Investment opportunities in Azerbaijan

Azerbaijan’s economy has weathered the recession better than most frontier markets in the Central Asian region, growing at a modest pace while neighbouring countries struggle to recover.

Over the past 10 years the country’s economy has grown by a staggering 900 per cent, fuelled mostly by the private sector. But its economic potential remains relatively unknown as investors and fund managers continue to favour emerging markets instead.

But experts from the region believe 2010 will provide the country with more opportunities for attracting higher levels of foreign investment.

The country has for years benefited from its vast supply of natural resources, including gold, ethanol and renewable energy, but has recently diversified into transportation, infrastructure and technology.

“For many years the people of Azerbaijan were very Azeri-centric. We weren’t active in promoting the country,” said Farid Akhundov, chairman of Pasha Bank, the country’s largest commercial bank by capital.

“At the same time this might explain why we didn’t participate in fancy financial instruments. We just didn’t trust it.”

Unlike Kazakhstan, Azerbaijan was never over-exposed to financial markets, though small and mid-sized companies have still suffered from a decline in global demand.

Local companies are now taking bigger strides in reaching out to foreign investors.

In October the European Bank for Reconstruction and Development (EBRD) agreed to finance a $120m (£73m) construction of a methanol plant, which is owned by the Azerbaijan Methanol Company (AzMeCo). Executives and fund managers met in London earlier this week at the first Azerbaijan Investment Summit.

Azerbaijan, however, remains more popular with active fund managers seeking to generate greater returns in what is still considered an inefficient market.

Institutional advisers such as Sturgeon Capital Management invest in fixed income, long and short equity, and special situations.

“Inefficient markets are good for sophisticated investors with an information hedge. Azerbaijan is still completely undiscovered from any standpoint,” said Clemente Cappello of Sturgeon Capital Management.

However most investments are still made via private equity purchases, but valuations remain at attractive levels.

Mr Cappello concedes that many challenges remain. The country still lacks a sustainable equity market, making it difficult for foreign investors to gain exposure to listed companies.

Frontier markets have also become less popular over the past year, as investors look elsewhere for a more stable flow of income. The volatility of governments, combined with complex legal systems in this sector also increase the risk in holding foreign assets.

Going forward, however, experts remain optimistic in Azerbaijan’s economic future, especially as it recovers quickly from the crisis.

“The public is still relying on private equity, but we do foresee the stock market to improve in two to three years, when companies start looking to initial public offerings as a way to raise financing,” Mr Akhundov said.