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GTR Leaders in Trade 2023: The winners

Azerbaijan has the potential to rival Singapore and Dubai as an international trade and logistics hub, according to speakers at a London event.

The energy-rich Central Asian nation has been investing heavily in infrastructure in an attempt to capitalise on its geopolitical location. It hopes to become a major point along future trade routes between East Asia and Europe.

In ambition that echoes that of Dubai, it’s hoped that by positioning itself as a regional trade hub, Azerbaijan can maintain economic stability once oil and gas reserves have been depleted.

The government has pumped billions of dollars into projects such as the 826km Baku-Tbilisi-Kars railway line, which will connect the capital with Georgia and Turkey and the Silk Wind transport project, which aims to launch container block train transit from China to the centre of Europe. It is also an active member of the Transport Corridor Europe-Caucasus-Asia (Traceca) programme, involving 13 other European and Asian countries.

Speakers at the Azerbaijan: Beyond Oil and Gas event told the audience and GTR that continued investment in such projects is imperative if Azerbaijan has serious ambitions of continuing its strong economic growth.

Azerbaijan is thought to be the first country to have produced oil for fuel: the first mechanically-drilled well was in Baku, in 1846. At the beginning of the 20th century almost half of world production was being extracted in Baku and 70% of the oil used by the Red Army in World War II was or Azerbaijani extraction.

The economy is hugely-dependent on energy: with oil alone generating 47% of GDP in 2012. And so despite the history, Azerbaijan is keen to diversify its economy and the government has been attempting to stimulate other industries.

Business done in the agriculture sector, which employs 39% of the population, but returns just 5.2% of GDP, is exempt from tax. The government has also been channelling huge amounts of capital into the construction sector.

Upon attaining independence from the Soviet Union in 1991, the country’s infrastructure was crumbling. As well as improving inter-regional transport links, the government has been investing heavily in national infrastructure projects.

The construction sector has grown by a factor of 40 in the past 15 years and now accounts for 9.2% of total GDP. Foreign direct investment (FDI), however, has also been primarily in the energy sector – something the government is also trying to reverse. The EBRD has been active in securing credit lines for Azeri non-oil SMEs looking to export, issuing guarantees for LCs to be confirmed by foreign banks.

The banking sector has also been evolving. Twenty years ago, there were more than 100 commercial banks. There are now 40 and the government has plans to consolidate further, taking the view that pooled resources will allow banks to better support the country’s exports.

But according to Neil McKain, the head of the EBRD’s resident office in Azerbaijan, the biggest barrier for Azerbaijan’s non-oil economy is a lack of transparency and endemic corruption.

The country is ranked number 139 in Transparency International’s Corruption Perception Index. The private sector is beset with corruption at all levels, while the government is commonly accused of democratic illegitimacy and human rights contraventions.

The banking and energy sectors, in order to compete, have had to become more open and abide by international standards. However, most other sectors are much further behind in these terms, McKain said.

The government must take a lead in improving the conditions, he said, but the private sector must also take some responsibility if businesses wish to become competitive overseas.

That was the view of Fair Ismailzade, founder and CEO of Golden Pay, an online payments company from Azerbaijan that’s about to become the first private company in the company to launch an IPO.