German companies are entering a new game on the Azerbaijani field

German companies are entering a new game on the Azerbaijani field
Germany is already one of Azerbaijan's biggest investors and trade partners. After a hiccup in 2023, Baku is redoubling its efforts to attack more German investment to help modernise its economy. / bne IntelliNews
By Seymur Mammadov in Baku March 22, 2024

The working visit of President of Azerbaijan Ilham Aliyev to Germany, to attend the Munich Security Conference in February, was marked by significant negotiations with the managing director of the German Eastern Business Association, Michael Harms. The discussion focused on increasing investment by German companies into Azerbaijan, which symbolises a strategic shift in German foreign economic policy and promises, perhaps, a new era in the economic relations between the two countries.

At the meeting, Harms announced a working visit to Azerbaijan by a delegation of German businessmen interested in the fields of transport, logistics, industry and others, which arrived in Baku a few days later.

It was the biggest German business delegation ever to visit. The group included companies interested in cooperation in the fields of industry, construction, renewable energy, agriculture, transport, logistics, ICT, finance, law, consulting and other areas, and was a direct result of the negotiations conducted in Munich between President Aliyev and Chancellor Scholz.

Despite a spike in tensions between Berlin and Baku that resulted from the military operation to retake control of Nagorno-Karabakh last year, it seems that diplomatic relations between the countries have recovered.

Baku is keen to get back to work and has been actively burnishing its bilateral relations. According to official data, trade between Azerbaijan and Germany in 2023 grew by 45.4%, reaching $1.8bn.

Active in Azerbaijan

Currently there are about 180 active German companies in Azerbaijan, making Germany one of the leading European investors in the country. The executive director of the German-Azerbaijani Chamber of Commerce, Tobias Baumann, expressed confidence in the growing interest of German investors in Azerbaijan despite the current high geopolitical tensions. He also pointed to the potential participation of German enterprises in reconstruction projects on the recently liberated territories of Azerbaijan. Special attention is given to the sectors of infrastructure, water resources, electricity, agriculture, renewable energy sources, construction and demining, where German technologies are in especially high demand. The existing participation of Germany in construction and infrastructure projects on Azerbaijani territory confirms the prospects for further cooperation and investment.

In 2022, the launch of a significant joint investment project between the Azerbaijan Industrial Corporation (AIC), Azeraluminium, and the German company Achenbach Buschhütten GmbH was announced. The project, aimed at the production of aluminium rolling products, envisages total investments amounting to $451.2mn.

The main goal of the project is to establish the production of 105,000 tonnes of aluminium rolling products per year. This involves not only the expansion of the existing primary aluminium production in Ganja but also the development of new lines for the processing of secondary aluminium.

The investment is divided into two main stages. The first stage, requiring investments of $132mn, is focused on the installation of equipment for secondary aluminium processing with low energy consumption. The second stage includes the construction of an electrolysis plant and the setup of the hot rolling process. The project is expected to create over 800 jobs.

Apart from the aluminium production sector, the production of German tractor models DEUTZ-FAHR 4100 W-6205g and AGROFARM-115g is planned to be established in the Azerbaijani city of Ganja. However, the project will be implemented not directly with German companies but through the Italian manufacturer SDF Group.

The Azerbaijani industry receives support from German enterprises through the supply of equipment and technologies in various sectors. The cooperation covers not only agricultural machinery but also drilling equipment for the oil and gas industry, as well as environmental protection solutions.

Special attention is given to waste management in collaboration with the state oil company SOCAR, highlighting an interest in environmental initiatives.

Moreover, German companies are actively involved in supplying equipment for the Azerbaijani textile, livestock and food industries.

In the logistics and transport sector German logistics giants such as DHL, Rhenus Logistics, DB Schenker, Hansa Meyer Global, and Kühne+Nagel have already moved in. As bne IntelliNews reported, Azerbaijan is positioning itself as a key node on the Middle Corridor, a logistic link between Europe and Asia that bypasses Russia.

Further to go

Despite the fact that the actual volumes of German investments do not yet match the growing interest of Germany in interacting with Azerbaijan, representatives of the German business community say there is still significant upside to prospective investments.

At the same time, it should be noted that research on the current state and dynamics of German investments in the Azerbaijani economy reveals a gap between Germany's growing interest in this country and the actual volume of investments.

According to data presented as a result of a semi-annual survey conducted by the Ifo research institute, investment intentions are currently falling. The index of net investment plans, developed based on a survey of 5,000 companies, showed a drop from 14.7 to 2.2 points for the period from March to November 2023.

Lara Zarges from Ifo highlighted the significant deterioration in the investment climate in the last year. Amongst the problems, she identified increased financing costs, a fall in demand, and economic uncertainty. Nevertheless, as relations revive, Zarges expects investment activity to also recover.

The German-Azerbaijani Chamber of Commerce has been in operation since 2012; it is the official representative of the German economy in Azerbaijan, and assists German companies exploring the Azerbaijani market. Azerbaijan is the main trading partner of Germany in the South Caucasus – accounting for 70% of all German trade with the region.

Additionally, Azerbaijan is the ninth largest supplier of crude oil to Germany. It has been and remains a major supplier of oil and gas to Germany, although last year there was a slight decrease in volumes. In December 2023, Germany purchased about 1.9mn barrels of Azeri Light oil from Azerbaijan, which is 14.8% less than the figure for the same period the previous year. The record was set in November of the previous year when Germany bought about 2.3mn barrels of Azerbaijani oil. And in the first half of the year Germany increased its oil imports from Azerbaijan again – up 342%; Azerbaijani supplies grew from €209mn in 2021 to over €922mn in 2022.

The automotive sector is an important direction in Azerbaijani-German economic relations and a priority for the government in Baku.

In 2023, exports of passenger cars and other vehicles designed for the transportation of fewer than ten people from Germany to Azerbaijan were growing. According to the Federal Statistical Office of Germany (Destatis), export volumes increased by 4.2%, reaching a figure of approximately 2,500 units. In monetary terms, exports grew 32.1% year on year, amounting to roughly €125.6mn.

Of particular interest is the dynamics in the export of new gasoline vehicles with engine capacities ranging from 1,500 to 3,000 cc. The reporting period saw a surge in exports in this category by 170%, reaching 580 units. Financial figures for this segment increased by 210%, reaching €31.2mn.

Conversely, the export of used diesel vehicles with engine capacities from 1,500 to 2,500 cc experienced a noticeable decline as Germany moves towards a universal ban on diesel engines. The number of exported units decreased by 33.3%, dropping to 310, while their value fell by 40.7%, amounting to approximately €3.8mn.

On the other hand, imports into Azerbaijan from Germany of used hybrid vehicles powered by gasoline and electricity. Here, an increase of 41.7% was observed, with a volume of shipments of 230 units, and the financial metrics improved by 34%, reaching a mark of €11.6mn.

Further investment will depend on continuing to build up good relations between Baku and Berlin. One of the key requirements is the creation by Azerbaijan of a favourable business climate for German entrepreneurs to conduct business and ensuring equal and fair conditions for all foreign investors.