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Azerbaijan can turn into a regional transit hub for e-commerce, and in the long-term make e-commerce one of the key drivers for expanding its exports if it expands the potential of retail e-commerce thanks to cooperation with international postal services and trading platforms and establishes a large wholesale electronic transport and logistics system. The neighbouring countries of Russia, Kazakhstan, and Turkey are already implementing similar strategies. Therefore, Azerbaijan should take measures to integrate into regional and global e-commerce systems considering its geographical advantages and transport / logistic potential.

Key driver

As the most cost-effective tool for selling goods and services, e-commerce is gradually developing in Azerbaijan. In recent years, about 1,500 online stores have been created in Azerbaijan, while the constant client base of some of the most advanced online trading facilities exceeds 5,000 people. The market turnover of non-food products amount to over 90%, while corporate clients provide almost 80% of purchases.

Trading through the Internet is still developing in Azerbaijan with turnover volumes way below the indicator of the leading countries. Nevertheless, a large share of local consumers are buying retail goods and services outside the country, on major world trading platforms because most of the local online stores selling consumer goods (clothing, footwear, perfumes, souvenirs, books, electronics, etc.) are often unable to compete with foreign online e-commerce counterparts by price and assortment. The objective reason is that the production of the above consumer goods is not fully localised in Azerbaijan. Therefore, local Internet shops have to incur the costs of transportation, customs tariffs, internal warehouse logistics, etc.

One of the subjective factors is the adoption of a law on January 1, 2017, which assumes the taxation of e-commerce. In particular, charging 18% VAT on e-services related to the purchase of e-books, music, audio, and video materials on the Web, etc. According to Osman Gunduz, President of the Azerbaijan Internet Forum, it is necessary to exempt electronic commerce from VAT for a period of 4-5 years or to charge a substantially low tax (about 1% for statistical records only), as practiced in other countries. The tax rate can be increased later when the companies are strong enough in the market.

The Ministry of Taxes of Azerbaijan however, considers such proposals highly questionable, as unreasonable preferences for e-traders may contribute to unfair competition with traditional traders and this imbalance may take part of the trade turnover to a weakly controlled "gray zone".

Therefore, it is most likely that not “tax holidays” but other trends be a key driver for the development of e-commerce in Azerbaijan. This may help overcome existing obstacles and make the country a regional e-commerce hub.

Two business segments

In fact, Azerbaijan is planning to develop the two internationally popular directions of e-commerce: the well-developed B2C (Business-to-Consumer) sales, as well as a relatively new direction, B2B (Business-to-Business), which is focused on wholesale supplies of goods.

In particular, the Azerbaijani postal operator,Azərpoçt LLC, intends to actively develop the B2C format to have its own e-commerce platform and to establish a logistics infrastructure mainly for the transit of goods. Azərpoçt's project on the development of the e-commerce platform is included in the company plan for 2018-2020 focused on the development of mobile and Internet banking services. The company is negotiating with relevant Russian, Ukrainian, and Kazakh companies providing specialised services for creating e-commerce platforms. On the other hand, Azərpoçt is reviewing the feasibility of attracting the Turkish postal operator epttavm.com to its own e-commerce project in order to take advantage of its logistics system and delivery of orders, as well as to use Azərpoçt payment cards for purchases through this platform.

Yet another perspective of e-commerce development in Azerbaijan lies in the possibility of full-fledged functioning of the world's largest e-payment system, PayPal. In collaboration with the world's leading Ebay trading platform, PayPal provides customers with an absolutely secure way to pay bills and purchases on the Internet, send and receive money transfers. If successful, a PayPal processing centre can be established in Azerbaijan as a limited liability company or a non-bank credit organisation. The full-fledged work of PayPal in Azerbaijan promotes the growth of electronic trade operations through partner banks and, as a result, the increase in tax revenues from electronic commerce to the state budget.

Independent distributor

It would be wrong to limit the volume of el-commerce only to retail trading, which is mainly focused on the delivery of goods to a relatively narrow Azerbaijani market. Rather, the establishment of a logistical system that would transform Azerbaijan at least to a regional transit hub of e-commerce seems to be a more perspective option. A particular example is Azexport’s project on electronic trading platform, which can contribute to the establishment of independent distribution centres functioning as warehouses for the bigger logistics system.

According to the head of Azexport, Zaur Gardashev, such distribution centres in Azerbaijan can store certain quantities of small-sized goods most demanded in third countries. As a guide, Azexport will choose the countries that often import small-sized goods. Accordingly, upon receipt of the order, the consumer will not have to wait for delivery for several weeks. In other words, Azerbaijan could serve as an intermediate transit mail hub between the countries of origin (China, the countries of South-East Asia) and the markets of Europe, CIS, etc.

It is noteworthy that Azərpoçt has a considerable experience as a transit hub. As of 2017, Azərpoçt has processed over 4.34 million different items for 17 countries with a total weight of more than 374 tons. This mainly included small cargo shipments (3.81 million) ordered predominantly from electronic shops of China and sent through Azerbaijan to Russia, Ukraine, Belarus, European countries and partly to the USA, Israel, Iran, Turkey, etc.

However, the volumes of transit traffic can be increased by several times. The government plans to invest in the establishment of a transnational logistics company. In this case, Azərpoçt has real chances to become as big international carrier as Fedex, DHL, Aramex, etc. However, in order to implement such an ambitious plan, it has to solve a number of difficult issues such as the effective management. First, Azərpoçt should reduce the tariffs for services and the processing and delivery of transit cargo.

As for the transport component of the project, Azərpoçt has long and successfully cooperated with the Azerbaijani cargo airline Silk Way, which has a track record of experience in air transportation.

Also, the management of Azərpoçt is planning to expand the scope of activities by processing and delivering large-sized mail cargoes purchased through electronic trading platforms. Last year Azərpoçt held negotiations with postal services of China, South Korea, and Singapore.

In all directions

The most considerable trend of the recent years in Azerbaijan has been the development of the e-commerce sector such as B2B focused on establishing wholesale deliveries of goods through electronic commerce. The leading institution in this area is the state portal Azexport (azexport.az) established in accordance with a presidential order "On the establishment of a unified database of goods made in Azerbaijan", dated September 21, 2016. Azexport has demonstrated high efficiency of e-commerce format since the very first days. In 2017, Azerbaijani producers received orders for the export of their products through Azexport for a total of $475m. In January-February 2018, Azexport helped the local companies to get export orders for a total of $119.1m.

Currently, Azexport’s database is integrated with the databases of many large electronic trading platforms such as eBay, Alibaba, Allbiz. It is also planned to expand the cooperation with the Turkish e-commerce platform hepsiburada.com, as well as Russian Yandex. Market. This cooperation allows the Azerbaijani goods be sold through global trading platforms, hence expanding access to target audiences.

At the same time, Azexport cooperates with postal operators of importing countries, in particular, Post of Russia, Ukrpochta (Ukraine). It is still negotiating with the Turkish transport company MNG Kargo for the direct mail delivery of goods to customers, as well as sending wholesale consignments through the postal and transport services of partner countries.

Azexport is also preparing to implement the Fulfillment By Azexport project in collaboration with the largest trading platform Amazon. Thanks to the US-based storage facilities to store the goods (cosmetic products, food and wine products, textiles, etc.) supplied from Azerbaijan, it will be possible to provide fast delivery of order reducing delivery cost several times.

However, one should consider that our neighbours, Turkey, Kazakhstan, and Russia, are going to implement similar long-term plans. Thus, only the countries that are first to ensure the radical and full development of retail distribution channels and transform the local transport logistics in line with global requirements will succeed in establishing a digital trading hub. To do this, it is of utmost importance to reduce the costs and shorten the delivery times, provide complete and timely information about the location of the goods, as well as facilitate instant customs clearance.