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12 I Companies & Markets bne June 2017 But the process lacked transparency and many were left in the dark about the extent of the problems at IBA. Fitch Ratings, upon finding out that Baku had actually spent three times more than it had originally anticipated on cleaning up the lender's balance sheet, downgraded the bank's viability rating to 'f' in November 2016.
The IBA scandal landed not only Hajiyev in jail – he is being tried for embezzlement and abuse of power while in detention – but also some of the most prominent businessmen in Baku, who had been accused of taking out loans from IBA that they had no way of repaying.
Among them were Ibrahim Nehramli, a quixotic tycoon who has been trying to build an ecosystem of glitzy islands and
a 1km-high tower off the shores of Baku; Nizami Piriyev, former owner of the largest methanol plant in the country,
“IBA's loss-making business model had been used across the board in the banking sector”
Azmeco (the company has since been taken over by state- owned oil company Socar), and reportedly a friend of former British prime minister Tony Blair; Rashad Mammadov, co- founder of construction company Azimport and head of the State Flag Square Complex, a large plaza on Baku's seaside promenade; and Mehdi Aliyev, director of construction com- pany Azerinshaat.
The IBA crisis in 2015 was only a foretelling of what was to fol- low. As the economy contracted by 3.1% in 2016 on the back of low oil and gas prices, Azerbaijan withdrew the licenses of a dozen smaller banks that it deemed insufficiently capital- ised or in violation of prudential norms, exposing how IBA's loss-making business model had been used across the board in the banking sector. A further dozen small banks out of the 32
remaining are believed to experience financial troubles, after failing to meet the February deadline to submit their financial reports to the regulator.
According to Fitch ratings, the ratio of non-performing loans in the sector climbed to 21% in 2017, as borrowers defaulted on foreign currency-denominated loans in increasing num- bers. As trust in the currency and banking system collapsed and public spending tanked, generating new business to cover previous losses became ever more difficult. Even previously strong banks, such as Accessbank, which is partly owned by international financial institutions (IFIs), succumbed to the crisis earlier this year.
Much of this year's projected government deficit, expected
to amount to 8.4% of GDP, is due to the funds provisioned to support the banking sector, primarily IBA. The price tag could now be even higher.
IBA's default on foreign loans comes at the worst time possible for Azerbaijan, as it could severely impact its ability to raise further capital from banks and international financial institu- tions (IFIs) for its landmark gas project, part of the Southern Gas Corridor project.
The project, which comprises offshore developments at the Shah Deniz II gas field and a network of three interconnected pipelines spanning the Caucasus, Turkey and Southern Europe, has been touted as a key piece in the puzzle of Europe- an energy diversification away from Russia.
Over the past year, Baku has asked the Asian Develop-
ment Bank (ADB) for a $1.5bn loan for the gas project –
it received $500mn in May– the World Bank for a $500mn loan, and the European Bank for Reconstruction and Devel- opment and the European Investment Bank for a €1.5bn loan, which is currently under consideration. Azerbaijan was also considering issuing a third Eurobond to raise another $1bn for the pipeline, following a successful issuance of a $1bn Eurobond in March 2016 and of a $1.2bn sovereign Eurobond in 2014.
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