Western Sanctions on Russia May Have Repercussions for Azerbaijan

As Western sanctions against Russia continue to mount, observers in Azerbaijan are concerned about the potential ramifications in a country with close economic ties to Moscow.

Some experts believe Russia’s worsening economic position will harm Azerbaijan’s trade relations and money transfers with the country, which is Azerbaijan’s main import partner and home to over 2.5 million Azerbaijani migrant laborers.

Economist Natig Jafarli told VOA that economic sanctions on Russia will create problems for the banking sector of Azerbaijan and could create certain obstacles to international money transfers, since Azerbaijan does not have a separate money transfer system with Russia.

“If Russia is completely excluded from the international money transfer system, at the very least, interbank money transfers and transfers between Azerbaijan and Russia will become impossible,” Jafarli said.

According to Gubad Ibadoglu, senior economist and visiting fellow at the London School of Economics and Political Science, the State Oil Fund of the Republic of Azerbaijan will be the most affected by the rapid changes in the Russian economy.

“SOFAZ’s investments in Russia have exceeded $903 million,” he said. “These investments are currently at risk, which will ultimately lead to exchange rate losses for SOFAZ. In other words, there will be an increase in extra-budgetary expenditures, which will increase its foreign exchange earnings,” suggesting that SOFAZ and other Azerbaijani government bodies must sell their assets before “the economic catastrophe” in Russia and withdraw their investments.

In addition to SOFAZ, Ibadoglu said Azerbaijan’s trade relations with Russia will be affected, considering that Russia is Azerbaijan’s main import partner.

Azerbaijan bought $2.1 billion worth of goods and sold $920.8 million on the Russian market in 2021. More than 95% of those goods were non-oil products. Ibadoglu said problems with bank settlements with Russia, which is the traditional market of the non-oil sector, and the devaluation of the ruble this year could create serious difficulties for exporters.

“Those who export goods from Azerbaijan to Russia will face losses due to the sharp depreciation of the ruble against the Azerbaijani manat, which will reduce the income of producers and exporters, especially in the non-oil sector, mainly in agriculture,” he said.

Remittances sent from Russia by the approximately 2.5 million Azerbaijanis living there will be another area affected by the situation in Russia, Ibadoglu said.

In most Azerbaijani districts, Azerbaijani labor migrants play an important role in determining household income. Ibadoglu said tensions in the Russian labor market, as well as the decline and devaluation of earnings as a result of the tensions, matched with the ruble’s depreciation, will result in a decrease in remittances to Azerbaijan.

“According to the data from the Central Bank of Azerbaijan for the first nine months of 2021, about 60% of remittances came from migrants living in Russia. This means that last year, remittances sent through banks by migrants living in Russia amounted to $680 million. A sharp decline in this transfer is expected this year,” Ibadoglu said.

Azerbaijani parliament member Rasim Musabeyov agrees that remittances will be affected.

“Russia’s sanctions will significantly limit banking operations. With the economic downturn in Russia, it will be difficult to send money to families,” he said.

He also argues that sanctions will have a negative impact on Azerbaijan’s foreign trade with Russia.

“We used to import very important food products from the Russian market. But it is difficult to say to what extent it will be possible to import them now,” Musabeyov said.

Yet the lawmaker says Russia’s economic downturn also creates opportunities. He claims that since communication routes through Russia are restricted, and Ukraine’s borders are closed due to the war, trade that was previously carried out through Russia, Ukraine and Belarus, will now mainly pass through the Baku-Tbilisi-Kars route.

“The importance of our transport routes will increase significantly. Both the Southern Gas Corridor and the Baku-Tbilisi-Ceyhan oil pipeline will be heavily loaded. It is estimated that a large part of Kazakh oil will be exported to the markets, not through Novorossiysk, but through Azerbaijan, and it is likely to significantly increase our capacity,” Musabeyov said.

This story originated in VOA’s Azerbaijani Service.

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