Kavkaz Files ISSN 2975-0474 Volume 28 Issue 1
Author: Giuliano Bifolchi
Executive Summary
The recent Azerbaijani-Saudi business forum underlined Baku’s attempt to diversify its economy and Riyadh’s desire to increasing its investment and economic presence in Azerbaijan and, therefore, in the South Caucasus region.
Baku can benefit from Riyadh’s increasing presence in its investment projects since the Caucasian republic needs to enhance its commercial partners and diversify its economy, whose revenues come significantly from the oil and gas sectors.
Considering Azerbaijan’s strategic location in the Eurasian chessboard on the Caspian Sea basin and the trade turnover that Baku has with Russia, the European Union, and Central Asian republics, Riyadh might benefit from the Azerbaijani market to expand its regional presence.
This report, based on information from local and international open sources and SpecialEurasia’s data, aims at analysing Azerbaijan’s national economy and Saudi support for its diversification. The reports assess also the impact of Riyadh’s presence at the regional level.
Background Information
During the Azerbaijani-Saudi Arabia business forum organised in Baku on October 1st, 2024, Hasan Al-Huwaizi, the chairman of the Council of Saudi Chambers (CSC), highlighted Riyadh-Baku cooperation opportunities, since both countries strive for economic diversification.
Over 300 investors and officials attended the forum, including the First Deputy Minister of Economy of Azerbaijan, Elnur Aliyev. The parties discussed plans to strengthen ties in the private sector.
Al-Huwaizi noted that the Saudi-Azerbaijani trade turnover is relatively small, amounting to about $13.4 million, although both countries have the potential to increase their economic cooperation. Riyadh aims to increase its investments and economic presence in the South Caucasian republic, while Baku looks for the creation of a joint investment fund to direct foreign financial funds into key sectors, including energy, tourism, and infrastructure.
Azerbaijan’s Economy: An Overview
The economy of the Caucasian republic has historically been heavily reliant on the oil and gas sector, which constitutes over 90% of its exports, approximately 35% of its GDP, and approximately 55% of the state budget.
In the past, because of the oil prices crisis and regional conflicts, Baku’s heavy reliance on the hydrocarbons posed a significant risk to its stability. Consequently, the Azerbaijani government elaborated a strategy to diversify its economy and fostering growth in sectors such as agriculture, tourism, and manufacturing.
In February 2021, Azerbaijan President Ilham Aliyev approved the order “Azerbaijan 2030: National Priorities for Socio-Economic Development” that emphasised five national priorities to accelerate the financial growth and diversify the national economy.
Baku has adopted a strategy based on developing agriculture thanks to modernisation and technological advancements which should guarantee food security and create new export opportunities.
Thanks to its cultural heritage and natural beauty, through strategic investments in infrastructures, marketing, and services, Azerbaijan might attract international visitors and increase its tourism sector by becoming a prominent tourist destination in the Caucasus.
The manufacturing sector offers opportunities to create jobs and add value to raw materials. Key areas within this sector include food processing, textiles, machinery production, and construction materials. To stimulate growth in manufacturing, the Azerbaijani government has implemented several initiatives aimed at attracting foreign investment and promoting local production.
Therefore, Baku established Free Trade Zones (FTZ) where companies can benefit from tax incentives and reduced regulatory burdens. For instance, the Alat Free Trade Zone, next to Baku International Sea Port, aims to turn the country into a regional logistics centre by promoting manufacturing that focuses on high-value exports.
Although Azerbaijan has attempted to diversify its economy, it still encounters numerous obstacles that impede its progress:
- Baku needs to attract foreign direct investments (FDIs) to support its socio-economic development. After completing the conquest of Nagorno-Karabakh/Artsakh in September 2023, for Azerbaijan attracting foreign investors to develop the region has become more important.
- Even though in the last years the national educational system has improved its standards by inviting foreign experts, mainly from Europe, the modernisation and innovation of the labour market still represents an issue for the South Caucasian republic.
- Addressing infrastructure deficiencies is essential for creating a conducive environment for businesses. Investing in transportation, energy, and telecommunications infrastructure will support efficient operations across various sectors and stimulate economic growth.
Azerbaijan – Saudi Arabia’s Diplomatic and Economic Relations
Azerbaijan and Saudi Arabia established diplomatic relations in 1992. Riyadh was one of the first countries to recognise Baku’s independence. Since the beginning, the two countries have based their relations on a common Islamic cultural heritage.
Since the 1990s, Saudi Arabia has supported Azerbaijan on the international stage, particularly in relation to the Nagorno-Karabakh conflict. The Saudi government has condemned “Armenia’s aggression”, reaffirmed its unwavering support for Azerbaijan’s territorial integrity, and provided humanitarian assistance to Baku.
In terms of economic collaboration, the two countries have worked together on various projects, such as infrastructure development and energy cooperation. Baku and Riyadh have strengthened their relations through several high-level visits, business meetings, and cultural exchanges in the past years.
In 2022, Azerbaijan exported $3.26 million to Saudi Arabia. The primary products exported included chocolate ($1.46 million), delivery trucks ($825,000), and non-knit women’s suits ($392,000). In the period 2017-2022, Azerbaijan’s exports to Saudi Arabia have experienced a significant increase, growing at an annualised rate of 17.6%. This growth is clear when comparing the export value of $1.45 million in 2017 to the $3.26 million recorded in 2022.
During the same period, Saudi Arabia exported $18.3 million to Azerbaijan. Saudi primary products were ethylene polymers ($6.99 million), propylene polymers ($6.16 million), and vinyl chloride polymers ($1.03 million). While Riyadh’s exports to the Caucasian republic have also shown an upward trend, the growth rate is relatively lower at 1.14% per year. The rise from $15.3 million in 2017 to $18.3 million in 2022 reflects this increase.
Conclusion
Both Riyadh and Baku are focusing on diversifying their economies away from hydrocarbons, which makes sectors like agriculture, infrastructure, tourism, and renewable energy attractive for joint investment. The proposed joint investment fund could facilitate large-scale projects, advancing Riyadh’s Saudi Vision 2030 goals and enabling Azerbaijan to attract FDIs for its non-oil sectors.
Looking at the regional geopolitics, Riyadh’s increasing presence in Azerbaijan might both support Baku’s economic and political partners’ diversification and allow the Saudi presence in the South Caucasus. Since the region is a ‘bridge’ between European and Asian markets, Riyadh can benefit from strengthening its engagement in the Azerbaijani market by extending its influence to Central Asian republics, Russia, Turkey, and the European Union.
Recently, Tehran opened an Iranian trade centre in Armenia. Thus, an increasing Saudi presence in Azerbaijan can counter the Iranian role in the region at the diplomatic and economic level. In addition, looking at the Middle East, the Saudi engagement in Azerbaijan might provide to Riyadh another asset to control and confront Tehran despite the parties reached a historical reconciliation thanks to Beijing’s sponsorship.
Monitoring Saudi and Iranian diplomatic and economic efforts in the South Caucasus is necessary to assess further developments, especially during this period characterised by an ongoing military escalation in the Middle East because of Iran-Israel’s confrontation over the Palestine situation and Tel Aviv’s strategy against Hezbollah in Lebanon.
If you require more comprehensive reports on the South Caucasus and the presence of foreign actors such as Saudi Arabia in the region, please contact us at info@specialeurasia.com. We invite you to request a call to evaluate our consulting services and monitoring reports.
