Azerbaijan and regional relocations Review by Caliber.Az

The ongoing war in Ukraine and the intensifying sanctions regime have turned into a mass exodus of Western companies from the Russian market. At the same time, local, mostly IT companies are also leaving the Russian market, moving mainly to the post-Soviet states. Since March, such trends were announced in Armenia, where the relocation phenomenon was even taken into account when assessing the economic growth of the republic. However, much stronger arguments in this regard are available in Kazakhstan, where recently President Kassym-Jomart Tokayev instructed the government to create favorable conditions for the placement of foreign companies leaving Russia. Azerbaijan is also taking steps to attract Western companies, including to the projects implemented in the Karabakh region. The recent New Zeon project also turned out to be attractive for the Russian IT business.

"Currently there is a global struggle for investment capital, in particular, every second of almost 1.4 thousand foreign companies has suspended activities or left the Russian market. Relocating foreign companies that have left the Russian market to Kazakhstan will provide the country with good opportunities to boost mid- and upper-end production," Kazakh President Kassym-Jomart Tokayev said Thursday, instructing the government to create favorable conditions to attract Western companies to the domestic market.

Back in May, he spoke of the need to create a comfortable environment and accelerate the process of setting up foreign companies in Kazakhstan, taking into account the sanctions context. According to him, the global giants are well aware of the advantages of the geo-economic location of the Eurasian Economic Union (EAEU) and can not ignore the potential of the 180-million consumer market.

In the Russian media, Nur-Sultan's initiative was met with restraint, but with understanding. "Any country in the world tries to create comfortable conditions for foreign investors, it is absolutely normal and all countries do so, including Russia," the press secretary of Russian President Dmitry Peskov commented on Kazakhstan's plans to attract businesses that left the Russian market. The Kremlin does not dramatize this decision, believing that Kazakhstan's initiative could become a convenient channel for "redeployment" to Russia of demanded sub-sanctioned imported goods, which would be beneficial for European companies that do not want to lose the Russian market.

In general, the expert community has no doubt about the interest of Western companies in the market of Kazakhstan, a population of which is approaching 19.5 million people, and given the country's membership in the EAEU and close trade and transport links with Central Asia and the South Caucasus, this makes the process of relocation even more attractive. Moreover, companies with Russian capital are already actively joining the localization of production and settling of foreign service and trading companies in the Kazakhstani market. From the start of the war in Ukraine until the end of May this year nearly 36 thousand Russian citizens have received Individual Identification Numbers (IIN) in Kazakhstan, which is 16 times more than during the same period last year. Foreigners need their IIN to open accounts in Kazakhstani banks, purchase property, become involved in business, or receive income from local sources. The above figures eloquently testify to the interest of Russian business in the Kazakhstani market, where companies expect to find an anti-sanctions safe haven.

It will become clear in the near future how successful the process of relocation of Western businesses in Kazakhstan will be, but so far this republic seems to be the most attractive harbor for Russian and Belarusian companies hiding from sanctions. This is not surprising, since the other EAEU members - Kyrgyzstan, Tajikistan, and Armenia, given the scale of their economies, are no match for Kazakhstan's potential. At the beginning of the war in Ukraine a significant flow of Russian business migration was directed to Armenia, but due to the weak economic performance of the South Caucasus outsider, the lack of an attractive industry for investors, weak infrastructure, energy dependence, and most importantly, the narrowness of markets in the sparsely populated republic this direction was unpromising for the implementation of industrial projects.

In addition, Armenia, which is in a logistical deadlock, is faced with difficulties in transport operations, and this reduces the level of margins in the localization of any industrial projects. In particular, all the attempts to attract portfolio investors to the three free economic zones (FEZ) formed in Armenia, in fact, proved fruitless. The two FEZs established long ago - "Alliance" and "Meridian" still invested only $16.2m in microprojects, and in recent years have failed to attract a single resident with a serious industrial idea. A relatively new FEZ "Meghri", on which Nikol Pashinyan's regime pinned so many hopes with an eye to the investment promises of Iran and Russia, has failed to attract residents' investments so far.

Here it should be noted that software activity is probably the only area of Armenia's economy where the international division of labor is ensured and the export component dominates. At the moment about 23 thousand specialists in the sphere of programming and system integration are working in the IT sector of the republic and the dynamic growth is ensured here by the availability of a cheap labor force and the creation of an extremely liberal tax regime. In particular, the income tax rate for IT specialists in the republic was decreased to 10% and income tax to 0%.

Nevertheless, the war in Ukraine, the anti-Russian sanctions, and the resulting window of opportunity to attract investors do not promise any significant benefits for Armenia. Thus, according to Armenian expert economist Karlen Khachatryan, the increased number of visitors and relocations to Armenia since late February mainly affected the indicators in the service sector (hotel business, rental housing, etc.), where there was a 24.9% increase. However, the expert believes that this growth is also temporary and will not have a positive impact on the basic potential of the Armenian economy, and will not lead to the solution of social problems in the republic in conditions of the continuing high inflation rate.

Another Armenian expert, Professor Tatul Manaseryan, Doctor of Economic Sciences, also questions the long-term effect of the influx of so-called business visitors into the country, suggesting that such factors will soon come to an end and that their impact on the economy will also inevitably end.

Experts' skepticism about the long-term positive effect of the influx of relocates is indirectly confirmed by the recent statements of Armenian Deputy Minister of Finance Arman Poghosyan, who noted the need for urgent legislative amendments, so as not to lose to other countries competing for the attraction and retention of mobile financial and IT specialists from Russia and Belarus. Alas, as the Armenian media reports, many relocates and specialists use Armenia only as a transit point and subsequently move to other countries with more developed markets and better business potential. Yerevan's capacity to attract portfolio investments by manufacturing companies is even vanishingly small.

How does Azerbaijan look in this context, how attractive is our country for European companies and investors, and what steps are being taken to attract Russian relocates - specialists in ICT and other spheres?

Against the background of the food crisis observed in the world, rising prices for energy, minerals and ores, cotton, and other industrial crops, the interest of European companies in diversifying the sources of such revenues have recently intensified. Today, due to the sanctions confrontation with Russia and Belarus, the EU countries are actively reducing their dependence on them, not only in the energy sector but also in the basic non-oil industries. In particular, the EU states are interested in diversifying the supply of raw materials and semi-finished products, petrochemicals and non-ferrous metallurgy products, and Azerbaijan's importance in this regard has noticeably increased. Moreover, according to the EU Business Environment Survey 2021, 54% of the respondents - companies from EU countries stated their interest in possible investment in the Karabakh and East Zangazur economic regions of Azerbaijan. The survey covered companies from 24 countries, including 20 EU Member States, two EFTA Member States, and the UK, and over three-quarters of the companies surveyed have been operating in Azerbaijan for over five years. About 14% of the companies surveyed have already begun active operations in this direction, in particular, companies from the UK are very active in this regard, as well as business in Eastern Europe, including Hungary, Serbia, Slovakia, Croatia, Poland, etc. During the Azerbaijan-EU business forum recently held in Baku, the head of the European group Bogdana Efe voiced business proposals of EU entrepreneurs.

Western business is also attracted by multi-million dollar government contracts to build and create energy and utility infrastructure in the liberated territories, investments in transport infrastructure, and innovative agricultural production and processing. No less interesting for the EU countries is the creation of joint ventures in renewable energy sources (RES), as well as "green" projects on energy saving, recycling of solid domestic waste, construction of zero-waste enterprises, production of building materials, fertilizers, etc. It is likely that European companies, forced to curtail their activities in Russia and Belarus, are also interested in the Azerbaijani market.
New trends indicate qualitative changes in the structure of business ties - today the vector of activity of European companies is gradually shifting from the energy sector to the non-oil economy. Moreover, this interest is supported by quite capacious financial sources: not so long ago the European Union joined investment programs and small business support in our country, providing about 2 billion euros for these purposes, as well as for the development of "green" technologies and other innovative directions.

Part of the EU funds including loans from the European Bank for Reconstruction and Development (EBRD) is planned to be directed for the implementation of projects on digitalization of the Azerbaijani economy, formation of elements of Industry 4.0, support of start-ups, and integration of local software business into the global system of labor division. These trends are very positive and may play the role of a reference point for the Russian IT companies that are very much tied to foreign orders and therefore the first to begin the process of relocation.

Azerbaijan is also taking steps to attract Russian and partly Ukrainian and Belarusian network specialists. "Attracting new IT specialists and specialized companies to Azerbaijan will have a very positive impact on the country's ICT market. This is important to attract new knowledge and experience, and will also strengthen competition in the local software market, as by increasing the supply will be optimized parameters of timeliness and quality relative to the cost of software and integration products," executive director of the public association "ICT Market Participants" Ali Aliyev told Caliber.Az. The expert also noted the importance of the project to create an IT HUB New Zeon, recently launched on the initiative of the Ministry of Economy of Azerbaijan. As part of this initiative the complex of buildings at Heydar Aliyev Avenue, 205, formed the basis for the attraction of foreign IT specialists, including the reception of about 40 families of software companies professionals from Russia and Ukraine. According to Aliyev, very important for the development of software business in Azerbaijan is the optimization of the fiscal burden in this area: it is necessary to reduce the rate of income tax and in particular address the issue of VAT collection when local programmers receive orders from international companies. The unregulated mechanism of offsetting the value-added tax reduces the margins of local companies, depriving them of many competitive advantages.

At the same time, the expert stated that positive steps have been taken in the country to provide fiscal support to innovative businesses, citing as an example the initiative of the Ministry of Economy's Small and Medium Business Development Agency (SME), which was launched last year and granted start-up certificates to almost half a hundred SMEs. Such certificates exempt innovative businesses from profit tax and income tax for three years from the date of their receipt.

Expansion of this scheme in relation to software companies, including individuals and legal entities that are not Azerbaijani residents, could play a significant role in attracting foreign specialists and companies to intercept the flow of relocations in the post-Soviet space.