International investors this summer gained their best chance yet to invest in Transcaucasia, the region of the CIS separating Russia and the Middle East, with the start of voucher privatization in Azerbaijan. The country's programme is more open to foreign investment than almost any other in the CIS and lets investors take exposure to an economy that is growing at more than 5% a year.
"Azerbaijan was at first slower to reform than other east European countries," says Thomas Bley, associate banker at the European Bank for Reconstruction & Development in London. "But since the start of this year the government has put a lot of effort into privatization and there has been substantial foreign interest in developing its natural resources, especially the oil and gas reserves."
Most foreign investment so far has taken the form of production-sharing agreements to exploit oil reserves in the Caspian Sea to the east of Azerbaijan. Voucher privatization could next year allow western investors to lift their exposure to the industry by buying shares in Aznefttechimmash, a complex of 19 enterprises manufacturing equipment for the oil industry, and eventually even in the state oil-production company.
Until recently, Azerbaijan has been held back by a conflict in Nagorno-Karabakh, a mountainous region whose predominantly ethnic Armenian population attempted to secede after the break-up of the USSR in 1991. By 1995, Azerbaijan's real GDP was just 35% of its level in 1989, about 20% of its territory had fallen into rebel hands and an influx of refugees had doubled the population of Baku, the capital city.
"Fighting has stopped," says one banker. "Azerbaijan and Armenia are about to start negotiations to resolve this dispute. It's in both their interests to reach an agreement."
After growth of 1.2% in 1996, the economy is bouncing back, with GDP expected to rise 5% this year and 7% next year. Inflation, which peaked at 1,700% in 1994, is expected to be 10% to 15% this year. The manat, the country's currency, appreciated against the US dollar from Am4,440 at the end of 1995 to Am3,950 in August.
Azerbaijan launched its mass privatization scheme in March when it began issuing vouchers. The entire population, including children born before January 1 1997, were given privatization "pies" comprising four privatization cheques. The cheques can be used to bid for shares in voucher auctions, which began in April.
Under Azerbaijani privatization law, 15% of the shares of each company are reserved for the employees and a further 55% to 60% is sold through voucher auctions. A further 5% to 30% is then sold through cash auctions. "That means the state is not retaining large stakes," says Leonard Barenboim, director of capital markets development at AJG Investment, an investment bank in Baku. "It does not intend to play a big role in industry with the exception of strategic sectors, such as cotton gins where it will own golden shares."
In contrast to most CIS countries, Azerbaijan allows foreign investors to participate in voucher auctions. "To do that, they have to buy vouchers in the secondary market and take them to the state property commission where they will be issued with one 'option' for each cheque," explains Barenboim. "One cheque and one option together allow them to bid in auctions." Privatization pies are trading on the secondary market at around $40 and it costs 50 cents to buy an option. That implies, in theory, that it would cost $336 million to buy all 8 million pies in the issue.
Cash auctions are more suitable for strategic investors. Bidders have to tender for all the shares on offer and deposit 10% of nominal value in advance. There have been no bids at many cash auctions, because domestic funds are so limited. That means that investors bidding nominal value have a good chance of winning the auction - and of picking up assets at a fraction of their true value.
There have been seven voucher auctions so far, and most of the companies sold have been medium-sized food-processing companies. "The crown jewels, such as the energy-related enterprises, will probably not be sold until next year," says one banker. Other important industries in Azerbaijan include chemicals and fertilizers; the country is also home to BAK-Conditioner, formerly one of the largest producers of air-conditioning units in the USSR.
In contrast to Russia, where the infrastructure for share trading developed piecemeal after voucher privatization was over, Azerbaijan has already prepared laws to set up a centralized depository, paving the way for dematerialized share trading, while the president of Azerbaijan issued a decree to set up a securities commission in late July. Bankers expect shares to be traded on the Baku Interbank Currency Exchange (Bicex).
In tandem with the development of the equity markets, Azerbaijan's debt markets are set to spring to life in October with the first issue of commercial paper. AJG Investment is planning to launch a six-month issue of zero-coupon paper in October, which will be issued jointly by seven Azerbaijani banks and is expected to total Am7 billion ($1.78 million). Gavin Gray