2/ 2010

THE US-EDUCATED AZERBAIJAN ALUMNI ASSOCIATION

MORTGAGE LENDING IN AZERBAIJAN: STATE AGENCY’S ROLE

INEKE BOTTER: “BAKCELL IS A VIBRANT PLACE FOR YOUNG PEOPLE TO WORK”

URBAN RESTRUCTURING OF BAKU CITY CENTER: PROBLEMS AND APPROACHES

EURO 2 STANDARDS IN AZERBAIJAN: FROM PLANS TO ACTIONS

ELEMENTS OF ALTERNATIVE ENERGY POLICY AND IMPLEMENTATION IN AZERBAIJAN

THE US-EDUCATED AZERBAIJAN ALUMNI ASSOCIATION 2/ 2010

EDITOR’S LETTER 3

Editor-in-Chief: ELEMENTS OF ALTERNATIVE ENERGY POLICY AND IMPLEMENTATION IN AZERBAIJAN Dr. Anar Valiyev by Randall Baker 4 Editorial Board: Fuad Aliyev LONG-TERM ECONOMIC DEVELOPMENT Vusal Khanlarov PROSPECTS AND CHALLENGES OF AZERBAIJAN Emin Huseynzade by Ramil Maharramov 10 Yusif Axundov Parvana Bayramova Vugar Allahverdiyev MORTGAGE LENDING IN AZERBAIJAN: Fuad Jafarli STATE AGENCY’S ROLE Fariz Huseynov by Fariz Huseynov 18

Art-Director Iman Huseynov “BAKCELL IS A VIBRANT PLACE FOR Photo YOUNG PEOPLE TO WORK” Interview: Ms. Ineke Botter, CEO, Bakcell Ltd. 24 Tofig Babayev

URBAN RESTRUCTURING OF BAKU CITY CENTER: PROBLEMS AND APPROACHES © AAA. The thoughts and by Leyla Sayfutdinova 26 opinions of the authors does not represent AAA’s opinion AZERBAIJANI BUSINESS IN 21st CENTURY: FROM CORPORATE PHILANTHROPY TO CORPORATE AAA Office at American Center, SOCIAL RESPONSIBILITY Azerbaijan University of Languages, by Ahad Kazimov 32 1st Floor, 60 Rashid Behbudov St., AZ1014, Baku, Azerbaijan EURO 2 STANDARDS IN AZERBAIJAN: FROM PLANS TO ACTIONS Tel.: (+99412) 441 01 72 by Rza Aliyev 36 E-mail: [email protected] www.aaa.org.az “ECOLOGICALLY CLEAN” PRODUCT by Nailya Aliyeva 38

EDITOR’S LETTER 2/ 2010

Dear Readers

It is my great pleasure to introduce the second issue of Context magazine published by the American Alumni As‐ sociation. As you know 2010 was declared the Year of Eco‐ logy in Azerbaijan. The government of Azerbaijan, public and private organizations have been implementing several large‐scale projects across the country. In order to raise awareness to the problem of environment in Azerbaijan, Editorial Board has decided to dedicate several articles of the current magazine to environmental issues. In his article Professor Randall Baker from New Bulga ‐ rian University touches on problems of alternative energy and policies that Azerbaijan should implement in order to diversify its energy production and protect environment. Leyla Saifutdinova’s article gives us good overview of urban restructuring of Baku and problems of green space and urban transformation. Rza Aliyev in his article tried to analyze policy implications for Azerbaijan to switch to Euro‐2 standards. The last but not least article on that topic is dedicated to ecologically clean products. Written by Nailya Aliyeva, article helps us to understand the advan‐ tages of production of organic goods. Other articles are also interesting for general reader. Fariz Huseynli’s piece on mortgages analyzes this market in Azerbaijan and gives his recommendations. Ramil Maharramov’s article on eco‐ nomic development brings our attention to necessity to invest into non‐oil sector in order to diversify economy and insure the country’s economy from future economic turmoil. Ahad Kazimov’s article on corporate social respon‐ sibility gives useful recommendations on how to forge cooperation between corporations and public sector. Editorial Board of Context welcomes all readers and hope that the second issue of the magazine would shed the light on some problems, challenges and opportunities facing our society.

Dr. Anar M. Valiyev, Editor‐in‐Chief

CONTEXT | 3 ELEMENTS OF ALTERNATIVE ENERGY POLICY AND IMPLEMENTATION IN AZERBAIJAN

ELEMENTS OF ALTERNATIVE ENERGY POLICY AND IMPLEMENTATION IN AZERBAIJAN

Randall Baker, PhD, Distinguished Professor, New Bulgarian University, Sofia

Emeritus Professor, School of Public and Environmental Affairs, Indiana University, Bloomington, USA

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INTRODUCTION Following the volatile changes in the price of oil on the world market in the middle of the first decade on this century, and the concerns about the possible cli‐ mate‐change implications of the continued burning of fossil fuels putting more “greenhouse gases” into the atmosphere, there has been a surge of interest in the introduction and expansion of alternative and renewable energy (ARE) in many countries. Despite the perceived failure of the Copenhagen Conference on Climate Change in 2009, countries are proceeding with national policies. The UK, for instance, intends to produce 40% of its electrical energy this way by the year 2020, and has introduced a carbon‐based budget‐ ing system. The problem is, however, not national but global, and those producing most of the carbon dioxide and other greenhouse gases are not necessarily those that will suffer most. The case of small‐island, low‐lying states such as the Maldives face possible obliteration and produce almost no greenhouse gases. This is a classic case of trying to tackle a global problem in a world made up of some 200 national sovereign states, often thinking first about their own interests or finding Randall Baker is a Distinguished Professor what they see as equity in a global solution. The at the New Bulgarian University in Sofia, Bul‐ contrast ing perspectives of China and the USA are garia. He was born in Wales in 1944 and is holds very significant in this regard. There is no executive a PhD from London University based on research global management system, and that is unlikely to in East Africa during the mid 1960s. He went on change in the near future. to become a co‐founder and dean of the School of Other factors inhibiting a major and global change Development Studies at the University of East include: Anglia in the UK, and was also affiliated with • The enormous amount of sunk costs and existing Cambridge University. infrastructure built on the exploitation of fossil fuels. He became Professor and Director of Interna‐ This adds an element of inertia to the present situation tional Programs at Indiana University’s School of and distorts the economics of introducing new sys‐ Public and Environmental Affairs in 1985. He tems in a world equipped to run on such fossil energy. spent time with the World Bank, Asian Develop‐ The introduction of ARE competes with exploration ment Bank, Unesco and helped create schools and for more oil supplies, for instance in West Africa, the departments of higher education in Bulgaria, Falkland Islands etc, to keep the old system running at Bolivia, the UK, Bolivia, Azerbaijan and several extremely low retail cost to the consumer. countries in Africa. He is the author of 17 books • The separation of the cost of finding, refining and and many articles, the most recent of which was delivering fossil fuels, and the costs of the damage published by Moscow State University in 2010 done by their combustion (externalized costs) so this and is entitled Environment: Science, Policy and separates cause and effect. Value, which is also the title of his newest book to • The long‐standing prejudice against the develop‐ be published in October of 2010. He has been a Ful‐ ment of a nuclear option, with countries such as Bul‐ bright and Rockefeller scholar, and holds honorary garia being forced to close down this option for some degrees from several universities. time even though it produced the great bulk of its elec‐ tricity. This fear arises from incidents like Three‐Mile Island and Chernobyl, distrust over assurances about safety and the problem of safe storage of nuclear‐fis‐ sion waste, which has a half‐life of around 25,000 years. This prejudice is beginning to ease with the percep tion of the risks associated with the price

CONTEXT | 5 ELEMENTS OF ALTERNATIVE ENERGY POLICY AND IMPLEMENTATION IN AZERBAIJAN

volatility and possible consequences of a world based Elements of the “Dutch Disease.” on fossil fuels. • Some skepticism about the nature of risk in con‐ The revenue, especially from hydrocar‐ tinuing with the present energy‐use model. There are bons, accrues initially to the state sector in well‐organized campaigns, particularly on the net, de‐ crying the “evidence” of climate change in general, terms of royalties, including fees for the and human causation in particular. This aspect was passage of energy via pipelines over the sharpened strongly by the revelation of “distortion of the statistics” by the Climate Research Unit at the Uni‐ national territory. Some jobs are gene ‐ versity of East Anglia, which was providing key “evi‐ rated, but relatively few directly in the dence” to the Inter‐Governmental Panel on Climate Change (UN) immediately prior to the Copenhagen context of the size of the revenue. The conference. The public at large ends up confused and cynical about authoritative statements regarding cli‐ government, then, has a major task of mate change, especially as this same public would “making the revenue work,” in terms of have to bear the immediate cost and changes of life‐ style commensurate with making the change to ARE. job creation, incentives, infrastructure • Arguments about the costs of licensed techno ‐ crea tion and the like. logy enabling developing countries to make the change. Nearly all these licenses are held by rich This situation has an in‐built tendency countries. to favor the big and quick fix—huge high‐ • The political process that has a much shorter time‐horizon than science because of election timeta‐ ways and public buildings, grandiose bles. In addition, the voting public tends to focus on improve ment of facilities, and the genera‐ immediate crises rather than preventative action. Legis lators are reluctant to go against the attitude of tion of endless bureaucratic “make‐work” their constituents, and that inhibits leadership with a long‐term perspective. It is not necessarily the case, in jobs. This works against more modest, and the USA for instance, that the public sees the energy long‐term options. problem as anything more than “the price of oil” that has more to do with market manipulation than the The capacity to spend is the capacity to issue of non‐renewable fuels. The fix arising from this inflate, which is something that Azerbai‐ perspective will be quite different from changing the system. jan has tried to control with the State Oil Apart from these general issues, when we start Fund that sets money aside for the future. looking at the specific case of Azerbaijan there is the additional complication that the economy is so heavily Nevertheless, unless this flow of money is dependent on the export of “traditional” sources of energy such as oil and natural gas. This situation is regulated, it can lead to inflated currency one that strongly supports the status quo unless there values, a limitless capacity to import is a strong policy line to do rather than produce, and a rush of money into project with limited real returns. It discounts the future because of the simplicity of “solving” problems here and now. This is critical because hydrocarbons are here and now, and ultimately do not have a future.

6 www.aaa.org.az 2/ 2010 otherwise—which there is. In a way, the income from at this stage, we should recognize that change in the traditional energy is, in part, dedicated to underwrit‐ direction of ARE is happening in Azerbaijan, note the ing fundamental changes in the future of energy use in creation in 2009 of a State Agency on Renewable and the country. We can consider the oil/gas‐based option Alternative Energy between policy and implementa‐ as the default option, and a planned development of tion, that could overcome some of the administrative ARE as a strategic option based on current revenue problems identified in this paper. The country needs sources. However, as we shall see, it takes more than to coordinate the different elements required to make clear policy lines to make this happen, though the ARE policy happen, (such as tariffs, incentives, popu‐ policy is an essential start. Otherwise it will be hard to lar information on the issue, etc), and also include the avoid a crisis management option when the time structure of the existing provision of domestic comes and there is no option but to make the change. energy—particularly Azerenergy (which has very In this context the situation is confused by conflicting recently announced its own ARE program)2. statements on how long Azerbaijan’s fossil‐fuel re‐ The key to ARE is national vision that will guide sources will actually last—one suggesting we have al‐ policy and action, and this requires leadership. This vi‐ ready passed the peak oil situation. Apart from sion counters the natural tendency in oil‐states to do anything else, the policy1 and its implementation, re‐ nothing but drift along as things are in terms of the quire a very high degree of integrated activity, abundance of fossil energy. Furthermore, the need for whereas governments are generally organized on sec‐ change cannot rely solely on science, which is cons ‐ toral or functional structures, making horizontal integ ‐ train ed by what it can prove, but, instead, must consi ‐ ration extremely difficult and encouraging rivalry. der the potential cost of doing nothing, and this This, in part, helps to explain why the problem has requires strategic thinking and risk analysis. been examined over and over by international consul ‐ Now we will consider some of the structural tants in Azerbaijan, often reprocessing the same data obstac les to ARE in Azerbaijan, though they are by no and saying the same things, but the implementation of means peculiar to that country in many cases: these recommendations remained, for a long time, al‐ Sunk Costs in the Existing System: The current most zero. The problem had been addressed many ener gy supply is dominated by Azerenergy, which is times, and unequivocal policy statements were made, wholly‐owned by the Government. It has built its in‐ but little actually happened. Despite this, more reports frastructure on the basis of subsidized supplies of gas were commissioned from international organizations and diesel from another State Enterprise, and so this to study the same thing. This is an important dilemma has introduced a distorting factor in the “cost” of elec‐ and needs explanation if we are to understand the trical energy to the main producer. ARE companies, needs of a situation that promotes real change. and the government strongly favors the private sector So, the way forward, given the fact that the policy in this area of development, have to deal with this statements are dedicated to the development of ARE challenge, at the same time as carrying enormous in Azerbaijan, the key question is “how do we make start‐up costs. Azerenergy itself has some hydro ca‐ this happen?” This is a question of general concern to pacity at present and has plans to expand into all countries, but becomes particularly difficult in the ARE area (announced 2010)3. In many countries that are, literally, floating on oil and gas. ways, Azerenergy could look There are frequent references to the “Dutch Disease,” upon ARE from which is illustrated in the text box. Responses to this vary from Norway to Nigeria. But,

CONTEXT | 7 ELEMENTS OF ALTERNATIVE ENERGY POLICY AND IMPLEMENTATION IN AZERBAIJAN

outside sources as competition to its profitability, es‐ to say so. However, these units, which are eventually pecially as it has recently borrowed large sums to handed‐over to the municipal authorities, require elec‐ renew its existing generating capacity throughout the tricity to run them, and the authorities have no way of country. Their position has to be understood, and they recovering those costs from the users of the stand‐ are in no way against such a change, but they have pipes. Furthermore, there are technical problems and debts to service and a commitment to the status quo in loss of service when the electricity goes off. So the au‐ terms of new power stations. thorities have no means of recovering the costs despite Tariff and Loan Issues raise serious problems. The the benefits to the users. The government could use an tariff charged by Azerenergy is around 5‐8c against equity and poverty‐alleviation argument to under‐ 20c in much of Europe, making it very hard to realize a write the cost of transferring these units to solar power return on the capital and recurrent costs of construct‐ for the authorities in rural areas, but a private com‐ ing ARE alternatives. This tariff is set independent of pany cannot, since its bottom‐line has to be profit. On the company. At the same time, companies wishing to the other hand, if the government is committed to the enter the ARE sector face serious problems with com‐ private development of ARE, then it can subsidize mercial loans which often have a 28% interest rate and these initiatives under regional development policies, a repayment time of five years. The one private ven‐ poverty‐reduction policies etc. As mentioned earlier, ture developing on the Caspian coast has raised its subsidies are a common element in Europe in order to funding privately in Germany with the assistance of its achieve a policy transformation for broad ecological machinery supplier. If there is not an adequate reasons—and Azerbaijan is a signatory to the principal prospect of profit, then the private sector cannot be ex‐ climate‐change CO2 reduction agreements. Further‐ pected to participate, and several ventures, including more, for local companies to participate in this trans‐ the Koreans, have pulled out. In Europe, for ARE to formation, they need to achieve economies of scale succeed it has been “kick‐started” with government allowing them to import equipment in sufficient quan‐ intervention in terms of tariffs, subsidies and the like tities to achieve cost reductions. This is the principal (Germany, UK etc). factor holding back local companies at the moment. Costs, Returns and Benefits have to be understood. Consumers also require financial inducements such as If we look at, for instance, the water‐purification plants tax breaks, to make the decision to switch to ARE. in the Kura Valley, we find that the benefits in terms of Structural Issues of Administration. The energy public health (parasite infections for instance) are sector in Azerbaijan is divided among many different enormous, as well as the convenience of having strate‐ agencies, though there is a Ministry of Energy. gically placed standpipes around the settlements. The Azerenergy, Commerce, Environment, State Oil and people are delighted and have written to the President Gas, the Foreign Ministry (for treaty obligations), and

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others have a role to play. However, it is very difficult always mean that it can achieve what is needed. to achieve the horizontal integration needed for a com‐ If the government is committed to a target of prehensive policy to be made and to function. The around 10% ARE contribution, then it will need to em‐ ener gy “pie” is divided into its sectoral wedges, each power the body in charge of this, have a program of focusing on its symptoms of the problem, rather than directing fossil‐fuel revenue into kick‐starting the ini‐ the problem at large. Recently, in 2009, a State Agency tiative and materially supporting the private sector, was initiated that will have responsibility for ARE, and working out a system of profitable tariffs. These which is definitely a step forward. However, what are the factors that have resulted in so many consult‐ mechanisms it has to effect an integration of the dif ‐ ing reports in this field having had, until now, little ef‐ ferent elements of responsibility, and merge them into fect in the area of real change. What we are talking a cohesive plan of action will have to be seen. It is the about here is a methodology to realize policy. There same problem that was faced by Ministries of the En‐ should be intervention to ensure that loans are made vironment in many countries, since environment, per on terms that are realistic for the transformation to se, encompasses everything. They often do not have happen. There should be incentives for the public and the authority to do anything unless there are stated business to start making the change. And, there must (and legislated) targets, goals and objectives and they be some material consideration for the needs of the are empowered to see that everyone complies and co‐ poor and disadvantaged both in terms of people and operates. This is a political issue of executive impor‐ regions. Then the transformation can occur. tance, and the mere creation of the institution does not

REFERENCES AND ENDNOTES 1 There are policy statements concerning the ARE in the areas of Energy, 3 Azerenergy, at present produces about 11% of its electrical energy from Environment, Regional Development, Tariffs, and there are commitments hydro, and about 1.5% of the country’s energy is ARE‐based at the moment. under IRENA, Pipeline Agreements and CDM. The target is to raise this to 8 – 10%. The potential is considerable for wind power along the, generally barren Caspian coast, and for solar in the Kura 2 For a much more detailed account of the situation in Azerbaijan see Baker, Valley. R. and Safarzade, E. (2009). Azerbaijan Alternative Energy Sector Analysis and Roadmap. (R‐CDTA 7274). Asian Development Bank. The detail is to be found in this report. For this reason, the current paper assumes a more narrative form.

CONTEXT | 9 LONG‐TERM ECONOMIC DEVELOPMENT PROSPECTS AND CHALLENGES OF AZERBAIJAN

LONG‐TERM ECONOMIC DEVELOPMENT PROSPECTS AND CHALLENGES OF AZERBAIJAN

Ramil Maharramov

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OVERVIEW Azerbaijan’s economy has grown at an un‐ precented rate during the last decade: the real GDP growth rate averaging 21 percent in the five years to 2009. This spectacular growth has been generated by major expansion of the oil and gas production and considerable increases in public spending for both in‐ frastructure and social needs of the country. As a re‐ sult, Azerbaijan’s economy exceeded its 1991 level in 2005 and became the 4th by per capita income in the post‐Soviet area only behind Russia, Kazakhstan and Belarus. Azerbaijan became one of the few countries among CIS countries and in its region whose sover‐ eign rating was upgraded to an investment grade of “BBB‐“ from Fitch rating agency in May 2010. This in‐ vestment grade was a testimony to rapid increase and prudent management of oil revenues and Azerbaijan’s public and external net creditor position. According to Fitch, virtually every external finance indicator in Azerbaijan is superior to the peer group median. This period also witnessed considerable improve‐ ment in living standards and social indicators. Be‐ Ramil Maharramov is a former Muskie fel‐ tween 2003 – 2009 official poverty rates declined from 45 percent in 2003 to 11 percent in 2009, while stan‐ low. He has two master degrees ‐ from the Center dard unemployment rate (estimated as per ILO of Public Policy and Administration at the Uni‐ methodology) declined from 15 percent in 2003 to 6.5 versity of Massachusetts, and from the Public percent in 2007. Despite global financial crisis, timely Administration Academy of Azerbaijan. He is interventions of the state and extension of concessional specialized in economic development and has lending to labor intensive non‐oil industries such as worked as an economist or a consultant for many Azerbaijan Aluminium Company allowed the country multilateral development institutions including to avoid deterioration in economic and social indica‐ tors to a larger extent. In general Azerbaijan’s econ‐ World Bank, International Monetary Fund, omy has felt the effects of the current global economic Asian Development Bank, Islamic Development downturn less severe. In 2009 the economy grew 9.3 Bank, and several global investment and consult‐ percent, the highest rate in the east European region, ing firms. Currently, he works at the headquar‐ although this was the slowest rate of GDP growth ters of the Islamic Development Bank as a senior since 1999 along with other oil & gas exporters in the consultant / economist. He has several researches Commonwealth of Independent States which were af‐ and publications on topics including but not lim‐ fected by lower global oil prices. ited to labor markets, analysis of public invest‐ OIL & GAS SECTOR ments, return of rate to human capital, With proven oil reserves estimated at 7 billion bar‐ knowledge economy, good governance, monetary rels as of 2009, Azerbaijan’s oil production has quadru‐ and financial economics, all related to Azerbai‐ plud between 1997 – 2008 growing from 180 thsd. jan. barrels per day (bbl/d) to 875 thsd. bbl/d. Over the same period the share of oil and gas production in GDP grew from 10 percent to 47 percent in 2009, which is projected to remain at this level at least till Guneshli (ACG) fields (which account for 80 percent 2015. of the oil production) at 1 million bbl/d rate until 2019. The oil output is expected to increase further as In absence of this project, oil production in the country new wells come online and new discoveries are made. is currently expected to reach its peak in 2014 and The government and BP led consortium are expected steadily decline from that time on reaching 200 mln. to approve a $10 billion project which will extend bbl/per annum in 2024. Azeri Light oil production from the Azeri‐Chirag‐

CONTEXT | 11 LONG‐TERM ECONOMIC DEVELOPMENT PROSPECTS AND CHALLENGES OF AZERBAIJAN

in Azerbaijan increased by 4 fold from 2.8 bln manats to more than 12 bln manats over the 2003‐2009 period. Consolidated public investments accounted for the largest share of increase in public spending. In a bid to renew much needed social and economic infra‐ strucutre of the country for improving productivity and reducing cost of doing business for the private sector, the government increased consolidated public investment expenditures for economic infrastructure by 10 times which reached 4.4 bln manats in 2009. In‐ deed, growth in non‐tradable non‐oil sectors (con‐

Source: IMF Country Data. May 2010. struction, communication, trade, tourism and travel *2010 – 2015 statistics are projections. services), have been largely driven by government ex‐ penditures or multiplier effects of massive investments Most of the oil production is exported, earning in the oil & gas sector. Azerbaijan much needed foreign exchange and en‐ abling it to finance capital imports and strategic eco‐ NON ‐ OIL SECTOR nomic development priorities. Decreasing domestic Azerbaijan’s non‐oil sector is dominated by non‐ consumption, allows the country to export more of the tradable sectors such as construction, communication, produced crude oil. Domestic oil consumption de‐ trades, tourism and travel services, and social services, clined from 203 thsd. bbl/d in 1992 to 128 thsd bbl/d in products of which can not be exported to or traded in 2008. Azerbaijan’s net oil exports was estimated at 749 other countries. The share of these sectors in the non‐ bbl/d in 2008, double the level of exports in 2005, oil economy has steadily increased, in parallel to ex‐ which generated 29 billion US dollars for the country pansion of oil and gas production and growing public in 2008. expenditures, from 59 percent in 2002 to 67 percent in Azerbaijan also posseses world‐scale gas reserves 2009. On the other hand the share of the tradeable sec‐ with proven natural gas reserves of 30 trillion cubic tors such as non‐oil manufacturing and agricutlure has feet (Tcf). Industry analysts consider Shah‐Deniz as declined over the same period by 12 percent adding one of the world’s largest gas field discoveries in the up to 18 percent of the non‐oil economy in 2009. Non‐ last 20 years, with an estimated potential recoverable tradeable sectors also grew much faster over the same resources of 15 trillion cubic feet of natural gas and 600 period, posting 15.4 percent average real growth ver‐ million barrels of condensate. The startup of the Shah sus 5.8 percent average real growth of tradeable sec‐ Deniz gas field in 2007 turned Azerbaijan int o a net tors. High share of non‐tradeable sectors in the non‐oil gas exporter from a net gas importer. In 2008 Azerbai‐ economy has unfavorable implications for interna‐ jan produced 572 billion cubic feet of natural gas tional competiteveness of the country, which add up mainly from the ACG and Shah Deniz fields, of which to urgency of diversification efforts of the economy 66 percent was consumed domestically. When Phase 2 and improving the business environment to create al‐ of Shah Deniz is completed in 2016 as expected, its ternative export industries to the dominating oil and (both Phase 1 and Phase 2) overall production capacity gas sector. will reach 1 Tcf. ACG and Shah Deniz together are ex‐ Even though all sectors of the non‐oil economy pected to be producing roughly 1.4 trillion cubic feet grew over time in nominal terms, non‐tradeable sec‐ natural gas from 2016 and on, much of which will be tors achieved the largest average real growth rates. Be‐ exported. When natural gas production and exports tween 2002 – 2007, the construction, communication, are taken into consideration, the revenue windfall and travel and tourism sectors were the champions in from the oil & gas sector is expected to continue be‐ terms of average real growth, achieving around 28 yond 2020. percent growth rates. Non‐oil manufacturing and agri‐ Given that oil and gas fields are under the national culture, both tradeable sectors, on average grew only ownership, large revenues they generate are also by 7.3 percent and 4.9 percent respective over this pe‐ owned and managed by the government, which tend riod. to increase the overall public spending for capital and Non‐oil economy has been able to withstand the ef‐ current expendtirues. Consolidated public spending fects of the global economic and financial crisis rela‐ (including current and capital expenditures, transfers, tively well. It was able to grow 3.2 percent in 2009 subsidies, and interest payments of the public sector) thanks largely to agriculture, communication, trans‐ portation, travel and tourism and trade. The most af‐

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Source: State Statistics Committe. 2010. *Tradeable sector includes non‐oil manufacturing, agriculture and fisheries industries. ** Non‐tradeable sector includes construction, communication, trades, tourism and travel services, social services and transportation. fected two sectors from the global crisis were non‐oil tors. In similar lines, Azerbaijan has made good manufacturing and the construction sectors, which progress in setting up functioning tax system. Since shrunk by 13.8 percent and 8.2 percent respectively, 1998, both tax rates and the number of taxes have been reflecting vulnarability of these sectors and their inter‐ constantly reduced. With the consolidated tax law, the connectedness with global markets and economic number of taxes was reduced from 15 to 9. growth through exports, financial sector and remit‐ Positive changes in the business environment of tances. the non‐oil economy found its reflection in the Doing Business ranking of 2009. According to the ranking (which assesses economies based on 10 indicators of business regulation that track the time and cost to meet government requirements in starting, operating a business and closing a business) Azerbaijan was the top reforming country in the world in 2008. Azerbai‐

Source: State Statistics Committe. 2010.

Diversification of the economy, development of the non‐oil economy, creation of enabling business and investment environment remains as one of the major strategic objectives of the government. The National Employment Strategy (2006‐2015), the State Program on Sustainable Development and Poverty Re‐ duction (2008‐2015) and the medium‐term economic social development program (2009‐2012) included the creation of the enabling business environment as one of the main objectives, and an important instrument for job creation and development of the non‐oil sec‐

CONTEXT | 13 LONG‐TERM ECONOMIC DEVELOPMENT PROSPECTS AND CHALLENGES OF AZERBAIJAN

jan rose from 97 to 33 in the global rankings on doing identified as problems by more than 15 percent of business. The country undertook reforms in seven out firms. On the other hand, access to finance and high of 10 indicators examined by the report – starting a tax rates were identified as major obstacles of doing business, contract enforcement, property registration, business by substantial number of firms (more than 20 easing tax burdens and employment restrictions, and percent), revealing huge potential for improving the strengthening investment protection, and getting business environment in the country. credit. Ease of... Doing Change in LONG‐TERM TRENDS Business rank from According to current projections by international 2009 rank 2008 financial institutions oil and gas sector will not be the Doing Business 33 +64 main driver of economic growth starting from 2010, Starting a Business 13 +53 with the exception of 2014 when the Chirag oil field Dealing with Construction Permits 155 +5 becomes fully operational. The level of oil production Employing Workers 15 +52 in the country is currently expected to reach its peak in Registering Property 9 +54 2014 and steadily decline from therafter reaching 200 Getting Credit 12 +13 mln. bbl/per annum in 2024 unless the USD 10 billion Protecting Investors 18 +92 investment made in the ACG field to maintain the Paying Taxes 102 +41 field’s oil production rate stable at 1 million bpd till Trading Across Borders 174 +2 2019. Fitch rating agency calculates that at the 2009 Enforcing Contracts 26 +1 production level, the countryʹs oil reserves will be de‐ Closing a Business 81 ‐1 pleted in 18 years compared with Kazakhstanʹs 54 years. IMF estimates that Azerbaijan’s oil reserves will Source: IFC and World Bank. Retrieved from be exhausted in 20‐25 years, all drawing attention to http://www.doingbusiness.org/Features/Feature‐2008‐21.aspx relatively moderate nature of the oil and gas windfall Another World Bank survey conducted in 2009 and natural resource endowment. As a result the share with large, medium and small enterprises on main ob‐ of non‐oil sector is projected to grow slightly to 56 per‐ stacles of doing business in Azerbaijan revealed major cent in 2015 from the current level of 48 percent. progress in the country’s business environment. Ac‐ However, these projections do not account for cording to the survey findings, very few firms (less Phase 2 Shah Deniz field development, which is ex‐ than 5 percent) identified customs and tax regime, pected to come online in 2016, development of dis‐ electricity, licence & permits, inadequatly educated puted oil fields with proven reserves in the Caspian workforce, tax administration and access to land as sea, discovery of new oil and gas fields. Growth of the major obstabces of doing business, which reflect major transit trade will also partially offset the projected de‐ improvements in infrastructure, electricity supply, tax cline in oil production, once Kazakhstan and possibly administration, quality of the workforce, access to land Turkmenistan start using Azerbaijan as a means of and licensing practice of the government. Corruption connecting to Western markets. In addition, if as and challenges of operating in informal sector were stated above the government and BP led consortium approve a $10 billion project to tap the oil reserves below the ACG fields, this will extend oil production from the ACG fields at 1 million bbl/d rate until 2019. Nevertheless, even if no new oil fields discovered or coming on stream, Azerbaijan will continue receiv‐ ing large oil revenues in the coming decade. IMF proj‐ ects that Azerbaijan’s Oil Fund assets will reach 98 billion US dollars by 2015, which will be 6.5 times of the 2009 level. At more favorable world oil prices this amount is expected to be much larger. The coming on stream of the Phase 2 Shah Deniz field in 2016, as ex‐ pected, will boost the growth, export revenues and in‐ ternational reserves of the country further. Regardless of the new discoveries or coming on stream of new fields, oil and gas reserves are fixed nat‐ ural resources which will run out at one point in time. All the estimates of Azerbaijan’s natural resource en‐

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ductive labor markets, and efficient support to highly productive and competitive sectors in the economy . Azerbaijan’s narrow economic base and depend‐ ence on goods of low‐value added are other major risks to the country’s long‐term outlook. Currenlty, non‐oil exports make up 5 percent of overall exports, whereas the tradables sector accounted for only 9.7 percent of total GDP in 2009. In absence of the viable non‐oil sector and exports, the economy’s capacity will be strained after 2020 and the real GDP growth will sharply slow. At the 2009 oil prices and hydrocarbons production forecast, the Economist Intelligence Unit dowment indicate that compared to Kazakhstan, Rus‐ projects annual average real GDP growth of 3.8 per‐ sia and other countries in the region, Azerbaijan’s oil cent for the period of 2009‐2030 and 2.8 percent for the and gas resources are relatively modest. The level of period of 2021‐2030, which are much lower than the oil and gas revenues is also lineraly correlated with the historical average in the last decade. global demand to commodities and world oil and gas Viable non‐oil sector in Azerbaijan lends itself in‐ prices, which make them vulnarable to all kinds of dispensible for social cohesion and harmony in the global downturns and shocks. It is now clear that the country, given that it provides employment and in‐ world demand for commodities will remain sluggish come to 98.9 percent of the total workforce, while the in the medium‐term, given the depth of the global fi‐ oil and gas extraction industry employs only the re‐ nancial and debt crisis and much slower pace of the maining 1.1 percent. The Economist Intelligence Unit global recovery. These clearly illustrate the need for projects that Azerbaijan’s population will reach 10.3 Azerbaijan to reduce its dependence on oil & gas rev‐ million by 2030, while the working‐age population enues and improve the long‐term outlook for the will grow by 0.44 percent between 2009 – 2030. Youth country through a viable non‐oil sector, acceleration of popualtion (15‐24) has the highest unemployment rate reforms to diversity the economy, balanced regional among all age groups in the country. In spite of im‐ economic development, effective wealth redistribution provements in the performance of labor markets and schemes, favorable business environment, massive in‐ reported reduction in unemployment, significant vestments in human capital development, highly pro‐ share of the population surveyed in 2006 (31 percent)

CONTEXT | 15 LONG‐TERM ECONOMIC DEVELOPMENT PROSPECTS AND CHALLENGES OF AZERBAIJAN

referred to unemployment as the biggest problem fac‐ analysis, participatory decision making. The economic ing Azerbaijan. Population cited only Karabakh con‐ governance shall be based on long‐term economic de‐ flict more important problem than unemployment. velopment strategy designed for 10 years or longer pe‐ This finding indicates that unemployment still re‐ riod. mains a serious issue for significant number of the Policy makers need to undertake urgent reforms to population, which should be addressed. Growing improve the quality of education and health services population and youth unemployment rate illustrate in parallel to significant investments into trainings, the need for sustaining high growth rates and diversi‐ lifelong learning opportunities and upgrading of fied non‐oil economy for generating adequate number human capacities. The government could use active of jobs for generations who will enter the labor force in labor market policies (ALMP) to provide affordable near future. trainings for workers who would like to improve their skills or acquire new skills demanded by markets. To GOING FORWARD do so, the government needs to increase spending on Given relatively moderate nature of the oil and gas ALMPs (which currently makes less than 1 percent of resources of Azerbaijan and high volatility of global the total budget) and institute effective delivery mech‐ commodity prices Azerbaijan needs to further im‐ anism in place to ensure relevance and quality of train‐ prove the business environment to reduce the cost of ings. doing business in the country. Educated workforce, Authorities shall also address widespread youth good infrastructure, improved policy and regulation unemployment mainly caused by lack of work experi‐ quality and immense development potential of of ence and poor level of practical skills. The public in‐ non‐oil sectors such as agriculture, transportation, ternship & work programme employing any citizen at tourism, communication, non‐oil manufacturing pro‐ the ongoing minimum wage rate both in the public vide Azerbaijan with all the necessary ingreditents to sector and partnering private sector entities might be develop a vibrant non‐oil sector and have one of the solution to this issue. most competitive business environments in the world. Improving human capital also requires the com‐ In 2010 staff consultations with the IMF, Azerbaijani mitment of individuals to develop their competencies authorities have broadly agreed with the recommen‐ and their careers. For this to happen, individuals dations to develop non‐oil sectors through improving should believe that human capital is worth the invest‐ the business environment including tax, customs, fi‐ ment spent for education and training and forgone nancial sector reforms. earnings. In other words, individuals should believe in In addition, economic planning and budgeting the decent and fair return to human capital reflected in process of Azerbaijan shall be improved to achieve existing wage rates in labor markets. Restoring confi‐ consistency between employment and economic dence of individuals in worth of human capital also re‐ growth objectives and to ensure effectiveness in use of quires a set of coherent and effective public policies, public resources for economic development objectives which would ensure high wages for skilled and expe‐ through use of cost‐benefit analysis, cost effectiveness rienced workforce.

REFERENCES AND ENDNOTES 1 Fitch Ratings. Press Release. London. 20 May 2010. 8 World Bank. Enterprise Surveys: Azerbaijan 2009.

2 The Economist Intelligence Unit. Azerbaijan Country report. March 2010. 9 The Economist Intelligence Unit. Azerbaijan: Ten‐Year Growth Outlook. July p.21. 2009.

3 Ramil Maharramov. Black Sea Labor Market Reviews – Azerbaijan. Unpub‐ 10 US Energy Information Administration. Country Analysis Briefs. October lished report. ETF. February 2009. 2009.

4 US Energy Information Administration. Country Analysis Briefs. October 11 The Economist Intelligence Unit. Azerbaijan: Ten‐Year Growth Outlook. July 2009. 2009.

5 US Energy Information Administration. Country Analysis Briefs. October 12 The State Statistics Committee. Labor Market statistics. 2008. 2009. 13 Source: IFES. 2006. Survey on Public Opinion in Azerbaijan. p. 10. 6 IMF Article IV Country Report Statistics. May 2010. 14 Ramil Maharramov. Black Sea Labor Market Reviews – Azerbaijan. Unpub‐ 7 IMF Article IV Country Report Statistics. May 2010. lished report. ETF. February 2009.

16 www.aaa.org.az

MORTGAGE LENDING IN AZERBAIJAN: STATE AGENCY’S ROLE

MORTGAGE LENDING IN AZERBAIJAN: STATE AGENCY’S ROLE Fariz Huseynov North Dakota State University

18 www.aaa.org.az 2/ 2010

MORTGAGE MARKETS AND RELATED INDUSTRIES: Every young person dreams his/her own house. However, most of them do not have sufficient funds to do it right away. They usually have two options: either wait for lifetime of saving, or borrow money and buy now. Mortgages are the loans used to pur‐ chase the real estate that provides the lender with se‐ curity for a debt. If the property owner does not pay the loan back, the lender seizes the property. De‐ pending on borrower credibility, buyers are usually required to make down payment when they pur‐ chase the property. Thus, mortgage essentially is the difference between the down payment and the value paid for property. The most important goal behind mortgages is to facilitate the real estate markets and provide house‐ hold with financial resources. The strategy is clear enough: more funds lead to more buyers; more buy‐ ers ignite the flow of capital to real estate markets. While higher demand increases house prices, avail‐ able funds through mortgage lending increase buy‐ ers’ purchasing power. Capital flowing into real estate increases capital investments and employment Fariz Huseynov is an Assistant Professor of in construction industry. While weak market struc‐ Finance at North Dakota State University. He ture and lack of competition in construction industry has taught several courses, such as, Investments, may lead to abnormal house prices, loose underwrit‐ Corporate Finance and International Finance. ing provisions may cause negligent lending. Accord‐ He has published several articles in academic ing to World Bank’s Doing Business reports, Azerbaijan ranks 158 among 183 countries for easi‐ journals and popular press. Recently, he has been ness in dealing with construction permits. Despite working on issues, such as taxation and its im‐ recent improvements in business environment, the pact on corporate valuation, financial develop‐ number of procedures and time to obtain construc‐ ment and banking, and the development of tion permits is among the highest in the world. financial sector in CIS countries. He received Construction and real estate industry has been PhD in Finance degree from the University of among top 10 economic activities with the highest number of employees in Azerbaijan (Table 1). More‐ Memphis, and MBA in Finance degree from Ball over, during 2006‐2002 these two industries showed State University. the highest growth in the number of employees. However, it is worth to mention that the construc‐ dustry (Table 2). Real estate related business activi‐ tion industry has not been able to increase its share ties are among top 10, as well. It is worth to mention during last 3 years. that financial activities added more economic value Construction industry in Azerbaijan outperforms before 2006 than after. all others for the value added per employee, but If we compare the average monthly salaries mining due to exceptional growth in oil and gas in‐ across the industries, we find that all three industries

Table 1: Distribution of employed population by economic activity, Top 10 (in percent to total) 2002 2003 2004 2005 2006 2007 2008 2008/2002 On economy ‐ total 100 100 100 100 100 100 100 ‐ Construction 4.8 4.8 5 5.1 5.6 5.6 5.6 0.8 Real estate, renting 2.6 2.6 2.6 2.6 2.7 3 3.4 0.8

CONTEXT | 19 MORTGAGE LENDING IN AZERBAIJAN: STATE AGENCY’S ROLE

Table 2: General value added for 1 person of employed population by kinds of economic activity, in 2005 prices (in thousand manats) 2002 2003 2004 2005 2006 2007 2008 2008/2002 Mining 69.04 71.56 74.95 125.21 194.92 269.96 288.86 4.18 Financial activity 10.85 12.03 13.02 13.13 14.10 11.98 10.63 0.98 Construction 3.19 4.66 6.03 6.03 5.71 6.54 8.87 2.78 Real estate, renting and business activities 1.61 1.71 1.75 1.71 1.90 1.71 1.71 1.06

of interest rank top 3, following mining industry quality of securities issued in secondary markets. (Table 3). Average salary in real estate business is Secondary markets for mortgages lower liquidity about twice as high as the average salary on econ‐ risk by enabling financial intermediaries to sell their omy. Average salary in financial activities is three claims from mortgages to third parties, usually insti‐ times higher than national average. tutional investors. Thus mortgage originator issue All these statistics point for the rising interest to the loan to potential homebuyer and receives fee for and importance of real estate markets and financial this. Later it sells claims for loans to third party in‐ industry in Azerbaijan. Thus it is extremely impor‐ vestor (institutional investors, usually) and passes tant to understand how mortgage markets work and the interest payments on. who the main players are. Financial intermediaries can either sell these mortgages to state agencies, such as Azerbaijan SECURITIZATION: Mortgage Fund (AMF) or issue mortgage backed se‐ Mortgage markets facilitate flow of funds from curities and sell them to third parties. Studies show households or institutional investors to those who that secondary markets (or securitization) have need them to purchase real estate. Key players in tremendously affected real estate markets by bring‐ these markets are surplus/demand units and finan‐ ing significant economic, financial, legal and political cial intermediaries. Figure 1 shows how financial in‐ change. termediaries affect this process by collecting Securitization in US has started when the Gov‐ deposits, repackaging and lending them to potential ernment National Mortgage Association (Ginnie homeowners. Loans provide them with two streams Mae), later followed by its sister organizations Fan‐ of income: origination/service fees, and interest pay‐ nie Mae and Freddie Mac, issued the first mortgage ments. The former is usually determined by the backed securities (MBS). Although private sector is‐ amount of loan (and price of property), while the lat‐ sued its MBS in late 70s, this market grew to its high‐ ter is determined by the risk of loan. Although mort‐ est levels in last two decades. In 2006, new issuance gage loans are backed by an asset, lenders face of MBS reached to $1.2 trillion. The problems in substantial risks, such as credit (when the borrower mortgage markets appeared in the beginning of 2007 defaults on her debt) or liquidity (ability to convert when widely spread rumors about possible mass de‐ the loan to the cash earlier than its maturity) risk. fault on bad or subprime loans created a systemic Banks can lower their credit risk by due diligence in panic in banking industry. Since financial institu‐ loan process and tight underwriting requirements. tions were able to transfer the risk and simply earn Credit risk eventually determines not only the cer‐ origination fees, loans were issued without thorough tainty of future interest payments, but also that the background check on borrowers. Most banks had lia‐

Table 3: Average monthly nominal wages and salaries by kinds of economic activity (in manat) 2002 2003 2004 2005 2006 2007 2008 2008/2002 On economy ‐ total 63.1 77.4 99.4 123.6 149 215.8 274.4 4.35 Mining 258.1 289 451.3 505.2 633.7 845.5 1011.4 3.92 Financial activity 204 196 217.3 314.1 545.8 709.1 812.6 3.98 Construction 109 154.4 218.2 237.6 298.7 381.4 406.1 3.73 Real estate, renting and business activities 132.3 171.5 203.1 299.2 383 504.7 527.9 3.99

20 www.aaa.org.az 2/ 2010 bilities backed by these assets and they needed to Azerbaijan, AMF received funds only from govern‐ meet those liabilities by selling MBS. Even if these ment. Predictably AMF stopped lending soon. When securities were highly rated, systemic panic created AMF restarted mortgage lending, it raised funds by distrust toward rating organizations and exacer‐ issuing bonds, much like MBS securities. Buyers of bated the problems. Fire sale of MBS that caused these MBS would simply rely on quality of loans many hedge funds and investment banks to go whose interest payments AMF will receive. As it is bankrupt was controlled only after FED decided to illustrated in Figure 1, AMF can either sell these purchase MBS from these institutions. However, the bonds back to financial intermediaries or to institu‐ new MBS issuance plummeted to $171 billion in tional investors willing to invest in mortgage mar‐ 2008. kets and earn fixed income with relatively low risk. In transition countries, such as Azerbaijan, com‐ AMF has already placed its first registered shelf mercial banks are not able to issue MBS and directly in amount of 55 million AZN bonds (7 year maturity, sell to institutional investors. Thus state agencies 3 percent coupon rate) during June 2009 – January (AMF) are needed to intervene and provide second‐ 2010 and launched new issue of 75 million AZN ary market for mortgage loans. Mortgage lending in bonds (10 year maturity, 3.75 percent coupon rate), Azerbaijan dates back to 2005 when the decree on out of which 12 million AZN is already placed. “Forming of mortgage loans systems in the Republic These bonds provide higher return at the same risk of Azerbaijan” approved and AMF under the Central with other comparable securities such as, T‐bills or Bank of Azerbaijan (CBA) was established to build notes issued by the CBA. Fortunately, AMF has also the efficient housing finance mechanism and attract been assigned BB+ rating (one notch below invest‐ local and foreign investors to mortgage lending. The ment grade) by Fitch Ratings that assigned relatively first state sponsored mortgage loan was issued in lower grades to commercial banks in Azerbaijan. March 2006 and the market issued about thousand This grade is also comparable to SOCAR’s Ba1 rating loans during a year. However due to unavailability assigned by Moody’s. However, investors should be of funds AMF stopped mortgage refinancing in sum‐ concerned about future interest rate risk, because in‐ mer 2007 and it was June 2009 before lending was re‐ terest rates cannot be expected to stay low (inflation, stored. The structure of mortgage lending through as well) for next 10 years. It will be difficult to attract AMF is as follows. A potential homebuyer applies to investors in future, unless AMF offers inflation pro‐ authorized loan organizations (ALO, usually banks) tected securities. to pass eligibility test. Having determined bor‐ We provide some statistics on mortgage loans is‐ rower’s eligibility, bank lends money to homebuyer sued by private banks in Azerbaijan during 2006‐ at specified interest rates, currently at less than 8 2009Q1 (Table 4). While the statistics show that percent. Later AMF refinances these loans and col‐ banks did not issue any mortgage loans between lects interest payments, while bank receives transfer May 2006 and June 2007, it is very possible that data fee. is missing for this period. Although AMF stopped fi‐ During the first stage of mortgage lending in nancing mortgages during the summer of 2007, the

Figure 1: How Mortgage Markets Function – AMF can be an example of federal agencies

CONTEXT | 21 MORTGAGE LENDING IN AZERBAIJAN: STATE AGENCY’S ROLE

commercial banks continued lending mortgages and for house prices. While mortgage lending allowed it took another year to reach May 2006 level. Two young adults to purchase their own house, increas‐ factors could explain the lower ratio during 2008Q3. ing house prices weakened its impact. Price per m2 First, the CBA increased the risk standard of mort‐ of housing space grew twice for new houses and 1.7 gage loans from 50 percent to 100 percent in Feb 18, times in secondary market during 2004‐2009. Figure 2008. Probably, it took another quarter to affect 2 shows that housing prices dropped in 2009, possi‐ mortgage issuance. bly due to financial crisis. However, during these Second, this might well be related to the financial years housing space per person remained constant crisis. However, in nominal terms banks issued new around 18 m2. mortgages during 2008Q4. Therefore we conclude that new risk standard or financial crisis significantly Figure 2: Housing Price per square m (Baku ‐ 1 affected mortgage lending only during 2008Q3. The USD) most recent data shows that banks issued very small amount of mortgages during 2009Q1 and 2009Q2. Note that the average mortgage loans/total assets and mortgage loans/total loans ratio remained al‐ most constant around 3 and 4‐4.5 percent, respec‐ tively. Thus on average banks are not highly exposed to the risks from mortgages. Unibank, Texnikabank, Nikoil and Turanbank are the top Unfortunately we do not have data on age profile mortgage lenders (at some point of time Unibank of mortgages issued by commercial banks. However, held 30 percent of mortgages). Data also shows that according to AMF, young adults (18‐29 age group) until the end of 2008, Turanbank and Azerbaijan among 1,600 borrowers benefited most from AMF Credit Bank had the highest mortgage loans/total as‐ sponsored mortgage program as they borrowed 41 sets ratio (13‐22 percent), while, Bank Respublika percent of funds. While easier access to funds may reached them during first three months of 2009. help young generation own a house, high prices def‐ initely hinder this affect. MORTGAGE MARKETS AND YOUNG GENERATION: Figure 3: Borrowers by Age Group (Feb 2010) Several studies investigate the impact of mort‐ gage market characteristics on young generation, such as that of lending rates (on mortgages or other types of loans) on labor mobility and borrowing among young adults. Martins and Villanueva (2009) compare the cost of borrowing in different regions in Europe and conclude that higher cost of borrowing reduces borrowing among young adults. They also find that when mortgage rates rise, young adults delay home purchases and more likely to live with their parents. Yelowitz (2007) finds that during 1980‐ 2000 increase in housing prices resulted in loss of PROBLEMS IN REAL ESTATE MARKET: purchasing power among young adults in US. According to “Real Estate Market Players” Public Azerbaijan is currently among top 50 countries Union (RMP), real estate markets and construction

Table 4: Mortgage Loans in Azerbaijani Banking Industry4

2006 2007 2008 2009 Month May Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1

No Banks 38 35 34 34 37 38 37 38 38 Mortgages/Total Assets (%) 3.00 3.11 2.61 2.98 2.78 2.97 2.45 2.71 3.00

Mortgages/Total Loans (%) 4.02 4.55 3.73 4.09 3.87 4.09 3.35 3.64 4.04 Mortgages (thousand AZN) 154,354 64,532 94,876 119,907 130,390 157,389 157,017 170,865 177,649

22 www.aaa.org.az 2/ 2010 industry in Azerbaijan was in full recession in 2009 have to pay 8,824 AZN down payment and pay 420 due to financial crisis. According to RMP, construc‐ AZN per month. If we assume that average price per tion of only 19 residential buildings started in 2009, m2 is in a range of 750‐1000, a borrower can only while all of them were planned in 2008 but issued purchase a house as large as 60‐80 m2. Besides, this permit this year. It is worth to mention that on aver‐ amount of loan will be accessible to only borrowers age 175 condominiums were built every year during whose monthly income exceeds 750 AZN, which is 2003‐2008. Prices also plummeted in 2009. Since the three times higher than average nominal salary. beginning of financial crisis, house prices in primary Clearly, either AMF needs to increase the amount of and secondary markets dropped 23 and 27 percent, loan in order to match house prices, or prices should respectively. RMP urges AMF to increase amount of further drop to acceptable levels. mortgage loans (from 75 million AZN) during 2010 AMF’s assistance may benefit some stakeholders in order to stabilize real estate markets. Currently in real estate markets (broker‐dealers, construction AMF refinances about 35‐40 percent of mortgages firms), however it is very critical not to loosen under‐ loaned by private commercial banks (Table 4 – 2010 writing requirements. Otherwise, real estate markets projected to be about 200 million AZN). may face similar default risk experienced in US. We are cautious about RMP’s call for more AMF Even though AMF sponsored mortgage loans are in‐ refinancing in mortgage markets. House prices rose sured by independent insurance firms, this does not abnormally during last 5 years and currently due to imply that they are riskless and commercial banks excessive supply market is correcting itself by sale should be held partially responsible for loans they pressure. It is quite natural that overpriced houses issue. are not demanded anymore. Prices could further de‐ Construction industry and real estate markets cline if investors found other investment alternatives have been among fast growing industries in Azerbai‐ (unless they purchased houses to live in). Prices in jan. By refinancing loans and issuing mortgage real estate markets should further decline to make backed securities state agencies play a critical role in houses affordable by young homebuyers. It is obvi‐ creating efficient financial mechanism through mort‐ ous that houses sold in Baku are not accessible with gages. However, recent financial crisis along with current level of average salary. homebuyer’s lower purchasing power challenged AMF sponsors only loans up to 50,000 AZN real estate markets. In this article, we reviewed mort‐ (35,000 AZN at 4 percent for social mortgages) and gage markets in Azerbaijan and shed some light to requires down payment of 15 percent. Thus the max‐ its achievements and provide our explanation for imum price of house purchased using AMF mort‐ current problems. gages can be 58,824 AZN, where homebuyer will

CONTEXT | 23 INEKE BOTTER: “BAKCELL IS A VIBRANT PLACE FOR YOUNG PEOPLE TO WORK”

Ineke Botter: “Bakcell is a vibrant place for young people to work”

More and more businesses are en‐ How important is training of person‐ tering into the market in Azerbaijan, nel for your company? which does not only mean investment Enhancing the professional level but also creation of new jobs. Estab‐ of about 1,000 employees of Bakcell is lished in 1994, Bakcell Ltd. is the first a strategic goal. In a very fast and in‐ company that began to provide mobile novative high‐tech industry, it is very telecommunication services for people important to keep up with all new de‐ and businesses in Azerbaijan. As one velopments. In our company we have of the largest investors in the economy all functions ranging from Customer of Azerbaijan, Bakcell is one of the Care to Sales and Distribution, IT, Ac‐ biggest and most attractive employers counting, Legal, , Marketing, Corpo‐ Ineke Botter in the country. How well are young rate Communications, Construction, people represented in this company? Network Deployment, Network En‐ CEO, Bakcell Ltd We addressed the same question to gineering, etc. and employees need to Ms. Ineke Botter, CEO of Bakcell Ltd. be up‐to date. Bakcell’s large training 15 students were selected to intern centre for employees makes it possi‐ with Bakcell in this summer. In Sep‐ Ms. Botter, what makes Bakcell an at‐ ble to train 120 staff at the same time. tember we started the second phase of tractive workplace, especially for Bakcell thinks about our people’s fu‐ the IMTB program with JAA and we young people? ture management capabilities and plan to reach out to more young stu‐ The market research shows that the succession plans and invests in them dents to provide them with trainings top motivations to apply for a job at in terms of training and career devel‐ on mobile telecoms and job shadow‐ Bakcell are the interesting work envi‐ opment. ing experience at Bakcell, with sup‐ ronment, competitive salaries, oppor‐ port of Alcatel‐Lucent. tunities for advancement, training and Bakcell organizes job shadowing professional development. As the program for university students. Can Today, corporate social responsibil‐ company grows, it creates opportuni‐ you tell us more about your projects ity is a growing trend among busi‐ ties for advancement. We work every for young students? nesses in Azerbaijan. In your day to make our company better for Telecommunications is a big in‐ opinion, how strong are corporate re‐ our clients, customers and partners, as dustry worldwide and generates tril‐ sponsibility initiatives in Azerbaijan well as our personnel. We want our lions of dollars. However in and how is Bakcell involved? staff to take pride in what they do. In Azerbaijan, as in many countries the Most CSR projects are sponsoring the end it is all about people and our education system does not suffi‐ miscellaneous charity activities. Bak‐ best ambassadors are our employees. ciently prepare telecom professionals. cell does not believe in sponsoring Apart from being a successful busi‐ We want young students learn more small charity projects with no strate‐ ness, our corporate image, brand val‐ about mobile telecommunications. By gic concept behind them. Bakcell’s ues and organizational culture makes spending time in Bakcell and getting CSR program, “Bakcell Stars” has a us one of the first choice companies, hands‐on experience, they get to clear purpose and meaning. We work especially for graduates to start their know this fascinating industry and with well‐known, successful charities careers. find out what the employment oppor‐ that help children in need, such as People working at Bakcell are tunities might be. We have invested in Save the Children, SOS Children’s young and energetic. Average age of several educational and training pro‐ Villages, United Aid for Azerbaijan employees is 26 and 79 % of staff rep‐ grams for young people: Bakcell and and Social Services Initiative. We fi‐ resents young people under 32 years Junior Achievement Azerbaijan’s nance theatre lessons for schoolchild‐ of age. About 84% of Bakcell employ‐ (JAA) “Introduction to Mobile ren that promote tolerance and ees have university level education, Telecommunication Business” (IMTB) children’s rights. We support creative and 31% possess a post graduate Mas‐ training program for technical major programs for disabled children. We ter and PHD qualification. We are very students. And we hope to shortly also finance a choir for the children interested in recruiting young people launch a Bakcell / AIESEC exchange living in the SOS Children’s villages. with education and experience from program for young graduate workers. Bakcell truly believes that children are abroad. About 12% of management As part of our cooperation with Jun‐ our future and we invest in their fu‐ positions at Bakcell are taken by young ior Achievements, 55 students at‐ ture by developing their social skills, people who were educated abroad. tended work‐readiness training and potential and talents.

24 www.aaa.org.az

URBAN RESTRUCTURING OF BAKU CITY CENTER: PROBLEMS AND APPROACHES URBAN RESTRUCTURING OF BAKU CITY CENTER: PROBLEMS AND APPROACHES

Leyla Sayfutdinova, PhD candidate, department of Sociology, Middle East Technical University (METU)

There are very few issues that are discussed in at the center of the debate: the preservation of ar‐ Baku as passionately as the ongoing and irre‐ chitectural and historical heritage, in the historical versible urban redevelopment of the past few city center built in the 19th‐beginning of 20th cen‐ years. This passionate response is understandable tury and particularly in the Old City (Icheri She‐ considering the increasingly rapid pace of the her); the impact of highrisers on the city and their transformation, its complexity involving multiple safety, and the environmental concern with the de‐ levels of urban system, and the profound effect on pletion of green areas. The issues are interrelated – the life styles and life chances of city inhabitants. thus, for example, the construction of highrisers in Over the recent years many concerns with this city centre is also a part of the concerns for the process have been voiced by various stakeholders preservation of historical heritage, and the concern and agents in a variety of media – from print news‐ for depleting green areas is a cross‐cutting issue. In papers to internet forums and blogs, let alone the this article my aim is not to offer yet another criti‐ informal communication. While not all of the opin‐ cal account of the many problems that the recent ions are critical – there are some that support and redevelopment has brought about, but rather to welcome the ‘embracing of modernity’ – the critical understand the concerns that are being voiced, and responses have been far more common. Clearly, the problems, needs and grievances that stand be‐ the process has been and continues to be a very hind them. But before we go on into a detailed dis‐ controversial one. While redevelopment is taking cussion of these issues, it is worthwhile to briefly place all over the city, the debate is concerned recount the history of urban development of Baku. mostly with city center. Several issues seem to be

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BAKU’S URBAN DEVELOPMENT: HISTORICAL OVERVIEW Up to the middle of 19th century the city was concentrated within the confines of the fortress walls, or the present day Icheri Sheher. It is only with the transferring of the administrative center of Baku Governorship from Shemakha to Baku that the city significantly expanded beyond the fortress walls. In the next several decades a rapid urban de‐ velopment took place, following the industrial and administrative growth of the city. The historical center where many buildings that we now consider architectural monuments are located is the heritage of that highly productive epoch of Baku’s urban history. However, this period gave rise not only to the architectural gems such as Ismailiye and Phi‐ larmonia; on the other end of the continuum were the so‐called Black City and multiple outer areas with low quality housing for the growing army of industrial workers. Basic utilities were largely lack‐ ing and the green areas were comprised of a lim‐ ited number of parks (Governors’ Garden, Mariinsky Garden, Villa Petrolea) and rapidly re‐ Leyla Sayfutdinova was born in Baku, ceding private gardens used mostly for subsistence Azerbaijan, in 1978. She had studied Law at gardening. Thus, the urban system of that period, like in many other capitalist cities, showed a sharp Baku State University (Baku, Azerbaijan) and contrast between the city center with its higher Conflict Studies at St. Petersburg State Univer‐ quality built environment used for administrative sity (St. Petersburg, Russia). She is now a Ph.D. and upscale residential buildings and low quality Candidate in Sociology at Middle East Technical districts housing the urban poor. The urban devel‐ University in Ankara, Turkey. Her research in‐ opment of the Soviet period aimed at changing this terests include urban sociology, sociology of post‐ inequality and increasing the quality of life in par‐ socialist transformation, stratification and ticular for the industrial workers. The important measures taken by the urban planners of the early nation‐building. Soviet period included the construction of new housing for the urban population and building new parks and gardens in line with the then popu‐ graphical, historical and architectural peculiarities lar doctrine of ‘garden city’. Another important of Baku, overall, the centralized process ensured task of the urban planning was development of that the decision making was more or less consoli‐ public transportation that would connect the dis‐ dated and the urban development was a directed tant outer districts with the city center. However, process. This has changed dramatically in the post‐ the process of urban development of Baku in the Soviet period, when the urban development was Soviet period also included the deconstruction of commonly defined as ‘chaotic’. many historical buildings, particularly of religious sites, and Baku lost a number of significant archi‐ PRESERVATION OF HISTORICAL CENTER tectural monuments. Another problem involved Preservation of historical and architectural her‐ the quality of new housing – especially in the noto‐ itage is arguably the most important concern with rious khruschevkas. the urban redevelopment of Baku. in the post‐So‐ It is important to note that the urban develop‐ viet period the center emerged as the most lucra‐ ment of Baku from the 19th century throughout the tive area in the city, and it is here that the urban Soviet period was centralized and followed the restructuring was first felt. Similar to the other masterplans which were adopted by city authori‐ post‐socialist cities the use of city center changed ties. While the masterplans themselves were often from primarily residential to business dominated. imperfect, and not always considered the geo‐ With the high unemployment and economic de‐

CONTEXT | 27 URBAN RESTRUCTURING OF BAKU CITY CENTER: PROBLEMS AND APPROACHES

The historical center of Baku has been densely built up even in Soviet and pre‐Soviet period, and therefore the land available for new construction is very limited. As the few available empty lots were used up the pressure for re‐use of already built‐up areas has increased. It is worth noting that this is not a new process in Baku – thus, in 1930s‐1950s extra floors were added to may pre‐Soviet 2‐3 storey buildings which significantly increase the residential capacity of the city. However, at present the pressure is not so much to add extra floors (al‐ though this too is taking place) but rather to bring down old structures and to build new buildings in their place. In some cases the process went more or less uncontested, as for example with tearing down the pre‐Soviet low quality housing around Sovet‐ skaya (now Narimanov) street, although there too were some concerns with safety of new construc‐ tion and with the amount of compensation offered to the residents. Some other cases, however, such as the Old Intourist Hotel near Azneft square and a recently torn down building on Nizami street raised more controversy. In both cases the tearing cline of the early post‐Soviet years real estate mar‐ down was justified by the authorities by claiming ket became a major source of income for many of that the buildings were damaged beyond repair. the city center residents, as apartments were con‐ The media and some city inhabitants on the other verted into shops and offices or rented out to the hand questioned whether this was indeed so and newly coming expatriate employees of the growing whether the buildings were indeed impossible to oil sector. At the same time construction of the new restore. buildings in the city center began. As the price of OLD CITY land grew the city center became increasingly at‐ The process of redevelopment of the city center tractive for the real estate investors who began to also affected Icheri Sheher, or the Old city confined develop the unoccupied lots of land. The first within the fortress walls. Like elsewhere, in Icheri buildings constructed in the city center in this pe‐ Sheher many residential units were converted into riod had received a lot of criticism for their archi‐ commercial ones, particularly souvenir and carpet tectural incongruity with the traditional Baku style. shops; in addition many new buildings housing The most notorious examples of this new incongru‐ foreign and local companies, hotels and embassies ous architecture include the International Bank of were constructed here. This redevelopment of Azerbaijan and ISR plaza near the Fountain square, Icheri Sheher was especially troubling since this and the National Bank of Azerbaijan by the train area is a State Historical Architectural Preserve and station. In the following years construction of high‐ is included in the UNESCO list of World Heritage risers continued on many other open lots of land Sites. The chaotic urban redevelopment of Icheri inside and around the city center. Following this Sheher in 1990s‐early 2000s,as well as damage from initial criticism recently there began a tendency to the earthquake of 2000 significantly changed the cover up the facades of the newly built buildings outlook of the Old City and UNESCO declared this with traditional stone and stone‐carved decora‐ site to be in danger in 2003. However, in recent tions. years the situation in Icheri Sheher has improved. The uncontrolled construction was stopped and

28 www.aaa.org.az 2/ 2010 more centralized measures of conservation were of some public space around highrisers which are implemented. The improvements in the conserva‐ in place, for example, in New York. This leads to tion management were confirmed last month by increased density and congestion of an already UNESCO when it removed Icheri Sheher from the dense and congested city center. list of heritage sites in danger. Nevertheless, this success should not obliterate the fact that consider‐ DEPLETION OF GREEN AREAS able irreversible damage has already been done I mentioned in an earlier section that green and that the urban redevelopment pressures are areas have always been an issue of particular sensi‐ only likely to grow in the future. tivity for Baku due to lack of natural forestation around the city. The post‐Soviet urban redevelop‐ HIGHRISERS AND THEIR SAFETY ment has been particularly harmful for this ele‐ Another major issue raised by the transforma‐ ment of the urban system. The trees are being cut tion of Baku’s built environment has to do with down all over the city. The first to come under at‐ proliferation of high rise buildings in the new con‐ tack were the unused spaces where trees were struction. There are several concerns related to this planted to sustain landslide or simply to increase issue. One is the concern with the outlook of the the area of greenery without officially establishing city, particularly in the historical center, as I men‐ them as parks. Unregulated ownership and lack of tioned above. The historical center was built up accountability resulted in a rapid conversion of with houses that are 2 to 5 floor high. In Soviet pe‐ these areas into construction sites. At the same time riod, some higher buildings were constructed as the trees are being cut down in the official parks, well, such as the present day Presidential Adminis‐ too, as well as in the streets and alleys. This is a tration Building, and some hotels: Absheron and very negative development, and unfortunately (new) Intourist. However, such higher buildings there appears to be no signs of this practice coming were rather exceptional, and they did not dominate to an end. The importance of greenery for urban the urban landscape. From the landscape point of system is well known and obvious – the trees ab‐ view, Baku had boasted an amphitheatrical layout, sorb carbon dioxide which is emitted into the air thanks to its geographical location on hills around by industrial production and traffic, thus helping the Baku bay. The new highrisers are built without to reduce air pollution. Needless to say, this is an any regard for these geographical conditions, so issue of extreme importance for the present‐day the amphitheatrical layout of the city can be now Baku with its growing number of cars. Unfortu‐ considered irreversibly lost. Another significant nately, this growth is not being compensated by concern is with the safety of the highrise buildings. new green areas, but on the contrary, the pollution In the Soviet period there existed restrictions on is being aggravated by the reduction of the existing the building height due to location of Baku in an greenery. earthquake prone zone. These restrictions have been lifted in the post‐Soviet period, and the justi‐ TRANSFORMATION OF SEMI‐PUBLIC SPACE fication of lifting of these restrictions is being de‐ In addition to these publically voiced concerns I bated. It is true that there has been since only one also propose one more that is unfortunately largely significant earthquake in 2000, and that the few neglected in the public debates. Less visible newly built highrisers that existed at that time did changes are also taking place, literally, behind the not suffer significant damage. However, in the 10 renovated facades. I am speaking about all the years that have passed since then the number of small and not so small construction taking place in highrisers increased multifold, and the concerns the courtyards of already existing buildings – con‐ with their safety continue to grow. These were ex‐ structions such as garages, extensions of kitchens, acerbated by collapse of an unfinished highrise bathrooms, verandas etc. And here, too, trees are building in summer of 2007. In addition, the streets being cut down to make for new construction or in Baku center are rather narrow for the buildings parking. This construction takes away the already of this height; there no requirements for provision not very wide semi‐public space that used to func‐

CONTEXT | 29 URBAN RESTRUCTURING OF BAKU CITY CENTER: PROBLEMS AND APPROACHES

30 www.aaa.org.az 2/ 2010 tion as children’s playgrounds and places of gath‐ ering for the neighbors. But what is particularly puzzling about this process is that this privatiza‐ tion of what used to be public space is not being contested much, not even verbally, in the media like the other issues are. Public space generally is defined as space that is open and accessible to everyone entitled. But in Baku courtyards seems that this space is seen as belonging to no one rather than belonging to everyone, and therefore open for appropriation by anyone with sufficient resources. This is a very dangerous conception of the public which also can explain the lack of resistance to the bigger scale unpopular redevelopment projects in the city.

WHAT CAN BE DONE? A remarkable feature of Baku redevelopment is the absence of grassroots organizations. Urban re‐ development of Baku is a spectacular process in terms of its pace and scale – but it is by no means a unique or unusual process for other post‐Soviet or post‐socialist cities. Everywhere it involves redefi‐ approved by City Duma, and thus the Soviet nition of the public and private, new construction, legacy of centralization and inaccessibility is being renovation, and conflicts around historical her‐ continued. I am not suggesting that the urban re‐ itage. Yet in many of these cities, be it Moscow, Bu‐ developers in Baku are completely insensitive to dapest, or even Tbilisi, there are citizen groups public opinion ‐ on the contrary, the renovation of who are trying to influence the process by seeking Baku center, the requirement to use traditional information, writing petitions, providing alterna‐ stone for decoration, some changed decisions like tive expert opinion. They are not always success‐ renovation of Sahil park instead of building an un‐ ful, but at least they try. In Baku this is not derground parking there point out that the deci‐ happening, and the rather large and active NGO sion makers do respond to some popular demands. community of Baku is remarkably uninterested in However, overall the process of urban decision the urban transformation. I can only speculate on making remains obscure, and there is no institu‐ the question of why this is so, and whether this is tional mechanism for providing information and an issue of ‘mentality’ or the fact that NGO activi‐ receiving feedback for the public. Thus, lack of ac‐ ties are generated by donors rather than grassroots tivism on the part of the citizens and lack of insti‐ interests. Yet the fact remains that despite the high tutional mechanism for incorporating public pitch of public discontent the grassroots activism is opinion feed into each other and surround the very limited. process of urban redevelopment of Baku with mis‐ On the other hand, at the policy making level trust and suspicion. If this is to change, if the there exists a clear deficit of information. The pub‐ process is to become more open and transparent, lic is usually informed about redevelopment proj‐ then policy makers should try to create such a ects after the decisions were already reached, the mechanism instead of simply reacting to the most projects were approved and the construction or vocal complains in the media, and the city resi‐ renovation is about to begin. One highly original dents should make an effort to step outside of way of informing the public about the construction media debate and make their demands more clear. projects is by putting computer generated images of the future structures on the fences surrounding construction sites. Public, the citizens are not par‐ ticipating in the process of making the decisions that have profound effects on their life. The process now is even less participatory than in pre‐Soviet period when at least the urban projects had to be

CONTEXT | 31 AZERBAIJANI BUSINESS IN 21ST CENTURY: FROM CORPORATE PHILANTHROPY TO CORPORATE SOCIAL RESPONSIBILITY AZERBAIJANI Ahad Kazimov BUSINESS IN 21ST CENTURY: FROM CORPORATE PHILANTHROPY TO CORPORATE SOCIAL RESPONSIBILITY

In many countries of the world, the business sector is a business’s responsibility to support social initiatives is playing an important role in addressing the social in the country and the best way to do it would be problems of citizens. A socially active private sector also through CSR model. is improving transparency issues in its business opera‐ tions, holding the state ministries and agencies account‐ HISTORY OF CORPORATE PHILANTHROPY able and actively partnering with nonprofit IN AZERBAIJAN organizations in delivering social services to vulnerable The end of 19th beginning of 20th century was iden‐ groups of population. Overall, corporate philanthropy tified as an industrialized period in Tsarist Russia. In in Western Democracies nowadays plays the role of cat‐ Azerbaijan, that period appeared the class of national alyst in social activities of the citizens and already be‐ bourgeoisie who were known as major philanthropists. came as an important component of the Civil Society. The types of charitable actions did not vary from phil‐ Corporate Social Responsibility (CSR) is an ideal anthropic activities in the rest of Russia . The philan‐ model to deliver financial and volunteering support to thropy those days were presented as almsgiving, the society from business structures. According to defi‐ patronage of charitable institutions, donations to reli‐ nition of CSR by Philip Kotler “Corporate social respon‐ gious institutions as well as support in the fields of pub‐ sibility is a commitment to improve community lic education, health protection and culture. well‐being through discretionary business practices and One of the prominent philanthropists in Azerbaijan contributions of corporate resources” . Almost all corpo‐ those days was industrial magnate H.Z. Taghiyev (1823‐ rations, banks and financial institutions in a West have 1924) who established a secular boarding school for separate CSR departments, own corporate foundations Azerbaijani Muslim girls in 1901, the first in the whole and specific corporate giving programs. Corporations Muslim World. This school was considered one of the there tend to meet expectations and social requirements major solutions to the problems of female literacy of the communities where they are operating. Any vio‐ among Azerbaijani girls and a change of the social sta‐ lation of consumer and civic rights (expired products, tus of Azerbaijani women in the beginning of the 20th exaggerated prices, any kind of discrimination, lack of century. Another famous Azerbaijani philanthropist, proper customer service and etc) would decrease the Agha Musa Naghiyev (1849‐1919), Bakuʹs wealthiest Oil number of their clients. Western business companies Baron, funded several hospitals in Baku including the pay attention to this, since they are working in very First Aid Hospital which was built in 1912 and now competitive environment. Moreover, being a socially re‐ bears his name. He also built one of the most wonderful sponsible company is a good publicity for any business buildings in Baku, "Ismailiye", in memory of his son company, and would increase its popularity and recog‐ who died of tuberculosis at the age of 27 and gave this nizability. From another side, active civil society in a building as a gift to the Muslim Philanthropic Society. West generates socially active citizens, who can form a The wealthiest Azerbaijanis in Baku belonged to dif‐ watchdog organization that would monitor the activi‐ ferent charitable organisations – one of them was the ties of business companies and engage in advocacy and Muslim Philanthropic Society, which collected money lobbying activities to protect their civic rights if some‐ to support vulnerable groups of the population. Other thing will go against the public interest. examples include the Caspian‐Black Sea Oil Industrial Prominent Azerbaijani oil barons in the beginning of and Trading Society created by the Rothschild’s in May 20th century left a legacy of generous philanthropy that 1883, the Council of the Baku Petro‐industrialists, in‐ also served the public interest. By acknowledging this volved in the construction of hospitals and schools, and fact, many people in Azerbaijan these days think that it the Baku Jewish Charitable Society .

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It is interesting to look to the development of local corporate philanthropy in Azerbaijan today to illustrate its size and scale and see how it changed over hundred years.

CORPORATE PHILANTHROPY IN MODERN AZERBAIJAN According to several studies Azerbaijani businesses are still active in supporting their communities in the 21st century. Assessment done by Synergy Strategies Group (Vermont, USA) in 2005 showed that Azerbaijani business companies are active in charity and philan‐ thropy: 100% of companies interviewed during assess‐ ment engaged in some form of charitable giving . Major areas of giving include orphanages, refugees, internally displaced people (IDPs), disabled people, education and sport. In 2008 Economic Research Center (Baku, Azerbaijan) held a survey regarding CSR initiatives and programs among large business companies in Baku, Azerbaijan . 81.1% of companies participated in survey said that they are implementing CSR activities in one or another form. In countries with transitional economies such as Azerbaijan, the understanding of Corporate Social Re‐ sponsibility is mainly focused around charity actions Ahad Kazimov was born in Baku, Azerbai‐ and social assistance to needy families. The research on jan. Heʹ has got his BA in Psychology and corporate social responsibility (CSR) which was con‐ MA in Social Psychology from Baku State ducted by the Institute for Social Action and Renewal University. In 2001 he was admitted as a (ISAR) in 2001 in Azerbaijan showed that even though PhD student to the Chair of Psychology of Azerbaijani companies are regularly donating to chari‐ Azerbaijan University of Languages. table causes, the contribution is done on an unplanned Currently he continue his dissertation on the basis and lacks a long‐term strategy . Psychology of Political Leadership. There are basically three main models of philan‐ From 2005 to 2007 Ahad did Master Studies thropy commonly using by local companies today. First in Public Affairs at Indiana University, Bloom‐ is a charitable giving to vulnerable groups without any ington (USA) through the Edmund Muskie Fel‐ PR element. Second is philanthropic activity with the lowship Program. Ahad Kazimov was working as rationale of improving the company’s image and repu‐ volunteer and expert in various social projects im‐ tation. Third –is a strategic approach that “addresses plemented by local and international organizations important social and economic goals simultaneously, operating in Azerbaijan. He was one of the by targeting areas of competitive context where the founders of Azerbaijan Psychologists Association. company and society both benefit because the firm His academic and professional interests are corpo‐ brings unique assets and expertise” . rate philanthropy, local social and public policy Companies which will be mentioned below show‐ and civic engagement in social processes in Azer‐ ing strategic approach which leverages the expertise, baijan. partnerships and financial resources of businesses with social development initiatives that improving their own enhance the social development of Azerbaijan. Azer‐ competitive advantages. cell’s current CSR project “Barama” aimed at develop‐ ing creative and innovative ideas in the field of AZERCELL TELECOM LLC information and communication technologies. The Corporate Social responsibility at Azercell covers main objective of the project is to explore new ideas, de‐ different aspects, such as sports, culture, art, education velop them and subsequently, turn them into reality. By and etc. During the period from 2007 to 2008 the com‐ combining human creativity and Azercell’s rich market pany has spent almost 9 million AZN ($ 11,250,000 and industry experience, Barama project will contribute mln.USD) for various social programs and projects to not only to the telecommunication sector of the Repub‐

CONTEXT | 33 AZERBAIJANI BUSINESS IN 21ST CENTURY: FROM CORPORATE PHILANTHROPY TO CORPORATE SOCIAL RESPONSIBILITY

lic of Azerbaijan, but also to its social welfare and eco‐ Business companies operating in Azerbaijan consid‐ nomic development . ering that the government should provide some incen‐ tives in tax legislation which would contribute to AZERSUN HOLDING promotion of the corporate philanthropy in the country. Since its establishment in 1991, the Azersun Holding 70.3% of respondents participating at the Economic Re‐ pursuing principles of strategic corporate philanthropy search Center’s survey regarding CSR activities in Azer‐ through a consistent support of vulnerable groups of baijan in 2008 considered tax freedom as the main population such as refugees and IDPs, youth, disabled stimulating measure for activities in CSR field . In addi‐ and etc. The company is constantly raising awareness tion 19% considered applying of deductions on taxes as about drug addiction, HIV/AIDS and other social prob‐ a stimulator. lems for young people and adolescents though theatri‐ One of the concerns nowadays in Azerbaijan is a low cal performances at the stage of its Community Hall level of trust among important stakeholders – govern‐ Theatre. ment, business and NGO’s. Only 22% of companies The company is using the strategy of “giving a rod participated in an assessment in 2005 had worked with to fish not a fish”. For example almost all employees at third‐party organizations during implementation of the Azersun’s packaging plant in Khirdalan are IDPs. their social projects . The business community in Azer‐ By doing this the company trying to alleviate problems baijan generally is distrustful and skeptical of the abili‐ of various disadvantage groups in communities where ties of the local NGOs to manage projects effectively company is operating. and use financial resources in a transparent manner. To serve public interests well, public and private sec‐ ACCESSBANK tors supposed to collaborate with each other through AccessBank is a first among the banks which started different arrays. They can do it effectively through part‐ active work in field of corporate social responsibility nerships. An active and viable Civil Society is a product and already implemented several significant projects in of successful partnership among these two important this field in Azerbaijan. Since 2008 Access Bank is imple‐ stakeholders. menting the Corporate Social Responsibility Program Businesses and NGOs can establish effective CSR which targets people with disabilities. The main idea of partnerships by using Social Entrepreneurship model. the program is to give young people with disabilities There are two important features that define social en‐ skills in banking so their chances to find job in current terprise. First they have a social goal and second they competitive job market will increase as well as chances merge social and commercial methods . For example, to be integrated into society. Besides trainings in bank‐ let assume that parents of disabled children, established ing, AccessBank also conducted special psychological a nonprofit organization and want to produce specific trainings for the participants. The training course was clothes or accessories for generation any possible source consist of 8 lessons (4 lessons – in banking, 4 lessons – in of income. The business companies in the region where psychology), and upon completion of the trainings, the this nonprofit registered can buy their production participants had to pass through tests. Eventually, par‐ which in its turn might bring additional funding to or‐ ticipants, who passed the tests, were employed by Ac‐ ganization. In addition, this would attract attention to cess Bank. the problems of disabled children in that particular area. Another example might be when a nonprofit or‐ CHALLENGES FOR DEVELOPING OF THE CSR IN ganization which is working with unprivileged youth AZERBAIJAN groups opens the special courses to educate young peo‐ The current tax environment is neither supportive of ple in manufacturing inexpensive office furniture. nor a barrier to corporate giving. The tax authorities in Young people who will be working at this manufactory Azerbaijan currently do not have plans to revise the tax will have more‐less stable source of income and most code to favor charitable contributions, partially due to a importantly will be far away from potential anti‐social loophole in former law which was repealed in 1999 behavior. In addition, for the possible generated income after businesses were taking advantages of it . For com‐ a nonprofit might fund other activities addressing prob‐ parision, in the neighboring country of Georgia, busi‐ lems of youth. ness entities are granted with a right to deduct 8% of Developing a Community Foundation is another donations to charitable organizations from the taxable form to encourage corporate philanthropy at the re‐ profit. In Kazakhstan, another former Soviet Republic, gional level. Business companies which are operating in the legislation offers corporations tax deduction up to the regions might contribute financially to specific 3% of their income for donations to nonprofit organiza‐ Community Foundations to address social problems ex‐ tions . isting in their respective areas. Largest source of income

34 www.aaa.org.az 2/ 2010 for community foundations usually are donations from businesses.Community Foundations are pooling local financial resources into endowment… which will con‐ tribute to the social and economic development of a particular community in a long‐run . Usually a commu‐ nity foundation is independent philanthropic organiza‐ tion which improving quality of life in communities by providing grants to local nonprofit organizations and engaging in community leadership. For example total sum of grants made by community foundations in Rus‐ sia in 2007 was approximately $4,433,709 USD .

CONCLUSION In my view, there is a big need to create the basis for a culture of the Corporate Social Responsibility in Azer‐ baijan, which will allow the private sector to become an active participant in the social‐economic development of the country. The limited level of corporate philan‐ learn best practices from western business companies thropy in Azerbaijan is grounded in the lack of knowl‐ which successfully aligned commercial and social inter‐ edge in CSR and its benefits among business companies ests in their CSR activities. and low capacities of local NGOs to engage in partner‐ It is very important to increase awareness about con‐ ships with business companies. There are external prob‐ cept of CSR among business companies, government lems as well, which related to tax legislation that bodies, representatives of non‐profit organizations and limiting the ability of business companies to donate. general public in Azerbaijan. By doing this we can meet A factor that can make CSR in our country more dis‐ several objectives: tinct and allow business sector to be more socially re‐ • Increase understanding of the concept and its im‐ sponsible is support of the concept from the portance government. Government bodies can introduce changes • Encourage partnerships between business compa‐ in legislation, provide sound legal framework for cor‐ nies and Civil Society Organizations porate contribution to Civil Society Organizations, and • Promote socially responsible practices by business encourage partnerships between public and business companies in the country sectors. The goal of this article was to give information to the Another cause of weak cooperation and interaction wide audience about concept of the Corporate Social between business and public sector in Azerbaijan might Responsibility and importance of its development in be lack of trust to each other. This is making negative our country. We know the fact that gaining profits is a impact on the level of interaction between people in so‐ major priority to business, but at the same time national ciety and among various sectors and potentially hinders business companies need to understand that strategic the development of the corporate philanthropy, because social programs and activities besides good PR will people who have low level of trust to each other, just bring commercial benefits as well. avoiding any engagement in any type of civic activities. Supporting and implementing CSR programs will There is a need in special CSR development centers enable the private sector to become an active participant or organizations assisting local companies in develop‐ in the social‐economic life of the country. Finally, as ing the capacities in design, implementation and moni‐ Michael Edwards said ‐ civil society cannot survive toring of effective CSR programs. In addition where there are no markets and markets need a civil so‐ top‐managers from national business companies should ciety to prosper” .

BIBLIOGRAPHY Print sources: 4. The state of nonprofit America. Lester M. Salamon editor. Foundations and 1. Arthur C. Brooks, Why Are Some Countries Uncharitable? Corporate Philanthropy. Leslie Lenkowsky. Brookings Institution Press. Washington, D.C. 2002 2. Adele Lindeymer, From Repression to Revival: Philanthropy in Twentieth‐ Century Russia 5. Civil Society in Azerbaijan: Challenges and Opportunities in transition. CIVICUS Civil Society Index Report for Azerbaijan. An international action‐ 3. Enterprise Nonprofits. A toolkit for Social Entrepreneurs. J. Gregory Dees, research project coordinated by CIVICUS: World Alliance for Citizen Partici‐ Jed Emerson, Peter Economy. John Wiley & Sons, Inc. 2001 pation. Baku, December 2007. International Center for Social Research (ICSR)

CONTEXT | 35 EURO 2 STANDARDS IN AZERBAIJAN: FROM PLANS TO ACTIONS

Rza Aliyev, MADIA student, Azerbaijan Diplomatic Academy

EURO 2 STANDARDS IN AZERBAIJAN: FROM PLANS TO ACTIONS

A second decade of the XXI century started with standardization of the gas emission was the fact that rather pessimistic results, if not failure, of the UN Cli‐ more than 20 percent of CO2 emissions was coming mate Change Conference 2009, held in Copenhagen. from the road transport, with 12 percent come from The world powers succeeded neither in creation of a vehicles. But only in 1993, European countries started new Kyoto Protocol nor in taking some serious steps implementation of the Euro 1 standard. The Euro 2 to “save the Planet”. On the other hand, in Azerbaijan standard, which was implemented in 1996, decreased several serious actions were taken in order to im‐ gas emission by 1.5 times. In order to comply with prove situation with environment. First, President of the rules the fuel engines of the vehicles had to be re‐ Azerbaijan decreed to declare the year 2010 to be a structured, particularly neutralization and fuel injec‐ Year of Ecology. Second, a number of projects and tion systems of the engine. The Euro 3 standards programs were launched including construction of were implemented in the European Union in 2000. waste‐to‐energy plant in Balakhani as well as build‐ Those standards have reduced the volume of the al‐ ing of new wind farms in the regions. Another im‐ lowed toxic gas by 25%, which is 2.5 times less than it portant step was to start prepare Azerbaijan to move used to be Euro 1. In October 2006 Europe introduced to Euro 2 gas emission standard by July 1, 2010. Euro 4 standards, which are twice stricter than Euro However, several issues need to be addressed before 3. With every stage of the program, the concentration the launching this program and most important one of lead, sulfur and benzene was enormously decreas‐ is what will it give to Azerbaijan. ing. It is necessary to note that Euro standards are applied only to the fuels used in vehicles. It is consid‐ EUROPEAN GAS ered that if the Euro standards would be commonly EMISSION STANDARDS applied, the aim of the Kyoto protocol to reduce the The idea to standardize the level of gas emission emission by 8% by 2012 would sound more realistic. emerged in Europe in 1970s and the reason for the The euro gas emission standards have been ap‐

36 www.aaa.org.az 2/ 2010 plied not only in the European Union, but also in a number of other states as well. If we look at the for‐ mer CIS countries, we could see that Russia, Kaza‐ khstan, Uzbekistan and Ukraine, together with Turkey, have already started to implement European gas emission standards. Azerbaijan is going to implement Euro 2 stan‐ dards in 2010 and automatically is preparing for the Euro 3 standard to be implemented in 2013. Finally, let’s see which consequences will the implementation of the higher Euro standard bring to Azerbaijan? First of all, this step shows that government realizes and takes responsibility for creating sustainable environ‐ ment. At the same time the implementation of the Eu‐ ropean standards on gas emission will help the domestic ecology and purify the air, especially in the capital of Azerbaijan, Baku. Taking into considera‐ tion that he number of cars in Azerbaijan is increas‐ ing extremely fast (by January 1, 2010 there were 925,900 cars in the country) that move will help the country to reduce the gas emission. Another problem is the level of polluted air of Baku, which is some‐ times a triple of the allowed levels. For example, ac‐ cording to the Ministry of ecology, the allowed Rza Aliyev is second year M.A. student at concentration of the dust in the air is 0.5 mg per cubic Azerbaijan Diplomatic Academy (ADA). Major‐ meter while in Baku it comprises 1.2‐1.7 mg per cubic ing in Diplomacy and International Affairs he meter. The concentration of the СO2 is up to 1.1 mg holds a bachelor degree in Public Administration per m3, while the standard is 0.5 mg/m3; concentra‐ from the Academy of Public Administration under tion of nitric oxide is 1.5‐2.0 mg per m3, but supposed the President of Azerbaijan Republic. Rza research to be 0.085 mg/m3 (23.5 times more than the stan‐ interests are energy diversification and energy se‐ dard). All these factors are main factors for a large curity issues. number of diseases, especially respiratory ones. Of course, the implementation of the European Gas Emission Standards will not solve all the environ‐ mental problems of Azerbaijan, but at least it will de‐ crease air pollution in Azerbaijan and as a result of the stronger regulations, decrease the number of cars in Baku. Even if some progress will be achieved, that could be considered as a fruitful year for the environ‐ ment of Azerbaijan.

Chronology of Euro 2 Standards Implementation:

Steps EU Russia Turkey Kazakhstan Uzbekistan Ukraine Azerbaijan

Euro 1 1992 1999 2001 ‐ ‐ ‐ ‐ Euro 2 1996 2006 ‐ 2009 2006 2006 2010 Euro 3 2000 2008 2001 2011 2010 2008 2013 Euro 4 2005 2010 2007 2014 ‐ 2008 ‐ Euro 5 2009 2014 ‐ ‐ ‐ ‐ ‐ Euro 6 2014 ‐ ‐ ‐ ‐ ‐ ‐

CONTEXT | 37 “ECOLOGICALLY CLEAN” PRODUCT “ECOLOGICALLY CLEAN” PRODUCT

Nailya Aliyeva

was a Muskie Fellow at Indiana University Bloomington from 2000 to 2003.

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There are many products in the Azerbaijani mar‐ have comprehensive organic legislation, and the ket advertised as “ecologically clean’’. But few peo‐ term "organic" may be used only by certified produc‐ ple realize the true meaning of the term. The western ers. In countries without organic laws, government countries and the United States in particular defined guidelines may or may not exist, while certification “ecologically clean” food as equivalent of organic is handled by non‐profit organizations and private product. Such foods are produced according to cer‐ companies. In the US, certification is handled by tain manufacturing standards, meaning that they are state, non‐profit and private agencies that have been grown without the use of conventional pesticides, approved by the US Department of Agriculture artificial fertilizers, human waste, or sewage sludge. (USDA). Internationally, equivalency negotiations Livestock are reared without the routine use of an‐ are underway, and some agreements are already in tibiotics and without the use of growth hormones. In place, to harmonize certification between countries, most countries, organic product should not be genet‐ facilitating international trade. There are also inter‐ ically modified. Farmers emphasize the use of re‐ national certification bodies, including members of newable (or sustainable) resources and the the International Federation of Organic Agriculture conservation of soil and water to enhance environ‐ Movements (IFOAM), the Organic Crop Improve‐ mental quality for future generations. The specifics ment Association (OCIA), and Ecocert. vary depending upon the type of food and its In Azerbaijan, the farmers cultivate highly valu‐ method of production. For example, organic meat, able and exotic food and spices such as pomegran‐ poultry, eggs, and dairy products come from ani‐ ate, walnuts, and figs that are in high demand in mals that are given no antibiotics or growth hor‐ western countries. These products can successfully mones. be exported to foreign countries to promote Azerbai‐ Organic food production is legally regulated. jan’s products in the world. Some neighboring coun‐ Currently, the United States, the European Union, tries such as the UAE and Turkey are already taking Japan and many other countries require producers to advantage of our Azerbaijan’s location and investing obtain organic certification in order to market food into food production in our country. Taking into as organic.Historically, organic farms have been rela‐ consideration increasing interest in food produced in tively small family‐run farms — which is why or‐ Azerbaijan and rapidly growing global demand for ganic food was once only available in small stores or organic food, Azerbaijan has to position itself as a farmersʹ markets. However, since the early 1990s or‐ ganic food has had growth rates of around 20% a year, far ahead of the rest of the food industry, in both developed and developing nations. Future growth is expected to range from 10‐50% annually depending on the country. Before a product can be labeled "organic," a Government‐approved certifier inspects the farm where the food is grown to make sure the farmer is following all the rules necessary to meet organic standards. Companies that handle or process organic food before it gets to your local su‐ permarket or restaurant must be certified, too. Re‐ quirements vary from country to country, and generally involve a set of production standards for growing, storage, processing, packaging and ship‐ ping that include: avoidance of most synthetic chem‐ ical inputs (e.g. fertilizer, pesticides, antibiotics, food additives, etc), genetically modified organisms, irra‐ diation, and the use of sewage sludge; use of farm‐ land that has been free from chemicals for a number of years (often, three or more); keeping detailed writ‐ ten production and sales records (audit trail); main‐ taining strict physical separation of organic products from non‐certified products; undergoing periodic on‐site inspections. The United States, the European Union and Japan

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In order to be able to take part in the organic mar‐ ket, organic standards need to be adhered to. Certifi‐ cation is required that is acceptable to the importing country. This means that the foods need to comply with several standards and certification systems. To obtain a larger share of the organic market, produc‐ ers and exporters in Azerbaijan need to design ap‐ propriate marketing strategies, seek more direct links with retailers in importing countries including through e‐commerce and create partnerships. Sev‐ eral actions should be implemented in order to suc‐ ceed in this area. First, there is a need to increase awareness of the environmental, economic and so‐ cial benefits of organic production as well as trading opportunities. Second, both research and develop‐ ment (R&D) and training are needed. Third, suitable marketing strategies and partnerships and appropri‐ ate government support should be provided to farm‐ ers. Few months ago the author bought a bottle of strong player in organic food market. The country pomegranate juice in one of the organic food store of has to be interested in organic agriculture because of Chicago. She was surprised to find out that it was the many ways in which it can contribute to trade made from Azerbaijani pomegranates and exported and sustainable development in Azerbaijan. Azerbai‐ by Turkish company. On one hand it is encouraging jan has vast swathes of agricultural land. By convert‐ see Azerbaijani product on American shelves. From ing some of these areas to organic agriculture, other hand it was disappointing that the product producers, and particularly small farmers, could im‐ was not exported by national producers. Consider‐ prove soil fertility, move towards more sustainable ing growing demand and rising price of organic forms of production and reduce their dependence on food it makes sense for Azerbaijani food producers external inputs. This, in turn, will help alleviate cur‐ to adopt international certification and labeling re‐ rent threats to Food Security in Azerbaijan which are quirements for organic food. This will ensure the droughts, severe environmental degradation, soil quality of food product for Azerbaijani citizens and pollution from the use of DDT and soil salinity in help national exporters of food products to be com‐ central regions according to World Food Organiza‐ petitive and profitable in the world food market. tion.

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