August 2004

Prepared by Bakhtiyar I. Mamedov, BISNIS Representative in Azerbaijan

Inside this report:

• Agricultural Summary.
• Overview of the food processing and packaging equipment sector.
• Canned Fruits and Vegetables in Azerbaijan.
• Khachmaz and Cuba Regions and its Agro-Processing and Food Industry.
• What is moving in the Azeri Agribusiness Market.
• SWOT Analysis of the Azeri Agribusiness Market.
• Price Construct to Baku and Customs Clearance.
• Agribusiness Financing.

This report provides an overview of commercial and investment opportunities in the agribusiness sector, focused on the Baku, Guba and Khachmaz regions of Azerbaijan.  The report contains snapshot of food processing and packaging equipment sector.  There is a section “SWOT Analysis of the Azeri Agribusiness Market”, which provides strengths, weaknesses, opportunities and threats of the agribusiness market for the U.S. exporter.

Agricultural Summary

Azerbaijan, an emerging market with vast potential energy resources, presents niche opportunities for U.S. food processing and packaging equipment suppliers.  The agricultural sector in Azerbaijan is second only to oil and gas, and this country’s continued energy development has spurred economic growth that will in time spill into the agricultural sector.  Khachmaz and Guba, located in northeastern Azerbaijan used to export fresh and canned fruits and vegetables to all the republics of the former USSR and was a net agricultural exporter.

With the collapse of the Soviet Union, these markets dried up, forcing this sector to create new trade linkages.  Azerbaijan has inherited outdated food processing equipment, and the packaging in many cases is rudimentary – all requiring imported equipment.  There is great potential for the development of the food processing industry, however large-scale U.S. exports will remain limited and niche deals will be more prevalent.  Given the challenges of doing business in Azerbaijan, U.S. firms are best advised to work with well-established firms with a proven market track record.

Overview of the food processing and packaging equipment sector

There is great demand for food processing and packaging equipment, especially for processing of meat products and fruits and vegetables.  There is also a need for production of packaging materials for different market segments given the lack of a broad-based food processing and packaging equipment industry.  Several food processing and packaging companies located in Guba have expressed interest in purchasing U.S. equipment to produce high quality food products for local consumption and for export. This market is limited, however, to a handful of credible buyers given the lack of financing for the deal.  Start-ups are quite difficult to sell to and finance in this challenging market, requiring the sharp focus of potential U.S. suppliers and patience.

Cash flow remains a chronic problem for Azeri importers including those in the Guba.  The Azeri government recognizes this problem and plans to establish credit unions in every village to help Azeri farmers access credit.  The World Bank has a pilot program in more than six regions to teach farmers how to use credit.  While this is a longer-term development strategy of little practical relevance to U.S. suppliers interested in immediate sales, a credit scheme will help this key sector to re-establish itself.  In an interview with the U.S. Department of Commerce, Minister of Agriculture Irshad Aliyev noted that the real key to agricultural development is to attract foreign investment of the kind that can bring value-added processing in Azerbaijan.

The key industry weakness, however, is the failure to convert Azerbaijan’s agricultural wealth into value-added product ready for export to Eurasian and Middle Eastern markets.  For example, Russian and Georgian buyers purchase large amounts of high-quality fruits and vegetables from the Guba region, to be dried, canned or packed in Georgia or Russia.  These products are then sold to other CIS buyers – at a handsome profit and with all value added done offshore.  A U.S. project developer and equipment supplier could take advantage of this and leverage minimal operating costs for such an attractive project.

Agro-Processing and Food Industry of Guba and Khachmaz

The territory of Guba is 2.6 thousand km and its population more than 145,000 people.  Guba and its villages have 144 schools, 16 kindergartens, a central hospital, 92  medical clinics, 107 libraries, 25 palaces of culture and 62 clubs.  Since 1999 a great amount of municipal rehabilitation works have made Guba more attractive.  Guba is also famous for its historic places and its very unique nature.  The village of Khinalig 3,500 m above sea level has a ninth century fire temple, while in Guba Town boasts a Cupol Bath, the “Sinakhanim” mosque and the “Guma” mosque.  There are a various ethnic groups, represented in this diverse region.

Agriculture in Azerbaijan is largest sector next to oil and gas, with over 45% of the population engaged in agriculture.  Azerbaijan's agricultural sector has undergone a dramatic transition since the breakup of the collective/state farm system and the privatization of agricultural land starting in 1996.  Before the collapse of the former Soviet Union, Guba region of Azerbaijan was a net agricultural exporter, exporting fresh and canned fruits and vegetables to all the republics of the ex-USSR.  With the disintegration of the Soviet Union and the breakup of economic ties, trading relationships collapsed and sellers were cut off from buyers.

The Guba region is developing its agricultural sector with its apple-tree gardens, the symbol of the picturesque region.  You will find here apples of any color and taste and Guba is the leading fruit-farming region in the republic.  The apple gardens of Guba are famous not only within Azerbaijan but also in Georgia, Southern and Central Russia.  Other branches of agriculture are grain crops and sheep breeding.  The processing industry is primarily focused on canning.

Today, 98 percent of the nation's agricultural land is in private hands, an important achievement in Azerbaijan’s privatization program.  Guba and Khachmaz have benefited from this privatization, but cash flow and access to affordable credit are major obstacles to business development for Azeri agribusiness.  There is great potential for development of the food processing industry supported by a wide variety of Azeri crops and excellent climatic conditions and extended growing seasons.  Fruits (apples, cherries, grapes, olives, lemons, persimmons, melons, watermelons, raspberries, strawberries, currants, plums, peaches, pears, quince, pomegranates and tomatoes); vegetables (potatoes, carrots, beets, cabbage, tomatoes, cucumbers, onions and greens), grains (wheat, maize, barley), tea leaves, and nuts are of high quality, have minimal unit production costs, and have strong brand recognition in NIS markets and in Eastern Europe.  The Guba region features much of this agricultural production.  Azerbaijan can regain its edge as a supplier of processed and packaged food products throughout the NIS, however this will be only be possible through procurement of new or refurbished equipment. Several start-up Azeri private firms including the Guba Tinning Factory (based in Guba), Mpro, the Azerbaijan Dairy Corporation and Azersun Holding have already made the move to European equipment and are interested in further sourcing of U.S. equipment.

Best prospects for U.S. exporters or what is moving in the Azeri agribusiness market?

• Machines for the preparation of fruits, nuts, and vegetables;
• Machines for cleaning, sorting, grading seeds, grains, and vegetables;
• Juice extractors;
• Machines for filling, closing, and & sealing bottles, cans, boxes, bags, or other containers;
• Storing, freezing and transportation facilities;
• Fruit dehydrators.

Canned Fruits and Vegetables in Azerbaijan

Only two out of the 43 canning factories in Azerbaijan are operating, and they produce primarily tomato paste, natural fruit juices, and apple concentrate.  The Guba Tinning Factory, located in Guba town, is one of the two remaining operating factories.  Given reduced domestic demand and the initial re-opening of Russian, Georgian and Turkish export markets, Azeri canneries do not work to full capacity, and their equipment is outdated and in dire need of replacement. Some Azeri canneries continue to use glass jars and bottles instead of plastic containers or tetrapaks that are less susceptible to damage in transit, have greater shelf life, and store better.

Short SWOT Analysis of the Azeri Agribusiness Market

Strengths:

1. Absence for competitive domestic industry for basic agricultural inputs, machinery, and food processing equipment;
2. Need for top quality agro-processing equipment: suppliers should recognize the need for agribusiness equipment, with preference to U.S. and European brands;
3. No local production of food processing equipment;
4. Azeri fruits and vegetables are well-known for their quality throughout Russian and NIS markets;
5. Food processing and packaging equipment is VAT and duty-free;
6. Low operating costs, including rent, labor, etc.  Keep overhead costs down.

Weaknesses:

1. Low purchasing power of Azeri enterprises: Azeri importers often lack strong financial backing, with purchases based on private capital thus limiting longer-term purchasing power.  A letter of credit confirmed by a Western bank is strongly recommended for any initial transaction with an Azeri importer;
2. Weak access to reasonably priced credit: as the risk environment is high, banks do not offer commercially reasonable credit terms to finance investments in agricultural sector.  However, some banks have invested in the agribusiness sector because companies in agribusiness sector maintain fixed securable assets, as opposed to smaller trading and service companies;
3. Legislative, customs and tax environment is different from Western standards;
4. Partial loss of NIS export markets following collapse of Soviet Union.

Opportunities:

1. Baku and other agricultural regions are ideally situated as a business development hub throughout the Caspian region, with air, rail, sea, and road links for market projection into the Caucasus and Central Asia;
2. Azeri firms are interested in establishing long-term relations with U.S. suppliers;
3. Lack of value added processing;
4. Great demand in fruit, vegetable and milk processing and fruit dehydrating equipment;
5. Strong export potential of value added goods to Russia, Turkey, Central Asia and Europe.

Threats:

1. Legislative, and tax environments are challenging;
2. Possible increases in import duties for some goods.

Price Construct to Baku and Customs Clearance

U.S. exporters should consider the following when doing a price construct for the Azeri market: customs and import duties are generally about 10-15%, plus 18% VAT.  To avoid unnecessary customs delays, let the Azeri importer handle the customs clearance.  Wheat imports have a 5% customs duty plus 18% VAT.  Food processing and packaging equipment is VAT and duty-free.  A 20 foot container of general, non-hazardous cargo from Baltimore to Baku is on average $4,000 per container.  Transit time is approximately 40 days, via Port of Poti, Georgia.

Azerbaijan requires import licenses for food products of animal origin.  The State Veterinary Committee (SVC) issues these licenses. Azeri legislation imposes special rules on labeling of food and agricultural products.  The labels must be in Azeri or at least in Russian or Turkish.  English labels are also acceptable if information in Azeri is also provided, although compliance, as seen on supermarket shelves, is spotty at best.

Azeri legislation requires the following product information to appear on the label:

• Name and brand of the product
• Name and address of producing company
• Country of origin
• Expiration date/shelf life
• Nutrition and caloric values
• Net weight (grams or kilos)
• Usage instructions
• Name and type of packing material
• Storage instructions
• Licensing and certification information etc.
• Special warnings, if applicable

If the product has a shelf life of under three months, it must include the day, month, and year of expiration.  If the shelf life is more than three months but less than eighteen months, the month and year are required.  Products with a shelf life of more than three years are technically not allowed for sale in Azerbaijan, however compliance is weak.  Fruit products must be labeled.  Another regulation requires that labels for fruit “juices” specify whether the product contains fruit juice (90-100% concentrate), nectar (25-50% concentrate), or fruit drinks (up to 10% concentrate).

Agribusiness Financing through Other Public Programs

The Government of Azerbaijan, through the Ministry of Economic Development (MED), sponsors an SME support program.  Via a Fall 2002 Presidential Decree, an SME Entrepreneur’s fund was formed.  With IMF and World Bank assistance, the Azeri government prepared a national poverty reduction and economic development program that identified priority public investment projects and set out a medium-term expenditure framework matching resources with projects of highest priority. Lack of available credit continues to be an impediment to regional and agricultural development in Azerbaijan.

The majority of companies are self-financing in trade finance, manufacturing equipment, services, food processing and retail business.  The main source of investment is internally generated cash.  The Government of Azerbaijan is seeking to expand the activity of the National Fund for Entrepreneurship Support (NFES) to provide more credit in the regions outside of Baku.  Currently, the Fund disburses credits at concessional rates to businesses and entrepreneurs through 14 participating commercial banks.  Loans range from microcredits (up to USD 1000 for 1.5 years) to larger credits of up to USD 100,000 for 5 years.  In 2003, approximately USD 11.6 million was loaned to 310 borrowers.  A May 4, 2004 presidential decree will expand the Fund's reach by allowing credit unions to participate in the program.

Established in 1992 to support entrepreneurship and business activity and funded mainly by state budget allocations, the NFES was originally set up to make loans directly to borrowers.  In August 2002, as part of a series of presidential decrees designed to improve the business climate, the Fund was restructured to allow selected commercial banks to screen the borrowers and grant credits at their own risk.  In 2003 the state budget allocation increased over four-fold.  As a result, all of the allocated funds for 2003 -- over USD 11.6 million -- were disbursed to 310 borrowers.

Terms & Instruments: The maximum interest rate set by NFES bank-agents is five percent per annum, while the market rates are much higher, varying around 12-20 percent depending on business type.  NFES credits vary range from USD 1,000 to 30,000

For more information, please contact:

• National Fund for Entrepreneurship Support (NFES)
• Address: 85 S. Askerova Street, 10^th floor
• Baku, Azerbaijan
• Tel: (994 12) 951105, 957547
• Fax: (994 12) 957556
• E-mail: fond@N0SPAM.economy.gov.az
• Web: www.economy.gov.az

Contact: Gadir Huseynov, Executive Director

The U.S. and other international donors have directed assistance to the development of SME’s, focusing on the agribusiness sector.  Assistance has supported training in business management and planning, use of improved technology, training in finance, credit, international accounting standards, marketing and development of agricultural associations.  New USAID-funded programs will focus on developing markets for fertilizers and other inputs needed to improve agricultural productivity.

Azerbaijan Rural Credit (ACDI/VOCA).  Date: May 2000 - May 2005.  Amount:  $7.3 million.

ACDI/VOCA administers the Azeri Rural Credit Program in the areas of Absheron Peninsula, Masalli, Gelilabad, Lenkoran, Ismaili, Guba, Khachmaz, Tovuz, Zagatala.  In the eighteen months since lending operations began, the program has disbursed more than $5 million in loans through these branches.  Interest rates are set at 18% annually for production loans and 25% annually for trade loans.  The program has sustained a repayment rate above 99%.  In addition to lending operations, ACDI/VOCA, through local NGOs and business centers, provides training and consulting services to agricultural producers.

USDA is also implementing the GSM-102 and Supplier Credit Export Guarantee Program in Azerbaijan.  In 2002, 2003 and 2004 USDA announced export credit guarantees to support sales of U.S. food and agricultural products to Azerbaijan.  The GSM-102 and Supplier Credit program reduce the risk of U.S. exporters shipping to Azerbaijan by covering 90 and 65 percent of the risk, respectively.  In 2004 the GSM-102 program size and tenor was increased to $15 million for three years.  The International Bank of Azerbaijan is the only bank eligible under the program. 

For more information on doing business in Azerbaijan, please contact: BakuCommercial@N0SPAM.state.gov