Azerbaijan: Important political events in 2023

1. 17.01.2023 - In Bucharest, the governments of Azerbaijan, Georgia, Romania and Hungary signed an agreement on strategic partnership in the field of development and transfer of green energy.
2. 16.02.2023 - SOCAR and “Masdar” Company (UAE) signed an agreement in Abu Dhabi on the joint development of 4-Gigawatt green energy projects.
3. 02.03.2023 - Construction of an explosives factory has begun in Azerbaijan
4. 23.04.2023 - The Ministry of Digital Development and Transport, together with PASHA Holding and with the support of the Israel Institute of Technology - Technion, established the Cybersecurity Center of Azerbaijan.
5. 05.27.2023 – “Baykar” and the Ministry of Defense of Azerbaijan signed a protocol of intent on joint production of UAVs in Azerbaijan.
6. 01.06.2023 - A Memorandum on Cooperation was signed in Baku between the Agency for the Development of Economic Zones, the Association of Manufacturers of Machinery and Equipment and “Uzbekavtosanoat” JSC to expand the production of motor vehicles in Azerbaijan.
7. 03.07.2023 - The law "On Electric Power Industry" was signed, regulating the energy industry reform in the country.
8. 25.10.2023 - Turkish President Recep Tayyip Erdogan, together with Azerbaijani President Ilham Aliyev, take part in the groundbreaking ceremony of the Ygdir –Nakhchivan gas pipeline and signed a protocol on the laying of the Kars-Nakhichevan railway.
9. 26.11.2023 - President Ilham Aliyev took part in the opening ceremony of the Garadagh Solar Power Plant (SPP) with a capacity of 230 MW, built by the Arab company “Masdar.”
10. 07.12.2023 - The foundation laying ceremony of the pharmaceutical production of Gen Pharma Colombia Manufacturing Operations LLC took place in Pirallahi Industrial Park (PI).
11. 08.12.2023 - Milli Majlis adopted the Code on Competition and its Legal Regulation

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Political turbulence in the world created problems for the development of economies. Economic ties between many countries have decreased, and the usual strategic trade and transport routes had to be replaced  by new ones. The transit of Russian gas to Europe through the territory of warring Ukraine looks like some kind of economic paradox. This is the height of economic pragmatism. Other countries found new opportunities. New opportunities were opening up for some countries. But even here, the negatives of the conflicts offset any economic benefits that could be obtained in this chaos. The unexpected outbreak of war between Israel and Hamas at the end of the year caused a string of problems not only for the Middle East. It has disrupted the good economic ties between Israel and Azerbaijan. There is no end in sight to this war yet.

After the economy grew by 4.6% in 2022, the decline to 0.8% in 11 months of 2023 might have seemed unexpected if not for the "explosive" increase in energy prices in 2022. And it was largely caused by the war in Ukraine and the subsequent imbalance of the global oil and gas market. To this was added the accelerating decline in oil production in Azerbaijan.  

The decline in GDP has already affected the parameters of the just-adopted 2024 State Budget. Income growth is much more modest than in previous years. But the largest amount of budget investment expenditures will be directed to the Karabakh Economic Region and to the country's defense. At the same time, the growth of social spending in the 2024 budget amounted to less than 1% compared to 2023.

The comparison with the neighbors was also not in favor of Azerbaijan. The growth rate of Armenia and Georgia was 8.3% and 7.5%, respectively. At the same time, average salaries, pensions, and social benefits have remained quite comparable in all three countries for many years.  Most of the growth in Armenia and Georgia last year was determined by temporary factors – the growth of parallel exports, a noticeable influx of relocants from Russia and financial transfers. Azerbaijan has not joined any of these economic games for many reasons. Some calmness of the authorities against the background of IT specialists pouring into these countries could be understood: the so-called financial cushion in the Azerbaijani economy remained quite stable. Strategic foreign exchange reserves increased to $68.2 billion at the end of the year, the balance of payments, although somewhat "melted" in the fourth quarter, remained in a positive zone, the exchange rate steadfastly held at around 1.7 manats per dollar. By the end of the year, inflation reached a single-digit figure of 9.3% and household incomes (12.8%), average salary (11.3%) of the year caught up and surpassed inflation.  

Meanwhile, the expansion of the digital economy and the green transition have become key to the development of the economy in 2023. Digit has already become one of the engines of economic development. There are 15 new startups within the framework of the country's first venture fund Caucasus Venture. The Ministry of Digital Development of Transport has created, together with the Israeli Technion Institute, a Cybersecurity Center, which, among other things, began to supply hundreds of young personnel for the IT sector.  In the field of management, a "Government cloud" was created, BP introduced the first digital mining management on a new ACG platform, farmers gained access to their own electronic platforms and have recently received subsidies, bypassing officials. We are no longer talking about the banking system, where the CBA and the Ministry of Digital Technologies and Transport have signed an agreement to accelerate the introduction of artificial intelligence, and advanced Arab companies promise to help with data processing.  Strange as it may sound, it was digitalization that opened the way for the development of human capital.              

When a noticeable decrease in oil production began to be added to the decrease in energy prices, the Azerbaijani economic authorities correctly judged that it was more correct to "ride" the wave of green transition and make it sustainable and long-term. Among other things, they also considered the green transition as an opportunity to attract direct investment and new technologies, followed by the export of the same "released" volumes of gas that will appear after the construction of renewable energy stations. And the excess volumes of electricity produced by renewable energy sources will be exported abroad. In January 2023, an agreement was signed between Azerbaijan, Georgia, Romania and Hungary on the construction of an underwater electric cable for the export of at least 1 gigabyte of electricity to Europe. But similar ideas are contagious: the CAR countries have already started talking about the possibility of combining their energy systems with the energy systems of the South Caucasus and even began to talk about further pumping it to Europe. To attract investments in renewable energy, a new "Law on Electric Power Industry" was adopted, which regulates the entire range of relations between the public and private sectors, as well as special working conditions with foreign companies that have already are coming to the country. And there are a lot of them.

At the same time, the model of an export-oriented economy can be observed, but inside the fuel and energy sector, when one product is gradually replaced by another. But this is only one element of the economic strategy. But it is more productive to talk about its other element – the inclusion of the economy in global value chains. Azerbaijan has acted quite consistently here, trying to implement this model through extremely close cooperation with a number of countries of the CAR and the Arab East. With Uzbekistan, for example, this was an attempt to find synergy and join the chains of the successful Uzbek automotive industry. In general, the entire strategy of cooperation between Azerbaijan and Uzbekistan is long-term and thorough. Such value chains can also appear as a result of creating a competitive environment within a single successful industry, for example, pharmacy. In part, we see this in the industrial park in Pirallahi, where the foundation stone of the building was laid by a well-known pharmaceutical company from Turkey. And an equally well–known company from Hungary is on the way.        

Some other elements of this program, in particular, achieving economic competitiveness, seem extremely difficult. First of all, for the reason that monopolism is imperceptibly increasing in the economy. Large economic groups behave quite harshly in all sectors. They not only suppressed competition, but also blocked the access of small and medium-sized businesses to new niches of the economy. An economy without competition in the domestic market can never claim to be competitive in the external market. We can expect that the Competition Code adopted in December will do its job here. 

2024 should be the year of high-quality implementation of projects launched in 2023. And the creation of institutions for their development. Economic reforms must be supported by political reforms. They are the ones who are able to eliminate differences in the economic development of the capital and the regions. Only political reforms can guarantee economic freedoms and property protection. They can help to gain the trust of external investors in the country by creating a full-fledged legal environment for economic development.