New world order in post-Covid era How will Azerbaijan take advantage of it?

The global economy, still reeling from the pandemic and Russia's invasion of Ukraine, faces an increasingly bleak and uncertain outlook as the ongoing war in Ukraine has overshadowed prospects for post-pandemic recovery.

This has not been an easy period for Azerbaijan either: the COVID-19 pandemic, the 44-day war in 2020, geopolitical tensions, negative developments in the global economy, and, finally, the earthquake in Türkiye directly or indirectly continue to affect the country's social and economic development.

High inflation, tightened monetary policy, and growth of prices for goods and services in many countries, including Azerbaijan's trade partners, fluctuations of energy and commodity prices, and disruption of production and logistics chains also had an impact on our economy, which is part of the global economy.

The highest share of the country's commodity exports belongs to the oil and gas sector. Its share of total exports has increased from 68.8 per cent in 1999 to 89.5 per cent in 2019. Although the value of non-energy exports (mainly agricultural products such as tomatoes, fruits, nuts, cotton and non-monetary gold) increased from 1999 to 2019, its share in total exports dropped from 31.2 per cent to 10.5 per cent, and averaged only 3 per cent of Azerbaijan's GDP over this period.

According to Azerbaijan's new national export strategy, covering the period until 2026, more than 100 products with export potential have been identified. Appropriate work will be undertaken to supply them to new and existing markets. In 2022 non-oil exports for the first time in the history of Azerbaijan exceeded $3 billion, a rise of 12.3 per cent, and this year it is expected to reach $3.4-3.5 billion. At the same time, Azerbaijan's foreign trade turnover last year increased by 55.4 per cent to $52.69 billion.

A noteworthy detail is that the country has increased exports of services such as tourism, transport, computer, and information services in the non-oil sector. But the impact of the COVID-19 pandemic, which affected tourism services particularly, still continues to negatively rebound for the sector, which is one of the most sensitive. In addition, the sector that has not recovered from the pandemic is also affected by the consequences of the ongoing Russian-Ukrainian war, tensions in Iran and its impact on the region.

Before the pandemic, i.e. in 2019, Azerbaijan welcomed more than 3 million tourists. In 2020 this flow decreased almost fivefold. The tourism sector is facing a major challenge to reach at least the pre-pandemic figure, but for that, the number of COVID-19 infections must be kept to a minimum, the number of flights must be increased, and of course, the lifting of restrictions and opening of borders for passenger traffic is important.

With regards to the devastating earthquake in Türkiye, as the country is one of Azerbaijan's main trading partners, accordingly any significant shocks to its economy cannot pass unnoticed. At the same time, no particular change is expected for shipments of major commodity groups. Probably, there will be some adjustments to forecasts on mutual tourism, which is associated more with a psychological factor, but it will be temporary.

The impact on the global economy is marked by higher oil prices, as well as higher cement and concrete prices. The earthquake also affected supplies for global logistics companies.

Gas and green prospects

The World Bank predicts that in 2050 Azerbaijan's oil sector will account for only 10 per cent of Azerbaijan's total GDP, compared to 29.5 per cent in 2020.

Production from the oil sector is expected to decline significantly, this will happen as the fields mature, and investment in the development of new reserves will be required to compensate. In 2019, Rystad Energy estimated that planned exploration projects in the Azerbaijani part of the Caspian Sea could increase Azerbaijan's recoverable reserves by 4.4 billion barrels over the next decade. However, the COVID-19 pandemic has caused delays in existing projects, as well as a sharp drop in oil investment, which is likely to have a perverse effect on these expectations.

While investment in new oil projects will continue to be in high demand to replace the natural decline in the number of existing wells, any future developments are likely to include lower oil price forecasts and assume a gradual decline in oil demand over the long term.

Energy consumption in Azerbaijan is known to be much more dependent on fossil fuels than in other countries. They account for 97.5 per cent of Azerbaijan's domestic energy consumption, of which about two-thirds is natural gas and one-third oil, while renewable energy sources account for only 2.5 per cent.

Kazakhstan, Turkmenistan and Uzbekistan are also dependent on fossil fuels, although coal accounts for a larger share of domestic energy consumption in Kazakhstan. Russia, and especially Ukraine, have a smaller share of fossil fuels in total energy consumption, partly because of the higher share of renewables, but also because nuclear power accounts for a large share of total energy consumption. In the European Union, fossil fuels account for about three-quarters of energy consumption, with renewables accounting for 15 per cent and nuclear power for 11 per cent.

Meanwhile, the oil and gas sector will remain a significant part of Azerbaijan's economy, so it is important that volatility in global energy markets is not spread on the economy through cost volatility or through price increases. In other words, Azerbaijan will need to avoid the cycles that have marked economic growth in the past.

However, global instability has confirmed another reality that an economic crisis is seen as inevitable and even sometimes a boon for the country. Thus, after the outbreak of the war between Russia and Ukraine, Azerbaijan received more than 10 applications from European countries asking for either an increase or the start of gas supplies to Europe. Although today Azerbaijan does not have enough gas to satisfy these requests, commercial negotiations should begin now, in particular with the countries that receive Azerbaijani gas.

Azerbaijan currently consumes about half of the natural gas it produces, mainly for power generation and to a lesser extent for heating, with the rest being exported. This level of exports is relatively low compared to other major natural gas producers. However, a reduction in domestic consumption can increase the amount of natural gas available for export and can be achieved either through energy efficiency policies or by replacing natural gas with renewables in electricity generation. The ratio of production to reserves in Azerbaijan shows the country's capacity to increase production.

In total, more than 21 billion cubic metres of natural gas shipped from Azerbaijan to Europe, namely to Greece, Bulgaria and Italy, since the Trans Adriatic Pipeline (TAP) became operational. Work is currently underway to double the capacity of TAP to 20 billion cubic metres, which will make an additional contribution to Europe's energy security.

Azerbaijan is gearing up for the "green" race, which already involves the world's largest countries. China, for example, is now the undisputed world market leader in the solar industry (not only in generating capacity but also in producing components for solar power plants, etc.). The EU, India, and the US are also seeking leadership in this area. Europe believes that increasing the use of renewable energy sources, especially solar, will galvanize its energy security.

Azerbaijan, together with international energy companies, is also starting to build large-scale renewable energy production as well as export facilities.

Last year, the construction of two large power plants was launched: Garadagh Solar (230MW) with Masdar (UEA) and Khizi-Absheron Wind (240MW) with ACWA Power (Saudi Arabia).

Azerbaijan's plans include bringing the share of renewables in its electricity generation capacity to 30 per cent by 2030 and reducing its greenhouse gas emissions by 40 per cent by 2050.

Azerbaijan is developing renewable energy sources not to ensure its own energy security, but because this industry has great potential. It will also help the country diversify its exports and create a new environmentally friendly sector of the economy.

In the short term, the agreement signed with Masdar will generate 4 GW of wind and solar power by 2027, and another 6 GW by 2037. In the medium term, this will be increased to 10 GW. Azerbaijan expects to create another 12 GW of generation capacity in renewable energy with Australia's Fortescue Future Industries.

As a result of this work, in parallel with becoming a green energy country, Azerbaijan expects to grow into important and reliable renewable energy and hydrogen export partner for the EU. In this regard, Azerbaijan plans to participate in a 4 GW submarine cable line project from Georgia to Romania.

Azerbaijan as a new transport and logistics hub

With no access to the open sea, Azerbaijan has already become an international logistics and transport hub. The country's transit role has increased even further against the backdrop of world events.

Because of the Russo-Ukrainian war, cargoes previously transported along the Northern Corridor have now been diverted to the Middle Corridor (Trans-Caspian International Transport Route, TTIM). Even if the situation in the Northern Corridor improves in the future, some cargoes will remain in the Middle Corridor, as international companies consider the Middle Corridor to be more reliable and safer.

Before the Russian-Ukrainian conflict, there was a decrease in wagon turnover, but last year the turnover increased. In 2022, 38,692 wagons were transshipped, i.e. 27.2 per cent more than in 2021.

However, in order to accelerate freight traffic in the Middle Corridor, existing infrastructural constraints in several destinations, mainly in Kazakhstan and Georgia, need to be overcome.

Today there are low-capacity sections on different segments of the Middle Corridor. Kazakhstan is one of the active countries in the Middle Corridor. Last year, the volume of cargo transported by Kazakhstan along this route increased 2.5 times compared to 2021, reaching 1.5 million tonnes. Although Kazakhstan is already building a third border crossing point on the Almaty route, Kazakhstan's port infrastructure is not capable of handling large volumes of cargo and needs to be expanded. Kazakhstan's main interest is in transporting oil, coal, and uranium, but China's 'One Belt, One Road' concept is aimed at increasing container traffic. In this context, the Aktau and Kuryk ports' infrastructure needs to be expanded.

Georgia is also one of the most important countries in the Middle Corridor, but sometimes shipments from Azerbaijan are delayed in the Georgian port. Georgia's current priority is the construction of the deep-water port of Anaklia on the east coast of the Black Sea. The port will be able to transship up to 100 million tons of cargo and up to 1 million containers. Panamax ships will be docked at this port. Georgia is also waiting for the completion of road and rail modernisation along the East-West corridor in 2024.

Turkey has announced a railway expansion project expected to invest $190 billion in the country's infrastructure over 30 years. Some 63 per cent of this amount will be invested annually in the railway, as the traffic potential is high, but the capacity is many times below its potential.

As for Azerbaijan, the construction of the second phase of the Baku International Sea Trade Port will kick off by the end of this year/beginning of next year.

The construction of the intermodal and multimodal terminal, which is available in the most developed ports of the world, is envisaged within the second phase of Baku port development, which will create conditions for attracting even more cargo to the region. It will allow finding fast logistics solutions for cargo arriving in the Middle Corridor.

In 2022, 6 million 314 thousand tons of cargo were transported through the Baku Port, a 13.6 per cent year-on-year increase. In order to increase the attractiveness of the Middle Corridor, the throughput capacity of Baku Port is planned to be increased to 25 million tonnes.

In addition, changes are made in the tariff policy: from March 1 tariffs for road transport in both directions on the route Baku-Turkmenbashi were reduced, and from the beginning of February carriage of cars in this direction is carried out at preferential rates. A joint venture between Azerbaijan, Türkiye, and Georgia is planned within the framework of TMTM, which will simplify the transport process and thereby increase the importance of the corridor.

The new joint venture will also provide intermodal transport and logistics services, negotiate cross-border prices and introduce a unified IT platform to fully automate cargo shipments from China to Türkiye and Black Sea ports.

So, with all this in mind, Azerbaijan, as an energy supplier, will continue to build its influence, both as a transit country and as a supplier of renewable energy sources.

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