Clare Nuttall in Astana -

Azerbaijan is working on a new law governing the country's capital market in an effort to create a modern financial system capable of supporting the country's economic development.

Azerbaijan launched a decade-long programme on development of the securities market in 2011. Government and stock exchange officials are working alongside international organisations including the EU and the World Bank, which has provided a $12m loan to support the project.

The planned legislation includes several EU recommendations. Dan Feder, partner and assurance leader at PwC Azerbaijan, says it important that the law specifically provides for strengthened protection of investor rights. "This is a very crucial pillar for successful modernisation of the capital markets and the overall economy of the country. This effort also entails facilitating establishment of corporate entities," Feder tells bne.

"Setting ground rules for market participants shall then gradually lead to the next step, which is the strengthening of the regulatory environment to enforce reforms. Currently, there are a number of bodies participating in the regulation of the capital market," says his colleague, Elchin Ibadov, director and PwC Academy leader.

At present, Azerbaijan's capital market has a low level of capitalisation and turnover. Confidence in the market is also relatively low, and an increase in financial literacy - among both the population and financial institutions - is essential for it to fully develop.

Feder stresses the importance of increasing financial transparency in Azerbaijan. "Here, the roles of independent auditors and the Ministry of Finance, as the regulator of financial reporting matters, are crucial to achieve the required level of financial transparency," he says.

While the capital market modernisation programme addresses the main areas of importance specific to the market, according to Feder and Ibadov, other areas including these fundamental issues such as investor protection also need to be addressed.

About more than oil

As an oil and gas rich country that was one of the fastest growing economies in the world in the mid-2000s, Azerbaijan has no shortage of cash for economic development. Expanding the non-oil sector has become a government priority, and development of the capital market would increase the options for growing companies outside the natural resources sector. Therefore, a strong effort to develop the capital market, coupled with wider-reaching economic reforms, would be a vital step to supporting businesses. "Azerbaijan receives substantial amounts of oil and gas revenues, which creates a significant pool of investment capital for many businesses that are not able to expand globally due to lack of efficient funding," says Feder.

That said, Ibadov says resilient infrastructure, strong human capital and overall confidence in the economy are key factors to facilitate the optimum circulation of these funds. "The future of the capital market in Azerbaijan will heavily depend on the success of the coordinated effort of the Azerbaijani government with global institutions on one hand, and with local businesses and consumers on the other."

In the longer term, it should also be possible for Azerbaijani companies to tap international capital markets as their peers from Russia and Kazakhstan have done. This, however, is some way off, given that there are few local companies with the necessary corporate governance, transparent financial reporting and financial sophistication needed to IPO internationally.