Azerbaijan: Green agenda and SME support Promising projects with Black Sea Trade and Development Bank

Over the past two years, most international financial institutions (IFIs) have qualitatively reformatted country projects in the post-Soviet region. Global donors are shifting activity towards green energy projects and innovative ventures on the climate agenda while expanding access to concessional finance for small and medium-sized businesses. Similar trends can be seen in the strategy of the Black Sea Trade and Development Bank (BSTDB). A BSTDB delegation headed by its president Sarhat Koksal recently visited Baku to discuss new prospects for cooperation at the Finance Ministry and Azerbaijan’s Central Bank and aspects of increasing the bank's subscribed capital were discussed.

A series of global economic crises and dramatic events around Ukraine, resulting in a confrontation between the West and Russia, changing market conditions and new logistical realities, among others, have prompted most MFIs to change their financing structure and diversify their lending flows in the former Soviet Union and its neighbouring regions. In the case of Azerbaijan, the new priorities of international donor agencies are based on a significant reduction in demand for long-term financing for capital and infrastructure projects, including conventional energy and oil and gas logistics. Accordingly, in the medium term, IFIs are shifting their financial focus to alternative energy and energy efficiency projects, solid waste management, the creation of an environmentally friendly recycling industry and the remediation of contaminated sites, and the diversification of the economy to promote green innovation. At the same time, the government is supporting digital transformation projects, Industry 4.0, and facilitating preferential financing for start-ups and small and medium-sized enterprises (SMEs). The development of infrastructure and logistics initiatives in the Middle Corridor, which has recently become strategically important for most countries in the region and many global actors, also seems to be an important area of focus. The World Bank, the European Bank for Reconstruction and Development, the Asian Development Bank and others have announced the development or adoption of new country agendas in the last 18 months.

The Black Sea Trade and Development Bank has been developing a similar country agenda for Azerbaijan since last year. The BSTDB was established in 1999 at the initiative of 11 countries - Russia, Greece, Turkey, Bulgaria, Ukraine, Romania, Albania, Azerbaijan, Georgia, Armenia and Moldova - in order to support the economies of the Black Sea region. Today, to increase the capitalisation of projects in the region, the donor agency has started to increase its subscribed capital with the assistance of the Bank's member countries. The last BSTDB capital increase took place in 2018. In autumn 2021, the BSTDB's board of governors decided to increase its subscribed capital by 35.4 per cent, from €2.29 billion to €3.1 billion, and the subscription allocation process was completed at the end of last year. As one of the bank's co-founders, Azerbaijan also participates in these initiatives: our country's share in the share capital until recently amounted to 5 per cent.
In particular, Finance Minister Samir Sharifov and Central Bank Chairman Taleh Kazimov recently held a meeting with a BSTDB delegation in Baku. The key issues discussed by the parties were increasing the bank's capital, prospects for cooperation between Azerbaijan and BSTDB, preparations for the annual meeting of the bank's Board of Managers in July and expansion of the bank's participation in financing projects in our country. According to the report of the Ministry of Finance, 36,680 shares for 41.032 million euros were offered to Azerbaijan within the increase of the subscribed capital, of which 12.31 million euros shall be paid by our country in eight equal tranches during the period from 2023 to 2030, and the first payment shall be made by the end of this year. Thus, despite the rather difficult geopolitical situation observed in the region, Azerbaijan has consistently supported the growth of the Bank's capitalisation, reaffirming its commitment to efforts to expand its geographical reach and economic development of the region.

Our country occupies a worthy place in the bank's financial operations: over the period of its operation, the BSTDB has lent nearly 520 million euros to our country for the implementation of some four dozen projects. Overall, the bank's current assets in projects in Azerbaijan are within ten per cent of its total loan portfolio. Loans provided have been predominantly to the energy sector (around 35 per cent), with two loans to SOCAR Trading and SOCAR AQS, a loan to the Shah Deniz development project, followed by the banking and corporate sectors. Overall, however, about two-thirds of the BSTDB loans to Azerbaijan are used by the private sector, mainly in the non-resource sector, with the remainder going to state agencies and state-owned companies.

During the BSTDB delegation's visit to Baku, new trends in the bank's operational policy were also discussed and priorities for financing certain areas of the economy were outlined. For example, as part of its country policy diversification the Black Sea Bank intends to expand the network of partner banks in Azerbaijan as a channel to provide loans to micro, small and medium-sized businesses as well as to support participants in foreign trade activities through trade finance mechanisms. One such project was a $5 million loan agreement signed last year with TuranBank to expand financing for export and import operations, including in the Black Sea region. In 2022, BSTDB also signed an agreement with Rabitabank for $10 million to lend for investment programmes and the working capital needs of SMEs.

At the same time, BSTDB will continue to cooperate with the financial sector in Azerbaijan in building financial instruments in the national currency, manat, to optimise credit support for projects and de-dollarise the country's lending sector. Black Sea Bank was the first MFI to lend in the national currency, the manat, and in 2019 the bank issued its first issue of manat bonds in the amount of 10 million. And these efforts are expected to continue: the bank's medium-term plans include the issue of manat bonds totalling 50 million manats [$29.3 million].

There are also plans to expand sectoral coverage through direct cooperation without banks - directly with large companies in areas such as agribusiness, manufacturing and trade. The Bank is also interested in strengthening its support for key infrastructure construction, especially at the municipal level in regional cities, where access to concessional finance has not yet been fully secured. The Bank's new priorities also include financing for coastal infrastructure, agribusiness, mining, water infrastructure and utilities. As part of these trends, the BSTDB's involvement in the reconstruction of the liberated areas of Azerbaijan is not ruled out, including lending for housing rehabilitation projects alongside investments in business projects.

According to the BSTDB's climate change strategy adopted the year before last, the bank plans to significantly increase its lending for green energy, as well as other climate-friendly and socially-oriented projects over the next 10 years. And in this context, the bank is ready to provide Azerbaijan with concessional loans for the development of renewable energy projects, as well as for emissions reduction and energy efficiency of relevant enterprises, construction of green buildings and development of an electric transport system.