bne IntelliNews -

Azerbaijan's central bank devalued the energy-rich country’s currency, the manat, by 33.5% to the dollar and by 30% to the euro on February 21 as falling oil prices and economic turmoil in Russia continued to create waves across the former Soviet Union. The new exchange rates are set at AZN1.05 to the dollar and AZN1.195 to the euro, the Central Bank said in a statement released on February 21.

The move “aims at stimulating the diversification of Azerbaijan's economy, strengthening the international competitiveness of the economy and its export potential, and guaranteeing stability in the balance of payments”, the regulator stated.

The bank abandoned the manat’s dollar peg on February 16 and began using a dollar-euro basket to manage the exchange rate. With oil and gas accounting for 95% of the country’s exports and 75% of government revenues, the Azerbaijani economy has begun to feel the heat since June: crude prices have dropped nearly 50% since then and Western sanctions against Russia over the annexation of Crimea and the conflict in eastern Ukraine have put additional pressure.

It has spent hugely in recent months defending the manat, eating into its foreign-currency reserves. Those fell $1bn in January to $12.68bn and by nearly $1.13bn in December.

The Central Bank also added that “the adjustment of the manat’s rate is also directed at offsetting negative effects from the devaluation of national currencies of Azerbaijan's trading partners”.

The plunging Russian ruble and falling oil prices affected the national currencies of many ex-Soviet countries, including neighbouring Georgia and Armenia. "Of these the Azeri move was the most surprising, given that they have a much longer track record of holding the manat fixed," Timothy Ash of Standard Bank said in a note to investors.

Azerbaijan has been less affected than other former Soviet states by Russia's economic problems but its economy is heavily exposed to price swings on global energy markets. The devaluation raises fears of a spike in inflation because it will make imports more expensive. The decision is also expected to sharply increase the domestic demand for dollars and euros.