EU-Azerbaijan: From energy partnership to innovation investment Review by Caliber.Az

Azerbaijan and the European Union have been consistently cooperating for many years in the field of energy supplies, transport cooperation, increasing trade turnover, and implementing joint projects in other areas. Against the backdrop of the protracted global energy crisis and the geopolitical catastrophe in Ukraine, these traditional ties with the EU have noticeably strengthened. Moreover, new vectors of cooperation are being formed in the field of "green" economy and energy, support for small businesses and joint ventures in the Karabakh region. A mutually beneficial business partnership with Europe will diversify and expand qualitatively in the future - this message became the leitmotif of the speeches of the EU-Azerbaijan business forum held in Baku on May 17.

Azerbaijani-EU intensive economic cooperation has a history of more than a quarter of a century: the level and consistency of these relations increased even more after the "Partnership and Cooperation Agreement" came into force in 1999. This trend was further developed in 2018, after the EU and Azerbaijan approved joint Partnership Priorities, and in recent years the parties have continued intensive negotiations on a new framework agreement designed to give an additional impetus to mutually beneficial cooperation.

It should be noted here that over the past period, Baku has been building business relations with the EU countries based on equal partnership. Being financially self-sufficient, our country has never had a critical dependence on EU donor assistance, moreover, compared to many other Eastern Partnership countries, Azerbaijan's energy and transport potentials have always had a special attraction for the EU.

This interest has noticeably increased in the recent period, against the background of the gas crisis in Europe that has been going on for about a year and a half, as well as the escalation of hostilities in Ukraine. Recent events have further increased the importance of Azerbaijani energy resources – oil, and to an even greater extent natural gas, which plays a significant role in diversifying the supply of natural fuel to the countries of Southern Europe (Italy, Greece and Bulgaria), and today the EU is fully interested in increasing such exports.

"Azerbaijan continues to constantly supply energy resources to the European market, and we expect that the volumes will only grow. The key area of our cooperation with the EU is the oil and gas industry, as well as the transport sector. Azerbaijan is a hub for transhipment of goods to EU countries and other markets, our international seaport and emerging economic zones allow us to expand current cooperation and increase the indicators of bilateral trade turnover," Azerbaijani Economy Minister Mikail Jabbarov, who took part in the business forum, said.

This year, the Azerbaijani-EU trade turnover will increase even more, including due to the favourable energy market conditions. Thus, in January-April 2022, the value of Azerbaijan's non-oil exports increased by 40 per cent relative to the corresponding figures of last year, and this growth is partly due to demand on the European market.

"Trade relations between the EU and Azerbaijan have returned to the level that preceded the coronavirus pandemic: last year, mutual trade turnover exceeded $15.4 billion, and today about 45 per cent of Azerbaijan's total external turnover falls on EU countries," head of the local EU delegation Peter Michalko said at the business forum.

Cooperation between Azerbaijan and the EU is also developing very actively in the field of investments and joint projects, as evidenced by the figures given by the Economy Minister: for example, over the past 10 years, European countries have invested over $20 billion in Azerbaijan’s economy, where more than 700 EU companies currently operate.

Moreover, the vector of investment activity of Western companies has recently shifted from the traditional energy and transport sectors to the non-oil economy. Within the framework of bilateral cooperation, companies from EU countries, as well as such specialized financial structures as the European Bank for Reconstruction and Development (EBRD), are implementing projects in the field of "green" economy, including the development of renewable energy, improving the energy efficiency of utilities in cities, the introduction of energy saving systems (such as the project "green" city in Ganja) as well as initiatives in the field of the innovative agricultural sector, etc.

In particular, negotiations are underway with European companies showing interest in participating in the construction of wind and solar power plants in Absheron, in the Karabakh region. European business can also be involved in projects for the modernization of small hydroelectric power plants and the construction of new hydroelectric power stations on the mountain rivers of the Lesser Caucasus. There are also prospects for the participation of European companies in contract work on mine clearance, reconstruction and economic restoration of the territories of Azerbaijan liberated from occupation.

Such prospects were studied recently, during the visit to the country of a mission consisting of experts from the European Union (as well as the UN and the World Bank) to assess the needs for rehabilitation and reconstruction in Azerbaijan’s liberated territories based on the methodology of "Assessment of ways to restore and develop peace" (RPBA). During the visit, representatives of the mission visited the territories liberated from occupation in Aghdam, Fuzuli and Jabrayil districts, EU experts got acquainted with the situation by clearing the liberated territories of mines and munitions, preparation of master plans of cities, working on the formation of road, energy and other infrastructure, environmental situation, work on the restoration of historical and cultural monuments, as well as the work aimed at facilitating the return of citizens to the liberated territories.

Against the background of the food crisis observed in the world, rising prices for mineral and ore raw materials, technical agricultural crops, and increased needs for other raw materials, the interest of European companies in diversifying the sources of such revenues have recently intensified.

Today, against the background of the sanctions confrontation with Russia and Belarus, the EU countries are actively reducing their dependence on these countries 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, in this regard, the importance of developing countries in Africa, Central Asia, the South Caucasus, including Azerbaijan, has significantly increased.

According to a recent survey conducted by EU experts, about 53 per cent of companies from EU countries operating in Azerbaijan have plans to expand their business in the republic. The survey covered companies from 24 countries, including 20 EU member states, two EFTA [European Free Trade Association] members, as well as the UK, and more than three quarters of the surveyed companies have been operating in Azerbaijan for more than five years.

According to the research results, 54 per cent of respondents are interested in participating in projects in the Karabakh and East Zangazur economic regions, and about 14 per cent of them have already started active work in this direction. Companies from the UK and Eastern European countries, including Hungary, Serbia, Slovakia, and Croatia are very active in this regard.

"An increasing number of European enterprises are expressing their interest in possible investments in Karabakh and East Zangazur: at the same time, alternative energy, ‘green’ economic initiatives, the development of transport infrastructure, as well as agriculture and the processing industry are designated as the most attractive areas for investment for about a third of respondents," the head of the business forum group Bogdana Efe said at the forum.

These new trends, in particular, indicate qualitative changes in business relations with European companies and with the EU in general, the vector of activity is gradually shifting from energy to the non-oil economy. Moreover, this interest is supported by quite capacious financial sources: not so long ago, the EU joined investment programs and support for small businesses in our country, providing about €2 billion for these purposes, as well as the development of "green" technologies, and other innovative areas.

The EU grant assistance of €5.25 million provided to the Azerbaijani government within the framework of the Administrative Agreement on the Operational Technical Assistance Instrument (AZTAF) signed in mid-February 2022 also serves similar purposes. These funds will be used to support institutional reforms in accordance with the country's national priorities, including initiatives that contribute to the growth of the non-resource economy and the expansion of business market opportunities.

"Within the framework of business assistance programs, the EU will also provide support to 25,000 small and medium-sized enterprises of Azerbaijan. I would like to encourage EU companies to invest in Azerbaijan, where the business climate will develop even more successfully in the future," EU Ambassador Peter Michalko stressed.

In turn, today Azerbaijan is making a lot of efforts to attract European investments and technologies to industrial projects implemented in the country - industrial zones and industrial quarters. In particular, some progress has been made in attracting a number of European companies to participate in projects of the Alat Free Economic Zone (AFEZ), the opening of which is scheduled for July this year.

The interest of Western companies is fully justified, since the advantages of the AFEZ include exemption from VAT, customs duties and taxes when importing into and exporting from the free zone, the absence of personal income tax for local specialists, social security payments and similar fiscal payments for foreign qualified personnel.