Karabakh set to become crucial factor for Azerbaijan's non-oil exports growth Khazar Akhundov's analysis

The favorable conditions in the global energy market have been contributing to the growth of Azerbaijan's export revenues for the second year in a row. At the same time, the high rates of development of the domestic non-oil economy were supported by the increased global demand for food, building materials, non-ferrous and ferrous metals, chemical products, yarn, etc.

The unprecedented growth in the country's non-oil exports was recorded last year, and good momentum was maintained thereafter. According to the recently published data of the Centre for the Analysis of Economic Reforms and Communications (CAERC), in January-August 2022, the domestic non-oil exports increased by 19 per cent.

In spite of negative global factors - pandemic, hyperinflation, and unbalanced supply chains - last year saw a rapid rise in business activity in the non-oil sector. Together with the booming demand for energy resources, the unprecedented rise in prices of raw materials, semi-finished products, and other industrial goods in world exchanges was a driving factor that supported the domestic industry and agricultural sector and played an important role in improving the foreign trade dynamics of our country. Overall, the last year has seen exceptional growth in non-oil exports, with total volumes reaching $2.7 billion, up 47.2 per cent.

The high rates of trade were maintained in the current year as well: the demand for Azerbaijani industrial and agricultural products increased, not only in traditional markets of pro-Soviet countries but also in foreign countries. This was facilitated by the global geopolitical instability caused by the war in Ukraine, which led to a breakdown in supply chains and a transport and logistics collapse.

According to research by experts of the international news agency Bloomberg, the Russian-Ukrainian war was a landmark moment ending the thirty-year period of globalisation of world production and trade. The process of disintegration of global trade was already observed at the end of the global energy crisis (2014-2017), as well as with the start of the trade war between the US and China. A colossal blow to integration processes was dealt by the coronavirus pandemic with its long lockdowns and quarantine restrictions, which brought down the industrial cooperation and logistics of raw materials and components created over decades. With the outbreak of the Russian-Ukrainian war, world trade is gradually segmenting into local markets, united by military-political and civilizational interests common to each group, as, in fact, it was before the end of the Cold War.

However, the trade and industrial pools of the world's leading economies are unable to adjust to the new geopolitical realities so quickly, and the collapse of the former commercial and transport links in the vast Eurasian area has resulted in a sharp increase in global demand for raw materials, primarily energy, petrochemical, non-ferrous and ferrous metal products, food, but also construction materials, microchips, equipment, etc. In these circumstances, the position of non-aligned, developing countries of the world, where domestic production has maintained the necessary volumes and, most importantly, comparatively more reasonable prices, has risen considerably. Today, in the context of the energy, food, and commodity crises, developing countries are increasingly meeting commodity demand in the EU region, North America, and a number of highly developed European states.

Azerbaijan, which has been expanding its geography and diversifying the range of its non-oil exports for two years now, belongs to such countries. Thus, the report of CAERC published a day before notes that as of January-August 2022, Azerbaijan's non-oil exports reached $1.9 bn, which exceeds figures of the corresponding period of last year by 19 per cent. According to CAERC, the volume of agricultural exports in the reporting period increased by 13.1 per cent up to $537.8 million, at the same time the supply of chemical products tripled, aluminum and its products - by 66 per cent, rolled ferrous metals - by 21.1 per cent, cotton fiber (for half a year) - by 12.8 per cent.

Currently, 60 per cent of domestic non-oil exports are accounted for by four countries - Türkiye, Russia, Georgia, and Switzerland. Türkiye, with which Azerbaijan signed an agreement on preferential trade, became the leader in non-oil goods turnover, contributing to the opening of the brother country's large market for Azerbaijani producers. "Together with geographical diversification and increase of non-resource exports, their structure is also changing: more than half of the non-oil exports share is industrial production," Economy Minister Mikail Jabbarov said in early August. The global crisis and lack of resources has contributed to an increase in the supply of Azerbaijani industrial products to relatively distant and undeveloped foreign markets in the past. So the export of polymer raw materials and chemical semi-finished products, including to the region of China and South-East Asia, and carbamide fertilisers to India and South America has increased manifold over the last year. Supplies of local processed fruits and vegetables and textiles to the Persian Gulf and North African markets have increased, Azerbaijan's cement, along with Georgia and Central Asian countries, are supplied to the highly-developed Germany; exports of construction materials, aluminum foil, and rolled stock, power cables, polymer pipes, etc. to Eastern European countries are on the rise. This year, energy operator Azerenerji resumed swap supplies of electricity to Bulgaria and Greece and expects to expand them to other southern European countries by 2024.

At the same time, the war in Ukraine and the resulting higher food prices have forced Azerbaijan to adjust its export policy somewhat to food security requirements. In March, the Cabinet of Ministers adopted a decree "On measures to regulate the export from the territory of the country of a number of basic foodstuffs included in the minimum consumer basket and raw materials used in their production". The document restricted the export of basic foodstuffs and raw materials, including flour and cereals, malt, starches, inulin, wheat gluten, oil seeds and fruits, some medicinal plants, fodder grasses, and feed grain. Meanwhile, the difficult economic situation in Russia, which is under sanctions, has somewhat reduced the purchasing power of its population, and the drop in demand has affected the volume of fruit and vegetable supplies from Azerbaijan. In particular, in the first half of the year, supplies (in tonnes) of apples and tomatoes to the Russian market decreased slightly, but the losses of Azerbaijani farmers were compensated by higher prices, given the high inflation in Russia: as a result, export income increased by 7.7 and 0.8 per cent, respectively, in monetary terms.

However, the role of the key vector of Azerbaijan's non-oil trade in the last two years has been firmly retained by the industrial sector. Undoubtedly, the country could not have achieved all this in such a short period of time, if not the programs of new industrialization and diversification of the non-oil industry had been implemented in the previous period, at the expense of which an increase in the production of internationally competitive products was ensured. Efforts to form specialised industrial clusters in Azerbaijan have played a special role in boosting the production of highly competitive export products. So, today there are six industrial parks and four industrial quarters, where 108 business entities have received the status of residents, and 60 of them have already started their activities. "The volume of investments in industrial zones has already exceeded AZN 6.4 bn, and it is planned to invest additionally AZN 400 mln in current projects. In the past years, enterprises of industrial zones have already produced production for over AZN 7.17 bn, at that, goods for AZN 2.3 bn or about 32 per cent of all production was exported", Economy Minister Mikail Jabbarov said recently. The minister also noted that in the first half of this year products produced in Azerbaijan's industrial zones were exported to more than 50 countries for AZN 1.3 bn. In January-June 2022, the specific weight of industrial zones in the production of non-oil products was 14.9 per cent and in non-oil export - 33.1 per cent. The export potential of the country's industry will further increase with the imminent launch of the Alat Free Economic Zone (AFEZ). In the medium term, the 850-hectare free economic zone is expected to be used by local and foreign investors to produce high-value-added products, much of which are also expected to be sold on foreign markets, using innovative technologies.

Azerbaijan's export strategy also envisages the active development of the agricultural and raw materials potential of the Karabakh and East Zangazur economic regions: robust demand and high world market prices make the creation of high-tech "green" agro-parks and mineral and other raw materials processing enterprises on the liberated territories extremely promising. Over time, the Karabakh region will become a critical factor in the growth of non-oil exports. All the above-mentioned directions are extremely important, as today the Ministry of Economy has formulated a key task - to ensure almost double growth of non-oil exports by the end of 2026, the volume of which is projected to reach $5 billion.