Side Effects Of Sanctions Against Russia On The Economy Of  Azerbaijan

Side Effects Of Sanctions Against Russia On The Economy Of  Azerbaijan

By Gubad Ibadoghlu, senior policy analyst  of the Economic Research Center

The scope of sanctions against Russia is expanding, and we receive information about new sanctions every day. The country’s export potential is already subject to full or partial restrictions on key products due to existing problems in the field of transportation and the breakdown of the supply chain. Russian ships are banned from entering most seaports, European and US airspace is closed to air transport, and highways are closed to trucks. Thousands of Russian ships were stranded in seaports. So far, no country in the world has faced sanctions and embargoes on this scale. As a result, there is no doubt that the current and future state of the Russian economy will deteriorate sharply, leading to a serious decline in the national economy, a significant decline in production, a rise in inflation, and job losses. Analysts predict that Russia’s GDP will fall by 20 percent in the second quarter.

According to the IMF Managing Director, Kristalina Georgieva unprecedented sanctions have led to an abrupt contraction of the Russian economy, moving into a deep recession. We are mindful that massive currency depreciation is driving inflation up. It is denting severely the purchasing power and standards of living for a vast majority of the Russian population. She mentioned that IMF is particularly concerned over possible impacts of the crisis on countries of Central Asia, the Caucasus, and Moldova, which have closer trade relations with Russia and Ukraine than with the rest of the world. Spillovers to neighboring countries are also significant. In particular, countries that are more closely integrated with the Ukrainian and the Russian economy. The main channels of this spillover are to the neighborhood—Central Asia, the Caucuses, Moldova, the Baltic countries—are trade, the interruption in remittances, and the influx of refugees. And that is demonstrably affecting the outlook for the immediate neighborhoods.

There is no doubt that the sharp changes in the Russian economy will have a significant impact on the countries of the region, including Azerbaijan. First of all, let’s look at the direct effects, the State Oil Fund of the Republic of Azerbaijan will be the most affected one in this direction. Because:

1) 0.6 percent of SOFAZ funds or 270,150,660 US dollars are in Russian rubles.

2) SOFAZ has invested $ 500 million and acquired about 3% of the shares of VTB Bank of Russia.

3) SOFAZ owns Galereya Aktyor Business Centre, worth $ 133 million and located at Tverskaya 16 in Moscow.

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

Apart from the State Oil Fund, if we take into account that Azerbaijan’s main import partner is Russia, then the biggest impact will be on trade relations with this country. This effect will be twofold. So, a number of imported products are expected to become cheaper due to the devaluation of the ruble in the Russian market compared to similar goods imported from other countries. This increases the likelihood that Russian goods will be offered cheaper in the domestic market and stimulates imports of Azerbaijan from Russia. Those who export goods from Azerbaijan to Russia will face losses due to the sharp depreciation of the ruble against the manat, which will reduce the income of producers and exporters, especially in the non-oil sector, mainly in agriculture. Last year, Russia was Azerbaijan’s first trade partner in imports with 17.2 percent and third in exports with 4.15 percent. So, Azerbaijan bought $ 2.1 billion worth of goods from Russia in 2021 and sold $ 920.8 million worth of goods on the Russian market. However, it should be noted that more than 95% of the goods sold in the Russian market were non-oil products. This means that 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.

One of the areas affected by the current and future situation in Russia will be remittances sent to the country by Azerbaijanis living there. It is estimated that about 2.5 million of our compatriots live in Russia. Azerbaijani labor migrants are key participants in the formation of household income in most districts of our country. Tensions in the Russian labor market, the decline and devaluation of incomes due to this, and the depreciation of the ruble will also lead to a reduction in remittances to Azerbaijan. According to the Central Bank of Azerbaijan, in 2021, remittances from individuals reached $ 1 billion 133 million. According to the report, this is 3.6 percent more than in 2020. According to the results of 9 months of 2021, about 60% of remittances fell to migrants living in Russia. This means that last year, remittances sent by migrants living in Russia by bank amounted to $ 680 million. A sharp decline in this transfer is expected this year.

Moreover, the RMB imposed a limit of $ 5,000 per month on the transfer of resident individuals abroad to other residents of the Russian Federation, as well as non-resident individuals, including relatives.[1] According to the decision, the amount is determined using the official exchange rates of foreign currencies against the ruble set by the Central Bank on the date of the transfer order or the equivalent in another foreign currency during the calendar month.

It is noted that the restrictions include transfers without opening a bank account or transfers from the accounts of resident individuals. This, of course, will create difficulties for Azerbaijani migrants living in Russia to transfer funds to their countries.

In addition, the situation in Russia as a whole will affect trade relations, investment cooperation, and transportation with the countries of the region, which will indirectly affect the economy of Azerbaijan.

As of 2019, there are about 700 companies with Russian capital in Azerbaijan. To date, Azerbaijan has invested $ 1.2 billion in Russia and Russia $ 4.6 billion in Azerbaijan. Azerbaijani investments in Russia are at serious risk, while Russian companies in Azerbaijan, especially banks with Russian capital, are facing difficulties.