REAL REVENUES FROM VIRTUAL TRADE

The ongoing pandemic crisis has also had an unprecedented impact on e-commerce growth in Azerbaijan in the last two years. Experts at the UN Conference on Trade and Development (UNCTAD) believe the rapid growth in e-commerce is related to lockdown restrictions on shopping malls and other commercial facilities during the peak of the pandemic. They think that this trend will remain mainstream after lifting the pandemic restrictions.

However, there are a number of issues that need to be solved in Azerbaijan to expand all areas of e-commerce, including in the B2B (Business-to-Business) segment, air transportation of cargo to make postal deliveries cheaper, access to international electronic payment systems, etc.

Growing statistics

Over the past few years, the global e-commerce market has grown rapidly. In 2017-2020, the global electronic commerce market nearly doubled from $2.3 trillion to $4.5 trillion. And this dynamic growth continued last year, with e-commerce volumes surpassing $5 trillion. According to forecasts, global sales through digital platforms will exceed $5.6 trillion this year and cross the $7.4 trillion mark in 2025.

The growth rate of online sales is markedly higher than that of traditional trade. According to UNCTAD, the total volume of global trade in 2021 was estimated at $28 trillion, which is 23% higher than pre-pandemic levels. With pandemic restrictions still in place in the first half of last year, the UN experts argue that much of this growth was due to e-commerce. However, the growth of global sales in the services sector has slowed and is still below the level of 2019. UNCTAD estimates that the outlook for 2022 remains very uncertain due to the expected slowdown in the global economy and the persistent trend of declining sales of goods and services in the offline segment.

Meanwhile, e-commerce is further expanding replacing the traditional retail sector, and accounts for 17.5% of all global trade in 2021. Today, some 2.4 billion people can be considered online shoppers, which is about a third of the global population. By 2025, 5 billion mobile devices around the world are expected to have access to the Internet, which will increase the number of potential shoppers in the digital space.

In parallel, the pandemic has introduced new trends into the e-commerce sector. Digital trading platforms have been used to order food as well as ready-made food, medical equipment and health products, hygiene products and household chemicals, etc. By 2028, e-commerce turnover in the food and beverage industries is expected to reach $71.6 billion, growing by 18% annually. The rapid introduction of e-commerce in everyday consumer sales is shaping fundamentally new tools of supply. This includes automated delivery systems as well as the mass adoption of robotic devices on the ground and in the air (drones), etc.

Format B2B

The same global trends, albeit in varying degrees of intensity, can be observed in Azerbaijan as well. E-commerce is still in its infancy in the country and cannot be compared in terms of its turnover with the leading countries. E-commerce accounts for approximately 1/6th of Azerbaijan’s total trade turnover. However, according to the Central Bank of Azerbaijan, the rate of growth of e-commerce in Azerbaijan in 2021 was 86% higher than in 2020, with the turnover more than ₼7.2bn. Such high dynamics in the local market demonstrated the development of sufficiently developed network and payment infrastructure in the country, strong demand for digital trading platforms, as well as the effectiveness of reforms in the field of cashless payments introduced since 2019.

At the same time, the Azerbaijani e-commerce market has some specific features that make it markedly different from the global trends.

Not long ago, a significant share of purchases has been provided by corporate customers. However, the vast majority of local e-commerce turnover is in non-food products, while demand for services is much lower. It mainly covers imports of goods from international electronic trading platforms by local companies in a B2B format. Unfortunately, the export of produce of Azerbaijani industrial and agricultural companies is still significantly lower, being less than 10% of the total turnover of e-commerce in the B2B segment.

In particular, in 2021 Azerbaijan’s largest digital trade operator Azexport.az secured $496.1 million worth export orders for local enterprises, which is 18.8% less than in 2020. Nevertheless, Azexport.az is working to increase exports. In particular, thanks to the work done so far Azerbaijani products will be sold in 40 countries via the US e-commerce platforms Amazon and eBay. Today, there are still some problems with postal transport due to limited air passenger traffic to a number of destinations. However, the number of countries available to Azexport.az will gradually expand.

Remarkably, the government of Azerbaijan fully supports initiatives to increase non-oil exports, including through sales via e-resources. In addition to Azexport.az, there are other institutions to fulfil this task in the country. For example, the Ministry of Agriculture attracted company ARIS to develop an agricultural portal with e-commerce tools to expand the access of local companies to public procurement. However, in the future, this resource may also become a platform for international supplies. In turn, the State Agency for Development of Small and Medium Enterprises (SME) has developed an online trading portal kobmarket.az, which is currently focused mainly on the domestic market. The portal already provides access to more than 80 online shops and posted more than 1,100 products. It will also be used to promote the Made in Azerbaijan brand in foreign markets.

In general, the digitalisation of B2B export mechanisms is one of the most important points of the recently developed National Export Strategy 2025. Azerbaijan’s Ministry of Economy of Azerbaijan also actively promotes an initiative to expand e-commerce with Turkic-speaking countries. "We continue to cooperate with Turkic-speaking countries in the field of innovation and e-commerce. The preparation of a memorandum is underway. We have recently reached such an agreement with the Turkish side," Minister of Economy Mikayil Jabbarov said during the 10th meeting of Economy Ministers of the Turkic Council in Baku.

Pandemic-caused inflation

As for the B2C (Business-to-Consumer) segment, which provides e-commerce opportunities between businesses (via e-platforms) and private consumers in Azerbaijan, the segment has at least doubled the turnover amid lockdowns and other pandemic-related issues in 2020-2021. Electronics, IT gadgets, tools, watches, clothes, footwear, cosmetics and other durables continue to dominate the sales share in the segment. Accordingly, the segment is largely based on imports from trading platforms of China, US, Turkey, Britain, Germany and the UAE, as well as other countries of Europe and Southeast Asia.

Despite about two hundred online shops in Azerbaijan, their turnover is relatively small. More than 90% of Azerbaijani consumers prefer to buy goods and services outside the country at major global markets such as eBay, Amazon, Alibaba, Aliexpress, etc. When shipping similar goods into the country, local online retailers incur various costs, including for transportation, customs tariffs, warehousing, logistics, etc., ensuring less profit than expected. In addition, domestic e-commerce is subject to VAT. And proposals to abolish it pose a number of problems, as they put traditional trade, which is subject to value-added tax, in an unequal position. Nevertheless, some Azerbaijani online retailers have found a market niche, selling some foodstuffs, alcoholic beverages, textiles, perfumes, carpets, national souvenirs and jewellery in foreign markets.

With the onset of the pandemic and the end of passenger aviation (which provided the lion's share of all e-commerce cargo transportation), transportation costs of goods ordered from global marketplaces increased in many countries. Similar problems have hampered the development of the B2C segment in Azerbaijan. During the pandemic, some 80 local cargo companies were forced to switch to commercial air cargo services (e.g. SilkwayWestAirlines, Cargolux, etc.), which increased rates for e-commerce shipments.

By the middle of last year, the problem has been partially solved, with THY and other Turkish airlines resuming flights to Azerbaijan, which helped to maintain stability in the delivery of foreign e-commerce cargo. Thus, the activity of Turkish e-commerce platforms in Azerbaijan has noticeably increased.

Recently, Azərpoçt also took measures to optimise the delivery of Chinese electronic goods to Azerbaijan through alternative channels, thereby reducing logistics costs.

Development incentives

Introduction of SmartCustoms system by the State Customs Committee in February 2021 has greatly contributed to the development of the domestic B2C segment. It has greatly simplified and facilitated customs procedures and accelerated the process of delivering e-commerce cargo to the end consumer.

Another significant step contributing to the reform of the local e-commerce market should be the liberalisation of payment market, which is planned by the Central Bank in the near future. In particular, it may ensure finally the full operation of the world's largest electronic payment system PayPal in Azerbaijan, which effectively operates in the segment of e-commerce in over 200 countries and provides transactions in 25 national currencies. The advantage of this system is also relatively low tariffs. Today, citizens of Azerbaijan are able to open a PayPal account and make payments for goods or services purchased online, but cannot receive money in their accounts through the system. The reason is associated with a number of technical issues, including the mechanism of control over financial flows. It should be noted that similar restrictions are in place in Ukraine, Belarus, Kyrgyzstan, Tajikistan, Turkmenistan, Uzbekistan and a number of other countries. Meanwhile, other payment systems, in particular Payoneer, are used as alternatives to PayPal.

As a rule, demand provokes supply, and the pandemic has only added value to online commerce. Accordingly, we will soon see more projects in the local market that can compete with foreign platforms.