The Right Kit

As with any sage oil-producing nation, Azerbaijan is keen to diversify its economic base away from the black stuff to ensure sustainable economic performance. Fundamental to this is the maturation of its capital markets. The Baku Stock Exchange (BSE), established in 2000, and currently trading state and corporate securities, is a closed joint-stock company with 20 shareholders, including Turkey’s Borsa Istanbul (BIST). In 2010, the President of Azerbaijan tasked the State Committee for Securities (SCS) of Azerbaijan (the regulator of the BSE), with further streamlining the capital market. This has involved introducing effective trading architecture, stimulating demand for a range of instruments and services—largely through the training of a competent workforce, public relations, and the establishing of a legal and regulatory framework. In May of 2011, these efforts were crystalized in the State Program on the Development of the Securities Market of the Republic of Azerbaijan for 2011-20. The program is geared at bringing the securities market up to date in providing risk management and greater capitalization potential. Among its key points were the creation of a central depositary of state and corporate securities, a simplification of the listing process, and the establishment of an electronic centralized clearing system. Confidence, both in the nation and the legal system, is fundamental to investment. And to foster investor confidence the regulatory base was bolstered by a legislative rethink on the securities-related tax regime, plus incentivization of investment income and capital gain from securities trading. The plan also stipulates the creation of pension funds to broaden the investment options.

ALL MOD CONS

In ongoing efforts to enhance its offering, the BSE has turned to the Korea Stock Exchange to install an information system that controls the, trade and post trade subsystems of the capital markets, according to the State Procurement Agency of Azerbaijan. On January 14 of BSE board chairman Fariz Azizov confirmed plans to complete the introduction of an integrated electronic platform by late 2015, or early 2016. Financing of the works is carried out within the framework of the agreement of the government of Azerbaijan and the World Bank for the modernization of the capital market in the country. The project is being funded by the International Bank for Reconstruction and Development (IBRD) through a 15-year loan with three-year grace period. The BSE has been keen to leverage the considerable pedigree of the Korean Stock Exchange, the world’s largest by derivatives transaction volume, and ranked among the twenty largest stock exchanges by market capitalization.

State Securities

From Monday to Friday both resident and non-resident investors trade in the T-Bills-Zero coupon bills of the Ministry of Finance of Azerbaijan Republic, with a maturity of one, three, and six months, and one year. Trading in T-Notes with a maturity of two and three years is done from 11am to 12.30pm daily. Zero coupon notes of the Central Bank trade from 11am to 12.30pm daily from 10.40am to 4.30pm among local commercial banks, as are repo-based T-bills and notes.

Corporative securities

The trading of ordinary and preferred shares occurs on Monday to Friday from 10am to 10.40am, and from 4.50pm to 5.30pm. For non-resident investors equity capital purchases of 10% or above require Central Bank approval. The BSE also executes the trading and clearing operations for corporate securities.

Azerbaijani car dealer Xazar-Lada has entered the capital markets through the sale of bonds at the BSE on January 5th. It was cleared to raise AZN5 million through the issuing of 1,000 papers at a par value of AZN 5,000 in the 1,825-day turnover period. The five-year bonds were set to yield 12% per annum.

The BSE, Azerbaijan’s National Depository Center (NDC) and Azerbaijani company Invest-AZ have partnered to develop a derivatives market for the trading of gold, silver, and other commodities, with clearing and accounting executed on the Meta Trader 4 platform. The BSE described the development as a means of trading currency and commodity financial tools via regulated market institutions.

According to Trend data, the total transaction turnover for all instruments traded on the BSE in January-December 2014 was at AZN8.2 billion—official exchange rate of 0.7844 AZN/USD as of January 5th—on a 3.7% YoY decline. State securities market volume stood at AZN4.2 billion (down 41.4%) for the period, while corporate securities market turnover was at AZN4.0 billion (close to threefold YoY growth for the period). The average monthly volume of the securities market for 2013 overall has soared 46%, to AZN8.8 billion.