...AND MORE

Recently, the EU's main lending body, the European Bank for Reconstruction and Development (EBRD), has been quite active in financing non-resource-based projects in Azerbaijan. A number of agreements have been signed on lending for green initiatives in the energy sector, as well as the decarbonisation of the economy, including the utilities sector. EBRD will also provide funds for the development of commercial shipping, broadband internet in the regions, infrastructure projects and has expanded trade finance and lending to the banking sector. It is expected that the EBRD will strengthen operations in Azerbaijan further this year.

Mutually beneficial loans

The EBRD has for many years been one of the leading foreign donors to Azerbaijan. Since the start of full partnership between Azerbaijan and the EBRD in 1992, the latter has provided about €3.8 billion to finance 187 projects in the country. At the beginning of this year, the total active portfolio of the bank in Azerbaijan was €843 million distributed among 35 projects: 86% in infrastructure, 10% in industry, agriculture and processing, and 4% in the financial sector.

Not long ago, much of the financial resources of the EBRD has been spent on the development of Azerbaijan's upstream sector and oil and gas transport infrastructure. The EBRD has been active in lending to the Southern Gas Corridor, providing €1.7 billion for the Shah Deniz Stage 2, TANAP and TAP.

The geopolitical situation since the outbreak of the Russo-Ukrainian war, which led to the sanctions regime and the cessation of Russian energy supplies to Europe, has made the EU-Azerbaijan cooperation on the energy track even more relevant. In July 2022, Azerbaijan signed the Memorandum of Understanding on a Strategic Energy Partnership with the EU. According to the document, the production and exports of natural gas in Azerbaijan will increase from 10 billion cubic metres (bcm) to 20bcm by 2027, while the throughput capacity of the SGC pipeline system will be extended. In this context, negotiations are underway to attract financial institutions and other sources from the EU to invest in the gas transmission infrastructure and increase gas production from Azerbaijani fields. Thus, the prospects of cooperation between Azerbaijan and the EBRD in energy security in Europe have further increased. "The EBRD's involvement in the SGC expansion projects is important," EBRD President Odile Renaud-Basso confirmed during a visit to Baku in September. The Azerbaijani government is currently negotiating with EBRD management for a loan for the expansion of the SGC. In particular, a pre-feasibility and financial assessment of future initiatives are underway. The bank will use these as a basis to outline the level of its involvement.

Energy projects have not been the only priority area for the EBRD's policy on Azerbaijan. Thus, in the new country strategy for 2019-2024, the EBRD shifted the focus to cooperation in the green economy, alternative energy, support for SMEs and start-ups, IT infrastructure development, etc. In total, the EBRD has allocated €440 million for 33 projects in the public and private sectors of Azerbaijan in 2018-2022.

Unfortunately, the negative processes, including pandemic, global inflation, etc., in 2020-2021 have made some adjustments to the scale and pace of implementation of these projects. Last year, the bank to compensate the lost opportunities by increasing funding 2.5 times to €86 million for nine projects.

This positive trend will continue to develop in 2023. Thus, the EBRD plans to increase lending more than three times. For the next three years (2023-2025), the volume of expected investments in Azerbaijan is estimated at $750 million. According to Kamola Mahmudova, head of the EBRD Azerbaijan, the agreement on around $300 million of this amount can be signed this year. It is planned to direct this amount mainly to renewable energy, transport, SME, private and banking sectors.

Key priority

Among other things, the EBRD's new country strategy includes ample opportunities to finance energy efficiency and renewable energy (RES) generation capacity. One important undertaking in this area was a €10 million loan to improve street lighting in Ganja. This includes the introduction of energy efficient lighting sources, automated lighting control and monitoring systems, replacement of poles and power cables, which will provide significant energy savings, reduce network maintenance costs and improve safety for road users.

Lending for projects in Ganja is comprehensive and is being implemented as part of the EU Green Cities Programme. In May last year, a loan agreement was signed with the EBRD, which provided the city with a €10 million loan to upgrade the solid waste collection infrastructure (rubbish, street cleaning) in the city, as well as improve the operational and financial efficiency of the Ganja Housing and Utilities Production Association. Moreover, over time, the Green Cities Programme can be continued in other regions of Azerbaijan, including in Karabakh.

The EBRD believes that Azerbaijan has significant potential to become a leader in the transition to green energy, as the government appreciates the potential of renewable energy sources and the need for sustainable infrastructure in line with commitments under the Paris Climate Accord. "Green energy is a key priority for Azerbaijan. The EBRD is working very closely with the ministries of economy and energy of the country. We actively support decarbonisation programmes at both investment and policy levels," Kamola Mahmudova said. She emphasised that last year the EBRD signed a loan agreement on the construction of a solar power plant in Azerbaijan (implemented by Masdar of the UAE). This year it also plans to support the creation of a wind farm on the Absheron peninsula.

Transport and IT

Transport sector has a special place in the EBRD's new country strategy for Azerbaijan. In April, the EBRD board of directors is expected to consider a $60m loan to upgrade the fleet of the Caspian Shipping Company (ASCO) as part of its international expansion strategy. According to the EBRD website, this will help ASCO purchase new vessels and improve regional connectivity and trade relations thanks to increasing cargo capacity and route flexibility. The project will also help increase traffic along the Middle Corridor and increase ASCO's revenues in international waters outside the Caspian. However, it is possible that the EBRD's financial cooperation with ASCO will further improve over time, with funding levels potentially reaching a total of $100 million.

Another strategically important area of Azerbaijan's cooperation with the EBRD is high technologies, including support for development of start-ups, expansion of IT-infrastructure, reduction of differences in terms of digitalisation in rural areas, etc. In particular, the EBRD will allocate $300,000 for IT HubAzerbaijan. The project jointly implemented with the Centre for Analysis and Coordination of the Fourth Industrial Revolution (4SİM) and StrategEast, will create a pool of qualified IT specialists. Half of the funding is expected to be the share of the Nakhchivan Autonomous Republic, while the rest will be spent for training specialists in Ganja, Sumgayit, Lankaran, Mingachevir, Shirvan and other regions of Azerbaijan.

Matteo Patrone, EBRD Managing Director for Eastern Europe and the Caucasus, says that an even bigger undertaking in the IT sector is being implemented with Azerbaijan's telecom company Aztelecom starting from December 2022: "Together with our partners from the European Union, which supported a loan of about $50 million with a guarantee through the European Sustainable Development Fund, we will join financing the development of digital infrastructure in the regions of Azerbaijan. Implementation of these works will provide reliable access to broadband Internet services for more than 280,000 rural residents of the country."

New phase

There are other promising projects in the corporate sector that also started late last year thanks to funding from the EBRD. These include loans to build an energy-efficient cold storage facility in Alyat, the "green expansion" of an agricultural producer in Salyan and the expansion of a battery recycling company in Sumgayit. These trends will continue in 2023. The EBRD launched the AgVenture competition to support technological start-ups in agriculture. The winners of the competition will receive special advisory support of up to €80,000 and a grant of €10,000 for additional services as part of the Star Venture programme. The goal is to address issues in the food industry, ensure food safety, overcome the negative effects of climate change, introduce economical irrigation technologies, etc.

It is expected that private businesses will be the main beneficiaries in the new phase of relations with the EBRD, with continued cooperation with Azerbaijani banks for lending. "We are currently working on several projects in line with our main strategic objectives, such as promoting international trade, supporting micro, small and medium enterprises and inclusive financing. EBRD is focused on providing local currency financing where possible, which is very important," EBRD President Odile Renaud-Basso said during her visit to Baku last year.

This is a very serious moment, as the EBRD has not implemented lending projects targeting Azerbaijani banks in the past six years. The first step in this direction was the EBRD's decision to resume operations in Azerbaijan's financial sector in 2023. Thus, concessional credit lines will be provided to three local banks to support small businesses, trade finance, and tender balancing through providing loans to businesswomen.

In short, the EBRD's growing activity in Azerbaijan is evident. It is nice to see such a wide spread of projects across various sectors of the economy.