FRIENDLY AGREEMENT

Commonwealth countries have been discussing the possibility of establishing a free trade zone in the CIS for the past 17 years. A specially created working group has held eight rounds of negotiations since March last year on harmonizing the new draft treaty prepared by the Russian Ministry of Economic Development. The current document was adopted in 1994 and is essentially outdated. Since then, more than 20 amendments have been made to it and, following the entry of some Commonwealth states into the World Trade Organization (WTO) with others intending  to join, and the establishment of a customs union between three states (Kazakhstan, Belarus and Russia), the need to improve the legal framework for bilateral trade relations has become apparent. Cooperation within the Commonwealth has strengthened, especially in recent years, as evidenced by growing trade within the CIS as we emerge from the global financial and economic crisis. So, in eight months of 2010, it increased compared with last year by almost 30 per cent, totalling, according to preliminary estimates, $120 billion. Of course, against a background of such figures, the issue of simplifying the foreign trade regime is becoming even more relevant.

New document

The legal framework for trade relations between CIS countries has become quite confusing in recent years. More than 100 agreements have been concluded, and they often contradict each other. The new treaty is intended to unite all the rules of trade and adapt them to modern economic realities.

It should be noted that the main provisions of the draft treaty on a free trade zone (FTZ) are based on WTO rules and disciplines. The document focuses on the application of rules to identify the origin of goods, issues concerning freedom of transit, re-export, special safeguard measures, antidumping and compensatory measures, subsidies, technical barriers to trade, sanitary and phytosanitary measures, customs administration, rules for the settlement of disputes and other aspects of trade relations.

The new draft document was discussed by economy ministers and members of the CIS Economic Council in September this year. During the negotiations, solutions were found to problems such as the provision of a national regime for government procurement, the inclusion of pipeline transport in freedom of transit, reservations about the treaty were overcome and the process of ratifying the agreement on rules to identify the country of origin from 20 November 2009 was accelerated.

It is planned to complete the text of the agreement on a free trade zone by the end of this year, and another round of talks is scheduled for 21-23 December.

All major differences between the parties to the agreement have been settled. There are some reservations on lists of exceptions to the free trade regime. Thus, Russia, Kazakhstan and Belarus insist on certain exceptions in trade with Ukraine. These issues must also be resolved or brought into coherent form by the end of the year. It is planned to sign the document at the next meeting of the CIS Economic Council to be held in Yalta on 15 April 2011.

Azerbaijan is watching

It is known that Azerbaijan already has bilateral agreements on free trade with Belarus, Kazakhstan, Georgia (when the agreement was signed, Georgia was a member of the CIS), Moldova, Uzbekistan, Kyrgyzstan, Russia, Turkmenistan and Ukraine. We should add, however, that discussion of the draft agreement provides for the elimination of these bilateral agreements.

The new treaty is aimed at creating conditions for the free movement of goods within the Commonwealth, as well as lifting restrictions on trade. Azerbaijan does not see itself as outside this field, so it is trying to participate actively in discussions and to protect its interests and position to the maximum, maintaining a predominantly neutral position. A governmental delegation led by First Deputy Prime Minister Yaqub Eyyubov was also present at recent negotiations on the document, which took place at the Council of CIS Heads of Government on 19 November in St. Petersburg.

As for why Azerbaijan has adopted a watching brief on this issue, the government explains this by its disagreement with Russia's proposal to abolish all import duties while setting a level of export duties in trade between the Commonwealth countries. Given the power of the Russian Federation in the fuel and energy complex, it still refuses to lift export duties.

Azerbaijan aims to build a civilized transit state, as President Ilham Aliyev has repeatedly stressed in his speeches, and thus the government believes that there is no need for exceptions from the free trade regime in either import or export transactions. In accordance with the current bilateral agreements on the free trade zone in the structure of Azerbaijan's exports, there are virtually no exceptions, and only on two types of goods (tobacco and denatured alcohol), are there exceptions with Russia and Kazakhstan.

Although Azerbaijan does not export energy to CIS countries today, our country defends its position in the light of plans for the future. For example, discussions are currently under way with Turkmenistan on the possibility of laying a gas pipeline on the Caspian seabed, which involves the pumping of Azerbaijani gas to other countries. The trans-Caspian pipeline project, which will link Turkmenistan and Azerbaijan and allow them to enter the European market through Turkey, seems very promising. The Nabucco gas pipeline project, whose assets have grown considerably since major US and Western oil and gas companies came to the Turkmen market, is usually associated with this direction.

As a solution to this point of disagreement on the new FTZ agreement, it is planned to adopt a separate document specifying conditions for oil and gas exports as in the previous agreement of 1994; this may affect Azerbaijan's position on this point.

The country does not have a monopoly on the export of non-oil sector products and possible exceptions are unlikely to affect the volumes of Azerbaijani products supplied to CIS countries. In this regard, the Azerbaijani government prefers to evaluate the preparation of the FTZ agreement from one side.

Maximum benefits

In general, if we estimate the structure of Azerbaijan's foreign trade transactions with CIS countries from January-September 2010, goods worth $1,423 million were imported from CIS countries during this period, which accounts for 31.33 per cent of total imports. Azerbaijan imported grains (14.08 per cent of total imports), ferrous metals (10.59 per cent) and machinery and mechanical plant (10.48 per cent) from CIS countries. The export of Azerbaijani goods to CIS countries totalled $1,417 million (9.05 per cent of total exports). Fuel oil, bitumen minerals (57.07 per cent of total exports), vegetables (2.58 per cent), animal and vegetable fats (9.27 per cent) etc. were the main exports to CIS countries.

That is to say, the figures speak of the importance of further developments in trade with CIS countries, especially as the new agreement will create some favourable conditions for businesses in Commonwealth countries, because trading rules will now become simpler. Accordingly, other countries also want to take advantage of these benefits, so many trading partners of CIS states around the world are interested in the free trade zone. For example, New Zealand and Vietnam have already expressed their intention to join the agreement.

Meanwhile, Azerbaijan is very interested in the transit relations regulated by the new FTZ agreement, which will make it possible to increase the volume of trade in future. Ukraine and Belarus are doing their best to defend favourable transit conditions in the negotiation process, and Azerbaijan supports their position in every respect.

It should also be noted that Russia has taken a moderate position on several aspects of the agreement. For example, there are a number of products that do not meet either the Ukrainian or Russian regime of duty-free transportation.

In this context, there are two main problems in relations between Ukraine and Russia. Firstly, there are issues related to technical and sanitary standards; the Russian veterinary authorities from time to time impose bans on food for whatever reason. In addition, Russia still has restrictions on the amount of Ukrainian metal supplied.

The desire to create a free trade zone provides for its introduction in the classical sense. This implies the lifting of border barriers. The question is one of lifting import duties on both sides and policy instruments that may be similar to duties. According to experts, there are several reasons why Russia has softened its position. In particular, this is due to the current food crisis. Ukraine avoided that and is now ready to help Russia with corn and sugar. But to this end, they need to overcome barriers erected over many years. On the other hand, Kiev has intensified negotiations to establish a free trade zone with the EU.

As you know, Azerbaijan is also in negotiations with the EU on an associative agreement, the signing of which will raise cooperation with EU countries to a new level. This will allow Azerbaijan to create a unified free trade zone with European countries. However, to participate in the zone, an applicant must be a WTO member, according to the requirements of the European Union, while Azerbaijan is still an observer country in the organization, like many other CIS states, although we already enjoy the benefits of duty-free exports of several thousands of products to EU countries. However, given the strategy of the Azerbaijani government to develop the non-oil sector and diversify energy routes, increasing exports of Azerbaijani goods to foreign countries is inevitable. Accordingly, the Azerbaijani side's desire to achieve the maximum acceptable conditions for trade and transit is understandable. It seems that the new agreement on the FTZ in the CIS will greatly promote the implementation of these plans.