Russia and Azerbaijan: 2023/24 Trade and Investment Dynamics

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Bilateral trade up 38% as Russia looks to Baku for Middle Eastern connectivity 

By Emil Avdaliani

Russia’s trade and investment ties with Azerbaijan fit into the overall pattern observable in Russia’s trade/investment relations with its immediate neighbors following the outbreak of the conflict in Ukraine in 2022. Moscow’s re-orientation of commercial ties from the EU to Asia and the Middle East benefits Russia’s neighbors and Azerbaijan is no exception. The latter serves not only as a market for re-export to Russia, but also as a developing transit route between Russia and Iran in what constitutes the International North-South Transport Corridor (INSTC). Azerbaijan is western branch out of three routes making up the INSTC and it links Iran’s and Russia’s most populous and relatively industrialized provinces expanding the transit trade between the two big Eurasian actors.

Yet despite the growing bilateral trade, Russia is not dominating Azerbaijan’s external trade. The investments dynamic is slower, and as in the case of many other countries Russia lags behind other actors when it comes to using emerging investing opportunities. Baku and Moscow seem to work for expansion of investment ties but amid the Western sanctions Russia seems to lack resources to adequately challenge other countries’ position in the Azerbaijan market.

Azerbaijan and Russia are mostly comfortable with where their bilateral relations are at the moment. The two countries are close politically as reflected in the agreement on enhanced cooperation in nearly all spheres signed between Moscow and Baku in February 2022. Yet despite Moscow’s cajoling Azerbaijan will likely abstain from joining Russia-led Eurasian Economic Union (EAEU). Both prefer transactional manner of bilateral relations avoiding undue expectations and full-scale alliance mode.

Russia – Azerbaijan Bilateral Trade

In 2022, the growth of bilateral trade between Azerbaijan and Russia amounted to US$4 billion, a 24% increase from 2021. In 2022 Russia ranked third among Azerbaijan’s trade partners after Italy and Turkey. However, the share of trade operations with Russia accounts for just 7.04% of Azerbaijan’s total foreign trade turnover.

Nevertheless, this positive trend continues in 2023. The bilateral trade between the two countries in H1 2023 reached US$1.165 billion, an increase of 37.7% over 2022. During this period, the exports of Azerbaijani products to Russia amounted to US$621.135 million, and imports of goods from Russia – US$1.543 billion. Overall officials from both countries contend that given the re-orientation of Russia’s trade and overall year-on-year positive dynamic, trade between the two countries could double in 2023-2024.

Russian exports to Azerbaijan mainly consist of wheat, meslin, crude petroleum, crude petroleum products derived from bituminous minerals, timber, various gaseous hydrocarbons, mineral or chemical fertilizers. From November 2022 Russia also began selling gas. Azerbaijan sends to Russia mostly animal products, plastics, rubber and rubber, machinery, equipment and apparatus, mineral products, and oil. In 2022 the cumulative global exports from Azerbaijan amounted to US$38 billion.

Exporting to Azerbaijan is easily carried out from all major cities across Russia. Interregional cooperation is the engine for the development of Russian-Azerbaijani trade and economic alignment. For instance, in 2022 Azerbaijan was visited by delegations from Adygea and Komi, Tatarstan and North Ossetia-Alania, Khanty-Mansiysk Autonomous Okrug-Yugra, Astrakhan, Kaliningrad, Nizhny Novgorod, and the Rostov regions, as connectivity from the Volga River region to the Caspian Sea and onto Azerbaijan’s Baku port remains dynamic.

A critical region for Russia-Azerbaijan trade cooperation is Dagestan. The cargo turnover between the latter and Azerbaijan by rail has doubled throughout 2022 after the removal of restrictions on the movement of nightly freight trains. Cargoes are mostly heading to the Middle East, which can access the region via Iranian ports.

The transit of goods through the territory of Azerbaijan to Russia in 2022 increased by about 2.5 times. The expansion of the INSTC is especially telling. In the first six months of 2023 around 388,000 tons were transported along the corridor – a striking increase with the first six months of 2022 when 125,000 tons of cargo were sent. Russian officials are hopeful that by 2025, cargo turnover through the INSTC could reach 30 million tons, and by 2023 up to 35 million tons.

Azerbaijan and Russia are constantly working on the expansion of transport and cargo movement across their border. Due to the growing demand for land transportation through the territory of Azerbaijan, several measures are being taken to expand the throughput capacity of customs points between countries and improve transport infrastructure. At the moment there are four automobile checkpoints and one railway checkpoint on the common border. The main automobile checkpoint for both cargo and passenger movements is Yarag-Kazmalyar (Russian side) – Samur (Azerbaijani side).

Numerous contracts are expected to be signed for the design and construction of new Tagirkent-Kazmalyar and Novo-Filya checkpoints, which will be completed by the end of 2025. In addition, in 2022, Russia and Azerbaijan launched the Green Corridor project, which will help ensure the smooth and accelerated movement of goods between countries. In addition to road communication between Russia and Azerbaijan, rail freight turnover is also growing.

Bilateral Investments

Throughout 2022 foreign direct investment into Azerbaijan’s economy reached US$6.276 billion, which is some 30.9% more than what was registered a year earlier – US$4.796 billion. Russia’s direct investments in Azerbaijan in January-September 2022 increased by 10.5 times – up to US$377.6 million in comparison with 2021. The growth placed Russia among top five investor countries into Azerbaijan. According to Azerbaijan’s Central Bank, the United Kingdom leads  with US$1.2 billion, followed by Turkiye at US$751.6 million, Cyprus at US$618.4 million, Russia at US$377.6 million and Iran with US$256.2 million.

In January-June of 2023, foreign enterprises and organizations in Azerbaijan directed 1.939 billion Azerbaijani manats (about US$1.45 billion) to fixed assets, which is 20.7% more than in the same period of 2022. Out of this figure 1.838 billion Azerbaijani manats (about US$1.3 billion) of FDI (94.8%) came from investors from the UK, France, USA, Turkey, Japan, Switzerland, Russia, Norway and Iran.

Russia officials say that cooperation Russia and Azerbaijan is expanding in the energy, machine-building, industrial, transport and other sectors. Presently, Russian companies are participating in 14 major projects, the total cost of which is almost US$7.5 billion. More than 900 joint ventures with Russian participation operate in Azerbaijan, and 300 of them have 100% Russian capital. Nevertheless, it seems that large Russian businesses have been somewhat hesitant to invest in Azerbaijan. Russia’s westward economic and investment focus has had an effect, while Moscow has been wary of Baku’s involvement in the conflict with Armenia. This however is changing as Azerbaijan is turning into a nodal point between Russia and Iran and Moscow needs to develop closer trade and investment ties with its Caspian neighbor.

Emil Avdaliani is a professor of international relations at European University in Tbilisi, Georgia, and is a scholar of the silk roads.

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