CONTINGENCY PLAN

The Ukrainian crisis has urged many countries to take proactive measures to avoid the collapse of national economies. The impact of the Russian-Ukrainian military confrontation is particularly noticeable in the trading partners of Ukraine, including Azerbaijan.

Azerbaijan’s main trade supplies to Russia and Ukraine are agricultural and hydrocarbon products, respectively. Fruits, vegetables and a number of other agricultural products cover about 60% of exports to Russia, while oil and oil products account for 82.5% of exports to Ukraine. Although Azerbaijan has not stopped supplies since the outbreak of hostilities, their volume is expected to diminish soon due to the decreased purchasing power in these markets. This makes it necessary to look for new export destinations. At the same time, it is necessary to negotiate with alternative importers of products traditionally purchased from Russia and Ukraine.

Alternative exports

The search for new markets for exports, or rather diversification of export geography, is always relevant, regardless of whether the geo-economic situation is stable or not. The main purpose of diversification is to minimise risks amid possible emergencies or conflict situations.

Considering that the main share (84%) of Azerbaijan's exports to Russia is fruit and vegetables, that is perishable products, Nijat Hajizade, head of the Centre for Analysis of Economic Reforms and Communications (CAERC), said markets that were easily accessible logistically should be considered as a backup option.

In this context, the Central Asian region, including the post-Soviet republics, thanks to its high level of self-sufficiency in agricultural products, is the main exporter of these products. However, statistics show that Azerbaijan has not maintained intensive trade operations in this market over the last five years.

Another available market for fruit and vegetables is the Gulf countries, where the situation is slightly different: the market is large, but the competition is quite high. Thus, a significant share of fruit and vegetable supplies to these countries comes from the US, the UK, China, Brazil, Thailand and Turkey.

In order to expand the geography of Azerbaijani exports, Mr. Hajizade recommends to increase the scope of the principles of preferential and free trade. This can affect price competition and increase the potential for diversification.

However, experts recommend not panicking about the future of Azerbaijani exports, as Russia will continue to be the main buyer of Azerbaijani products.

Today Russia has a significant share in Azerbaijan's non-oil exports, with the turnover of agricultural products in 2021 reaching $1.3 billion, which is 4% more than a year earlier. We supply the Russian market with high-quality agricultural products, including tomatoes, apples, pears, potatoes and onions.

Europe's tough sanctions motivate Russia to create favourable conditions for expanding the volume and share of exports from neighbouring countries, including Azerbaijan. On the one hand, this will ensure the inflow of foreign currency revenues to Azerbaijan and, on the other hand, employment in these sectors.

Wheat and oils

In contrast to exports, there is a greater need to find new markets for imports of essential agricultural and other products into Azerbaijan.

Azerbaijan is largely dependent on imported wheat. We buy 95% of wheat from Russia, but the Kremlin has imposed restrictions on grain exports until August 31, 2022. Therefore it is possible that there will be significant problems in the supply chain, at least in the short term. Kazakhstan is the only alternative in the region, but it too has imposed quotas on wheat and flour exports, which will be in effect from April 15 to June 15, to prevent a shortage on the domestic market.

Other alternatives promise us the prospect of buying wheat at a higher price and therefore a higher end product cost.

One option is India, which has already expressed willingness to increase exports either through intergovernmental deals or private channels. "Our goal is not to be a temporary measure just for the current crisis, but to become a reliable long-term supplier of good quality wheat in markets dominated by Russian and Ukrainian wheat. We are not looking for short-term gains, but instead will take this opportunity to build long-term relationships with major wheat-importing countries," said Madhayan Angamutu, Chairman of the Agricultural and Processed Food Export Development Authority (APEDA).

India intends to engage 30 countries to export wheat, with a target of exporting nearly 11-12 million tonnes of wheat in 2023. But again, one must take into account that the final product will not be cheap, with the price for Indian wheat on global markets jumping to around $360 per tonne amid the grain crisis, although the current price of Indian wheat is still the lowest among global competitors, where the price for some varieties of wheat even reaches $400 per tonne.

But India is still the most viable option, as replacing Russian and Ukrainian grain products with American and Australian ones would significantly increase the cost of the product due to logistical costs.

Azerbaijan also depends on the import of sunflower oil (53,400 tonnes, of which 98% was supplied from Russia, and the rest from Turkey). On April 1, Russia raised the export duty to $313 from $260.1 per tonne in March ($251.4 in February). The price of sunflower oil has jumped 60% this year, from £1,130 (€1,353) per tonne in February to more than £1,800 (€2,155) in March, according to Mintec analysts.

However, it is possible that Russia will ban sunflower oil exports to avoid a rush on the domestic market. If so, Azerbaijan will have to look for alternative channels. Argentina may be one of them. Given the fact that Azerbaijan already imports corn oil from this country, it is safe to assume that the necessary logistics for the supply of sunflower oil is also available. It should be noted that in 2021, Azerbaijan purchased from 12 countries a total of 20,526 tonnes of corn oil, of which about 60% was supplied from Argentina.

More domestic meat

Self-sufficiency in meat products in Azerbaijan exceeds 85%. We mainly have a relative dependence on imported poultry meat (self-sufficiency index 79%) and for beef (87-88%).

Saadet Hajiyeva, head of the analytical department of the Agricultural Research Centre of the Ministry of Agriculture, says that more than 80% of imported beef is imported in frozen form: "The volume of frozen beef imports in 2021 was 4,450 tonnes, which is almost twice less than in 2020. Frozen meat is mainly used to meet the demand of the country's tourism sector, restaurant chains and cafes".

Frozen beef is imported to Azerbaijan mainly from Ukraine. Out of 4,500 tonnes of frozen beef imports last year, 79.7% (3,600 tonnes) came from Ukraine, 14% from India and 5% from Brazil. Animal feed was also imported from Ukraine and Russia.

In the current situation, imports from the last two countries are not possible, not only because of logistical problems, but also because of the lack of guarantees on contractual obligations.

Therefore, Azerbaijan considers the markets of Georgia, Turkey, Iran and Belarus as alternatives for importing meat products.

Paper and timber shortages

Dependence on Russian imports is not just in the food category. Last year, 97% of paper and cardboard products and 100% of newsprint came from Russia. Because of the war, there may also be problems with the supply of these products to the country. Local publishers complain that the price of paper in the country has increased several times in the last month. Earlier a tonne of paper cost $1,380, then prices went up to $1,700, and now they reach $2,100.

Currently, raw materials from Finland, Indonesia and Germany are imported as alternatives to Russian paper. Naturally, paper from Europe will cost more. China is also experiencing a paper crisis. The price of paper in the Chinese market has increased as well, as local produces use Russian raw materials, like in Turkey. In general, there is currently a shortage of paper on the global market.

Suppliers of various paper grades complain about rising prices on the Russian market, which can affect product quality. If earlier the buyers were presented the price schedule for 2-3 months in advance, it is now updated daily due to rapid changes in the ruble-dollar exchange rate. It is therefore possible to find out how much the prices have risen when the goods are already dispatched.

The situation has also complicated the imports of wood-based materials to Azerbaijan, which is 97.5% dependent on Russia. This risks rising the cost of logistics affecting the cost of production.

Participants of the timber retail market note a price increase in the majority of retail companies. For example, while one cubic metre of timber previously cost $200, it is now $230-250. Some shops have already suspended purchases, selling only from the stock.

Import substitution in the construction market

Azerbaijan's construction sector is also largely dependent on the Russian market. Experts expect a price increase in this sector too. Prices for goods made in Turkey are rising as well. "If prices go up in one country, if there are problems with logistics, this affects the neighbouring countries as well. Prices for Turkish products have risen by 15-20%," market participants say.

Prices for metal products have already risen by ₼30-40 per tonne. A tonne of thin and thick profiles costs ₼1,600 and ₼1,500, respectively. A tonne of rebar produced in shops and plants costs ₼940 + VAT (18%) and ₼1,500 + VAT in average, respectively.

Some suppliers are not experiencing difficulties but are still considering back-up options for fear of supply disruptions due to payment related payments. After all, they have previously conducted trade operations in US dollars, while there is increasing risk of switching to national currencies.

Ramiz Isayev, Chairman of the Union of Commercial Legal Entities of the Association of Construction Materials Manufacturers of Azerbaijan, believes that the introduction of a total ban on the export of untreated timber from Russia also affects the cost of building materials imported from Russia. This means that local entrepreneurs will no longer be able to import timber as a raw material, but only as final products (lumber, etc.). This will result in a real difference in the cost of goods. "Even before the Russian-Ukrainian war, there was an increase in the price of imported timber. The situation has further intensified now," Mr. Isayev said.

Alternative markets in this area are Ukraine and Kazakhstan, although importing wood materials from Ukraine is currently a challenge in itself. In this case, the Kazakh market can be the last alternative in this area.

This is only a partial list of problems in Azerbaijan's trade sector as a result of the ongoing military crisis. We can only imagine how tense the government authorities and businesses are now looking for ways out of the crisis in order to avoid the translation of shortage and price increase into acute deficit in a number of commodity groups. Most importantly, all efforts should now be focused on increasing Azerbaijan’s level of self-sufficiency in the most important items. Baku is already heading forward in this direction.