In the early years of independence, Azerbaijan’s foreign policy was primarily focused on addressing issues such as conflict, occupation, and ethnic cleansing. The political and economic crisis of that time, along with the loss of significant economic resources due to occupation, significantly limited the opportunities for economic development. Nevertheless, even during the period of occupation, Azerbaijan was able to develop key and strategic sectors of its economy.
Thus, if one of the objectives of the conflict was to hinder Azerbaijan’s economic development, this goal was not achieved. Despite all the constraints, Azerbaijan managed to secure its economic independence. In the subsequent period, rapid economic growth was fueled by oil and gas revenues, and the necessary infrastructure was established for the development of other sectors. A successful oil and gas strategy transformed Azerbaijan from a crisis-stricken, impoverished country into one with an above-average income level.
Now, following the resolution of the conflict and the restoration of territorial integrity, Azerbaijan can set new priorities in its foreign policy. In the new reality, where the factor of occupation is no longer present, Azerbaijan faces two primary tasks.
The first task is to create a safe and stable region among neighboring countries. The occupation of Azerbaijani territories by Armenia for many years turned the South Caucasus region into an unstable zone, negatively impacting its overall development. Despite the implementation of regionally significant projects during the occupation, the conflict prevented the full utilization of the region’s economic potential and cooperation opportunities. Now that the conflict has been resolved, conditions have been created for the full realization of the region’s economic cooperation potential. Under these circumstances, Azerbaijan aims to contribute to the development of the region by fostering a stable environment in neighboring countries while simultaneously strengthening its political and economic positions as one of the region’s leading states. Given that the South Caucasus has always been a stage for competition, and the unresolved Karabakh conflict was a result of this rivalry, reducing competition and preventing new conflicts are of paramount importance.
The second task is to accelerate economic development. Through its successful oil and gas strategy, Azerbaijan has also managed to establish effective economic diplomacy. This diplomacy, by making Azerbaijan one of the main energy suppliers to Europe, has strengthened its economic position and created conditions for expanding cooperation through regional formats.
However, despite the rapid economic growth driven by oil and gas revenues, this has also increased Azerbaijan’s dependence on this sector. Therefore, the current primary goal of economic strategy is to develop the non-oil sector to ensure sustainable economic growth. The agricultural and energy resources of the liberated territories can play a significant role in developing the non-oil sector. At the same time, Azerbaijan’s initiatives and projects for green energy exports are also important for ensuring sustainable economic development.
At this new stage, accelerating economic development also requires expanding cooperation with customs unions. Currently, two customs unions exist around Azerbaijan: the Eurasian Economic Union (EAEU) and the European Union (EU). Although Azerbaijan is not a member of these unions, it has close economic ties with many of the countries within them. A significant portion of Azerbaijan’s agricultural exports is directed to the EAEU market, while the majority of its energy exports go to the EU market. Joining these unions could be important for expanding Azerbaijan’s non-oil exports, though it carries certain political risks.
Azerbaijan’s main economic goal at present is to accelerate the development of the non-oil sector and increase its role in economic growth. This is crucial for protecting the country from potential shocks in the energy market and ensuring sustainable economic development.
Although there has been growth in non-oil exports in recent years, and its role in economic development is increasing, the oil and gas sector still dominates the economy. For instance, in 2023, the share of non-oil products of Azerbaijani origin in total exports was 8.82%. Over the past five years, the volume of non-oil exports has increased by 49.5%, or by $990 million, reaching $2.99 billion. Despite the high growth rate of non-oil exports in recent years, its volume remains small, and its share in foreign trade is still low.
In 2023, the largest share of non-oil exports was comprised of fruits and vegetables, as well as electricity, accounting for 24.3% and 13.5%, respectively. Together, these products constitute 37.8% of non-oil exports and 3.3% of total exports. Other significant export items include ethylene polymers, cotton fiber, polypropylene, ferrous metals, and more. As can be seen, the share of non-oil products in Azerbaijan’s exports is small, and non-oil exports are mainly based on raw materials, with high product concentration. Therefore, these products cannot significantly contribute to value creation.
Additionally, non-oil exports are highly concentrated not only by product but also by country. For example, 33% of non-oil exports go to Russia, 23% to Turkey, and 10% to Georgia. Overall, these countries account for 66% of Azerbaijan’s non-oil exports.
One of the key reasons for the low level of non-oil exports and their high concentration by country and product is Azerbaijan’s lack of membership in customs unions, which prevents it from gaining advantages and integrating into trade chains in these regions. It is clear that increasing the production and export of non-oil products to new markets requires competitive products in terms of both quality and price. Therefore, joining customs unions or finding special forms of cooperation is important for increasing local producers’ interest in non-oil sectors and stimulating non-oil exports.
However, there are challenges for Azerbaijan on the path to joining these unions. For example, agricultural products, which currently represent Azerbaijan’s primary non-oil export, are also produced and exported by EAEU member countries. In these countries, the demand for traditional Azerbaijani non-oil products, such as fruits and vegetables, is low. Therefore, to expand non-oil exports to the EAEU market, Azerbaijan must increase the production of other, non-traditional non-oil products that will be competitive in this market.
The EU market, in turn, offers opportunities for transitioning to more competitive production and strengthening positions in the global market. However, there are challenges related to accessing the EU market, such as the lack of WTO membership and the adaptation of local producers to EU standards. Overall, WTO membership is important for entering the global market and increasing non-oil exports, as without adopting WTO standards, it is difficult to obtain favorable export conditions. In the initial phase of increasing non-oil exports, it is essential to secure these favorable conditions. If these challenges are addressed, Azerbaijan will be able to enter the EU market with traditional non-oil products, especially agricultural goods.
Azerbaijan can overcome existing limitations in non-oil exports and achieve significant growth in this area by implementing necessary measures and expanding cooperation with customs unions.
The initial condition for increasing non-oil exports is to boost non-oil production. To achieve this, there is a need to accelerate the development of the processing industry, establish new production facilities, and stimulate the production of goods that go through all stages of the manufacturing process. Since diversification of production and exports is a complex process, it would be appropriate to apply horizontal diversification in the initial stage (increasing the variety of products within the same sector). For example, in the early stages, production of processed products related to the chemical industry and agriculture could be increased. Later, it is possible to move to vertical diversification (increasing production in different sectors). Sectors where vertical diversification could be implemented include light industry, heavy industry, tourism, finance, digital services, and IT.
The increase in production in the non-oil sector directly depends on the demand for the products produced. Since Azerbaijan has a small domestic market, it is necessary to expand access to foreign markets and identify markets where there could be high demand for Azerbaijani products to achieve large-scale development of the non-oil sector. In this regard, the privatization of state-owned production facilities with the participation of foreign investors is a crucial condition. For a substantial and sustainable increase in non-oil exports, the search for new markets and the increase in production levels must be carried out simultaneously.
To gain access to foreign markets, relations with customs unions can be reconsidered, and the possibility of entering new markets through bilateral relations can be explored. For example, to enter the Eurasian Economic Union’s market, Azerbaijan should increase the production of non-traditional non-oil products and direct them toward this market. To enter the European Union (EU) market, institutional issues such as membership in the World Trade Organization should be resolved, and production should be aligned with EU standards. At the same time, the economic space of the Organization of Turkic States could be beneficial in this regard.
Given the existing challenges of joining customs unions, Azerbaijan could develop trade relations bilaterally and enter new markets until these challenges are resolved. Several regional groups could be considered potential markets for Azerbaijan’s non-oil exports, including the Middle East and North Africa (MENA), Southeast Asia, South Asia, and Central Asia. To enter these markets, it would be beneficial for Azerbaijan to sign bilateral, multilateral, regional, and free trade agreements with these countries. Cooperation with China and Central Asia through the Middle Corridor and with Russia through the North-South Corridor could open up opportunities for the development of non-oil sectors such as tourism and transportation.
Additionally, measures like increasing the number and effectiveness of trade representations abroad, strengthening cooperation ties, and boosting industrialization could also be beneficial in increasing non-oil exports. For this to happen, a general vision must be formed, within which the state should create the necessary conditions, and the activities of all state structures should be directed towards increasing economic activity. Once such an environment is established, the private sector should be given a leading role, turning it into the driving force of non-oil sector development. The main goal is to increase non-oil exports to $10 billion within the next five to six years.
Translated from CSSC
