Foreign Exchange Market &

Banking in Azerbaijan
By: Faig Khasayev
Information on lecturer

 2014-2018, UNEC ISE, Accounting & Audit

 2016, CEFAM, Erasmus+ Exchange

 2019-2021, ICD, MSc International Business Development

 2017-2019, EY Azerbaijan, Assurance Services

 2021- present, Kaptial Bank, Budgeting & Strategy

 Linkedin: https://www.linkedin.com/in/faigkhasayev/
 Gmail: fkhasayev@gmail.com
General overview

 Central Bank of Azerbaijan (CBAR) is the authority supervising

exchange rate and operations related to exchange rate
 CBAR has established a fixed rate for AZN against USD. The rate is
fixed at 1 USD = 1.70 AZN
 AZN exercises floating rate against other currencies, such as EUR,
GBP, RUB, etc.
 Two major devaluations: 2015: 0,78 – 1,05, 1,05 – 1,55. Floating
rate: 1,90-2,00. Fixed at 1,70
USD-AZN Chart, 10 years’ view
EUR-AZN Chart, 10 years’ view
Impact of devaluations on banking

 Decline of oil prices and decrease of foreign currency inflow put Azerbaijan
economy under strain
 CBAR reserves decreased from 15 billion USD to 6,2 billion USD during last 6
months of 2014. Estimated 2 billion AZN was spent in Jan-Feb 2015 to preserve
the 0,78 rate.
 Devaluation of currency twice in 2015, when AZN devalued for almost 200%,
created significant disbelief among population in fate of their assets in AZN and
liabilities in USD
 Banks became more limited in funding of their operations via liabilities. Deposits
totaled a 73,4% in banking industry in 2013, amount increased to 85,1% in 2017.
Impact of devaluations on banking

 Increased share of non-performing loans in FX. Creation of bad loans portfolio.

Problematic loans portion surged from 5,1% in 2013 to 13,8% in 2017.
 Rapid increase in amounts due to customers & financial institutions
 Revaluation gain/loss, depending on portion of assets, liabilities & income in FX
 Banks with weak risk management system and reserves go bankrupt. Devaluation
saw 10+ banks shut their doors.
 Loss of cash due to withdrawal from AZN current accounts/ Turn in USD.
 Opportunity! : Banks that survive the period strengthen control, risk management
& underwriting to ensure high-quality assets in loans
FX Sources: Primary/Secondary Markets

 Banks need foreign currency for their daily operations: lending, investing,
performing payment orders, paying out for deposits, keeping up turnover in
ATMs.
 There are two sources where banks get foreign currency: Primary Market,
Secondary Market
 Primary Market involves participation of CBAR & SOFAZ
 Secondary Market involves commercial banks agreeing to trade among each other
 Primary Market offers sale of USD only, USD purchase still dominates secondary
market
CBAR & SOFAZ: Primary Markets

 CBAR organizes auctions for commercial banks on a weekly basis or twice a

week depending on the demand.
 The role of provider of foreign currency is allocated to SOFAZ
 45 auctions during 2021, 2, 768 million USD of sales. Last sale, 29 June, 77,1
million USD
 End of 2020 - Early 2021 saw a surge in demand to USD, which was reflected in
amount of demand on auctions reaching 142, 2 million USD
 Increased demand and falling oil prices (Brent 35 $) saw the speculations around
next devaluation.
Secondary Markets: Banks

 Banks due to nature of operations accumulate either excess funds in LCY or in FCY. This
depends on share of FCY loans & deposits, operations via core accounts etc.
 Banks might need to improve their position on any of the currencies. Currencies different
from USD are not offered on the market, USD is traded only during certain days
 In Azerbaijan, as a practice, banks enter into agreements (SPOT, BKNT) with a favorable
rate and make trades happen.
 Resident banks also enter into agreements with non-resident banks for forward contracts.
Those are usually buy contracts for resident banks and help ensure FX currency inflow at a
favorable rate and mitigate against future fluctuations in exchange rate
 Dealing Income in Banking

 Dealing Income is the summary of earnings generated by active operations of the Bank using the foreign currency
exchange rate.
 It also is the income generated from buy/sell operations with currency from individuals, corporate & SME
customers.
 The rate of buy/sell in banks is determined by the rule of CBAR Rate +/- 0.5% margin. This margin serves as a
restrictive tool preventing banks from conducting significant operations in volumes and rates that might negatively
impact policy of CBAR on holding the exchange rate fixed.
 Banks offer special rates as part of their agreements to their corporate & SME customers as part of banking
services provided to the clients
 Dealing income by banks
 International Bank of Azerbaijan: 47.34 million AZN (2020)
 Kapital Bank: 30.76 million AZN (2020)
 PASHA Bank: 22.86 million AZN (2020)
Translation Gain/Loss in Banking

 Gain or loss occurs due to translation exposure of assets/liabilities in foreign currency

 Let’s say, a resident company in Azerbaijan holds 1 million USD and the rate is USD-AZN
rate is 1:1. Closer to the year end, rate becomes 1:2 & translation loss is reported as
500,000 AZN on the financial statements.
 Translation gain/loss for some banks in Azerbaijan:
 International Bank of Azerbaijan: 19.84 million AZN gain (2020), 17.95 million AZN loss (2019),
89.39 million AZN loss (2015)
 PASHA Bank: 8.57 million AZN gain (2020), 0.3 million AZN loss (2019), 12.99 million AZN
gain (2015)
 Foreign Currency Swaps in banking

 Two parties exchange equivalent amounts of two different currencies

 Swaps can include interest rates, then they become offsetting loans.
 Swaps are done to borrow currency with lower exchange rate
 Swaps help to hedge against exchange-rate risk
 One bank offers 100 million USD, other bank 170 million AZN. Swap rate is 1.70. İnterest
rate is determined between the banks. Gain is that due to uncertain situation with currency
in future helps avoid losses and purchase of FX for higher exchange rates.
 In Azerbaijan, FX swap interest rates for buy swaps in USD, < 1%, FX interest rates for
buy swaps in AZN, 6-8 %
Thank you for your attention!