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Azerbaijan’s integration into international economy

December 2011

Elchin Akbarov
Tax Senior Euro Audit LLC, Baku,
Nexia International
member in Azerbaijan

International capital mobility is determined by stability, transparency, predictability and adherence to the internationally adopted rules, and not simply by access to cheap labour and raw materials. Multinational corporations transfer not only technology and management skills, but also labour standards that are in line with the international norms. Export orientation, deregulation, liberalisation and privatisation that serve to characterise the expansion and deepening of the globalisation and integration processes are directly connected to the expansion of external competition.

During the integration process, countries in transition, such as Azerbaijan, must closely co-operate with international organisations, thereby receiving assistance as far as the development of market economy is concerned. Following the declaration of independence by Azerbaijan in 1991, the country initiated processes aimed at achieving active integration into the international economy. In addition to the Organisation of the Black Sea Economic Co-operation (BSEC) organisation, the Economic Co-operation Organisation (ECO) and the Organisation of the Islamic Conference (OIC), Azerbaijan has become a member of the Organisation for Security and Co-operation in Europe (OSCE), the International Monetary Fund (IMF), the European Bank for Reconstruction and Development (EBRD) and the CIS since 1992. Furthermore, Azerbaijan has received observer status with the World Trade Organisation (WTO) in 1997, and is currently in the process of acquiring full membership.

Azerbaijan has embarked on a series of market-based reforms to ensure the democratic development of the country and to restructure the economy so that it could become more balanced, diversified and competitive, thus enhancing its integration into the regional and wider international economy. The European Union supports the economic reforms in Azerbaijan by providing relevant technical assistance and expertise via its Technical Assistance to the Commonwealth of Independent States (TACIS) programme. Under the TACIS programme for Azerbaijan, priority is given to the three main areas of co-operation – infrastructure, the private sector and human resources development.

Additionally, it is important to note that on May 25-27, 2011, during the 16th meeting of the Non-alignment movement at the level of ministers of foreign affairs in Indonesia, Azerbaijan was accepted as a member of that movement. The Non-alignment movement is the movement uniting the countries which do not wish to join the armed blocks like NATO and the former Warsaw Treaty Organisation.

Azerbaijan has made significant progress on the path of market-oriented reforms, despite the difficult and complex internal and external circumstances. Major achievements have been made with regard to the exploitation of its hydrocarbon reserves, which have served to attract high levels of foreign direct investment (FDI). They have also attained macroeconomic stability through the implementation of stringent financial measures, combined with the involvement of international financial institutions.

Oil-rich Azerbaijan is acknowledged across the world for its natural resources. The signing of production-sharing agreements (PSAs) with leading international energy companies has helped to open a new era, as the country has initiated exports to Europe and the US. The discovery and exploitation of oil and gas fields has increased the FDI flow into Azerbaijan, thus forming a basis for stable economic growth and drawing attention to the development of the non-oil sector and integration into the world economy. Consequently, the annual non-oil GDP increased from AZN3.06bn (USD3.92bn) to AZN18.44bn (USD23.64bn) within the period 2000–2010. The first-quarter results for 2011 indicate year-on-year growth of 23 per cent, when compared with the same period the previous year. This is indicative of the rapid development of the non-oil sector, which should advance Azerbaijan's integration into the world economy. In line with that, as shown below, Azerbaijan's non-oil export volumes had increased from USD 510 mln to USD 1.37 billion between 2004-2010.

Azerbaijan became an OSCE member in 1992, the objectives of this organisation being to secure peace, democracy and civil rights of its member countries and to foster mutual co-operation. Thus, Azerbaijan and other member states gained an opportunity to achieve more unification with international markets. Moreover, the OSCE Minsk Group was established to settle the conflict which arose in connection with the Armenian occupation of Nagorno-Karabakh and seven adjacent territories.

Accession to the WTO

The main objectives of Azerbaijan in seeking full WTO membership are to:

• accelerate its integration into the world economy
• benefit from trade concessions between the WTO member states
• carry on trade with other countries, based on the regulations established by the WTO
• attract assistance with the implementation of economic reforms
• further enhance FDI levels following the implementation of the WTO regulations
• implement the WTO conflict resolution mechanism if possible.

Accession to the WTO ranks amongst the top goals of the Azerbaijani economy. The country has already launched a website - www.wto.az- following meetings with the Working Group for Azerbaijan established on 16 July 1997 as part of the WTO Council. Altogether, there are more than 30 members in the Working Group for Azerbaijan, including representatives from such countries as the US, China, Japan, and Turkey. To date, the Group has held eight meetings since 2002, during which several rounds of bilateral negotiations have been conducted, with an opportunity to answer questions from the WTO member countries. During the most recent meeting in October 2010, new questions and comments were submitted to the Azerbaijani representatives, who forwarded those questions for specialists to reply. Full WTO membership will provide a myriad of opportunities for Azerbaijan. The government has also appointed a commission composed of high-ranking officials from various governmental authorities to undertake preparatory work preceding full WTO membership.

Currently, Azerbaijan's membership as a ‘developing country’ is amongst the most pressing issues. Around two-thirds of the WTO members have been given such status, which means that they may benefit from special rights. For example, there are time extensions regarding the implementation of obligations; provision of assistance and aid in the amount equivalent to 10% of the output, as opposed to 5% adopted for the developed countries; and the right to introduce limits on trade and imports in special circumstances.

Increasing competition

Free trade areas; unique markets; and both customs and economic unions are some of the forms of international economic harmonisation. Bearing this in mind, Azerbaijan continues to take decisive steps towards integration, and this is how the new Law on Special Economic Zones (SEZ) came into effect in 2009. This initiative will serve to enhance trade and to develop contacts and relations with international markets via co-operation with foreign investors. Furthermore, enhanced FDI flows will expedite the application of high-tech, experienced management and marketing techniques. This should serve to reduce poverty and unemployment, thus helping Azerbaijan to supply competitive goods and services that will increase its representation in the international markets.

Macroeconomic stability has provided favorable conditions for widening and deepening market reforms. Azerbaijan has launched economic restructuring through the liberalisation of trade and economic activities, privatisation, and radical reforms in the agriculture and service sectors, as well as banking and finance. Reforms in the social and public administration sectors have also entered the initial stage. Due to these measures, Azerbaijan has significantly diversified its international trade and its economic ties with the outside world.

Like many post-Soviet countries, Azerbaijan has begun the privatisation of state-owned plants, factories and other production and service facilities. Among the most important initiatives was the investment in the Sumgait Technology Park (STP), which specialises in the production of electric cables, heavy equipment, plastic pipes, solar energy, copper melting and galvanising systems. The investment in STP will provide the local market with high-quality products and ensure representation of Azerbaijan in the international markets.

The private sector now plays a key role in determining the future of new economic structures. To date there has been a lack of parity in the economic growth between various economic sectors and regions, which is attributed to the concentration of the energy sector facilities in the vicinity of the capital city of Baku. Other branches of economy, such as agriculture, remain at the developing stage in other regions of Azerbaijan. Some of these initiatives have already brought results, with their products being supplied across the regional market.

Future prospects

One of the most evident manifestations of contemporary globalisation is that such major players as multinational corporations, large industrialised countries and international organisations play an increasingly determining role in the global economic development. Such small economies as Azerbaijan remain extremely vulnerable to external developments and must develop the ability to react and adapt quickly to such changes. This will serve to determine their competitiveness and, in this context, the role of governance and management of relationship with cross border countries is becoming increasingly important. However, Azerbaijan has already demonstrated the desire for economic integration with other countries and has implemented effective strategies to achieve this objective.