GREEN LIGHT FOR NEW PROJECTS

Reformatting of global markets, which has changed the geography and logistics of trade relations and caused a revision of economic priorities in almost all countries, also affected the international financial institutions (IFIs). The global negative trend of recent years has also influenced Azerbaijan. Thanks to the timely assessment of the emerging trends, Azerbaijan actively cooperates with donor structures to attract funding in green energy and industry, innovative projects, as well as joint projects in Garabagh. IFIs' new priorities have been recently expressed in Baku during the 24th Annual Meeting of the Black Sea Trade and Development Bank (BSTDB).

Looking for new partners...

There have been numerous initiatives by the EU and its financial institutions, reports by UN agencies, as well as policy documents by the World Bank (WB) and the International Finance Corporation (IFC), which have stated new global priorities and outlined areas for financial and technical assistance in a rapidly changing world. In particular, the war in Ukraine and the ensuing humanitarian and global security issues urge the Western countries to restructure transport and logistics corridors and energy delivery routes in Eurasia. These circumstances have significantly increased the importance of the Central Asian states, Azerbaijan and Turkey, which have the necessary transport alternatives, as well as significant potential for energy resources and other raw materials.

The global food and fuel crises, rising inflation, and high volatility on financial markets are prompting Europe and the US to lower trade barriers with developing countries and push them to expand technological cooperation with them. Reorientation of European and North American economic policy is very relevant, especially amid the confrontation with Russia and, in the longer term, the intensification of the conflict with China (trade wars and the situation around Taiwan). We currently witness a process when the West purposefully reduces economic ties with Russia; earlier, similar processes took place in relation to China. Recently, multinational companies from the US, Japan and South Korea have started to shift the vector of industrial and high-tech activity to other Southeast Asian countries, as well as to India by localising production there.

Technologically advanced Western countries have to look for new partners and allies in developing countries, attracting them into the initiative of great energy transition of 2030, the development of renewable energy sources (RES), IT technology and start-ups. In doing so, they increasingly support their infrastructure and industrial projects.

Today we can see how these trends start shaping. But they will be structured very quickly given the rapidly changing geopolitical realities. Along with Asia and the Middle East, some post-Soviet countries may also become beneficiaries of emerging trends. In fact, these trends have been evident from the changes in the strategies of the world's leading IFIs shifting towards the CIS states, in particular Azerbaijan.

...and new areas of cooperation

Since 2022, the leading IFIs—promoters of Western economic policies—have offered new financial proposals for Azerbaijan. These include projects in renewable energy and climate change, the use of technologies from the fourth industrial revolution and support for the digitalisation of industry and agriculture. Similar perspectives were discussed at the end of June in Baku during the 24th annual BSTDB summit and business forum attended by global IFIs.

Due to the global crises and new market conditions, most IFIs have already began to change their financing structure since last year, diversifying their loan flows. The new priorities of BSTDB, EBRD, IFC and WB announced at several forums and programs are based on the fact that Azerbaijan has partially reduced demand for long-term funding of capital and infrastructure projects, including conventional energy and oil and gas logistics. Accordingly, in the short term the IFIs plan to shift the financial focus towards alternative energy projects, diversification of the non-oil economy, increased lending support to small and medium-sized enterprises (SMEs), and support investment flows into digital transformation and the establishment of Industry 4.0.

In particular, BSTDB is planning to increase lending for trade and SMEs by expanding the volume of funding to Azerbaijani banks, to issue yet another batch of bonds worth ₼50 million. BSTDB’s another area of interest is the expansion of lending to green energy, as well as other climate-friendly and socially-oriented projects. Moreover, the bank plans to attract loans from partner institutions, such as the Nordic Investment Bank, to support renewable energy projects, and this process has already begun. Another priority area of cooperation is the bank’s funding for the rehabilitation of infrastructure and housing in the liberated territories of Azerbaijan, as well as support for projects to create a green energy zone in Garabagh.

"Investments of the International Finance Corporation in Azerbaijan may increase in the 2023 fiscal year, which begins in July 2022," IFC regional manager for the South Caucasus Ivana Fernandez Duarte said at the forum held in Baku recently. According to her, IFC is ready to develop cooperation with the Azerbaijani government in implementation of green and RES projects, as well as to support private businesses developing such solutions and projects. IFC's key efforts are focused at supporting Azerbaijan in developing offshore wind energy. The country's offshore wind energy roadmap has been presented recently, with potential to reach 7.2GW by 2040 and provide 37% of the country's energy supply.

Azerbaijan's relations with another leading donor, World Bank, also a member of the financial group hosting IFC, are also developing in a similar way. Thus, in line with the strategic program National Socio-Economic Development Priorities: Azerbaijan 2030 and the Socio-Economic Development Strategy of Azerbaijan in 2022-2026 implemented under this program, WB intends to support priority projects for the development of IT startups, IoT technologies and other elements of Industry 4.0. WB is ready to provide donor assistance also in the development of green economy and energy, technical support for projects in the liberated territories of Azerbaijan. These opportunities have been explored during the visit of a mission including the experts of UN, WB and EU to Azerbaijan to assess the recovery and reconstruction needs in the liberated territories of Azerbaijan on the basis of the World Recovery and Development Assessment methodology. The mission visited the liberated areas in Aghdam, Fuzuli and Jabrayil. In February 2022, the EU and the WB signed the Administrative Agreement on Operational Technical Assistance Instrument (€5.25m) with the Azerbaijani government, including green energy components in the Garabagh region.

Europe’s ‘green’ accents

The most ambitious green transformation initiatives are expected as a result of Azerbaijan's cooperation with the EU and under the EBRD's new programmes. The country has joined the EU and EBRD's Green Cities Initiative (GCAP), while the EBRD has been involved in two environmental initiatives in Ganja since May 2022. The executive body of Ganja was provided with a €10m loan to implement a project to upgrade solid waste collection infrastructure (rubbish collection, street cleaning) and improve the operational and financial efficiency of the Ganja Housing and Utilities Company. Another EBRD installment of €12.5m (€10m as a loan and €2.5m as a grant) will soon be allocated to improving Ganja's street lighting system. The EBRD Country Strategy for Azerbaijan 2019-2024 provides ample opportunities to finance energy efficiency projects and build renewable energy generation capacity. In the near future, similar green projects can be implemented with EBRD support in the Garabagh region.

Cooperation between Azerbaijan and the EU is actively developing in the area of investments and joint projects. Over the past ten years, European countries have invested over $20b in Azerbaijan's economy, with over 700 EU companies currently operating. Lately the vector of investment activity of European companies has been shifting from the conventional spheres of energy and transport to non-oil economy. This interest is also supported by sufficiently large financial sources. Recently, the EU became involved in investment programs and support for small businesses in Azerbaijan, providing about €2b for these purposes, as well as for the development of green technologies and other innovative projects. Given the increased donor assistance, Azerbaijan holds negotiations with European companies interested in the construction of wind and solar power plants in Absheron and Garabagh. European businesses supported by EBRD can also be involved in projects to upgrade small hydropower plants and to build new hydro power plants on mountain rivers in the Lesser Caucasus.

In short, there are plenty of projects of mutual interest to both IFIs and Azerbaijan. It is important that the terms of lending be mutually beneficial.