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Ulviyya Shahin

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On February 18, 2024, Azerbaijani President Ilham Aliyev met with Senior Managing Director of the World Bank, Axel van Trotsenburg, in Munich.

Axel van Trotsenburg offered his congratulations to Azerbaijan on the hosting of COP29, emphasising that it is a manifestation of the country's support for green transition and combating climate change. He noted that the World Bank is ready to cooperate with Azerbaijan in this regard.
Undoubtedly, this meeting will have certain economic significance for Azerbaijan.

We had a discussion with Stefanie Stallmeister, Country Manager for Azerbaijan, Europe, and Central Asia, regarding the mentioned topic.

Azernews presents the interview.

Q: Mrs. Stefanie Stallmeister, what role can international financial institutions like the World Bank play in supporting Azerbaijan's green energy initiatives, and what are the potential economic outcomes of such cooperation?

A: First, allow us to commend the government for its focus on transforming Azerbaijan from a fossil-fuel-dependent economy to a motor for the green transition both at home and abroad. The World Bank has been an advocate for the green economy and the energy transition in particular for over a decade, and our President Ajay Banga has further upped our commitment to supporting our member states to create a world free of poverty on a livable planet. As a World Bank Group, our role is to work closely with the government and provide knowledge, technical assistance, and financing for the green transition to both the government and private sector players. Concretely, this means that we are supporting targeted studies and analytics to help the government decide on specific actions and projects to undertake and finance for the green transition. Currently, this includes dedicated assistance to the establishment of the Energy Efficiency Fund and the identification of energy efficiency measures for buildings, an offshore wind road map that we have already finalised, and studies on how to best develop and integrate renewable energy into the value chain. We then, and that really is our primary role, provide financing to the government to develop economically and financially viable projects for the green transition. Currently, we are discussing a very important project with the Ministry of Energy and Azerenerji to provide funding for the needed expansion and strengthening of the power grid to integrate the large-scale renewable energy additions that the government agreed with private developers. Put together, our provision of knowledge solutions and comparatively cheap and long-term financing help the government develop projects at least cost to minimise the overall cost of the transition to society as a whole. In short, the World Bank Group can assist the Government of Azerbaijan in financing infrastructure projects for the green transition, providing technical advice and analysis, and attracting and financing private sector investments.

Q: How might the Caspian Sea underwater electric cable project impact regional economic dynamics, and what are the potential economic challenges and opportunities associated with it?

A: Regarding the Black Sea Submarine Cable, we see this as a key driver for regional integration, harmonisation, and an incubator for renewable energy development in the region. First, the project has brought together the South Caucasus countries and the South-Eastern European countries in a joint project that can only be delivered if everybody works together closely. Economically, the size of the project, estimated at around US$3 billion, is clearly challenging for any single country, which is why I commend the participating countries for having agreed to pool resources and wo/man power to push this important project forward. You are certainly aware of the ongoing discussions by the government on the development of Green Corridors to the EU. This cable would be the first direct linkage between the South Caucasus and the EU via the Black Sea. The cable would allow both Azerbaijan and Georgia to increase the development of their significant renewable energy resources (wind and hydro) and export them to a power-hungry market, the EU. For Azerbaijan, this would help the transition from fossil-fueled exports to renewable energy exports, which, in the face of declining oil and gas reserves, would be very important for the domestic economy. For Europe, it would increase energy security increasing the diversification of energy sources for the European market.

Q: Considering Azerbaijan's positive economic indicators, what are the key factors driving its economic growth and how sustainable is this growth trajectory, especially in the context of global economic trends and challenges?

A: A sharp increase in oil production and exports, starting in the late 1990s, coinciding with the global commodity supercycle, pushed growth to unprecedented double-digit levels from 2005-2008. Together with high levels of investment, particularly public investment, this led to an over four-fold increase in per capita incomes from 1995 to 2019, moving Azerbaijan from a lower middle-income country to an upper middle-income country. Azerbaijan’s impressive growth performance rested predominantly on two pillars -- oil and natural gas rents and state-driven investment. Growth has slowed since the end of the commodity boom, as a decline in oil prices in the mid-2010s triggered Azerbaijan’s first recession in 2016, a credit crunch in the financial sector, and an ensuing banking crisis. The economy recovered post-recession, but the pace of growth fell before the COVID-19-induced crises in 2020, from which the economy has subsequently recovered in 2021 and 2022.

Azerbaijan aims to boost and sustain growth to achieve the country’s long-run objectives, as highlighted in the “Socio-Economic Development Strategy (SEDS) for 2022-26”. The SEDS targets an annual GDP growth rate of 3-4 percent over the medium-term, with close to 5 percent GDP growth targeted in the non-oil and gas sector. The growth objectives need to contend with structural headwinds that dampen long run growth prospects. The critical headwinds are in the form of declining oil and gas reserves, declining population growth, and an ageing population.

The challenges posed by the structural decline in oil production become even more pressing as global climate policy efforts towards decarbonisation cut into global fossil fuel demand. Azerbaijan CCDR estimates that, by 2060, a global net zero economy will have reduced Azerbaijan’s exports by close to 3.4 percent of GDP compared to business-as-usual, even if Azerbaijan meets its climate targets for 2030 and 2050.

Azerbaijan will need a fundamentally new growth model driven by a dynamic private sector. Economic growth will need to be driven by a dynamic non-oil/gas private sector that will be more productive than the current state-owned enterprises present in several sectors of the economy and more integrated into the global economy.

Azerbaijan’s long-run growth will also be shaped by an evolving global environment. The world is more uncertain than ever. Additionally, policymakers face the challenges of falling potential growth and increased global inflation, persistent strains in global value chains, facing the changing nature of work, and the energy transition. Azerbaijan must carefully navigate these trends, being well prepared for the risks and on the lookout for emerging opportunities.

Q: How could Azerbaijan leverage its renewable energy resources to diversify its economy away from traditional sectors such as oil and gas, and what are the potential risks and rewards of such a transition?

A: This ties directly to your earlier questions. In our view, Azerbaijan has three main avenues at its disposal to harness its significant renewable energy sources to transform its dependence on the oil and gas sector and move towards a low-carbon, green economy. With a view to Azerbaijan’s strong dependence on energy exports, adding renewable-based export capacity is clearly a top priority for the government, especially as key markets are reducing their reliance on oil and gas.

Regarding exports, Azerbaijan could and already is looking at the possibility of constructing power grid infrastructure to export its green electricity potential from wind and solar. In general, this would go either via Turkiye or via the Black Sea Submarine Cable that we discussed before. In addition, Azerbaijan could produce hydrogen from a combination of its offshore wind resources and gas and then export it via pipeline to the EU. This would allow the country to produce a new value-added product and become a pioneer for a new energy source. Let me highlight that all these options require significant investments and that Azerbaijan’s electricity exports would have to compete on the EU market as the EU has fully liberalised markets. The risks here are clearly higher than the usual offtake agreements in the piped gas sector.

Second, going to the domestic agenda, the development of large-scale renewable sources for export could lead to the development of a new manufacturing and service industry in Azerbaijan for wind and solar. Clearly, attracting actual production of panels or turbines would require the development of gigawatts to make the market attractive for international investors. In addition, Azerbaijan could use its domestic renewable energy sources to free up gas for hydrogen production and export, transform domestic electricity consumption to solar and wind, heat to geothermal energy, and transport to electric options.

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