The Impact of Falling Oil Prices on the Foreign Trade Turnover of Azerbaijan

The countries that are rich in oil and gas are essentially dependent on the international price formation, extraction and sales opportunities of those energy carriers. Until 2000 the oil did not have the price it had later. The sharp increase in the price of this energy carrier was conditioned by the “Chinese phenomenon” – China’s economic growth. In 1999 that country stopped exporting oil as it did not meet its own needs anymore, and from 2000 it started to import oil from the Persian Gulf countries and Russia. China’s economic growth led to unprecedented growth of oil prices in 2011, 2012, 2013: the average annual oil price fluctuated between $ 110-115 per barrel. The fall in oil began in the second half of 2014 and continues with some fluctuations up to now making an average of about $ 48 per year.

Factors contributing to oil price deflation

If we try to link oil prices to certain factors, it is necessary to clearly identify 4 main factors:

  1. The slowdown in China’s economic growth, the decline in oil consumption,
  2. Wider coverage of alternative energy sources,
  3. unprecedented exploitation of shale oil in the USA,
  4. Removal of embargo on raw oil exports 40 years ago in the USA.

This prohibition was established in 1973 when Arab countries announced an oil embargo on the USA. It’s main goal was to curb the possible upsurge in oil prices, as well as to protect the market from manipulations. With the abolition of the embargo, the American side tries to obtain as little dependence as possible from importing oil products and carry out an economic revolution by increasing oil export volumes. If we add the continued instability in the Middle East and the Persian Gulf countries to all the aforementioned, the picture will be more complete.

The Influence of the Oil Factor on Azerbaijan

The sharp decline in oil prices hit the countries with high oil production rates. Being one of the main oil-producing countries in the Caspian region, Azerbaijan faces serious problems. The created situation has a negative impact not only on the economy but also on the entire political system. In this study, we will try to understand how the decline in oil prices affected one of the main branches of economy – the foreign trade turnover of that country. To illustrate how much the foreign trade turnover, as well as the oil price fluctuations in that context affects Azerbaijan, it should be noted that the budget of that country is mainly fed from the incomes from the oil and gas sector.

The Essence of the Problem

The foreign trade turnover of Azerbaijan is directly proportional to the volume of oil extracted in that country and the international prices of that product. Naturally, the current situation leads to the reduction of export volumes. The record significant impairment of manat of the country’s currency against the dollar, the resulting inflation, the decline in the purchasing power, the collapse of the banking system, the high inflation rate, the reduction of the Central Bank’s reserves almost three times, the withdrawal of a number of international organizations from Azerbaijan create a general picture, and it becomes clear that this country has faced serious economic and political problems.

If we want to understand the problem deeply, it is necessary to analyze the foreign trade turnover figures from 2013 to 2016. If in 2013 the foreign trade turnover of Azerbaijan amounted to $ 34.5 billion (export – $ 23 billion 904 million, import – $ 10 billion 763 million), 93% of which were in oil and gas resources, then in 2016 according to the State Customs Committee of Azerbaijan, the indicators have dropped considerably, reaching $ 17 billion 675 million which is 19.46% lower than in the foreign trade turnover figures for 2015. In 2016 exports of $ 9 billion 143 million were implemented, which is 28.17% less than in 2015. As regards imports, there is also a negative balance of 8 billion 532 million dollars which has declined by 7.42% compared to the last year. If we look backward, we will see that the trade turnover rates have been decreasing only since 2013. In 2015 compared with the previous year, the fall was 33.44%, and in 2014 it was 10.58% compared with the previous year. Basically, trade turnover rates have been maintained with those countries in which there is a lack or a small number of energy resources.

Azerbaijan-EU trade turnover

The EU is the main trading partner of Azerbaijan. The bilateral cooperation covers more than 20 trade sectors. In 2013-2016 the negative balance is quite visible (For more, see Table (1).

Table 1

Date Export

(Currency-Euro)

Import

(Currency-Euro)

2013 14 bln 370 mln 3 bln 729 mln
2014 13 bln 206 mln 3 bln 478 mln
2015 10 bln 696 mln 3 bln 450 mln
2016 7 bln 605 mln 1 bln 880 mln

The above-mentioned figures show that the bilateral trade turnover has been reduced more than twice in 2016 as compared to 2013, especially the export volumes. This year as well the figures have a tendency to decline. In January-August of this year the bilateral trade turnover has made $ 4 bln 333 mln.

Azerbaijan-US trade turnover

The trade turnover with the United States is also of primary importance for Azerbaijan. The volumes are not comparable with the EU, mainly related to space. Naturally, the crisis in the economy could not have worsened the trade turnover with the United States (For more, see Table 2).

Table 2

Date Export

(Currency-USD)

Import

(Currency-USD)

2012 1 bln 94 mln 492,6 mln
2013 1  bln 136,2 mln 381 mln
2014 1 bln 11 mln 950,3 mln
2015 507,1 mln 478 mln
2016 142 mln 433,5 mln

 

This table also shows that the export volumes have been significantly reduced. The trade turnover with the United States in January-September of this year amounted to $ 470 million which is 7% higher compared to the same period of the previous year.

Azerbaijan-Russia trade turnover

Russia is the main trade partner of Azerbaijan among the CIS countries. The fall in oil prices hit both sides directly, which could not negatively impact on bilateral trade turnover (For more, see Table 3).

Table 3

Date Export

(Currency-USD)

Import

(Currency-USD)

2013 1 bln 77 mln 1 bln 505,1 mln
2014 1 bln 314,5 mln 640,3 mln
2015 1 bln 315 mln 374,9 mln
2016 1 bln 641,8 mln 409,3 mln

This table shows that, for example, in the case of the trade turnover with Russia, a considerable decline was recorded in the import figures. The reason is quite clear: in case of export, energy resources are absent. Exports from Azerbaijan amounted to $ 913.2 million in January-August of this year and imports totaled $ 364.9 million. This figure dropped by 25.8% in comparison with the same period of the last year.

Tendencies

The 50% of Azerbaijan’s gross domestic product (GDP) is the oil and gas sector, and the other two branches, service and construction are also dependent on that sector. That is, about 85-95% of the country’s economy depends on oil and gas. About 90-95% of the export from Azerbaijan is also the oil and gas sector. Naturally, low oil prices, besides serious economic problems, also have serious political consequences. The created situation leads to the reduction of the capacities of the states to influence the price change. That is to say, the decline in the impact on the pricing mechanisms in the international oil market for oil-rich countries also leads to the change in the external security environment. For us the situation in the neighboring country had both positive and negative impacts. Naturally, the decrease of the financial flows also led to a reduction in military spending, about 40%. But this situation is also explosive and dangerous for us. The testimony is the April war, the main goal of which was to distract the Azerbaijani population from the current economic and social problems. However, it should not be supposed that Azerbaijan will refuse from new attempts to aggravate the situation in the future.

The oil market instability affects oil-rich regions, leading to a reduction in the interest of major powers and a change in their roles. In the case of the created difficult situation Azerbaijan has started to carry out some internal economic diversification, but it is not possible to reach a breakthrough on the sale of energy carriers. On the other hand, the custom fees and the VAT have sharply increased in order to ensure the state budget revenues. Due to these changes, the budget revenues of the current year have increased by almost 21.5% compared to the previous year. However, these steps do not reduce the dissatisfaction among the society, and many jobs are closed in the complex socioeconomic situation. Only the British Petroleum has closed several thousand jobs. In the last few months there is a slight but some increase in the oil price, but the oil price should be at least $ 70, which, according to the president of Azerbaijan Ilham Aliyev, will be a great price for organizations, investors and the government to save Azerbaijan’s economy. However, it is difficult to predict such figures in the next few years.



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Translator: Knarik Galavaryan

Author: Rafayel Avdalyan


 

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