Nijat Hajizadeh, Head of the department at CAERC: "The potential for diversification of Azerbaijani products may increase"

Nijat Hajizade

The Head of department of CAERC

30 March 2022, 13:57

 Nijat Hajizadeh, Head of the department at CAERC: "The potential for diversification of Azerbaijani products may increase"

One of the main markets for Azerbaijan's non-oil exports is Russian and Ukrainian market. In this sense, the conflict between Russia and Ukraine means the loss of many non-oil export markets for Azerbaijan. I want to know what steps are being taken to find new markets for Azerbaijan's non-oil exports?

At the same time, many non-oil products were imported to Azerbaijan from Ukraine and Russia. However, the ongoing war in Ukraine, as well as economic sanctions against Russia, the separation of Russian banks from SWIFT and other reasons have caused difficulties in importing products from these countries. Considering this, what is planned to be done in the non-oil sector to reduce Azerbaijan's dependence on imports and promote local production?

Russia and Ukraine are Azerbaijan's main foreign trade partners. Both countries have a significant share in Azerbaijan's non-oil sector trade. Due to the current geopolitical events, there is a high probability that Azerbaijan's trade with these countries will decrease. In addition, the advantage of both countries over other countries is directly related to the free trade factor. The main advantage in trade with the Russian Federation is fruit and vegetables, and in trade with Ukraine - oil and oil products. Thus, fruits and vegetables and a number of agricultural products account for about 60% of exports to the Russian Federation. The main driving force in exports to Ukraine is oil and oil products. This product accounts for 82.5% of exports to Ukraine. Although exports to both countries continue, purchasing power is expected to decline.

The discovery of new markets or the diversification of export geography is always relevant, regardless of whether the geoeconomic situation is stable or unstable. The main purpose of diversification is to minimize the risks of possible emergencies or conflicts. Given the high share of fruit and vegetable products in exports to the Russian Federation, it is more advantageous for neighboring countries to be logistically close to the export of these products to other countries. However, from a regional point of view, the Central Asian region is a major exporter of agricultural products, along with a high level of self-sufficiency. The business environment in the fruit and vegetable market of the Arab Gulf countries is diferent.  Thus, the United States, the United Kingdom, China, Brazil, Thailand and the Republic of Turkey have a significant share in the import of fruits and vegetables of the Arabian Gulf. The signing of a free trade agreement between the UAE and Turkey from the beginning of 2022 is also being discussed.

In addition, the range of products exported by Azerbaijan to Russia and Ukraine is smaller. Thus, of the 546.6 million US dollars worth of exported fruits and vegetables to the Russian Federation,  9 products account for 84%.

The diversification of Azerbaijan's non-oil exports directly depends on the diversity, variety, rarity and sophistication of local production. In addition, expanding the scope of preferential and free trade principles can increase the potential for diversification by affecting price competition. Although the export risk for these countries is directly related only to the Russian Federation, the diversity and variety of these products, as well as the lack of industrial and technological capacity weaken the potential for diversification. In addition, despite the existence of free trade relations with the CIS countries in the Central Asian region, the export of fruits and vegetables to these countries has not been dynamic over the past 5 years. In other words, even the price advantage created by low quality requirements, free trade and close border logistics has not played a trigger role in previous years' exports. Looking at trade statistics, we do not see a high share of trade operations in the region in total foreign trade.

Successful  and unsuccessful   import substitution policy have been observed in a number of countries around the world. Import substitution should not mean restricting imports. Consumer rights and preferences are regulated by law, and in a free market environment, as well as important documents aimed at increasing bilateral trade volumes  are completely contrary to the restrictive approach. The availability of quality products and price advantage over imported products, as well as the implementation of the value chain in domestic production through cheaper resources and branding are important challenges. For example, according to estimates, the share of domestic production of industrially produced food, beverages and tobacco products varies around 70-80% of domestic demand. However, the vast majority of intermediate consumption of products that make up that percentage is imported raw materials, equipment and a number of services provided to them. In addition, we can see that the vast majority of domestic production is directed to foreign demand, but the same product is imported from a number of countries. Given these circumstances, the conclusion of preferential and free trade agreements is becoming a major challenge. In other words, the competitiveness of domestic production in the domestic and foreign markets is directly related to the import of low-tariff intermediate products.

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