Prosperous Mutual Interdependence: Economic Cooperation between the EU and Azerbaijan and Key Matters to be covered in The New Agreement
Introduction
With the adoption of the new agenda, “EaP beyond 2020,” the approach of the EU in its policies towards the countries of the region has changed, where it now focuses deeper on the strengthening of the resilience of the economies of the Eastern Partnership (EaP) countries. The stronger economies of EaP can contribute to the stronger economic development of the EU. In this regard, Azerbaijan plays a particularly important role for the EU, not only as a member of the EaP region, but also as a country with natural gas resources and a strategic location between Russia and Iran, providing the EU with safe access for trade with Central Asian countries.
Russia’s declaration of war on Ukraine underscored the importance of the EU’s bilateral cooperation with Azerbaijan. Azerbaijan is now one of the countries that can help the EU fill the void left by trade sanctions of the EU on Russia in many sectors, as it has natural gas resources that can diversify the EU’s energy supply in the Balkan region and allow the EU to expand its presence in the Central Asian market.
Funding Own Prosperity
While analyzing the economic relations between the EU and Azerbaijan, it is crucial to mention that the EU is the biggest trade partner in Azerbaijan, accounting for 52 percent share of the total external trade turnover of the latter in 2022. A significant share of Azerbaijan’s exports is the export of fossil fuels, where some of the countries of the EU are one of the biggest importers of Azerbaijan’s fossil fuels. As the volume of such exports rose, the share of the export to the EU from the total exports of Azerbaijan accounted for 65.6 percent in 2022. (Akhmedova, 2023)
As Azerbaijan is a member of the eastern dimension of the European Neighbourhood, entitled Eastern Partnership (EaP), strengthening the country’s economic resilience is essential for the EU. The increase in the number of small and medium-sized businesses (SMEs) plays a significant role in the increase of the economic resilience of a country. Within the framework of the EU4Business initiative, between 2009 and 2017, the EU contributed 14 million euros, supported 11 300 enterprises and created 3 thousand new jobs, effectively increasing exports, increasing trade possibilities and helping businesses grow. Only in 2021, more than 13 thousand SMEs in Azerbaijan were supported by the EU4Business program, which generated 63 million euros of income and created additional 2 thousand jobs. (European Commission, 2023) The difference in the time-to-output ratio shows a clear rising interest of the EU in support of SMEs and the EU’s creation of new jobs in Azerbaijan.
On November of 2017, during the EaP Summit, a new approach to the EaP, entitled “20 Deliverables for 2020”, was announced. Such plan has focused on the strengthening of the economies, governance, connectivity and the society of the countries in the EaP region. This plan eventually took the form of the agenda, entitled “EaP beyond 2020”, which was announced in 2019. One of 5 major goals of this agenda is the work towards more resilient, sustainable and integrated economies in EaP, which includes Azerbaijan as well. The agenda is expected to mobilise the potential 2.3 billion euros for the investments and up to 17 billion euros for public and private investments as blending and guarantees. (European Commission, European Neighbourhood Policy and Enlargement Negotiations (DG NEAR): Eastern Partnership, 2023)
One of the examples of such investment has occurred on the 7th of December in 2022 with the visit of the Director of the Department of Eastern Neighborhood of the European Commission’s Directorate, Lawrence Meredith, to Azerbaijan. On the day of the inauguration of the high-level working group on the EU’s Economic Investment Plan by the EU and Azerbaijan, a total of 2 billion euros was announced to be invested in Azerbaijan for the diversification and strengthening of the resilience of the economy, creation on new job places and the inclusive rural development. This high-level working group is expected to bring together regularly the representatives from the European Commission, the European financial institutions and the government of Azerbaijan for better allocation of the investment that is the part of the “EaP beyond 2020” agenda. (Press and information team of the EUDEL, 2022)
While analyzing the investments done by the EU to the development of the economy of Azerbaijan, it is also essential to understand the reasons. The “World-Systems Theory” of Immanuel Wallerstein can answer this. According to the argument of Wallerstein in his theory, the economic prosperity of the periphery is essential for the strength of the economies of the core. Given that the economy of the EU is the core of the EU in its decision-making, the economic prosperity in its Neighbourhood, which is the periphery, is vital for its prosperity. Being a member of the Eastern Partnership initiative of the EU, which is part of Neighborhood policy, the economic prosperity of Azerbaijan plays a role in the strength of the economy of the EU. Additionally, Azerbaijan is an important country for the diversification of natural gas imports for the EU. Also, it presents a unique pass between Russia and Iran to the Central Asian market, which is the region essential for the expansion of the trade of the EU.
Cooperation in the field of Energy: Exploring new Horizons
Along with mutually beneficial cooperation in the economic sector, where the EU heavily focuses on the strengthening of the economy of Azerbaijan, the major spheres of cooperation also include connectivity and energy supply to the EU market.
Following the launching of war by Russia on Ukraine on the 24th of February, 2020, the EU has adopted number of sanctions. These included heavy sanctions on the imports of Russian gas by the countries of the EU. The EU will import 83 percent of its natural gas in 2021. The share of Russian gas in the total natural gas imports of the EU has decreased from 35.7 percent in February 2022 to 12.9 percent in November 2022. It is also worth noting that this figure has risen to 53.8 percent in January 2021. Such a sharp decrease in share has created a vacuum in the EU’s natural gas import market. (European Council, Infographic – Where does the EU’s gas come from?, 2023)
Among the number of alternatives to Russian gas, Azerbaijan was the only country from the eastern periphery (the Eastern Partnership) of the EU to diversify its natural gas imports. Azerbaijan has proven itself to be a reliable partner in the energy sector for the EU. As the construction of the European segment of the Southern Gas Corridor, the Trans-Adriatic Pipeline, was completed in 2020, the first delivery of Azerbaijani gas to the European market occurred on December 31, 2020. (Jafarova & Hajiyev, 2021) While in early 2021 the total gas export from Azerbaijan to the EU was expected to be more than 5 bcm, the number eventually reached 8.2 bcm and 12 bcm in 2022. (interfax, 2022) (Huseynov, 2023) Nevertheless, such an increase did not make a major difference in the share of Azerbaijani gas in the total imports of natural gas by the EU. The EU is one of the biggest consumers of natural gas as an energy resource, and with the rising demand and Azerbaijan’s potential to export its natural gas, there cannot be a big difference in the share of total imports. However, it has the potential to diversify the natural gas imports of the members of the EU in the Balkan region, which were highly dependent on the import of Russian gas. Azerbaijan can be a good competitor in the region due to the existing infrastructure via the Southern Gas Corridor and the low consumption of natural gas in energy
production in these countries
As the trade relations between the EU and Azerbaijan in the energy sector were already strengthening, the pace of this process was bolstered with the official visit of the President of the European Commission, Ursula von der Leyen, to Baku on July 18, 2022. The most significant result of this visit was the signing of the Memorandum of Understanding on a Strategic Partnership in the Field of Energy, signed by Ursula von der Leyen and the President of the Republic of Azerbaijan, Ilham Aliyev. The major importance of this document comes from the reflection of the aim of reaching an increase in the export of natural gas from Azerbaijan to the EU from 8.2 billion cubic meters in 2021 up to 20 billion cubic meters by 2027, which is more than double the 2021 volume. (European Commission, 2022) The decisions were not limited to cooperation in this sector. During the press statement, President Ursula von der Leyen mentioned the importance of cooperation in green energy and greater investment in the economy of Azerbaijan through the support of SMEs. (European Commission, 2022)
Following the signing of the memorandum, the level of cooperation in the energy sphere immediately started to rise, as by the end of 2022, the export of natural gas from Azerbaijan to the EU had risen by 40 percent. As it was mentioned earlier, Azerbaijan cannot become the sole alternative to the vacuum left by the decrease in Russian gas imports by the EU in general. However, it can be a good alternative for the Balkan region of the EU. Azerbaijan already exports natural gas to Greece and Bulgaria, taking a significant share of their total natural gas imports.
On the 29th of January of 2023, President of the Republic of Azerbaijan, Ilham Aliyev, has arrived in Budapest with an official visit. The next day, after the expanded meeting with the Prime Minister of Hungary, Victor Orban, a ceremony of signing documents was held. The major documents included the “Joint Declaration on Enhanced Strategic Partnership between the Republic of Azerbaijan and Hungary,” signed by the leaders, and the “Memorandum of Understanding on Natural Gas Cooperation between the Ministry of Economy of the Republic of Azerbaijan and the Ministry of Foreign Affairs and Trade of Hungary,” that was signed by the Ministers of Economy. (President of the Republic of Azerbaijan, 2023) This has marked the beginning of a new era in cooperation between two countries and the addition of Hungary to the list of countries that will import Azerbaijani gas.
Such a trend did not stop with Hungary. On February 2, 2023, the President of the Republic of Romania, Klaus Iohannis, made an official visit to Baku to discuss further steps in bilateral relations. During the press statement, both Presidents placed a specific accent on the export of an additional volume of natural gas to Romania, recalling the importance of the visit of President Ilham Aliyev to Bucharest in December 2022 and the Memorandum signed in July between the EU and Azerbaijan. (President of the Republic of Azerbaijan, Joint press statements of Presidents of Azerbaijani and Romania, 2023)
The cooperation in the energy sector is not limited only to the export of natural gas but also to the development of new infrastructure for the export of electricity from Azerbaijan to European soil. On the 17th of December in 2022, during the official visit of President Ilham Aliyev to Bucharest, he attended a meeting with the leaders of the EU, Romania, Hungary, and Georgia. Another important agreement, entitled “Agreement on a Strategic Partnership in the Field of Green Energy Development and Transmission between the Governments of the Republic of Azerbaijan, Georgia, Romania, and Hungary,” was signed during that visit. (President of the Republic of Azerbaijan, 2022) According to the agreement, an approximately 1100 km long electric cable is planned to be constructed from Romania through the Back Sea to Azerbaijan for the export of electricity from Azerbaijan to European soil. This will bring the EU and Azerbaijan closer in their goal to cooperate in the field of green energy.
The new Agreement and Recommendations
Current relations between the EU and Azerbaijan are legally based on the EU-Azerbaijan Partnership and Cooperation Agreement that has been in force since 1999. (European Council, EU relations with Azerbaijan, 2023) Although comprehensive at the time of its initiation, the agreement needs to be upgraded in the number of spheres that are not reflected in it.
Current relations between the EU and Azerbaijan are primarily based on the values of the Eastern Neighbourhood, which are related to the fields of strengthening governance, economic development, greater connectivity, and mobility. However, even these values have been further developed with the new agenda “EaP beyond 2020,” which has more comprehensive goals. While negotiations for the signing of a new agreement for the legal basis of the relations between the EU and Azerbaijan have been initiated a number of times, they gained a new chance in 2022 with greater cooperation between Brussels and Baku. The new agreement needs to encompass such matters as:
- The strengthening of the framework for policy dialogue and cooperation between the EU and Azerbaijan.
- Negotiation for the legal basis for greater trade relations is necessary as the volume of trade is projected to rise. Include the EU’s investment framework in Azerbaijan to strengthen the latter’s economy’s resilience.
- The inclusion of a framework for cooperation in the sphere of energy export from Azerbaijan to the EU, including the importance of the Memorandum signed between the leaders in July 2022.
- The creation of a stronger framework for connectivity and transportation, as Azerbaijan plays a strategic role for the EU in its trade with Central Asia, which is projected to rise significantly.
The opinions expressed within the content are solely the author’s and do not reflect the opinions and beliefs of her employer, organization, committee or other groups.
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