Armed Conflict in Ukraine: Beyond Economic Consequences

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BY KELLY CHAIB DE MARES

AZERI OBSERVER STAFF WRITER

Azerbaijan shapes its economy, military position, and foreign policy while addressing humanitarian issues. It strives to lessen the consequences of the armed conflict between Russia and Ukraine in order to try and ameliorate the geopolitical turmoil.

The Economic front

Armed conflicts destroy capital, increase uncertainty, and slow down the economic growth of the countries involved and the world. With the war between Russia and Ukraine, the expectations of growing the economy for 2022 dropped to 2% or even – 1.7%, production chains have been interrupted and the prices of oil, gas, fertilizers, wheat and corn, as well as essential metals have increased, mainly affecting the automotive industry and global food security.

For Azerbaijan, food security is a particular concern since its food supply relies heavily on imports from Russia and Ukraine. Russia is the country’s largest source of wheat, accounting for 90% of overall imports. Last year, Azerbaijan imported nearly $300 million of wheat from Russia, as well as timber materials worth $100 million and vegetable oils worth $46 million, according to the State Statistics Committee of Azerbaijan.

With the outbreak of the hostilities, Azerbaijan is importing more grain from Kazakhstan and is counting on its strategic reserves. Although at higher prices, Baku is acquiring food products also from India and Brazil to prevent scarcity. Therefore, the current annual inflation is expected to rise from 12% but will not be more than 17%, as estimated by Orkhan Baghirov, Leading Advisor for AIR Center, in an interview for Azeri Observer.

Regarding the exports, as the ruble loses value due to economic sanctions, Russia’s demand for Azerbaijani products decreases. Therefore, there is a significant impact on the non-oil sector, considering that Russia usually ranks first in importing products such as fruits, vegetables, tea, and tobacco from Azerbaijan with a value of 877.760 million USD, according to the Center for Economic and Social Development (CESD) in the report “The Economic Consequences of Russia-Ukraine War for Azerbaijan” in March 2022.

Exporters have been compelled to find new markets to reduce the economic impact. A representative case has been the hazelnut industry, which not so long ago exported up to 70% of its product to Russia. The USAID Private Sector Activity (PSA) in Azerbaijan reports to Azeri Observer how it organized an “industry-wide trade mission to Italy in May, while the Azerbaijan Hazelnut Exporters Consortium in 2022 is expanding to the Japanese and Egyptian markets, among others, and will be exhibiting at the FOOMA food and agricultural exhibition in Tokyo this June.”

Women sorting hazelnuts in a processing plant in Zaqatala. USAID Private Sector Activity (PSA).

Another issue that affects the well-being of the population are the remittances, with three million Azerbaijanis living and working in Russia, providing a significant financial lifeline to their country. In this regard, a recession is happening with two-sided implications. As was pointed out by CESD in the report mentioned above, a weak and isolated economy diminishes the employment rate of migrants and their ability to send remittances, and the upheaval in the ruble’s value against the dollar reduces the nominal US dollar value sent in remittances. 

However, while the non-oil sector suffers from the consequences of the war, on a broader spectrum, the Azerbaijani economy is recovering rapidly. Given the sanctions against Russia tightening the crude’s offer, the oil prices reached a peak of $139.13 a barrel at the beginning of March, the highest level for almost 14 years, before falling back to around $120 by the end of the first quarter. This increase in the oil prices provides a background for more foreign currency reserves in the short term as hydrocarbons largely dominate national export.

In this context Baku is cementing its role as Europe’s reliable gas supplier. With this objective, the stakeholders are giving new impetus to the Southern Gas Corridor, the first east-west non-Russian gas pipeline built to diversify energy supplies. In April, Azerbaijan’s state-owned oil company SOCAR announced that it planned to increase natural gas exports to Europe by 30% this year and had already delivered 2.6 billion cubic meters in the first quarter alone. Thus, the project of a Caucasus corridor to transport energy from Central Asia to Southeastern Europe is being discussed now with greater chances.

In the same way, Azerbaijan is consolidating its project of becoming a regional hub. The traditional route for Europe-Asia cargo through Russian Railways is being compromised by the turmoil of the conflict in Ukraine. Under the uncertainty, international shippers are shifting to the Middle Corridor, the Central Asia-Caucasus route. According to the press release on May 10, the Trans-Caspian International Transport Route Association (TITR) estimates that cargo transhipment will grow six times in 2022 compared to the previous year, to 3.2 million metric tons.

National Security

Unsurprisingly, the Russian military effort in Ukraine has weakened the ability of Russia’s peacekeeping contingent to maintain the ceasefire between Azerbaijan and Armenia. In late March, clashes broke out some five kilometres west of the town of Aghdam, resulting in Azerbaijani control of the village of Farrukh. The increased fighting came with a disruption in the natural gas supply to Karabakh. The international community called on the parties to use direct communications channels to de-escalate immediately.

Therefore, the EU has now emerged as an alternative peace broker between Armenia and Azerbaijan. Recently, outside the format of the Minsk Group, the presidents of both countries have met twice (one in April and one in May) in Brussels along with European Council President Charles Michel. So far, both parties achieved a significant breakthrough, the first meeting between commissions from each country tasked with demarcating their border. The dual negotiating platform appears after Moscow has weakened its position in the Caucasus by focusing its efforts on Ukraine.

Ilham Aliyev holds tet-a-tet meeting with President of European Council Charles Michel in Brussels on May 22.

The tense situation with Russia however, is cementing relations between Azerbaijan and Turkey, recently demonstrated during the Aerospace and Technology Festival – Teknofest – in Baku, where Turkey showcased its TB2 drones. These are the same drones that supported Azerbaijan in winning the Second Karabakh War and now are playing a prominent role in Ukraine’s military operations against Russia.

Traditional Azerbaijani art of balancing its foreign policy

Two days before Russia launched its special military operation against Ukraine, Azerbaijan and Russia signed a “declaration on allied interaction”. Several international analysts feared that this document was evidence of Baku’s support for Moscow in escalating hostilities towards Ukraine. However, the evolution of events has shown how Azerbaijan has once again managed to balance its foreign policy.

The need to strike a perfect balance is crucial for Baku, given the widespread fear among the former Soviet Republics that the Kremlin could find an excuse for any operation in its territory, following the Ukrainian invasion model. In addition,  the unique situation of Azerbaijan must be considered, which has 1,960 Russian peacekeeping troops along the contact line in Karabakh and the Lachin Corridor.

Although one of the pillars of Azerbaijan’s foreign policy has been to advocate for territorial integrity, to maintain balance in this situation, it has had to remain silent in the multilateral mechanisms used by the international community to sanction Russia. In this regard, Baku did not vote on the United Nations General Assembly’s resolution condemning the Russian actions nor the resolution suspending Russia from the UN Human Rights Council.

Therefore, Azerbaijan has achieved its balance, remained silent in Putin’s military decisions, provided humanitarian aid to Ukraine, unifiedbilateral relations with Turkey as its main ally in the region, strengthened ties with the European Union as a reliable gas supplier, and opened a new platform for negotiations with Armenia.

Ilham Aliyev and Recep Tayyip Erdogan attend TEKNOFEST Azerbaijan Festival in Baku on May 28.

Humanitarian Affairs

Since the beginning of the military clashes, Azerbaijan has shown solidarity with the victims of the crisis in Ukraine. By April, the total amount of humanitarian aid amounts to 27.6 million manats (about 15 million euros) and weighs 720 tons. Likewise, the country received about 6,163 Ukrainians between February and April, according to Azerbaijani State Migration Servicemen Spokesperson Elnur Kalantarli.

Furthermore, some Azerbaijanis have had their rights directly violated . According to declarations by Azerbaijani Foreign Minister, Jeyhun Bayramov, by late March, about 20,000 citizens and their families were evacuated from Ukraine by bus to Bucharest and Iasi (Romania) or Katowice (Poland) and then repatriated by charter flights to Azerbaijan with government support. On the other side of the conflict, migrants in Russia – economically affected by the crisis generated by international sanctions – had difficulty returning to their native country with land borders closed since the COVID-19 pandemic outbreak.

Even freedom of expression has been violated. The portal Azernews published the appeal by Azerbaijan’s journalist organizations to relevant Russian state agencies and the international media community. They denounced the Russian Federal Service for Supervision of Communications, Information Technology, and Mass Media (Roskomnadzor) for blocking access to Azerbaijani Russian-language websites – oxu.az, haqqin.az, and minval.az – on Russian Federation territory.

As it appears, Azerbaijan not only has contained the consequences of the geopolitical disturbances, but has managed the situation skillfully. So far, it has avoided a food crisis, offset the economic effects of the conflict by strengthening the oil and gas sector, consolidated its position as a regional hub, and cooperated on a new negotiating platform with Armenia.