STANDARD REFORMS OR REFORMS VS. STANDARDS

The new environmental standards to be applied to automobiles in Azerbaijan from 1 July 2010 will undoubtedly affect prices in the local automobile market, as well as the quantity and quality of its products. However, it is doubtless high time that this market was reformed: the country's demand for transport vehicles is fully met and rigorous control over the quality of automobiles brought to and produced in the republic will be no catastrophe. Reform will, in fact, be gradual, so the market will have the opportunity to adapt.

Statements and solution

The importance of tightening environmental requirements for transport vehicles was highlighted at a meeting on environmental problems chaired by Azerbaijani President Ilham Aliyev. The head of state indicated that, according to information received, automobile transport was responsible for 70 per cent of air pollution. "I think that the measures we have planned will help us reach European standards," said Mr. Aliyev.

According to the head of the Baku executive authority, Hacibala Abutalibov, there are 549,511 vehicles registered in Baku, of which 80 per cent do not meet Euro-3 and Euro-4 requirements. These automobiles discharge toxic substances into the atmosphere. "If we prevent the import of transport vehicles which do not meet European standards; gradually decommission vehicles manufactured over 10-15 years ago, those not meeting environmental requirements and those whose lifetime has expired; while increasing production of new fuels meeting European requirements, we will improve the environmental situation in Baku," the mayor has said.

Shortly before the meeting, the head of the State Committee on Standardization, Metrology and Patents, Ramiz Hasanov, stated that the importing of automobiles not meeting European standards would be banned from 1 July 2010. "European countries have already introduced Euro-5. In Azerbaijan, we will start with Euro-2," said Hasanov. According to him, work on the introduction of national standards is being carried out jointly with SOCAR because, "local fuel must also meet European requirements".

SOCAR immediately issued a statement saying that it was going to improve the quality of diesel fuel to Euro-4 standard. According to the company's vice-president for refining, Davud Mammadov, the standard of diesel produced in Azerbaijan would be raised to Euro-3 by April and to Euro-4 by the end of the year. This is the maximum level to which the quality of diesel fuel can be brought using the existing capacities of the company's oil refineries in Azerbaijan. As for petrol, its quality will be improved to Euro-3 over the next two to three years. This will be done completely at the company's own expense. Mammadov added that about 55 per cent of transport vehicles in Azerbaijan use petrol and 45 per cent use diesel fuel. 

In fact, after SOCAR has established its oil refining and petrochemical compound in the Qaradag District, it will be possible to improve further the quality of fuel to Euro-5 and higher standards (so far oil products are produced by SOCAR's two oil refineries, with a combined refining capacity of 20 million tons a year).

All of these statements eventually led to a Cabinet decision to bring in national standards on hazardous atmospheric emissions by transport vehicles (imported and produced in Azerbaijan) in line with European ones. Following this decision, vehicles brought to Azerbaijan after 1 July 2010 will be subjected to environmental standard Euro-2 (on hazardous emissions). According to the document, relevant institutions are to submit suggestions to the Cabinet on a gradual transition to Euro-3 and higher environmental standards. Government bodies will also be required to submit draft regulations on the importing and customs clearance of rare transport vehicles to Azerbaijan.

Prices to rise 

As for vehicles manufactured in Azerbaijan, everything seems to be in order here. In any case, according to the managers of local enterprises, their products comply fully with Euro-2 standards for hazardous atmospheric emissions. The director of the Ganca automobile plant says that "the Belarus tractors and MAZ automobiles manufactured by the enterprise now fully comply with Euro-2 standards. At the same time, the plant is prepared to switch to Euro-3". The director of the Naxcivan automobile plant, Musa Abdullayev, says that the Lifan automobiles manufactured by the factory are fitted with engines fully compliant with Euro-3 standards.

In 2009, Azerbaijan imported 63,400 cars, which was 28.8 per cent fewer than in 2008. According to the State Statistical Committee, the total value of cars imported in 2009 was about $455.9 million, which is 29.8 per cent less than in 2008.

Meanwhile, the general director of the MBA Group consulting company, Nusrat Ibrahimov, believes that in the wake of the Cabinet decision this year's figures will be even lower. "The stricter environmental standards will lead naturally to an increase in customs duties on imported automobiles. This will affect the volume of imports and domestic prices. Nor should we forget the ongoing global recession and its impact on the population's purchasing power," he said.

According to the expert, if a 1 per cent price increase leads to a 1.5-1.6 per cent drop in supply, the expected 13-14 per cent price increase following recent statements and decisions will reduce supply by 20 per cent. Price fluctuations will affect not only the secondary market, but also new cars. "If customs duties are raised, this will affect the cost of imported cars," said Mr. Ibrahimov.

According to a survey by the MBA Group, cars with price-tags of $13,000-20,000, which are in demand today, will largely be affected by the increase.

These developments will also affect important market segments like bank loans. It must be acknowledged that the situation in this sector is considerably different from that of several years ago. While in 2006-2007 banks were easily able to provide loans for the purchase of automobiles, they are much more cautious now. "The point is that there are quite a few problematic loans here - many people borrow money from banks without calculating their own financial capabilities properly, and refuse to repay their debt after several months. As a result, the banks incur losses and cannot resell the reclaimed property of unreliable clients. This has eventually compelled credit organizations to tighten their conditions and lower interest rates, bringing them closer to the real capacities of their clients," Ibrahimov said.

Situation is ripe

At the same time, almost all experts agree that the Cabinet decision to tighten environmental requirements for imported cars is quite timely. "The situation is ripe and people will now treat environmental considerations more carefully," Ibrahimov added.

According to a member of the standing parliamentary commission on economic policy, MP Vahid Ahmadov, whereas in 1992 there were about 70,000-75,000 cars in the country, today there are almost one million. The main problem is that automobiles are imported without proper registration of their quality, impact on the transport sector or the environment. At the same time, Ahmadov believes that the impact of the Cabinet decision on prices will not be very dramatic or sustained. The import of cars will not decline immediately either.

Meanwhile, some tension was already in evidence on the markets in January, in anticipation of the said decision, while some owners of old car have even left the market. According to a report by the Property Market public organization, there was a considerable increase in supply and decrease in demand in January as compared to December of last year. Also, the number of transactions registered in this market sector dropped by 2.7 per cent. We recall that cars (apart from Russian ones) are imported to Azerbaijan from three areas: from Germany, in transit through Georgia and from the UAE (Dubai). Low-quality cars are imported through all three routes. Experts think that the introduction of new standards will compel entrepreneurs operating small businesses in this sphere to abandon the market.

In any case, certain tendencies are likely to appear as early as this month, while specific effects of the reform can be expected in July. If the air in Azerbaijan eventually becomes cleaner, it is certainly worth waiting for.