Azerbaijan Raids Wealth Fund as Central Bank Gets $4 Billion

(Bloomberg) -- Azerbaijan will transfer as much as 7.5 billion manat ($4 billion) of assets from its sovereign wealth fund to the central bank this year, giving it ammunition to defend the manat in the latest effort to break the grip of a currency crisis.

The regulator will use the money to “ensure macroeconomic stability” in 2017, according to a decree signed by President Ilham Aliyev and published on Tuesday. Under the plan, the assets of the State Oil Fund known as Sofaz will decline for a second consecutive year after shrinking by 4 percent in 2016.

A rebound in oil prices has brought no relief for Azerbaijan, the third-biggest crude producer in the former Soviet Union, which fought a run on its currency last year after already suffering two devaluations in 2015. Buoyed by the decision to bulk up the central bank’s defenses, several lenders in the capital Baku resumed dollar sales on Wednesday for the first time in at least two months. 

“If nothing out of the ordinary happens, the move will help calm down the situation in the market this year,” Samir Aliyev, an analyst at the Center for Support to Economic Initiatives group in Baku, said by phone. “Banks will resume dollar sales and the importance of the black market will shrink.”

Dollar Crunch

Desperate for cash, Azeris have had to turn to the black market, where illegal traders offered dollars at rates much higher than the official level set by the central bank. Until this week, banks have all but stopped foreign-exchange sales as the manat continued to depreciate and auctions organized by the central bank failed to quench demand for dollars.

The central bank will scrap a rule that allowed lenders to buy and sell foreign currency only within 4 percent on either side of the official exchange rate, Interfax reported, citing a person it didn’t identify. At a meeting with representatives of commercial banks on Wednesday, Governor Elman Rustamov said supply and demand of foreign currency will now determine the manat’s rate, according to Interfax.

Policy makers burned through more than two-thirds of their reserves in 2015 before shifting to a managed floating exchange rate as crude prices collapsed. To relieve pressure on the manat last September, the central bank also raised its key interest rate by 5.5 percentage points to 15 percent in an emergency move.

Losing Value

The manat traded 0.2 percent weaker against the dollar on Wednesday. It depreciated about 13 percent last year after losing more than half its value against the dollar in 2015 even as the currencies of other crude-exporting nations such as Russia and Kazakhstan stabilized.

The Azeri president said in a televised cabinet speech on Tuesday that inflation needs to be kept below 10 percent and vowed to maintain macroeconomic stability this year.

The $33 billion wealth fund has been the only source of dollars at auctions since February, when the central bank stopped sales after its assets declined to $4 billion. The regulator will use the Sofaz funds to offer more dollars and help repay foreign debt guaranteed by the state, analyst Aliyev said. It will also provide liquidity to banks.

Sofaz will transfer an additional 6.1 billion manat to the national budget this year and allocate 496 million manat to fund projects to pipe natural gas to Europe, according to the presidential decree.

Azerbaijan should allow the manat to float freely by the end of this year, according to a strategic road map of economic reforms drawn up by McKinsey & Co.

To contact the reporter on this story: Zulfugar Agayev in Baku at zagayev@bloomberg.net. To contact the editors responsible for this story: Torrey Clark at tclark8@bloomberg.net, Paul Abelsky, Andrea Dudik