"Green" energy and small business: Black Sea Bank's priorities in Azerbaijan Analysis by Caliber.Az

A quarter of a century ago, 11 states of the Black Sea and Caspian region, including Azerbaijan, established the Black Sea Trade and Development Bank (BSTDB). Since then, the bank has been actively assisting the states and private businesses of the region in the development of trade and the implementation of investment projects. The activity of the BSTDB has decreased somewhat in recent years against the background of a series of crises – a pandemic, energy and food shortages, hyperinflation, and now the war in Ukraine. However, despite the observed negativity, the Black Sea Bank is ready to expand its participation in the creation of "green" energy, diversification of the non-oil sector and other landmark regional projects, including in Azerbaijan. The bank's priorities were announced at the 24th annual meeting of the BSTDB, which started yesterday [June 23] in Baku.

The two–day meeting of the Black Sea Bank, which ends today in Baku, took place against the backdrop of the most acute geopolitical catastrophe of the 21st century - the war in Ukraine, which led to mass deaths and a large number of refugees. Moreover, the negative consequences of this conflict are most felt in the countries of the Black Sea and Caspian region. "The Russian-Ukrainian war and the events around the Black Sea have created problems with the transportation of food, which poses a threat to global food security in general. Energy supply chains have also been seriously disrupted, and regional trade has suffered. Unfortunately, the war is not over and the consequences of geopolitical tensions for the region are unknown," said the bank's representative director for Azerbaijan, Samir Sharifov, who chaired the meeting.

It is appropriate to recall here that the consequences of the military conflict in Ukraine are far from the only problem faced by the countries of Southern and Eastern Europe, which have barely begun to overcome the negative [impact] of the pandemic crisis of 2020-2021. The acute gas crisis that has been going on since last year, the shortage of petroleum products and fuel, food, fertilizers and building materials and the high inflation caused by these factors have a very negative impact on the credit sector, reducing the activity of investors and small and medium-sized businesses (SMEs).

But despite the rather unfavourable political background and significant macroeconomic risks, most of the countries of the Black Sea and Caspian region as a whole were able to overcome the period of a two-year recession, and the positive trade dynamics gradually stimulates the activity of international donor structures, including the BSTDB. This message was voiced in the speech of the bank's President Dmitriy Pankin and other participants of the meeting, which was attended by directors-representatives of the BSTDB member countries - Albania, Bulgaria, Georgia, Moldova, Romania, Russia, Türkiye, Greece, Ukraine and Azerbaijan. Only one participant in the bank's annual forums, Armenia, did not take part in the Baku meeting.

The Board of Directors assessed the bank's activities and approved the financial statements for 2021, at the same time, the prospects for opening credit lines to banks and financing small and medium-sized businesses (SMEs) were studied. Among other things, the issue of increasing the capitalisation of the BSTDB was considered, in connection with which Azerbaijani Finance Minister Samir Sharifov confirmed Azerbaijan's readiness to support the bank's efforts in this area. "BSTDB was able to significantly increase its capital last year, and in the current difficult geopolitical situation, Azerbaijan is once again ready to participate in the process of increasing the bank's capitalisation," Sharifov said. The finance minister stressed that Azerbaijan, as one of the co-founders of the bank, is committed to the efforts made in relation to the economic development of the region: "New goals have been outlined to expand the geographical area of the bank, which we fully support." During the meeting of the BSTDB in Baku, new trends in the bank's operational policy were also considered and priorities for financing a number of areas of the economy were outlined.

To what extent can our country count on the growth of financing through the BSTDB and in what areas of the economy can these loans be directed? To recall, Azerbaijan, one of the founders of the Black Sea Trade and Development Bank established in 1997, owns a 5 per cent stake in the equity capital of this regional bank, estimated at €3.5 billion euros. Azerbaijan occupies a worthy place in the bank's financial operations: over the entire period of its activity, the BSTDB has allocated loans to our country in the amount of over €480 million for the implementation of four dozen projects. In general, the bank's current assets for projects in Azerbaijan are within 10 per cent of its total loan portfolio. The loans provided were mainly directed to the energy sector (about 35 per cent), in particular, two loans were provided to SOCAR Trading and SOCAR AQS, and a loan was also allocated for the Shah Deniz field development project. This is followed by the banking and corporate sectors. In general, over three-quarters of the BSTDB loans allocated to Azerbaijan are used by the private sector, the rest of the investments fall on state structures.

However, taking into account a number of global crises and the changed market conditions, since the end of last year, the BSTDB has begun to consistently change the financing structure, diversifying credit flows. The new priorities of the Black Sea Bank are based on the fact that the demand for long-term financing of capital and infrastructure projects has partially decreased in the regional countries. Accordingly, in the short term, the bank is increasing credit support for small and medium-sized businesses, and the number of borrowers will be expanded due to the optimisation of business project planning and greater participation in the process of its implementation.

The BSTDB also plans to increase trade financing, and in this regard, they intend to almost triple the capitalisation of relevant projects in the medium term. According to the plans outlined at the end of 2021 to diversify the bank's priorities, it was expected to bring the loan portfolio to more than €2 billion this year. At the same time, according to the BSTDB strategy adopted in March 2021 to combat climate change, in the next 10 years, the bank is going to significantly increase lending to "green" energy, as well as other climate-friendly and socially-oriented projects.

These aspects, in particular, were discussed on the second day of the event, on Friday [June 24], at a business forum organised with the support of the Azerbaijani government and the Azerbaijan Export and Investment Promotion Agency (AZPROMO), as well as regional business associations. The business forum was dedicated to the topic "The role of the BSTDB in supporting the diversified and innovative economy of Azerbaijan in a changing world". During the forum, which brought together private companies, representatives of the expert community and leading business leaders of the Black Sea region, issues of diversification of the non-oil sector were discussed, and the trade and investment potential of Azerbaijan was considered.

"We are planning to launch new projects, ideas and services that the BSTDB can provide to the private sector of Azerbaijan. Our bank consistently cooperates with the financial sector of Azerbaijan, issuing our financial instruments in the national currency - manats. Our bank is also extremely interested in developing projects in the field of renewable energy," BSTDB President Dmitriy Pankin said during the meeting.

And the BSTDB really has a good experience of cooperation with a number of banks in the country in providing targeted credit lines aimed mainly at financing SMEs in industry, agriculture, construction, trade, services and other areas of the non-oil sector. Moreover, in order to lend projects in Azerbaijan in the national currency in 2019, the Black Sea Bank issued the first issue of manat bonds in the amount of 10 million manats. The continuation of this undertaking is expected - the issue of manat bonds totalling 50 million manats is listed in the medium-term plans of the BSTDB.

The most important priorities of the BSTDB include financing projects in the field of renewable energy sources (RES), and in this area, it is possible to both direct lending through the bank and attracts loans from partner structures, for example, the Investment Bank of the Nordic Countries (Nordic Investment Bank). "Azerbaijan is not a member of the Nordic Investment Bank, but we can sign a cooperation agreement with it. This will allow us to directly support your country," said Secretary-General of the Investment Bank of the Nordic Countries Heikki Cantell, a participant in the Baku Forum. According to him, within the framework of the partnership programme, the Investment Bank participates in financing projects implemented in Azerbaijan through the BSTDB structure and, in particular, is ready to provide a loan for the development of projects in the field of renewable energy.

Another priority area of cooperation with the Black Sea Bank is the participation of the BSTDB in the restoration of the territories of Azerbaijan liberated from occupation, and along with investments in business projects, it is possible to restore the housing stock, etc. In turn, taking into account the fact that a considerable part of the renewable energy projects are planned to be implemented in the Karabakh region, where the formation of a green energy zone has already begun, long-term low-interest loans from the BSTDB for the construction of wind and solar stations would also be in great demand here.