ADDED VALUE

We have left behind three quarters of this year – a period when much of the world experienced the most complex factors of the global post-pandemic reality.

Nevertheless, for Azerbaijan this year is definitely associated with the revival and growth of business activities. Large-scale anti-crisis measures, restoration of infrastructure in Garabagh, as well as a favourable situation in foreign trade since spring helped to impede the consequences of last year's recession thanks to a 3.6% GDP growth rate. In parallel, the unprecedented growth rates of non-oil exports, primarily the supply of industrial products, has become a key marker determining the positive dynamics of the local economy.

Trillions of liquidity

Today, there is no consensus in the expert community regarding the reasons behind such a rapid recovery of foreign trade operations. Statistical data for this period is significantly different than the most optimistic forecasts of last year. At the same time, most analysts believe such a rapid change in the balance between the growing demand and supply with unprecedented financial measures taken since the middle of last year in the US, the EU, Japan, and a number of other developed countries.

In particular, according to Bloomberg estimates, it was the injection of several trillion dollars to the American economy by the US Federal Reserve System, as well as pumping the European economy with finances while maintaining an extremely low level of discount rates by most central banks of the developed countries that played an instrumental role in increasing the dynamics of global trade. Measures taken in China, South Korea and other Southeast Asian countries to increase production also contributed to this. It was therefore possible to revive the economy, contributing to a sharp increase in global demand for raw materials: primarily energy, petrochemical products, non-ferrous and ferrous metal works, food, as well as building materials, microcircuits, equipment, etc.

On the other hand, mass vaccinations and the lifting of lockdown restrictions have also increased the global demand for the supply of goods and services. Moreover, due to the lagging supply trend, all these measures caused an unprecedented rise in prices for all types of raw materials and semi-finished products. As a result, the demand for the supply of such products from the developing countries has increased ten times.

Energy is primary factor

Favourable external factors observed since the beginning of March contributed to the restoration of basic export industries in Azerbaijan. Primarily, we have increased profits from the export of energy resources, which reached about 87% of all the export volume in January-August 2021.

Compared to last year's indicators, oil exports of Azerbaijan (more than 18.8 million tons in January-August) decreased by 9.5% due to the production decline, as well as Azerbaijan’s obligations under the OPEC+ deal. However, during the year, Azerbaijan has covered the loss largely thanks to high market prices, which brought oil revenues closer to $8.5 billion during eight months (+25.1%).

We have even better indicators in the supply of natural gas, electric power, and oil products. Azerbaijan has set a new record due to the increased production and supply volumes bringing in more income due to a sharp rise in the price of energy products globally. According to the State Customs Committee, in January-August Azerbaijan exported nearly 13.2 billion cubic meters of gas, which is 47.2% more than last year. In value terms, deliveries exceeded $2.4 billion (+38% compared to the corresponding period of 2020).

The increased prices for oil and gas have inflated prices not only for fuel, but also for all types of petrochemical products, including various polymers, methanol, urea fertilizers and other export products made in Azerbaijan. As a result, deliveries to foreign markets of domestic petrochemicals in monetary terms reached $450 million (increased more than twice during the eight months of 2021).

A similar situation was observed in the power generation sector: prices for natural gas, which is the base fuel type for generating electrical power, increased several times and changed the demand for exported electricity both in Europe and in other neighbouring regions. While the power supply from Azerbaijan significantly decreased last year, then during eight months of 2021 Azerbaijan increased the power supply to 971.9 million kWh (+17.1%).

Thus, the rising prices of energy resources had a significant positive effect on Azerbaijan's foreign trade turnover in the last eight months, pushing it up to $20.3 billion (+22.4%). During the same period, the positive balance of Azerbaijan’s foreign trade increased to $5.6 billion (+75.1%).

Secondary factor: Non-resource exports

It is worth mentioning that in comparison with purely raw oil and gas exports, the supplies of petrochemicals and electricity are considered part of the industrial production. This means that Azerbaijan increased the export of products with added value, which has been one of the main goals of the government reforms to build a new non-resource industrial cluster in the country.

These include the increased production of processed agricultural and industrial products in agricultural parks, technoparks, industrial districts and the new Alat Free Economic Zone (FEZ). According to government estimates, due to the development of processing and industrial clusters, in five years, the annual export of non-oil goods will double, reaching $4 billion.

The next target is a sustainable access to the markets of non-CIS countries, including in the Middle East, Africa, Southeast Asia, and the EU. This will make it possible to bring the share of processed products to half of total exports of Azerbaijan by 2030.

This is an extremely difficult, yet a necessary mission. Azerbaijan is interested in the growth of foreign exchange profits from non-resource exports, since in 10-15 years it will need to compensate for the increasing lost of income from the supply of energy resources. According to experts, with the implementation of the global energy transition, massive introduction of alternative energy, electric, hydrogen and other ‘green’ means of delivery, the demand and prices for traditional energy carriers, primarily oil, will noticeably decrease.

Therefore, to avoid possible risks, Azerbaijan is gradually rebuilding its economy and trade for the future demand. Significant progress has been made so far to implement these critical tasks. For example, the volume of exported non-oil products has slightly increased since the beginning of 2021 and currently reaches almost 13% of Azerbaijan’s total exports. In particular, for eight months of 2021, Azerbaijan has recorded a 37% increase in non-oil exports, very close to hit the $2 billion mark.

Most importantly, the traditional structure of non-resource mineral exports is changing, primarily due to the growing role of the non-oil industry. If a few years ago the share of agricultural sector was the ⅔ of the volume of non-oil exports, today it barely reaches ⅓. The same is true for the supply of fresh fruit and vegetable – less than ¼ of all non-oil foreign trade. The current situation is partly due to phytosanitary and other restrictions in Russia, the main sales market for Azerbaijan’s agricultural industry.

According to the Centre for Analysis of Economic Reforms and Communications, the export of non-oil industrial products recorded a multiple growth. Statistics on processed agricultural and industrial products with a high level of added value are especially encouraging. In particular, over the seven months of 2021, the export of sugar increased by 2.3 times, cotton fibre by 2.8 times, ferrous metals and products by 2.4 times, etc. In short, there is a noticeable increase in the range of semi-finished and finished products for export.

Statistical data for 2021 also confirms significant changes in the priorities of the Azerbaijani non-oil economy, which is recovering from the recession observed last year. Azerbaijani companies become less dependent on raw materials and increase the supply of processed products with a higher margin of added value.