What Opportunities and Threats Impact Business in Azerbaijan?

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PwC has recently presented a 2022 Azerbaijan’s CEO Survey Report, which covered over 100 CEOs from more than 20 industries of the country. In an exclusive interview with the Azeri Observer Magazine, the Country Managing Partner for PwC Azerbaijan, Mr. Movlan Pashayev, talks about the main findings of this report, explains how Azerbaijani business leaders are meeting the most pressing challenges of the day, and how different their views are from the ones of their peers around the world. Finally, he reflects on the impact of Russia’s invasion in Ukraine on the Azerbaijani market and the opportunities for the country to transform into a new regional business hub.

BY ELENA KOSOLAPOVA

AZERI OBSERVER STAFF WRITER

Question: Your company provides services to many local and international companies in Azerbaijan. How do they see business opportunities in the country? How has it changed over the past few years?

Answer: In late 2021 PwC conducted a survey with the participation of more than 100 CEOs operating in Azerbaijan. Its results have been recently presented in PwC’s Azerbaijan CEO Survey Report, which shows that despite two difficult years of living with COVID and the challenges in the region, Azerbaijani CEOs are very optimistic. As much as 80% of the respondents told us that they are confident about the growth of the global and Azerbaijan’s economy, as well as an increase in their revenues in the short and mid-term. For me, this is the best demonstration of the confidence in our economy.

The public sector is undergoing a big transformation. It is not a secret that in the past, most of the state enterprises were inefficient, made losses, didn’t have a suitable people’s agenda and didn’t pay taxes properly. However, several years ago President Ilham Aliyev made his vision clear about the state companies’ future. In a number of speeches and decrees, he made it a priority to transform the public sector, turning these enterprises into normal commercial enterprises. Now with the creation of Azerbaijan Investment Holding, and the rolling out of a number of special transformation programs in several large state-owned enterprises, they are now in the process of converting them into modern, effective and sustainable companies. It is still early to identify major results, but the reality of these transformation programs and committing financial, human and political resources to this goal is the best demonstration of upcoming improvements in this sector.

In the private sector, we have observed fewer transformations. However, many of them are taking the path of expansion – not only in Azerbaijan, but also beyond the country’s borders. Pasha Holding, expanding in Georgia, Turkey; and Neqsol Holding expanding to Georgia, Turkey, Ukraine and US can be good examples here. I think the next step should be liberalizing the economy, continuing the governmental support to small and medium enterprises, and promoting innovations, startups and outbound investments.

Q.: You said that the majority of CEOs are quite optimistic about business opportunities. However, there are always some risks and threats. What are the most pressing business challenges?

A.: I will again refer to the CEO Survey results. Number one risk mentioned by the CEOs on 2022 was pandemic. However, there is an important caveat here, that the Survey was conducted before Russia’s invasion in Ukraine. At that time – in the last quarter of 2021, most of the CEOs viewed the pandemic as the biggest threat to their business. Now the effect of the pandemic on the business is definitely lower. The businesses both in Azerbaijan and globally have adapted to the new realities. Number two risk mentioned by the CEOs is geopolitical conflict – this is precisely what is happening now in Ukraine. I am sure if the survey was conducted now, that would have been number one risk. The third risk mentioned by the CEOs is cyber security. Many CEOs view hacking, leaking of confidential information, and other risks in the virtual world as one of the major threats. It is interesting, because in the previous surveys – before 2021 – the biggest risks were the rate of manat and tax obligations. Now, none of them are even in the top 10. This shows how much the world has changed in one year, how much the Azerbaijan CEOs’ perception and vision have changed. The macroeconomic issues, pace of changes and the politics are changing very quickly internationally. Globally, we are in the middle of an economical system which has been disrupted but a new one has not emerged yet. So, we are in a grey zone, and it is a big question for everyone, how the global economy is going to develop and shape up in the future. Before, the growth pace of the global economy and emerging of new influencing factors were more or less predictable, however, now it has become even more unpredictable.

Q.: I see from the Survey, that the majority of CEOs in Azerbaijan consider digitalization as one main goal in their companies’ long-term corporate strategy. What opportunities will digitalization open up?

A.: If you look at the non-financial goals that CEOs put in their strategy plans, digitalization is the number one goal in Azerbaijan. As much as 70% of the questioned CEOs put digitalization as the main non-financial aim. The future is in digitalization, that is obvious. The real question is how to get there. There is still a big question if CEOs are ready to commit financial and non-financial resources to reach that goal. This process will not be cheap, as it requires lots of investments in the form of hardware, software and consultancy. However, the biggest challenge here is to find the right people. I am talking about the right hands and brains who can put together various programs and move the business from traditional platforms to electronic ones. It is about the people who can lead that change and who can make sure that whenever digitalization and transformation are happening, they become a part of the company’s strategy and aspirations. These people should be able to encourage everyone to use those platforms, those tools. Unfortunately, we have witnessed a number of failures in big companies introducing the best world technologies. They didn’t work, didn’t give the companies the results that were expected, simply because people could not use them, and a proper change management program was not in place. This process should start from the top, it requires personal commitment of CEOs and the leadership team, and only with this condition it will filter down to the rest of the organization. As for the business’ readiness to invest in digital transformation, the picture is quite patchy. Some companies have just declared their commitment without specific details of how they are going to do it. Others have developed detailed programs of how they want to get there.

Q.: There is one more interesting point in the survey. The majority of companies consider cooperation with three countries – Turkey, Russia and US – as the most promising for their potential growth. Could you comment on these results?

A.: The first two are not surprising. Both Russia and Turkey have been our largest trade partners. Obviously, with Russia the trade might change, though it is still a question how and when it will happen. However, the US’s third place was a surprise for us. In the previous surveys, Georgia was the country which ranked third. Now Georgia is number four. I think people didn’t look at the level of cooperation with the US that we have now, but assessed what we can do in future. It could be about accessing US technologies, accessing US customer base or bringing that base to Azerbaijan. Maybe it is because the US economy has a high growth rate, it has proved to be a very reliable and predictable partner for lots of businesses for many years.

Q.: How different are the results of the Survey in Azerbaijan from the rest of the world? What are the main differences? And how can you explain them?

A.: Probably the biggest difference is the attitude to climate change and environmental, social and governance (ESG) in general. Azerbaijani CEOs, like their foreign peers said that ESG, climate change are on their agenda, which is an improvement. In the previous years, people didn’t even think about it – it was purely about business and money. This year companies start thinking about it. This is already a big step forward. A journey to solving a problem starts with people recognizing that there is a problem. The next stage is what they are going to do about this problem. Unfortunately, when we started asking the executives on the Survey, what they are really doing about net zero, carbon emissions, greenhouse, climate change, we realized that we still have a way to go. People are yet to be committed to solving these problems because they consider other things like financial and social issues, sustainability, governance to be more important and urgent. Then, the biggest difference from the international findings is that we don’t do much about climate change.

Another change in the mindset is about diversity and inclusion. In the past, people said that it was not a problem. Now the situation is changing. Just like with climate change, recognizing that we have such a problem is the first step we need to make. We never had race or ethnic issues, but gender issue is acute in Azerbaijan. We must ensure more women are in leading position; in PwC we have put quotas for every country for fair gender representation. In Azerbaijan there is a plan to get to 30% of females in the leading positions within one year.

Q.: The survey was conducted before the war in Ukraine began in February this year. So, the survey doesn’t reflect its impact on the business atmosphere in Azerbaijan. In your opinion, what impact could it have?

A.: First of all, I would like to say that it is a tragedy what is going on in Ukraine, and PwC has condemned this invasion. We, as a firm, have given humanitarian support to Ukraine, like Azerbaijan does. We are supporting our Ukrainian colleagues and we have some of them now working and living in Azerbaijan. And we applaud the Azerbaijani President’s statements and speeches from the beginning of the conflict about the territorial integrity of Ukraine and the support we should be giving it.

With all these geopolitical games in the region, there is also opportunity. In these circumstances, Azerbaijan has a great potential to become an even stronger regional leader in Eurasia. First of all, it is about strengthening of the role of Azerbaijan as an energy security partner for Europe. As Russian oil and gas are being embargoed, Azerbaijan will become an even more reliable and stronger energy partner, providing gas to Europe. The second perspective is about becoming a transportation hub for the whole region. There is a great potential for moving goods from China and the eastern side of the Caspian Sea to Europe and from Russia to Iran and other countries in the South. I believe we will play a much bigger role in transportation and logistics than we used to do. The question here is if we are ready to do it? Do we have required infrastructure in place? Do we have enough locomotives, wagons, warehouses and the general capacity to transport those goods? And these are the questions we will have to work on. There is a plan by the Ministry of Transport and some other organizations on how to increase the flow of goods and satisfy high demand in this sphere. Number three is the opportunity to convert Azerbaijan into a regional service and production hub. Before, most of the international FMCG, automotive, transportation companies, etc. had their central regional office in Russia, from where they managed and monitored their activities in other countries of the region. Now because of the sanctions, many of them are leaving Russia, and they have to move their assets, people, money, management to other places. The question is where. Azerbaijan definitely has potential: in terms of infrastructure, proximity to Europe, the standards of living; we are definitely in a better position than many other countries. However, there are other issues that need to be resolved in order to make Azerbaijan a hub for the right kind of companies. For example, taxation and ease of doing business. Azerbaijan has made progress in making the country a better place to do business, but we still need to do more in terms of helping startups, trading across the borders, facilitating tax and customs issues, etc. Creating techno parks and free economic zones definitely contributes to this process, and we need to start showing the world, big companies, what we can do. We need to do it quickly, because the sanctions are already working, the companies are already moving out from Russia and they need to make decisions soon about where to put their next regional hub.