Azerbaijan rattled international investors this month when the country’s biggest lender, International Bank of Azerbaijan, announced it lacked the funds to pay bondholders and filed for bankruptcy protection in a New York court.



International investors who hold some of the bank’s $3.3 billion in foreign debt will have to accept a 20 percent loss in value or walk away entirely. And while it’s not uncommon for developing country banks to go bankrupt, it is rare when the bank is de facto government-owned and government-run, and the government in question has more than enough money to pay.



International Bank of Azerbaijan is legally a private entity, but the bank is majority-owned by state enterprises, and Azerbajian has not been shy about writing checks to keep the bank afloat. In 2016, the bank received $7.8 billion of government largesse, and creditors were betting that this spendthrift attitude, combined with stabilizing oil prices, would save the bank from a portfolio filled with the nonperforming – that is, more than 90 days overdue – loans that have been dragging it, and the entire Azerbajiani banking sector, down.



While it is hard to sympathize with investors betting on a middle-income country’s government bailing out a failing bank in perpetuity, investors do have a legitimate grievance: IBA is a de-facto state-owned and run bank, and the state of Azerbajian has more than enough funds to pay the bank’s debts. But as Sofaz, the state oil fund, is IBA’s largest investor, chagrined international investors’ chances of gathering up enough votes to reject the restructuring plan are slim to none.



Although upset investors have lashed out at the decision in the business press, and rightly pointed out that Azerbaijan will have to pay much higher interest to attract private investment in the future, Baku does not seem particularly concerned - perhaps because international nongovernmental lenders like the European Bank for Reconstruction and Development seem set to provide enough funding for the country’s strategic economic priority, the Southern Gas Corridor, despite Baku’s failure to meet the (fairly low) bar of transparency demanded by the Extractive Industries Transparency Initiative. What, exactly, specific use for their currency reserves Baku has in mind that’s more pressing than paying its debts is not immediately clear.



Despite the outrage from investors, the writing has been on the wall for some time. Standard and Poor’s cut Azerbaijan’s credit rating to junk over a year ago, Moody’s downgraded IBA’s deposit ratings in February, and Fitch reported that 21 percent of all loans in the country were nonperforming in March. As Business News Europe reports, average interest rates on manat-denominated loans are sky-high at 22 to 26 percent, so this last statistic is, sadly, not surprising.



On top of everything else, IBA has a history as a money laundering vehicle for the country’s rich and powerful.



In October 2016, IBA’s former chairman and seven others were sentenced to up to 15 years in prison for misappropriating 211 million manat of IBA funds. Analysts and activists suspect the convicted managers were merely scapegoats, and have alleged that the stolen funds actually amounted to as much as $8 billion. The scheme was allegedly connected to the once-powerful former National Security Minister Eldar Mahumdov, who was fired by President Aliyev in late 2015, shortly after the initial arrests in the case.



Given the opacity of official decision-making and state finances in Azerbaijan, it does raise the question of why the state chose this moment to cut off financial support to IBA. It counts as just one of several surprising recent moves from Baku, from formalizing a block on major independent media outlets to the shocking kidnapping of investigative journalist and activist Afghan Mukhtarli in downtown Tbilisi.



Taken together with Azerbaijan’s hasty and unceremonious exit from the EITI in March 2017, the underlying theme is the government appears to care less and less about its perception in the west – which was also Ilham Aliyev’s explanation for naming his wife vice president in an interview with the Russian journalist Vladimir Solovyov.



Finally, it is difficult to assess Azerbaijan’s decision to restructure IBA’s debts and anger investors at this moment in time outside the context of International Crisis Group’s recent report on the Nagorno-Karabakh conflict, which reported the breakaway province’s leadership plans to use any future hostilities as an opportunity to advance further into Azerbaijan.



If Baku anticipates a renewal of hostilities in the near future, it might be trying to hang on to as much hard currency as possible, just as it might be trying to shut down the media outlets that undermined the official narrative of last year’s Four-Day War. If nothing else, the ongoing IBA saga highlights the risks of betting on decision-makers in Baku.