Investors were caught by surprise in May, when the country’s largest commercial lender, IBA, missed a payment of principal and interest on $100 million worth of subordinated debt. The revelation that the central bank had already shifted $5.9 billion worth of bad debt off the bank’s balance sheet suggests that authorities failed to address poor management at IBA, which remains largely state-owned, and the strong trading report issued by the bank for the first quarter of 2017 highlights significant transparency issues.

Even if a proposed debt-restructuring deal is approved by creditors and is implemented seamlessly, the government has scored a spectacular own-goal. At the very least, the default will weaken investor interest in the planned privatization of IBA, putting the sale on indefinite hold, and the doubts about financial transparency could negatively affect funding for the Southern Gas Corridor, resulting in delays in completing the $45 billion pipeline project.

As fiscal austerity, a devalued currency and rising unemployment continue to cause hardship for many ordinary citizens, President Ilham Aliyev is implementing a succession strategy aimed at sustaining the family dynasty begun by his father. As expected, the president has appointed his 52-year-old wife, Mehriban Aliyeva, to fill the newly created post of first vice president, which she is expected to fill until the first couple’s son Heydar Aliyev, who is not yet 21 years old, is ready to be groomed for the top position.

In the near term, the poor performance of the oil-dependent economy will remain a potential source of political risk. Real GDP is forecast to contract once again in 2017, and positive growth will be held to less than 2% next year. The transition to a fully floating exchange rate in mid-January initially produced a 15% depreciation, but the manat rebounded in February. The firming of the currency may be difficult to sustain in view of the problems at IBA and the uncertain outlook for oil prices.