Azerbaijan-China relations: why are the results lower compared to the potential?

In this article, we try to assess the history, current state, problems, and prospects of China's relations with Azerbaijan in the context of China's growing economic authority and influence in the region and the world. Although these relations have historically been based on cultural and trade relations, in the current period, the areas of cooperation have expanded to include industry, agriculture, tourism, ICT, transport and logistics, construction, military, security, medicine, education, sports, and other areas. Trends and structural assessments in all these areas show that the relations between Azerbaijan and China are developing steadily and continuously, especially after the restoration of Azerbaijan's independence. Political relations between the two countries have played a particularly important role in this development.

With the recognition of the independence of Azerbaijan by the People's Republic of China (PRC) on December 27, 1991, and the establishment of diplomatic relations on April 2, 1992, the modern stage of relations between the two countries began. China opened an embassy in Baku in 1992, and Azerbaijan opened an embassy in Beijing in 1993. The first high-level visit between the two countries was made by Azerbaijani President Heydar Aliyev in 1994. President Ilham Aliyev has twice paid official visits to China (2005, 2015) and visited China three times to participate in various international events.

During the last official visit of President Ilham Aliyev to China in 2015, a document[1] was signed between the two countries to jointly promote the establishment of the Silk Road Economic Belt. On April 24-27, 2019, a delegation led by President Ilham Aliyev visited China to participate in the 2nd Belt and Road Forum for International Cooperation. Within the framework of this international forum, 10 documents worth $ 821 million were signed between Azerbaijani and Chinese companies in various fields. These include the construction of a tire plant in Sumgayit Chemical Industrial Park, the construction of a modern greenhouse complex on 300 hectares in Kurdamir, the creation of agro-logistics industrial parks in Guba, Khachmaz, and Goychay, the creation of the Asia-Europe telecommunications corridor under the Azerbaijan Digital HUB program, the transportation of up to 2,500 containers to Baku via the Trans-Caspian Transport Corridor and in transit through Azerbaijan to other countries, the export of Azerbaijani wine and other alcoholic beverages to China, and the establishment of the Azerbaijan Trade House in Chengdu, China. According to co-chair of the Azerbaijan-China Intergovernmental Trade and Economic Cooperation Commission, head of the Eurasia Department of the Ministry of Commerce, Luo Weidong, PRC is interested in increasing the import of agricultural, chemical, and industrial products from Azerbaijan, as well as deepening cooperation on the creation of the digital Silk Road and development of the Silk Road e-commerce.

China has visited Azerbaijan four times at the level of Minister of Foreign Affairs (1996, 2004, 2010, and 2019). In addition, in May and June 2016, a delegation led by Vice-Premier of the State Council of the People's Republic of China, Zhang Gaoli, and a member of the Political Council of the Communist Party, Secretary of Central Political and Legal Affairs Commission of the Central Committee, Meng Jianzhu, visited Azerbaijan.

Last year, the 7th meeting of the Azerbaijan-China intergovernmental commission was held. Azerbaijan joined the initiative of China and became a co-founder of the Asian Infrastructure Investment Bank. The agreement on the establishment of the bank was signed by 57 countries on June 29, 2015, in Beijing.

So far, 8 business forums have been held with the participation of Azerbaijani and Chinese businessmen. As a result of these measures, an agreement was signed on the export of wine to China, and Azerbaijani wine received an award. In 2016 and 2017, Azerbaijani export missions were organized to Hong Kong, Guangzhou, and Shanghai, where national wines were displayed with a single country stand.[2] Azerbaijan has a trade mission in China. Azerbaijani trade houses have been opened in Urumqi, Luco, and Shanghai.

The commissioning of the Alat International Seaport with a carrying capacity of 15 million tons across the Caspian Sea in May 2018, the fact that the Baku-Tbilisi-Kars railway, which connects Asia and Europe, is considered to be the shortest transport route from China to Europe and back create potential opportunities for transport links between the two countries. Therefore, Azerbaijan is interested in supporting the Trans-Caspian Transport Route as part of China's Belt and Road Initiative. Thus, Chinese companies can be involved in the Alat free trade zone, and cargo can be transported to and from Azerbaijan through the Baku International Sea Trade Port Complex.

Azerbaijani Deputy Prime Minister Shahin Mustafayev said that[3] Azerbaijan had great potential for the export of a number of agricultural, processing, and industrial products to China, and China's support in issuing relevant permits for the export of these products was important. He also added that there are wide opportunities for expanding cooperation regarding the participation of Chinese businessmen in industrial parks and agro-parks created in Azerbaijan, projects implemented in the construction sector, the establishment of joint ventures, especially the production of agricultural equipment, the joint production of cotton and food products, ICT, the Chinese company Huawei, and the tourism sector.

Azerbaijan is China's largest trading partner in the South Caucasus. There are positive dynamics in trade turnover between Azerbaijan and China. According to customs statistics[4], the trade turnover between the two countries in 2020 amounted to $ 1.846 billion, which is 7.55% of the total turnover. Thus, according to the results of 2020, China is the 4th partner of Azerbaijan in terms of trade turnover, the 3rd in terms of imports, and the 9th in terms of exports.

Last year, the volume of imports from China to Azerbaijan amounted to $ 1.413 billion, which is 13.18% of total import operations. As for export operations between China and Azerbaijan, last year Azerbaijan sent $ 432.760 million worth of goods to China, which is 3.15 percent of Azerbaijan's exports. In order to increase exports to China, Azerbaijani Trade Houses have been opened in Urumqi, Luco, and Shanghai, as well as Azerbaijan regularly organizes trade missions to various regions of China.

As a result, the dynamics of imports and exports between Azerbaijan and China have increased significantly over the past five years. Such that while the trade turnover in 2015 amounted to $ 561 million, this figure reached $ 975 million in 2016, $ 1 billion 298 million - in 2017, $ 1 billion 310 million - in 2018, $ 2 billion 184 million - in 2019, and $ 1 billion 846 million - in 2020.

For comparison, in 1992, when independent trade relations between Azerbaijan and China began, the trade turnover between the two countries amounted to $ 1.5 million, and this figure increased 1,500 times in 2019. Azerbaijan's share in China's trade with the South Caucasus is 43 percent.[5] At present, China is one of Azerbaijan's four major trading partners.

Last year, indicators in this area deteriorated compared to the previous year, as the COVID-19 pandemic had a negative impact on trade relations between China and Azerbaijan in 2020. Such that while Azerbaijan's exports to China in 2019 amounted to $ 752 million, last year this figure fell to $ 433 million. This change has also negatively affected trade turnover between the two countries. In 2019, the trade turnover increased by 66.7 percent compared to 2018, despite the fact that Azerbaijan's total foreign trade reached 6.56 percent, in 2020, the trade turnover decreased by 15.5 percent compared to 2019.

The dynamics of foreign trade turnover, import and export operations between China and Azerbaijan over the past 10 years can be seen in the table below.

Table 1. Azerbaijan's trade relations with China in 2011-2020

Source: Customs Statistics of Foreign Trade of the Republic of Azerbaijan

Although there has been a significant increase in the dynamics of Azerbaijan-China bilateral trade over the past 10 years, this is mainly due to increased imports from China to Azerbaijan. As a result, there is always a positive balance in favor of China in mutual trade between the two countries. Although Azerbaijan's exports to China in 2019 were the highest in the analyzed period ($ 752 million), in the same year, imports from China also increased sharply, exceeding $ 1 billion 432 million. The highest negative balance between China and Azerbaijan in the last 10 years was $ 1,084 million in 2018, and the lowest negative balance was $ 410 million in 2017. Although the foreign trade deficit between China and Azerbaijan decreased in 2019 compared to 2018, last year the deficit increased again.

Azerbaijan's exports to China are mainly crude oil and petrochemical products, while a wide range of products (from electronic products to perfumes) is imported from China to Azerbaijan.

The data of the past 5 years show that there are positive dynamics in investment cooperation between the two countries. Such that in 2016, 77 companies based on Chinese capital operated in Azerbaijan. In 2017, their number exceeded 100. At present, about 120 companies based on Chinese capital operate in Azerbaijan. This factor, of course, has a positive effect on the dynamics of mutual investment.

However, there is an imbalance in mutual investments. Such that while Chinese companies invest more than $ 800 million in Azerbaijan, Azerbaijan's investments in the Chinese economy amount to $ 1.7 billion. In addition, the Chinese-led Asian Infrastructure Investment Bank has provided a $ 600 million loan to finance the TANAP gas project.

Chinese companies operate in various sectors of the country's oil, industry, energy, finance, banking, communications, ICT, agriculture, and non-oil sectors. On October 3, 2018, SOCAR and BGP Inc., a subsidiary of the China National Petroleum Corporation (CNPC), signed a Memorandum of Understanding on the establishment of a joint venture.[16] BGP's main areas of activity include onshore, transition, and offshore exploration, as well as the acquisition, processing, and interpretation of seismic data through complex operations, the production of seismic equipment, and the provision of related information and communication technology (ICT) services.

Azerbaijan applies a simplified visa procedure for Chinese citizens. The visa can be obtained at the international airports of Azerbaijan. There are regular direct flights between Azerbaijan and China. As a result, in the first 5 years of the last 6 years, there has been a positive trend in the number of foreigners and stateless persons coming to Azerbaijan from China. Such that although Chinese tourists visiting Azerbaijan began to play an important role in the development of the tourism sector before the COVID-19 pandemic, China has not yet entered the top ten in the number of countries of origin of tourists coming to the country as a whole. It is true that the number of Chinese tourists increased by 53% in 2019 compared to the previous year; however, due to the objective effects of the pandemic, the number of Chinese visitors to Azerbaijan in 2020 decreased significantly.

Although the highest number of Chinese visitors to Azerbaijan was recorded in 2019, the share[17] of more than 25,000 Chinese tourists visiting the country that year in the total number of tourists was less than 1 percent, or more precisely, 0.78 percent.

The table below provides information on tourists from China to Azerbaijan.

Table 2. Indicators on tourists from China to Azerbaijan[18]

Source: State Statistical Committee, Tourism in Azerbaijan, 2021

Relations between China and Azerbaijan have been established not only centrally but also locally. At present, there is a bilateral cooperation between the regions of Azerbaijan and the regions of China. Such that in 2001, the city of Zhou in the Chinese province of Zhejiang and the city of Sumgayit in Azerbaijan became sister cities. In 2017, the Garadagh District Executive Power and the Shenzhen Regional Economic Cooperation Association signed an agreement on the establishment of the Azerbaijan-China Free Economic Industrial Campus in Alat settlement.

In addition to political ties, the two eastern countries are also linked by cultural ties. According to the agreement on cultural cooperation signed between the Republic of Azerbaijan and the PRC, an exhibition of works by famous Azerbaijani artist Sattar Bahlulzade was held at the Beijing International Exhibition Center on April 12-21, 1995. Azerbaijan Day was held on August 10, 2008, at the China World Hotel in Beijing, the capital of the People's Republic of China, as part of the XXIX Summer Olympic Games. Azerbaijan Culture Days were held in China in May 2011, and the People's Republic of China Culture Days were held in Azerbaijan on December 10-14, 2012. In November 2019, a concert entitled "Evenings of Azerbaijani music" was held in Beijing with the support of the Heydar Aliyev Foundation and the Embassy of the Republic of Azerbaijan in China.

There are two Confucius Institutes in Azerbaijan. Interest in Chinese culture and the Chinese language is growing in Azerbaijan.

Although the sale of eight Typhoon missile systems by the PRC to the Republic of Armenia in May 1999 cast a chill over Azerbaijani-Chinese relations at the time, military relations between the two countries have been developing recently.

In January 2019, a delegation led by the Minister of Defense of the Republic of Azerbaijan, Colonel-General Zakir Hasanov, paid an official visit to Beijing at the invitation of a member of the State Council of the People's Republic of China (PRC), Colonel-General Wei Feng. During the visit, a document on military assistance was signed between the Ministry of Defense of the Republic of Azerbaijan and the Ministry of National Defense of the People's Republic of China. Thus, a new stage in the Azerbaijani-Chinese military relations has begun.

The People's Republic of China and the Republic of Azerbaijan mutually recognize each other's sovereignty and inviolability of their lands. China, a permanent member of the UN Security Council, has always supported Azerbaijan. The other side also appreciates Azerbaijan's foreign policy, which supports China's position on Taiwan, Tibet, and East Turkestan.

During a telephone conversation between President Ilham Aliyev and Chinese President Xi Jinping on June 2, 2020, it was planned to further deepen useful cooperation and strengthen new economic and transport projects in the post-pandemic period. During the COVID-19 pandemic, both countries supported each other, and Azerbaijan was one of the first countries that received the vaccine from China.

In conclusion, I would like to note that there are also unresolved issues between China and Azerbaijan. So far, China has signed bilateral swap currency agreements with about 20 countries, but even though the State Oil Fund of Azerbaijan places a small part of the funds in Chinese yuan, no swap currency agreement has been reached between the two countries. Chinese companies have not been able to operate in the financial sector of interest to Azerbaijan due to the existence of barriers to entry for foreign companies in this market. At the same time, it is impossible to find Chinese companies in the mining industry and the oil and gas sector.

There are also disparities in trade and investment cooperation between China and Azerbaijan. The trade surplus belongs to China, and the investment balance belongs to Azerbaijan. In fact, the opposite is in the economic interests of Azerbaijan. Although Azerbaijan treats China as a potential export market and, at the same time, as an innovative investor for the country's economy, no significant changes have been observed in either exports or investment cooperation.

[1] http://www.e-qanun.az/framework/31817

[2] https://report.az/biznes-xeberleri/azerbaycan-ve-cin-ticaret-dovriyyesini-67-e-qeder-artirib/

[3] https://apa.az/az/xeber/maliyye/xeber_nazir_____oten_il_azerbaycanla_cin_arasind_-502024

[4] https://customs.gov.az/modules/pdf/pdffolder/93/FILE_E7B3B9-B46FB9-AA0331-12CB1C-A0451C-E46BD4.pdf

[5] https://azvision.az/news/176497/azerbaycan-cin-sirketleri-ile-821-milyonluq-senedler-imzaladi-fotolar-.html

[6] https://customs.gov.az/modules/pdf/pdffolder/24/FILE_AEF849-C52CE0-9072CF-E63113-978920-8B210A.pdf

[7] https://customs.gov.az/modules/pdf/pdffolder/25/FILE_CF8DE5-10B5EA-3EBB1E-A0F13F-CB481C-EC1C01.pdf

[8] https://customs.gov.az/modules/pdf/pdffolder/26/FILE_B6169C-82EE4B-01483B-AAA5B8-9A7EAF-63257A.pdf

[9] https://customs.gov.az/modules/pdf/pdffolder/27/FILE_13E5D9-5D24EC-989630-28E2C5-2920CB-BF089C.pdf

[10] https://customs.gov.az/modules/pdf/pdffolder/28/FILE_5ACDFE-6ABB50-5D07D4-9B4D06-DD4FB9-22847A.pdf

[11] https://customs.gov.az/modules/pdf/pdffolder/29/FILE_82AA10-3D95DC-B6BD16-2BC4C5-AD9199-C474C7.pdf

[12] https://customs.gov.az/modules/pdf/pdffolder/56/FILE_AA28EF-712081-B355C1-37724A-E40246-2FAAF8.pdf

[13] https://customs.gov.az/modules/pdf/pdffolder/71/FILE_44C1D3-FD03FF-A9A62A-0678E5-8898EF-88787F.pdf

[14] https://customs.gov.az/modules/pdf/pdffolder/84/FILE_4A9D8C-5B4D1A-34831F-265C31-60B8D6-94CBDD.pdf

[15] https://customs.gov.az/modules/pdf/pdffolder/93/FILE_E7B3B9-B46FB9-AA0331-12CB1C-A0451C-E46BD4.pdf

[16] https://oilgas.az/socar-ve-cin-sirketi-birge-muessise-yaradir-muqavile-imzalandi/

[17] https://fins.az/turizm/223715/2019-da-azerbaycana-gelmis-turistlerin-sayi-aciqlandi/

[18] https://www.stat.gov.az/source/tourism/