Over the past week, a number of analytical papers have been published on the financial market response to the Armenian-Azerbaijani conflict in Nagorno-Karabakh. For example, experts polled by Reuters believe that investors are betting that “Baku’s economy, which is heavily dependent on oil and gas, will be much better able to weather the war-related crisis in the disputed area.”
–
The main argument is the government bonds quoted by Azerbaijan on the financial markets, the value of which has shown a positive trend since the beginning of the conflict. For example, Armenian government bonds cannot be proud of this trend. Is this really due to the fact that investors have more confidence in the Azerbaijani economy? Everything is not so simple.
–
The fate of Nagorno-Karabakh is a constant theme in Armenian-Azerbaijani relations, and both sides have balanced on the brink of an open military confrontation over the past decade. On Sunday, September 27, the conflict began to escalate, but a day later it had escalated into a real war. The market reaction was immediately visible. On October 16, three weeks after the first shots, the value of Armenian Eurobonds fell by almost 4%, while Azerbaijani bonds have already recovered after a slight decline.
–
However, in the financial markets, bonds do not give a complete picture of what is really going on. First, credit risk must be assessed – the amount paid by the borrower to compensate creditors for the risk of default. Second, the structure of bondholders. The increase in the value of assets on stock exchanges is a very important factor. However, a large proportion of stock exchanges are passive and aim to keep growth modest. Therefore, any capital inflows into such funds are shared between the participating countries, the lenders, taking into account all the necessary indices.
–
What does it mean? Each capital inflow associated with a bond is associated with a cash flow from the stock exchanges in which the bond is listed. As a result, when prices change, listed bonds repeat the movement in the value of these funds’ shares to a much greater extent than unlisted bonds. The Eurobonds of Armenia and Azerbaijan are a clear example of this difference.
–
For example, Azerbaijani four-year bonds are included in most developed country indices, while Armenian bonds are not. That is why Armenian bonds are, in a sense, a “poor asset” in the eyes of investors. Therefore, the value of Armenian bonds is also less affected by price fluctuations in the stock markets of developed countries.
–
Over the past three weeks, inflows to the 18 largest stock markets have been worth more than $ 1.6 billion, an increase of 7.3% in cash flow. No wonder it also reduced credit risk in the bond segment.
–
Theoretically, the government bonds of Armenia and, to a much greater extent, Azerbaijan also had to receive a certain share of the inflow of these investments and show an increase in value similar to the stock market indices. However, this is not the case.
–
At first glance, Armenian securities have suffered from the escalation of the military conflict, but if we take into account the individual sensitivity of the bonds to the dynamics of stock exchange indices, it can be seen that the Eurobonds of Armenia and Azerbaijan were significantly sold out.
–
Separating investors’ optimism about the debt of developed countries, it can be seen that lending to Armenia and Azerbaijan has risen by 24% and 17% respectively, and is not as rosy as it might seem at first. The volume of loans also demonstrates a more objective view of the market response.
–
Investors know that the war has become a very negative factor in relations between the two countries. Rating agencies have already responded by downgrading the credit ratings of both countries. For example, Fitch Ratings has given a negative outlook to the Azerbaijani state oil producer SOCAR, while the rating of Armenian government bonds has been downgraded to B +.
–
The most important factors are important, and it must be borne in mind that during the war, both countries will have to reckon with both human casualties (a fact of which is a tragedy in itself) and various negative consequences, both financially and economically. To be fair, during the war, investors are not betting on any country, but on Armenia and Azerbaijan. It is clear that war will cost everyone dearly. And the market is aware of that.
— .
