Azerbaijan in the orbit of Eurasian integration: CIS free-trade zone

Azerbaijan is continuing its systemic rapprochement with Eurasian economic space in two main formats: in the mode of the free-trade zone of the Commonwealth of Independent States (CIS FTZ) and in the format of coordination with the economic regulation system of the Eurasian Economic Union (EAEU).

New approaches

At the meeting of the heads of CIS countries’ governments in Sochi (took place on 8 June 2023) Ali Asadov, the Prime Minister of Azerbaijan, together with his peers signed the Agreement on free trade of services, on FTZ establishment, operation and investment. The document was in the process of development since 2011. This Agreement is a next powerful move in the integration of FSU area allowing for improving internal trade flows (increase the cumulative export of services by more than 5%, import – by 3%). It will also promote the favorable investment climate in the CIS countries.

Hence, the CIS area is getting more and more harmonized with the EAEU standards.

This May, the most unexpected foreign policy event was participation of President Ilham Aliyev in the Eurasian Economic Union summit in Moscow. This for the first time during the period of interaction between Azerbaijan and EAEU. The most important reason for international attention to the Aliyev’s visit to Moscow was the fact of his negotiations with Nikol Pashinyan, the Prime Minister of Armenia, and President Putin. However, the topic of coordination between Azerbaijan and EAEU is by itself very important as well.

In any case, Ilham Aliyev himself expressed this opinion in his interview to the TV program «Moscow. Kremlin. Putin» at Rossiya 1 TV channel. This is what he said among other things: «We shared our opinions on the potential of future cooperation, on rapprochement. Of course, you need to explore all pluses and minuses when discussing such issues, you need to be based on pragmatic approach. And this is what we always are based on in our policy».

It is significant, that Ilham Aliyev did not exclude even more extended economic integration with EAEU countries: «our economy is quite open and balanced... we do not have any taboos within the rapprochement. Again, we will be based on specific circumstances linked to the global economy and the economic situation in Azerbaijan. So, it remains to be seen. I believe, the very fact of Azerbaijan participating in the EAEU summit evidences our interest in this organization and our intent to deepen our rapprochement with its member countries».

It is understandable, that right now and in the short-time perspective, it is difficult to imagine formalization of the rapprochement between Baku and EAEU in any judicial format (e.g., the status of observer for Azerbaijan). But work with the Eurasian Economic Commission is quite possible.

On the other hand, Azerbaijan is gradually progressing in its dialogue with Yerevan, which may be an incentive for Baku to participate in the Eurasian transport agenda, and this is especially relevant for promoting the concept of Zangezur corridor and the development of logistics along the routes of the North-South International Transportation Corridor (ITC).

Let us remind here that on May 17, practically one week ahead of the EAEU summit in Moscow, Mikhail Myasnikovich, the Chairman of the Board of the Eurasian Economic Commission, very well known to Azerbaijan party during his work in the position of the Head of Belarus Government, paid a visit to Baku.

In essence, when Baku is developing two-lateral contacts with Moscow, Minsk and Astana (within CIS FTZ), it means simultaneous development of investment projects and mutual trade with EAEU. Both from the practical standpoint (within common standards of product quality), and from the statistical standpoint, the trade and investment footprint of Azerbaijan in Kazakhstan is taken into account in the Unified Register of Industries and Investment inside EAEU.

Joint projects of high potential

The following projects of the Eurasian organization may be of special interest for Baku:

1. Agrarian supplies extension within the Agroexpress Project. Russian Railways company is implementing this Project on bi-lateral basis, but it has a status of an EAEU project. In this sphere the key regulatory document is Agreement on using navigation seals to track the agrarian product transportation within EAEU. Digitalization of railway transport becomes especially relevant in this context, and ADY in partnership with Russian Railways is active in this sphere.

2. Promoting investment into hubs and logistics of Azerbaijan segments of North-South and East-West ITCs. It should be noted that the network of trans-Caspian automotive and railway routes (Baku – Aktau, Baku – Kuryk, Baku – Turkmenbashi) are within the regulation of the CIS Free Trade Zone, inside the trans-Eurasian communication network and inside the single space of product quality regulation (standard certificates of origin).    

The projected industrial parks and several free economic zones in Azerbaijan will be reinforcing the hubs of North-South and East-West corridors in the territory of the country.  

If you look at the location of the key industrial zones of Azerbaijan: Chemical industry park in Sumgait, Industrial park in Balahan, Industrial park in Garadag, Industrial park in Mingyachevir, Industrial park in Pirallah, Industrial park «Araz Valley Economic Zone» in Jabrail district, and the planned park in Agdam district – they are inside the triangle of the already operating and planned logistic hubs.    

From the Caspian Sea side, it is Baku International Commercial Port with Alyat Free Economic Zone, in the South-West of the country it is the planned railway hub in Julfa and the planned FEZ in Nakhchivan, in the South – railway logistics hub in Astara (Iran), where its transformation into the Free Economic Zone is proposed.   

3. Investment into transportation hubs in Azerbaijan. We can see that the main focus of the Program of social and economic development of Nakhchivan for 2023-2027 proposed by Ilham Aliyev is on the logistical resources of the Autonomous Republic as the key hub for Zangezur corridor. The strategy stipulates for developing the proposals about the establishment of the Free Economic Zone in Nakhchivan. The document talks about the plan to establish a special customs zone in the territory of the Autonomous Republic; to provide logistical support of exporting items produced in Nakhchivan to the external market; to establish an industrial park in NAR territory; to assure launching the operations of the Industrial Quarter in Sharura; to develop various lines of agricultural industry sector; to establish agrarian parks. These measures are targeted not only at attracting the investors from neighbor countries – Turkey and Iran, but also at partners in CIS FTZ and EAEU, which have common agrarian and food market staying within the orbit of Russian economy.  

4. Potential acquisition of participatory interest in the Eurasian Development Bank (EADB). If Baku joins the EADB participants, it may put Azerbaijan into closer focus of investors from EADB partner countries.  

5. Joint ventures to assure imports phase-out. For example, one of the projects discussed lately is an Azerbaijan-Belarus JV manufacturing lifting equipment (together with Mogilevliftmash). This project and similar ones potentially may create new export-oriented sectors in Azerbaijan with account of Western manufacturers exiting Russian market (in case of lifting equipment, this is about replacing the products of OTIS company from the US). Joint ventures with EAEU countries in mechanical engineering also have great potential for the purposes of localizing rail car manufacturing and rolling stock repair shops.  

6. Projects for creating grain and fertilizers hubs at the Caspian Sea for their further exporting to the Middle East countries. In particular, Russian company FosAgro plans to ramp-up its supplies to Azerbaijan up to kt in 2023 (+27% vs 2022), and such supplies would be organized through the company office in Kazakhstan. It should be also reminded that in Q1 2023 Russia accounted for 65.5% of wheat import to Azerbaijan, and Kazakhstan accounted for 34.5%; both countries are EAEU members and key players in the global grain market.

7. Expansion of trade in national currencies. The turnover in the CIS currencies is consistently growing within CSI FTZ (first of all, transactions in Rubles, which make up to 78% of the CIS sales turnover). At the same time, the strong US dollar peg remains, at least as a ratio for cross-exchange calculations, and even symbolically – as an equivalent of numerical estimates of the sales turnover. It is interesting that Mikhail Mishustin was the first to break this cliché during the bi-lateral meetings after the Heads of CIS States Council session. The Chairman of the RF Government for the first time assessed the metrics of Azerbaijan-Russia turnover in rubles and manats – almost RUB 300 bn or AZN 7 bn. In January-April of the current year, the turnover grew by 21% (up to RUB 98 bn or AZN 2 bn).

In addition to the Russian vector, the metrics of growth of trade with Uzbekistan, Kyrgyzstan, Kazakhstan and Turkmenistan are also very important for Azerbaijan. It has grown by dozens of per cents allowing for introducing such new regional integration instruments as Development Funds (the Agreement of establishing the joint Investment Fund was signed by Azerbaijan and Uzbekistan was signed on 24 February 2023. The document stipulates for USD 500 mln ceiling of the authorized capital of the Fund).    

8. CIS FTZ and EAEU modes synchronization. The development of the free trade mode inside CIS is obviously encouraging the participants for closer integration and removal of the next series of barriers. Signing the Agreement on free trade of services, on FTZ establishment, operation and investment was a significant step forward. It will be a framework document for this sphere along with the Agreement on free trade of goods. New incentives will appear for attracting national businesses and capitals from CIS member countries and for new jobs creation. Services are known to account for more than 50% of GDP of the Commonwealth countries.

9. Agricultural production in EAEU is another important sphere for coordination with Baku. In Q1 2023, this sector grew by 2.9% – in all member countries of the Eurasian Economic Union. Here is an example to illustrate this trend. EAEU is seriously ramping-up the share of food products both inside the Union and for export. In 2022, China was the biggest customer of food coming from EAEU, Turkey was the second with 18% share in the total export, and Egypt was the third (circa 10% of EAEU agricultural export).

To illustrate the importance of this sphere for Azerbaijan economy, here is a quote from the speech by Ali Asadov at the plenary session of the 3rd Eurasian Congress: «Azerbaijan is commited to further development of cooperation and share our agricultural expertise with our EAEU partners, because agriculture is the corner stone of food security».

Currently, the Eurasian Economic Commission is discussing the idea of establishing a Common Export Agency allowing for the partners to strengthen their positions in the external markets, to combine the deliveries by deadlines, to operate the logistics and to broaden the product range.

EAEU effects

Another important aspect of the current EAEU activities is expansion of investment-related and trade-related interaction with BRICS and ASEAN. If SCO, partially overlapping the EAEU space, is to be included into such list, then the total trade volumes with these associations in 2022 grew by 35% and exceeded one third of EAEU total sales turnover.    

Uzbekistan (the observer in EAEU) holds a special position in the list of partners of the Eurasian Economic Union. In 2021, the turnover between EAEU member countries and Uzbekistan grew by more than 22% totaling almost USD 12 bn. In 2022, it grew by 27% more.

All these signals are interesting for Baku to analyze, just like another topic – the EAEU Free Trade Zones with separate countries, which also belong to the list of potential partners of Azerbaijan.      

Take UAE, for example. In 2022, negotiations between EAEU and Dubai started on gradual development of the Free Trade Zone. According to some estimates, it will allow to increase mutual supplies for more than 1,300 commodity items – a significant part of them can go through Azerbaijan territory via the North-South ITC. Mutual trade between EAEU and UAE grew 4 times during the period from 2015 to 2021 achieving USD 6.3 bn, mainly at the expense of exports from EAEU. Today, the pace of EAEU rapprochement with the Gulf countries is setting the trend for relocating the center of attraction for the Russian top business from London to Dubai. In any case, UAE with its port hubs has the best potential for becoming the final destination for the North-South ITC via interaction with Iranian ports.

Even before the special military operation, i.e., in 2018-2019, it was natural to assume that the southern base of the North-South ITC would be distributed between the Iranian and Arabian ports and Free Economic Zones in the ocean ports.      

Right now, it is difficult to say, what would be the maximum possible level of Azerbaijan’s participation EAEU. Until last February, experts discussed the options of association or observer status.

No matter, which would be the final point, it is clear that until the end of 2020s  EAEU will stay as the base for the integration space oriented towards Russian markets of investment, consumption and industrial capacities.

One can say that EAEU is a certain objective factor, an inevitable way of interaction, which you cannot get rid of. The CIS experience shows that such organizations can adjust to any circumstances, even the most unfavorable ones.

The FSU countries have been too much mutually imbedded within the common «Soviet house», and some of these connections have strengthened exponentially over the last thirty years.

For a group of countries in Central Asia and Southern Caucasus, Russia remains and will continue to be a lever for social tension removal, an investment donor and a filter for adjustment of the most successful political and administrative practices into the local field of paternalistic traditions. In a word, it provides for stable system of balances against potential turmoil including the domestic one.