Commodities, Frontier Markets

Falling Oil Prices Raise Concerns Over Azerbaijan Stability

By Riccardo Dugulin

Azerbaijan Absheron Oil FieldThe ongoing fall of oil prices leaves the Azerbaijani economy exposed to structural issues, increasing the risk of social unrest linked to current hardships.

Since December 2015, the Azerbaijani economy has felt the negative effects caused by falling oil prices. The drop in state revenue from oil, along with the devaluation of the national currency, is resulting in economic hardships for the local population. The current economic downturn raises questions concerning the long-term stability of the country. High inflation, linked to a drop in private purchasing power along with public budget reductions, led to a string of protests in mid-January that underscored the growing discontent within Azerbaijan.

Azerbaijani government revenue depends up to 75% on oil and gas incomes, and the drop in oil prices came as a structural shock. Indeed, authorities had initially planned a 2016 budget based on a USD 50 per barrel. Given the continued decrease in the oil trading price, Azerbaijan’s central bank reviewed its yearly budget on 19 January, adjusting it to USD 30 per barrel.

The revision of the state budget is just one among many measures authorities took in an attempt to protect the national economy. In December 2015, the central bank unpegged the Azerbaijani Manat (AZN) from the US dollar to safeguard the national currency from the ongoing loss of value. Since then, the Manat lost approximately 40% of its value against the dollar and the central bank lost more than half of its foreign currency reserve in an attempt to limit the weakening of the national currency. In light of the current devaluation of the Manat, Azerbaijan put in place capital control measures including a 20% tax on all international cash movement as well as the temporary closure of independent currency exchange booths.

While these measures may be sufficient to limit the damages to the national economy in the short-term, the soaring prices of imported goods and the resulting inflation have already led to social unrest and rising fears of potential instability. In early January, the self-immolation of a man protesting his sudden inability to reimburse bank loans indicated the hardships faced by the people of Azerbaijan. Since then, there have been reports of crowds rushing to local grocery stores, fearing additional increases in prices.

The dire economic situation led to massive protests throughout the country. Between 12 and 13 January, rallies were held in several districts, including Siyazan, Fizuli, Aqsu, Aqcabardi and Lankaran. Demonstrators were either independent citizens or members of the opposition Azerbaijani Popular Front Party (AXCP) and Musavat Party. Violent unrest broke out in several locations and at least 55 demonstrators were detained. These incidents received international attention, as the country is generally not subject to major episodes of public protest.

Azerbaijani ruling authorities have in the past generally responded to social unrest linked to political opposition or social issues with a mixture of security operations and public expenditures aimed at quelling public discontent. However, the current economic situation makes the latter option more difficult to implement. While President Ilham Aliyev has so far faced a fragmented and rather weak political opposition, the current economic crisis could serve as a mean to unify protesters.

As such, given the bleak economic prospects for a country over-reliant on energy exports, there is a risk of additional unrest in the coming months. At this point, demonstrations are unlikely to translate into a direct threat to the regime, but any probable security crackdown is likely to lead to enhanced social instability in a period of economic hardship.


Courtesy of Global Risk Insights, © 2016 Global Risk Insights
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Global Risk Insights (GRI) provides expert analysis on political events impacting business, investment, and economic climates worldwide.

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