SLOWDOWN

Western sanctions against Russia after the start of military confrontation in Ukraine has crossed the mark of ‘unprecedentedness’ in two weeks only. Perhaps no country in the world has so far suffered from such a large magnitude of simultaneous economic pressure affecting almost all areas of the national economy. The Russian economic drive stopped at full throttle and continues its inert forward movement. But the effect of convulsions at the moment of breaking will be powerful because of the total unexpectedness of the crisis and unpreparedness for it.

It is also clear that it is not only Russia that will not be the same again. Sanctions have turned the entire economic architecture of the world upside down and changed the perspectives for global economic relations. And they will definitely reflect on the economic performance of many countries.

Crisis cannot be avoided

On March 15, World Bank’s president David R. Malpass said that sanctions against Russia would hit global GDP hard and have serious consequences for Russians, including the devaluation of the rouble.

Ten days earlier, the International Monetary Fund (IMF) had made similar forecasts, underlining the significant impact of sanctions on the global economy and financial markets, with significant consequences for many states. IMF forecast a worldwide rise in the prices for energy and commodities, including wheat and other grains, which indeed happened shortly after.

Chinese Prime Minister Li Keqiang also warned of the negative impact on the global economy, which had already been severely affected by the effect of the pandemic. "Sanctions will hit the global economic recovery and will not benefit either side," Mr. Li said.

"The war in Ukraine and Western sanctions against Russia are a major shock to CIS and non-member states of CIS from among the former Soviet republics. Although the channels of influence will be distinct, the secondary economic effects will be significant across the region," Fitch Ratings’s analysts expect. They believe that uncertainty about the course of the conflict, its duration and the scale of sanctions leads to uncertainty about their impact on disruptions to intra-regional trade and financial flows, as well as transport and logistics links. Fitch believes that the sanctions will put pressure on post-Soviet economies through trade, remittances and tourism in 2022.

The largest package

At the time of writing, the third package of anti-Russian sanctions adopted by the EU has been considered the largest and affected the financial, energy and technology sectors. Disconnection of sanctioned banks (and maybe even the entire banking system of Russia in the future) from SWIFT, a ban on all EU transactions with the Bank of Russia, and the freezing of Russia’s foreign exchange reserves are worth a lot. In addition, Russian bank cards have been disconnected from the foreign payment systems Visa and Mastercard since March 10.

Despite Russia’s hopes for establishing its own bank transfer system, so far only 20% of domestic transactions can use it. As for foreign payments, Russians traditionally hope for Chinese assistance, but given the current political climate, it is hard to expect China confront the West.

This current situation affects not only money transfers, but also export-import operations, which, in particular with Azerbaijan, are exercised in dollars. Obviously, many of them have to be slowed down until a solution is found, new contracts are concluded, etc.

At the same time, multinational corporations operating in the Russian automotive, energy, food, clothing and accessories, machinery and technology, and logistics sectors are leaving the Russian market en masse. Local offices are being closed down and joint production is being halted. This will probably worsen significantly the situation with the unemployment in the near future, including the effect on the nationals of Azerbaijan working in Russia (about 2 million people unofficially).

It will be impossible to fill this gap in the short term, including at the expense of national equivalents. The deficit will sharply increase the prices for many goods, including primary goods. In fact, the leading sectors of the Russian economy depend on foreign supplies to ensure 30-70% of domestic output.

This suggests that all importers of Russian products, including Azerbaijan, will have to think about alternative sources and delivery routes for certain types of equipment due to the closure of offices of foreign manufacturers, pharmaceuticals, food products, building materials, etc.

Main danger: food products

President of the International Fund for Agricultural Development, Gilbert Ungbo, warned that the ongoing crisis could limit the supply of staple crops and lead to sharp rise in food prices and famine. "This could jeopardize global food security and heighten geopolitical tensions," Ungbo said.

Food prices around the world had been rising even before the situation in Ukraine due to the climate change and the pandemic. Now the effect of these factors has been extended by the risk of disrupted sowing season in Ukraine and a temporary ban on grain exports from Russia.

Ukraine now accounts for 10% and 15% of the global wheat and corn supplies, respectively. Russia is another largest exporter of grain products and one of the leaders in sunflower exports. The two countries account for 20% of global corn exports and 80% of sunflower oil exports. Meanwhile, 40% of wheat supplies from the Black Sea region are supplied to the Middle East and Africa, where food prices are already quite high.

Grain shipments from Russia have more than halved to 40,000 tonnes due to the suspension of shipping in the Azov basin, the ports of Makhachkala and Taganrog. Currently, shipments are only made under existing contractual obligations. Commercial shipping has been suspended in all Ukrainian ports. The country can no longer ship to regions such as South East Asia, the Middle East and Africa. One can only imagine what this means for these countries, which are already experiencing food shortages.

In Russia itself, after the Bank of Russia has doubled the discount rate to 20%, the access of the agricultural sector to loans will be significantly limited. This will reduce investment in the agricultural sector, as well as the agro-industrial complex as a whole.

Thus, food prices will rise this year. It cannot be avoided, even if the conflict is resolved in the short term, and the market will not recover from the shock any time soon.

Unfortunately, Azerbaijan will suffer from these effects too. Lest we forget that last October President Ilham Aliyev signed a decree on the establishment of State Reserve Agency, which also includes State Grain Fund. There are enough food reserves in the country, which can be safely used by the government in the last resort, until the market situation is stabilised.

We cannot avoid the inevitable

As Azerbaijan's closest neighbour, Russia has traditionally been one of its top three trading partners, one of the main partners in a number of major projects. On the other hand, a number of joint ventures and projects have been implemented in partnership with Ukraine.

Russia is the main supplier of grain to Azerbaijan (95% of wheat imports). Therefore, it is possible that, at least in the short term, there could be problems in the supply chain. The only alternative in the region is Kazakhstan, but in 2022 it reduced the area under wheat cultivation by more than 368,000 hectares. And it is still a big question whether we will be able to get the Kazakh wheat. Other alternatives offer wheat at a higher price meaning higher prices for the end product.

The global market is also experiencing a shortage of sunflower oil, as 60% of the sunflower oil used worldwide is produced in the Black Sea region. Russia is the second largest producer of this product after Ukraine.

Azerbaijan also buys sunflower oil from Russia. Last year, 98% of sunflower oil imports came from Russia and the rest from Turkey.  Given the total scope of anti-Russian sanctions, Argentina could be an alternative supply channel. Given that Azerbaijan already imports corn oil from this country, we can safely assume that the necessary logistics for sunflower oil supplies are in place as well. In 2021, Azerbaijan purchased a total of 20,526 tons of corn oil from 12 countries. Sixty percent of these imports were from Argentina.

Transport and logistics

As mentioned above, amid the escalation of the Russian-Ukrainian conflict, navigation in the Azov basin, the ports of Makhachkala and Taganrog ceased. Currently, shipping from Russia is carried out only under existing contractual obligations. Merchant vessels avoid entering the Black Sea due to high safety risks. Commercial shipping is suspended in all Ukrainian ports.

Thus, all neighbouring countries have thought of alternative routes for cargo deliveries. In particular, Kazakhstan has offered Azerbaijan a reorientation of export cargo flows—from Kazakhstan to Europe via the Trans-Caspian International Transport Route (TCITR).

A delegation led by the chairman of Samruk-Kazyna, Almasadam Satkaliyev, visited Baku on this occasion. The main focus of discussions was a project to set up a joint venture to develop this new route. The new joint venture also joined by Georgia will solve the issues associated with setting through fare and cargo declaration, apply unified IT solutions and consolidate transit cargo transportation on this route.

Geographical characteristics of Azerbaijan and Kazakhstan, including their location between the largest economic centres of Europe and Asia, are real prerequisites for ensuring an efficient and well-established transport network between the countries. The completion of the Baku-Tbilisi-Kars railway line has contributed to the development of the route positively as well. This has reduced the delivery time from China to Turkey via Kazakhstan to 12 days.

In total, the route can transport up to 10 million tonnes annually, including up to 200,000 containers.

Moreover, Kazakhstan has also offered to transport its oil through Azerbaijan, which could be an alternative to the existing routes. This idea came up as the war in Ukraine threatened Kazakhstan's oil exports, which had been running through southern Russia to Russia's Black Sea oil terminal in Novorossiysk, which is just 200km from Mariupol, Ukraine—one of the fieriest battle scenes of the conflict.

Energy news agency S&P Global Platts reported that shippers were already cancelling planned orders to receive crude from Novorossiysk by tankers. By the way, Azerbaijan also transports oil to the north, but, unlike Kazakhstan, it has other routes that do not pass through Russian territory, including the Baku-Tbilisi-Ceyhan pipeline. This is the route that could be useful for exporting Kazakh oil as well.

Aviation and tourism on standby

The Russian-Ukrainian crisis is affecting the aviation and tourism sectors to a certain extent, including Azerbaijan. Because of the refusal of major insurance companies to issue policies for flights to Russia, airlines, including our national carrier AZAL, have cancelled all scheduled flights. They will have to refund the cost of tickets already purchased. This will be a painful blow to the budget of airlines that operate regular flights to Russia and Ukraine, the income of airports, service companies, etc., which are barely recovering from the pandemic crisis.

Cancellation of flights to Russian destinations has also put travel companies in a desperate situation, as many booked tours are cancelled.

For the record: in 2021, 792,000 foreigners and stateless persons visited Azerbaijan. Of this number, 32.6% were from Russia, which was 14.7% more than in 2020. Local travel companies had high hopes for Novruz holidays and the summer season, but, alas, they are now unlikely to come true.

Chairman of the Board of the Azerbaijan Tourism Association Ahmed Gurbanov believes that there is an urgent need to refocus and ensure an inflow of tourists from other countries, opening land borders, increasing the number of flights. But the projected figures for this year are no longer achievable, except for domestic tourism.

It is difficult to say what the impact on Azerbaijan's economy will be. The government is already assessing the risks and preparing countermeasures. But we must recognise that in any case the negative consequences cannot be avoided; the main thing today is to reduce them as much as possible.