kwaśniewski.

Some observers see the “One hundred steps” as both a political and an economic liberalization. Kazakhstan, which is closely linked to Russia through the Eurasian Economic Union, will have to work on loosening these ties, if it wants to (as it should) look for partners in the West. The truth is that the Eurasian Economic Union is a burden and not a benefit for Kazakhstan. One example: the equalization of customs duties with Russia certainly wasn’t beneficial for Kazakhstan, which has a well-developed trade with China.

The poor and quarrelsome cousin

Kazakhstan has a wealth of resources that will allow it to survive the difficult period. The fourth of the five members of the Eurasian Economic Union, Armenia, lacks such a cushion. The discontent of the local population became visible last summer, when hundreds of people participated in several rounds of protests in Yerevan.

The cause was a 16 per cent increase in energy prices, but the protests were also an expression of frustration with the bad condition of the country (unemployment, impoverishment of society – about 40 per cent of Armenians live below the poverty line – and finally corruption, which is a crucial problem in almost every post-Soviet State). Armenia is a closed system, economically almost entirely dependent on Russia (it hasn’t built the foundations for cooperation with other partners, and doesn’t even maintain diplomatic relations with two of its immediate neighbours).

It is possible to improve the situation, but it would require the reconstruction of the economic system, which is dominated by monopolies, a reduction of the role of the state in the economy, the simplification of procedures for businesses and an increased presence of foreign capital.

If Armenia and Kazakhstan want to grow, they have to find a way to operate independently of the will of the Kremlin. That will be easier for relatively affluent Kazakhstan than for Armenia.

Russia has no interest in the development and success of the other members of the Eurasian Union. The project was political in nature from the very beginning and was supposed to show that Russia is an attractive leader, able to coalesce at least some of the countries of the former Soviet Union around its leadership. The question is, will it react as nervously as in the case of Ukraine’s desire to „divorce”?


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