SELF-MOTIVATION OR JUST A MEANS

Azerbaijan's entry to the World Trade Organization is high on the current agenda. Intensive talks towards accession are currently under way and are gradually taking on a broader remit. The more actively the process develops, the more discussions question whether or not Azerbaijan actually needs this worldwide organization. There is a plethora of opinions regarding the potential benefits or, on the contrary, the disadvantages for the national economy of admission to the WTO. Both of these opinions have merit, given that it is currently extremely difficult to provide an unequivocal answer to the question. But from a global standpoint, WTO membership is more advantage than disadvantage, particularly considering that the peculiarities of the Azerbaijani economy allow us to consider WTO admission a relatively safe move.

What's the hurry?

Back in the days, about 10 years ago, when I was embarking on my career in journalism, one of my colleagues headlined his story on WTO admission "We will be in the WTO in about five years." This headline drew some fire from Azerbaijani officials, who believed that just two years would be enough for Azerbaijan to become a fully-fledged member of the organization. But reality turned out to be harsher and Azerbaijan did not succeed in mounting such a blitzkrieg, indeed there was actually no acute need to do so. The country was not ready for WTO admission at the time, as its economy in the late 1990s was still in the early stages of development and was outlining its own priorities. In the past decade Azerbaijan has travelled more than half the road to WTO admission, but much remains to be done to open the door. In any case, it is necessary to evaluate what has already been accomplished and to determine what remains to be done before Azerbaijan joins the WTO club.

One cannot assert that WTO admission is a vital necessity for Azerbaijan. We have been outside the WTO for 17 years and are doing quite well. But WTO admission is a certain challenge, a stimulus, if you will, intended to change attitudes, the philosophy of economic policy as a whole and that of separate enterprises. Thus we should not be afraid of WTO admission, not to mention the suggestions that Azerbaijan's economy would collapse if the country became a WTO member state. This cannot and will not happen. The Azerbaijani economy has put on some muscle in recent years, allowing it to withstand the pressure of competition. True, our economy is not ready, at this point, for strong competition, but it should be remembered that WTO admission is not around the corner, and is, rather, a distant prospect. The process will take a few years and Azerbaijan certainly has time to strengthen further. Moreover, much depends on the terms of the country's future admission. If a properly-devised strategy is pursued, Azerbaijan can win quite favourable terms by bargaining with WTO members; we know first-hand of the Azerbaijani people's ability to bargain. And so we are quite optimistic about this issue. 

Some people involved in separate sectors of the national economy are rather worried about the prospect of membership of this international organization, but this is inevitable too. Not everyone can be a winner here and, in bargaining with the WTO, some compromise will certainly be needed. The most important thing is for that compromise to be minimal for Azerbaijan and, if this is accomplished, it will bring great benefit to the country. 

Agriculture should be vigilant 

Azerbaijan's agriculture probably faces the most daunting task in adapting to new conditions. True, Azerbaijan is currently in talks to achieve the highest level of subsidy after WTO admission - 10% a year. However, the situation is not favourable for Azerbaijan at this point. We have to consider conditions in which the country will not receive significant concessions on subsidy, and its agro-industrial complex may face certain problems. The government is currently channelling hefty investment into the agriculture sector. Funds are being placed directly, by means of favourable terms for credit and subsidies on the purchase of mineral fertilizers, fuel and lubricants, as well as indirectly, by providing tax breaks. The amount of subsidy is growing by the year, as the agro-industrial sector is very sensitive to developments in world markets, while reports emerging from there are not at all reassuring. Therefore, until Azerbaijan's entry to the WTO, the government should provide the maximum possible support to the agro-industrial sector, knowing that there will be no opportunity afterwards to subsidize the sector to such an extent. Moreover, the experience of our neighbours, who have recently been admitted to the WTO, suggests that agriculture faces the biggest test of its robustness when a country enters the WTO. 

For instance, in Ukraine, a newly-admitted WTO member, certain problems are in store, notably a shortage of dairy products, and it should be noted that this country has a more developed agricultural sector than Azerbaijan. The anticipated shortage is due to the WTO's requirement forbidding dairy exporters to buy milk from street vendors; this limits the choice to big farms, only a few of which are available in Ukraine. 

Moreover, certain problems are also in store for Ukraine's sugar production. WTO membership makes this a highly risk business for Ukraine, due to the fact that the Ukrainian market will be supplied with a semi-finished product, made from sugar cane. The cost of sugar produced from cane is $150 per ton, while that of sugar beet is $450. This certainly forces the conclusion that sugar beet will not be able to compete in the market.

These are just the sectors that are currently developing rapidly in Azerbaijan as well. Amid worldwide concern to ensure food safety, special emphasis is placed in the country on the domestic production of dairy products, with the number of enterprises operating in the field on an upward trend. But it is also necessary to develop farmers' interest in dairy production, given that a farmer will only grow a product that yields a profit and no one will do business at a loss, which was once the case with cotton-growing. Once the Imishli sugar factory was commissioned, farmers from adjacent districts shifted their focus from cotton to beets, as they sell for a higher price than cotton. 

The same picture can be seen with regard to fruit. The more fruit-processing and juice-producing factories appear, the more profitable it becomes to work in the field. And so it is important to avoid harm and not to develop one direction of agriculture at the expense of another.

It is indicative that, according to the estimates of Ukrainian experts, following WTO admission the biggest losses in the agriculture sector are expected in the fruit-growing sector. Arable land under fruit currently covers an area of 250,000 hectares in Ukraine, while 93,000 hectares are under grapes and 19,000 hectares under berries, with three-quarters of land privately-owned. Upon admission to the WTO, Ukraine did not outline gardening as a priority area. Thus it can receive only indirect state support, through the so-called "yellow box" programmes. Azerbaijan should take into account the experience of other countries, whose agriculture sector is most similar in structure to that of Azerbaijan, and try to learn from others' mistakes in its own interests. This is feasible. 

As for animal husbandry, certain challenges may also emerge here. In Ukraine, for instance, meat factories are closing because of a shortage of supplies. The reasons for the current problems in this field are more profound - cutting-edge technology for growing livestock and processing meat products needs to be introduced in Ukraine. The equipment used in Ukraine's animal husbandry enterprises should be replaced and operational changes made. Running a successful business without up-to-date equipment is currently virtually impossible, particularly considering Ukraine's WTO membership. Up-to-date agricultural enterprises realize that, in addition to growing vegetables and fruit, developing animal husbandry is profitable. Ideally, this is a close-circuit complex in which animal husbandry and vegetable and fruit-growing are inter-twined, with animal husbandry supplying fertilizer for crop and receiving feed in return.

The scheme, in itself, is decent, effective and may bring benefits, especially given that the government is currently investing heavily in the acquisition of pedigree cattle and mineral fertilizers. 

In Russia, which has a more developed financial market than that in Azerbaijan, worries are mounting that the domestic market may not be able to withstand competition from foreign insurance companies. Analysts say that Russia's chances of preserving an advanced, independent banking and insurance sector after admission to the WTO will be quite slim. This independence can be preserved only by "quasi-state-run" entities. Additionally, the agro-industrial sector may sustain a severe shock, as it will face challenges to cope with the spread of cheap goods produced in Western countries. 

A similar situation may emerge in most other segments of the consumer market. Certainly, consumers may benefit from this, but the national economy and the country's global competitiveness are unlikely to benefit. This being said, it is predicted that metallurgists and fertilizer producers, who face various restrictions in a number of saturated foreign markets, will benefit from Russia's entry to the WTO. As a result of WTO admission, these businesses will be able to increase their presence there substantially, with increased sales. Moreover, oil and gas companies may obtain certain advantages, although they are currently not facing major problems either.

Liberalization of financial markets should be stage-by-stage

Unlike Russia, metallurgy and fertilizer production is not very developed in Azerbaijan, and so it would be more appropriate to note the affect on our financial markets. Undoubtedly, the current level of services provided in the country's financial markets does not allow us to compete with foreign institutions. And this should come as no surprise. Banks and insurance companies in the West have been operating in competitive conditions for centuries and a fiercely competitive environment has made them stronger. They strive to do everything they possibly can to preserve each client, as this is a matter of prestige. In Azerbaijan, the situation is somewhat different; there is a great need for a transitional period preceding full liberalization. WTO membership may improve the state of the domestic capital and banking services markets as well as facilitating access for major Azerbaijani banks to financial markets worldwide. Certainly, the expansion of a foreign presence in Azerbaijan's banking services market should also be considered to be the most likely scenario in the event of the country being admitted to the WTO. However, the problem is not so much the expansion of their presence but, rather, the readiness of local banks to operate in their presence. Since the WTO was established in 1995, not a single country entering the organization has kept out the subsidiaries of foreign banks and Azerbaijan will be no exception. The key objective in ongoing talks on Azerbaijan's WTO admission should be to reach agreement with trading partners on a stage-by-stage liberalization of the country's financial services market. One of the steps aimed at increasing the competitiveness of banks and insurance companies on the road to WTO admission should be the stimulation of the process of mergers. Neither banks nor insurance companies have been active in this respect; however, this is the demand of the present-day. Such a policy would promote rapid growth in the capitalization and liquidity of banks and insurance companies, after which they would be able to compete with foreign rivals. Azerbaijan needs at least a five-year grace period for these purposes after entry to the WTO. 

There is one more peculiarity entailed by WTO admission which should be taken into account, especially as it is not very reassuring. In 2005, Saudi Arabia faced pressure from the United States, which demanded that it raise the domestic prices of raw materials for export-oriented petrochemical companies. Until Saudi Arabia agreed, the U.S. blocked talks, having put forward a number of demands, including cancelling the trade boycott that Saudi Arabia had announced against Israel, ensuring effective combat against terror, as well as other requirements of a socio-political nature, including guarantees about children's education. Subsequently, Saudi Arabia laid down similar demands during talks with Russia, but relinquished them after three years of discussion. In Azerbaijan, energy prices were raised in 2007, but there are no guarantees whatsoever that these prices will be equal to global levels in three to five years. Thus it is possible that Azerbaijan might also face similar pressure from WTO members. 

Azerbaijan has no place in the WTO without improved legislation 

Problems facing Azerbaijan in view of its future WTO admission are linked to factors of legal and economic nature. The first group of questions is governed by the need to improve national legislation and its application in line with WTO norms and regulations. The Azerbaijani government plans to complete the process of improving legislation to bring it into compliance with WTO standards by 2009. A total of 37 documents, including 16 new laws, are to be passed. Some of these documents have already been endorsed, while more are currently near completion. But adopting these laws and amending legislation will not suffice. Now, additional measures to bring legislation into compliance with WTO standards are required. Up to 20 laws dealing with trade are yet to be supplemented and passed. But even this is not all that is needed. After Azerbaijan and the WTO outline the country's obligations in the area of services, the process of developing national legislation will be continued. As part of these efforts, Azerbaijan is also to solve outstanding problems regarding standardization, customs, taxation etc.

As for services, Azerbaijan and WTO have certain differences. They pertain to tariffs on audio-visual and energy services, as well as issues relating to ownership of land by expatriates and the amount of subsidy provided to the services sector.

In addition, it is unclear how the unification of tax rates on domestically-produced excise goods and imported commodities will be carried out. Today, Azerbaijan is undoubtedly pursuing an actively protectionist policy in this area, which focuses upon levying high excise duties on imported goods. This primarily holds true for alcoholic beverages. Pursuing this policy after WTO admission will no longer be feasible. The question therefore arises about how to make everyone happy. This concerns the state budget, which receives excise duties, WTO members, as well as local producers, who thrive on high excise duties; as such prices make the import of alcoholic beverages less profitable, even in conditions of growing demand for these products. The situation is quite intricate, as the negotiating group has to strive to get more time for Azerbaijan's transition to unified rates on excise duties. Unification will also apply to excise duties on tobacco, although the situation involving these products is not so difficult. A solution to this issue lies through the use of a combined approach, notably, a slight reduction of excise duties on imported goods and a rise in domestic excise duties. If Azerbaijan succeeds in obtaining a transition period of three to five years, it is most likely that only domestic excise duties will be raised. But the best option builds on a different approach, namely the stimulation of major producers of alcoholic drinks and tobacco products to set up production of their goods in Azerbaijan, similar to what Russia's Baltika Breweries Company has done. When it witnessed high demand for its products, as well as losses from increased excise duties, the company purchased a brewery in Azerbaijan, thus gaining a certain advantage over other major beer producers. The policy pursued by the Azerbaijani government will be similar to this approach and it will envision the establishment of new enterprises in the country, increasing the bulk of domestic production, developing the regions and creating jobs.

WTO membership unlikely until 2011

As for the timing of Azerbaijan's admission to the WTO, under favourable circumstances, this is a mid-term prospect. In the best case-scenario, the country may become a member of the organization in 2011. The point is that 2009 and 2010 will see a continuation of bilateral talks and a gradual increase in the number of countries with which Azerbaijan negotiates. Simultaneously, it will be necessary to hold multi-lateral talks on subsidizing the agro-industrial complex, which are unlikely to be swift and easy. Moreover, the most serious issue involved is the improvement of legislation. Until WTO members see final results in this area, membership of the organization is out of the question. After all these processes are completed, the preparation of a final report will be tackled, which will take at least six months. This will be followed by ratification of WTO membership in parliament, and only six months after that will it be possible for Azerbaijan to become a fully-fledged member of the organization. Therefore, 2011 is the shortest time-frame possible. 

The WTO system unites the overwhelming majority of world nations and regulates over 90% of worldwide trade. Membership in the group makes it easier for countries to assert their positions in disputes arising from global trade. WTO admission lifts a considerable number of export-related restrictions, which is important for companies dealing in raw materials. Therefore, it is rather pointless to discuss whether or not WTO accession is a good idea. If we are talking today about Azerbaijan as a global player, we should aspire to be part of all global processes. It is essential that we use the WTO as a means of building a normal economic model, whereby all players play by the same rules, and that we weigh its advantages and disadvantages. Therefore, WTO admission for Azerbaijan represents not just self-motivation, but only a means… of forming an economic system suitable for all and which may remain sustainable and attractive.