Azernews.Az

Qabil Ashirov

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Last week marked a significant milestone for Azerbaijan’s financial markets. One of the country’s major banks announced plans to launch an initial public offering (IPO) within the year—a development that may seem routine for established market economies, but for Azerbaijan, a nation still transitioning to a full-fledged market economy, it is momentous.

In post-Soviet countries, robust stock exchanges are rare. Moscow dominates the region, with its exchange far surpassing others in scale and activity. The Astana International Financial Centre in Kazakhstan ranks second, yet most other exchanges across the former Soviet space remain relatively small in terms of trading volume. Against this backdrop, Azerbaijan’s Baku Stock Exchange (BSE) has long held the distinction of being the largest in the Caucasus. Yet, by global standards, it still lags behind in several key metrics. Like many post-Soviet exchanges, the BSE primarily facilitates repo operations and bond issuance. Notably, these bonds are largely issued by collective investment funds rather than corporations. Shares of large Azerbaijani companies rarely reach the exchange, limiting public engagement and investor participation.

The numbers underscore this reality. Several years ago, the country’s largest bank, Azerbaijan International Bank (AIB), was listed on the BSE. That same year, the number of deposit accounts at the National Depository Center soared nearly twentyfold, from 1,800 to 40,000. According to official reports, approximately 33,000 individual investors acquired AIB shares, reflecting an unprecedented level of public interest in the stock market.

The upcoming IPO of another major bank is likely to amplify this enthusiasm. Critics may argue that the BSE currently hosts only two major companies, both from the banking sector, and question the exchange’s sectoral diversity. However, it is more constructive to view this development as the first step toward broadening the availability of financial assets in Azerbaijan. The listing of companies across diverse sectors is an inevitable next phase, signaling a maturing market that will attract both institutional and retail investors.

The benefits of a thriving stock market extend beyond banks and large corporations; they have profound implications for the economy and ordinary citizens. Listing on the BSE strengthens the financial capacity of local companies, providing them with the resources to invest, expand, and innovate. Moreover, with a relatively underdeveloped domestic exchange, many Azerbaijani investors currently turn to foreign markets such as the New York Stock Exchange. While this provides opportunities, it also results in a steady outflow of foreign currency from the country. A stronger domestic market could help mitigate, at least partially, these outflows, keeping capital circulating within Azerbaijan.

The absence of diverse financial instruments has long influenced domestic investment behavior. Most individuals still prefer bank deposits, while larger investors gravitate toward real estate. This partly explains the steep rise in property prices, particularly in Baku. For example, in the Narimanov district, a 40-square-meter Khrushchyovka apartment sold for $8,000–$10,000 three decades ago, with rental income around $150–$200 per month. Today, the same apartments fetch $70,000–$80,000, while monthly rent hovers between $300–$400. Property prices have increased tenfold, while rental yields have only doubled. This discrepancy reflects the shift from demand-driven rental markets to investment-driven purchases.

A more active stock market could relieve some of this pressure. With greater availability of financial assets, investors may redirect funds from real estate to equities. Globally, stock markets have consistently outperformed property in generating returns. Evidence from the BSE supports this: over two years, the sole listed company posted a 14% capital gain, while distributing dividends around 15%. Assuming similar dividends this year, investors could achieve approximately 44% total returns in just two years—a performance rarely matched by short-term real estate investments. Furthermore, dividends remain tax-exempt until 2028, a policy designed to encourage domestic investment.

Revitalizing the exchange offers substantial advantages for small investors. Historically, they have relied on bank deposits to safeguard capital, particularly after the 2015 devaluation, which prompted many to convert savings into dollars and store them "under the mattress." Yet even dollar holdings are not immune to inflation, while real estate often fails to fully hedge against currency devaluation. Experiences in neighboring Turkey demonstrate that stock market investments can provide a more effective defense against currency fluctuations than real estate or cash holdings.

In summary, the renewed activity of the BSE represents a transformative moment for Azerbaijan’s financial sector. The gradual listing of new companies will democratize access to financial instruments, allowing ordinary citizens—not just large institutions—to benefit from market growth. This development is more than a milestone for a single bank; it is the first step toward building a robust, inclusive financial ecosystem capable of supporting long-term economic growth. For Azerbaijan, a vibrant stock market is no longer a luxury—it is an essential pillar of a modern, diversified economy.