VZCZCXRO2764
RR RUEHDBU
DE RUEHKB #0205/01 0411311
ZNY CCCCC ZZH
R 101311Z FEB 06
FM AMEMBASSY BAKU
TO RUEHC/SECSTATE WASHDC 9582
INFO RUCNCIS/CIS COLLECTIVE
RUEHAK/AMEMBASSY ANKARA 1465
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RUEAIIA/CIA WASHINGTON DC
RHEHNSC/NSC WASHDC

C O N F I D E N T I A L SECTION 01 OF 02 BAKU 000205 
 
SIPDIS 
 
SIPDIS 
 
DEPT FOR EB/OMA 
 
E.O. 12958: DECL: 02/10/2016 
TAGS: ECON EFIN PREL PGOV AJ
SUBJECT: NEW MANAT SLIPS IN THE BACK DOOR AS INFLATION 
INCREASES AND MANAT BEGINS SLOW APPRECIATION 
 
REF: BAKU 81 
 
Classified By: Ambassador Reno L. Harnish III, Reasons 1.4(b) and (d). 
 
¶1. (C) SUMMARY. With the beginning of the new year, the 
Government of Azerbaijan is facing increasing macroeconomic 
challenges.  The introduction of the newly designed manat and 
redenomination ultimately went smoothly, although the GOAJ 
decided to stagger the roll-out of all the notes over several 
months.  Consumer prices, however, have started to creep 
upwards and on January 6 the government doubled the price of 
diesel.  According to official statistics, the CPI in January 
increased 1.3 percent, higher than expected.  This increase 
in prices is sure to be a long-term trend despite the 
National Bank's efforts to keep inflation in check.  In 
addition, the manat has already begun to appreciate further 
on the local currency market, complicating the work of the 
National Bank.  With the projected government expenditures 
scheduled to begin in the next two months, the economy may 
not feel the true effects of the tremendous expenditures 
until late in 2006, by which time it may be too late to 
reverse course.  END SUMMARY. 
 
THE NEW MANAT ARRIVES WITH A WIMPER 
----------------------------------- 
 
¶2. (C) The new Azerbaijani manat began circulating officially 
on January 1, although it took several days for local 
residents to pocket the new bills and some have yet to use 
them.  In the end, the National Bank announced December 28 
that it would introduce only 1 and 5 manat notes (and all six 
coins) rather than introducing all six bank notes.  A 
National Bank contact has confirmed with EconOff that the 
National Bank has not yet received the 10, 20, 50 and 100 new 
manat notes from the printer in Europe.  In its December 
announcement, the National Bank indicated that the 10 and 20 
new manat notes will be introduced in March, followed by 50 
and 100 new manat notes in April.  A National Bank contact 
confirmed the schedule for the introduction of the 10 and 20 
notes, as well as the 50 and 100 notes, although he could not 
provide a schedule for removing the old manat notes. It is 
unclear if the National Bank had originally planned this 
schedule or whether other factors influenced its decision. 
Many banking contacts tld EconOff that the National Bank 
wanted to introuce the new manat slowly so the local 
populationcould "psychologically" get accustomed to the new 
currency. 
 
¶3. (C) A senior banking contact at the International Bank of 
Azerbaijan told EconOff that the National Bank has introduced 
30 million new manats into the banking system.  The new 
manats total only four percent of the total money in 
circulation.  In fact, it can be difficult to find new manats 
in stores or markets and most Azerbaijanis are using the old 
manats for daily purchases.  According to IBA, the National 
Bank has not begun removing old manat notes from circulation. 
 A National Bank executive confirmed to EconOff the amount of 
new manats introduced into the economy and noted that the 
National Bank is removing only old, damaged and unusable 
currency.  He added that the National Bank was also 
continuing to introduce large denominated "old" manat bills. 
 
Azerbaijani Manats or Euros? 
---------------------------- 
 
¶4. (C)  At first glance, the new manats look extremely 
similar to euros.  The new manat bills have a small map of 
Europe in the bottom left corner that stretches far to 
include Azerbaijan.  Some of the new "qepik" coins are minted 
with a crescent moon and a five-pointed star on their edges 
rather than Azerbaijan's eight-pointed star.  Also, there is 
no date minted on the "qepik" coins which has spawned rumors 
that the government will recall them.  A National Bank 
contact denied the rumors and explained that the star on the 
coins' edges was a security feature and had nothing to do 
with the Azerbaijani flag, adding that coins in general did 
not require a mint date.  Most surprisingly of all, former 
President Heydar Aliyev's image is not on any of the new bank 
notes; before their unveiling, most Azerbaijanis speculated 
that the notes would include the late President 
 
JANUARY INFLATION 
----------------- 
 
 
BAKU 00000205  002 OF 002 
 
 
¶5. (C) A contact at the National Bank told EconOff that 
according to official statistics, January 2006 inflation was 
1.3 percent, a higher number than expected.  (NOTE: According 
to several banking and economic contacts, inflation in 
January historically has always been low, with an increase in 
inflation expected in March, April and May.)  The National 
Bank contact expressed concern to EconOff at the possibility 
for higher inflation this year, blaming the dangerous 
spending plans of the GOAJ.  He also highlighted the increase 
in the money supply with new and old manats operating in 
parallel as an added danger for higher inflation in 2006. 
The contact noted that the National Bank would work to 
maintain low inflation but that its tools were limited.  In 
addition, the National Bank understand that its 
anti-inflationary efforts could lead to an appreciation of 
the manat and damage the domestic non-oil sector.  The IMF 
reported that price increases in January, especially for food 
products, may suggest monopolists are using the 
redenomination and the January 6 diesel price increase 
(REFTEL) as a smokescreen to catch up on nine months of price 
restraint. 
 
¶6. (C) COMMENT: The relatively high inflation figure for 
January, combined with the slow appreciation of the manat, 
could foreshadow coming macroeconomic problems in 2006.  The 
National Bank is seriously concerned that it will be unable 
to control inflation and that its efforts, however futile, 
will hurt the local economy.  It is no secret in Baku that 
the President wants inflation to remain under 10 percent. 
The GOAJ met this goal last year by "playing" with the CPI 
numbers.  This year, the task will be much more difficult. 
According to the National Bank, the GOAJ has not yet begun to 
disperse large amounts of funds previewed in the 2006 budget 
expenditures.  Once this begins, a National Bank official 
commented, it will take between six and eight months for the 
full effects of inflation to be realized.  By this time, it 
may be too late for the government to stop spending and the 
economy could be severely damaged.  END COMMENT. 
HARNISH