By Mike Runey
BAKU (Eurasianet.org) — Azerbaijan rattled international investors this month when the country’s biggest lender, International Bank of Azerbaijan, announced it lacked the funds to pay bondholders and filed for bankruptcy protection in a New York court.
International investors who hold some of the bank’s $3.3 billion in foreign debt will have to accept a 20 percent loss in value or walk away entirely. And while it’s not uncommon for developing country banks to go bankrupt, it is rare when the bank is de facto government-owned and government-run, and the government in question has more than enough money to pay.
International Bank of Azerbaijan is legally a private entity, but the bank is majority-owned by state enterprises, and Azerbaijan has not been shy about writing checks to keep the bank afloat. In 2016, the bank received $7.8 billion of government largesse, and creditors were betting that this spendthrift attitude, combined with stabilizing oil prices, would save the bank from a portfolio filled with the nonperforming — that is, more than 90 days overdue — loans that have been dragging it, and the entire Azerbajiani banking sector, down.
While it is hard to sympathize with investors betting on a middle-income country’s government bailing out a failing bank in perpetuity, investors do have a legitimate grievance: IBA is a de-facto state-owned and run bank, and the state of Azerbajian has more than enough funds to pay the bank’s debts. But as Sofaz, the state oil fund, is IBA’s largest investor, chagrined international investors’ chances of gathering up enough votes to reject the restructuring plan are slim to none.
Although upset investors have lashed out at the decision in the business press, and rightly pointed out that Azerbaijan will have to pay much higher interest to attract private investment in the future, Baku does not seem particularly concerned – perhaps because international nongovernmental lenders like the European Bank for Reconstruction and Development seem set to provide enough funding for the country’s strategic economic priority, the Southern Gas Corridor, despite Baku’s failure to meet the (fairly low) bar of transparency demanded by the Extractive Industries Transparency Initiative. What, exactly, specific use for their currency reserves Baku has in mind that’s more pressing than paying its debts is not immediately clear.