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On the occasion of the 24th Annual Meeting of the Board of Governors, the Black Sea Trade and Development Bank (BSTDB) will host a Business Forum, titled “BSTDB role in supporting a diversified and innovative Azerbaijani economy in a changing world” in Baku, on June 24, 2022.

Senior economic policymakers, representatives of major companies, academics, and members of the banking and business community will exchange views on Azerbaijan’s ongoing need for diversification of the economy, away from its dependence on energy and natural resources.

Ayya Lmahamad of Azernews presents an exclusive interview with the Black Sea Trade and Development Bank's President Dmitry Pankin on the upcoming Business Forum, Azerbaijan's cooperation with the Bank, and the implementation of joint projects.

- What are the expectations from the Forum and what topics will be discussed there? Will the Forum be marked by the signing of any agreements?

It has become a good tradition at the Black Sea Trade and Development Bank (BSTDB) to organize a Business Forum in the framework of our Annual Meetings hosted each year by one of our Member Countries. The Forum aims to highlight the economic achievements of Azerbaijan towards a diversified, innovative and inclusive economy. The event also intends to promote investment opportunities in the country amid the changing regional and local environment. The Forum, which is organized in close cooperation with the Azerbaijani Government and AZPROMO, the national export and investment promotion agency, will gather entrepreneurs from the countries of the Black Sea Region who will discuss business and investment opportunities in Azerbaijan. We expect the event to be concluded with the signing of new agreements with two local partner banks.

- As Azerbaijan is the host of the Forum, what is your assessment of the bilateral cooperation between the BSTDB and Azerbaijan?

In 23 years of operations, BSTDB has financed 39 projects in Azerbaijan totaling more than half a billion euros. Moreover, BSTDB financing has always been aligned with the strategic priorities set by Azerbaijan. What are these priorities? First, the development of capacity for the production and export of key energy resources. However, aware of the risk of dependence on a single source of income, diversification of the economy has also been on the agenda of Azerbaijan’s government. While in terms of the balance sheet BSTDB is a small bank compared to other multinational banks, we still managed to participate in strategic energy projects like Shah Deniz and we continue to finance SOCAR’s projects in Turkey.

However, given the rising importance of the diversification of the economy, we are increasingly involved in financing non-oil small and medium-sized enterprises (SMEs) in Azerbaijan. While most foreign banks, be it multinational or commercial, are targeting big projects, we help small-scale businesses that experience problems in accessing financing. What is more important is that we do this through local banks. In that way, we support both SMEs and local banks. It is worth mentioning here that we are the first multilateral development bank to issue local-currency bonds in Azerbaijan and to provide local-currency financing to SMEs in the country.

Therefore, bilateral cooperation between BSTDB and Azerbaijan can be assessed as very positive. When assessing cooperation, one should also pay attention to the other priorities of the country. We are aware of Azerbaijan’s official policy of lowering the external debt. Compared to other countries, Azerbaijan, thanks to the persistent current account and fiscal surpluses, can better meet its financing needs through domestic sources. Accordingly, even if BSTDB’s financing in Azerbaijan might appear relatively low, it is still at solid levels taking into consideration the particularities of the country. And here we are on-site to check if there is additional demand for our products.

- What major projects has the BSTDB implemented/funded in Azerbaijan?

Since its inception, BSTDB has provided support to projects in various sectors of Azerbaijan’s economy. As a development bank, we have given priority to the non-oil and gas sectors and thus financed projects in poultry farming, food processing, production of household goods, glass manufacturing, and real estate, among other sectors. Given the relatively small size of the companies and projects in the non-oil and gas sectors, BSTDB has also provided on-lending facilities to various banks in Azerbaijan to be used for support of SMEs in the country. Moreover, BSTDB is one of the founding shareholders of AccessBank Azerbaijan, and in that role, it has provided hundreds of millions of USD to support SMEs. BSTDB sold most of its shares in AccessBank in 2018 as it completed its mandate, retaining only a minority stake as of today.

Additionally, BSTDB is the first multilateral development bank to issue an Azerbaijani manat (AZN) denominated bond with the aim of promoting the development of Azerbaijan’s capital market and supporting lending in local currency. The two-year bond for the amount of AZN 10 million, which represented an innovative BSTDB product on its own, was placed on the Baku Stock Exchange on 1 August 2019. BSTDB used the proceeds from the bond to provide a local-currency SME facility to TuranBank. A second SME facility to TuranBank in local currency was extended in 2021. Namely with loan financing in Azerbaijani manat BSTDB helps SMEs in Azerbaijan to mitigate risks associated with fluctuations in foreign exchange rates.

In 2019, BSTDB also partnered with SOCAR Trading, a major international energy trading company, to advance regional cooperation in the energy sector. The energy and infrastructure sectors have a vital role in regional development and as such are a strategic priority for us.

- As of now, are there any projects/investments underway or in the pipeline?

After a slowdown provoked by the COVID-19 pandemic, we are currently in the process of building a pipeline of new projects. Non-oil and gas sectors continue to be our priority. We already have several projects in the pipeline that we hope to be able to finalize during 2022 and early 2023. Agribusiness, food processing, logistics, and retail are the sectors that will lead the expansion of our portfolio in Azerbaijan.

- What is BSTDB’s role in supporting the diversification of the Azerbaijani economy?

Following the completion of major energy projects, Azerbaijan has naturally started promoting the diversification of its economy. It is a well-known fact that dependence on a single source of income makes a country vulnerable to external shocks and, at the same time, erodes the competitiveness of other economic sectors. Diversified economies are more immune to external shocks. Furthermore, the bulk of employment in any country is generated by the non-oil and gas sectors. Accordingly, Azerbaijan has declared the diversification of its economy a top priority. It should be noted that the official country priorities are reflected in BSTDB’s strategy for Azerbaijan. Therefore, by our mandate, our role is also to support the diversification of the economy. And, if you review our projects in Azerbaijan, you will see that most of them have been directed toward the non-oil and gas sectors. Generally, multinational banks prefer big-ticket projects, as the provision of small-scale financing is relatively costly. This is not the case for the BSTDB. We handle this challenge by partnering with local banks to whom we provide funds for “on-lending” to SMEs that meet certain requirements. In that way we finance SMEs in various sectors, thereby supporting the diversification of the Azerbaijani economy. In the process, we also support local banks.

- With no end to the Russian war in Ukraine and amid the imminent energy crisis, do you consider that the diversification of the Azerbaijani economy is as topical as it was before the recent developments?

Economic diversification should be on the radar of policymakers, particularly during periods of high energy prices. For energy-rich countries, high oil and gas prices lead to massive revenue inflows that can easily distort the domestic economy and increase its vulnerability to the next price shock. To mitigate this, policymakers should focus on diversification. With rising revenues during periods of high oil and gas prices, officials, in terms of financial costs, can afford reforms that promote economic diversification. However, certain interest groups might oppose the necessary reforms, preferring instead to rely on easy money flow. This could be a perfect recipe for an imminent economic shock in the case of a sharp decline in oil and gas prices. And in such a scenario, the country would have to make reforms the hard way and with limited financial resources. To avoid “reforms by the hard way”, it is necessary to prepare in times when oil and gas prices are high. Obviously, given the recent security challenges and the concerns about the energy supplies from Russia, Azerbaijan might be considered an alternative source of energy for Europe and for the Black Sea Region in particular. Nonetheless, the country should continue its diversification agenda.

- As many BSTDB member states are announcing the end of the COVID-19-related restrictions, what is your assessment of the Bank’s role in addressing the negative effects of the COVID-19 pandemic?

The BSTDB has navigated the difficulties of the COVID-19 pandemic very successfully, emerging stronger from the crisis. First, we have successfully safeguarded the health of our employees. In response to the lockdowns, we switched to distance working and hybrid arrangements wherever physical presence was mandatory. The transition was smooth and popular, and now we have an additional tool to deploy if needed in order to maximize staff efficiency and satisfaction. Second, we have benefited from the ultra-low interest rate environment to strengthen and diversify our funding base. Operationally, we shifted our lending focus from assisting new investment and infrastructure development to more corporate lending for working capital, SMEs support, and trade financing. Portfolio growth dipped slightly, but we still grew by 11.8% in 2020 and by an additional 14.6% in 2021, more or less in line with our business targets. We suffered no new impairments and maintained our profitability in 2020, while in 2021 we posted a record-high performance.

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Ayya Lmahamad is AzerNews’ staff journalist, follow her on Twitter: @AyyaLmahamad

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