Azerbaijan, Japan diversify business agenda Review by Caliber.Az

In recent years, Azerbaijan has accelerated work on projects in the field of green energy, energy efficiency and introduction of digital, innovative trends in the industry. Large-scale construction endeavors in the Karabakh region act as a driver of the aforementioned transformations. Japan is among the key partners of Azerbaijan in the development of these trends: the success of  the countries' partnership is evidenced by the statistics of trade turnover last year, according to which the rate of trade increased by almost 50 per cent. The successes and further prospects of Azerbaijan-Japan cooperation were discussed on the sidelines of the official reception at the Embassy of Japan in Baku dedicated to the Japanese national holiday - the birthday of Emperor Naruhito.

Due to significant differences between the markets of the two countries, as well as geographical remoteness, which increases the "transport leg", Azerbaijani-Japanese trade and economic relations are quite specific. The basis of mutual trade has traditionally been Japanese imports - automobiles, electronics and electrical engineering, various equipment for industry and power engineering, as well as metals, medicines, chemical products, etc. The trade imbalance was due to the fact that Azerbaijan practically did not export hydrocarbon raw materials and petrochemical products to Japan, while domestic supplies of non-raw materials were extremely insignificant.

As for the investment component, Japanese capital dominated here as well, represented mainly in the extractive and oil transportation sectors. Thus, companies from the “Land of the Rising Sun” were participants in the first “Contract of the Century” and took part in the capitalization of the Baku-Tbilisi-Ceyhan oil export pipeline project. And in September 2017, under the new contract for further development of the Azeri-Chirag-Gunashli block (ACG) until 2050, the share of Japanese Inpex Corp. and ITOCHU Oil amounted to 9.31 per cent and 3.65 per cent, respectively.

The participation of Japanese companies in numerous tenders for the supply of industrial, energy, transportation and other equipment, construction of enterprises, etc. played a significant role in the development of economic cooperation between the two countries. The largest project with the participation of Japanese contractors was the two-phase construction (in 2004 and 2019) of “Shimal” and “Shimal-2” combined-cycle thermal power plants in Shuvalan settlement of Khazar district. The construction works were contracted by the Japanese company Toyo Engineering Corporation, and power equipment and combined cycle generators with a total capacity of 800 MW were supplied and installed by the Mitsui/Mitsubishi alliance using a soft loan from the Japan Bank for International Cooperation (JBIC) in the amount of over $275 million maturing for 40 years.

Bilateral ties based on the implementation of pilot initiatives financed by the Japanese government have been equally active. Thus, since the beginning of cooperation in the 90s and until 2023, about 278 grant projects have been implemented in the field of education, supply of medical equipment, as well as in the spheres of agriculture, water supply and irrigation system in 56 districts of Azerbaijan.

After Azerbaijan's victory in the Patriotic War of 2020, which resulted in the final restoration of the territorial integrity of our country and the subsequent revival of the Karabakh region, cooperation with Japan has gained a second breath. Japanese companies are involved in various projects in the territories liberated from occupation, as well as in the sector of renewable energy sources (RES), innovation and digitalization of communal and other urban systems. These endeavors, as well as the two countries' desire to diversify business ties, have contributed to a marked increase in mutual trade.

According to information provided to Caliber.Az by the Ministry of Economy of Azerbaijan, Azerbaijani-Japanese trade turnover showed an unprecedented growth rate last year and reached $452.15 million. The basis of Japanese imports in 2023 was motor vehicles and spare parts (mainly passenger cars), pipes and other ferrous metal products, technological equipment, mechanical devices and parts, optical, medical, photographic and precision devices, electrical equipment, as well as pharmaceutical and other products. In turn, Azerbaijani exports are mainly represented by winemaking products, processed fruits and vegetables and other food industry goods.

"Last year, trade turnover between Azerbaijan and Japan increased by 49 per cent and we expect further trade growth between the two countries, including considerable potential for expanding cooperation in the non-oil and services sectors. Efforts to promote export of products manufactured in Azerbaijan's industrial zones to the Japanese market, as well as attraction of Japanese companies to investment projects in these industrial clusters also contribute to the expansion of bilateral business ties," said Deputy Foreign Minister Elnur Mammadov, who attended an official reception at the Embassy of Japan in Baku on the occasion of the national holiday of the “Land of the Rising Sun”.

Efforts to promote the export of products manufactured in Azerbaijan's industrial zones to the Japanese market, as well as the involvement of Japanese companies in investment projects in these industrial clusters also contribute to the expansion of bilateral business ties. According to the Deputy Foreign Minister, the positive results of the negotiations on the agreement regarding promotion and protection of investments between Azerbaijan and Japan will also make an important contribution to increasing the investment flow.

The RES sector is seen as a promising field for expansion of bilateral cooperation: thus, since 2021, the Ministry of Energy with the support of Japanese consulting company TEPSCO, has been working on the development of a draft concept of "Green Energy Zone" in the territories of Azerbaijan liberated from occupation. Thus, a general plan of the future "Green Energy Zone" has already been developed, where a specific scenario for the creation of the necessary generating capacities of renewable energy sources for the medium and long term has been outlined on the basis of the concept, and optimal options for the use of solar, wind and hydropower have been developed. In general, according to the Japanese specialists’ estimates, more than 10 thousand MW of renewable energy can be generated in Karabakh and Eastern Zangazur.

“Today, Japanese companies are implementing various projects in the energy sector not only in the Karabakh region, but also in the Nakhchivan Autonomous Republic," Elnur Mammadov noted.

Last year, specialists of Japanese TEPSCO provided Azerbaijan’s Energy Ministry with technical and organizational data on the development of Smart City systems on the example of Japanese cities as Fujisawa, including information on optimisation of transmission and distribution networks for sustainable power supply in emergency situations, as well as expansion of the use of RES component. In turn, a memorandum of understanding on RES projects was signed between Azerbaijan Renewable Energy Agency (AREA) under the Ministry of Energy and Japan's Komaihaltec Inc. in mid-2023. In particular, the document envisages the development of a feasibility study of a pilot project considering the formation of an optimal system of electricity and heat supply using hybrid power generation with the use of renewable energy sources in villages in mountainous regions of Azerbaijan. It is noteworthy that Japan is also ready to cooperate with Azerbaijan in the field of energy efficiency and climate agenda.

"Creating a green society in the coming years is an important challenge not only for Azerbaijan, but also for the whole world. In Azerbaijan, 2024 has been declared the ‘Green World Solidarity Year' and we look forward to Azerbaijan's participation in addressing today's topical issues, especially in areas such as energy policy," Japanese Ambassador to Azerbaijan Katsuya Watanabe said in his remarks at the official reception. The diplomat added that Japan, using its experience, technological capabilities and skills, will be able to support the solution of these problems in the future. In this regard, it is extremely important that Tokyo supports Baku's efforts within the framework of the UN Climate Change Conference (UNFCCC COP 29).

However, apart from the energy and environmental agenda, Azerbaijani-Japanese investment ties are complemented by components in the non-oil sector. In particular, such prospects are seen in the spheres of information and communication technologies (ICT) and transport: including the implementation of Japan's rich experience in the digitalisation of various processes in industry and the use of advanced solutions to expand the logistics infrastructure of the Middle Corridor.

In recent years, bilateral cooperation has been supplemented by projects in the field of agro-processing: a project on tobacco production and drying has been implemented in the Oghuz district of Azerbaijan, in which the Japanese businessman invested $2.2 million. Cooperation in the tobacco sector has a much wider potential, as the global giant Japan Tobacco International (JTI), which has been operating in Azerbaijan since 2007, continues its activities both in the local market and expands its export opportunities. Agreements have been signed with the largest Azerbaijani cigarette manufacturer Tabaterra CJSC on joint production of JTI world brands of cigarettes and their subsequent export to the countries of the region.

As it appears, these projects will continue: on the sidelines of the Davos Economic Forum this January, Azerbaijani Economy Minister Mikayil Jabbarov and President and CEO at Japan Tobacco International Eddy Pirard hold talks, discussing the prospects for further development of cooperation.