PRIVATE SECTOR ACTIVITY (PSA) Annual Progress Report

Year 1: September 18, 2019 – September 30, 2020

Jarchi Hagverdiyev’s team received recommendations regarding to the construction of warehouse in accordance to ISO 22000

Prepared for review by the United States Agency for International Development under USAID Contract No. 72011219C00001, Private Sector Activity (PSA) implemented by CNFA. Private Sector Activity

Annual Progress Report

September 18, 2019 – September 30, 2020

Submitted by: CNFA USAID Contract 72011219C00001 Implemented by CNFA

Submitted to: USAID/Azerbaijan Samir Hamidov, COR

Originally submitted on October 30, 2020

1st Revision submitted on November 4, 2020 2nd Revision submitted on December 4, 2020 Table of Contents

Executive Summary ...... 6 Summary of Achievements ...... 9 Detailed PSA Progress by Activity and Component ...... 9 Operations ...... 9 Office Startup ...... 9 Staffing ...... 10 Subcontracting ...... 11 Legal Registration ...... 12 Finance ...... 13 Financial and Expenditure Summary ...... 13 Budget and Expenditure Detail ...... 13 Document and Deliverables Submission ...... 14 Program Activities ...... 15 COMPONENT ONE: Developing A More Diversified Non-Oil Economy ...... 15 Azerbaijan Fruit and Vegetable Value Chain (VC) Prioritization and Gaps Assessment ...... 15 Agritourism Value Chain ...... 16 Berry Value Chain ...... 18 Hazelnut Value Chain ...... 19 Orchard Fruit Value Chain ...... 22 Perishable Vegetable Value Chain ...... 23 Pomegranate/Persimmon Value Chain ...... 24 Cross-Cutting and Collaborative Efforts ...... 25 PSA Project Year 1 Work Plan ...... 25 Trade Capacity Building...... 26 Facilitating Linkages with U.S. Agribusinesses...... 27 Technology Transfer Fund (TTF) ...... 30 Access to Finance ...... 31 Food Quality and Safety ...... 32 Collaboration with Azerbaijani Government Agencies and Donor Projects ...... 33 Agrarian Services Agency and DAIM Centers ...... 33 AFAQ - Azerbaijani Women in Agriculture ...... 34 Azerbaijan Food Safety Agency (AFSA) ...... 34 Youth Engagement ...... 35 Azerbaijan State Agricultural University (ASAU) ...... 36 Azerbaijan Rural Women’s Association (ARWA) ...... 38 Microenterprise Assistance & Reporting ...... 40 Gender Equality and Women’s Empowerment ...... 40 Preventing Violent Extremism (PVE) ...... 41 Collaboration with Other Assistance Efforts ...... 41 COMPONENT TWO: Improving the MSME Business Enabling Environment...... 42 Business Enabling Environment Improvement ...... 42 Public Perception Survey...... 43 Azerbaijan Small and Medium Business Development Agency (SMB) ...... 44 Development of Member-Based Organizations (MBOs) ...... 45 COMPONENT THREE: Supporting Azerbaijan’s Economic Reforms ...... 46 Cross Cutting Activities ...... 49 Monitoring, Evaluation and Learning (MEL) ...... 49 Environmental Management and Monitoring ...... 50 Communications and Outreach ...... 51 Key Constraints and Lessons Learned ...... 52 A. PSA Year One Performance Monitoring Plan (PMP) ...... 59 B. Short-Term Technical Assistance/International Assignments ...... 59 C. Technology Transfer Fund (TTF) Status Updates ...... 59 D. Linkages Table ...... 59 E. Financial Research Reports ...... 59 F. Azerbaijan Agritourism Assessment ...... 59 G. Azerbaijan Fruit and Vegetable Value Chain (VC) Prioritization and Gaps Assessment ...... 59 APPENDIX A: PSA Year One Performance Monitoring Plan (PMP) ...... 60 3 Private Sector Activity (PSA) Annual Progress Report APPENDIX B: Short-Term Technical Assistance/International Assignments ...... 65 APPENDIX C: Technology Transfer Fund (TTF) Status Updates ...... 66 APPENDIX D: Linkages Table ...... 68 APPENDIX E: Financial Research Reports ...... 70

4 Private Sector Activity (PSA) Annual Progress Report Acronyms

ABPEA Azerbaijan Berry Producers and Exporters Association AEISI Agricultural Export and Investment Support Initiative AFSA Azerbaijan Food Safety Agency AFSI Azerbaijan Food Safety Institute AHPEA Azerbaijan Hazelnut Producers and Exporters Association ASAU Azerbaijan State Agricultural University AzPromo Azerbaijan Export and Investment Promotion Foundation B2B Business-to-Business BDS Business Development Services BMSB Brown Marmorated Stink Bug BSP Business Service Provider CNFA Cultivating New Frontiers in Agriculture DAIM State Agricultural Development Centers of the Ministry of Agriculture DAS Deputy Assistant Secretary of State ERC Environmental Review Checklist GAP Good Agricultural Practices HACCP Hazard Analysis and Critical Control Points HSE Health, Safety, and Environmental ICD Islamic Cooperation for Development ICT Information and Communication Technology IPM Integrated Pest Management IR Intermediate Result MELP Monitoring Evaluation & Learning Plan MOA Ministry of Agriculture MOU Memorandum of Understanding PERSUAP Pesticide Evaluation Report and Safer Use Action Plan PMP Performance Monitoring Plan PPE Personal Protective Equipment PPEAA Pomegranate Producers and Exporters Association of Azerbaijan PVE Preventing Violent Extremism PY Project Year ROC Record of Compliance SEDA Socioeconomic Development Activity SMB Small and Medium Business Development Agency SME Small and Medium-Sized Enterprise STTA Short-Term Technical Assistance TA Technical Assistance TTF Technology Transfer Fund USACC United States-Azerbaijan Chamber of Commerce VC Value Chain

5 Private Sector Activity (PSA) Annual Progress Report Executive Summary

The USAID Private Sector Activity (PSA) is a $15 million five-year project that applies a partnership and co-investment approach to support a more resilient Azerbaijan economy and improve the business enabling environment. Supporting the non-oil sector, by improving the competitiveness of the private sector (with a special emphasis on agriculture and other rural economic activities), building capacity of business support service providers, and reducing the barriers that hinder the development of micro, small, and medium enterprises (MSMEs), is contributing to a more secure and sustainable Azerbaijani economy.

The first quarter of Project Year 1 not only marked the start of the Activity’s operation, but was also an extremely busy period for implementation. Within the reporting period, PSA provided significant funding for and co-organized a series of events such as the second U.S.-Azerbaijan Agricultural Forum, which took place this time in Oklahoma a Safe Use of Food Additives workshop and a Fruit and Vegetable Juice Production Quality and Safety event in Baku, and exhibited at the third International Hazelnut, Walnut, and Chestnut Festival held in Zagatala region as well as the Tea, Rice, and Citrus festival held in Lankaran region. Within its work with Azerbaijani government agencies, PSA supported four Food Safety Institute laboratory employees to attend a training in Dubai, provided translation services for a plant protection short course taught by a U.S. professor at Azerbaijan State Agricultural University (ASAU) in Ganja, and organized a series of meetings for the chairman of the Small and Medium Business Development Agency (SMB) with U.S. counterparts in New York City and Washington, DC.

While many of the aforementioned events were large, high-level events requiring a great deal of organizational efforts, PSA also continued its start-up activities in parallel. PSA followed in the footsteps of the USAID Agricultural Support to Azerbaijan Project (ASAP), which closed out on the day prior to PSA’s launch. This eased the start-up process, which included PSA drafting and signing agreements with major subcontractors Nathan Associates and WCC International, recruiting new staff for open project positions, expanding upon existing or building new relationships and partnerships with state agencies, conducting a value chain study with Serbia- based subcontractor SEEDEV, and drafting a work plan for year one of the Activity’s operations.

PSA’s subsequent efforts were directed towards identifying new beneficiaries and concepts, meeting with partnering governmental entities and international organization and specifying areas of collaboration with them, carrying out in-depth assessments of the agritourism value chain (VC) and other VC gaps, and carrying on implementation of activities started during the previous quarter and under the predecessor project. PSA also jointly implemented a scientific and practical conference entitled, “Intensive Horticulture in Azerbaijan: Achievements, Perspective, Problems and Solutions,” a series of trainings agritourism and ecotourism business trainings activities with partners the Agro Procurement and Supply (APS) company under the Ministry of Agriculture, and began planning for several later public events, study tours and export promotion visits.

PSA also held a number of meetings with Ferrero, a global leader in hazelnut production and processing, to plan a partnership with the Activity that is anticipated to launch in PY2. In response, PSA developed a list of proposed joint activities in the hazelnut value chain, to which Ferrero provided positive feedback, thus initiating work on a Memorandum of Understanding (MOU) with PSA to jointly implement a variety of activities to train growers; build institutional capacity; develop curricula, training videos, and a production manual; organize international study tours; and work with PSA and ASAU to develop a certificate program in hazelnut production.

6 Private Sector Activity (PSA) Annual Progress Report As part of its efforts to expand collaboration with the MOA, PSA met with representatives of the Ministry’s Agrarian Services Agency (ASA) to discuss possible collaboration, especially with the Agency’s subordinate State Agricultural Development Centers (DAIM), which are tasked with providing agricultural extension-type services, followed by field visits to a number of their extension centers to assess their strengths and weaknesses. Plans for collaboration between PSA and ASA include joint needs-based trainings for farmers in communities and DAIM centers, engage PSA STTA to build the capacity of both DAIM centers and ASA laboratories (especially soil labs), and jointly develop and oversee demonstration plots in order to model good agricultural practices for farmers. PSA also hired a Business Enabling Environment Manager, who started actively meeting with agricultural associations, confederations, and public unions, as well as the Small and Medium Business Development Agency to identify existing administrative, business environment, and technical challenges, and propose PSA activities to address them.

In the spring of 2020, the Activity the world faced thee global coronavirus pandemic (COVID-19). In response to the restrictions and challenges resulting from COVID-19, PSA adapted its activities in order to continue implementation while abiding by the necessary safety measures and lockdown requirements. Generally, the Government of Azerbaijan (GoAJ) has provided a favorable environment for agribusinesses in the country by permitting businesses in the agricultural sector to move freely throughout the country for business purposes during the quarantine period, though initially, there were some obstacles to informal farmworkers traveling to their places of employment. As far as PSA implementation is concerned, however, many physical activities, such as face-to-face discussions, group meetings, and travel were restricted or limited due to either PSA policies to manage risk to employee, partner, and beneficiary health, or the application of mandatory quarantine regimes by the GoAJ in order to manage the pandemic’s spread.

Since mid-March 2020, PSA’s Baku office has been closed and staff have been working from home. Field trips continued while project staff wore masks and practiced social distancing to the maximum practicable extent. Activity management moved online, with weekly staff meetings and ad hoc sessions, such as for grants evaluation committee meetings, taking place via Zoom. The situation was further challenged by the COP being stranded in Tbilisi in early March when he traveled there to obtain a new Azerbaijani visa right before Georgia and Azerbaijan decided to close their border to help contain the coronavirus. While he has been able to work remotely from Tbilisi since, the search for a new DCOP (the original proposed candidate could not deploy to Baku due to a family medical emergency) has stalled due to the inability of ensuring that a new hire could deploy to Azerbaijan due to the closed border and the heavy field work requirements of that position.

Concurrently, PSA created new online platforms for communicating with beneficiaries and the wider public and commenced work on creating content, with a special emphasis on video trainings. In collaboration with USACC, WCC organized a number of webinars, in order to disseminate programming assistance to its beneficiaries and facilitate new business linkages between both Azerbaijani and American businesses and educational institutions.

PSA adapted its approach to supporting this sector as well. PSA created two Facebook pages and a YouTube channel to expand its outreach during the time of social distancing and travel restrictions when in-person trainings were not possible. PSA’s main Facebook page, Kənd Təsərrüfatının İnkişafına Dəstək (Support for Agricultural Development), began to be used as a platform for PSA to provide valuable information and training to its beneficiary farmers and processors. Since May, Baku-based staff and the project’s newly hired field-based agronomists produced and posted 29 videos on modern growing practices and other topics, as well as 56 7 Private Sector Activity (PSA) Annual Progress Report other original posts. By the end of PY1, the posted videos reached about 68,089 individuals. These expanded social media activities have grown PSA’s social media followers to 2,211 individuals.

Also during the year, following the approval of the PSA Technology Transfer Fund (TTF) manual, PSA started to actively work on issuing Requests for Concept Notes (RFCNs) for TTF projects, and Requests for Applications (RFA) to those applicants whose concept notes had been approved by PSA and USAID.

The PSA Business Enabling Environment Manager (BEEM) held virtual meetings and phone conversations with the representatives of the Agro Economics Research Center of the MOA, State Committee for Family, Women and Children Affairs, Cadastral and Landscape Project Research Center LLC, Azerbaijan Export Support Center, Ernest and Young’s (EY) Baku office, Eden Organic LLC, and Gabala Hazelnut Producers’ Group. The purposes of the meetings varied from identifying the challenges in the business environment, finding out about opportunities for collaboration, and providing requested support. Along with these meetings, the BEEM also developed two video trainings aimed at increasing agricultural players’ financial literacy, and prepared a USAID-requested research report summarizing issues related to available water resources and consumption in Azerbaijan.

Late in PY1, PSA agreed to partner with AzPromo and USACC to implement the Agricultural Export and Investment Support Initiative (AEISI), a multi-faceted initiative that the parties designed to support small and medium-sized agribusinesses in Azerbaijan. The activity will upgrade MSMEs’ processes and product quality throughout the entire production and processing chain in order to enter or expand access to foreign markets. AEII will focus on competitively selected enterprises producing dried fruits, persimmons, and strawberries, with each implementing party bringing unique resources to address the various technical, business, financial, and quality constraints to exporting by working within their own guidelines and procedures, but coordinating with one another wherever practicable.

As previously noted, Nathan Associates was engaged to lead Objective 3 to establish a responsive, flexible mechanism for supporting the GoAJ’s Economic Reform Agenda, in addition to streamlining and operationalizing regulations governing MSMEs in Azerbaijan. A shortfall in USAID funds, however, led to the suspension of Component 3 activities under the subcontract between CNFA and Nathan Associates in February 2020. This unfortunate turn of events resulted in PSA staff expending major effort on designing the component, contracting the subcontractor, explaining and formalizing the suspension of the subcontract, and following up with the donor and subcontractor on a periodic basis to gain and provide updates on possible paths forward. As a result, work on Objective 3, originally planned to be a government-facing facility to empower public sector agencies and officials to design and execute economic reforms that support the private sector, has been put on hold due to a USAID funding shortfall.

In place of the Objective 3 work, with funding from the White House’s Women's Global Development and Prosperity (W-GDP) Initiative, Component 3 will now entail work on a new activity for which funding has been obtained. Women in Associations Leadership and Linkages (WALL) aims to increase the access of women entrepreneurs and business owners to market information, markets, digital and business development services, access to finance, networks, mentorship, and other resources that will enable them to overcome the obstacles of starting and/or growing firms. Under WALL, PSA will empower and capacitate Azerbaijan’s women- owned, women-led and women-focused businesses and professional associations to sustainably deliver on the component objectives. To select a subcontractor to help implement this 8 Private Sector Activity (PSA) Annual Progress Report component, CNFA issued an RFQ with a September 2, 2020 submission deadline and received one complete application from the DC-based Center for International Private Enterprise (CIPE). As of the end of the reporting period, after receiving USAID’s consent to subcontract, CNFA was finalizing the subcontracting process with CIPE. Summary of Achievements

Through support to six value chains – agritourism, berries, hazelnuts, orchard fruits, perishable vegetables, and pomegranates/persimmons – assisted enterprises increased overall sales revenues by $1 million, export revenues by $0.27 million and overall productivity by 1,064 metric tons (MT) in FY 2020. In response to challenges to field travel and group training from COVID-19, PSA adapted its activities to establish a robust online and social media presence to facilitate communications and provision of information to beneficiaries. Newly created Facebook pages, a YouTube channel, and WhatsApp groups were all utilized to expand outreach and provide live and recorded webinars and trainings when in-person trainings were not possible. In all, PSA provided 252 instances (74 for women) of in-person technical assistance and posted online 29 new videos it had created on modern growing practices, which were viewed 3,126 times, resulting in 1,975 individuals applying improved management practices or technologies. Collaboration with the GoAJ, other donors, as well as private-sector stakeholders such as Coca- Cola and Ferrero was an important emphasis for USAID in order to identify gaps, avoid overlap, ensure buy-in, as well as to leverage USAID assistance to expand the scope and resonance of its initiatives. Through such partnerships, USAID leveraged $33,500 of outside funding in exchange for its own contributions of just $6,500. In so doing, USAID not only expanded access to technical information, but fostered public-private dialogue by facilitating seven exchanges between/by business associations, MSMEs, and the GoAJ. In November 2019, USAID helped organize a U.S.-Azerbaijan Agricultural Forum in Oklahoma with various public and private sector partners and sponsors from both countries. The forum served to lay a foundation for future Azerbaijan-U.S. bilateral agribusiness trade, a strategic partnership and Dual Master’s Degree Program in International Agriculture between Azerbaijan State Agricultural University and Oklahoma State University, and other collaboration. Under its efforts to facilitate trade linkages, USAID helped facilitate a first shipment of fertilizer formulations from U.S. firm Grow More, Inc. to Azerbaijani input dealer Vatan LLC in the amount of $40,000. USAID also linked the U.S. firm DotMed.com to the Azerbaijani company Raytech LLC, which imported DotMed.com medical equipment costing $19,000. USAID also helped three agricultural enterprises to adopt quality and food safety standards during the year. Finally, USAID facilitated the issuing of loans in the amounts of 120,000 AZN and 70,000 AZN, respectively, by sharing its agricultural technical expertise to assist the Ministry of Agriculture’s Agricultural Credit and Development Agency (AKIA) and a World Bank-supported project to gauge the feasibility of agricultural loan applications.

Detailed PSA Progress by Activity and Component

Operations

Office Startup

Although PSA is a distinct activity, it followed in the footsteps of the USAID Agricultural Support to Azerbaijan Project (ASAP), a previous CNFA-implemented project, which closed out one day prior to PSA’s launch. During the first week of the Activity, PSA conducted a review of office

9 Private Sector Activity (PSA) Annual Progress Report space availability and pricing in central Baku within walking distance of the USAID office in order to determine an ideal office location that would facilitate frequent meetings and coordination between PSA and USAID. Based on its findings, PSA decided to remain in ASAP’s former office, at least initially, as the location was ideal, the rental price competitive and within the PSA budget, and fully equipped and available for use from day one of PSA. Thus, CNFA signed a one-year lease agreement during the first week of the Activity. During the first month, CNFA upgraded its internet access from a telephone line to a dedicated fiberoptic line in order to provide for more reliable internet access. Though the office space may prove to be smaller than ideal once PSA is fully staffed in PY2, the lack of a Deputy Chief of Party (DCOP) for much of PY1, the suspension of the Component 3 subcontract with Nathan Associates, and the remote work arrangements froim mid-March 2020 onward due to the COVID-19 pandemic ensured that the office was of sufficient size throughout PY1.

Staffing

Because most of PSA’s personnel were identified in the project proposal, CNFA was able to quickly contract most full-time staff within the Activity’s first week. CNFA conducted a competitive selection process to select an experienced legal firm to assist in exploring legal options for engaging personnel both prior to and upon legal registration of the Activity, as well as to review PSA’s various employment, travel, and office-related policies to ensure maximum compliance with Azerbaijani legislation and CNFA policies. Activity personnel were initially engaged through consultant agreements, but it is planned that staff will be transitioned to employment agreements upon legal registration of the PSA Activity.

The Chief of Party (COP) of the Activity was already in the country and started work on day one of PSA, thus meeting the USAID requirement that the Contractor’s COP arrive in-country no later than 30 days following the contract award date. Unfortunately, the designated Deputy Chief of Party (DCOP) could not accept his position in Azerbaijan due to family medical circumstances and withdrew from the position one week prior to scheduled deployment. CNFA immediately commenced a search for both an Interim DCOP and long-term DCOP. An Interim DCOP, Ilia Kvitaishvili, a former Deputy Minister of Agriculture in Georgia and currently the Technical Unit Lead of the USAID Agriculture Program in Georgia, was deployed to Baku from October 20 through December 6, 2019, and he supported PSA’s start-up and program implementation activities. Although CNFA managed to identify a suitable candidate for the long-term DCOP position in the spring of 2020, the closing of the Azerbaijani border made it impossible for the project to field a new expatriate to Azerbaijan through the end of PY1. CNFA agreed with USAID to postpone engaging a long-term DCOP until relocation to Azerbaijan could be provided for. Meanwhile, when the COP traveled to Tbilisi, Georgia in March 2020 to obtain a new Azerbaijani visa, the border between Azerbaijan and Georgia was closed in order to help stop the spread of COVID-19. The COP began working remotely from Tbilisi, which was less disruptive to the project than might normally be the case, as PSA shut its Baku office as well and ordered all staff to work remotely from home as well, except for essential field trips, in order to protect staff from the pandemic. As of the end of PY1, the COP was still working remotely from Tbilisi, as return travel to Azerbaijan was still not possible, and the rest of the Azerbaijan-based staff continued to work primarily freom home except for essential field travel and occasional meetings with partners and beneficiaries,

During startup, CNFA also advertised to fill three additional local positions, namely for an Accountant/Office Manager, Procurement Assistant, and Business Environment Improvement Manager. Over 100 individuals applied in all. After interviewing shortlisted candidates, CNFA submitted a personnel and rate approval request to USAID for the selected candidates. Ms. Sevil 10 Private Sector Activity (PSA) Annual Progress Report Gurbanova was hired for the Procurement Assistant position and commenced her assignment on December 3, 2019. Mr. Shahriyar Bayramzade was hired for the Accountant/Office Manager position and commenced his position on January 9, 2020. Finally, CNFA received USAID approval to hire Mr. Elsevar Guliyev as the Business Environment Improvement Manager and he commenced his position on February 25, 2020.

On April 20, PSA requested approval for the engagement and daily rates of six field-based agronomy consultants, covering the Berry, Hazelnut, Orchard, Perishable Vegetable, and Pomegranate/Persimmons Value Chains. USAID provided this approval on April 24. On May 18, Orchard Value Chain Agronomist Jabbar Heybatov resigned his position due to personal financial difficulties, which forced him to accept full-time employment with another employer, making it impossible for him to continue in his part-time field-based agronomy consultant role with PSA. A replacement Orchard Value Chain Agronomist candidate, Sahil Guliyev, was later approved by USAID and the position was filled in June 2020.

Subcontracting

As approved in the PSA contract, CNFA has two tier-one subcontractors under PSA, namely Nathan Associates Inc. and WCC International. Nathan Associates Inc. manages a portfolio of programs worldwide to strengthen macroeconomic and fiscal policy, trade, investment, and business enabling environments, and was engaged to provide leadership under PSA Objective 3 “Support for Azerbaijan’s Economic Reforms,” in order establish a responsive, flexible mechanism for supporting the Government of Azerbaijan (GoAJ) with its Economic Reform Agenda and support the GoAJ in the streamlining and operationalization of regulations governing MSMEs in Azerbaijan. Objective 3 was to be led by Ms. Zeynep Akalin, a development economist from Nathan Associates. CNFA subcontracted with Nathan Associates on September 18 and Ms. Akalin was deployed to Azerbaijan on October 22, 2019. However, due to a shortfall in USAID funding, activities under Objective 3 were suspended in February and the subcontract between CNFA and Nathan Associates was put on hold. At present, the subcontract is formally suspended, USAID and PSA as well as PSA and subcontractor communicate on a periodic basis to discuss updates on possible paths forward.

WCC International, a U.S. small business that supports international trade with a focus on Azerbaijan, the Caucasus, and Central Asia, and has a close relationship with the United States- Azerbaijan Chamber of Commerce (USACC) and U.S. agribusinesses, supports the U.S. agribusiness linkages and export promotion activities of PSA, and facilitates relations between analogous U.S. and Azerbaijani government agencies in order to catalyze experience exchange and collaboration. An initial subcontract was signed with WCC early in the first month of PSA to support the Activity to organize the First Oklahoma-Azerbaijan Agricultural Forum, which took place in early November. CNFA signed a longer-term subcontract with WCC International to continue supporting PSA implementation in April 2020. The current agreement took effect on Friday, April 1, 2020 and originally ran through the end of the project year. WCC’s role in the Activity includes working to foster commercial agribusiness linkages, international educational partnerships, and other efforts to strengthen existing Azerbaijan-U.S. partnerships, as well as establish new ones. Since the onset of COVID-19 related restrictions that limit in-person programmatic activities, WCC has continued to provide robust support to promote U.S.- Azerbaijani business linkages through facilitating a series of business linkages-related webinars.

Late in PY1, PSA obtained incremental USAID funding to support women in business in Azerbaijan. This will support a new Activity component, Women in Associations: Leadership and Linkages (WALL), made possible with funding from the Women’s Global Development and 11 Private Sector Activity (PSA) Annual Progress Report Prosperity (W-GDP) Initiative. WALL aims to strengthen business and professional associations that serve and are led by women to increase women’s economic empowerment. Under WALL, PSA will collaborate with private sector actors, the GoAJ, and relevant Azerbaijani business and professional organizations to increase the access of women entrepreneurs and business owners to market information, markets, digital and business development services, access to finance, networks, mentorship, and other resources, thereby enabling them to overcome obstacles of starting and/or growing firms and sustainably deliver on the component objectives. Early in PY2, CNFA plasn to engage the DC-based Center for International Private Enterprises (CIPE) as a subcontractor to help implement this component.

PSA also subcontracted with SEEDEV, a resource partner company based in Serbia with substantial experience in agricultural research and analysis around the world, including the Caucasus, to conduct a Value Chain Prioritization and Gaps Assessment for Azerbaijan’s horticultural sector and fielded a two-person team’s visit to Azerbaijan in November 2019 under the assignment. Based on the recommendation of the Value Chain Prioritization and Gaps Assessment, PSA recruited and fielded a consultant to conduct an Agritourism Assessment in February 2020.

Consulting with Stakeholders and Donors

In order to develop a detailed Year 1 Work Plan, PSA held a wide variety of meetings with agricultural, tourism, governmental, and other stakeholders to identify and map needs, resources, and opportunities that will enable the Activity to refine its goals, strategy, activities, partners, and beneficiaries. This process entailed ground-truthing assumptions that were incorporated into CNFA’s PSA proposal, exploring the feasibility of proposed activities from both a cost and time perspective, and identifying new opportunities and resources that the Activity can tap into.

Two major reports came out of these efforts, including a Value Chain Prioritization and Gaps Assessment and an Agritourism Assessment. Building on a methodology previously used under USAID’s Agriculture Program in Georgia, SEEDEV’s work with the PSA team built upon this knowledge, much of which was applicable to Azerbaijan, in the PSA Value Chain Prioritization and Gaps Assessment, thereby allowing the PSA Team to more rapidly conduct and conclude a similar assessment for Azerbaijan. The Assessment was completed in three steps:

1) Analyzing the competitiveness of a wide range of products and product groups. 2) Conducting a market system mapping for an in-depth gap analysis. 3) Developing value chain action plans.

Finally, the PSA team conferred with USAID and relevant government agencies in order to gain buy-in and consensus on final value chain selection and action plans.

For the Tourism Analysis, the PSA team brought an expert to Azerbaijan to work with PSA staff to study and gain a better understanding of the strategy and capacity of the Azerbaijan Tourism Board and of nascent agritourism and ecotourism ventures and support activities recently launched in the country.

Legal Registration

After nearly five years of attempts to legally register a CNFA branch in Azerbaijan, the branch received its official registration certificate from the Ministry of Justice (MOJ), valid as of July 17, 2019. In Azerbaijan, however, the project itself must also obtain registration from the Ministry of 12 Private Sector Activity (PSA) Annual Progress Report Justice (MOJ). Thus, CNFA submitted an additional application to register the PSA Project to the MOJ on February 19, 2020 and checked in with the Ministry periodically since then, each time being told that that the application was still under review.

Meanwhile, CNFA coordinated with the U.S.-Azerbaijan Chamber of Commerce (USACC) and the Ministry of Agriculture during PY1 in order to attempt to extend the branch registration for another year (it is only valid for one year at a time) and ensure that letters of support for this effort were obtained from all required Government of Azerbaijan (GoAJ) authorities and provided to the MOJ. At the end of June, in order to help facilitate smooth communication and coordination with the Ministry of Agriculture, PSA began providing monthly written reports to the Ministry on its activities over the previous month, with a special emphasis on collaboration with and assistance to the Ministry and its subordinate departments, agencies, and other institutions. On August 11th, CNFA’s Azerbaijan Branch registration was successfully renewed through March 2021.

13 Private Sector Activity (PSA) Annual Progress Report Document and Deliverables Submission

CNFA submitted the following deliverables and other documents to USAID during the year: USAID Submission USAID Approval/ Document Submission Date(s) Acknowledgement Status 1. Quarterly Reports September-December 2019 Submitted December 13, 2019 Approved Quarterly Progress Report January-March 2020 Submitted April 17, 2020 Approved Quarterly Progress Report April-June 2020 Submitted July 16, 2020 Approved Quarterly Progress Report 2. Program Design PSA Start-up and Preliminary Work Submitted October 19, 2019 Approved Plan PSA PY1 Work Plan Submitted January 25, 2020 Approved PSA Value Chain Prioritization and Submitted February 18, 2020 Acknowledged Gaps Assessment PSA Grants Manual Submitted November 22, 2019 Approved PSA Grants Manual (revision) Submitted April 2, 2020 Approved Azerbaijan Agritourism Assessment Submitted March 20, 2020 Acknowledged MEL Plan Submitted February 29, 2020 Acknowledged MEL Plan (revision) Submitted April 6, 2020 Approved Communications Plan Submitted Internal document Approved Azerbaijan Bumpers Analysis Submitted May 19, 2020 Approved Report 3. Weekly Updates Monthly Financial Research Reports Weekly Updates Submitted Weekly Acknowledged Research Report: “Analysis of 2020 Submitted October 16, 2019 Acknowledged Azerbaijani State Budget” Research Report: “Are Banks Submitted November 22, 2019 Acknowledged Lending to Agribusiness?” Research Report: “Azerbaijan’s monetary policy actions and Submitted December 19, 2019 Acknowledged achievements in 2019” Research Report “Main trends in Submitted January 24, 2020 Acknowledged Azerbaijan's 2019 foreign trade” Research Report “Main trends in Azerbaijan’s banking sector in Submitted February 17, 2020 Acknowledged 2019” Research Report “Potential Effects of Reduced Oil Prices on the Submitted March 17, 2020 Acknowledged Azerbaijani Economy” 14 Private Sector Activity (PSA) Annual Progress Report Research Report “State Support to Entrepreneurs in Response to the Submitted April 20, 2020 Acknowledged COVID-19 Pandemic” Research Report “Banks’ Support to Clients During the Quarantine Submitted May 17, 2020 Acknowledged and Economic Hardship Period in Azerbaijan” Research Report “Are banks' Submitted June 17, 2020 Acknowledged lending to Agribusiness?” Research Report “Azerbaijan’s Submitted July 17, 2020 Acknowledged Non-Oil Exports in 2020” Research Report “Overview of Amendment to the State Budget of Submitted August 20, 2020 Acknowledged Azerbaijan” Research Report “Impact of the COVID-19 pandemic on Submitted September 23, 2020 Acknowledged Azerbaijan's economy”

Program Activities COMPONENT ONE: Developing A More Diversified Non-Oil Economy

Azerbaijan Fruit and Vegetable Value Chain (VC) Prioritization and Gaps Assessment

With resource partner SEEDEV, PSA conducted a Value-Chain Prioritization and Gap Assessment to inform value-chain selection, guide program interventions, and identify promising partnership opportunities based on a methodology tested and fine-tuned under USAID’s Agriculture Program in Georgia. As a result of an analysis focused on export trends, import substitution potential, ability to add value to the products through innovation, know-how or technological advancements, and gross farm income, PSA evaluated the relative competitiveness of various Azerbaijani agricultural fruits and vegetables. To prioritize value chains for targeted PSA assistance, the Activity weighed the outcomes of the competitive analysis together with trends in the sector, diversification potential, market risk, job creation, the possibility for adding value, and USAID ASAP experience.

The key findings of these efforts, complemented by PSA staff experience and information on activities under the predecessor ASAP Project, informed the selection of the following five horticultural value chains and one cross-cutting value chain for prioritization under PSA:

 Agritourism: Cross-cutting and not limited to the target horticultural value chains noted below;  Berries: Including “traditional” berries, i.e., strawberries, raspberries, blueberries, and blackberries, as well as niche market products, kiwi and feijoa;  Hazelnuts;  Orchard Fruits: Including stone fruit and apples; 15 Private Sector Activity (PSA) Annual Progress Report  Perishable Vegetables: Including tomato, cucumber, eggplant, lettuce and other leafy vegetables, as well as some types of cabbage; and  Pomegranates & Persimmons.

Next, for each horticultural value chain selected in the prioritization process, PSA conducted market system mapping for an in-depth gap analysis. Based on this gap analysis, PSA developed value-chain action plans (VCAP) that are serving as a road map for PSA interventions and treated as living documents that meet the changing and emerging needs of each value chain. In addition, the Azerbaijan Agritourism Assessment including recommendations for activities that were incorporated into a PSA PY1 Agritourism Activity Action Plan that was submitted to and approved by USAID in April 2020 and subsequently incorporated into a revision of the PSA PY1 Work Plan.

Agritourism Value Chain

While there are many definitions, when it relates to on-farm activities, agritourism can be defined as visiting a working farm or any agricultural, horticultural, or agribusiness operation for the purpose of enjoyment, education, or participation in the activities of the farm or operation. For example, agritourism may include a farm stay, pick your own fruit activity, or sale of processed farm products where the branding or point of sale places a strong value-adding focus on the identity, values, and/or processes utilized by the specific farm(s) where they are produced.

The objective of agritourism is to promote sustainability and competitiveness in rural communities through the production of products, experiences, and services that link agricultural activities to tourism in ways that foster food security, environmental sustainability, and sustainable use of natural and cultural resources, validate traditional knowledge, and lead to sustainable livelihoods.

A key strength supporting the potential growth of the agritourism sector in Azerbaijan is the government's focus on developing both tourism and agritourism in a post-oil economy. Agritourism has been highlighted as a potential opportunity for development at a national level, with activities being undertaken throughout the country (to varying degrees), at a regional level, and at a local level through local representatives, individual entrepreneurs, tourism and agriculture stakeholders, NGOs, and donor projects.

The culture, heritage, and regional diversity of Azerbaijan is a key strength in potential authentic stories to tell through products and activities. There have been and continues to be an increase in products and experiences both on the farm and off the farm. However, the number of products (including farmhouse accommodation) and experiences, type of experiences based on market need, and the level of engagement for tourists in existing experiences remain low. In addition to a reported lack of knowledge in the types and processes of setting up agritourism products and experiences, for all potential agritourism businesses, including significant sized farms with engaged entrepreneurs, there are prohibitive factors specific to smallholder farmers who cannot afford to address requirements such as food safety certification, packaging, etc. Farmers attending the PSA agritourism training in Ismailli

16 Private Sector Activity (PSA) Annual Progress Report The PSA Team has planned a set of activities that will address current challenges and allow SMEs in Azerbaijan to take better advantage of the opportunities available in the sector. Farmers and local business operators are benefiting through increased revenues and diversified income sources. As it develops, agritourism will enable Azerbaijan to capture a greater share of tourism revenues and generate more investment in rural areas.

PSA implemented the following activities during PY1:

 Agritourism and Ecotourism Assessment: PSA hired an international consultant to conduct an agritourism and ecotourism assessment, in order to provide a clear picture of the current situation in Azerbaijan. Based on the findings of the Agritourism Assessment, PSA incorporated the recommendations into its Work Plan. Given the many disparate activities focused on the tourism space that are being launched in Azerbaijan, PSA continued liaising with other public and private organizations to improve coordination, avoid overlap, and leverage resources, including working closely with the State Tourism Agency (STA), Azerbaijan Tourism Board (ATB), Destination Marketing Organizations (DMOs), APS, GIZ, and Coca Cola. PSA and STA/ATB identified relevant activities to advance the agritourism sector, such as developing an agritourism handbook, product development, trainings, and upgrading facilities of guesthouses to support this value chain. Agri/ecotourism (including national parks) routes and services will be closely analyzed, and PSA will consider supporting the efforts of GoAJ, GIZ, and other projects and organizations to develop and provide for the offering of tours to build on the tourism features and potential of given regions.  Field-Based Agritourism Trainings: In order to build awareness of opportunities to expand into agritourism product and service provision, PSA held a series of trainings for farmers in Agritourism Development in Azerbaijan with the support of APS and Coca-Cola for 50 farmers in Lankaran, Ismayilli, and Zagatala regions.  One Village One Product Program: PSA developed a joint concept with STA, “One Village One Product,” which will help develop new tourism products from different regions to attract new tourists to rural Azerbaijan and enrich their travel experience. PSA, in partnership with the government and the private sector, identified four main corridors (southern, northern, northwestern, and western) for establishing about 20 agritourism sites over the next two years. Introducing agritourism to these sites will help increase participants’ incomes by at least 30%, while also creating new jobs and attracting new investments in establishing facilities and launching new service providers.  Agritourism Promotional Event in Lenkaran: PSAheld an Agritourism event at a beneficiary farm in Lenkaran to promote its anticipated collaboration with the Agro Procurement and Supply Company to support the development of the sector and demonstrate the potential for attracting additional revenue to agricultural production operations through the provision of agritourism services.

Further collaboration with the GoAJ included PSA’s participation, together with a wide variety of governmental and non-governmental stakeholders, in discussions on the Activity Plan for the Implementation of of the 2020 Strategic Road Map on National Economy and Key Sectors of the Economy of Azerbaijan, which outlines activities aimed at developing rural tourism activities in Azerbaijan.

Additional partnership work included collaboration with GIZ on exchanging PSA’s agritourism assessment and GIZ’s 2019 ecotourism assessment, and planning a joint event celebrating the anniversary of German heritage in the Caucasus, though this event was shifted to PY2 due to COVID-19. For the same reason, a number of activities to provide individual technical assistance to agritourism providers planned for PY1 will instead be implemented during PY2. 17 Private Sector Activity (PSA) Annual Progress Report Berry Value Chain

At present, in Azerbaijan, the Berry VC is dominated by strawberry production, which increased almost 15-fold over the 2016-2020 period, from about 2,200 MT to 30,000 MT. The harvested area in 2020 is 1,500 hectares and the major production regions are Lankaran, Ganja and Guba- Khachmaz. The size of the sector influences not only the quantity but also the quality of production. Strawberry production must be expanded and diversified urgently into the production of other berries in order to make the expansion of the cold chain, including processing into frozen products, an efficient activity. At present, there are nine strawberry varieties legally registered in Azerbaijan. Producers are purchasing new varieties from Italy, Spain, and other countries.

As concerns feijoas, the volume and value of current production is not insignificant, and they are quite complementary to the production of other fruit and berry due to their late harvest season. In 2019, there were 1,200 hectares of feijoa production, of which 949 were in Lankaran economic region. Since average yields vary from 6 to 14 MT per hectare, production volumes also fluctuate, but they average around 10,000 MT per year. Almost all product is sold in the local market, both fresh and processed. While there are limited exports, there is no official data and volumes are estimated at around 500-700 PSA trained young MT of fresh product to the Russian market. Kiwi is not a completely beneficiaries in a strawberry new crop to Azerbaijan; there are orchards that are more than a field in Jalilabad region decade old and producers with good experience and knowledge of how to deal with the production challenges. However, the area under kiwi production is not large, around 300 hectares as of 2019, which has been increased by large companies setting up new modern orchards. Production varies, but is around 200 MT, which is expected to increase after the new orchards start bearing fruit. ASAP supported those enterprises and has positive experience working in the sector. As was decided though the Value Chain Prioritization exercise it conducted during PY1, PSA assistance to the feijoa and kiwi subsectors will be limited to new technology dissemination, whereas PSA is providing extensive assistance throughout the entire Strawberry VC.

PSA hired a field-based agronomist for the main growing regions for berry production in April 2020. The primary growing regions for this value chain are the Western, Southern and Northern regions. Although blueberry and raspberry production is limited and mostly not viewed as commercial crops, strawberry, kiwi, and feijoa production is widespread and demands intensive care. PSA has identified new beneficiaries in the Berry value chain in both the Southern and Northern regions and provided assistance to them on the application of relevant agricultural practices. During PY1, PSA provided field training to 50 growers, covering over 150 hectares of berry orchards in Jalilabad, Masalli, and Lenkaran regions. The training and TA focused on spraying USAID representatives visit a USAID-supported cold storage operation in Lenkaran 18 Private Sector Activity (PSA) Annual Progress Report microelements, preventing disease, and preparing for harvest and post-harvest handling. Due to the necessity of social distancing, PSA agronomists provided TA and held small training sessions only for a limited number of berry growers.

A Berry VC demo plot was selected in Goytepe, Jalilabad to serve as a model to show small and medium size farmers how to properly establish berry operations. The strawberry demo is owned by Mr. Mirismayil Guliyev, who has about 15 hectares of production overall. The demo plot will be used to display modern practices and technologies that are feasible for increasing yields and productivity in Azerbaijani conditions. Planting, growing, and postharvest operations are all present in the demo, which will enable PSA to demonstrate all production phases. Growing trainings provided here will include irrigation, fertilization, and pest management, among other topics.

PSA conducted online trainings in the Berry VC, as the entire berry season in Azerbaijan has overlapped USAID stand at the 3rd Tea, Rice and Citrus festival in Lenkaran with the pandemic period. Starting in May, PSA began producing short videos on various seasonal agricultural practices for berry orchards. PSA’s berry agronomist produced four videos on cultivation methods, pest control, orchard management, and harvest and post-harvest handling. The videos are designed to educate growers and promote PSA activities. In addition to online trainings, PSA conducted TA on-site for small groups of beneficiaries, reaching 60 growers in all, over the May-August period.

The Berry Value Chain was greatly strengthened and achieved the following accomplishments during PY1:

1. 5 new beneficiaries planted 100 hectares of strawberries in Lenkaran, where berries were not previously planted; 2. Average production per hectare increased by 7 MT (from 13 MT to 20 MT); 3. Cold chain management and post-harvest handling of berries were improved; With the introduction of three cold storages constructed by USAID under PSA’s predecessor project, exports increased by about 1,500 MT in 2020; and 4. Several vegetable producers diversified, adding strawberry to their production mix or expanding their existing strawberry production. The harvested area in 2020 was 1,500 hectares and the major production regions are Lankaran, Ganja and Guba- Khachmaz.

Hazelnut Value Chain

Azerbaijan has one of the rare favorable climates for commercial hazelnut production. Over the past 5-6 years, the hazelnut sector has almost doubled its production and reached 70,000 hectares of new and existing orchards, yielding over 45,000 MT of in-shell hazelnuts each year. 19 Private Sector Activity (PSA) Annual Progress Report While PSA’s predecessor ASAP Project rolled out an intensive training program and addressed the limiting factors that inhibited growth in the hazelnut production field, which was backed by new PSA activities in PY1, few of the old constraints remain and some new challenges have arisen as a result of growth in the sector. There is still a need to support a few privately-owned, small- scale hazelnut nurseries in the regions, demonstrate state-of-the-art knowledge plots, and assist associations, cooperatives, and state extension agencies in providing professional technical assistance to the wider community of growers. Value-adding is another area which has experienced insufficient progress to date and is planned to be one of the key issues addressed in the second year of PSA implementation. To address these issues, PSA will go beyond the previous general grower trainings and partner with global private-sector actors, such as industry leader Ferrero, as well as educational institutions, to roll out training programs to educate growers, agronomists and agricultural university graduates in advanced horticultural practices.

Building on the success achieved in previous USAID projects, including developing an organized system of knowledge of good agricultural practices and making technical materials available locally, PSA utilized new programming strategies to help the hazelnut sector develop even further during PY1. Although the 2020 production year wasn’t favorable climatically and resulted in reduced harvest on a national level due to the heavy frost that occurred in mid-spring of this year, PSA beneficiary demo plots and their neighboring orchards look much healthier and bore more nuts due to the application of the good agricultural training provided by the Activity. Constrained by COVID-19, PSA developed innovative training and outreach mechanisms, which resulted in effective communications and training.

In the first year of implementation, PSA hired two experienced agronomists specializing in hazelnut production, to perform training and provide technical assistance. Ziyaviddin Aliyev, a local agronomist has been assigned for activities in the northwest of the country, including

Video footage: training on green pruning (left) and spraying Gabala, Sheki, Oghuz, Gakh, Zagatala and Balakan regions. A local agronomist, Bahlul Bayramov, was hired to work with PSA beneficiaries in the northern Khachmaz, Guba, and Gakh regions. Both of the agronomists performed group and field-based training, provided TA to demo plot and other beneficiaries, and recorded video trainings. PSA identified new beneficiaries in the hazelnut value chain in both the Northern and Northwestern regions and provided assistance to them in the application of relevant agricultural practices. PSA provided field training to 62 growers, covering over 300 hectares of hazelnut orchards in Zagatala, Gakh, Balakan and Khachmaz regions. The training and TA focused on spraying microelements, preventing against powdery mildew fungal disease, green pruning in hazelnut orchards, preparing for harvest and post-harvest handling of hazelnuts. Due to the necessity of social distancing, PSA agronomists provided TA and held small training sessions for a limited number of hazelnut growers.

20 Private Sector Activity (PSA) Annual Progress Report Starting in May, PSA began producing short videos on various seasonal agricultural practices for hazelnut orchards. PSA’s two hazelnut agronomists produced seven videos on sulfur spraying, green pruning, pest control, orchard management and harvest and post-harvest handling. The videos are designed to educate growers and promote PSA activities as well as the Azerbaijan Hazelnut Producers and Exporters Association (AHPEA) and its agricultural machinery services. PSA supported AHPEA to produce short videos on applying agricultural practices in the hazelnut orchards and aired them on its social media channels. At the same time, AHPEA has begun using its USAID-provided agricultural machinery, including tractors, sprayers, and flail mowers, in member orchards as part of its annual plan for agricultural services. During the reporting period, AHPEA provided machinery services on nearly 50 hectares of various beneficiaries’ orchards, generating 3,000 AZN in revenue.

PSA also helped AHPEA to develop and successfully lobby for an “Export Promotion” amendment. This simplified the process for obtaining export promotion tax refunds for hazelnut exports by removing an administrative barrier that created a disincentive to trading with EU countries. Namely, those requesting tax refunds on exports had to obtain stamps from the importing country, but such stamps while common in Russia are not used in the EU. After extensive discussions with various ministries, the government lifted this requirement, enabling exporters of raw kernels to apply for 3% refunds and exporters of value-added products to receive 6% refunds. PSA helped the association to get registered and organized, as well as to communicate their message to the GoAJ. One PSA beneficiary, Jaarchi Hajiyev, heard about this change from PSA for the first time. As an exporter of roasted hazelnuts, this enables him to adopt a more aggressive pricing strategy to boost his competitiveness. For his part, Ismail Orujov, the head of AHPEA, received a refund of about $20,000 this year as a result of the amendment.

Additional PSA collaboration with AHPEA during PY1 preparing and submitting a list of recommendations to the Government of Azerbaijan to help improve the hazelnut sector in the country, reviewing the association’s report on work completed, and drafting the association’s strategic plan.

As mentioned above, PSA selected a total of four demonstration plots, with two in Zagatala, and one in Gakh and Khachmaz regions. In the first year, PSA laid the initial groundwork at the selected beneficiary orchards through pruning, formation of the orchard, weed and pest control. By providing training and TA to the owners of these orchards, PSA laid an important foundation for rejuvenation of these orchards. In subsequent years, based on the positive dynamics of increased production and overall health of the trees, PSA in partnership with regional DAIMs and other partner organizations will use these demo plots for disseminating information about practices applied. PSA also witnessed the construction of a community-owned hazelnut drying and storage center in Gakh, which was co-funded by a TTF investment under the USAID ASAP project. Though the construction of the drying and storage facility took much longer than expected PSA Agronomist providing TA on green pruning in Zagatala due to the extended legal process of obtaining proper documentation and the COVID-19 outbreak, the facility is operational and will be fully engaged during next year’s harvest.

21 Private Sector Activity (PSA) Annual Progress Report More complete information on PSA beneficiaries’ hazelnut production, sales, and export results from the 2020 harvest will be included in a revision to the present Annual Report that will be submitted to USAID in late November, and further supplemented in successive quarterly reports.

Orchard Fruit Value Chain

Azerbaijan has a favorable climate for pome and stone fruit production, is proximate to large markets and enjoys strong trade links with most neighboring countries. Azerbaijan’s apple production averaged 271,000 MT per year from 2015-2019. During this period, the growth of production was faster than average world apple production growth. The major trigger for this growth was privileged access to the Russian market and investors from different sectors who recognized the opportunity.

Although Russia is one of the largest apple importers and apples from Azerbaijan are competitive at present in this market, diversification to other markets is necessary for the stability of enlarged and modernized production. There are exporters who have successfully sold to a range of countries in the Middle East, where quality requirements are very high, and competition is also stiff. The import of apples in Saudi Arabia is growing, about 3% per year from 2014-2018, while UAE imports decreased over the same period by 8% per year. In recent years, apple producers have used modern rootstocks (M9), and modern varieties in intensive planting systems (2,500 to 3,000 trees per hectare). Investments in cooling and storage capacity and quality improvements (including complying with international standards like GlobalG.A.P. and HACCP) have the potential to further enhance the sector’s competitive position.

Stone fruits are the most diversified fruit subsector, characterized by a wide range of species and varieties. Although diversified, they share common investment needs and value-chain commonalities; in many cases various stone fruits are produced by the same producers, traded by the same traders and sold at the same points of sale. In Azerbaijan, production of stone fruits increased by nearly 120% from 80,000 MT in 2009 to 176,000 MT in 2019. Sweet cherry production has been growing continually since 2014, increasing by 58% from 25,700 MT in 2014 to 40,600 MT in 2019. Plum production has a similar trend, while the production of peaches and cherry plums is stagnating.

During its first year, PSA assisted more than 1000 hectares of orchards in the northern, north- western, central, and western regions of Azerbaijan, encompassing 65 beneficiaries, including 50 new beneficiaries. Beneficiaries received TA and training based on their needs, as well as support in establishing linkages with suppliers, buyers, and exporters. This assistance was provided by the PSA Agronomy and Production Specialist and local Persimmon and Orchard Value Chain Agronomist.

In all, 38 farmers received training and TA on orchard management during the project year. As a result of the COVID-19 pandemic, starting in June, PSA produced video trainings on 6 topics (apple scab control, powdery mildew control in apples, green aphid control in apples, peach leaf curl (Taphrina deforming) control in peaches, cherry monulinia (brown rot) control in cherries, and black cherry aphid control in cherries). These trainings aimed to educate farmers as well as students. In addition, PSA subtitled into Azerbaijani four video trainings produced by the USAID Georgia Agriculture Program on pear, plum, and cherry production on the specific topics of: modern sweet cherry training system; an alternative training system for intensive plum production; multi-axis system for maintaining tree size in pear production; and weed management

22 Private Sector Activity (PSA) Annual Progress Report tools in fruit orchards, and shared them via Facebook. These trainings have been viewed by hundreds of farmers, students and other interested individuals.

Although holding regular group trainings was not possible in light of the pandemic, in addition to reaching growers through the training videos on the Internet, PSA was able to provide small group training and individual assistance to 38 growers in the Orchard VC since late April, when most PSA field-based agronomists were hired.

More complete information on PSA beneficiaries’ orchard fruit production, sales, and export results from the 2020 harvest will be included in a revision to the present Annual Report that will be submitted to USAID in late November, and further supplemented in successive quarterly reports.

Perishable Vegetable Value Chain

According to the State Statistics Committee, as of July 1, 2020, 3,233 greenhouses with a total area of 1,400 hectares were operating in Azerbaijan. Various types of vegetables are grown in greenhouses. Compared with the same period in 2019, greenhouse tomato production during the period from January to June 2020 increased by 4.2% to 181,800 MT, and cucumber production increased by 10.5% to 10,700 MT. The country's tomatoes exports increased by 53.3% year on year in the first quarter of the year, amounting to 32,769 MT, according to State Customs Committee. Tomatoes ranked first in the list of non-oil export products. The cost of exported tomatoes is estimated at $43.9 million with 72.5 percent growth. Russia was the main importer of Azerbaijani tomatoes. Tomato exports to Russia increased in quantitative and value terms by 53.6 and 34.1 percent accordingly.

Due to their relatively high levels of production, development potential, and interesting trends, specific attention was given to tomatoes. Tomato growers in greenhouses only achieve 25-30 kg/m2 in Azerbaijan while typical yields are 40-45 kg/m2 and in the Netherlands even reach 60-90 kg/m2. It would be possible to extend the growing season in winter by adding lighting, and this seems like a viable option to explore. In addition, improvements are needed in other production technologies, such as fertigation.

In order to increase the quality and quantity of production, PSA selected a young and experienced agronomist with knowledge of modern perishable vegetable production. The agronomist’s role included finding suitable perishable vegetable producers that are in a position to adopt innovative and flexible methods of production in order to enter to new markets and increase their profitability. In the western area of Azerbaijan, PSA identified around 10 new greenhouse tomato and cucumber growers that understand the market demands and the risks of overdependence on the Russian market, and are ready for product diversification. These producers have already begun to modify planting schedules to extend the harvest period with PSA support.

PSA developed required scripts for the development of Perishable Vegetable VC video trainings for dissemination through social media, and also provided training and individual assistance to 20 growers in the VC. As a result of these trainings, the greenhouse producers were able to PSA Agronomist providing TA in Shamkir region increase the quality of production and consequently the 23 Private Sector Activity (PSA) Annual Progress Report volume and cost of sales. As over 70% of these beneficiaries were able to adopt PSA recommendations and obtain positive results from the corresponding improvements by the end of PY1, other greenhouse producers also requested PSA support from Tovuz region as well. PSA also identified a need for demonstration plot development in Shamkir region. The demo plot that PSA plans to implement entails a cooling system for greenhouses that facilitates increases in the quantity and quality of production. In all, the Activity developed 4 video trainings on the topics of 1. Pest and disease control for tomato production, 2. Pest and disease control for cucumber production, 3. White fly control and fertilization, and 4. Powder mildew control and organic fertilization. Each video was presented by the PSA Perishable Vegetable Agronomist, who also developed a relevant WhatsApp groups to share video trainings, deliver seasonal recommendations, and conduct interactive discussions with farmers.

Pomegranate/Persimmon Value Chain

Commercial production of pomegranates in increasingly modern orchards has grown in recent years in Azerbaijan. The investors in fresh pomegranate production often are entrepreneurs who are able to access information on the global food market and can devote resources to their operations to maximize their return on investment. Compared to traditional orchards producing no more than 3 MT/ha of low-quality production, these agribusinesses aim to produce over 10 MT/ha of high-quality fruit. PSA’s approach to the VC builds on the approach utilized by the predecessor ASAP project. Through technical assistance and training, PSA is facilitating the adoption of good agricultural practices. Productivity gains of small and medium pomegranate farms increased by 10% or more thanks to rapid dissemination of information and learning through demonstrations of improved technologies, including improved varieties. In Goychay region, PSA linked grower Mr. Hikmat Mammadov to a Hajigabul-based producer of the Minashirin variety and planted a 33-hectare intensive orchard. As a result of an increasing number of quality pomegranate producers, the cost of pomegranates sold by farmers to processors has increased from 0.10 AZN/kg to 0.25 AZN/kg.

Usually, better-quality pomegranates are harvested and stored in cold storages or directly shipped to the Russian market from the orchards, and the lower quality (damaged, cracked) pomegranates are sold 3-4 times cheaper to processing facilities, which export the concentrates, juices, and other pomegranate byproducts. Therefore, in order to reach fresh production quality and quantity, PSA aimed to demonstrate best practices from input supplying to post-harvest handling through its training activities.

Although there are no official statistics illustrating Azerbaijani pomegranate and pomegranate products’ export and domestic sales figures, sources such as the Pomegranate Producers and Exporters Association (PPEAA) report approximate numbers that demonstrate positive trends. Based on information provided by PPEAA, the country’s 2020 pomegranate production is about 20,000 MT and the sales are over 12 million USD, which is 19% higher than in 2019. This progress is due to entering new markets such as France and Poland (fresh pomegranate); Germany and Israel (sauce and seeds); and Vietnam, China, Canada, New Zealand, and the U.S. (concentrates and juices), facilitated by the participation of producers and processors in exhibitions and B2B meetings through the PSA Agronomist providing TA on USAID-funded ASAP project, AZPROMO and other fruit splitting in Goychay activities. 24 Private Sector Activity (PSA) Annual Progress Report Compared to pomegranates, persimmons are a fruit that doesn’t require much care. Although there is still significant demand for persimmons in the Russian market, growers need to think about other international markets access as well. To be competitive in international markets, Azerbaijani persimmon growers need to transition to better varieties. Processed persimmon products and value-added fresh persimmons (properly stored and packed) were strategies that PSA promoted to farmers, while also providing technical assistance on improving production quality.

Persimmon exports have increased more rapidly than have pomegranate exports. Persimmon figures for 2020 are not yet available, as the harvest is still continuing, however export sales increased by 16 million USD to 27 million USD between 2018 and 2019. Thanks to the development of new processing facilities for persimmons and improved cultivation practices in 2020, production volume is expected to be higher than in 2019. However, the price from the farm gate is still lower (0.60 AZN/kg) than in 2019 (0.85 AZN/kg). Russia is the main export market for persimmons at present, but introducing processed persimmon products and adopting intensive varieties will create opportunities to enter new markets in the future. The development of storage and post-harvest handling infrastructure could also facilitate the penetration of Azerbaijani persimmons into more demanding markets.

During PY1, PSA identified and hired professional agronomists for pomegranate and persimmon production that are based in Goychay (pomegranate) and Ganja (persimmon) areas. Their role in the Activity is to conduct group and individual trainings, provide technical assistance, and provide other in-person and virtual assistance related to production consultations. At least 41 growers in the Pomegranate/Persimmon VC received training and individual assistance since late April, when most PSA field-based agronomists were hired. PSA agronomists for Pomegranate/Persimmon VCs developed relevant WhatsApp groups to share their video trainings, deliver seasonal recommendations, and conduct interactive discussions with farmers. Six video trainings were developed with the pomegranate agronomist, and one with the persimmon agronomist, and all were posted on the PSA web page during pandemic period. PSA organized two online discussions/webinars -- on organic pomegranate production, with International Agricultural Technologies Company (IATC), an Indian consultancy, and on IPM monitoring tools with the Oklahoma-based Trécé company. As there is currently no Azerbaijani-language manual available to provide for the capacity building of persimmon growers in Azerbaijan, PSA started developing a persimmon production manual which will be disseminated to the persimmon VC actors and institutions during PY2.

More complete information on PSA beneficiaries’ pomegranate and persimmon production, sales, and export results from the 2020 harvest will be included in a revision to the present Annual Report that will be submitted to USAID in late November, and further supplemented in successive quarterly reports.

Cross-Cutting and Collaborative Efforts

PSA Project Year 1 Work Plan

In December 2019, PSA brought consultant Kathleen Doherty to Azerbaijan for a short visit to help coordinate drafting of the PY1 Work Plan. Following the original submission of PSA’s PY1 Work Plan in December, and in response to USAID’s feedback, PSA expanded and provided more detail in a revised draft that it submitted to the donor on January 21, 2020. This draft was

25 Private Sector Activity (PSA) Annual Progress Report presented to USAID at a meeting in the PSA office on January 23rd and feedback from the ensuing discussion informed some final revisions that were incorporated into the subsequent draft that was submitted to USAID on January 25th. USAID provided formal approval of the Work Plan on January 28th. On February 6th, the PSA Chief of Party presented an overview of the approved Work Plan activities for USAID’s wider staff at a meeting at the Mission in Baku.

Trade Capacity Building

Trade capacity building is an important component in achieving U.S. foreign policy objectives in Azerbaijan and supports the development of Azerbaijan’s long-term potential as an independent, prosperous, and stable U.S. trading and business partner. PSA also places emphasis on developing business relationships between U.S. and Azerbaijani agribusinesses. In so doing, PSA identifies the potential needs of local agribusinesses for innovative technologies that could be provided from U.S. suppliers and has achieved progress in spurring on the increased import of innovative agricultural technology to Azerbaijan. To foster broad-based and sustainable economic growth, the Activity uses its trade capacity building approach to promote economic security and resilience, with a focus on agriculture. Trade Capacity Building also bolsters Azerbaijan’s ability to export to new markets and decrease the impact of Russia’s trade sanctions and frequent border closings promoting the diversification of exports toward the European Union, Gulf countries, and other alternative markets.

PSA continues to help reduce economic vulnerabilities by promoting the diversification of exports away from Russia and toward the European Union, Gulf Countries, and other alternative markets. In order to meet this objective, PSA supports Azerbaijani agribusinesses with potential for initiating and/or expanding exports. PSA does this in various ways, including supporting SMEs to participate in B2B workshops, exporter and buyer missions, networking events, and trade fair participation. During PY1, PSA worked with multinational hazelnut buyer and processor Ferrero to help plan a trade mission to Italy for Azerbaijani hazelnut growers and exporters. Together with APS and the Dubai Chamber of Commerce in Azerbaijan, PSA agreed to jointly provide export promotion and marketing assistance to Azerbaijani SMEs, including through a B2B trip to the United Arab Emirates. While both of these trips had to be postponed until 2021 due to the COVID-19 pandemic, plans and partnerships are now in place.

Other export assistance included initiating efforts to assist Azerbaijani fruit and vegetable producers to develop stronger presentations for their brands and expand their export destinations. PSA has identified over 30 producers with the potential to begin exporting or diversifying their export portfolio to more lucrative markets. In this regard, PSA developed a multilateral MOU with the Azerbaijan Export and Investment Promotion Foundation (AzPromo) and the U.S.-Azerbaijan Chamber of Commerce (USACC) to implement the Agricultural Export and Investment Support Initiative (AEISI). AEISI seeks to enable small and medium-sized agribusinesses in Azerbaijan to upgrade their processes and product quality throughout the entire production and processing chain in order to enter or expand their access to foreign markets. AEISI will focus on competitively selected enterprises producing dried fruits, persimmons, and strawberries. Each party will bring together complementary resources to conduct export market investigation for selected target products, facilitate compliance with international standards, support participation in exhibitions and trade missions, and organize buyers’ missions.

In order to facilitate U.S.-Azerbaijani agribusiness linkages, in November 2019, PSA helped organize a U.S.-Azerbaijan Agricultural Forum in Oklahoma with various public and private sector partners and sponsors from both countries. The forum served to lay a foundation for future Azerbaijan-U.S. bilateral agribusiness trade, including work with Trécé, an Oklahoma-based 26 Private Sector Activity (PSA) Annual Progress Report manufacturer of pest monitoring and control products, which PSA helped to set up meetings with government agencies and potential distributors during a visit to Azerbaijan after the Oklahoma event, and which USAID is currently helping to set up trials of its donated products in Azerbaijan to demonstrate their potential value to Azerbaijani growers. Together with the U.S. Commercial Service, the Activity also arranged a U.S. pavilion at the Caspian Agro agricultural exhibition in Baku to provide U.S. firms with partial support in promoting their products to the Azerbaijani market. Due to COVID, however, the exhibition has been pushed back to FY 2021. Under its efforts to facilitate trade linkages, PSA helped facilitate a first shipment of fertilizer formulations from U.S. firm Grow More, Inc. to Azerbaijani input dealer Vatan LLC in the amount of $40,000. PSA also linked the U.S. firm DotMed.com to the Azerbaijani company Raytech LLC, which imported DotMed.com medical equipment costing $19,000.

Due to the pandemic during PY1, however, most planned activities in this area have been pushed back to PY2, including:

 Facilitating a trade mission to UAE, including establishing a set list of participants, developing a trip program and determining preliminary agreements with the hosts representing large retail and wholesale chains in the Emirates.  Working with Ferrero to organize a trip for Azerbaijani hazelnut processors and exporters to Italy. All major trip components have been negotiated and organized, and the trip is now planned to take place in summer 2021.  Supporting the Export Support Center (ESC), which is under the Center for Analysis of Economic Reforms and Communication (CAERC), to design and create content for a “myexport” website, which will provide exporters with information on the export process, including required documentation and import guidelines of targeted countries.

Facilitating Linkages with U.S. Agribusinesses

Among its various objectives, PSA seeks to modernize Azerbaijani agriculture by strengthening access to U.S. agribusiness technologies in the country. Thus, during the year, PSA outlined its strategy to facilitate the establishment of new or deepened business linkages between Azerbaijani companies and foreign, primarily American companies, The strategy consists of several parts, each contributing to identifying the mutual interests of buyers and sellers, forming new business linkages, and providing valuable project assistance in liaising and organizing agreements and business deals. ASAU and Oklahoma State University signing an Activities implemented during PY1 included: MOU on collaboration in Stillwater, Oklahoma

 Oklahoma-Azerbaijan Agricultural Forum: PSA helped organize a U.S.-Azerbaijan Agricultural Forum in Oklahoma in cooperation with the U.S.-Azerbaijan Chamber of Commerce (USACC), Oklahoma Department of Commerce, and Oklahoma Department of Agriculture, Food and Forestry. The group discussed best practices in livestock production, processing, packaging and marketing, as well as the prospects for bilateral trade, investments and collaboration between the United States and Azerbaijan. The visit brought together representatives from agribusinesses and educational institutions in both constituencies. A 28- person Azerbaijani delegation traveled to Oklahoma, and included officials from the MoA, Azerbaijan’s Embassy in Washington, the American Chamber of Commerce in Azerbaijan, the 27 Private Sector Activity (PSA) Annual Progress Report Azerbaijan State Agrarian University (ASAU), the governor of Gadabay region, and private agribusinesses.  OSU-ASAU Collaboration: During the same forum, Oklahoma State University (OSU) and Azerbaijan State Agriculture University (ASAU) signed a Memorandum of Understanding in Stillwater, Oklahoma. The MoU provides a legal basis for bilateral cooperation, including exchanges of students and faculty members, research, and institutional outreach activities. After the November visit of the Azerbaijani delegation to Oklahoma, PSA held a series of PSA, Trécé, and ASAU planning cooperation meetings online and in person with representatives of both universities. As a result, a number of possible directions for ongoing collaboration, most prominently a dual-degree program between the OSU and ASAU, were identified.  U.S. Linkages Facebook Page: In April, PSA developed a communications tool for its linkages activity by launching the U.S.-Azerbaijan Business Linkages Facebook page. This platform is dedicated to promoting trade and investment linkages between farmers, agribusinesses, and agricultural supply and support businesses in these two countries.  Linkages-Related Webinars: Starting in Quarter 3, PSA began conducting webinars to promote linkages and attract Webinar on US Azerbaijan Business Linkages an audience to advertise linkage opportunities. This method proved to be extremely efficient and attracted many new followers to the Facebook pages that PSA administers. PSA prepared many relevant topics that raised lively discussions at the webinars by inviting expert speakers on each topic, helping to ensure the quality of and attendance at the live events. In PY1, PSA held four webinars, touching upon such important subjects as e-commerce, trans-border transportation and freight forwarding, product localization, drop shipping, and others. The topics for webinars were requested by the target audience as well as by PSA staff and covered the following themes: Grounds for US-Azerbaijan Business Linkages, The Role of Transportation and Logistics in the Cross-Border Trade, Access to the Global E-Commerce Platforms and Product Adaptation in Import-Export Operations.  Trécé: During the year, PSA collaborated with the American company Trécé, a leading manufacturer of insect monitoring and control products, and has identified a reputable local input supplier Expert Agro Services LLC. After a number of videoconferences and with the active liaison and facilitation from PSA, the companies agreed to collaborate. Trécé seriously considered Expert Agro as their partner in Azerbaijan and the companies are currently working towards signing an agreement and registering the brand in Azerbaijan. At the same time PSA is working on the linkage with Trécé, and ASAU. During the Oklahoma Forum, PSA linked Trécé with the ASAU leadership. After their B2B meeting in Oklahoma City, the organizations met in Azerbaijan and discussed the establishment of a mutually managed demonstration plot, where Trécé would perform trials with the company’s traps and mating

28 Private Sector Activity (PSA) Annual Progress Report disruption products and demonstrate the results to the growers and agribusinesses together with ASAU. Currently, the products are being shipped from the US to Azerbaijan.  Raytech LLC: PSA facilitated a deal for purchasing and shipping medical equipment from the U.S. firm DotMed.com to the Azerbaijani company Raytech LLC for $19,000. PSA assisted with preparing the U.S. export declaration, U.S. customs clearance, and shipment of the equipment to Azerbaijan.  Grow More, Inc.: PSA efforts also finally brought the ASAP-initiated linkage between Azerbaijani input dealer Vatan LLC and U.S. fertilizer formulator Grow More, Inc. to a commercial transaction. The value of the first shipment which took place during the year was $40,062.94. PSA assisted the parties with negotiating payment and delivery terms as opposed to the initially agreed irrevocable Letter of Credit term. Due to high interest rates for the issuance of irrevocable Letter of Credit (L/C) by a local bank, this option was declined by Vatan LLC and it requested PSA assistance in negotiating other forms of payment with the US company. PSA discussed buying the products on open account terms with Grow More and suggested that Grow More consider future sales to Vatan LLC PSA announcement for webinar on International Shipping and Logistics for posting on the Activity’s Facebook page and other importers through the US Exim Bank export credit insurance. Vatan has paid off 100% of the first shipment. However, for the next transactions, PSA will facilitate utilizing US Exim Bank export credit insurance when Vatan places another order. This is one of the methods of payment in international trade which might increase export sales to existing customers and new buyers by offering open account and eliminating the need for expensive letters of credit.  DTN: DTN is an American company based in Burnsville, Minnesota that specializes in subscription-based services for the analysis and delivery of real-time weather, agricultural, energy, and commodity market information. DTN is signing an MOU with CNFA to collaborate in various countries to provide weather services to farmers. In Baku, PSA hosted DTN’s VP of Sales to discuss potential collaboration, including the possibility of DTN donating up to 5 refurbished weather stations to the Activity and 6-12 months of weather forecasting services that would be piloted and demonstrated in various parts of the country, possibly in conjunction with ASAU, agricultural associations, and/or DAIM centers. PSA is currently exploring how it would get the weather stations into the country and what associated costs it might entail to implement these pilots.  Caspian Agro: Due to the success of the USAID-U.S. Embassy Pavilion at last year’s Caspian Agro agricultural exhibition, USAID and the U.S. Embassy Commercial Section agreed to collaborate again this year in order to continue to promote U.S. linkages. During PY1, PSA booked a 36 m2 space in Hall #4 of the exhibition, gathered bids for stand construction, and disseminated information sheets and application forms for U.S. firms interested in exhibiting. The Activity contacted a wide variety of U.S companies, including Sensitech, Trécé, and DTN, as well as to other high-tech agricultural companies such as NPC Agro, Provitaz, and Progress LLC. Late in the quarter, the exhibition organizer announced that Caspian Agro had been postponed from its originally planned May 19-21, 2020 dates to November 22-25, 2020 due to the COVID-19 outbreak. PSA informed all potential exhibitors of the change in dates, but reassured them that USAID and the U.S. Embassy would be providing the same exhibiting opportunity to U.S. businesses at the rescheduled exhibition.

29 Private Sector Activity (PSA) Annual Progress Report  John Deere: Late in PY1, PSA began promoting cooperation between Kapital Bank OSJC and the U.S. Eximbank to help facilitate John Deere equipment sales in Azerbaijan. The cooperation is intended to help identify a suitable local linkage partner with the capacity to promote the U.S. agricultural machinery giant’s equipment, which will require the establishment of a new sales and service center, among other efforts. Kapital Bank OSJC and the U.S. Eximbank could play a key role in supporting financing for such a venture.  Other Linkages Efforts: The Activity identified several U.S. companies interested in cooperation such as CoolBot, E2Open, Evolus, National Sanitary Foundation, Johnny’s Seeds, U-Mate International, Westec, DTN, and Symbiont Nutrition, and Azerbaijani companies and organizations such as Expert Agro Services LLC, Progress LLC, Vatan AZ, Sevilla, ASAU, AFSA, SMB and others. PSA is working with these and other companies in their efforts to establish new US-Azerbaijan business linkages. More detailed information is available in the Linkages Table in Appendix D.

Technology Transfer Fund (TTF)

The PSA Technology Transfer Fund (TTF) is a Grants-Under-Contract facility that is providing up to $2 million in matching funding to support projects that build postharvest storage and processing capacity that will benefit Azerbaijan’s agricultural producers, as well projects that strengthen the capacity of formal and informal groups of farmers and rural entrepreneurs to work together for mutual benefit. PSA seeks as TTF applicants entrepreneurial, market-driven enterprises, with a focus on those enterprises and organizations whose growth and development can have a transformative effect within the targeted value chain. PSA issues awards for two types of matching grants: Private Sector Investments (PSIs) for commercial actors, and Community Investments (CIs) for associations, cooperatives, and other collaborative groups.

Private Sector Investments target enterprises and cooperatives within selected value chains. PSA encourages the participation of women-owned MSMEs and youth business owners and entrepreneurs, and targets value-chain drivers. PSI grantees are required to provide a contribution at a ratio of 3:1 (Grantee: PSA) or more in support of the grant activity.

Community Investments support sectoral and cross-cutting associations to strengthen the operating environment and services for VC actors. PSA finances capacity building costs at a ratio of up to 1:3 (Grantee: PSA).

Because of its focus on six target value chains, PSA endeavors to support grants for technologies likely to generate the most impact for the individual recipient business and its value chain linkages, as well as serve as a valuable demonstration of a technology that other analogous businesses in the value chain would most benefit from adopting.

During PY1, PSA completed drafting and received USAID approval for the Grants Manual and its Annexes, a Request for Concept Notes (RFCN), and Request for Applications (RFA) for both TTF types: Private Sector Investments and Community Investments. (Unlike under ASAP, PSA’s TTF selection process has two stages.) As of September 30, 2020, PSA had issued 38 RFCNs in all, 29 in April, 4 in July, 1 in August, and 4 in September. In Response, PSA received 15 Concept Notes (CNs) in all, distributed by value chain as follows: Berry – 4, Hazelnut – 2, Orchard – 5, Perishable Vegetables – 2, and Persimmon/Pomegranate – 2. Of these 15 CNs, PSA approved 14 and of those USAID approved 11 to date. Of the 11 beneficiaries whose CNs were approved, 6 have submitted full investment proposals to date, all of which were approved by PSA. Project staff is currently assisting beneficiaries in drafting full investment proposals for the other five projects. 30 Private Sector Activity (PSA) Annual Progress Report For the 5 full investment proposals already approved, it is anticipated that 4 full grants packages will be submitted to USAID for final approval in October 2020, while one of them was canceled due to the beneficiary’s failure to reach an agreement with the selected vendor on payment terms.

Access to Finance

Seventy-four percent (74%) of farmers in Azerbaijan have never taken out a loan. Collateral requirements and bureaucratic procedures for obtaining agricultural credit are high and discourage small and medium enterprises from accessing new credit. The transition to commercial production, value addition, and export marketing all require access to capital, and agriculture-specific financing mechanisms are necessary for farmers to move into more commercial production and export. PY1 objectives included:

 Promotion of and Referrals to AKIA, the Entrepreneurship Development Fund (EDF) of the Ministry of Economy, and other lending facilities. Currently, loans from AKIA and EDF are disbursed and administered by commercial banks. PSA aimed to update information on the availability and terms of these and other lending options to farmers and agribusinesses to share with Activity beneficiaries, as well as work with interested commercial banks to map their lending processes, understand bottlenecks, and identify opportunities for streamlining the lending process.  Supporting SMB Houses to provide access to lending institutions, building on relationships established with SMB under Objective 2.  Promoting cash-flow based lending. IFC is currently piloting its Cash Flow Linked Agri-Risk Assessment (CLARA), a cash-flow based lending tool, but it has not yet been accepted. CLARA simplifies, increases and accelerates risk assessment for agricultural loans, providing the user with a number of options, such as agricultural liquidity prediction, testing, formation of flexible assumptions and a set of tools for financial analysis. PSA intends to coordinate with IFC and, if and when CLARA gained traction, and to work with enterprises, AKIA, EDF, and commercial banks to promote its use on a wider basis.  Drafting analytical briefs on financial topics for submission to USAID on timely topics in agribusiness lending and the Azerbaijani financial sector.

Major activities implemented during PY1 were the following:

 PSA drafted twelve analytical reports/briefing notes as requested by the USAID COR: o “Brief Analysis of State Budget of Azerbaijan for 2020”; o “Are banks’ lending to Agri-Business?”; o "Azerbaijan’s major steps in the monetary policy/financial sector in 2019"; o "Are banks' lending to Agri-Business?"; o “Main trends in Azerbaijan's 2019 foreign trade”; o “Main trends in Azerbaijan’s banking sector in 2019”; o "Potential effects of reduced oil prices on Azerbaijan’s Economy"; o “State Support to Entrepreneurs in Response to the COVID-19 Pandemic”; o “Bank support to clients during quarantine and economic hardship period”; o "Are banks' lending to Agribusiness?”; o “Azerbaijan’s Non-Oil Exports in 2020”; and o “Major changes in the state budget of Azerbaijan 2020.” Several of the reports were translated into Azerbaijani and distributed among Activity beneficiaries. 31 Private Sector Activity (PSA) Annual Progress Report

 PSA worked to assist six beneficiaries to draft financial statements for their TTF applications and helped them to understand the financial statements in detail.  PSA established good relations with the Agricultural Credit and Development Agency (AKIA) and the World Bank’s Azerbaijan Competitiveness and Improvement Project at the Ministry of Agriculture. By utilizing its agricultural experience, PSA conducted an external review of two loan applications provided by the World Bank’s Azerbaijan Competitiveness and Improvement Project, which resulted in the issuing of loans in the amounts of 120,000 AZN and 70,000 AZN, respectively.  Finally, together with the Azerbaijan Micro-finance Association, PSA drafted an initial proposal for both an agricultural finance conference and financial literacy trainings. Due to the COVID- 19 pandemic, however, it was agreed that the conference and trainings would be shifted to PY2.

Food Quality and Safety

Increased awareness of and adherence to internationally recognized Quality and Food Safety Standards is essential from both health and sales standpoints. Modern consumers and developed markets increasingly demand assurance not only that specific products meet those standards, but that management systems for the entire production, processing, and handling chains are in place to prevent product contamination and deterioration and to detect and rectify problems when unexpected events occur. There are approximately 2,600 registered food producing and food processing companies in Azerbaijan, and only 150 companies (about 6%) have internationally recognized food safety certification. In addition, there are more than 106,000 registered farms in Azerbaijan, of which only seven have GlobalG.A.P. certification. This huge gap makes clear that tremendous work needs to be done to develop certification programs in the country. Azerbaijan’s new food safety legislation will require that all large agribusinesses (with >200,000 AZN in annual revenue) become HACCP certified within two years of the passage of the law (the bill has not been passed into law yet, but is expected to be enacted soon). Non-exporting SMEs will be allowed a transition period of four years prior to obtaining certification under a HACCP-based plan. This legislation has put increased pressure on agricultural enterprises to conform to quality and food safety standards and PSA will help on a system-wide level as well as the level of individual enterprises. Due to COVID-19, there is a delay in the adoption of new legislation and the certification process for companies has been temporarily suspended.

PSA's food quality and safety activities during PY1 included the following:

 SGF/IFU Eurasia Road Show: On October 31, 2019, USAID and its private sector engagement partner, Coca-Cola, jointly supported the International Fruit and Vegetable Juice Producers Forum, hosted by Sure-Global-Fair (SGF) and the International Fruit and Vegetable Juice Association (IFU), in collaboration with the American Chamber of Commerce in Azerbaijan (AmCham). The SGF/IFU Eurasia Road Show is a series of forums aimed at educating juice producers Dr. Jay Singh delivering remarks at the about available resources to support member 2019 Eurasia Road Show in Baku access to international markets. The event attracted nearly 50 local producers and entrepreneurs, as well as government and international donor representatives. The forum is held on a different continent each year, having previously taken place in Latin America 32 Private Sector Activity (PSA) Annual Progress Report in 2016, Asia in 2017, and in Africa in 2018. This initiative is an example of USAID’s private sector engagement in action, as well as its support to business and professional organizations to boost the diversity of Azerbaijan’s non-oil economy.  Food Quality and Safety Curriculum Development: PSA is assisting Azerbaijan State Agricultural University (ASAU) to develop a Food Quality and Safety curriculum. The syllabus will include 15 two-hour lectures and 15 two-hour seminars that will be delivered as early as the 2021 spring semester. During PY1, PSA started to develop the lectures, each of which consists of an introduction to the topic, a history of standards, Recently, PSA initiated discussions with Ganja Technology University, which focuses on food processing and food technology through its Food Engineering Faculty, about potentially helping that institution to adopt the curriculum as well.  GlobalG.A.P. Video Developed: PSA developed its first video training module on GlobalG.A.P. for interested parties, including farmers, managers, and students engaged in agriculture. It was posted online on the PSA Facebook page.  Organic Certification Assistance: PSA provided TA to Absheron Saffron Company to upgrade its facility to meet International Food Safety Standards for Organic Certification. Recently Absheron Saffron completed Disinfection and Maintenance Facility practices in the factory. PSA provided recommendations on improving the layout of the facility and developing the relevant procedures for implementing Organic standards. Unfortunately, Absheron Saffron could not apply for its initial certification because the auditors could not travel to the production facility due to the COVID-19 pandemic.  Assistance to EU-funded Slow Food Project: The EU-funded Slow Food Project requested, and PSA agreed, to support the former’s beneficiaries to develop HACCP programs and food safety procedures. PSA developed a layout and design for hazelnut production facilities for EU beneficiary small hazelnut communities in Gabala in accordance with food safety requirements, and provided TA on how to construct and manage production.

Collaboration with Azerbaijani Government Agencies and Donor Projects Agrarian Services Agency and DAIM Centers

State Agrarian Development Centers of the Ministry of Agriculture (DAIM) are regional institutions with modern infrastructure in most rayons of Azerbaijan. DAIMs provide services under coordination of the Agency of Agrarian Services (ASA). During PY1, PSA met with the ASA in Baku as well as many of the DAIM Centers in the field to plan collaboration. As a result, during PY2 PSA plans to work with DAIM centers in Shamkir, Samukh, Goranboy, Kurdamir, Goychay, Gabala, Oghuz, Sheki, Zagatala, Gakh, Balakan, Lankaran, Jalilabad, Astara, Guba, Khachmaz, and Gusar. This assistance will be aimed at both providing technical assistance and training to agricultural producers through the DAIM Centers, as well as building the capacity of the DAIMs to provide such assistance to the agricultural sector on their own. During PY1, the DAIM centers in Goygol and Samukh were selected to start joint activities on establishing demo- plots for raspberry production. The planned trainings could not be held due to the pandemic and restrictions applied in this regard.

These and other specific joint activities now planned to be implemented during PY2 include:

 Engaging local and international experts to build DAIMs’ capacity;  Establishing demo-plots in selected regions with participation of DAIMs, and increasing capacity of DAIMs specialists and farmers to conduct practical training and TA (established demo-plots will be constantly used by DAIMs as aboth resource center for training and TA).

33 Private Sector Activity (PSA) Annual Progress Report  Providing, jointly with DAIM staff, trainings, and recommendations to local farmers in the communities and DAIM centers;  Support DAIM centers to develop and publish training and extension materials; and  Facilitate participation of DAIM specialists in study tours and exchange programs in order to improve their agricultural skills and knowledge.

Due to changes during PY1 in the management of the Agency of Agrarian Services, which is coordinating DAIMs activities, collaboration opportunities and planned joint activities agreed with the previous management will be discussed with the new management early in PY2 to ensure that both parties are on the same page.

AFAQ - Azerbaijani Women in Agriculture

Azerbaijani Women in Agriculture (AFAQ) is a program implemented by the Azerbaijan Procurement and Supply Company under the Ministry of Agriculture. AFAQ’s strategy consists of three directions: 1. Technical Assistance, 2. Trainings, and 3. Establishment of women farmers groups. The main objective of the project is to facilitate the access of women to sales markets, help to build the capacity of women entrepreneurs in the field of agriculture, increase their knowledge in marketing and sales, and create small production facilities and greenhouses for them. AFAQ closely works with the Azerbaijan Rural Women’s Association (see page 35 for more information on PSA’s work with the association during PY1) and its women’s groups, which PSA also has begun to assist. Depending on need, PSA may provide demonstration plot and TTF support for specific activities, such as persimmon pre-processing at the community level and homemade pomegranate product (juice, narsharab) production. Due to the pandemic, PSA collaboration with AFAQ could not be initiated during PY1.

Azerbaijan Food Safety Agency (AFSA)

PSA will provide a wide range of capacity-building support to the Azerbaijan Food Safety Agency. This will include activities directly related to capacity building for the AFSA and its associated Azerbaijan Food Safety Institute (AFSI), as well as activities to be jointly implemented targeting beneficiary enterprises and organizations. In addition, under Objective 1, PSA will develop a HACCP training curriculum for technicians from AFSA who will be assisting agribusinesses to become HACCP compliant and certified.

 PSA Partnered with Public & Private Sector to Promote Safe Use of Food Additives: In fall 2019, PSA, AFSA, and Coca- Cola jointly organized a one-day Food Safety Workshop with a focus on food additives. The workshop, which took place in Baku, brought together public and private sector representatives from the agricultural, food, and regulatory sectors. They discussed international best practices as well as the current situation in Azerbaijan vis-à-vis food Food Additives Seminar Participants safety, risk analysis, and nutrition in the area of food additives. The workshop also sought to educate its over 60 attendees about the role the private sector can play in leading the way toward stricter food safety standards. Presenters and speakers included experts from the Netherlands, Georgia, and Turkey, as well as Azerbaijan. PSA provided extensive logistical support in arranging and implementing the event, including negotiating the 34 Private Sector Activity (PSA) Annual Progress Report conference venue and moderating the forum, among other responsibilities. Coca-Cola contributed over 95% of the estimated $30,000 cost of the event, while USAID PSA contributed the remaining amount. Broadcast media provided extensive coverage of the workshop. This event is an example of USAID’s support in building government capacity to regulate and ensure food safety, as well as to facilitate public-private sector engagement. In follow-up to the conference, the Activity facilitated Coca-Cola bringing in STTA on lab-based toxicity analysis for AFSA. Due to COVID-19, this STTA assignment has been pushed back to December 2020 for now, but the situation on the ground will ultimately determine whether the timing needs to be pushed back again.  PSA supports AFSI Team to Attend Training in Dubai: During the first week of November 2019, PSA facilitated attendance by four laboratory technicians from the Azerbaijan Food Safety Institute (AFSI) at a training program on Next Generation DNA Sequencing (NGS). The five-day course, which took place in Dubai, empowered the participants to apply genomics techniques to DNA sequencing in the laboratory. The training took place at Alliance Global Group’s DNA Center of Excellence at Dubai Science Park. Previously, AFSI had no staff with practical expertise in sequencing, Azerbaijan Food Safety Institute staff at the PSA-supported training in Dubai including NGS, which is an innovative, fast, and inexpensive method for bacterial identification and pathogenicity assessment in food safety.  PSA supports AFSI Team to Attend Virtual Training: PSA arranged and provided partial financial support for the same four laboratory technicians from AFSI to attend a follow-on training in Germany on Next Generation DNA Sequencing (NGS). Due to the COVID-19 situation, the trainings were postponed and rescheduled for summer 2020, but the AFSI staff could not attend because Germany visas were no longer being issued in Azerbaijan, among other complications beyond their control. Instead, PSA arranged for the AFSI staff to attend the same training in October 2020 via an online platform at a reduced cost, and the training provider refunded the difference in cost to PSA. Having completed the trainings, the participants are now better placed to assume their roles as a core team for AFSI’s planned genotype sequencing laboratory.

Youth Engagement

Helping young people to earn a living through entrepreneurship can make a crucial contribution to the development of future businesspeople. Youth entrepreneurship is a key tool to develop the human capital necessary for the future, unleash the economic potential of youth, and promote sustainable growth. PSA is addressing youth in rural Azerbaijan because of the high rates of youth unemployment, especially in rural areas, to help build resiliency, and to build job skills to help drive the rural economy.

Innoland, a local acceleration and incubation center established under ASAN Service, reached out to PSA during PY1 with funding proposals to support youth entrepreneurship and the use of AI in agriculture. Innoland founded SUP project, which was established in 2014 and is an intensive acceleration program that helps startups grow in Azerbaijan and expand to international markets.

There are two events that SUP.AZ proposed to support. The first, Agtech Hackathon, is a three-day event competition, which is aiming to support 50 entrepreneurship-minded young 35 Private Sector Activity (PSA) Annual Progress Report individuals to develop, discuss, and fine-tune their business proposals. The second event is a workshop to be organized in Ganja to educate participants about new technological trends in agriculture, such as precision agriculture, the use of robotics and AI, and vertical farming in controlled environments. The Activity will benefit from the identification of U.S. companies that would be interested in attending the event and sharing information on their product portfolios. Due to the pandemic, neither event could be held during PY1, but are now planned for PY2 once group gatherings will again be feasible.

PSA considered opportunities for cooperation with Azerbaijani Youth in Agriculture (AMAL), a new initiative of AKIA to assist youth. A pilot project of the activity selected 200 young people to receive training and other assistance in 10 districts. The first stage of the project organized workshops on generating business ideas, agriculture and innovation, developing business plans, and development of financial models for future entrepreneurs. PSA met with staff of AMAL, which is jointly implemented by AKIA and FAO, to discuss potential collaboration. AMAL mainly works with youth and is implementing the Young Farmers Project, Pilot Project, and Youth Support Project. AMAL already developed a 50-hectare lemon orchard in Lankaran, 15-hectare tea plantation and 3-hectare tea nursery in Masalli, and a 25-hectare vineyard in Shamakhi region. AMAL also assisted in the restoration of 130 hectares of lemon and grape orchards in Lankaran and Shamakhi regions. In addition, it developed the AMAL Winter and Summer Academies, where selected students and young graduates from various regions attend workshops and trainings on topics such as Market Value Chain, Modern Agriculture, and Gender Equality. for 10 days. 428 youth from 21 regions have already been trained on business planning by AMAL. AMAL is planning to appoint volunteer “ambassadors” in the regions to serve as a bridge between the local population and AMAL for the purposes of information transfer. The project also intends to establish agricultural fields and demonstration plots for youth. During PY2, PSA will consider signing an MOU on future collaboration with AMAL to outline some potential joint initiatives that AMAL has expressed interest in, such as organizing a certification program for AMAL Academy, study trips, and joint TTF investments in production and post-harvest handling.

Azerbaijan State Agricultural University (ASAU)

Azerbaijan State Agricultural University, a public university located in Ganja, Azerbaijan, was established in 1920 and reports to the Ministry of Agriculture. The university has 5,800 students, 528 faculty members, and 6 academic departments. As the country’s only full-service university dedicated to educating agricultural professionals, ASAU plays a key role in building and disseminating agricultural capacity in Azerbaijan through its teaching, research, and extension activities. Despite significant facility upgrades in recent years, however, there are gaps where its curriculum is outdated or incomplete, as well as a lack of linkages with the private sector. As a result, the university’s efforts can at times be more theoretical than practical, which limits the access that farming and agribusiness have to well-trained agronomists and other agricultural professionals, as Jabbar Heybatov delivering a presentation on well as actionable research, and relevant intensive orchard management at a horticultural demonstration efforts. conference at ASAU in Ganja in February 2020

In order to help address these obstacles, PSA is working with ASAU to build its capacity, as well as jointly implement various activities, in the following areas: 36 Private Sector Activity (PSA) Annual Progress Report  Providing regular trainings to ASAU teaching staff and students on Food Safety and compliance with international standards. Arranging for ASAU teaching staff and students to visit PSA beneficiaries in order to improve their practical skills and knowledge;  Engaging ASAU’s senior students to receive internship trainings at PSA office and practical trainings on the farms during holiday breaks;  Supporting ASAU teaching staff and students to design and adopt new curricula on agronomic and other topics, as well as to potentially build capacity via courses through or at leading U.S. agricultural universities;  Supporting OSU specialists in conducting initial assessments of ASAU performance under the MOU signed between ASAU and OSU and to facilitate the design and delivery of such institutional collaboration;  Holding a joint ASAU-PSA conference/workshop on Intensive Orchard Management at ASAU; and  Supporting ASAU in building a small cold storage facility and establishing intensive and semi-intensive orchards (apples, nectarines/peaches, cherries, strawberries, etc.), and engaging local and international specialists to manage the orchards in order to serve as demonstrations and improve the quality and practical character of agricultural education.

Professor Babadoost delivers a lecture during the second day of a course on Plant Disease Diagnosis and Management at ASAU In the first year of implementation, PSA laid the foundation for developing a Technical Certificate Program (TCP) in collaboration with ASAU. The Activity attracted a world leader in hazelnut training and production, Ferrero, to partner with PSA and ASAU in the implementation of the training program. Implementation of this program has been delayed due to travel and other restrictions imposed to counter COVID-19, but work on an MOU to outline this and other planned collaboration with Ferrero is ongoing.

PSA and ASAU also partnered to provide an intensive course in agronomy on Plant Disease Diagnosis and Management. The course was conducted by a professor from the University of Illinois at Urbana-Champaign and benefited from interpretation and field visits arranged by PSA. In addition, PSA and ASAU conducted a conference on “Intensive Horticulture in Azerbaijan: Achievements, Zoom call between Azerbaijan State Agricultural Perspectives, Problems and University (ASAU) and Oklahoma State University (OSU) 37 Private Sector Activity (PSA) Annual Progress Report Solutions,” which was attended by a total of 95 participants.

Based on a memorandum of understanding signed between ASAU and Oklahoma State University (OSU), PSA facilitated communication between the universities, conducting virtual meetings, identifying cooperation opportunities, and leading discussions on establishing a dual degree Master’s in International Agriculture Program (MIAP). During PY1, the parties began negotiations regarding the logistics of the dual degree program, including the duration of the program, course payment details, and other details. In order to increase the effectiveness of the education provided by ASAU and educate skilled agronomists and specialists on product storage, PSA has begun work on establishing two demo plots on ASAU’s training and experimental farm. For construction and equipping of the small-scale cold storage, a tender was announced to identify potential implementing vendors. Activities on establishing intensive orchards are ongoing and will be more intensified by the beginning of next planting season. Training materials in the GlobalG.A.P. standard for ASAU have been developed and presented to the university, although delivering this course has been delayed until next year due to the pandemic.

During the past year, PSA worked with a leading innovator in insect monitoring and control, the U.S. company Trécé. Early in the year, PSA facilitated a meeting between the leadership of Trécé and ASAU in Ganja. At the meeting, the U.S. firm presented its pest monitoring and control products and sought collaboration to demonstrate their benefits for agricultural production. The Rector of ASAU invited Trécé to use the university’s demonstration plots to exhibit the efficiency of insect monitoring and mating disruption products for four types of pests in fruit and vegetable orchards. At the same time, PSA was actively involved in helping Trécé identify a local distributor in Azerbaijan.

Due to the pandemic situation, full implementation of many of the above activities was not possible during PY1. In such cases, implementation of such activities will be launched in or continued into PY2.

Azerbaijan Rural Women’s Association (ARWA)

This Baku-based Association has 38 groups of women operating in 17 regions throughout Azerbaijan. Each group consists of an average of 8-12 women. The groups are engaged in a diverse range of activities, such as fruit and vegetable production, fruit drying, cattle/poultry farm management, and other, non-farm activities. The association seeks support to improve its member groups’ businesses in technical and business management areas, provide them with training on tillage, storage, and drying, and to hold joint events to better engage women producers.

During PYI, PSA met with nine of women’s groups to define their activities and future plans, and determined that at least seven of them fully met PSA Activity requirements and indicators. Several groups were provided with needs-based trainings and TA. Five groups received Requests For Concept Notes to apply for PSA TTF support, three of which (two in Balakan and one in Barda) drafted and submitted Concept Notes for TTF matching investment support, which were approved by PSA and USAID, and are now drafting full investment proposals. While some of the groups are working on developing TTF proposals, others received PSA assistance in business and strategic planning to better formalize their applications. During PY2, PSA will continue to cooperate with ARWA and these groups, while it will consider other groups for inclusion in project activities as well. PSA will work not only with ARWA groups engaged in horticulture, but also those active in other spheres (for example confectionary/bakery, sewing, etc.). Working with 38 Private Sector Activity (PSA) Annual Progress Report ARWA, PSA will also consider supporting the establishment of new women’s groups within regions targeted by PSA (such as Guba, Shamkir, Goychay, and Jalilabad).

PSA meets with women’s enterprise and development groups

Agricultural Export and Investment Support Initiative (AEISI)

On behalf of USAID, PSA helped to develop a multilateral MOU with AzPromo and USACC to implement the Agricultural Export and Investment Support Initiative (AEISI). AEISI is a multi- faceted initiative that seeks to enable small and medium-sized agribusinesses in Azerbaijan to upgrade their processes and product quality throughout the entire production and processing chain in order to enter or expand their access to foreign markets. AEISI will focus on competitively selected enterprises producing dried fruits, persimmons, and strawberries. Each party will bring unique resources to address the various technical, business, finance, and quality constraints to exporting and will work within their own guidelines and procedures, while coordinating with one another wherever practicable, to undertake the following:

 Conducting Export Market Investigation for Selected Target Products. The Initiative will investigate potential markets and their import requirements, and draft reports for each product/market combination.  Facilitating Compliance with International Standards. The Initiative will audit the selected enterprises and provide information on documentation, processes, and upgrades necessary for quality certification. Enterprises may also apply for TTF support for facility upgrades to comply with international standards. AEISI members may support pilot ventures in access to subsidies and agricultural loans from AKIA, as well as from other funding sources.  Supporting Participation in Exhibitions and Trade Missions. The Initiative will organize export missions for each exporter, including partially covering the costs of exhibiting and participation, and arranging buyer-to-buyer (B2B) meetings and visits, and support on follow-up meetings, negotiations, and other activities.  Organizing Buyers’ Missions. The Initiative will organize inbound buyers’ missions to the selected Azerbaijani pilot ventures for familiarization with products to be exported, including partially covering associated costs.

By the end of the reporting period, the draft MOU was reviewed by all parties, but had not yet been signed.

39 Private Sector Activity (PSA) Annual Progress Report Microenterprise Assistance & Reporting

The goal of USAID microenterprise development efforts is to broaden access to microfinance, markets, and resources for the poor in developing countries. Achieving this goal includes providing the poor in developing countries with the tools they need to compete in an increasingly globalized market economy. As some of PSA’s funding is provided expressly for microenterprise development, the Activity is required to report to USAID annually on its microenterprise assistance efforts each spring, which it did most recently in March 2020.

According to USAID’s definition, a microenterprise is “a very small enterprise owned and operated by poor people, usually in the informal sector. For USAID program purposes, the term is restricted to enterprises with 10 or fewer workers, including the microentrepreneur and any unpaid family workers. Crop production activities, previously excluded from the scope of the definition, are now included as long as they otherwise qualify on the basis of enterprise size and the economic status of the owner operator and employees.”

In PY1, PSA supported microenterprises through a group training program for smallholder agricultural growers in all six of the project’s targeted value chains. Group training sessions were held starting in April 2020, when the agronomists were hired and addressed topics relevant to each part of the growing season, such as green pruning, fertilization, irrigation, fertigation, spraying and other applications of micronutrients, Integrated Pest Management (IPM) , harvesting, and post-harvest management. Group training programs were provided in the field, often utilizing PSA’s Demonstration Plots, which model best agricultural practices, for practical training sessions. During 2020, PSA assisted 160 microenterprises to implement proven agricultural practices and harvesting techniques for open-field and greenhouse operations. In all, PSA provided 249 instances (74 for women) of in-person technical assistance and posted online 29 new videos it had created on modern growing practices, which were viewed 3,126 times, resulting in a total of 1,975 individuals applying improved management practices or technologies.

Gender Equality and Women’s Empowerment

In PY1, PSA continued USAID’s efforts to prioritize short-term agricultural sector productivity training to women beneficiaries. During 2020, the Activity identified eight women’s enterprise and development groups in rural Azerbaijan and provided them with agricultural growing trainings, while inviting them to apply for PSA community grants to modernize or expand their activities. By the end of PY1, two groups had submitted concept notes, both of which PSA had approved. PSA also held meetings with Women’s Resources Centers founded by UNDP Azerbaijan in 6 regions of Azerbaijan and began drafting a joint action plan for supporting rural women’s businesses in those regions. During introductory meetings with the State Committee on Women, Children, and Family Affairs, the Committee expressed interest in collaboration on PSA’s women’s economic empowerment efforts and requested an official request proposing such collaboration. In addition, with funding from the Women's Global Development and Prosperity (W-GDP) Initiative, PSA prepared to launch Women in Associations Leadership and Linkages (WALL) , which will increase women entrepreneurs and business owners’ access to market information, markets, digital and business development services, access to finance, networks, mentorship, and other resources to help them to overcome the obstacles of starting and/or growing firms. Late in PY1, a subcontractor was selected to implement the three-year program. Through the aforementioned training and technical assistance PSA reached 74 female beneficiaries in person, in addition to an estimated 152 female online viewers of PSA production training videos, leading to at least 158 women applying improved management practices or technologies. 40 Private Sector Activity (PSA) Annual Progress Report Preventing Violent Extremism (PVE)

PSA continued PVE efforts in the most vulnerable areas where agriculture-focused programming can support livelihoods and thus address push factors. To address these vulnerable agricultural communities, PSA maintained its geographic focus throughout the northern, northwestern, and southern areas of the country. In all of these areas, fruit and/or hazelnut production are the most important economic activities, especially in rural communities, and thus represent the best opportunity to increase employment and incomes, as well as to build community resilience through economic collaboration and inclusion. In PY1, PSA continued its group training program (adjusted due to the COVID-19 pandemic to address small groups of beneficiaries) for small farmers and growers from vulnerable communities to help them increase production quality and productivity. In all three regions, PSA-supported agronomy consultants provided individual technical assistance, using demonstrations plots designed to model best production practices throughout the growing season. PSA also continued to identify new fruit growers to expand the reach of this assistance. In addition, PSA identified eight women’s enterprise and development groups in the western, northwestern and northern regions of Azerbaijan and provided them with agricultural growing trainings, while inviting them to apply for PSA community grants to modernize or expand their activities. By the end of September 2020, two groups had submitted concept notes, both of which PSA had approved. In all, PSA reached 181 individuals in the vulnerable areas with agricultural training, including 64 female-headed households and 28 youth.

Collaboration with Other Assistance Efforts

Colaboration with other donors, as well as Private Sector Engagement (PSE), are increasingly important tools for leveraging USAID assistance to expand the scope and resonance of its initiatives. Some of PSA’s efforts in this area during PY1 included:

 Coca-Cola: The Food Safety Agency (AFSA), Azerbaijan Food Safety Institute (AFSI), Coca- Cola, and USAID jointly organized and financed a one-day Food Safety Workshop, with a focus on food additives in late November 2019. This workshop discussed international best practices and the role of the private sector in leading the way toward stricter food safety standards. PSA, Coca-Cola, and APS organized tourism trainings in the regions to increase awareness on hospitality and budgeting of rural residents, including farmers, women, and youth. Three two-day trainings were conducted in February in in Lankaran, Ismayilli, and Zagatala regions. In addition, Coca-Cola and USAID jointly organized and financed a one-day Fruit Juice Production Workshop, with a focus on production standards, in Baku in late November.  Food and Agriculture Organization (FAO): PSA attended the Inception Workshop of the "Catalyzing the Efficiency and Sustainability of Azerbaijan's Hazelnut Sector" Project under the FAO-Azerbaijan Partnership Programme. The workshop was held via Zoom and brought together experts from the Ministry of Agriculture (MoA), including the Department of Fruits and Vegetables, and AKIA, as well as FAO. Ismail Orujov and Zulfugar Gurbanov, leaders of AHPEA, presented at the workshop on technical challenges in the value chain, such as aflatoxin and relatively low yields. Mr. Orujov also spoke about the joint activities the association conducted with PSA and described the Agency's role in improving the sector and providing thousands of farmer trainings across the country’s northwestern region, where AHPEA is most active. PSA also held a Zoom meeting with Yusif Akhundov, project manager of the FAO agricultural project, and discussed similar activities implemented by both projects, such as VC development, agrarian consultancy services, and agritourism development. FAO is interested in conducting joint activities with USAID PSA and other interested parties, such as the State 41 Private Sector Activity (PSA) Annual Progress Report Tourism Agency (STA) and would like to be a part of the working group on agritourism that consists of USAID/PSA, STA, GIZ, and others. PSA informed FAO about the activities it has completed or is currently implementing in agritourism, such as the Agritourism Assessment it conducted this past spring and the development of an Agritourism Handbook. PSA shared the Agritourism Assessment with Mr. Akhundov so that he could explore potential ways to complement or support PSA’s planned activities in the sector.  Ferrero: PSA continued its partnership with Ferrero to implement a number of activities aimed at developing the hazelnut sector in Azerbaijan. The Activity initiated the drafting of a USAID MoU with Ferrero. According to the agreement, the partners will use and adapt PSA’s existing demonstration plots and new hazelnut orchards as knowledge-sharing platforms to apply and demonstrate Ferrero’s best agronomic practices. PSA will focus on strengthening the capacity of the existing demo plots as well as participating in the establishment of new demonstration areas together with Ferrero, as well as contribute toward the purchase of agricultural machinery and equipment (or use of equipment already purchased in Zagatala by USAID/ASAP) needed for modern management of the demonstration fields. Special events and field days could be organized with the participation of regional growers, DAIM center beneficiaries and ASAU students to provide hands-on interactive training.  USAID Broad Agency Announcement (BAA): PSA provided recommendations on concept note development and answered questions from the Azerbaijan Persimmon Producers and Exporters Association (APPEA), Pomegranate Producers and Exporters Association of Azerbaijan (PPEAA), and Azerbaijan Organic Producers and Exporters Association (AOPE).

COMPONENT TWO: Improving the MSME Business Enabling Environment

Business Enabling Environment Improvement

The goal of PSA Objective 2 is to utilize a partnership and co-investment approach to support a more resilient Azerbaijani economy and improve the business enabling environment. Supporting the non-oil sector, by improving the competitiveness of the private sector (with a special emphasis on agriculture) and reducing the administrative barriers that hinder the development of micro, small, and medium enterprises (MSMEs), will contribute to a more secure and sustainable Azerbaijani economy. Under Objective 2, activities fall under two categories, those focused on improving GoAJ support to MSMEs, and those focused on improving MBO support to MSMEs. In both cases, the focus is on developing sustainable institutions to support MSME growth, rather than directly providing services as a project. Under the first, PSA is working cooperatively with SMB to improve its capacity and service delivery, as it is the primary government agency for MSME support. Under the second, PSA is developing the capacity of private member-based organizations to deliver services to members and engage with the government on issues of concern to their members.

Administrative Barriers

During PY1, in assistance with Business Associations and PSA beneficiaries, the following barriers were identified: 1. Agricultural production on leased state and municipal land that has not been classified by the Ministry of Economy as agricultural, although legal, is not eligible for subsidies; 2. Farmer’s access to finance through the “AKIA-Bank-Farmer” mechanism is not efficient. Although the annual interest rate of credit does not exceed 7-8%, banks require from 42 Private Sector Activity (PSA) Annual Progress Report farmers' profit/loss statements and collateral. However, because agricultural production is exempt from taxation, most farmers are not keeping financial records. In addition, banks often refuse to register farmers' land or other property located in rural areas as collateral due to the collateral’s lack of liquidity; 3. Registration of technical specifications in Azenerji OSJC for new pumps for artesian wells and connecting them to electric lines takes at least six months; 4. Restrictions on modifying the classification of agricultural land to allow construction of a cold storage, processing facility, or irrigation ponds; and 5. The requirement of the State Tax Service that cooperatives and “large” (10-50 hectares) farms must employ at least five workers per hectare of cultivated land and provide monthly obligatory social contributions to each such worker is excessive, because not all farms require five workers per hectare for effective operations.

In PY1, PSA held consultations with Agro Research Center (the main analytical center of MoA). PSA and the Center are currently drafting suggestions for the MoA for eliminating the first barrier. PSA is supporting the AgroNote project designed by ASAU Accounting and Auditing Department teachers and aimed at eliminating farmers’ profit/loss statement challenge. The special notebook will allow small and medium-sized farmers to keep records of farm operations and to draft profit/loss statement. In the future, the farmers will use the AgroNote as an information database and source for financial analysis.

With assistance from the Azerbaijan Farmers’ Association, PSA drafted an appeal to the State Tax Service requesting the elimination of the requirement that farmers employ five workers per hectare of their cultivated land. The appeal was drafted on behalf of the Association and takes into consideration the opinions of more than 200 farmer-members.

Public Perception Survey

PSA originally planned to conduct, in collaboration with the SMB Agency, a public perception survey of agribusiness small and medium enterprises (SMEs), including farmers, processors, and traders, which will serve as a baseline for measuring progress under the Activity’s “Improved Business Environment for MSMEs” objective. Although PSA was not able to obtain a commitment from the Agency to contribute to this effort, the results of the survey will be shared with the Small and Medium Business Development Agency (SMB) to help guide it towards priority bottlenecks in the business enabling environment.

This survey will serve to establish a baseline for measuring progress under PSA’s Objective 2, Improve the Business Environment for Micro, Small and Medium Businesses, and will be modeled upon the IFC’s Enterprise Surveys to assess the attitudes, perceptions, and actual experiences of agribusiness SMEs in a series of topical areas most important for SME growth in targeted value chains. These topical areas will include: Access to Finance, Gender, Infrastructure, Innovation and Technology, Taxes, and Transparency.

Survey data will identify the main business challenges by the key business performance and behavior measures and be disaggregated by geographical location of SME, value chain (including target value chains agritourism, berries, hazelnuts, orchard crops, perishable vegetables, and pomegranates/persimmons), gender, and other relevant characteristics. Although a tender was held in PY1 and a provider selected to finalize the survey design, actual implementation of the survey may be possible only after the volatile situation on the ground related to the conflict over the foreign occupation of Azerbaijani territory stabilizes – or it may be necessary to conduct the survey by phone. 43 Private Sector Activity (PSA) Annual Progress Report This survey will also be utilized in spring 2021 to help PSA conduct the required Microenterprise Results Reporting described earlier in this report.

Azerbaijan Small and Medium Business Development Agency (SMB)

In October 2019, PSA arranged for a representative from Azerbaijan’s SMB Development Agency to meet with the New York Director and International Trade Specialist from the U.S. Small Business Administration; a Regional Manager for Export Solutions from the U.S. Commercial Service’s New York City Export Assistance Center; and the Director of the New York Small Business Development Center. Later in 2019, PSA’s main counterpart at the Agency, Shamil Suleymanov, left the organization. As a result, work on further clarifying the collaboration between PSA and SMB was delayed. Starting from SMB chairman Orkhan the Second Quarter, however, PSA drafted an MOU between Mammadov with counterparts USAID and SMB, which is nearing completion of a lengthy from the U.S. small business administration approval process and is expected to be signed early in PY2.

a) Provide assistance to the SMB House development

During the end of the ASAP project and the start of PSA, SMB received significant assistance from the Activity in the development of the SMB House design and development. SMB eventually decided to open the first House in Khachmaz region and not in Baku, as had originally been planned. The project participated in the opening of the House in December 2019. PSA provided guidance and recommendations on the design and development of the SMB Development Center, which is currently offering service to SMEs. In July 2020, PSA held a videoconference with the SMB House Khachmaz Branch’s staff. The meeting was initiated by SMB management and was designed to find overlapping goals and activities in the North region to coordinate with PSA. The staff informed PSA about the current activity of the Branch and highlighted the following directions where both organizations seemed to have an interest in working and developing local private sector actors:  Providing trainings for entrepreneurs and farmers  Promoting and developing local SMEs through financial and donor organizations  Promoting women and young entrepreneurs  Organizing different SMBs programs for SMEs development

b) Provide capacity building to the SMB Development Center

In March 2020, PSA provided SMB with a sample of a U.S. business association charter as an example for drafting a charter to newly established associations in Azerbaijan. In June 2020, PSA designed a Scope of Work for the investment consultant requested by SMB and submitted it for approval. After the signing of the MoU between USAID and SMB, the latter agency hopes to obtain technical assistance from PSA, especially on SME-investment-related issues. During PY1, PSA also held a series of consultations with the management team of SMB regarding the SME Development Fund, which the center is planning to establish in the near future. Namely, PSA advised SMB on the technical and legal challenges existing in Azerbaijan’s banking and investment

44 Private Sector Activity (PSA) Annual Progress Report legislation that are serious obstacles to the development of an advanced investment environment in Azerbaijan. The technical and legal challenges in the legislation include:  The banking law prohibits banks from making direct financial investments;  The banking law prohibits banks from engaging in direct trade operations with non- financial assets;  The banking law prohibits banks from establishing their own investment companies;  The banking law prohibits foreign investors from investing in local companies in foreign currency; and  The procedure for listing companies is complex.

Development of Member-Based Organizations (MBOs)

PSA works with a wide range of MBOs to build their capacity to serve members effectively and interface with other private and public sector organizations. This includes business management associations, product-based membership associations in the targeted value chains, cooperatives, and community groups. With product-based groups, work under Objective 2 builds on relationships developed through activities under Objective 1, while for broader MBOs, Objective 2 may be the main focus of their interaction with the Activity. By providing capacity building for MBOs, PSA is helping the groups to identify the most important BEE reforms for their growth and effectively raise these issues through a clear advocacy agenda. The Activity is strengthening associations in the targeted sectors to provide better and more relevant services to their members.

In PY1, PSA identified and selected many MBOs and began providing assistance to them. Initial evaluations showed that MBOs in Azerbaijan, especially newer groups, need significant assistance and training with management, building relationships with the board and members, and developing charters and bylaws as they lack the ability to gather the wider community of their members to take on an industry challenge or effectively lobby for the common interest of improving the operational climate for many. PSA’s work with women’s groups, youth, disabled persons and industry associations is empowering them to take proactive steps to improve the work environment.

During PY1, the following MBOs were identified for assistance:

 Azerbaijan Berry Producers and Exporters Association;  HH Group NGO/Azerbaijan Agronomists’ Union;  Azerbaijan Farmers Association (AFA);  Azerbaijan Rural Women’s Association;  Azerbaijan Hazelnut Producers and Exporters Association;  Azerbaijan Nursery Producers and Exporters Association (ANPEA);  Pomegranate Producers and Exporters Association (PPEAA);  Azerbaijan Pomegranate Producers and Exporters Cooperative (APPEC);  ATABABA Hazelnut Producers Cooperative: Azerbaijan Organic Producers and Exporters Association (AOPE);  Azerbaijan Persimmon Producers and Exporters Association (APPEA);  Community-Owned Fruit Producers and Fruit Dryers; and  Development of a Rural Tourism Association (RTA).

PSA held a series of meetings with the MBOs and identified their main needs for capacity building and institutional development. All requirements can be characterized as follows: 45 Private Sector Activity (PSA) Annual Progress Report  Trainings for associations members by specialists;  Specialist services for association members;  Strengthened asset base of association members;  Technical assistance in drafting proposals for different grant programs;  Developing networking capacity and opportunities;  Strengthening production and export capacity of growers; and  Promoting MBOs’ activities.

Additional assistance that PSA provided to associations during PY included:

 Capacity building for business and industry associations: PSA held a series of meetings with ABPEA, AHPEA, ANPEA, PPEAA, and AOPE associations and identified numerous administrative barriers, such as documentation bureaucracy, unjustified taxation, price discrimination, lack of direct state investments in the development of agricultural infrastructure, a lack of state promotion of Azerbaijan agricultural products in Europe and UAE markets, and contradictory laws and unclear or inefficient division of responsibilities between governmental agencies. PSA assisted the Beekeepers Association of Azerbaijan to draft a request to the Ministry of Ecology and Natural Resources for obtaining access to a map of flowering forests for use by beekeepers. PSA also drafted a business plan for the Gabala hazelnut producers’ group, which was established by the EU-funded COVCHEG Azerbaijan Project.  Concept Note/Proposal Assistance: During PY1, MBOs submitted proposals to the TTF program and proposals for the USAID USAID Broad Agency Announcement (BAA) solicitation with assistance from PSA.  Azerbaijani Agricultural Association Web Portal: PSA identified a lack of online information on Azerbaijani agricultural associations. Out of more than 40 associations, only a few of them have their own website. Therefore, PSA decided to support the construction of a unified online portal for such groups, in coordination with the Ministry of Agriculture. PSA nearly completed contracting as service provide to build the portal at the end of PY1. The portal will be completed early in PSA PY2. - “One Window” Export Support Center (ESC): PSA encouraged exporter associations to work with the “One Window” ESC of the Center for Economic Reforms Analysis and Communication (CAERC) in order to obtain the necessary export-related documentation and food safety certifications. PSA also agreed to support the ESC to create an export- oriented “myexport.az” web portal that would bring together a wide range of content about the Center and its services, as well as technical information about export requirements and procedures. Its sections would also include analytical articles, an online export certificate application, information on financing, and import-country-specific legislation and procedures, required documents, import duties, and so on.

COMPONENT THREE: Supporting Azerbaijan’s Economic Reforms

As previously noted, PSA engaged Nathan Associates Inc. as a subcontractor to guide Component 3 efforts under the Activity. Under PSA Objective 3 “Support for Azerbaijan’s Economic Reforms,” Nathan was to establish a responsive, flexible mechanism for supporting the GoAJ with its economic reform agenda and help it streamline and operationalize regulations governing MSMEs in Azerbaijan. Ms. Zeynep Akalin deployed to Azerbaijan on October 22, 2019. However, due to a shortfall in USAID funding, activities under Objective 3 were suspended in 46 Private Sector Activity (PSA) Annual Progress Report February 2020, and the subcontract between CNFA and Nathan Associates was put on hold. At present, the subcontract is formally suspended, but CNFA and its subcontractor communicate on a periodic basis to discuss updates on possible paths forward. The activities implemented from October-December 2019 are presented below.

Identification and Clarification of the scope for PSA Objective 3 Support for Azerbaijan’s Economic Reforms

The Economic Reforms Manager (ERM) gave a presentation to PSA’s COP and Acting DCOP to propose a vision of PSA Objective 3 based on the RFP and USAID’s debriefing comments. After internal discussions, the presentation was delivered to the USAID Azerbaijan Contracting Officer’s Representative (COR), and the pursuing discussions helped clarify USAID’s expectations for the component’s work.

Meetings with Government and Partner Agencies

The ERM set up meetings with potential government and partner agencies, starting with those recommended by the USAID COR and continuing with other prominent organizations in the private sector development and economic reforms context in Azerbaijan.

Results of Meetings with Government Agencies

PSA established an initial understanding of collaboration for all government agencies with which it was able to hold meetings during the ERM’s first six weeks in the country. These government agencies are: Center for Economic Reforms Analysis and Communication (CAERC), Azerbaijan Accreditation Centre (AzAK), State Tourism Agency, Agency for Agro Credit and Development (AKIA), and Small and Medium Business Development Agency (SMB Agency). The most advanced relationship at this point in terms of details of possible PSA work is with CAERC, followed by AzAK.

During meetings with the agencies, the ERM tried to focus on beneficiary requests that are linked to economic reforms and gathered more details about requests of this kind. The main potential areas of collaboration for each agency are listed below:

1. Center for Economic Reforms Analysis and Communication (CEARC): M&E Capacity Enhancement and other potential activities such as legislation support for Intellectual Property Rights and Competition Code; strengthening Azerbaijan’s competitiveness in attracting investment; and linking Azerbaijani MSMEs into Global Value Chains (GVCs). 2. Azerbaijan Accreditation Center (AzAK): Strengthening the knowledge and application capacity of standards for all sector products, including operational standards for implementing entities. 3. State Tourism Agency: Legislative support for infrastructure, concession services, and taxes for homestay establishments; technical assistance for raising quality and safety standards in the tourism sector, tourism product development, and tourism awareness, among others; support for facilitating coordination with other government agencies and donor organizations; monetary/physical resource support for building accommodation and facilities. 4. Agency for Agro Credit and Development (AKIA): Policy research on a) new subsidy schemes, b) obstacles on obtaining certificates of origin for internally displaced farmers; technical assistance on a) agri-processing SMEs, b) agro-leasing, c) warehouse receipt system, d)

47 Private Sector Activity (PSA) Annual Progress Report logistics services/ infrastructure, e) contract farming, f) state strategy for livestock, among other potential areas. 5. Small and Medium Business Development Agency (SMB Agency): Technical advisory services a cluster development strategy and implementation; model factories for lean production (for all sectors); support to workforce development; identifying SMB constraints in specific areas and assisting with solutions; capacity building for business associations; providing assistance to SMBs on writing business plans, among other potential areas.

Results of Meetings with Potential Partner Agencies

The PSA team met with potential partner agencies composed of international donor organizations and private sector representatives including associations. In addition to establishing relationships for future collaboration, these meetings added substantial value by providing essential information on the Azerbaijani economic reforms context, leads for areas/issues that are high on the government’s agenda that PSA can work on, and referred contacts for other meetings.

Conclusions

Over the first two months of PSA Objective 3 work, PSA established a good foundation for building project activities during the first and following project years. The ERM initiated key relationships, formed an information and knowledge base to inform the sensitive political environment around this work, and gathered relevant documentation and contacts. PSA/ERM established initial understanding for future collaboration with five government agencies and six potential partner agencies. All meetings involved conversations on the details of collaboration, although to varying degrees.

In addition, PSA delivered a good start in terms of introducing the project to government agencies and demonstrating good faith to the agencies that PSA is there to assist them with their economic reforms activities in the next five years.

In conclusion, there is substantial demand from the government agencies we were able to meet with to date for potential PSA support related to economic reforms. In addition, based on other meetings and research, there are many indications for more demand on high-agenda issues from other government agencies that our team did not get a chance to meet with to date. The demand for PSA work covers a wide range of areas in terms of technical areas and type of assistance (legislative, capacity-building, analysis/ research, policy advisory, organizational change, and material resources, among others).

PSA/ERM believe Objective 3 would benefit from a public event to inform multiple government agencies more extensively about PSA. There seems to be a lot that the project can support on economic reform agendas, and the distance between the project and these agencies seem to be substantial. PSA’s good start with CAERC will be instrumental in publicizing the project to implementing bodies of economic reforms.

48 Private Sector Activity (PSA) Annual Progress Report Cross Cutting Activities

Monitoring, Evaluation and Learning (MEL)

In February, PSA submitted to USAID a Monitoring, Evaluation, and Learning (MEL) Plan reflecting PSA’s strategy for tracking progress and measuring achievement of the Activity’s objectives, goals, and contract deliverables. After reviewing the Plan, USAID MEL team and COR held a meeting with the PSA COP and MEL and Communications Manager. Upon USAID’s request, PSA transferred the MEL Plan to an updated USAID template, and added several new indicators and other details and submitted to USAID April 6.

Through indicators #2, 3, 4, and 5, PSA collects data and measures the sales by the enterprises directly assisted by PSA in the relevant value chains (VCs) . PSA VC Specialists and agronomists surveyed 95 direct beneficiaries throughout all assisted value chains. The conducted survey covered two periods: 1) Baseline: October 2018 – September 2019; and 2) Year 1 Results: October 2019 – September 2020.

For reporting on Indicator #7, Percentage change in sales of beneficiary households engaged in targeted sectors, PSA surveyed 94 direct beneficiary housholds from the Hazelnut. Persimmon/Pomegranate and Orchard Value Chains. In the Hazelnut Value Chain the farmers smaller than 3 hectares and in Pomegranate/Persimmon and Orchard Value Chains famers with smaller than 1 hectare of land were considered to be household growers. The survey recorded a 2% increase in incomes of the beneficiary households. The majority of the surveyed respondents were from the hazelnut sector, which experienced an less successful year than usual, due to frosts in spring 2020 and the effects of the hazelnut’s alternate bearing growing cycle, both of which negatively affecting productivity this year. This affected the overall results for PY1 for this indicator, and PSA was not able to reach the target of 4% set for the first year.

During the survey of beneficiaries operating cold storages built with USAID funding, PSA found out that out of six cold storages, those operated by Eldar Zalov, Shamil Jahangirov, Ayaz Alakberov and Saleh Arabov rented out space to others to store produce in. In total, they rented out space for storing 5,340 MT of produce, and generated $222,294 as a result. The two cold storages operated by Berry VC beneficiaries did not rent out the cold storage space to others.

PSA has developed a database of the farmers that it has assisted directly through technical assistance and/or training. From that list, PSA surveys a sample of microenterprises in order to measure their increases in income. Besides reaching out to growers directly via agricultural TA and training, PSA has also begun utilizing social media channels to disseminate training videos to farmers. PSA assumes that the commitment of someone watching a 10-15-minute video reflects a significant level of interest on the part of, and relevance for, the viewer, so PSA includes the total number of training video views in its number of people trained. For PY1, this result is 3,126. PSA assumes that 60% of viewers adopt new practices and technologies (that is, 3,126 viewers x 60% = 1,876) , and included this number in its reporting against indicator #6 for PY1. In addition, the use of Facebook to access videos for training on proper agricultural cultivation practices is itself considered the application of an improved management practice or technology.

PSA provided field-based training to 238 individuals since the Activity engaged field-based agronomist consultants in April 2020. Of that number, 102 were the employees of the agribusinesses. When conducting a phone survey of the remaining 136 beneficiaries, PSA was able to reach 113 respondents, out of which 99 positively responded to the question ‘Have you

49 Private Sector Activity (PSA) Annual Progress Report adopted any new practices or technology in your farm as a result of PSA assistance?’ Of those surveyed, 14 beneficiaries answered that they did not apply the obtained knowledge. The main reasons listed for not adopting the practice were a lack of water for using the recommendations, insufficient resources for accessing input supplies, the relevant season for the practice(s) not having arrived yet, and the need for soil analysis before applying the practice.

In order to obtain Export Promotion status (3% subsidy), the exporters were required to provide verifying the acceptance of the load by the importing company with a stamp and special notes. AHPEA lobbied to remove this barrier, and after many discussions with the MoE (including Tax), Customs, and MoA, government lifted this requirement and declared that export documentation originated in the country will be sufficient to receive the “Export Promotion” and, as a result, be entitled to a refund. PSA attributes its participation in overall assistance to the association, which enabled them to get organized and communicate their message to the GoAJ. Also, PSA contacted beneficiaries engaged in exporting of hazelnuts to solicit their feedback on the amendment. Jaarchi Hajiyev, heard this news from PSA for the first time. As exporter of roasted hazelnuts, this enables him to adopt a more aggressive pricing strategy in order to increase his competitiveness. Ismail Orujov, received a refund of about $20,000 this year as a result of this amendment.

Throughout the year, PSA MEL Manager carried out routine information collection and reporting activities and, together with the Business Enabling Environment Manager, worked through identifying and hiring a company to conduct a Public Perception Survey of the business enabling environment for SMEs in PSA’s target value chains.

Environmental Management and Monitoring

At the beginning of Project Year 1, the PSA Environmental Compliance and Monitoring Specialist was mainly engaged in coordination with an international consultant that was working remotely with the project team to revise its PERSUAP. A scope of work (SOW) was drafted earlier in the quarter for a STTA assignment to conduct this work and a successful candidate was selected and contracted in March 2020 with a Period of Performance between March 12 and April 7, 2020 (later extended to add a few more days in July 2020). The completion of the PERSUAP entailed a long process of emailing and exchanging comments between the Consultant, PSA and USAID. The PERSUAP process has now been completed, with USAID provided it final approval on October 9, 2020.

Starting from July 2020 the PSA Environmental Compliance and Monitoring Specialist began preparing new ERCs. Despite the lockdown for COVID-19 in Azerbaijan, the process of ERC development was managed successfully and six new ERCs obtained approval by USAID by the end of Project Year 1. The table below shows the current status of ERCs:

Environ- USAID Type of Beneficiary mental ERC ERC Date ROC Name of the ERC Sector Region Activity Name Reviewer Status Approved Status 1 Installation of Cold Berry Lenkaran TTF Iskandar Elvin ERC August 28, TTF Storage Equipment on Sharifov Sadikhov approved 2020 application Iskandar Sharifov’s Farm process is in Lenkaran rayon ongoing 2 Installation of Cold Berry Masalli TTF Ibrahim Elvin ERC September TTF Storage Equipment on Abiyev Sadikhov approved 01, 2020 application Ibrahim Abiyev’s Farm in process is Masalli rayon ongoing 50 Private Sector Activity (PSA) Annual Progress Report 3 Installation of Plastic Box Berry Jalilabad TTF Namik Elvin ERC August 26, Project has Production Equipment Aghayev Sadikhov approved 2020 been and Accessories on cancelled Namik Aghayev 's Facility in Jalilabad rayon 4 Installation of Cold Perishables Samukh TTF ATA AGRO Elvin ERC September 1, TTF Storage Equipment on Sadikhov approved 2020 application ATA Agro’s Farm in process is Samukh rayon ongoing 5 Installation of Cold Perishables Goychay TTF Ahmad Elvin ERC August 28, TTF Storage Equipment on Rahimov Sadikhov approved 2020 application Ahmad Rahimov's Farm in process is Goychay rayon ongoing 6 Installation of Cold Variable Goygol Demo ASAU Elvin ERC September 7, TTF Storage Equipment on Sadikhov approved 2020 application Azerbaijan State process is Agricultural University’s ongoing Training & Experimental Farm in Goygol rayon

Communications and Outreach

 PSA Facebook Page: Agriculture is a critical industry whose production is always in demand regardless of circumstances, and the COVID-19 pandemic is no exception. Thus, while the sector continues to operate and provide for the country’s need for fresh food in trying conditions, the USAID Private Sector Activity has adapted its approach to continue supporting this sector as well. In May 2020, PSA created several Facebook pages and a YouTube channel to expand its outreach in a time of social distancing and travel restrictions, when in-person trainings are not possible. PSA’s main Facebook page, Kənd Təsərrüfatının İnkişafına Dəstək (Support for Agricultural Development), is now being used as a platform for PSA to provide valuable information and training to its beneficiary farmers and processors. Over just the first four month and a half, Baku-based staff as well as field-based agronomists under the Activity produced and posted 29 videos on modern growing practices and other topics, as well as 56 other original posts. By the year’s end, the videos had been viewed 3,126 times. PSA is now set to expand these efforts through collaboration with the aqrar.az website. The aqrar.az website, which is a free platform for agricultural announcements and advertisements, will soon add a new education section to The PSA Facebook page reached 2,133 likes and 2,211 followers by the end of PY1

51 Private Sector Activity (PSA) Annual Progress Report its webpage and post PSA-developed video trainings there.  U.S.-Azerbaijan Business Linkages Facebook Page: Another PSA designed Facebook page is called U.S.-Azerbaijan Business Linkages, and has generated a total of 577 followers to date. The purpose of the page is to create a digital platform to facilitate linkages between U.S. producers, manufacturers, vendors, and exporters with the Azerbaijani companies interested in buying, distributing, representing, and importing the American products and services. PSA posts all significant and potential U.S.-Azerbaijan business linkages related content on this page to boost the interest of business people and companies from both countries so that they may engage in trade and facilitate business interactions. PSA has developed an email communication that is currently used to distribute information to U.S. companies with potential interest in selling their products in Azerbaijan. The Activity is offering the opportunity for U.S. firms to advertise their products and services as well as business opportunities on its page free of charge. PSA also promotes U.S. linkage opportunities and endeavors by providing a wide range of targeted viewers with exciting and relevant content. PSA’s business linkages Facebook page has two main target groups: U.S. businesses interested in expanding the export of their goods and services to Azerbaijan and the Caucasus region, and Azerbaijani traders who are interested in exporting to as well as importing from the U.S. PSA will promote U.S.-Azerbaijan business linkages and trade in three main ways: o By facilitating trade and investment between U.S. and Azerbaijani companies through the introduction of goods and services and playing a key role in establishing business linkages; o By using the Facebook page as a trade platform to promote and advertise U.S. companies’ product features and gauge interest of local companies who want to become dealers, distributors, representatives, or pursue other types of trade relationships; o By providing trainings through webinars and other means of information sharing on cross-border trade, including logistics, legal issues, taxation, consolidated shipments, private label, marketing, advertising, packaging, and standards. During PY1, PSA also posted a short video with the message "Thank You Farmers," featuring Valtra tractors, which are a brand of U.S. agricultural consortium AGCO. The video communicated a message of gratitude to farmers for continuing their work to put nutritious food on our tables during the pandemic. The video reached over 500 views over the first couple of days after posting. Last year, USAID helped facilitate a new linkage between Valtra and an Azerbaijani equipment dealer, resulting in Valtra tractors being introduced to the Azerbaijani market for the first time. PSA also created a video clip dedicated to the World Trade Month in May and uploaded it to the U.S.-Azerbaijan Business Linkages Facebook page.

Key Constraints and Lessons Learned

Key Constraints

Coronavirus Disease 2019 (COVID-19): As for virtually every business, the COVID-19 pandemic presented by far the biggest obstacle encountered by PSA this past year. Lockdown measures, travel restrictions, and the need to responsibly practice social distancing to protect the health of staff, partners, and beneficiaries, as well as their families, all created challenges for the day-to-day ability of the Activity to conduct operations and provide assistance. Group farmer trainings could not be held, international experts could not be fielded to Azerbaijan for consulting

52 Private Sector Activity (PSA) Annual Progress Report assignments, study trips were postponed, and international exhibitions and trainings were canceled, the Chief of Party was stuck in Georgia (where he had gone to obtain a new Azerbaijani visa) from March onward, among other negative impacts on PSA’s programming. Agribusiness beneficiaries faced analogous challenges to their operation as well, with added difficulties such as reduced access to labor when travel restrictions impeded workers who commute to work, delays at the border holding up perishable exports, and delays in the delivery of public and private services, such as the issuing of new certificates from international quality and safety certification companies. Thankfully, these firms did provide letters of extension to clients whose re- certification was delayed due to auditors’ inability to travel. Most notably, agribusinesses were hurt by the resulting economic slowdown, which reduced demand for agricultural production overall, and especially by high-end buyers who are willing and able to pay a premium for top quality and value-added production, as restaurants and other food service businesses were closed or forced to operate at a fraction of their capacity, while events and ceremonies, such as weddings, were canceled or postponed when not prohibited. As a result of such challenges, this year’s reported agricultural production represents only a 2% annual increase,1 much lower than in previous years and less than a sixth of the 13% increase over the same period last year. The economic downturn also had a negative impact on beneficiaries’ ability to invest in expansion, modernization, or in some cases, even routine maintenance, as the overall uncertainty in the market reduced the availability of and access to finance, while many entrepreneurs chose to emphasize savings in order to preserve a financial cushion to manage risk.

Water Shortages: Poor water management, long-term trends likely due to climate change, and lower precipitation this year have all contributed to major water deficiencies in Azerbaijan, which is especially problematic for farmers. As a result of decreasing volumes of water in canals, the largest fresh pomegranate producers in Kurdamir, for example, faced a major irrigation problem. This problem mainly affected the producers in the Central Regions, which is specialized in pomegranate, wheat, barley, and cotton production. As the country’s main water source, the Kura River has had its level drop by as much as 2.5 meters in some places, and the level of the Mingachevir reservoir, which is fed by the Kura, dropped by 16 meters in recent months.2 As a result, pomegranate growers have not been able to irrigate on time or in sufficient volumes. This is expected to reduce the size and productivity of this year’s harvest, while lowering juice content by 20%. For field crop producers, the barley and wheat harvests were 2-3 times lower (600-700 kg/ha) in Kurdamir region than in 2018. The water available for irrigation was directed to the large agroparks, which are under the government’s control. Some farmers have an immediate solution in drilling new artesian wells, but this adds to their production costs, and is likely only a short-term solution, as groundwater resources will not be sufficient over the long term and may quickly be depleted. Reduced water resources also affected places not dependent on the Kura. In the northwestern region, several large irrigation canals either ran dry or experienced significantly reduced water flow due to the environmental changes. Orchards which were irrigated naturally by these canals for decades faced devastating droughts during the last couple of years which, if they continue, threaten to reduce agricultural yields, and cause permanent damage to orchards. Thanks to PSA recommendations and USAID demonstration plots, some growers turned to drip irrigation of hazelnut and fruit orchards for the first time. Improved irrigation management at both the national and farm level will require proper pricing, incentives for reduced water use, and the introduction of water-saving technologies.

1 https://azertag.az/xeber/Kend_teserrufati_mehsullarinin_istehsali_2_faiz_artib-1565385 2 https://eurasianet.org/azerbaijan-faces-growing-water-shortage

53 Private Sector Activity (PSA) Annual Progress Report Azerbaijan’s Limited International Profile: One of the bigger obstacles to PSA’s priority activity of facilitating the establishment of linkages between U.S. and Azerbaijani agribusinesses is the fact that American companies have insufficient information about Azerbaijan or do not consider the region to be a potentially lucrative market. For this reason, it can be difficult to get responses from U.S. firms to inquiries about potential collaboration with interested Azerbaijani businesses. In order to overcome this obstacle, PSA created a U.S.-Azerbaijan Business Linkages Facebook page and began holding informational videoconferences in English with American manufacturers, often in conjunction with the U.S.-Azerbaijan Chamber of Commerce (USACC). PSA also continues to reach out to U.S. businesses using various methods of communication and trusted intermediaries such as the Wes Watkins Center for International Trade Development at Oklahoma State University to convey the potential of trading with Azerbaijan and the wider region.

There are some specifics of the environment in Azerbaijan that pose challenges to attracting U.S. investments, products and services: For example, there is a) Limited access to publicly available information on prospective business partners. In many instances, U.S. companies cannot obtain reliable information about their business counterparts in Azerbaijan. Most of the businesses either have no website or have a website with very limited or outdated information. Online search does not yield a tangible result. It is practically and legally impossible to get information on a legal entity’s ownership, shareholders, financial statements, corporate credit history, and so on. In addition, there is the frequent phenomenon of 2) Businesses being affiliated or associated with a public figure. Most large and even medium-sized businesses (including holding companies) that have significant trade and commercial potential have ties with government officials, which is a red flag for U.S. companies when considering a business or investment opportunity in Azerbaijan.

Indirect impact of US Export Control and Russia/Ukraine and Iran-related US Sanctions on U.S.-Azerbaijan bilateral trade: One of the deterrents for US-Azerbaijan bilateral trade is Azerbaijan’s proximity to and significant trade and investment transactions with both Iranian and Russian companies. A handful of U.S. exporters have expressed legitimate concern that there is a high risk of breaking U.S. laws by entering into transactions with leading companies in Azerbaijan both from FCPA and US Export Laws standpoint. From a U.S. exporter perspective, there is a concern that one day a U.S. product they ship to a customer in the Caucasus or Central Asia may end up being used in Iran or in the hands of people listed on U.S. SDN or OFAC Lists. U.S. exporters are responsible for the end-use of certain categories of products and services (dual-use goods) that they export overseas.

CNFA and PSA Registration: The lack of legal registration in Azerbaijan for PSA and delay in CNFA Azerbaijan’s registration agreement renewal with the Government of Azerbaijan (GoAJ) was a minor, but not trivial, obstacle during PY1. Certain GoAJ structures were reluctant or unwilling to collaborate with the Activity prior to its registration, such as the Ministry of Economy (including AzPromo) and the State Committee on Family, Women and Children Affairs. The efforts required to pursue registration (re-registration in the case of the CNFA/Azerbaijan branch) also diverted some PSA leadership and staff effort away from other tasks essential to moving forward activities of direct benefit to beneficiaries. These registration efforts were also delayed somewhat due to the COVID-19 pandemic, as government offices closed in Washington, DC and as a result delayed CNFA’s ability to apostille certain required documents. Fortunately, the CNFA/Azerbaijan branch’s registration was successfully reactivated in August and PSA project registration is now expected by the end of PY1.

54 Private Sector Activity (PSA) Annual Progress Report Vacant Deputy Chief of Party Position: Upon start-up of PSA, the proposed and approved Deputy COP candidate informed CNFA that due to a family medical emergency, he was unable to travel to Azerbaijan and therefore declined to accept the job offer. An exhaustive recruitment effort for a replacement ensued, while an interim DCOP from CNFA/Georgia filled in. When CNFA identified a suitable candidate in spring 2020, however, the COVID-19 situation had resulted in Azerbaijan being closed to foreign visitors and the U.S. Embassy being unable to assist in providing visa support due to the State Department’s suspension of non-essential travel to/from Azerbaijan. Until Azerbaijan reopens to international travelers and the situation with visa support for Azerbaijan is clarified, it will not be possible to move forward on the recruitment of the preferred candidate, as he is currently employed and not willing to step down from that position until all of the conditions of employment on PSA are clarified. As a result, PSA was shorthanded in both technical and administrative areas for much of PY1, requiring remaining staff to step up their efforts.

Suspension of Component 3: In September 2019, CNFA signed a subcontract with Nathan Associates, one of the approved international implementing partners under the PSA contract. Nathan Associates was engaged to lead Objective 3 to establish a responsive, flexible mechanism for supporting the GoAJ’s Economic Reform Agenda, in addition to streamlining and operationalizing regulations governing MSMEs in Azerbaijan. A shortfall in USAID funds led to the suspension of Component 3 activities under the subcontract between CNFA and Nathan Associates in February 2020. As a result, PSA staff expended major effort on designing the component, contracting the subcontractor, explaining and formalizing the suspension of the subcontract, and following up with the donor and subawardee on a periodic basis to gain and provide updates on the possible paths forward.

Lessons Learned

Although the aforementioned obstacles have undoubtedly made the implementation of PSA more difficult, the program team has exhibited flexibility and creativity in order to identify and implement alternative approaches to achieving the Activity’s overarching goals.

Below are a few of the lessons learned from these efforts:

 Significant PSA assistance can be delivered remotely. With the inability to conduct group training of farmers, but the need to reach a broad segment of growers nationwide, PSA quickly transitioned to producing video and streaming content. PSA staff worked closely with field-based agronomy consultants and service providers to begin planning, filming, editing, and disseminating a range of short training videos of improving quality. Videos were produced on topics related to all five of the Activity’s agricultural value chains, as well as on cross-cutting topics such as financial management. While the first few videos produced were of more rudimentary quality, staff quickly gained experience in better drafting and delivering their training material, PSA identified several talented filmmakers and editors with the requisite equipment and skills to provide high- quality video and audio, as well as engaging approaches to filming and editing, and staff developed an increasingly standardized approach to “branding” the videos so that they could be presented more as an ongoing set of videos within a unified series than a haphazard collection of videos with no unifying “branding” or presentation. PSA also launched live-streaming webinars to facilitate active dialogue on various topics of relevance to beneficiaries and partners. Specific lessons learned about successfully implementing these activities included:

55 Private Sector Activity (PSA) Annual Progress Report o High-quality videos displaying hands-on practices from the field are more captivating: To continue support farmers with respective trainings and TAs in accordance with seasonal needs number of trainings have been developed in a format of video lessons, which later were shared on the Activity’s social media channels. It allows benefiting from the trainings not only to direct PSA beneficiaries but also to hundreds of other interested farmers who were able to extend their knowledge in the respective sphere. To gain the farmers' attention among the vast, and competitive information flow on Facebook, the PSA team quickly realized the need to adapt to training approach for videos to shorter, field-based content that is both engaging and visually attractive, requiring good audio and picture quality. These types of videos generally generated more views than videos of formal classroom presentations. o A wider audience can be reached online than in person: Because it was not possible to provide classroom training, the Activity’s agronomists recorded trainings and later aired those via social media and communications platforms. Reaching out to the farmers via online means increased the number of growers covered. If live training events could be attended by the maximum of a few dozen participants, the online training videos were watched by hundreds of growers, and that numbers continue to grow. Besides posting the videos on the Activity’s page, the page administrator also shares the posted videos through 6 different local agricultural Facebook groups in order to reach farmers beyond its own Facebook audience. Over the first three months, the posted videos generated over 161,000 views and garnered the attention of other agricultural platforms (aqrar.az and azfood.az) that requested permission to share the video materials on their websites as well. While these videos fill in the gaps in the availability of the agricultural technical information in the absence of field-based group trainings, they also serve PSA’s mission to maximize its outreach. PSA will return to group trainings in person when the situation allows, but will continue to produce and disseminate videos as well because both approaches are mutually reinforcing. o It is desirable to reach out beyond social media: While the new recorded training material was quickly gaining large views on social media, receiving feedback from more beneficiaries, PSA realized that not all, and especially a smaller number of older generation of growers do not have social media accounts and cannot follow the training videos. In those cases, PSA, together with industry associations and large buyers of raw material from the growers, tried to identify such farmers and created WhatsApp groups, where the practical information and videos were shared at. This helped to increase the number of people benefitting from the PSA training. o Webinars are a useful tool for facilitating interactive and long-distance discussion: When it became obvious that working in lockdown conditions was becoming a new norm for an extended period of time, PSA began using webinars as a means to promote its agronomy services and U.S.-Azerbaijan business linkages. In PY1, PSA held webinars targeted at providing specific educational information in the area of U.S.-Azerbaijan linkages, agritourism, advanced agronomy practices, and finance. PSA benefited from this experience and learned some important lessons. Firstly, it turned out that paid online announcements of the webinars on the social media are effective in driving turnout and very inexpensive. PSA learned how to use this tool effectively, which added dozens of targeted participants to the webinars. On average, PSA’s Facebook announcements reached 20,000 users in Azerbaijan. Many of these people followed through the link and viewed PSA social media profiles and learned more about the Activity’s activities. This contributed to 56 Private Sector Activity (PSA) Annual Progress Report PSA achieving nearly 2,000 followers on its Facebook pages and reaching an interested audience. Secondly, PSA learned that high-quality experts with strong presentation skills can be successfully encouraged to take part in webinars free of charge and that they also help drive attendance and quality. Lastly, PSA learned that the interactive format of the webinars, where speakers share slides and fact sheets onscreen and the audience has a chance to ask questions or express their comments, results in the best kind of learning and information sharing. Even though most participants will not vocalize their questions or comments, they type them in the chatbox, facilitating audience engagement and attendance through the entire program.  COVID-19 led to higher demand for and PSA awareness of IT services and technologies. The pandemic and the resulting lockdown, by leading to much professional activity online, brought to the attention of many organizations and companies the importance of access to IT services. Many activities had to move online, raising awareness, especially among older professionals, of the Internet as an important informational tool. Accordingly, during PY1, three entities requested PSA assistance in constructing the following web portals: o Agricultural Associations of Azerbaijan (requested by the Ministry of Agriculture); o Agroinvest (requested by Agricultural Research Center of the MoA); o Myexport (requested by the “One Window” Export Support Center).  International private sector actors can be engaged to implement collaborative activities. During PY1, PSA was quite active in exploring opportunities to leverage cash and in-kind contributions from U.S. and other major foreign agribusinesses to expand and amplify program activities. Because of either their interest in Azerbaijan as a potential market or to conduct public relations efforts in what is already a market for them, several major firms agreed to collaborate with PSA over the past year. PSA worked with Coca- Cola to jointly sponsor a food-safety workshop in Baku and conduct agritourism training across the country, while collaboration with U.S. agribusinesses DTN and Trécé, as well as multinational Ferrero, was widely discussed and is now planned for launch in PY2. Specifically, PSA plans joint demonstrations with equipment donated free of charge by the two U.S. firms, as well as a variety of joint trainings and a study trip together with Ferrero. While the COVID-19 pandemic would likely have postponed implementation until PSA PY2 in any case, it should be noted that delays in getting MOUs signed between USAID and these firms have also greatly slowed progress. As we have learned, USAID, GoAJ and private sector firms have quite different approaches to MOUs and it can be extremely difficult to navigate the bureaucracies of each in order to agree on a template for an MOU, not to mention the content. In addition to having verified that USAID and various well-known international businesses indeed have a common interest in collaboration, perhaps the main lessons learned here are that patience and persistence are required, because much communication and many MOU iterations are usually required before the documents can be finalized and signed.  PSA collaboration with government institutions is both feasible and mutually beneficial. It is no accident that PSA and the GoAJ share many overarching goals regarding SME and agricultural development in the country. These respective parties also have different, often complementary, resources that they can contribute to working toward these mutual goals, leveraging both greater and more diverse resources, while helping to build both private-sector and government capacity. While the GoAJ has the authority, both literally and figuratively, to identify and attract a wide range of Azerbaijani stakeholders from both the public and private sectors, PSA has the flexibility to move quickly to implement new ideas and easy access to U.S. service provider and technologies. Throughout PY1, PSA worked beneficially on joint activities with organizations such as the 57 Private Sector Activity (PSA) Annual Progress Report Ministry of Agriculture (MoA), Ministry of Economy (MoE), Food Safety Agency (FSA) and Institute (FSI), State Tourism Agency (STA), Small and Medium Business Development Agency (SMB), and others.  Adoption of modern practices and technologies accelerates when needs are urgent. Although during the USAID ASAP project, beneficiaries were provided with extensive information on efficient irrigation practices and technologies, as well as supported through demonstration plots and TTF matching investment, beneficiaries’ investment in these technologies remained limited. Now that the water situation has become more critical, and the GoAJ has recognized the problem’s urgency, both the public and private sectors are beginning to act. Many farmers - large and small - have started to express great interest in efficient irrigation systems and requesting PSA support to acquire them. One of the lessons here, therefore, is that changes in behavior often take time and tend to be reactive more than proactive. This suggests that patience is sometimes in order when, for example, the immediate adoption of new technologies and management approaches that a project promotes and demonstrates is not forthcoming. Sometimes results from awareness of new technologies take longer to materialize and drawing conclusions about the relevance or efficacy of training may not be advisable until a significant amount of time has passed.

58 Private Sector Activity (PSA) Annual Progress Report Appendices

A. PSA Year One Performance Monitoring Plan (PMP)

B. Short-Term Technical Assistance/International Assignments

C. Technology Transfer Fund (TTF) Status Updates

D. Linkages Table

E. Financial Research Reports

F. Azerbaijan Agritourism Assessment

G. Azerbaijan Fruit and Vegetable Value Chain (VC) Prioritization and Gaps Assessment

59 Private Sector Activity (PSA) Annual Progress Report APPENDIX A: PSA Year One Performance Monitoring Plan (PMP)

# Indicators Actuals Targets Details

Gross Domestic Product (GDP) January-September 2020, million USD 30,631.83

GDP growth, compared to January-September 2019 -3,9%

Imports of goods and services, million USD 7,823.454

Imports of goods and services as % of GDP 25.5%

Exports of goods and services, million USD 10,579.825

Exports of goods and services as % of GDP 34.5%

Gross National Income (GNI) for 2019 $44.87B6 Objective 1: More Diversified Non-Oil Economy 1. Dollar value of cost-share B H O P V No grants were issued leveraged from grant recipient $0.3 mln during PY1 organizations 0 0 0 0 0 2. Percentage change in value of Berry VC – 14% agricultural exports to markets in Vegetable VC – 10% Europe, Middle East, and Asia Orchard – 19% 2% Pomegranate/Persimmon – 0% Hazelnut – 5% 3. Value of agricultural exports to Berry VC – $883,199 markets in Europe, Middle East, Vegetable VC – $139,647 and Asia Orchard – $1,712,171 2% Pomegranate/Persimmon – $21,035 Hazelnut – $5,004,706 4. Percentage change in quantity of Berry VC – 25% Private Sector Activity-targeted Vegetable VC – 16% farm products exported Orchard – 19% 5% Pomegranate/Persimmon – 0% Hazelnut – 5% 5. Percentage change in sales by Berry VC – 25% assisted enterprises Vegetable VC – 17% Orchard – 23% 4% Pomegranate/Persimmon – 3% Hazelnut – 5% 6. Number of individuals in the 99 - Beneficiaries receiving 1,975 2,000 agricultural system who have field-based training or TA

3 https://www.stat.gov.az/news/macroeconomy.php?page=1?lang=en 4 https://customs.gov.az/az/faydali/gomruk-statistikasi/xarici-ticaretin-veziyyeti-haqqinda/ 5 https://customs.gov.az/az/faydali/gomruk-statistikasi/xarici-ticaretin-veziyyeti-haqqinda/ 6 https://www.macrotrends.net/countries/AZE/azerbaijan/gni-gross-national-income

60 Private Sector Activity (PSA) Annual Progress Report # Indicators Actuals Targets Details

applied improved management 1,876 - Viewers of PSA- practices or technologies with developed training videos USG assistance posted on Facebook and You Tube 7. Percentage change in sales of beneficiary households engaged in 2% 4% targeted sectors 8. Number of food safety and quality Absheron Saffron has standards or practices adopted adopted the following elements of Organic certificate:  Personal hygiene  Storage management  Infrastructure improvement 5 15 VatanAz has adopted the personal hygiene element of GlobalG.A.P. certification

PSA provided Slow Food LLC recommendations on building its facility according to the requirements of ISO 22000 standard. The facility is being built accordingly 9. Number of firms receiving USG assistance that have obtained certification from (an) international 0 0 quality control institution(s) in meeting minimum product standards 10. Number of new jobs created in 0 20 PSA-targeted regions 11. Female participation in PSA- 70-female employees of the assisted activities designed to agribusiness and agribusiness increase access to productive owners received agricultural economic resources 74 70 TA from PSA; 4-female agribusiness owners attendeding field- based agritourism trainings 12. Percent change in revenue as a result of provision of agritourism 0% 0% activities introduced or improved with USG assistance 13. Value of agriculture-related PSA conducted an external financing accessed as a result of review of two loan USG assistance applications provided by the World Bank’s Azerbaijan $111,765 $0.2M Competitiveness and Improvement Project, which resulted in the issuing of loans in the amounts of 120,000 AZN and 70,000 AZN, respectively. 14. Number of business loans to 2 2 PSA conducted an external private sector facilitated under the review of two loan 61 Private Sector Activity (PSA) Annual Progress Report # Indicators Actuals Targets Details

activity applications provided by the World Bank’s Azerbaijan Competitiveness and Improvement Project, which resulted in the issuing of loans in the amounts of 120,000 AZN and 70,000 AZN, respectively. 15. Value of U.S. business and Academic Business $19,000 – deal between the academic exports to Azerbaijan in U.S. firm DotMed.com and targeted sectors the Azerbaijani company Raytech LLC; $40,000 – PSA helped $1M 0 $59,000 facilitate a first shipment of fertilizer formulations from U.S. firm Grow More, Inc. to Azerbaijani input dealer Vatan LLC 16. Number of new PSA-facilitated Deal for purchasing and business deals between U.S. and shipping medical equipment Azerbaijani companies from the U.S. firm DotMed.com to the Azerbaijani company Raytech LLC; 2 1 PSA helped facilitate a first shipment of fertilizer formulations from U.S. firm Grow More, Inc. to Azerbaijani input dealer Vatan LLC 17. Number of new PSA- facilitated 3 - SMB was linked with: academic, government, and NGO  New York exchanges or linkages between or representation of U.S. through U.S. and Azerbaijani Small Business institutions Administration (SBA);  U.S. Commercial Service’s New York City 4 5 Export Assistance Center;  New York Small Business Development Center 1 - Azerbaijan State Agricultural University was linked to Oklahoma State University 18. Percent of individuals who Out of 56 agritourism complete USG-assisted workforce 91% TBD training attendees, 51 development programs completed the training Objective 2: Improved Business Environment for Micro, Small and Medium-Sized Businesses 19. Number of economic 1-AHPEA with assistance administrative barriers removed from PSA was able to obtain for MSMEs 1 0 an amendment to the GoAJ Export Promotion requirements 20. Ratio of number of 0 15% recommendations provided to 62 Private Sector Activity (PSA) Annual Progress Report # Indicators Actuals Targets Details

GoAJ reformers responsible for improvements in business enabling environment to number of technical and policy recommendations implemented by the GoAJ 21. Number of new legislative acts improving the business 0 0 environment 22. Number of facilitated exchanges 1-On February 19, PSA between/by business associations, facilitated a dialogue among MSMEs, and the GoAJ the representatives of hazelnut and pomegranate associations, and orchard and vegetable value chains and the top management of SMB where the MSMEs communicated the problems in their respective VCs; 1-Linked the Berry Association’s to the Ministry of Agriculture and faciliated their discsussion to move forward the association’s registration; 1-Faciiated dialogue among Berry association, Grow 7 5 More, VatanAZ LLC and Food Safety Agency for registering 10 Grow More products in the country; 1-State Tourism Board, State Tourism Agency, Coca-Cola, GIZ and APS were brought together for joint collaboration to improve agritourism sector; 1-Organizing Road Show Conference; 1-Organized Food Additatives Conferene 1-APS was brought together with the Organic Producers Association to develop organic production in Azerbaijan Objective 3: Support for Azerbaijan’s Economic Reforms 23. Number of economic reforms implemented through assisted 0 0 Component on hold agencies 24. Ratio of number of recommendations provided to Azerbaijani reformers responsible 0 15% Component on hold for improvements in economic diversification and the enabling environment for business to

63 Private Sector Activity (PSA) Annual Progress Report # Indicators Actuals Targets Details

number of technical and policy recommendations implemented by the GoAJ

64 Private Sector Activity (PSA) Annual Progress Report APPENDIX B: Short-Term Technical Assistance/International Assignments

Name/Functional Area of In-Country # Purpose of Trip Expertise Dates Otabek Rakhimov, Sevior Program September 18- 1. To assist PSA on in-country project start-up Officer October 8, 2019 George Melton, Agribusiness To contribute to the planning of field visits, identification of speakers, October (10 days 2. Technical Support and provision of guidance on presentations to be delivered by LOE in U.S.) Consultant participants in the First Oklahoma-Azerbaijan Agricultural Forum November 4- Ivana Markovic and Goran Zivkov, Azerbaijan Fruit and Vegetable Value Chain (VC) Prioritization and 3. January 17 SEEDEV Gaps Assessment (contracted dates) Kathleen Doherty, Start-up 4. Year 1 Work Plan support Dec. 2-4, 2019 Consultant Sandra Willett, Agritourism Value February 2-15, 5. Azerbaijan Agritourism Assessment Chain 2020 Dr. Oliver Macdonald, Environmental March 12 – April 6. PERSUAP Revision (remotely conducted assignment) 7, 2020 Compliance (contracted dates)

65 APPENDIX D: Linkages Table

# U.S. Organization AZ Organization Potential Opportunity Status/Phase

Companies reached agreement for distributorship partnership - Ship samples to Azerbaijan 1. Trece Expert Agro Work in progress - Assist both companies with state registration, so that Azerbaijani company could import products. 1) Progress, LLC CoolBot, Enter local market and establish working relationships with many 2. 2) Expert Agro Work in progress Store It Cold, LLC partners on a non-exclusive basis. 3) Vatan Az Project on export of medical equipment (Zeiss Stratus 3000 OCT, Humphrey Model 750 Visual Field Analyzer with electric 3. Raytech LLC Trading company Project Closed table and Canon CR4-45NM Non Midriatic Retinal Camera) closed on 08/12. E2Open a Texas based Azerbaijan Export Support Capacity-building E2Open a Texas based company, a leading provider of Center company, a leading cloud-based global trade provider of cloud-based 4. management (GTM) software, global trade management trade content and training. (GTM) software, trade content and training. Evolus Sevilla Purchase of biological products for resale and distribution Project Closed until 5. further notice Public and Private sector NSF International Food safety curricula for training food producers, foodservice 6. participants Work in progress (National Sanitary Foundation) retail establishments AFSA (gov) Bringing Non- GMO and Organic seeds, farm supplies OMRI 7. Johnny’s Seeds Expert Agro Services, LLC listed products to meet the needs of smallholder farmers looking Work in progress for natural and organic food production Commercial transaction linkage between Azerbaijani input 8. Grow More Vatan Az In closing stage dealer Vatan LLC and U.S. fertilizer formulator Grow More, Inc.

68 # U.S. Organization AZ Organization Potential Opportunity Status/Phase

1) Vatan Az The product might be a good solution for soil health 2 )Expert Agro Services 9. U-Mate International, LLC improvement, and plant growth, especially for organic farming Gathering information 3) ASAU (soil science practices. department) Progress LLC (regarding pivot Westec Inc. has great potential for exporting non-GMO hybrid systems), corn, alfalfa, Durum wheat, barley and forage seeds to Vatan Az (seeds) Azerbaijan. Potential sales channels for Westec products are major farming companies and agroparks in Azerbaijan. 10. Westec, Inc. Expert Agro Services (seeds) Work in progress Azerbaijan Organic Company The company is interested in the development of business relationships with agriculture input suppliers and large Guneshli Agropark agribusinesses, and export its non-gmo, hybrid seeds (corn, Yalama Agropark wheat and alfalfa) ASAU for (R&D) The company manufactures and exports its patented products Animal nutritionists, known as OZ45 and OZ45 organic, aimed at increasing the Symbiont Nutrition production of protein in the dairy cow through bacteria and 11. Veterinarians Work in progress protozoa, the most perfect forms of protein to the dairy cow. Agrodealers, specializing in Potential sales channels for the company are small and large livestock supplies and dairy farms in Azerbaijan. solutions Aquaponics Education & Technology Transfer Center Nelson & Pade, Inc. 12. IDEA N&P $65K Work in progress IDEA $110K Smallholder farmers or PPP project with An online marketplace for arranging or offering lodging, Azerbaijan Tourism Agency homestays, or agro tourism experiences. Encourage, educate 13. Airbnb local farmers and individuals providing agritourism services in On hold AFAQ Azerbaijan join and offer their services thru Airbnb ecommerce DOST platform. SMB

69 APPENDIX E: Financial Research Reports

1. Brief Analysis of the State Budget of Azerbaijan for 2020 2. Are Banks Lending to Agribusiness? (November 2019) 3. Azerbaijan’s monetary policy actions and achievements in 2019 4. Main trends in Azerbaijan's 2019 foreign trade 5. Main trends in Azerbaijan’s banking sector in 2019 6. Potential Effects of Reduced Oil Prices on the Azerbaijani Economy 7. State Support to Entrepreneurs in Response to the COVID-19 Pandemic 8. Banks’ Support to Clients During the Quarantine and Economic Hardship Period in Azerbaijan 9. Are Banks Lending to Businesses? (June 2020) 10. Azerbaijan’s Non-Oil Exports in 2020 11. Overview of Amendment to the State Budget of Azerbaijan 12. Impact of the COVID-19 pandemic on Azerbaijan's economy

70 PRIVATE SECTOR ACTIVITY (PSA)

Brief Analysis of the State Budget of Azerbaijan for 2020 October 16, 2019

Introduction

The Ministry of Finance of the Republic of Azerbaijan recently presented the draft of the 2020 State Budget.1 The 2020 Consolidated Budget is expected to be 28.19 billion AZN ($16.58 billion at the current exchange rate), while revenues are projected at 27.60 billion AZN ($16.23 billion). The Consolidated Budget deficit is projected at 586 million AZN ($344.70 million). State Budget2 expenditures are expected to be 25.62 billion AZN ($15.07 billion), an increase of 427.7 million AZN ($251.58 million) from 2019. Despite a strategy of optimizing budget expenditures that was widely proclaimed during the 2016-17 financial crisis, the Ministry of Finance continues to maintain the pace of spending, thereby continuing to rely on oil-revenue-based growth. In this brief report, I will summarize some of the most important aspects of next year’s budget.

Declining GDP growth

According to the budget, the growth rate of Azerbaijan’s Gross Domestic Product (GDP) will decrease next year compared to 2019. While GDP is projected to grow by 3.2% in 2019, this rate is expected to be a more modest 2.4% in 2020. GDP is forecasted at 82.7 billion AZN in 2020 ($48.64 billion at the current exchange rate). The Ministry of Finance predicts a 3.3% rise in non-oil GDP, which means it will generate 54.2 billion AZN ($31.88 billion) next year. The decline in overall GDP growth will be related to the projected downturn in oil production and the current volatility in world oil prices. Thus, although the non- oil sector generates a significant share of GDP, oil prices retain a crucial influence on macroeconomic indicators.

Increased inflation

Amid rising budget spending, there will be some changes in the inflation rate as well. According to the government’s forecast, annual inflation will reach 4.6% by 2020, versus a 2019 Central Bank forecast of 3.7%. Although the government of Azerbaijan forecasts higher inflation next year, the official inflation rate is still in single digits. Amid growing budget spending and expanding social benefits, the demand for more resources for the consumer market will increase as well. At the same time, import dependence will continue to threaten to weaken the Azerbaijani manat, fueling inflationary pressures in the coming years. Therefore, independent economists expect increased, even double-digit, inflation in the near future.

1 Preliminary Statement of the State and Consolidated Budgets of the Republic of Azerbaijan for the 2020 Fiscal Year: http://finance.gov.az/en/news/5377/preliminary-statement-for-the-state-and-consolidated-budgets-of-the- republic-of-azerbaijan-for-the-fiscal-year-2020 2 The State Budget differs from the Consolidated Budget in that, unlike the latter, it does not include the budget of the Nakhchivan Autonomous Republic and non-budgetary state funds, such as the State Oil Fund, State Social Protection Fund, and the Unemployment Insurance Fund. 2

Budget largely funded by oil income

The draft State Budget assumes a $55 price of oil per barrel in 2020. Budget revenues are projected at 25.5 billion AZN. In all, 57% of revenues will be provided by the oil sector. Nearly 11.8 billion AZN will be transferred to the State Budget from the State Oil Fund (SOFAZ). It should be noted that in 2019 the SOFAZ should contribute 11.4 billion AZN to the State Budget.3 After the financial crisis that Azerbaijan suffered from 2015-2017 due to declining world oil prices, one would expect that the Ministry of Finance would focus on reducing the Fund’s transfers, not on increasing them, because reducing the budget’s dependence on oil and, in particular, the oil market, remains a main priority. The non-oil sector’s share in budget revenues will grow by 11.3% compared to 2019. Although this development is seen as positive, economists stress that the government should still strive to generate at least half of its budget revenues from the non-oil sector. We observe an increase in transfers from the SOFAZ to the State Budget even after the 2015 oil shock and Azerbaijan’s resulting measures to shore up the country’s economy and state finances. It is projected that the State Oil Fund will remain the most important source of income for the state budget in the coming years, but economists believe that the budget’s increased dependence on the SOFAZ is unsustainable

State Oil Fund Transfers to State Budget, billion USD 14 11.767 12 11.364

10 9.216

8 6 6.1 6

4

2

0 2016 2017 2018 2019 2020

Source: State Oil Fund of Azerbaijan (SOFAZ)

Budget spending growing

The Ministry of Finance forecasts that the growth in budget spending will continue in the coming years, although this is not considered desirable from the budget spending optimization point of view, i.e., the stated government policy to decrease reliance on funding from the SOFAZ. As is becoming clear, the burden of tax revenues falls on the oil sector; thus, the price of oil will have a leading influence on the cost of expenditures. With regard to costs, 40% of the budget’s spending will be on social expenditures, including implementation of a mandatory medical insurance mechanism, pensions, increasing social allowances to vulnerable segments of society, and other social expenditures. In contrast, in 2019 social expenditures make up only about 30% of total expenditures. These costs are forecasted to increase by 2.7 billion AZN in 2020, thus representing a single-year increase of 33% (!) in social spending as a share of total spending. Expenditures to cover labor compensation will reach 6.7 billion AZN, while pensions and

3 State Oil Fund of Azerbaijan reports, https://oilfund.az/en/report-and-statistics/recent-figures 3 social allowances will reach 3.2 billion AZN. Furthermore, the Government of Azerbaijan is dedicating 900 million AZN to instituting nationwide mandatory medical insurance in 2020.

Conclusion

The Ministry of Finance recently presented a summary of the 2020 State Budget draft to the public. An analysis of the draft shows that the budget will still be dependent on oil next year. Fifty-seven percent of budget revenues will be generated by the oil sector, which will be driven mainly by transfers from the State Oil Fund. According to the budget, the estimated price per barrel will be $55, which is $5 less than the figure in the 2019 budget. On the other hand, the rise in budget expenditures in 2020 will raise pressure on the consumer market, which is reflected in both official and independent inflation forecasts. Thus, more price increases are expected. The Ministry of Finance forecasts that the rate of the manat to the dollar will not change next year. However, in spite of positive tendencies such as growing non-oil revenues and an optimistic forecast of oil prices, how the manat exchange rate will actually fare in 2020 will largely depend on the world market price for oil and the exchange rate of the currencies of Azerbaijan’s non-oil trading partners.

PRIVATE SECTOR ACTIVITY (PSA)

Are Banks Lending to Agribusiness?

November 22, 2019

Introduction

In order to assess the current status of lending in Azerbaijan, in particular to businesses, ASAP contacted a variety of banks in the country. In general, the table below shows that more banks have re-started lending and have developed more loan products targeting business customers, increased limits and in several cases decreased interest rates. The banks that have decreased their interest rates and improved their credit terms include Amrahbank, ASB, Bank Avrasiya, BTB, Bank of Baku, Bank Respublika, Expressbank, Xalg Bank, Kapital Bank, NBC Bank, Rabitabank, and TBC Credit. Three financial institutions – VTB Bank, Finca, and Gunay Bank – have resumed lending to businesses since the previous survey was conducted in April of this year. Unfortunately, however, two banks have still not restarted their credit programs and don’t offer any loans to businesses or consumers. One of the banks – Silk Way Bank has rebranded and is now called Premium Bank.

Another observation is that, the Agricultural Credit and Development Agency (AKIA) under the Ministry of Agriculture, which previously used to work with only two correspondent banks, has now started working with more banks. Besides the pure loans that they provide through correspondent banks, they offer loans for acquisition of agricultural equipment and machinery (up to AZN 1 million for the purchase of agricultural machinery) as well as pure-bred animals. Thus, the entrepreneur prepays 20% of the cost of the agricultural machinery and, the state provides a 40% subsidy (grant) and, the remaining balance is provided by the bank as an interest-free loan. For buying a pure-bred animal, the prepayment amount is 25% of its cost, while the state provides a 60% subsidy (grant), and the remaining amount is provided by the bank as a loan with an interest rate of 7% per annum.

BANK CURRENT LENDING STATUS

Access Bank The bank offers the following types of business loans to agribusiness:

a) Microloans: 300 - 30,000 USD equiv., 6-60 months, 19-29% b) SME loans: 50,000 – 3,000,000 AZN, up to 60 months, % is negotiated and dependent on loan amount, duration, collateral, financial situation and credit history of the borrower c) Agricultural credits: in AZN and USD, 300 - 30,000 USD equiv., 6 - 60 months, interest rate 19-28% d) National Fund for Entrepreneurship Support (NFES) loans: 5,000 – 10,000,000 AZN. 6- 120 months, interest rate 6% e) Agricultural Loans and Development (ALDA) loans – AZN 5000 – 200 000, 6-36 months, interest rate 7%

2 The bank also offers letters of credit and bank guarantees to business customers.

AFB Bank The bank offers the following types of business loans to agribusiness:

a) Microloans: up to 50,000 USD equiv., 36 months, 20-24% b) Business loans: starting from 50,000 AZN, up to 36 months, 10-16% for USD loans, 20- 25% for AZN loans c) Corporate loans: more than 20,000 AZN, up to 60 months, 8-16% for USD loans, 18-25% for AZN loans. d) Small entrepreneurship loans: up to 50,000 AZN, 24 months, 28-30% interest rate e) NFES loans: 5,000 – 10,000,000 AZN. 6-120 months, interest rate 6%

The bank also offers letters of credit and bank guarantees to business customers.

AG Bank Discontinued all lending

AmrahBank The bank offers the following types of business loans to agribusiness:

a) Business loans: 300 – 1,000,000 AZN, up to 48 months, interest rates starting from 16% b) SME loans: 20,000-1,000,000 AZN, up to 48 months, interest rates 18-22%. c) NFES loans: 5,000 – 10,000,000 AZN, 6-120 months, interest rate 6%

The bank also offers letters of credit and bank guarantees to business customers.

ASB Bank The bank offers the following types of business loans to agribusiness:

a) NFES loans: 5,000 – 10,000,000 AZN, 6-120 months, interest rate 6% b) Business loans: up to 36 months, interest rates – 15-20%, 2,000 – 1,000,000

The bank also offers letters of credit and bank guarantees to business customers.

AtaBank The bank offers the following types of business loans to agribusiness:

a) NFES loans: 5,000 – 10,000,000 AZN, 6-120 months, interest rate 6% b) Business loans: up to 50,000 AZN, up to 48 months, interest rates starting from 20%

The bank also offers letters of credit and bank guarantees to business customers.

Azer-Turk Bank The bank offers business loans to businesses in both AZN and USD. Terms are negotiated individually with borrowers and depend on the borrower’s business plan and credit history/rating.

3 Bank Avrasiya The bank offers the following types of business loans to agribusiness:

Business loans: up to 200,000 AZN, up to 36 months, interest rates 18% for AZN, 8% for USD loans.

The bank also offers letters of credit and bank guarantees to business customers.

Bank BTB The bank offers the following business loans to small and medium sized businesses to agribusiness:

a) SME loans in AZN: up to 1,000,000 AZN, 3-36 months, interest rates from 16% for AZN, 7% for USD b) SME credit line: same terms as above, with 30 days grace period. c) Corporate loans: terms are negotiated upon application. d) ALDA loans – 5000 – 200 000 AZN, 6-36 months, interest rate 7%

The bank also offers letters of credit and bank guarantees to business customers. Bank of Baku The bank offers the following types of business loans to agribusiness:

a) Microcredits: up to 20,000 AZN, 26-30%, up to 24 months. b) Agricultural credits: up to 20,000 AZN, interest rate 26-30%, up to 24 months. c) SME loans: 20,000 - 300,000 AZN, interest rate 20-22%, 3-36 months. d) Large project loans: 300,000+ USD or AZN, interest rate 6-22%, 3-120 months.

The bank also offers letters of credit and bank guarantees to business customers.

Bank Respublika The bank offers the following types of business loans to agribusiness:

a) Micro loans: 500 – 50,000 AZN (USD 10,000) up to 36 months, interest rates from 11% b) SME loans: 20,000-1,000,000 AZN (USD or EUR equivalent), Terms are negotiated with businesses. c) Corporate loans: 1,000,000 – 5,000,000 AZN+ (USD or EUR equivalent), terms are negotiated.

The bank also offers letters of credit and bank guarantees to business customers.

Premium Bank Discontinued all lending, as well as business lending. The Bank will resume lending soon and will determine whether it will lend to businesses or not. Bank VTB The bank resumed lending to businesses and offers the following types of business loans to agribusiness:

a) SME loans: 25,000 – 500,000 AZN, up to 36 months, interest rates starting from 14% b) Corporate loans: more than 500,000 AZN, terms are negotiated.

The bank also offers letters of credit and bank guarantees to business customers.

4 Express Bank The bank offers the following types of business loans to agribusiness:

SME loans: 50,000 – 5,000,000 AZN, 60 months, interest rates starting from 14% for AZN, 6% for USD

The bank also offers letters of credit and bank guarantees to business customers.

FINCA The organization has resumed lending to businesses and offers the following terms:

Micro-credit for agriculture and other business purposes: 500-10,000 AZN, 6-24 months, interest rates starting from 25%.

International The bank offers the following types of business loans to agribusiness: Bank of Azerbaijan a) Business loans: 50,000-5,000,000 AZN (USD and EUR equivalent), up to 84 months, interest rates starting from 14% for AZN and 7% for USD/EUR loans b) Credit lines: 30,000 – 1,000,000 AZN (USD and EUR equivalent), interest rates starting from 15% for AZN, 8% for USD and EUR loans, up to 12 months (24 months in exceptional cases) c) ALDA loans – AZN 5000 – 200 000, 6-36 months, interest rate 7% d) NFES loans: 5,000 – 10,000,000 AZN. 6-120 months, interest rate 6%

The bank also offers letters of credit and bank guarantees to business customers.

Gunay Bank The bank has resumed lending to businesses and offers the following business loans to agribusiness:

c) ALDA loans – AZN 5000 – 200 000, 6-36 months, interest rate 7% d) SME loans: up to 36 months, the amount and interest rates are negotiated.

The bank also offers letters of credit and bank guarantees to business customers.

Kapital Bank The bank offers the following types of business loans to agribusiness:

a) Business loans: up to 36 months, amounts starting from 50,000 AZN, interest rates starting from 16% for AZN and 8% for USD/EUR loans b) NFES loans: 5,000 – 10,000,000 AZN. 6-120 months, interest rate 6%

The bank also offers letters of credit and bank guarantees to business customers.

Mugan Bank The bank offers the following type of business loans to agribusiness:

c) ALDA loans – AZN 5,000 – 200,000, 6-36 months, interest rate 7% d) NFES loans: 5,000 – 10,000,000 AZN. 6-120 months, interest rate 6%

The bank also offers letters of credit and bank guarantees to business customers.

5 NBC Bank The bank offers the following types of business loans to agribusiness:

a) Small business loans: up to 100,000 AZN, 36 months, 22-25% interest rate b) Medium business loans: up to 500,000 AZN, 60 months, 18-22% interest rate c) ALDA loans – AZN 5,000 – 200,000, 6-36 months, interest rate 7%

The bank also offers letters of credit and bank guarantees to business customers.

Pasha Bank The bank offers the following types of loans to agribusiness:

a) Overdrafts: short-term financing of working capital. Terms are negotiated. b) Credit lines: terms are negotiated individually. c) Corporate loans: terms are negotiated individually. d) Loans to financial institutions: up to 2,000,000 AZN. Terms are negotiated. e) Subsidized Agricultural loans funded by the Ministry of Finance: up to 50,000 - 500,000 AZN/USD, 24-84 months, other terms are negotiated individually. f) Subsidized loans funded by State Fund for Development of Information Technologies: up to 5,000,000 AZN, up to 10 years, fixed 5% interest rate. g) NFES loans: 5,000 – 10,000,000 AZN. 6-120 months, interest rate 6%

The bank also offers letters of credit and bank guarantees to business customers.

Rabita Bank The bank offers the following types of loans to agribusiness:

a) Business loans for women engaged in agriculture, trade, production, industry, and service sectors: 20,000 – 100,000 AZN, 36 months, interest rates starting from 14.9% b) Business loans: up to 36 months, 300,000 AZN – 500,000 USD, interest rates range between 13.9-18.9% for AZN loans and 4.9-8.9% for USD loans

The bank also offers letters of credit and bank guarantees to business customers.

TBC Credit The credit organization offers the following types of business loans to agribusiness:

a) Micro loans: 500 - 15,000 AZN, 6-48 months, interest rates starting from 19% b) Business loans: - 1,000 – 300,000 AZN, 3-48 months, interest rates starting from 20% - 1,000 – 300,000 USD, up to 60 months, interest rates starting from 14%

Turan Bank The bank offers the following types of business loans to agribusiness:

a) NFES loans: 5,000 – 10,000,000 AZN. 6-120 months, interest rate 6% b) ALDA loans – AZN 5,000 – 200,000, 6-36 months, interest rate 7% c) Corporate business loans: terms are negotiated

The bank also offers letters of credit and bank guarantees to business customers.

6 Unibank The bank offers the following types of business loans to agribusiness:

e) Micro loans: 500-50,000 AZN, 48 months f) NFES loans: 5,000 – 10,000,000 AZN. 6-120 months, interest rate 6% g) Business loan: 15,000 - 10,000,000 (AZN, USD, EUR), 48 months, interest rate 14%.

The bank also offers letters of credit and bank guarantees to business customers.

Xalg Bank The bank offers the following types of business loans to agribusiness:

a) Business loans in AZN and USD: up to 6 years, 12-19% interest rates, up to 500,000 AZN b) NFES loans: 5,000 – 10,000,000. 6-120 months, interest rate 6%

The bank also offers letters of credit and bank guarantees to business customers.

Yapi Kredi Bank The bank offers business loans in AZN and USD. Terms are negotiated individually.

The bank also offers letters of credit and bank guarantees to business customers.

Ziraat Bank Lending to businesses in AZN and USD. Terms are negotiated individually.

The bank also offers letters of credit and bank guarantees to business customers.

PRIVATE SECTOR ACTIVITY (PSA)

Azerbaijan’s monetary policy actions and achievements in 2019 December 19, 2019

Introduction

Although some economists argue against the credibility of government statistics and the official figures for inflation likely differ a bit from reality, it is widely accepted that inflation in Azerbaijan has been fairly stable in 2019 and lower than in the preceding years. The exchange rate of the Azerbaijani manat has been stable at 1.7 AZN against USD throughout the year. In this brief report, we will examine the government’s mone- tary policy actions that have contributed to the stability in the inflation and exchange rates.

Stable inflation rate The government of Azerbaijan has targeted a stable inflation rate from the beginning of 2019. The Central Bank has stated that the main goal of monetary policy in 2019 and in the medium-term is to ensure low and stable inflation. In its document, “Statement on the main directions of monetary policy in 2019 and the medium-term,” the Central Bank states that it will continue its stable monetary and exchange rate policies, and will support social welfare, economic growth, and employment. The Central Bank announced that it will maintain price stability by keeping inflation at 4% (± 2%), the ultimate monetary policy target for 2019.

According to the State Statistics Committee,1 in August 2019, average annual inflation was 2.6%. The high- est inflation rate recorded this year was in July (2.7%). The Consumer Price Index (CPI) has been heavily affected by food products. During the first eight months of this year, the average annual price increase for food was 3.3% and for services was 2.7%. The official inflation rate does not exceed 4% (± 2%), as envisaged in the Central Bank’s Statement. Commenting on the most recent decision to reduce the refinancing rate, dated December 13th, 2019, which is its eighth such decision in 2019, the Central Bank states that actual inflation in Azerbaijan remains within the target range and is expected to do so for the rest of the year.2

According to independent economists, the inflation rate is low mainly thanks to the stability of the national currency’s exchange rate over the reporting period. Over the first eight months of this year, compared to the same period in 2018, the annual inflation rate was 0.1% lower due to the fact that, with the national currency stable, the rise in the prices of non-food products was lower than the rise in the prices of food products and services. During the reporting period, the average daily exchange rate of the manat against the US dollar remained at AZN 1.7000. One other factor that reduced import inflation was the decline in the correlation with the manat of the value of the national currencies of some of Azerbaijan’s trading partners. During this period, the manat rose against the Turkish lira, the euro, and against the Georgian lari.

However, the credibility of official data on the inflation rate has been questioned by the public. There are even independent experts who claim that actual price increases have been higher than the official figures. Since there are no alternative estimates of inflation in Azerbaijan, such claims are based on observations or indirect arguments.

1 Statistical Bulletin 08/2019 https://uploads.cbar.az/assets/504e06f81edcc01efe6c50357.pdf 2 Central Bank decision on parameters of interest rate corridor https://www.cbar.az/press-release-2412/on-parameters-of- the-interest-rate-corridor?language=en

2 Stability of Azerbaijani Manat Due to high oil prices in world markets, the manat has been under pressure to strengthen over the first eight months of 2019. As a result, the Central Bank's foreign exchange reserves increased by $378.6 million, or 6.7%, to $6.0 billion over the January-August period this year. Compared to previous years, there was a decline in demand for the dollar. Over the first eight months of this year, total sales at the State Oil Fund’s foreign exchange auctions, held twice weekly by the Central Bank, were $3,89 billion, which is 8.3% less than over the same period in 2018 (over that period in 2018, $4.24 billion was sold).

According to the Central Bank, over the first eight months of this year, banks purchased $1.25 billion in U.S. currency in cash. Over the corresponding period last year, this figure was slightly higher: $1.37 billion. The same is true for dollar sales. During the reporting period, banks sold $1.59 billion of US currency, which is a drop of $560.0 million compared to the same period last year.

During the reporting period, the Central Bank conducted 35 deposit auctions and 35 auctions for the place- ment of bills in national currency to regulate the money supply and manage excess liquidity in banks.

Reduced discount rates: The Central Bank has gradually lowered the refinancing rate under its policy of relaxing monetary and credit policies throughout 2019.3 The refinancing rates were lowered in February this year from 9.75% to 9.25%, in March to 9.0%, in April to 8.75%, in June to 8.5%, in July to 8.25%, in September to 8.0%, in October to 7.75%, and in December to 7.5%. Over this period, the ceiling of the interest rate corridor was reduced from 11.75% to 9.25%, and the floor was lowered from 7.75% to 5.75%. Despite the decline in the interest rate corridor, the demand for deposit and bill auctions consistently re- mained several times greater than the supply. In some cases, demand exceeded supply by 6-7 times. The reason for this was the excess liquidity in banks against a background of weakening lending.

Bank’s reserve requirements: The Central Bank maintained its reserve requirements unchanged during the reporting period and kept them high in order to manage the monetary base. The reserve requirement was last modified on March 3, 2016. According to that change, the reserve requirement is set at 1.0% for foreign currency liabilities, 0.5% for liabilities in manats and precious metals, and 0% for non-resident financial sec- tor liabilities and settlements with international financial institutions. During the first eight months of this year, the required reserves decreased from AZN 163 million to AZN 157.8 million.

Central Bank’s interventions in the market: The Central Bank regulated the growth of the money supply through deposit auctions and bill issues. During the first eight months of 2019, the volume of the money supply temporarily withdrawn from circulation through deposit auctions and bill issues varied between AZN 1-1.3 billion.

Conclusion

Obviously, the stable exchange rate and stable or slightly lower inflation rate in Azerbaijan over the course of 2019 was achieved thanks to stable oil prices in the world and Azerbaijan’s relatively stable income from oil and gas exports. But economists agree that the government’s monetary policy actions have also played a significant role in targeting low inflation and a stable exchange rate throughout the year. Through contin- ued reductions in the discount rate, high reserve requirements for banks, regular interventions in the cur- rency market, such as deposit auctions and bill issues, and continued increases in the Central Bank’s cur- rency reserves, the Government has achieved price stability. It has signaled that it will continue this policy through 2020 as well.

3 Central Bank decision on refinancing rate https://www.cbar.az/page-134/monetary-policy-decisions

PRIVATE SECTOR ACTIVITY (PSA)

Main trends in Azerbaijan's 2019 foreign trade January 24, 2020

Introduction

2019 was favorable for Azerbaijan in terms of foreign trade,1 and the fact that there was no sharp drop in oil prices in world markets was crucial. According to the Central Bank's monetary policy review for the first nine months of 2019, the average price for Brent crude oil over the January-September period was $64.8.2 Experts estimate that based on the real demand for foreign currency in the economy, and especially on international transactions, a crude oil price above $55 is sufficient to provide the country with a surplus in its balance of payments and trade.

Balance of Payments Analysis: Key Trends

Over the first nine months of 2019, the volume of capital inflows into Azerbaijan as part of current operations totaled $19.62 billion, and the amount of foreign currency outflows from the country totaled $15.61 billion. In current operations, there was a surplus of $4 billion.

Compared to the same period in 2018, the volume of inflows into Azerbaijan in the current account fell by about $1.8 billion (8.3%), while outflows dropped by $710 million (4.3%). The current account surplus decreased by $1 billion (21.3%) in 2019 compared with the first nine months of the year before as a result of the greater decrease in inflows compared to outflows.

As a noteworthy negative trend, it should be noted that the current account's non-oil deficit has grown by approximately $408 million (8.5%) to $5.2 billion.

Over January-September of 2019, as part of current operations, the oil and gas sector brought in $13.908 billion, or 71%, while the non-oil sector accounted for $5.708 billion (29%).

Over the first 9 months of this year, in current accounts, 76.6% of revenues were generated by commodity exports, 14.6% by service exports, and 8.8% by initial and recurring revenues. Over the same period of 2018, commodity exports accounted for 71.7% and service exports for 18.9%. While the amount of commodity exports in absolute terms remains almost the same (an increase of 0.2%), service exports fell by $1.184 billion (30%), income from initial revenues fell by $288.5 million (23%), and income in the current account from recurring revenues fell by $109 million (10%).

1 The latest official data on the balance of payments is for the first 9 months of 2019. 2 Retrieved from: https://uploads.cbar.az/assets/10f30b8fb0eaba16484a704c4.pdf

2 The sharp decline in revenues in the balance of services is due to the tourism sector. The export of tourism services in January-September of 2019 amounted to $1.414 billion. This is about half (56%) of what it was the previous year and represents a decrease of $1.097 billion dollars. Meanwhile, revenues from the export of transportation services fell by $72 million (8%). Over the first 9 months of this year, there was a total deficit in the balance of services amounting to $1.841 billion. This is an increase of $532 million (41%) compared to the previous year.

In terms of initial revenues, foreign payments decreased by about $331 million to $2.427 billion. Of these payments, $1.447 billion came from the repatriation of revenues from international oil and gas companies. In addition, during the period under review, in the securities portfolio, $356.1 million was paid to non-residents, while $331.9 million went to foreign loans. In addition, the income earned by non-residents working in Azerbaijan and taking their earnings out of the country is also included in the amounts of these payments.

Foreign revenues in the form of Azerbaijan's primary revenues are mainly derived from interest from the management of foreign currency reserves, profits from foreign direct investment, interest from foreign deposits of the local financial and business sectors, and so on.

Recurring revenues on the balance sheet are two times higher than foreign payments, totaling $761 million. About 91% of the inflow is due to remittances sent by citizens living abroad to their families, while 6% comes from humanitarian and other forms of assistance.

Trade Balance Structure: Key Changes

Over January-August 2019, 3 compared with the same period last year, foreign trade turnover increased by 3.158 billion (16%), reaching $22.9 billion.

A large-scale expansion in imports played a decisive role in the growth of foreign trade turnover. The expansion of imports accounted for 80% of the total increase in turnover, while exports accounted for 20%. During the period under review, exports increased by 4.9%, or $630 million, to $13.5 billion, while imports increased by $2.5 billion, or 37%, to $9.38 billion. If import operations accounted for 35% of total foreign trade turnover during the first 8 months of 2018, this figure rose to 41% in the same period of the current year. As a result of the faster growth of imports, the positive balance in foreign trade decreased by 32%, or $1.879 billion, to $4.138 billion.

Although there has been a significant increase in the share of the non-oil sector in exports, in absolute terms exports of non-oil and gas sector products are still small.

According to statistical data, the share of non-oil exports increased from 8.5% to 9.5%, and the absolute value increased by $184 million (16.8%) to $1.277 billion. When looking at the structure of non-oil exports by commodity groups, the biggest groups are food products, metallurgical products, plastic products, chemical products, and raw cotton. Over the first 8 months of 2019, food products comprised 33% ($418.5 million) of total non-oil exports, plastic products comprised 10.7% ($136.8

3 Customs Statistics of Azerbaijan’s Foreign Trade retrieved from: https://customs.gov.az/modules/pdf/pdffolder/84/FILE_94D804-50BC0F-E1409A-8D89FA-A10549-4D8860.pdf

3 million), metallurgical products made up 9.6% ($122.6 million), raw cotton accounted for 8.3% ($106.4 million), and chemical products comprised 5.3% ($68.5 million).

During the same period, five countries (Russia, Turkey, Switzerland, Georgia, and Italy) accounted for $961.4 million or 75.3% of non-oil exports. Over the same period in 2018, this figure was $820 million, or 74.9%. There was also a high concentration of exports in terms of exporter entities. Over the first eight months of 2019, the 20 largest exporter entities accounted for 56.5% of non-oil exports, or $722 million. Over the same period in 2018, these figures were 40%, or $437 million. The main factor in the sharp increase in imports (37%) over the first eight months of 2019 was the expansion of public sector imports.

The public sector accounted for 89% of the total increase in imports, while the private sector accounted for 11%. Over the first eight months of 2019, compared to the same period the previous year, public sector imports increased by $2.245 billion (almost tripling) to $3.512 billion, while private sector imports increased by $62 million (1.2%) to $5.270 billion. During the period under review, the share of public sector imports in total imports increased from 18.5% to 37.5%.

In the structure of imports, most significant are machinery and equipment ($1.710 billion or 18.2%), food products ($997 million or 10.6%), vehicles ($749.1 million or 8%), and ferrous metal products ($ 646 million or 6.9%).

Conclusion

As we see from the above information, the overall picture of the country's foreign trade is positive. There is a surplus in the country's balance of payments, thanks to stable oil prices and to incremental increases in the country’s non-oil exports. But of the aforementioned trends, two negative tendencies are noteworthy. First, Azerbaijan's income from the export of services, i.e., tourism, fell in comparison with the previous year. This means that the country is doing something wrong, as it says it wants to attract more tourists. The second negative trend is the growth in the public sector's imports. This is directly related to the Government's increased share of expenditures in the economy or, in other words, the increased expenditures from the State Oil Fund. In essence, the more the Government invests, the more it imports from abroad.

PRIVATE SECTOR ACTIVITY (PSA)

Main trends in Azerbaijan’s banking sector in 2019

February 17, 2020

Introduction

The relative stability observed in recent years in Azerbaijan’s banking sector continued through 2019 as well. Although the number of banks has not changed, their branches and staff have expanded. According to the Central Bank of Azerbaijan,1 in 2019 the number of bank branches increased by 1 to 509, and the number of bank offices2 increased by 3 to 133. As for the number of employees, there were 17,415 individuals employed in the banking sector in 2018, but by the end of 2019 the number increased to 19,460. As of the end of 2019, the number of employees per bank was 649, compared to 580 at the beginning of the year.

Analysis

Banks grew in 2019. According to the Central Bank’s statistics, during 2019 banks' assets increased by 4.1% from 29.5 billion Azerbaijani manats (AZN) to AZN 32.7 billion. The main driver of asset growth was credit investments (+20.6%), cash (+12%) and nostro accounts3 (+67%).

Concentration of banking assets. The banking sector has tended toward concentration since 2018, and this continued in 2019. According to the Azerbaijan Bank Association’s statistics, in 2018 the market share of the top five banks in the banking sector was 65.6%, and in 2019 this rose to 67.8%.4 The concentration level was mainly stimulated by the growth of the assets of the International Bank of Azerbaijan (IBA). The market share of the largest bank in the country increased from 26.9% to 29.7%. The assets of the second and third largest banks, Pasha Bank and Kapital Bank, decreased during this period, their shares falling from 15.9% to 14% and from 12.8% to 12.6%, respectively. The fourth and fifth biggest banks, Khalg Bank and Bank Respublika, strengthened their positions.

Banks’ increased lending. Banks showed increased lending activity in 2019. In comparison with 2018, the value of loans increased from AZN 13 billion to AZN 15 billion. As a result of the increase, the share of credit investments in total assets increased from 42.8% to 45.5%.

1 General information on financial market participants: https://www.fimsa.az/uploads/5/31-dekabr-2019-cu-il-tarixine-olan- bank-sektorunun-esas-gostericileri.pdf 2 In Azerbaijan, bank offices are similar to bank branches, but they are easier to open and provide a more limited range of services. 3 A nostro account refers to an account that a bank holds in a foreign currency in another bank. Nostros, a term derived from the Latin word for "ours," are frequently used to facilitate foreign exchange and trade transactions. The opposite term "vostro accounts," derived from the Latin word for "yours," is how a bank refers to the accounts that other banks have on its books in its home currency. 4 Azerbaijan Banks Association: https://aba.az/en/banklar/renkinql%c9%99r/

2 Increases in the volume and share of consumer loans continued in 2019. Compared to the previous year, the share of consumer loans among total loans increased from 40.9% to 45.6%.5 The value of loans made to households increased during this period, reaching AZN 6.1 billion, the highest it has been since 2015. During this period, the share of loans in trade and services fell from 18.3% to 16.3%, the construction and real estate sector rose from 3% to 3.1%, the share of loans for transportation and communications decreased from 10.5% to 7.9%, and the share of loans for industry and manufacturing increased from 5.4% to 5.7%. Despite the recent increase in the government's efforts to develop the agricultural sector, there has been no significant increase in bank financing to this sector. In 2019, the value of financing of the agricultural sector increased by 16%, but its share remained stable at 3.6%.

Manat lending increased. The currency structure of loans shows that in contrast to foreign currency lending, there has been an increase in lending in the national currency. Manat loans rose by 12.8% over 2019 to AZN 9,107.3 million. This is the highest lending has been since the 2015 devaluations. Loans in foreign currency decreased by 3.8% to AZN 4,758.2 million during this period. Loans in AZN increased mainly in the form of long-term loans.

Problem loans decreased. As a result of the steps taken in relation to the presidential order addressing the problem loans of individuals, in 2019 the share of overdue loans declined from 12.2% to 10.8%. The value of problem loans decreased by 6.3% in 2019 from AZN 1.59 billion to AZN 1.49 billion. At present, the share of problem loans in manats (8.3%) is less than the share of problem loans in foreign currency (15.5%). Although the presidential order and the relevant support that followed helped to resolve overdue loans, the problem remains. Banks are forced to increase their allocations to targeted reserves as the number of overdue loans increases, or as the amount of time they are overdue, grows. The value of targeted reserves for loan repayment losses increased by AZN 5 million over 2019 to AZN 1.484 billion. At present, the bulk of problem loans are business loans. Although the presidential order helped the public, it did not fully solve the banks' problems.

Deposits increased. As banks gradually move away from foreign liabilities, especially after the aforementioned 2015 devaluations of the manat, and don’t have many options for loans from other banks and financial institutions, banks are more interested in attracting deposits. Analysis of banks’ liabilities shows that their dependency on deposit resources continued to increase in 2019. Despite the apparent liquidity in the banking sector, deposits increased by 13%, reaching AZN 24.7 billion.6 The currency structure of deposits shows that the stability of the manat contributed to the growth of deposits in AZN. Deposits in manats increased by 9.7% in 2019, while foreign currency deposits fell by 1.1%. The public’s savings in the national currency increased by 19.8%, the deposits of financial institutions by 27.8%, and the deposits of non-financial institutions decreased by 0.1%. The public’s savings in foreign currency decreased by 8.4% and the deposits of financial institutions by 0.6%, but the deposits of non-financial institutions increased by 3.6%.

The Law on Full Deposit Insurance was amended on February 19, 2019, and the mechanism for full deposit insurance was extended for one more year. According to the law, the public’s deposits are fully insured at the annual interest rate, regardless of the currency. Azerbaijan’s Deposit Insurance Fund has lowered the maximum interest rate on deposits in the national currency from 15% to 10%, and for foreign currency from 3% to 2.5%, as of July 1, 2019. If the term of the law is not extended, the amount of compensation for fully insured deposits will be regulated by the Deposit Insurance Law, which has been in effect since

5 Sectoral breakdown of loans https://www.cbar.az/page-42/monetary-indicators#page-2 6 Deposits and savings in credit institutions https://www.cbar.az/page-42/monetary-indicators#page-1

3 December 29, 2006. According to Article 26.1 of that Law, insured deposits up to AZN 30,000 AZN would be fully compensated by the Deposit Insurance Fund.

The level of dollarization has decreased. The dollarization of the banking sector continued to decrease in 2019. This trend was observed in both credit investment and deposit attraction. In 2015, the rate of dollarization (49.4%) reached its highest point since 2006, but with the stabilization of the manat’s exchange rate there has been a decrease in dollarization. In 2019, the share of loans in foreign currency decreased from 38% to 34.3%. This is the lowest it has been since 2014. The stability of the manat and the low return on foreign currency deposits supported de-dollarization. The decreasing trend of dollarization in total deposits has continued, dropping from 65.3% at the beginning of the year to 63% in 2019. The lowest level of de-dollarization was recorded in the public’s savings. During this period, the dollarization of deposits decreased from 62.5% to 56.0%. Due to the devaluation, the share of foreign currency in the deposits of financial institutions with the highest level of dollarization (89.1%) fell to 67.6%. In the deposits of non-financial institutions, however, the level of dollarization increased from 66.4% at the beginning of the year to 67.2%.

Conclusion

In general, economists consider 2019 to have been a year of stability and growth for Azerbaijan’s banking sector. Banks increased their credit and deposit portfolios, which shows that they have improved their public reputation, which was damaged following the devaluation. There are more bank offices and more bank employees at the end of the 2019, which means more interaction between the banks and potential borrowers. The stability in the exchange rate played a crucial role in the de-dollarization process and the share of manat loans and deposits increased. The situation of problem loans eased in 2019, and the government’s support should be emphasized here, as it compensated some of the losses that borrowers incurred as a result of the devaluation of the manat. Unfortunately, the concentration of banking assets increased in 2019 and a limited number of bigger banks are even larger and stronger now. This means that monopolization in the banking sector has increased, which has negatively affected the quality and cost of services that banks offer. In addition, the banking sector was the subject of a major reform closer to the end of the year, as the Azerbaijani president gave supervisory authority over the banking sector back to the Central Bank, though we have yet to see any major changes introduced by the Central Bank in this area.

PRIVATE SECTOR ACTIVITY (PSA)

Potential Effects of Reduced Oil Prices on the Azerbaijani Economy March 17, 2020

Introduction

World oil prices have declined sharply in the past several weeks. There are several reasons for this decline, including the outbreak of COVID-19, which started to hurt demand for oil and the disagreement between the Organization of the Petroleum Exporting Countries (OPEC) and Russia on cutting the production of oil by 1.5 million barrels per day. The five-year agreement, which was concluded in 2015 to limit the supply and regulate world oil prices, is expiring this April and the parties could not achieve a deal to prolong the agreement. Since the price of Azerbaijan’s main export product is decreasing, this cannot go on without hurting Azerbaijan. Fearing devaluation of the local currency as a result of the country’s decreased income, people have been flooding bank branches since March 10th, eager to exchange their money into USD. In this brief report, we will look at how the drop in oil prices can hurt Azerbaijan’s economy, the state budget, and the financial sector. The report has been drafted based on information about the market and Azerbaijan’s budget, media reports on the Azerbaijani Government’s actions and plans, as well as discussions with independent economists and bankers.

Oil prices are decreasing

As a response to decreased demand for energy resources in the world market, initially due to decreased demand in China that then spread across Asia and Europe as a result of the COVID-19 outbreak, world prices for oil have been decreasing since the start of the year. The steady fall of the price of Brent crude from $68.91 on January 6, 2020 to $49.99 on March 5 was followed by a sharp decrease after the major oil-producing states could not agree on a deal to limit world oil production, launching a trade war.1 The market reacted sharply to these events and the price for Brent further declined, reaching $33.85 when the markets closed on March 13, 2020. This is more than a 50% decline in prices, which will affect the economies that largely depend on income from oil exports. As COVID-19 spreads further in the world each day, and more countries limit work and travel, the demand for oil is expected to continue to decline and keep downward pressure on the price of oil indefinitely.

Potential effects on Azerbaijan’s budget

Azerbaijan’s economy is dependent on revenues from oil exports, and the revenues of Azerbaijan’s state budget are generated mainly by oil exports. The 2020 budget envisions 47% of budget revenues, or 11.35 billion AZN, being transferred directly from the State Oil Fund. On March 11th, the second working day after the OPEC-Russia deal failed, the Cabinet of Ministers convened for an extraordinary meeting to discuss “The situation in the global energy markets and its effects on the Azerbaijani economy.” The

1 Bloomberg: https://www.bloomberg.com/quote/CO1:COM

2 meeting was followed by a statement to the public.2 According to the statement, the Government of Azerbaijan is not going to make any changes to the state budget and will spend as much of its resources in the State Oil Fund as needed to implement the state budget as is. According to the law on the state budget,3 the government will exchange $6.69 billion in 2020 to implement its transfers to the state budget as planned and the reduced prices for oil will not change the government’s plan on spending resources from the State Oil Fund. According to the statement, the COVID-19 outbreak and relevant government measures to curb the effects of the outbreak will result in a reduction of certain budget expenditures, such as travel and transportation of government employees, cancellation of certain events, and others. But beyond that, all other budget expenditures and investments will be implemented as planned for 2020 and savings from some line items will be used to finance unforeseen activities, such as the fight against COVID-19.

Potential effects on the financial sector

Having experienced the devaluations of 2015, Azerbaijanis took the sharp oil price decline very seriously and rushed to banks to exchange their manats into USD on March 10th. The Cabinet of Ministers and the Central Bank Chairman’s statements that the Government of Azerbaijan does not have any plans to devaluate the manat did not assuage the public, as it had heard similar promises before the sharp devaluations in 2015 as well. As a result, long queues formed in front of bank branches. The statement that followed the Cabinet of Ministers’ meeting urged the people to stay calm and refrain from rashly exchanging their manats into USD. The Central Bank Chairman promised that the market will be provided with as much USD as needed. In response to the increased demand for USD, the Central Bank carried out additional auctions to offer USD to banks.

At the same time, the Central Bank has been implementing measures to prevent an illegal exchange market from forming. All exchange operations over USD 100 require an identification card and all exchange operations over 15,000 AZN need to be reported to the Central Bank. According to several bankers I’ve talked to, these additional measures also slow down the process, result in extended queues in front of bank branches, and cause additional worry in people that the devaluation threat is real.

Another factor that has put Azerbaijani banks under stress in recent weeks is the situation regarding the government’s guarantee on deposits. The law on a blanket guarantee of deposits for three years, which was adopted in March 2016 and then prolonged for an additional year in March 2019, expired on March 4, 2020. Since the law was not extended, people started to withdraw their deposits from banks, leading to major liquidity problems at certain banks, as deposits are a major source of funds for most banks. At last on March 15th, the Parliament adopted an amendment to the law on blanket guarantees of deposits in banks for an additional nine months.4

Conclusion

Both international and local experts agree on the impossibility of forecasting the future price of oil, as it will depend largely not only on the supply, but also demand, which is greatly affected by the continued

2 Cabinet of Ministers Statement: https://cabmin.gov.az/az/article/712/ 3 State Budget of Azerbaijan for 2020: http://www.maliyye.gov.az/static/243/dovlet-budcesi-haqqinda- azerbaycan-respublikasinin-qanunu 4 Law on extending full guarantee of deposits: https://www.cbar.az/press-release-2527/on-extension-of-blanket- guarantee

3 coronavirus outbreak. At present, both Russia and OPEC countries have plans to reduce prices, the world demand for oil is decreasing every day, and this is expected to continue for the foreseeable future.5

According to independent economists, the Government of Azerbaijan has all the resources to implement the State Budget for 2020 as is without making any changes, even if world prices for oil drop below $30 per barrel. The large cushion that the State Oil Fund offers can keep the State Budget safe throughout the year, although the price per barrel of oil was forecasted at $55 per barrel in the State Budget. Thus, the state budget expenditures will stay largely untouched if the government continues to think as it does today. Also, according to both pro-government and independent economists, the government does not need to devalue the Azerbaijani manat to finance the state budget thanks to the State Oil Fund’s reserves. But all agree that the Government of Azerbaijan will probably reconsider its decision if the oil price goes below $30 per barrel and stays there for a period of 3-4 months or more.

5Global Oil Use Heads for Record Annual Drop as Virus Spreads https://www.bloomberg.com/news/articles/2020- 03-15/global-oil-demand-heads-for-record-annual-drop-as-virus-spreads

PRIVATE SECTOR ACTIVITY (PSA)

State Support to Entrepreneurs in Response to the COVID-19 Pandemic

April 20, 2020

Introduction

The Cabinet of Ministers of Azerbaijan adopted an Action Plan to implement paragraph 10.2 of the Order of the President of the Republic of Azerbaijan No. 1950 dated March 19, 2020, “On measures to reduce the negative impact of the coronavirus (COVID-19) pandemic and, consequently, sharp fluctuations in world energy and stock markets on the economy of the Republic of Azerbaijan, macroeconomic stability, employment issues and entrepreneurship subjects in the country.” 1 The coordination of the implementation of the Action Plan was assigned to the Ministry of Economy, and various agencies – including the Central Bank, Ministries of Economy, Finance, Agriculture, Labor and Social Protection, and Customs Committee – were tasked with the implementation of relevant activities. In this report, I will review parts of the Action Plan of the Government of Azerbaijan (GoAJ) that will affect the operations of small and medium enterprises in particular, and provide examples of how these measures will affect real businesses. It should be noted that implementation plans for only some of the elements of the Action Plan have been elaborated by the various agencies so far. The activities are grouped under various categories. It should also be noted that access to finance by entrepreneurs and activities by relevant government agencies are among the few areas where additional details have been provided to the public so far.

Protection of Employment and Social Stability

As part of the first stage, in order to prevent workplace staff reductions, the Action Plan includes partial payment of salaries of employees working in the areas affected by the pandemic. About 300,000 entrepreneurs will benefit from assistance and 215 million AZN has been allocated for these purposes. In order to access this support, entrepreneurs will need to apply through their online accounts (“electronic cabinets”) at the Online Tax Office (www.e-taxes.gov.az) and a certain portion of the amounts that entrepreneurs pay to their workers as salaries and social insurance premiums will be transferred to entrepreneurs’ bank accounts. When determining the payments, the country’s official average monthly salary of 712 AZN will be used as the main basis for the calculations. Payments to entrepreneurs will be made twice, in the months of April and May, and entrepreneurs will be able to use these funds only for paying salaries, as these funds will be closely monitored.

The Action Plan also includes financial support to private (micro) entrepreneurs operating in areas affected by the pandemic. Only entrepreneurs who paid taxes, mandatory state social insurance, and unemployment insurance in 2019 will be eligible for this assistance. Eighty million AZN has been allocated for these purposes, and 300,000 entrepreneurs will benefit. In order to access the assistance, entrepreneurs will apply through their online accounts at the Online Tax Office and the allocated funds will be transferred to their bank accounts. If an entrepreneur owes taxes to the state budget or any other

1Order of the Cabinet of Ministers retrieved from: https://cabmin.gov.az/az/document/4367/

2 state fund, this will not prevent him from accessing the assistance funds transferred to his or her account. If an individual (micro) entrepreneur paid less than 250 AZN in taxes to the state budget in 2019, the state’s financial support to him or her will be 250 AZN. The maximum limit of the support will be 5000 AZN.

Tax Incentives to Maintain Economic Activity

The Government of Azerbaijan has allocated 115 million AZN to provide the following tax benefits and holidays to business entities (including SMEs) operating in areas affected by the pandemic:

 Short-term simplified tax abatements to microenterprises;  Temporary exemptions from property and land taxes;  Short-term profit (income) and simplified tax abatements to taxpayers;  Temporary exemptions from ongoing profit (income) and property tax payments;  Extension of deadlines for submission of tax statements on microenterprise entities (income, profit, property, and simplified tax) and for payment of taxes;  Extension of deadlines for payment of taxes on the areas of economic activity affected by the pandemic;  Temporary tax exemption on certain types of products necessary for food and medical needs of the population;  VAT exemptions on imports of raw materials and supplies related to the production of certain types of products in order to meet the short-term needs of the population in food, medicine, and other necessary products;  Deductions from taxable income of expenses incurred for necessary preventive measures, including disinfection, carried out by the taxpayer in order to prevent the pandemic and protect the life and health of the population;  Abatements on taxes payable from rents;  Short-term deferral of interest calculations on unpaid taxes, mandatory state social insurance and unemployment insurance premiums; and  Reductions in the social insurance burden of a number of business entities.

State Loan Guarantee for Entrepreneurship

The state program includes complex measures to provide a government subsidy mechanism for loans to enterprises generally, and for improving subsidized lending to agriculture. First, the state will pay 10% of the interest on loans disbursed through March 10th, 2020. Second, the state has allocated 500 million AZN to be lent to entrepreneurs with a duration of three years and an annual interest rate of 15%. The state will pay half (7.5%) of the accumulated interest and guarantee 60% of the loan amount, in order to mitigate lending organizations’ risks and soften collateral requirements. The government allocated 50 million AZN in additional funds to the Entrepreneurship Development Fund.

How is this assistance going to affect borrowers? Let’s calculate: for example, an entrepreneur has borrowed 100,000 manats for 3 years with an annual interest rate of 16%. In this case, his/her monthly payment is 3515 AZN and at the end of the term, he will have paid 26,565 AZN as interest. Now that the state will pay 10% of the 16% interest that he signed up for, the entrepreneur’s monthly payment to the bank will be 3042 AZN or 473 AZN less than it was previously. Over three years, he will pay 17,046 AZN less to the bank.

3 Let’s say an entrepreneur is borrowing 100,000 AZN for three years with an annual interest rate of 15%. In normal circumstances, he would have to pledge 150,000 AZN (150% of the loan amount) in collateral and pay 3466 AZN per months for three years. In other words, he would have to pay 24,800 AZN in interest on top of the principal amount. Now that the state guarantees 60% of the business loans, the entrepreneur has to pledge collateral for only 40% of the amount he is borrowing, which will be 60,000 AZN worth of collateral (1.5 times the 40,000 that is not guaranteed by the state). As the state pays 7.5% of the bank’s interest, the entrepreneur’s monthly payment will be 3110 AZN, or 356 AZN less. In total, the entrepreneur’s interest payment will be 12,000 AZN and he will have saved 12,800 AZN. The state program also includes financial support to passenger transportation in areas of vital importance in the amount of 280 million AZN, and increases the funds allocated for privileged mortgage loans by 90 million AZN.

Improving Access to Finance in the Agricultural Sector

The adoption of the Action Plan was followed by presidential decrees on improving state support to agricultural lending. According to the Decrees of the President of Azerbaijan, dated April 8, 2020, on “Amending the Decree Number 571 of the President of Azerbaijan Republic, dated July 23, 2015, on Statue of the Agricultural Credit and Development Agency under the Ministry of Agriculture of Azerbaijan Republic,”2 and “On making amendments to the Decree 413, dated December 19, 2018 “On improving the state support to agriculture and leasing activities in the agricultural sector and stimulating the financing of the agricultural sector,”3 additional measures are intended to protect the agricultural sector from potential damage caused by the pandemic. The changes are intended to stimulate microloans in the agricultural sector.

According to the decrees, the Agricultural Credit and Development Agency (AKIA) under the Ministry of Agriculture will not only provide loans and subsidies to entrepreneurs engaged in the agricultural sector, but will also provide guarantees. AKIA will also participate in making loan guarantees together with banks and non-bank financial institutions that will act as correspondent credit organizations. According to the new rules, risks that are associated with the non-performing portion of microloans underwritten with a state guarantee will be covered by the Agency. Non-performance means a delay in payments for more than 90 calendar days. Another important change is related to increasing the loan amounts and applied interest rates.

The most notable features of the changes are a prolongation of the duration of microcredits for one year and a three-fold increase in loan amounts. The changes increase the upper limit of the microloans for any kind of agricultural activity from 5,000 AZN to 15,000 AZN, and prolongs the maximum duration of the microloans from two to three years.

In addition, the changes include a credit guarantee mechanism within AKIA for agricultural loans. The new mechanism sets an upper limit on interest rates applied to banks in underwriting AKIA-funded loans. AKIA’s resources will cost correspondent banks 2% for microloans or other subsidized loans that are underwritten without collateral, plus an additional 0.5%, i.e., a total of 2.5%, for microloans underwritten with collateral. (One of the goals is to provide an incentive to grant loans to those who are unable to pledge collateral.) The upper limit of the interest rate that correspondent credit organizations apply on loans underwritten with AKIA funds must not be more than 12% for microloans that are underwritten without identification of the method of provision of liabilities, and 7% for other subsidized loans.

2 Presidential Decree Retrieved from: https://president.az/articles/36363 3 Presidential Decree Retrieved from: https://president.az/articles/36364

4

In other words, credit organizations will be able to obtain credits from AKIA for a 2.5% interest rate and on-lend for a maximum of 12%. Usually, banks are not interested in microcredits because they cost credit organizations the same amount, but banks earn less as the loan amounts are small. Therefore, microcredit in Azerbaijan is usually offered for around a 25% annual interest rate. By reducing the cost of financing for credit organizations, this order is aimed at increasing credit organizations’ interest in microloans. On top of this subsidized financing, banks’ risks will be partially covered by the state.

Additional Measures to Support Areas Affected by the Pandemic

The GoAJ’s support program also includes the following support to small and medium enterprises: waiving rent costs for businesses affected by the pandemic that are leasing state property, state-owned land, or industrial land through the end of 2020.

In order to increase and stimulate the export of non-oil products, the state program amends the Tax Code to include a mechanism to sell goods with an “export note,” which is used in international practice in order to increase interest in the export of non-oil products (provided that the payment of taxes is secured by a bank guarantee and other methods in case of non-export of goods); application of customs duty exemptions according to a relevant list in order to increase the competitiveness of local production areas that depend on imported and non-locally produced raw materials and intermediate goods; and measures to stimulate the use of a special customs procedure internally by entrepreneurs.

The state program also calls for measures in order to fully and without interruption provide residents with vital food and medical needs imported into the country, such as a temporary waiver of import duties on products deemed necessary; quick customs clearance, control and issuance of permits (certificates) during the import of products deemed vital. The program calls for additional measures to support SMEs through procurement of local products (goods and services) in public procurement and waive fees paid to the Financial Market Supervisory Authority by professional participants of the banking and insurance markets.

Conclusion

In summary, the main target of the Action Plan is to protect entrepreneurs and individuals from the negative effects of the pandemic, and maintain the functionality of the economy. According to the Action Plan, besides the 2.5 billion AZN that has been allocated from the State Budget, an additional 343.6 million AZN will be allocated from other sources, such as the Unemployment Insurance Fund and State Social Protection Fund. Taking into consideration the 112 million AZN 4 that has been collected in “The Coronavirus Response Fund” (various businesses and individuals in country and abroad have donated to this fund in the past several months after the President called for donations) and 10 million AZN allocated to the Cabinet of Ministers in March to fight COVID-19, Azerbaijan’s budget for fighting the effects of the pandemic is about 3 billion AZN. If spent wisely, these funds can achieve a great deal in maintaining economic activity in the country and supporting entrepreneurs. According to experts’ initial review, the Action Plan, and specifically its sections aimed at protecting entrepreneurship, has all the necessary elements. It is hoped that implementation of these activities will proceed without delay.

4 The Coronavirus Response Fund http://covid19fund.gov.az/az/donation

PRIVATE SECTOR ACTIVITY (PSA)

Banks’ Support to Clients During the Quarantine and Economic Hardship Period in Azerbaijan

April 18, 2020

Introduction

As Azerbaijan, like the rest of the world, is experiencing the COVID-19 pandemic, the government has implemented a quarantine and lockdown regime since early March. The worldwide economic recession has affected almost all spheres of the economy everywhere, and Azerbaijan is no exception. The Azerbaijani Government has adopted and launched a special program of assistance to support businesses during this hardship period. Azerbaijani banks have also been offering new and additional services to their clients during this period, both to ease their banking experience in the face of lockdown measures and to help borrowers in these difficult economic circumstances. In this paper, I will briefly summarize what specific kinds of support services selected banks are offering to their clients, as well as examine the Central Bank’s advice to banks to support consumer and business loan borrowers. The table below provides an overview of this support offered by individual banks.

AccessBank - The Bank renders services remotely to people aged 651 and over to carry out the following operations: prolongation or currency conversion for current deposits, restructuring of current loans, public utility payments, wire transfers among one’s own accounts, requests for and home delivery of new bank cards, blocking and unblocking of bank cards, activation of SMS banking service, removal of card limits. - The bank extended all bank cards expiring in March, April, and May through July 2020, but for their use in Azerbaijan only. Pasha Bank - Taking into account the difficulties of entrepreneurs who trade with partners in China, the bank has lowered the commission it applies to wire transfers to China to 0.2%. - The bank offers absolutely free bank accounts to individuals and legal entities for business purposes. Kapital Bank - The bank prolonged the validity of bank cards expiring during the lockdown period automatically by three months. The bank also home-delivers new pension cards to people over 65 years of age. - The bank’s card holders may withdraw their pensions, allowances, stipends, and any other social payments from ATMs from any bank or the closest post office without any commission for two months, as of April 8th, 2020. All transaction costs are covered by the bank. - Any person seeking to engage in electronic commerce can enjoy certain discounts. For example, any business can join Kapital Bank’s partners list

1 According to the regulations adopted by the Cabinet of Ministers of Azerbaijan Republic, people aged 65 and above are not allowed to leave their homes during the lockdown period. 2

without a fee and enjoy discounted commissions on installment as well as lump sum payments. - The bank is applying a standard commission (0.2%) on all international wire transfers made through its online banking system to encourage electronic banking practices. The bank is waiving commission fees applied to business loans, and will pay for all appraisal (of collateral) and insurance costs until the end of the quarantine period, in order to support SMEs’ access to finance. Bank - The bank extended the validity through July of all bank cards expiring in Respublika March, April, and May. International - The bank is encouraging its clients to use its internet banking systems and Bank of mobile applications during the lockdown period, and advises the use of its Azerbaijan online “Rendezvous” service if clients need to physically go to a bank branch. - The bank extended all pension cards expiring in March and April for three months. - Pension cardholders can withdraw cash from ATMs from any bank or the closest post office without any fee for two months as of April 8. - Businesses can use the bank’s online service to open corporate accounts. - The bank is giving its clients 2% cash back on all electronic and in-store payments made with salary and pension cards, 1% of which is transferred to the Coronavirus Response Fund. - Newly issued pension cards are being delivered to elderly people’s homes. People who live in remote areas are serviced with mobile ATM machines. Elderly people are able to withdraw cash from their pension cards from ATMs from any bank or the closest post office without any commission for two months starting April 8th. All relevant transaction costs are covered by the bank. - Medical workers are not being charged fees for any bank services during the lockdown period. - The bank’s corporate clients can now order new salary cards through internet banking. Expressbank - The bank is extending the validity of its bank cards through July 31st for all cards expiring in March, April, and May. Xalq Bank - The bank is automatically extending its bankcards expiring in March, April, May, and June. VTB Bank - The bank is extending through July 1, 2020 its bankcards expiring in March, April, and May. - Users of the bot Direct of the Bank’s Facebook messenger service will be able to use the following services for free: ordering digital and plastic cards, card services, debiting from bank cards, payments for goods and services, card-to- card transfers to cards of VTB Bank and other banks. TuranBank - The bank is extending until July the validity of its bank cards (except for credit cards) expiring in March, April, and May. Bank of - Entrepreneurs who are interested in establishing or moving their business Baku online can join during the lockdown and use the E-commerce service the bank offers for free until the end of June. Businesses which activate this service on their trading sites or mobile applications can enable their customers to make online payments. The bank also offers free consulting services to these clients. 3

- Clients can make wire transfers through “Contact” service, which is added to the bank’s mobile application, “DostBank.” All payments made on the mobile application are exempted from any fees. AFB Bank - The bank is extending by three months the validity of bank cards expiring during March, April, and May. Unibank - The bank delivers bank cards to clients’ homes if they order them online. - Clients can order free Digital Cards to make online payments. - The bank is extending bank cards expiring during the lockdown period through the end of June. - Business owners can open bank accounts and start using Internet banking and Mobile Banking systems without visiting the bank. Premium - The bank has launched the Evdaqal.net (stay home) project to serve the Bank needs of people over 65 years old. Through this platform, people in need can apply for assistance and people who want to help can donate. Ziraat Bank - The bank has extended bank cards expiring in March, April, and May until after the lockdown period is over.

In addition to this support to clients, almost all banks have contributed financial support to the Coronavirus Response Fund, started humanitarian campaigns to deliver food parcels to the vulnerable population in Baku and wider Baku region, joined the project initiated by the Ministry of Labor and Social Protection to help people start up their own businesses by donating equipment, livestock, and other goods to people around the country, and have funded information campaigns on traditional and social media to encourage staying home and other responsible behavior.

Support to consumer and business loan borrowers

Beyond the aforementioned individual measures taken by each bank to support their clients, all banks have been advised by the Central Bank to support borrowers of consumer and business loan who are having difficulties with payments during this period. On March 23, 2020, the Central Bank of Azerbaijan adopted “suggested supportive measures” to protect businesses, consumers, as well as the banking and insurance sectors and capital market participants against the effects of the economic difficulties caused by COVID-19.2 For the purposes of this brief paper, we should note that the adopted measures aim to relieve banks from certain regulatory and supervisory burdens for a period of between six and eighteen months, depending on various factors.

Most importantly, the Central Bank has advised banks to render the following support to consumer and business borrowers. Upon request from borrowers, banks are advised to restructure mortgage loans provided with funding from the State Mortgage Fund and Credit Guarantee Fund lent prior to March 1, 2020, until September 30, 2020. Banks are advised not to charge borrowers any penalty or other fees for delayed payments. In order to preserve borrowers’ credit ratings, banks are advised to submit a special report to the Credit Bureau on borrowers that had a clean history through March 1, 2020, but had to delay payments as a result of economic hardship during the pandemic.

The Central Bank provided similar guidance regarding government-subsidized business loans. Namely, it advised that, upon request from borrowers, business loans subsidized with funds from the Entrepreneurship Support Fund under the Ministry of Economy and the Agricultural Credit and

2 https://banker.az/wp-content/uploads/2020/04/4abaa71e03055090a17e75d89.pdf 4

Development Agency (AKIA) under the Ministry of Agriculture, the quality of which was acceptable until March 1st, 2020, be restructured until September 30, 2020. In order to protect the borrowers’ credit ratings, banks are advised to submit a special report to the Credit Bureau on borrowers that had a clean history through March 1, 2020, but had to delay payments as a result of economic hardship during the pandemic. The Central Bank advised banks not to charge borrowers any penalty or any other fees for delayed payments.

Finally, for loans that have been made with banks’ own commercial funds bank, the Central Bank has advised banks not to charge consumer and business borrowers penalties or any other fees for delayed payments until September 30, 2020. It is noteworthy that, although the Central Bank only “recommended/suggested” these measures to commercial banks, it is strictly monitoring the sector to make sure that banks implement them. The Central Bank has requested that borrowers report if any bank does not implement this “advice.” In reply to my inquiries, it appears that banks have already started to respond to such requests from borrowers.

PRIVATE SECTOR ACTIVITY (PSA)

Are Banks Lending to Businesses?

June 17, 2020

Introduction

In order to assess the current status of lending to businesses in Azerbaijan, PSA contacted banks and two non-bank financial institutions. The main difference in this survey from previous surveys was that there are now four fewer banks in Azerbaijan than when the previous survey was conducted in fall 2019. According to the decision of the Central Bank of Azerbaijan, the licenses of AmrahBank, AtaBank, NBC Bank and AGBank were withdrawn, and the banks are now undergoing bankruptcy proceedings.

The main finding from the survey was that all banks have active lending programs. Premium Bank, which was not lending at the time of our previous survey, has started lending to consumers and businesses. Also, a positive trend has been observed in the interest rates of the loan products offered to businesses. Most banks have lowered their interest rates for businesses loans by 3-4 percent. Another good sign for agribusinesses is that many banks have started to lend AKIA (Agricultural Loan and Development Agency under the Ministry of Agriculture) supported micro and business loans, the terms of which have recently been revised. Banks now lend AKIA funds for micro-loans as well, with no collateral up to 15,000 AZN for a 12% annual interest rate, which is the lowest rate that has ever been available in Azerbaijan for micro borrowers accessing loans without collateral.

BANK CURRENT LENDING STATUS Access Bank The bank offers the following types of business loans to agribusiness:

a) Micro and Agro loans: 500 - 100,000 USD equiv., 3-48 months, starting from 17% b) SME loans: 50,000 – 3,000,000 AZN, up to 60 months, % is negotiated and dependent on loan amount, duration, collateral, financial situation, and credit history of the borrower c) National Fund for Entrepreneurship Support (NFES) loans: 5,000 – 10,000,000 AZN. 6- 120 months, interest rate 5% d) AKIA: microloans with no collateral: 5000-15,000 AZN, 12-36 months, interest rate 12% AKIA Regular loans with collateral: 5000-200,000 AZN, 6-36 months, interest rate 7%

The bank also offers letters of credit and bank guarantees to business customers.

2 AFB Bank The bank offers the following types of business loans to agribusiness:

a) Agricultural loans: 300-30,000 AZN, 3-36 months, starting from 22% b) Microloans: 300-30,000 AZN, 3-36 months, starting from 21% c) SME loans: 30,000-250,000 AZN, 6-36 months, interest rates 17-18% for AZN, 9-12% for USD/EUR loans. d) Corporate loans: more than 250,000 AZN, 6-36 months, interest rates 15-16% for AZN, 7-9% for USD/EUR loans. e) NFES loans: 5,000 – 10,000,000 AZN. 6-120 months, interest rate 5%

The bank also offers letters of credit and bank guarantees to business customers.

ASB Bank The bank offers the following types of business loans to agribusiness:

a) NFES loans: 5,000 – 10,000,000 AZN, 6-120 months, interest rate 3-5% b) Business loans: up to 36 months, interest rates – 15-20%, 2,000 – 1,000,000

The bank also offers letters of credit and bank guarantees to business customers.

Azer-Turk Bank The bank offers business loans to businesses in both AZN and USD. Terms are negotiated individually with borrowers and depend on the borrower’s business plan and credit history/rating. Bank Avrasiya The bank offers the following types of business loans to agribusiness:

Business loans: up to 200,000 AZN, up to 36 months, interest rates 18% for AZN, 8% for USD loans.

The bank also offers letters of credit and bank guarantees to business customers.

Bank BTB The bank offers the following business loans to small and medium sized businesses to agribusiness:

a) Micro loans: 500-50,000 AZN, 1-48 months, 18-26% for AZN, 12-16% for USD loans. b) SME loans: up to 1,000,000 AZN, 3-36 months, interest rates from 16% for AZN, 7% for USD c) SME credit line: same terms as above, with a 300-day grace period. d) Corporate loans: terms are negotiated upon application. e) Mortgage and Credit Guarantee Fund loans: 30,000-5,000,000, up to 84 months, interest rate 6-12%. f) AKIA: microloans with no collateral: 5000-15,000 AZN, 12-36 months, interest rate 12% AKIA Regular loans with collateral: 5000-200,000 AZN, 6-36 months, interest rate 7%.

The bank also offers letters of credit and bank guarantees to business customers.

3 Bank of Baku The bank offers the following types of business loans to agribusiness:

a) Microcredits: 500 - 30,000 AZN, 3-36 months, interest rate 20-29% b) Agricultural credits: 500-20,000 AZN, interest rate 15-20%, 3-24 months. c) SME loans: 20,000 - 300,000 AZN, interest rate 20-22%, 3-36 months. d) Large project loans: 300,000+ USD or AZN, interest rate 6-22%, 3-120 months.

The bank also offers letters of credit and bank guarantees to business customers. Bank Respublika The bank offers the following types of business loans to agribusiness:

a) Micro loans: 500 – 50,000 AZN (USD 10,000) up to 36 months, interest rates from 11% b) SME loans: 20,000-1,000,000 AZN (USD or EUR equivalent), Terms are negotiated with businesses, grace period up to 12 months. c) Corporate loans: 1,000,000 – 5,000,000 AZN+ (USD or EUR equivalent), terms are negotiated, grace period up to 12 months. d) NFES loans: 5,000 – 10,000,000 AZN. 6-120 months, interest rate 5% e) AKIA: microloans with no collateral: 5000-15000 AZN, 12-36 months, interest rate 12% AKIA Regular loans with collateral: 5000-200,000 AZN, 6-36 months, interest rate 7%.

The bank also offers letters of credit and bank guarantees to business customers. Premium Bank The bank has resumed lending and offers the following types of loans to businesses:

a) Micro loans b) SME Loans c) Large corporate loans

All terms are negotiated with applicants. Bank VTB The bank offers the following types of business loans to businesses:

a) Small business loans: up to 660,000 AZN, up to 60 months, interest rates starting from 14.5% b) Medium business loans: up to 36 months, terms are negotiated.

The bank also offers letters of credit and bank guarantees to business customers.

Express Bank The bank offers the following types of business loans to agribusiness:

a) SME loans: 50,000 – 5,000,000 AZN, 60 months, interest rates starting from 14% for AZN, 6% for USD b) Mortgage and Credit Guarantee Fund loans: 30,000-5,000,000, up to 84 months, interest rate 6-12%.

The bank also offers letters of credit and bank guarantees to business customers.

4 FINCA The organization has resumed lending to businesses and offers the following terms:

Microcredit for agriculture and other business purposes: 500-15,000 AZN, 6-24 months, interest rates starting from 23%.

International The bank offers the following types of business loans to agribusiness: Bank of Azerbaijan a) Export support loans: 100,000-1,000,000 AZN, starting from 12%, for over 1,000,000 starting from 8%, up to 60 months. b) Business loans: 50,000-5,000,000 AZN (USD and EUR equivalent), up to 84 months, interest rates starting from 14% for AZN and 7% for USD/EUR loans c) Credit lines: 30,000 – 1,000,000 AZN (USD and EUR equivalent), interest rates starting from 15% for AZN, 8% for USD and EUR loans, up to 12 months (24 months in exceptional cases) d) Mortgage and Credit Guarantee Fund loans: 30,000-5,000,000, up to 84 months, interest rate 6-12%. e) Invoice financing: 25,000 – 500,000 AZN, 1-4 months, interest rate starting from 15%, f) AKIA: microloans with no collateral: 5000-15000 AZN, 12-36 months, interest rate 12% AKIA Regular loans with collateral: 5000-200,000 AZN, 6-36 months, interest rate 7%.

The bank also offers letters of credit and bank guarantees to business customers. Gunay Bank The bank has resumed lending to businesses and offers the following business loans to agribusiness:

a) Business loans: up to 36 months, terms are negotiated with borrowers. b) AKIA: microloans with no collateral: 5000-15,000 AZN, 12-36 months, interest rate 12% AKIA Regular loans with collateral: 5000-200,000 AZN, 6-36 months, interest rate 7%.

The bank also offers letters of credit and bank guarantees to business customers. Kapital Bank The bank offers the following types of business loans to agribusiness:

a) Business loans: up to 36 months, amounts starting from 50,000 AZN, interest rates starting from 16% for AZN and 8% for USD/EUR loans b) NFES loans: 5,000 – 10,000,000 AZN. 6-120 months, interest rate 5%

The bank also offers letters of credit and bank guarantees to business customers.

Mugan Bank The bank offers the following type of business loans to agribusiness:

a) Business loans supported with jewelry as collateral: up to 10,000 AZN, up to 36 months, interest rate starting from 23%. Business loans supported with real estate as collateral: 10,000 – 50,000 AZN, up to 36 months, interest rate starting from 19%. For 50,000 and up the duration is up to 48 months and interest rate starting from 16%. b) SME credit card: up to 30,000 AZN, up to 30 months, interest rate 22-24%. c) AKIA: microloans with no collateral: 5000-15000 AZN, 12-36 months, interest rate 12% AKIA Regular loans with collateral: 5000-200,000 AZN, 6-36 months, interest rate 7%. d) NFES loans: 5,000 – 10,000,000 AZN. 6-120 months, interest rate 5%

5 The bank also offers letters of credit and bank guarantees to business customers. Pasha Bank The bank offers the following types of loans to agribusiness:

a) Overdrafts: short-term financing of working capital. Terms are negotiated. b) Credit lines: terms are negotiated individually. c) Corporate loans: terms are negotiated individually. d) Loans to financial institutions: up to 2,000,000 AZN. Terms are negotiated. e) Subsidized Agricultural loans funded by the Ministry of Finance: up to 50,000 - 500,000 AZN (or equivalent in USD), 24-84 months, other terms are negotiated individually. f) Subsidized loans funded by the State Fund for Development of Information Technologies: up to 5,000,000 AZN, up to 10 years, fixed 5% interest rate. g) NFES loans: 5,000 – 10,000,000 AZN. 6-120 months, interest rate 5%

The bank also offers letters of credit and bank guarantees to business customers. Rabita Bank The bank offers the following types of loans to agribusiness:

a) Micro loans: 300-30,000 AZN, 3-36 months, interest rate 22-26%. b) Micro loans for women: 300-30,000, 3-36 months, interest rate 18.9%. c) Business loans for women: 30,000-1,000,000, up to 36 months, interest rate 14.9% d) Business loans: up to 36 months, starting from 30,000, interest rate start from 16% for AZN and 6% for USD loans. e) Exporter loans: starting from 30,000 AZN, up to 36 months, interest rates range between 13.9-18.9% for AZN loans and 4.9-8.9% for USD loans f) Mortgage and Credit Guarantee Fund loans: 30,000-5,000,000, up to 84 months, interest rate 6-12%. g) AKIA/World Bank project: 30,000 - 800,000 AZN (USD 500,000), interest rate 8.8%, 36- 84 months, grace period 36 months. h) AKIA: microloans with no collateral: 5000-15000 AZN, 12-36 months, interest rate 12% AKIA Regular loans with collateral: 5000-200,000 AZN, 6-36 months, interest rate 7%. i) NFES loans: 5,000 – 10,000,000 AZN. 6-120 months, interest rate 5%

The bank also offers letters of credit and bank guarantees to business customers. TBC Credit The credit organization offers the following types of business loans to agribusiness:

a) Micro loans: 500 - 15,000 AZN, 6-48 months, interest rates starting from 19% b) Business loans: - 1,000 – 300,000 AZN, 3-48 months, interest rates starting from 20% - 1,000 – 300,000 USD, up to 60 months, interest rates starting from 14%

Turan Bank The bank offers the following types of business loans to agribusiness:

a) Young entrepreneur loans: 500-30,000 AZN, 3-36 months, interest rate – 25%. b) Women entrepreneur loans: 500 – 100,000 AZN, 3-36 months, interest rate – 18.5%. c) MSME loans: 500-100,000 AZN, interest rate 19% for AZN, 12% for USD loans, up to 48 months. d) NFES loans: 5,000 – 10,000,000 AZN. 6-120 months, interest rate 5% e) AKIA: microloans with no collateral: 5000-15000 AZN, 12-36 months, interest rate 12%

6 f) AKIA Regular loans with collateral: 5000-200,000 AZN, 6-36 months, interest rate 7%. Corporate business loans: terms are negotiated

The bank also offers letters of credit and bank guarantees to business customers. Unibank The bank offers the following types of business loans to agribusiness:

e) Micro loans: 500-50,000 AZN, 6-48 months, interest rate starting from 5%. f) Agro-credits: 20,000 – 300,000 AZN, up to 3 years, 6-month grace period, interest rate is negotiated. g) Production credit: 50,000 -1,000,000 AZN, up to 3 years, 3-month grace period, interest rate is negotiated. h) NFES loans: 5,000 – 10,000,000 AZN. 6-120 months, interest rate 5% i) Business loan: 15,000 - 10,000,000 (AZN, USD, EUR), 48 months, interest rate 14%. j) Business credit line: terms are negotiated but are very close to the business loan terms. k) Loans subsidized by Azerbaijan’s Mortgage and Credit Guarantee Fund: 30,000 – 10,000,000, up to 84 months, interest rate 6%. l) Overdraft: 5000-100,000 AZN, 2 months, interest rate 16%.

The bank also offers letters of credit and bank guarantees to business customers. Xalg Bank The bank offers the following types of business loans to agribusiness:

a) Business loans and credit lines in AZN and USD: up to 6 years, 12-19% interest rates, up to 500,000 AZN. Up to 72 months for loans more than 500,000 AZN. b) NFES loans: 5,000 – 10,000,000. 6-120 months, interest rate 5% c) IT loans: 10,000 – 5,000,000. 6-120 months, interest rate 5%. Funded by the State Fund for the Development of Information Technologies.

The bank also offers letters of credit and bank guarantees to business customers. Yapi Kredi Bank The bank offers business loans in AZN and USD. Terms are negotiated individually.

The bank also offers letters of credit and bank guarantees to business customers. Ziraat Bank Lending to businesses in AZN and USD. Terms are negotiated individually.

a) SME loans b) Agricultural loans c) Business credit lines d) Loans to support imports from Turkey, in cooperation with the “Turkish EximBank.” Terms are negotiated. e) AKIA: microloans with no collateral: 5000-15,000 AZN, 12-36 months, interest rate 12% AKIA Regular loans with collateral: 5000-200,000 AZN, 6-36 months, interest rate 7%. f) Mortgage and Credit Guarantee Fund loans: 30,000-5,000,000, up to 84 months, interest rate 6-12%. g) NFES loans: 5,000 – 10,000,000. 6-120 months, interest rate 5%

The bank also offers letters of credit and bank guarantees to business customers.

PRIVATE SECTOR ACTIVITY (PSA)

Azerbaijan’s Non-Oil Exports in 2020 July 17, 2020

Introduction

This report briefly highlights Azerbaijan’s major non-oil exports over the first five months of 2020 and compares them with results from the same period in 2019. The paper also briefly summarizes the decline in the tourism sector, which has been hit hard by the COVID-19 pandemic.

Findings

Azerbaijan’s exports and non-oil exports decreased in the beginning of 2020: According to official statistics,1 Azerbaijan’s exports over January-May 2020 amounted to $6.9 billion, a decrease of $1.7 billion from the same period the previous year. Between January-May of 2020, non-oil exports amounted to $721 million, which represents an 8.9% decline compared to the same period in 2019.

Azerbaijan’s major export destinations in the non-oil sector: From January-May 2020, Azerbaijan’s exports of non-oil products amounted to $271 million to Russia, $144.3 million to Turkey, $70.5 million to Georgia, $71.5 million to Switzerland, and $23.6 million to China. Compared to the same period in 2019, 2020 non-oil exports increased by 3.6% to Russia, by 40.3% to China, and by 26% to Switzerland, although these gains were more than offset by the sharp drop in exports to Turkey alone.

Azerbaijan's non-oil exports to five major destinations, in million USD

300 271 261.2 250 200 180.8 144.3 150 76.9 2020 (January - May) 100 71.5 70.5 52.9 2019 (January - May) 50 23.614.1 0

Azerbaijan’s biggest export products in the non-oil sector: Among the non-oil sector products exported during the first five months of 2020, tomatoes ranked first, Azerbaijan exporting $123.1 million worth of

1 State Customs Committee of Azerbaijan Republic: https://customs.gov.az/en/faydali/gomruk-statistikasi/en-cox- ixrac-olunan-mallar/

2 the product during this period. Next came gold at $64.7 million and hazelnut kernels at $51 million. By product group, exports during the first five month vegetables, $49.5 million for cotton fiber, $31.5 million for aluminum of 2020 were $236.5 million for fruits and its finished products, $34.4 million for chemical products, $19.5 million for ferrous metals and their finished products, $9.2 million for cotton yarn, $5.7 million for alcoholic and non-alcoholic beverages, and $5.9 million for sugar. Exports of persimmons and apples for the first five months of 2020 amounted to $14.1 million and $8.5 million, respectively.

Azerbaijan’s major non-oil export products, in million USD

Polyethylene 2 0.2 18.1 Polyethylene 1 20.2 35.4 Potato 22.723.2 Polypropylene 31.933.6 2019 (January - May) Electricity 41 51.9 Cotton 48.6 68.1 2020 (January - May) Hazelnut 51 62 Gold 51 64.7 Tomato 104.2 123.1 0 50 100 150

Decline in exports of tourism services: The COVID-19 pandemic and relevant quarantine measures have hit the tourism sector hard, especially after March 2020. According to the Center for Analysis of Economic Reforms and Communication,2 during January-May 2020, 563,900 people visited Azerbaijan from 152 countries, which is 1.9 times fewer than during the same period in 2019. Tourists arrivals from China declined by 5.5 times, from South Korea 4.4 times, United Arab Emirates 4.1 times, Poland 3.8 times, Japan 3.7 times, Great Britain 3.5 times, Canada and Israel 3.3 times, Hungary 3.2 times, the U.S. and France 3.1 times, Germany and Netherlands 3 times, Italy 2.9 times, and from Malaysia and Turkmenistan by 2.7 times. In general, tourists from European Union countries declined by 3.4 times to 16,200, from Gulf countries by 2.2 times to 75,300, and from CIS countries by 1.9 times to 205,400 people. The value of transactions that foreign nationals conducted in Azerbaijan with their bank cards from January-May 2020 equaled 256 million AZN, versus 475.7 million AZN over the January-May 2019 period.

The value of bank card purchases by foreign nationals 475.7 500 400 300 256 200 88.3 98 103.2 100.9 85.2 72.985.3 53.9 100 19.7 24.3 0 January February March April May Total

2020 2019

2 Center for Analysis of Economic Reforms and Communications: http://iqtisadiislahat.org/export

3

Conclusion

The above statistics clearly show a decline in the value of Azerbaijan’s non-oil exports, as well as in the exports of agricultural products and tourism services. Among the major agricultural export products, the exports of hazelnuts and cotton declined, although the exports of tomatoes and potatoes increased. According to media, farmers and exporters of agricultural products have experienced certain difficulties in their exporting operations since March, as Azerbaijan as well as destination countries have applied certain quarantine measures that have complicated the export business. The quarantine measures have prolonged the time needed for border crossings, which have prevented many farmers from exporting perishable products over long distances and caused them to focus mostly on Russia among export markets. Meanwhile, difficulties with and limitations on transportation, as well as declining purchasing power in Russia and a slightly devalued ruble, have led many farmers to focus more on the domestic market, rather than exporting to Russia. This has mostly impacted the exports of fruits and berries. As can be seen from the figures presented above, however, the pandemic and relevant quarantine measures and border closures have hit the tourism sector hardest of all.

USAID PRIVATE SECTOR ACTIVITY (PSA)

Overview of Amendment to the State Budget of Azerbaijan August 20, 2020

Introduction

On August 12th, the President of Azerbaijan signed the “Law on amending the Law of Azerbaijan on the budget of Azerbaijan for 2020.”1 This came as no surprise to anyone, as economists had been expecting such a development. Given the country’s declines in revenues since the second quarter as a result of reduced income from oil and gas exports, as well as significant impacts on the economy from the COVID- 19 pandemic, budget expenditures have been increasing to support both the population and the private sector. In this brief report, we will summarize the negative economic trends that have necessitated amending the State Budget and what those amendments entail.

Economic Factors Necessitating the Budget Amendment

The economy of Azerbaijan has been severely affected by the pandemic and fluctuations in oil prices. Over the first half of 2020, the GDP level of 33.8 billion Azerbaijani manats (AZN) represented a decrease of 2.7% in real terms compared to the same period the previous year.2 Crude oil prices on the world market are significantly lower in comparison with last year's indicators. The average price per barrel of Brent crude over the first six months of 2020 was $42.1, which is $23.8 less than it was in January of last year.3

Due to the current situation in the country and measures implemented with the aim of preventing the spread of the disease, both domestic and foreign tourism were negatively affected. In particular, the largest rate of decline (a 47.9% decrease) and the largest reduction in the composition of non-oil GDP (2.0 percentage points) were observed in this area. Moreover, it is worth mentioning that according to the official statistics provided by the Azerbaijani Central Bank, over the first quarter of 2020 tourism services turnover decreased by 18%. Meanwhile, the number of individuals travelling abroad decreased by 23%, whereas the number of tourists visiting the country declined by 18%. As a result, tourism industry development and foreign exchange proceeds entering the country were both negatively impacted.

The government has significantly increased spending on public health and announced support to affected businesses and individuals. The government’s economic support program also includes certain tax privileges and tax holidays for business entities.

According to the State Customs Committee, over the first half of 2020 foreign trade turnover amounted to $12.68 billion, a decrease of 25.4% in comparison with the previous year.4 Additionally, the trade balance shrank from a surplus of $2.96 billion over the first half of 2019 to a surplus of $2.70 billion over the first six months of 2020. The volume of exports decreased by 23%. This recession might be explained by the decline in oil production and drop in oil prices on the world market. Pressure on the national

1 Law on amending the State Budget of Azerbaijan: https://president.az/articles/40456 2 State Statistics Committee: https://www.stat.gov.az/source/system_nat_accounts/ 3 https://www.bloomberg.com/quote/CO1:COM 4 State Customs Committee: https://customs.gov.az/az/faydali/gomruk-statistikasi/xarici-ticaretin-veziyyeti- haqqinda/ 2 currency increased in March against a backdrop of sharp declines in oil prices and oil revenues, as well as expectations of lower foreign currency revenues.

Summary of Changes in the State Budget for 2020

Changes in the State Budget’s revenues section:5

1. Total revenues of the State Budget decreased by 0.04% from 24.135 billion AZN to 24.124 billion AZN. 2. Transfers from the State Oil Fund (SOFAZ) - increased by 850 million AZN, or 7.5%. 3. Other income – increased by 30 million AZN, or 42.9%. 4. State Tax Service revenues – decreased by 685 million AZN, or 8.7%. 5. State Customs Committee revenues – decreased by 170 million AZN, or 4.3%. 6. Revenues of other budgetary organizations – decreased by 35.5 million AZN, or 4.2%.

Share of revenue sources in the State Budget

0.40% 3.30% After changes 50.06% 29.80% 15.90%

0.29% 3.48% Before changes 47.03% 32.63% 16.57%

0.00% 10.00% 20.00% 30.00% 40.00% 50.00% 60.00%

Other income Other orgs Oil Fund Taxes Customs

Changes in the State Budget’s Expenditures:

Total State Budget expenditures increased by 2.2%, from 26.90 billion AZN to 27.49 billion AZN.

Sections with decreased Percentage Sections with increased Percentage expenditures Change expenditures Change General Public Services -4.2% Health +24.4% Defense and National Security -1.3% President’s Reserve Fund +60% Judiciary, Law, and Enforcement -1.7% State Budget’s Reserve +90.9% system Fund Education -3.8% Socio Economic Reforms +18.3% Culture, Arts, Information, Physical -3.6% Social Care +300% Education, Youth Policy and other activities Agriculture -2.5% Social Protection +20.3% Environmental Protection -2.4%

5 Amended State Budget: http://finance.gov.az/scripts/pdfjs/web/viewer.html?file=/uploads/static- pages/files/5f35e4a46d50a.pdf 3

Conclusion

It is clear that amending the budget was inevitable due to the factors described above. We may conclude that the pandemic brought devastating results and led to an economic recession affecting all sectors. Due to the quarantine measures applied by the government, a significant decline in the revenues was observed. It is expected that the downward trend in budget revenues will continue and expand in the second half of 2020 as well. The private sector was severely hit by the reduced demand for goods and services. As a result, the government had to implement measures and reforms to provide support for the affected businesses and sectors. This program had a direct impact on the budget, increasing expenditures, which necessitated amending the budget.

It is clear that the biggest contribution to increased expenditures is being made through oil revenues, which unfortunately increases the dependence of the budget and economy on oil and gas revenues. Unfortunately, this dependence is growing at a time when income from oil and gas production is decreasing. A decline of more than 40% is expected in the amount of SOFAZ revenues in 2020. At the same time, increased expenditures will increase the monetary base/money supply, which is negatively affecting the currency market. The expanded money supply is increasing demand for foreign exchange just when the monthly trade balances are going into negative territory (as they did for May and June 2020), the currencies of neighboring countries are weakening, and individuals are buying U.S. dollars and euros in anticipation of a devalued manat.

USAID PRIVATE SECTOR ACTIVITY (PSA)

Impact of the COVID-19 pandemic on Azerbaijan's economy September 23, 2020

Introduction

The spread of the COVID-19 disease has led to strict containment and quarantine measures around the world. Almost every country has imposed a mixture of quarantine regimes, border closings, travel bans, and shop and factory shutdowns, which has inevitably led to substantial disruptions in production, processing, trade, and other economic losses. Azerbaijan likewise has been unable to avoid damage to its economy. The pandemic and government response have substantially weakened economic activity and development of various economic sectors, increased unemployment, and created risks for the financial sector. In this brief paper, we will review some of the major impacts of the COVID-19 pandemic on Azerbaijan’s economy.

Oil production decreased: It goes without saying that the economy of Azerbaijan was severely affected by COVID-19 and a collapse in oil prices. On April 9, 2020, the 23 countries of the OPEC+ grouping discussed the recession caused by the spread of the coronavirus and agreed to cut oil production by 9.7 million barrels per day, starting from May 1, 2020. The negotiation was aimed at balancing supply and demand on the global market. Azerbaijan alongside with other participating countries agreed to cut the production accordingly. Thus, based on the international agreement,1 Azerbaijan agreed to limit daily production to 554,000 barrels in May and June 2020, 587,000 barrels in July and December 2020, and 620,000 barrels between January 2021 and April 2022.

Economy contracted: According to the official data from the State Statistics Committee,2 the gross domestic product (GDP) produced in the country between January-June 2020 amounted to 33.8 billion manats, which was 2.7 % less in comparison with the same period the previous year. The GDP per capita decreased by 3.4% compared to the same period of the previous year and stood at 3393.7 manats (6787.4 AZN on an annualized basis).

Tourism sector devastated: Tourism is among the key sectors of the Azerbaijani economy that was severely affected by the outbreak of COVID-19. Since the borders were closed, nearly all incoming and outgoing passenger flights have been suspended, except for repatriating citizens. This, in turn, has led to stagnation in the tourism industry. It is worth mentioning that prior to the rapid spread of the coronavirus infection in Azerbaijan, the tourism sector was growing steadily. According to the State Border Service, nearly 26,000 foreign travelers visited Azerbaijan in June 2020, 91.7% less than in June 2019. Nearly 92% of total foreign travelers in June came from four bordering countries: Russia, Turkey, Georgia and Iran. The number of travelers that arrived from Turkey and Russia decreased by 59.9% and 94.8%, compared to June 2019.3

1 Azerbaijan’s commitment in OPEC+ deal: http://www.socar.az/socar/en/news-and-media/news-archives/news- archives/id/11466 2 State Statistics Committee of Azerbaijan: https://www.stat.gov.az/news/macroeconomy.php?page=1&lang=en 3 Source: Azerbaijan Tourism Board: https://tourismboard.az/statistics 2

Industrial production decreased: Over the first half of 2020,4 the volume of goods and services produced by industrial enterprises and individual entrepreneurs operating in this field declined by 1.5% and amounted to 18.4 billion manats. Compared to the same period last year, industrial production in the non- oil and gas sector indicators for January-June 2020 increased by 11.2%, while in the oil and gas sector production declined by 2.8%. The total value of production in the mining industry amounted to 11.3 billion manats, which represents a decrease of 3% compared to the first quarter of the last year. It is worth noting that production of crude oil, which is considered the industry‘s main product, amounted to 17.8 million MT, while natural gas production was 13.8 billion cubic meters. Thus, oil production decreased by 4.9%, while gas production increased by 14.9%. Meanwhile, over the first half of 2020, the processing industry produced goods and provided services worth 5.9 billion manats. The total value of oil products produced was 1.6 billion manats, an increase of 0.8% compared to the figure for the first half of the previous year.

Azerbaijan’s trade decreased: According to official data, the foreign trade turnover was $12.7 billion over the first half of 2020, representing a decrease of 25.4% in comparison with the same period the previous year.5 A decline in both imports and exports was noted (exports decreased by 23%), but the trade balance remained positive over the first half of 2020. The recession might be explained through a decline in oil production and the drop in oil prices on the world market. As can be seen in the chart below, over the first half of 2020 foreign trade decreased significantly, due to the pandemic and the quarantine and other restrictions imposed in response.

Main indicators of foreign trade, in million USD 18,000.00 16,994.66

16,000.00 13,322.76 14,000.00 12,675.82 12,000.00 9,979.03 10,000.00 8,678.42 8,662.43 7,686.28 8,000.00 7,015.63 5,268.75 6,000.00 4,660.33 4,989.54 4,000.00 3,409.67

2,000.00

0.00 2017 (January - June) 2018 (January - June) 2019 (January - June) 2020 (January - June)

Foreign Trade Turnover Export Import

Source: State Customs Committee of Azerbaijan

4 Chamber of Accounts of Azerbaijan: http://sai.gov.az/upload/files/DURUSTLESHME2020_REY_F%C4%B0NAL(1).pdf 5 State Customs Committee of Azerbaijan: https://customs.gov.az/az/faydali/gomruk-statistikasi/xarici-ticaretin- veziyyeti-haqqinda/ 3

Conclusion

The COVID-19 pandemic is far more than a health crisis, as it has impacted economies and entire societies. It is clear that the spread of the virus has had a considerable negative impact on Azerbaijan’s economy, including business and the aforementioned economic subsectors in particular. The pandemic was the main root cause of the decline in GDP of 2.9% over the first half of 2020. As a result of the restrictions on travel, the tourism sector was among the most severely hit subsectors. At the same time, catering and transportation services incurred considerable losses. Moreover, based on official statistics, we observed a considerable decrease in import and export volumes, and here the correlation between foreign trade and oil production is clear. Meanwhile, the decline in industrial output over the first half of 2020 provides evidence that industry has not been spared the negative impact of the pandemic either. Demand for foreign currency rose steadily as consumer concerns grew. We should also note that international rating agency Fitch has evaluated Azerbaijan's long-term foreign-currency issuer default rating (IDR) as 'BB +' with a negative outlook.6 According to Fitch, the Negative Outlook reflects the impact of the combined shock from lower oil prices and the COVID-19 pandemic on Azerbaijan's external buffers and the risk of a disruptive macroeconomic adjustment, such as amendments to the state budget, budget income, State Oil Fund transfers to the state budget, or the potential devaluation of the manat.

6 Fitch Ratings: https://www.fitchratings.com/research/sovereigns/fitch-affirms-azerbaijan-at-bb-outlook- negative-17-07-2020

USAID PRIVATE SECTOR ACTIVITY (PSA)

Azerbaijan Agritourism Assessment

Sandra Willett March 2020

Prepared for review by the United States Agency for International Development under USAID Contract No. 72011219C00001, Private Sector Activity (PSA) implemented by CNFA.

Disclaimer: The author’s views expressed in this publication do not necessarily reflect the views of USAID or the

United States Government. 1 Table of Contents

Acronyms...... 3 Executive Summary ...... 4 Report Objectives and Development Methodology ...... 6 Defining Agritourism ...... 7 To What Sectors Does Agritourism Belong ...... 9 Agritourism Benefits ...... 9 What, Where & Who of Agritourism ...... 10 Who is the market? ...... 11 Related Niche Tourism ...... 11 World Tourism Trends ...... 13 Developing Agritourism Resources ...... 14 Agritourism Resource Center Models ...... 16 The Government Agency Service Model ...... 16 The Self-Regulating Service Model ...... 16 The University Extension Service Model ...... 17 Background – Tourism and Regional Tourism in Azerbaijan ...... 17 Tourism in Azerbaijan ...... 17 Regional Tourism ...... 17 Agritourism in Azerbaijan ...... 19 Strengths and Weaknesses ...... 19 Potential Project Interventions ...... 23 Facilitate Agritourism Working Group – PPP ...... 23 Implement a Regional Facilitative Train-the-Trainer/ Facilitator Program ...... 26 Agritourism Handbook ...... 26 Agri-Food Processing Intervention ...... 27 Small Grants Program ...... 27 Pilot Trail Development ...... 27 Include Map/Create your own map ...... 27 Study Tours ...... 29 Conclusion ...... 29 Bibliography and Reports Reviewed ...... 30

2 Acronyms

ADB Asian Development Bank ATAA Association of Travel Agencies of Azerbaijan CSR Corporate Social Responsibility DMO Destination Management Organization EU European Union FAO Food and Agriculture Organization GIZ The Deutsche Gesellschaft für Internationale Zusammenarbeit MSME Micro, Small and Medium Enterprise MoA Ministry of Agriculture PSA USAID Private Sector Activity Project SME Small and Medium Enterprise SRRD Support to Rural and Regional Development UNESCO United Nations Educational, Scientific and Cultural Organization UNDP United Nations Development Programme UNWTO United Nations World Tourism Organization USAID United States Agency for International Development

3 Executive Summary

In many regions around the globe, farmers are recognizing the need and desire to diversify their farm products and supplement their agricultural incomes. Concurrently, recognition of the benefits of tourism is being acknowledged as a major contributor to GDP, job creation, local economies and investment. Though “tourism” is a single sector, it is made of numerous tangible and intangible elements that both affect and are affected by many other sectors. It therefore has the potential to be economically beneficial in numerous sectors and to the entire local economy.

With a diversified regional offering of quality produce, culture and heritage, Azerbaijan has a strong opportunity to diversify the list of product and service offerings through agritourism. Agricultural tourism increases the potential for higher margins, both on-farm and off-farm sales, of value-adding products and services, and for further diversifying the product line of the farm operation and in turn ability to export.

However, agritourism and related niche tourism segments, while growing in demand as well as value of economic returns, are becoming increasingly globally competitive as they are recognized by both developed and developing tourism economies as strong economic sources of income to the national economy, and in particular to rural communities.

A key strength supporting the potential growth of the agritourism sector in Azerbaijan is the government's focus on developing both tourism and agritourism in a post-oil economy. Agritourism has been highlighted as a potential opportunity for development at a national level, with activities being undertaken throughout the country (to varying degrees), at a regional level, and at a local level through local representatives, individual entrepreneurs, tourism and agriculture stakeholders, NGOs, and donor projects.

One of the factors that robust developed and developing tourism and agritourism economies share is a partnership between the public and private sector in development, implementation and management. A national and regional approach ensures a top-down and bottom-up approach to effective development and sustainable growth. In the case of Azerbaijan, development of the sector is being driven by the public sector and, while there is engagement with the private sector at various stages, it is not a shared vision, there is no formal partnership in planning, strategy development, implementation, or management.

The objective of an agritourism economy is to promote sustainability and competitiveness in rural communities through the production of products, experiences and services that link agricultural activities to tourism in ways that foster food security, environmental sustainability and sustainable use of natural and cultural resources, validate traditional knowledge, and lead to sustainable livelihoods.

4 Strengthening links between agriculture and tourism through clear focus on regional economic development agendas is critical. Forging these links capitalizes on the inherent ability of a tourism sector to diversify the regional economy, stimulate entrepreneurship and investment, and assist in social development in rural communities. These linkages offer opportunities in agricultural production, create employment throughout the tourism value chain, and build resilience and sustainability of regional economies.

With a focus on the most successful strategic outcomes, a successful agritourism destination focuses concurrently on the driving forces of Product and Experiences, Marketing and Promotion, and the Enabling Environment. The activities represented within each driver individually and collectively help drive growth to the sector, while the enabling environment provides the foundations conducive to agritourism development and economic advantages.

5 Report Objectives and Development Methodology

This report is aimed at conducting a rapid assessment of gaps in the developing agritourism sector in Azerbaijan and providing recommendations on a range of activities that the USAID Private Sector Activity (PSA) might undertake to address those gaps. Special consideration was given to strategic activities and interventions, in line with international best practice, and achievable within the project’s lifetime, that could support an enabling environment during the current stage of the sector’s development, drive success, and provide for a sustainable platform for growth moving forward.

The report was drafted following a two-week fact-finding mission to Azerbaijan in February 2020 that included meetings and interviews with both public and private sector stakeholders in Baku and three regions of Azerbaijan (Lankaran, Sheki and Quba), as well as a rapid desk research review. Meetings were undertaken with government agencies such as the State Tourism Agency, the Azerbaijan Tourism Board, Agro Procurement and Supply, and the representatives of two national parks (Shirvan National Park and Hirkan National Park); with members of the private sector including the Association of Travel Agencies in Azerbaijan, tour operators, farmers, agritourism operators in the regions and those that wish to get engaged on this sector; with donors and/or projects or donor beneficiaries (e.g., USAID, GIZ, EU, UNDP, etc.); and a review of a wide range of reports, studies and research undertaken directly and indirectly related to agritourism and, where relevant, tourism in general.

6 Defining Agritourism

It is an EXPERIENCE! One that provides connection to nature, rural areas and the outdoors. It can be romantic, healthy and quiet, and may involve adventure, education and/or learning.

May be a product food, specialty products, crafts May be a service information, demonstration, participation, activity, etc.

Farm Destination

While there are many definitions, when it relates to on-farm activities, agritourism can be defined as visiting a working farm or any agricultural, horticultural, or agribusiness operation for the purpose of enjoyment, education, or participation in the activities of the farm or operation. Examples include:

Experiences • Farm stay • Bed and Breakfast (B&B) • Farm events (e.g., harvest) • Pick your own fruit/vegetable • Working farm holiday • Farm education

Products • Oils • Soaps • Arts & crafts • Fresh foods • Processed farm produce such as jams, ice cream, etc.

Kates Berry Farm Pacific Hazelnut USA Farm Stay Rural Ireland

https://www.pacifichazelnut.co www.agritours.ie m/factory-tours.html https://katesberryfarm.com/

7 Regional Destination

Successful agritourism destinations offer a range of off-farm activities as well. Examples include:

• Festivals; • Events; • Regional food outlets; • Food trails; • Wine trails; • Culinary experiences such as cooking schools/classes; • Farmers’ markets; • Opportunities to see products being made; and • Make your own... (e.g., bread, local dish, etc.)

Trenta Valley Slovenia

California Cheese Trail

www.eko-plajer.com

Scottish Wild Food Festival

https://cheesetrail.org/

https://www.scottishwildfoodfestival.co.uk/about-the-festival

Around the world, Agritourism has become vitally important to farmers due to two main developments:

• Pressures from increased consolidation and productivity thanks to new and more expensive technology have forced farmers, especially those with smaller or less technically sophisticated operations, to use diversification strategies to increase their income opportunities; and

8 • The growing market demand for more non-urban vacation experiences and interest in travel within a rural environment.

Tourists are seeking “rural” destinations because of:

• A desire to escape city life/urban centers; • Growing interest in natural environments; • Search for less commercialized and inexpensive holiday alternatives; and • Interest in authentic culture, farming heritage, good quality local foods and lifestyles.

These factors, in combination with better access to rural areas, are making agritourism a popular form of diversification for a growing number of farmers, rural communities, and tourism operators.

What is Being Sold?

Experiences • Connection to Nature/ Rural/Outdoors • Healthy, Quiet, Romance, Adventure • Education, Learning – Local Culture

Agritourism Basics • Have something for visitors to see • Have something for them to do • Have something for them to buy To What Sectors Does Agritourism Belong?

Agritourism is a link in a quality territorial system that integrates agricultural, tourist, environmental, cultural and historic resources.

Agritourism Benefits

The potential benefits of agritourism development extend to farmers, rural communities, and tourism operators, and in turn have strong potential to contribute to the regional and national economy. Agritourism supports the objectives of attracting increased numbers from higher potential markets, increased length of stay, increased tourist spending and tourism receipts, and increases the value of tourism to rural communities.

Farmer Benefits • Improving incomes and revenue streams • Supports additional on-farm revenues directly to family members • Expanding farm operations • Utilization of farm-based products in innovative ways • Developing new consumer market niches

9 • Increasing awareness of, and in turn demand for, local agricultural products • Improved living conditions, working areas and farm recreation opportunities

Community Benefits • Diversification and strengthening of the rural economy via job and income creation • Additional revenue generated for local businesses and services from tourists • Increased protection of rural landscapes and natural environments for residents as well as tourists • Upgrading and revitalization of community facilities for residents and visitor • Preserved local traditions, arts and crafts • Promotion of inter-regional, inter-cultural business and communication supported • Ongoing use of local agricultural products and services promoted • Active business environment in attracting other businesses and small industries promoted

Tourism Benefits • Diversification of mix of tourism products and services available to visitors • Supports increasing tourism flows into rural regions • Supports an increase in length of stay • Increases season length during traditionally off-peak periods • Uniquely positions rural regions in key tourism markets • Increased contributions of foreign currency to local businesses and local economy

What, Where & Who of Agritourism

Agriturismo Forest Italy Agritourism, one of the fastest growing segments of the travel industry, includes visits to working farms, wineries and agricultural industries. Agritourism destinations offer a huge variety of entertainment, education, relaxation, outdoor adventures, shopping, and dining experiences.

Agritourism connects a farm and its products to www.agriturismoforest.com - other tourism operations - other regional retail outlets

Agritourism can be offered on the farm or within the region, offering different but complementary products and experiences.

Farm Destination Regional Experiences Festivals Farm stay Regional food Farmhouse meals Food trails Pick your own fruit/vegetable Wine trails Working farm holiday Participatory culinary/cooking lesson Farm education “open farm” Food stalls Cooking with the farmer/learning to Farmers markets Products Make your own… Fresh foods Seeing products being made Secondary products (e.g., jam/cheese) Food tastings Byproducts (e.g., oils, soaps, candles) Events e.g., food and wine matching

10 Product-to-table experience Regional produce featured on restaurant/dining menus Product to handcraft experience (e.g., wool to carpet) Who is the market?

• Those that are already coming to the region who could spend more time and/or money. • Those that would come if there were more options. • Those that want what the region offers.

Of particular interest are related tourism niches that individually and collectively have a large overlap with agritourism while maintaining their own area of focus. While this report aims to address agritourism, it is important to note these niches as primary source markets as they develop in Azerbaijan. Related Niche Tourism

Ecotourism: According to the International Ecotourism Society, ecotourism is responsible travel to natural areas that conserves the environment and improves the well-being of local people. It is about uniting conservation, communities, and sustainable travel. This means that those who implement and participate in ecotourism activities should follow the ecotourism principles of minimizing impact, building environmental and cultural awareness and respect, providing positive experiences for both visitors and hosts, providing direct financial benefits for conservation, providing financial benefits and empowerment for local people, raising sensitivity to host countries' political, environmental, and social climate. While a concept document1 with recommendations has been developed, it is critical that ecotourism practices be considered in all agritourism strategies and interventions in Azerbaijan.

Food Tourism: Internationally, the demand for food tourism and experiences, the popularity of farmers markets, and the appreciation of artisan producers are all on the rise, an increasing number are voting with their feet and with their wallets for authentic, good, clean and fair food – whether it be food that is produced locally or which is imported such as fair-trade tea, etc.

Culinary tourism does not have to mean gourmet food. It is increasingly about unique and memorable experiences. It includes the dining experience itself, a taste of how it should be, but it also an awareness that supporting such endeavors has the ability to generate rural development. It helps to diversity revenue sources, and improves rural employment and income levels.

Local foods – both produce and secondary products – are disappearing. To counteract this effectively, potential must be measurable and implementable, via better prices, quantities produced, and numbers employed. Producers must have economic assurance about their future, economic objectives, and environmental objectives.

The Slow Food movement continues to grow around the world. With the aim of preventing the disappearance of local food cultures and traditions, as well as counteracting the rise of a fast lifestyle and combating people’s dwindling interest in the food they eat and where it comes from, the global movement now engages millions of people in over 150 countries.

1 Concept on Sustainable Development of Ecotourism in Azerbaijan (GIZ)

11 Slow Food believes food is tied to many other aspects of life, including culture, politics, agriculture and the environment. Through our food choices we can collectively influence how food is cultivated, produced, and distributed, and as a result bring about great change.

In Azerbaijan, an EU-funded Slow Food project is currently in its second year of a program and is due to end in 2021. Its focus is on mapping of agrobiodiversity and traditional products, implementation of food value chain local pilot projects, implementation of rural tourism projects in pilot areas, a national campaign to promote local food consumption and sustainable food choices, an international campaign to promote rural tourism in Azerbaijan, and on participation in international events to promote food value chain and rural tourism projects.

Since 2010, UNESCO has accepted local food as an Intangible Cultural World Heritage. This status can provide tourism destinations with a competitive advantage and help them develop their brand image around it.

Examples of food cultures in developing tourism economies include: Azerbaijan – dolma making and sharing tradition Azerbaijan, Iran, Kazakhstan, Kyrgyzstan and Turkey – flat bread making and sharing culture Georgia – Ancient Georgian traditional Qvevri wine making method Tajikistan – Oshi Palav, a traditional meal Uzbekistan – Plov culture and tradition

Rural Tourism: There are numerous definitions of rural tourism. Generally, it focuses on sustainable improvement to the quality of life of rural people, the poor in particular; encompassing a wide range of attractions and activities that take place in agricultural or non-urban areas, offering visitors the opportunity to directly experience agricultural and/or natural environments.

Sustainable Tourism: Focus on making a low impact on the environment and local culture, while helping to generate employment and future employment for local people.

Adventure Tourism: the Adventure Travel Trade Association (ATTA) defines adventure tourism as containing three main components for the traveler: 1) physical activity, 2) a connection to nature and the environment and 3) an immersive cultural experience. As tourism is one of the largest employers on the planet, it has a major impact on peoples’ economic well-being and the planet’s health. Furthermore, adventure tourism is inextricably dependent on human- and nature-capital; protection and promotion of these resources is key.

Responsible Tourism: focuses on making better places for people to live in and better places for people to visit. Responsible Tourism requires that operators, hoteliers, governments, local people and tourists take responsibility and take action to make tourism more sustainable

Pro-Poor Tourism: Focus on net benefits to poor people from tourism. It is an approach to tourism development and management as opposed to being a specific product or niche sector.

12 World Tourism Trends

Responsible Tourism The trend in demand for responsible tourism is continuing to rise and greater account is being taken of the congestion that tourism generates and of the negative effects on resources and host communities that can come with it. Although some developers are giving extensive emphasis to Corporate Social Responsibility (CSR), in many destinations are still to include it as a basic requirement in development and potential for growth/sustainability. Green practices, such as reducing waste and emissions, using alternate energy sources, and producing natural products, have become something of a “me too” cause in recent years. Yet companies and destinations with a history in green innovation have reaped the most benefits and are making real cost savings, and will continue to do so during both periods of economic recession and growth. Green Key program for hotels for example, are ethical but also have potential to be marketed.

Community Based Tourism There is a growing demand for transparency in social and economic benefit to communities and tourism contribution to preservation and promotion of cultural heritage. There is a growing support by the international tourism trade, including major international operators, to recognize destinations and businesses who are actively addressing these sustainability themes, incidentally this trend is in-line with the growing requirement of international agriculture buyers/importers and their market in regards to product source, fair trade etc. There is in an increasing trend among tour operators in transparency in their choice of suppliers based on these themes. To support the development of community-based tourism, the implementation of ongoing tourism awareness and training plans is required as a priority.

Culinary Tourism The tourism market internationally is increasingly being influenced and motivated by food and culinary experiences. Visitors are increasingly demanding a wide range of quality dining experiences and the availability of these experiences are influencing both destination choice and the perception of the quality of the overall holiday experience and satisfaction criteria. In addition, there is a growing demand for a variety of quality, authentic local food and culinary specialties. Tourists want to try distinctive foods that reflect the tradition, heritage and culture of a place, and which preserve traditional forms of agriculture and cultural heritage. As food, regional dishes and dining events are a major component of Azerbaijan’s history and culture, from authentic dishes to seasonal dishes, Azerbaijan and its regions have an enormous opportunity to benefit from this growing market if the range of experiences that visitors can partake in are increased and promoted, and if standards and quality are aligned with international best practice.

Digital Tourism The trend in digital tourism continues to grow at an exponential rate, resulting in changes to the tourism supply chain and transformation of effective tourism marketing across the purchase cycle. Today's tech savvy traveler, whether 65 or 25, uses technology at every stop of their travel experience. They are being influenced on destination choice online, they are being motivated to actually choose destinations to research through online influences, they undertake pre-trip research online, packaging and booking and paying online and they post travel reviews and recommendations to their networks

13 during and post travel - thereby influencing their peers in destination choice. Global online travel bookings are growing at twice the rate as is the overall market. (Phocuswright). 2

Aging Populations Increases in the proportions of older persons (60 years or older) are being accompanied by declines in the proportions of the young (under age 15). By 2050, the number of older persons in the world will exceed the number of young for the first time in history. By mid-century, there will be some 2 billion older persons, a tripling of this age group in a span of 50 years. Marked differences exist between regions in the number and proportion of older persons. In the more developed regions, almost one fifth of the population was aged 60 or older in the year 2000; by 2050, this proportion is expected to reach one third.

Halal Tourism According to ITB World Travel Trends 2019, Muslims will make up approximately 25% of the world’s population by 2030 and in some Muslim-dominated markets a thriving middle-class is emerging with growing buying power and a new consumer behavior that includes an increase in international trips. With strong growth forecast, halal travel offers huge growth potential for destinations around the world. Meeting criteria for halal certification for most agricultural produce and agritourism byproducts is not considered complicated, however, having certification is a strong asset.

Developing Agritourism Resources

The high potential for agritourism development in many regions means it is critical that mechanisms be created to nurture and support the industry’s growth. Starting a new endeavor or expanding an existing agritourism business requires planning, partnerships, and digging in deep to understand topics such as risk management and land-use policy. In the case of Azerbaijan, where agritourism (and to a larger extent, tourism in general) is in its infancy and there is a mandate to develop and grow the sector, it is imperative that a strong foundation is set in place that facilitates growth, develops and provides the resources required, directs farmers to existing resources and provides a forum to gather feedback from farmers and other regional stakeholders. One of the most effective ways involves developing a form of Agritourism Resource Center that can provide a ‘one stop shopping’ support for nascent and established agritourism operators.

Services Provided

Agritourism Resource Centers generally provide an ever-evolving set of services customized to their stakeholders. These services and resources reflect a combination of the capacities of the organization to develop and deliver them, as well as the industry and government issues and priorities that require attention. While it is not unusual for many of these services to be promoted as being part of a centralized ‘one stop shop’ office, in many cases such ‘support products’ are delivered by specialized suppliers such as specific government agencies, commercial consultancies, non-government organizations, universities, etc.

2 Global Online Travel Overview 2019

14 Information– providing customized (often contract-based) contacts, references, background information, and supporting documentation in hard copy and /or digital formats.

Technical Summaries – preparing tailored (often contract-based) agritourism policy, planning, development, and management reports on specific issues in hard copy and/or digital formats.

Newsletters - periodic digital and/or hard copy newsletters concerning agritourism business topics such as new products and services, market trends, management strategies, legislation changes, upcoming conferences, etc.

Conferences and Workshops - periodic regional and national workshops on agritourism issues, business management, partnership development, leadership and management strategies, emerging legislation interpretations, etc.

Product Quality Assurance Programs - development and delivery of quality assurance programs for approved agritourism products and services.

Marketing and Promotion Programs - development and management of web-based agritourism business directories, destinations, products and services. Development and distribution of agritourism, advertising and public relations information with tourism industry, agricultural and community partners, etc.

Risk Management Programs - development and management of agritourism risk management insurance programs in conjunction with insurance companies

Human Resource Recruitment – development, management, and delivery of agritourism labor force recruitment, training, and retention programs

Advocacy - providing advocacy positions and lobbying support for initiatives requiring the approval of governments and other stakeholder organizations (e.g., facilitating legislation, funding and technical support, etc.

Reference Centers – collecting, classifying and distributing print and/or digital book, periodical, report, audio-visual materials on issues related to various agritourism management issues

Information Resources

An effective Agritourism Resource Center provides leadership in the development and distribution needed to support the development of competitive agritourism products and services. Information should relate to specific planning, development, and management issues deemed to be particularly important to key stakeholders. An important role is to actively work with its partners to establish these priorities. Required and effective information generally covers particular themes:

• Understanding agritourism markets and their behaviors • Assessing agritourism’s fit with current farming operations • Dealing with government policies • Addressing financial considerations

15 • Establishing effective marketing programs • Developing customer-friendly service programs • Creating responsive risk management programs • Establishing credible product and service quality standards • Building strategic partnerships • Managing agritourism product development opportunities

Agritourism Resource Center Models

Agritourism is recognized as a viable contributor to agriculture, tourism and regional economies, and with it the accelerating recognition of the need to nurture the sector’s development as a business. Therefore, comprehensive support systems, designed to nurture the development of this sector are growing. In general, Agritourism Resource Centers operate as one of three models with each providing varying types and levels of ‘one-stop shopping’ services.

The Government Agency Service Model With roots in interests associated with agricultural land, food security and food quality, a growing number of governments are developing agritourism units, usually within ministries responsible for agriculture. They are supported primarily via on-going government funding for a small group of ‘agritourism specialists’ and related administrative staff. At times, they receive additional resources for ‘one-off’ projects that foster public-private sector partnerships with farming organizations (e.g., training workshops, research, and quality standards program development) or through development projects, etc. They provide “one-stop shop” information to both established agritourism operators and prospective operators concerning: • Policy and regulatory requirements; • Business development and management resources; • Incentives such as available grants, access to finance, etc.; • Relevant training programs; and • Product and service promotional opportunities.

Some government-run resource centers play a proactive role in helping industry and community organizations fund and manage applied research projects designed to address current and emerging agritourism challenges (e.g., market research, risk management, market development, etc.).

The Self-Regulating Service Model In some areas, Agritourism Resource Centers exist as part of a self-regulating industry organization, specifically designed to be at arm’s length from government control. Typically, they are initially funded by a government grant or public-private sector agreement covering a prescribed incubation period, e.g., 3-5 years, and are then expected to be self-sustaining. Usually their mandate includes: • Sharing and coordination of information on farm business management practices which prevent duplication, encourage cost-sharing, and build partnerships; • Acting as a dialogue forum on farm business management issues; and • Assisting in the development and distribution of information concerning products and services which help increase the competitiveness of agritourism businesses.

16 The University Extension Service Model Agritourism has emerged in recent years as a new ‘product line’ for some post-secondary academic institutions. Typically, they are supported by a combination of funding, including: • University budgets for core faculty and administrative staff; and • Government contracts for limited term, e.g., 3-5 years, for ongoing program initiatives (such as education and information dissemination); and shorter-term contract-based consulting and research for specific industry and government agencies.

Background – Tourism and Regional Tourism in Azerbaijan

Tourism in Azerbaijan

According to the most recent available World Travel and Tourism Council figures,3 in 2017 travel and tourism directly supported 173,500 jobs (3.8% of total employment) in Azerbaijan. This was expected to rise by 4.7% in 2018 and a further 3.1% per year to 246,000 jobs (5.3% of total employment) in 2028.

Visitor exports generated AZN 5.59 billion (USD 3.24 billion), 16.5% of total exports in 2017. This was forecast to grow by 9% in 2018, and grow by 6.1% annually, from 2018-2028, to AZN 11.03 billion (USD 6.39 billion) in 2028, 19.6% of the total.

Travel and tourism investment in 2017 was AZN 486.3 million, 2.9% of total investment (USD 281.8 million). It was expected to rise by 5% in 2018, and rise by 4.2% annually over the next ten years to AZN 773.7 million (USD 448.2 million) in 2028, 3.2% of the total.

Leisure travel spending (inbound and domestic) generated 81.1% of direct travel and tourism GDP in 2017 (AZN 6.07 billion) compared with 18.9% for business travel spending (AZN 1.41 billion). Leisure travel spending was expected to grow by 5.2% in 2018 to AZN 6.39 billion, and rise by 6.1% per year to AZN 11.52 billion in 2028. Business travel spending was expected to grow by 10.6% in 2018 to AZN 1.56 billion, and rise by 6.2% per year to AZN 2.86 billion in 2028.

Domestic travel spending generated 25.3% of direct travel and tourism GDP in 2017 compared with 74.7% for visitor exports (i.e., foreign visitor spending or international tourism receipts). Domestic travel spending was expected to fall by 1.9% in 2018 to AZN 1.86 billion, but rise by 6.1% annually to AZN 3.35 billion in 2028.

Regional Tourism

Length of Stay in Regions

According to research by the State Tourism Agency,4 the mean length of stay of those who travel to regional areas in Azerbaijan is 6 days.

3 WTTC Travel & Tourism Economic Impact 2018 Azerbaijan 4 Report of Azerbaijan Regional Tourism Destination Survey

17 49,4

30,2

13,4 4,1 1,4 1,0 0.5

1 day 2-7 7-15 15-30 30-60 60-90 90+ days days days days days days

Source: State Tourism Agency Length of Stay by Region Of those who travel to the regional areas of Baku, Lankaran, Quba, Ganja, and Sheki, approximately one-third spend one day and approximately half spend 2-7 days.

Baku Lankaran Quba Ganja Sheki 1 day 25.6% 23% 35% 34% 37% 2-7 days 45.4% 43% 51% 51% 59% 7-15 days 21.1% 16% 8% 11% 3% 15-30 days 5.2% 9% 2% 3.0% 0.9% 30-60 days 1.6% 4% 0.8% 0.8% 0.2% 60-90 days 1.0% 4% 1% 0.0% 0% 90+ days 0.1% 1% 1% 0.4% 0% Source: State Tourism Agency

Length of Stay in Regions Azerbaijani vs. Foreign The average length of stay in those regional areas is similar for Azerbaijani visitors as it is for foreign visitors, though it is not clear how many of the foreign visitors are foreign nationals residing in Azerbaijan.

Length of Stay Azerbaijani Foreign 1 day 32.1% 28% 2-7 days 48.6% 50% 7-15 days 11.3% 16% 15-30 days 3.8% 4% 30-60 days 1.8% 1% 60-90 days 1.5% 0.5% 90+ days 0.7% 0.% Source: State Tourism Agency

18 Agritourism in Azerbaijan

The activities represented within each pillar of Product and Experience and of Marketing and Promotion individually and collectively, help drive growth to the sector, while the enabling environment platform provides the foundations conducive to agritourism development and economic advantages. To be effective, they must be developed in tandem, with each pillar, as well as the enabling environment, informing each other on the development of strategic objectives and also the activities and interventions required to reach those objectives.

Strengths and Weaknesses

Products and Experiences

The culture, heritage, and regional diversity of Azerbaijan is a key strength in potential authentic stories to tell through products and activities. There have been and continues to be an increase in products and experiences both on the farm and off the farm. However, the number of products (including farmhouse accommodation) and experiences, type of experiences based on market need, and the level of engagement for tourists in existing experiences remains low. In addition to a reported lack of knowledge in the types and “how-to’s” in set up of agritourism products and experiences, for all

19 potential agritourism businesses, including significant sized farms with engaged entrepreneurs, there are prohibitive factors specific to smallholder farmers who cannot afford to address requirements such as food safety certification, packaging, etc.

The level of interpretation and engaging the visitor with various authentic stories offers great potential and opportunity. There is great potential to increase the range of products. A number of farmers are providing farm-related products such as jams; however, for many visitors the story of “jam,” such as how it is consumed in Azerbaijan, i.e., from a spoon while drinking tea as opposed to on toast, is an example of a cultural story that could be told. While work is being undertaken on handcrafts, a national strategy on the development of handcrafts, including agritourism-driven items, would increase the product offering, increase the number of those engaged/employed, support an increase in the value of agritourism/tourism to the economy, and support protection of cultural heritage.

While there is a growing number of outlets, both online and offline, for authentic agritourism products through projects such as Village-to-City, ABAD, and so on, the baseline is low and the range of authentic products and outlets does not meet the potential. While some trails are being developed, there is potential to increase the number and type of trails based on experience/length of time available in the region, etc.

While agritourism trails could be developed based on particular products (e.g., a Honey Trail, as well as general agritourism trails that include an offering of a range of products and experiences), developing clusters based on existing visitor hubs – e.g., based in Sheki and travelling out from Sheki – increases the spread of tourism into rural areas and offers potential for targeted growth and the creation of further tourism hubs as tourism numbers grow. In addition, the offering of multi-country trails, such as those offered by international operators such as Intrepid and Peregrine, which provide fixed-date tours that include both Azerbaijan and Georgia for tour group visitors looking for an authentic cultural experience incorporating food and agritourism, highlights the potential for multi-country trails and tours for tour groups, but also suggests the need for multi-country trails for independent travelers who do not want to travel on pre-set dates or in a tour group.

Marketing and Promotion

20

Marketing and promotional activities with a local food and culture focus are being undertaken both internationally and domestically, with both visitors and, to some extent, the travel trade. With new resources such as national tourism representation in key markets, and the level of awareness and consideration of Azerbaijan as a destination likely to increase, it is critical that this translates to the regions. New concepts such as the Village-to-City branding for fresh and processed produce are positive solutions in a developing agritourism destination. However, lack of engaging content on individual agritourism product/experiences and lack of marketing capabilities of individual operators/farmers or marketing and promotion services for micro agritourism businesses, reduces both potential visitor motivating factors and engagement, as well as the ability of operators/farmers to promote their businesses. Further, as the private sector, such as tour operators, are not engaged in development of the sector from the outset, there is limited awareness of the products and experiences being developed and therefore they are not being considered in the design or promotion of their product offering to partners internationally.

There is a lack of cross-promotion of agritourism business by produce, e.g., honey, and by region, e.g., agritourism operators promoting each other within a region or at key locations, such as national parks providing information/relevant agritourism produce through their ticket offices.

While to some extent this is being addressed by individual projects, there is an overall lack of information for tourists on agritourism products and experiences for those visitors that may consider Azerbaijan or individual regions as a destination, those that are planning to visit, or those that are in country or in the region and looking for things to do. According to Phocuswright, 85% of U.S. travelers, for example, use mapping apps during their time in destination. While markets differ, according to Phocuswright, 53% of travelers book activities within 7 days, 20% of which were on the same day.

Enabling Environment

21 A key strength supporting potential growth to the agritourism sector is the government focus on developing both tourism and agritourism. Agritourism has been highlighted as a potential opportunity for development at a national level with activities being undertaken throughout the country (to varying degrees), at a regional level, and at a local level through local representatives and agencies. A wide variety of tourism research has been/is being undertaken and it is influencing key strategic decision- making and planning.

While much work is being undertaken throughout the country and there is strong government and government agency support and activities, agritourism in Azerbaijan is very much in its nascent stage. While there has been private sector engagement such as when new products and experiences have been developed (e.g., the "fam" (familiarization) visits facilitated by the USAID PSA project in coordination with Agro Procurement and Supply Company in December 2019), the need for an agritourism/rural tourism association has been recognized by various government agencies. The State Tourism Agency has developed an Action Plan Strategic Road Map 2020 Development of Rural Tourism that is being implemented and does go a way to address a number of the gaps/sector weaknesses highlighted in this report.

Very positively, the State Tourism Agency highlighted the need and started implimenting the roll-out of Destination Management Organizations (DMOs) throughout the country, with an initial three DMOs already functioning in the key areas of Sheki, Quba and Lankaran. Employing 4-5 staff members in each region, their role is focused on product development, marketing communications and HR and standards. Encouragingly, in each of the three regions visited, the DMO Directors are motivated, proactive and focused on delivering their work plan in their region, while being engaged on a national level through direct line reporting to the STA in Baku; some level of private sector engagement does seem to be underway; and while the role of the DMO is on tourism in general, agritourism has been highlighted as a key area of focus.

However, as yet there is no association or working group that includes both the public and private sector in developing and implementing an agritourism strategy that is focused on product and experience development based on market demand, in tandem with the creation of an enabling environment as a platform to support growth of the sector. To support ownership, efficacy, success and sustainability, an agritourism strategy is developed with both the private and public sector engaged at all stages of strategy, including strategy development and implementation.

There is no one-stop-shop agritourism resource for farmers who have a potential interest in agritourism, but don’t have an understanding of what it is, what they need to consider in regards to feasibility, regulations, etc. Questions such as those related to tax legislation have been highlighted as a barrier to entry for many farmers, so provision of information that answers these questions is crucial. A number of elements of the enabling environment as it relates to policy and regulatory environment are currently being addressed. For example, there are activities in place with objectives to address the law as it relates to tax legislation and standards for rural guesthouses. There is no agritourism-specific resource that both represents farmers and provides information or guidance to them on which laws and regulations specifically apply to and impact them. While an Agritourism Resource Center of sorts is required, as outlined under the Agritourism Resource chapter, it is not a requirement to create a new entity to play this role. A possible solution to be considered could sit under the remit of the State Tourism Agency DMOs as they are rolled out. As outlined above, DMOs are already engaged with stakeholders in the region and engaged in the sector in regards to driving growth. DMO workplans already include some of the requirements and do include activities that address some of the challenges,

22 so while further human resources would likely be required within each DMO, expanding mandates to include the provision of information and training for farmers could be a possible strategic solution.

While some support does exist, such as the GIZ program that has included resources, such as a guesthouse handbook, and will roll out much needed training, there is no specific agritourism handbook outlining specific information on the why, how, who, where, when of starting or running an agritourism business. An agritourism handbook, online and in print, tailored to answer questions farmers have or don’t know to ask, that outlines or provides guidance on the potential of agritourism, risk management, business plan development, etc. or what potential solutions do exist, would support farmers/entrepreneurs who are already engaged in agritourism have potential interest in being involved and help raise awareness with those who have not yet considered agritourism.

While there is a justifiable requirement for food safety certification, current regulations automatically impede the potential for smallholder farmers to benefit/get involved/increase the product offering in agritourism. Further, international best practice as well as STA research5 suggests the need for training in areas such as safe food handling.

There are key questions surrounding risk management, insurance risks and requirements, access to finance, environmental risk management, etc. However, some of the individual elements are being considered, such as a potential new ADB-supported project addressing access to finance for agritourism development. If there were an effective Agritourism Resource Center, these are some of the areas that could be addressed.

While much needed and effective training has been undertaken or is planned and supported by donor projects such as USAID PSA, GIZ and EU’s Slow Food Project, SRRD, and other activities, there is no resource to fulfill farmer specific requirements and support farmers before, during, and after rollout of an agritourism activity. Feedback and international best practice suggests the need for ongoing guidance and mentorship and training. Having trained trainers/mentors in the regions over the long term would support developing agritourism, a sustainable solution following the life of donor projects, and a sustainable regional agritourism sector moving forward.

Potential Project Interventions

There are a number of areas that need to be addressed, focusing on key areas of support possible within the PSA Project timeline and budget. Consideration has been given to strategic, achievable solutions, that are possible within the current environment, support a strong agritourism framework, support sustainability and, where possible, are aligned with PSA’s Work Plan. While not exhaustive, consideration has been given to the opportunity to facilitate activities generated by an industry working group and/or an agritourism strategy as they evolve.

I. Facilitate Agritourism Working Group – PPP

While there is need for an agritourism/rural tourism association, as highlighted, there is also a need for the private and public sector to work together on developing an agritourism strategy focusing on products and experiences that are developed based on market demand, ensuring private sector engagement and ownership; on market and promotion focused on the rollout of agritourism

5 Analysis of Regional Tourism in Azerbaijan – Restaurants, Hotels & Wineries

23 experiences and the creation of an enabling environment that is created in conjunction with and according to the needs of the sector.

While there are many and varied definitions of a PPP, in this case it is meant as an alliance or a form of cooperation between government and private sector stakeholders that agree to work together to reach the common goal of a robust agritourism sector, while jointly assuming the risks and responsibilities and sharing resource competencies. It is the pursuit of a common objective through collaboration of the public sector actors who generally have responsibility for the development, governance, institutionalization and sustainability of the sector to support growth in agritourism and the value to the economy, and the private sector stakeholers, who generally have a vested interest.

While the three areas of Product and Experience development, Marketing and Promotion, and Enabling Environment have distinctive challenges and opportunities, there is a vast overlap with both opportunities and impact feeding across each category.

To use the example of tour operators as private sector stakeholders, they understand what their visitors require and can provide valuable input into the highest priority requirements in regards to the type and location of product and experience development; they will also play a key role in promoting the sector to their international and local partners, requiring both advance planning and also ownership and buy-in of the sector; through their international networks they aim to fulfill demand of the international tourism sector and promote local experiences to their network; they represent the customer who requires an experience that will fulfil on or exceed expectations; and therefore they have an interest in quality and service standards, certification, and so on.

An important consideration in the objective of a multi-stakeholder partnership, is to include representation of small and medium-sized enterprises that will both develop the products and experiences and require support in doing so.

Facilitating a formal industry working group that is responsible for implementing as well as designing a strategy would support a top-down and bottom-up approach, support more focused efforts, alleviate bottlenecks, and maximize sustainable success. Facilitating such a partnership would align the sector with international best practice and support a platform for sustainable growth within and after the lifetime of the PSA project.

While PSA could facilitate the working group, with responsibility for coordination of the meetings, minutes, sourcing experts and/or providing relevant solutions as they arise, in order to support

24 ownership and sustainability, it is not recommended that PSA undertake the role of Chairperson. The Chairperson could either be an individual from the Agro Procurement and Supply company tasked with developing agritourism or from from the State Tourism Agency (which based on its current mandate may have more longevity as well as vested interest), or could be nominated by the industry working group.

The objective of the working group would be to implement, as well as develop, an agritourism strategy, with regular meetings planned in line with key objectives. Monthly meetings would be recommended for a formal working group with more regular meetings undertaken by sub-groups as required.

Three sub-groups could be Product and Experience Development; Marketing and Promotion, and Enabling Environment – while developing detailed strategies, these sub-groups would need more regular meetings such as weekly, while during implementation may only require once meeting prior to the main group meeting. Sub-groups (that could include further participants as necessary for individual activity) could be tasked with developing/implementing the strategy/workplan activity, with the team leader of the sub-group reporting back, and gathering feedback, at each industry working group meeting. It is imperative that each stakeholder representative has the opportunity to provide input on all areas of business – e.g., while a tour operator may be directly tasked within the product and experience development sub-group, their input in service and quality standards that meets customer requirements is critical.

The agenda for each working group meeting should include

• A review of the minutes and resulting action plan undertaken at the previous meeting • A report from each sub-group/relevant stakeholder in regards to each action • Next steps • Other business and relevant news and updates • Assignment of actions to relevant stakeholder with timelines

Distribution of minutes to each working group member should be undertaken within two working days to ensure clear communication in allocation of tasks and responsibilities.

Industry working group focus

Plan – Implement – Report – Plan

Potential Members (e.g.) Agro Procurement & Supply company State Tourism Agency Ministries of Agriculture, Education, Environment, Ecology & Natural Resources National Association of Rural Municipalities of Azerbaijan Association of Travel Agencies of Azerbaijan Tour Guides Azerbaijan Hotel Association Farmers Associations

25 Participation in Donor/Project Coordination Meeting Group As a new donor/project coordination meeting group has been established by the EU SRRD Project, it is also recommended that an appointed representative or the heads of each sub-group participate in the meetings with the objective of providing feedback on strategy development and implementation, as well as sourcing solutions/partners for projects highlighted within the workplan. While it may not be necessary to attend each meeting, attending once every three months would be advisable.

II. Implement a Regional Facilitative Train-the-Trainer/ Facilitator Program

While the need for an Agritourism Resource Center has been highlighted above, ongoing support for existing and potential agritourism operators is critical. Trainings being undertaken are transformational, however the resource availability of agritourism development facilitators/mentors and trainers is critical to development and to sustainability. A train-the-trainer program of facilitative trainers, available in the regions, would provide an invaluable resource in regional areas. A potential partner in rolling out this intervention could be the DMOs who already include many direct and indirect agritourism-related activities in their work plans. While additional human resources would likely be required within each team, there is a potential for these train-the-trainer/facilitator trainings to be undertaken by some existing staff members. Having these resources in place would also provide sustainability for trainings undertaken by other donor projects in regional areas.

Example Areas of Training Developing Agritourism Products and Experiences – e.g., Physical interventions, experience implementation, safe food handling, pricing, etc.

Agritourism/Tourism Soft Skills – e.g., Hosting visitors, developing and sharing information/stories, communications, conflict resolution, etc.

Agritourism Start-up – e.g., Business plans, available access to finance, regulatory requirements, opportunities, feasibility studies, etc.

III. Agritourism Handbook

Develop a print and online (print-friendly) Agritourism Handbook for farmers (or an aspiring farmer), those that have a tourism business that works with farmers, or budding entrepreneurs with no land but an agritourism venture idea. Having the Handbook’s content in the form of PDF documents would also allow for downloading and printing as needed.

Chapters and topics could include: • What is agritourism? • Why get involved? • Market trends in agritourism • Assessing potential for agritourism • Complying with legal and regulatory requirements • Managing risk • Developing an agritourism business plan • Marketing your agritourism venture • Developing and delivering a compelling visitor experience • Agritourism resources

26 IV. Agri-Food Processing Intervention

While not purely an agritourism challenge, it has been highlighted that many smallholder farmers do not have the means to process produce in line with food safety requirements. Lack of food safety certification, branding, packaging, eamd so forth is a barrier to the agritourism market. If a group of farmers had access to a low-cost facility, this would alleviate this barrier and enable more farmers to operate/benefit from agritourism. The intervention could be undertaken as a pre-determined farmer community/common-use facility or with a single benefactor who provides a low-cost, fee-based solution within a geographic area. Consideration should be given to seasonality, e.g., as the hazelnut processing season generally lasts from August through December, having a facility that can process hazelnuts and dried fruits would ensure year-round use, or at least extend the season.

Benefits Allows for food safety certification Allows smallholder farmers to get involved Further activities could include joint branding/labelling – with traceability to individual farms on rear label Cross-selling of community products Addresses costs (printing, etc.) Supports year-round sale of produce Increases quality agritourism product offerings Supports export opportunities

V. Small Grants Program

The areas of required support for existing agritourism operators to fully leverage potential and for those that wish to commence operations are vast. While access to information and mentoring is critical, financial support that is provided to complete a step that supports an increase in operators that are “market ready” would support a potential increase in the number of agritourism operators and increase the product/experience offering of those already involved.

Possible interventions to be undertaken by PSA could include support in physical interventions such as signage, seating areas, and/or interpretation and presentation of experiences in specific regional areas, and they in turn could be used as pilot projects. While the specific guidelines for a small grants program would need to be developed, DMOs in Lankaran, Sheki and Quba have commenced gathering an inventory of potential operators requiring specific support, making the State Tourism Agency, and their DMOs specifically, ideal partners in the roll-out of the program. However, if PSA facilitates an industry working group and the development of an agritoursm strategy, a small grants program could be rolled out to support key activities highlighted within the resulting strategy, aimed at supporting an overall strategy element and more likely to support successful outcomes.

VI. Pilot Trail Development (include map/create your own map)

While DMOs have developed hard copy maps for the regions of Quba, Sheki, and Lankaran that include markings for existing agritourism facilities, the maps do not allow space for information on the actual agritourism business, the experience, or contact details. With such a large proportion of visitors wanting to book/organize activities at short notice while traveling, having the facilities to do so both

27 fulfills market demand and also increases the potential of an increased number of activities during a visit, as well as increased spend and value to the region. While there is demonstrated potential for visitors in country, an online map with engaging content for each visitor option highlighted on the map would increase engaging content available during pre-trip planning as well as the ability to add additional visitor options to the map as more agritourism providers are business ready and/or are in season.

Source: Bon Appetit Appalachia

A map (right) that highlights products and experience, provides contact details and information on the facility and the experience on offer, and is downloadable/printable increases engagement for potential visitors. For example. See the following link to a map of the Hood River Fruit Loop trail in Oregon:

https://hoodriverfruitloop.com/travel-tips/fruit-loop-map A trail map based on individual experiences, such as the following Berkshire map (above left) , provides an opportunity to highlight particular produce in the region, e.g. berries in the South, or honey in the Northwest: http://www.berkshirefarmandtable.org/taste-trails-cheese/

A map that allows visitors to see options based on accommodation, experiences, agritourism outlets and so on and then allows them to plan their own trip, and download a personalized map to their phone/ (or a printable version for those who do not have mobile data access on the road) would both provide engaging content and also enhance the visitor experience.

28 VII. Study Tours

Study tours are already included in the USAID PSA Work Plan. Where relevant, extending these study tours to include a focus on agritourism would provide an opportunity to increase knowledge of types of products and experiences and most importantly, the key success factors of successful agritourism destinations. For maximum results, the study tour should include members/stakeholders from both the private and public sectors. For example, a Study Tour to Oregon, which is a strong example of a successful agritourism destination, has already been considered by PSA. While experiencing actual agritourism products and experience is important, a study tour should include visits to and meetings with resource organizations and individuals that support the sector too, such as the Oregon Agritourism Network, Agritourism Resource and Industry Organizations in Oregon, Travel Oregon, universities, agritourism farms and other agritourism-related businesses.

Conclusion

The development of agritourism in Azerbaijan is growing, as is the market for agritourism products and experiences. However, as the international demand for agritourism grows, along with the value of economic returns nationally and to regional and rural areas, it is becoming increasingly competitive as a growing number of developed and developing economies leverage the opportunity and thereby increase the range and value proposition in the marketplace.

It is therefore critical that a robust framework and platform for the sector is developed, that there is a sector wide approach in the development of agritourism in Azerbaijan, protecting, preserving and presenting the unique assets and thereby unique selling points, that the country and the regions offer; developing products and experiences, and services that meet and exceed market demand; marketing and promotion to the highest potential markets, attracting more visitors, increasing tourism spend and increasing the value of agritourism in rural areas.

While it cannot be the role of the PSA Project to develop agritourism overall, there is enormous potential in supporting key areas that will have a significant impact on the foundations of the agritourism sector, thereby enabling growth now and sustainable success after the life of the PSA Project.

29 Bibliography and Reports Reviewed

Analysis of Regional Tourism in Azerbaijan State Tourism Agency of the Republic of Azerbaijan

ASAN Pilot Survey Tourism Satisfaction State Tourism Agency of the Republic of Azerbaijan Results Action Plan Strategic Road Map 2020 State Tourism Agency of the Republic of Azerbaijan Development of Rural Tourism

Draft Tafsiliati Plan - The Tourism Strategic State Tourism Agency of the Republic of Azerbaijan Road Map Detailed Plan

Year Book 2019 State Tourism Agency of the Republic of Azerbaijan

Report of Azerbaijan Regional Tourism State Tourism Agency of the Republic of Azerbaijan Destination Survey

Report of Marketing Research with Tourists State Tourism Agency of the Republic of Azerbaijan Leaving Country

Strategic Roadmap for Development of Center for Analysis of Economic Reforms and Specialised Tourism Industry in Republic of Communication Azerbaijan

Travel and Tourism Economic Impact 2018 World Travel and Tourism Council Azerbaijan

Azerbaijan’s Tourism Sector – Opportunities Center for Economic and Social Development and Obstacles (CESD)

Azerbaijan, 2019–2023 —Promoting Asian Development Bank Diversified and Inclusive Growth

World Travel Trends 2018 2019 IPK International for ITB Berlin

The Development of Ecotourism in the 8th Silk Road International Conference World: Azerbaijan Case “Development of Tourism in Black and Caspian Seas Regions”

Strategic roadmap for vocational education State Tourism Agency of the Republic of Azerbaijan and training sector in the Republic of Azerbaijan

Concept on Sustainable Development of GIZ Ecotourism in Azerbaijan

Sowing the Seeds for Sustainable UNDP, EU, State Tourism Agency Development: Supporting small businesses in north-west Azerbaijan

30

VALUE CHAIN PRIORITIZATION, ANALYSIS, AND ACTION PLANS

USAID PRIVATE SECTOR ACTIVITY IN AZERBAIJAN

REVISED FINAL REPORT 2020 Prepared for review by the United States Agency for International Development under USAID Contract No. 72011219C00001, Private Sector Activity (PSA) implemented by CNFA.

VALUE CHAIN PRIORITIZATION, ANALYSIS, AND ACTION PLANS USAID PRIVATE SECTOR ACTIVITY IN AZERBAIJAN SEEDEV

USAID Contract

Implemented by CNFA

Submitted to:

Samir Hamidov

Contracting Officer’s Representative

Submitted by:

USAID Private Sector Activity (PSA)

USAID Contract

72011219C00001

Implemented by CNFA

Original Submitted on January 31, 2020

First Revision Submitted on February 18, 2020

DISCLAIMER

The author’s views expressed in this publication do not necessarily reflect the views of the United States Agency for International Development or the United States Government.

2

TABLE OF CONTENTS

I EXECUTIVE SUMMARY 7

II OVERVIEW OF AZERBAIJAN AGRICULTURE 8

III PRIORITIZATION AND SELECTION 15

IV BERRIES 23

V PERISHABLE VEGETABLES 29

VI STONE FRUITS 39

VII APPLES 45

VIII TABLE GRAPES / KIWI / FEIJOA 51

IX HAZELNUT 59

X PERSIMMON 66

XI POMEGRANATE 72

TERMS AND ACRONYMS

ACRONYM DESCRIPTION ABAD ASAN Support to Family Business AFSA Azerbaijan Food Safety Agency AKIA Azerbaijan Agency for Agro Credit and Development ASAP Agricultural Support to Azerbaijan Project AZN Azerbaijani Manat BRC British Retail Consortium CIS Commonwealth of Independent States COMTRADE UN COMTRADE is a repository of official international trade statistics DAIM State Agrarian Development Centers of the Ministry of Agriculture EDF Entrepreneurship Development Foundation EU European Union EU 15 EU Member States Accessed to EU before 2004 EUROSTAT Statistical Office of the European Union FAO Food and Agriculture Organization FAS Foreign Agricultural Service FSSC Food Safety System Certification FVO Food and Veterinary Office GABA Ganja Agribusiness Association GDP Gross Domestic Products GI Geographical Indication GlobalG.A.P. Global Good Agricultural Practices GoAJ Government of Azerbaijan HACCP Hazard Analysis and Critical Control Points HS Harmonized System ICT Information and Communications Technology IFS International Featured Standards IPM Integrated Pest Management ISO International Organization for Standardization ITC International Trade Center MAP Medicinal and Aromatic Plants MENA Middle East & North Africa MoA Ministry of Agriculture MRL Maximum Residue Limits MT Metric Ton NGO Non-Governmental Organization NMS New Member State (EU Member States Accessed to EU after 2004) OHSAS Occupational Health and Safety Assessment Series PPEAA Pomegranate Producers and Exporters Association of Azerbaijan PSA Private Sector Activity in Azerbaijan SME Small and Medium Enterprise SPS Sanitary and Phytosanitary SSC State Statistical Committee U.S. United States UAE United Arab Emirates ULO Ultra-Low Oxygen

4

UN United Nations USAID United States Agency for International Development USD United States Dollar USDA United States Department of Agriculture UTZ program and label for sustainable farming VC Value Chain VCAP Value-Chain Action Plan

TABLES Table 1: Detailed Scoring Methodology ...... 18 Table 2: Activity table ...... 20 Table 3: Selected Products and Groups of Products ...... 21 Table 4: Berry Action Matrix ...... 28 Table 5: Perishable Vegetable Action Matrix ...... 38 Table 6: Stone Fruit Action Matrix ...... 44 Table 7: Selected Apple Importers from all Origins (080810) ...... 48 Table 8: Apple Action Matrix ...... 50 Table 9: Characteristics of each product ...... 51 Table 10: Main development directions ...... 57 Table 11: Table Grapes, Kiwi and Feijoa Action Matrix ...... 58 Table 12: Key characteristics of the value chain ...... 61 Table 13: Hazelnut Action Matrix ...... 65 Table 14: Persimmon Action Matrix ...... 71 Table 15: Trends Favorable For Pomegranate Market Growth and Consumption ...... 73 Table 16: Pomegranate Action Matrix ...... 76

GRAPHS Graph 1: Comparison of the Structure of Production of Different Groups of Agricultural Products (volume, MT) ...... 8 Graph 2: Comparison of the Export Structure of Different Groups of Agricultural Products (value, USD) .. 8 Graph 3: Agricultural Trade Balance Azerbaijan ...... 9 Graph 4: Agricultural Production in Regions (2013-2017) ...... 9 Graph 5: Area Harvested in Regions (2013-2017) ...... 10 Graph 6: Average Agricultural Production ...... 11 Graph 7: Average Agricultural Export ...... 11 Graph 8: Fruit Trade – Export and Import (Value) 2013 – 2018 ...... 11 Graph 9: Vegetable Trade – Export and Import (Value) 2013 – 2018 ...... 11 Graph 10: Azerbaijan Production Share in World (left), Region and CIS (right) ...... 12 Graph 11: Azerbaijan Export Share in World, CIS and Region ...... 12 Graph 12: Position Analysis Azerbaijan in World – Production / Value of Export ...... 16 Graph 13: Competitiveness in Relation to the World...... 17 Graph 14: Competitiveness in Relation to the CIS ...... 18 Graph 15: Rank at the Product Level after Scoring ...... 19 Graph 16: Group of the Products’ Rank ...... 19 Graph 17: Index of Competitiveness ...... 20 Graph 18: Fresh Strawberry, Blueberry and Raspberry Global Export Value ...... 23 Graph 19: Frozen Strawberry, Blueberry and Raspberry Global Export Value ...... 23 Graph 20: Base Import Index at Several Markets – Fresh Strawberries 2010-2018 (2010=1) ...... 24 Graph 21: Base Import Index at Several Markets – Frozen Strawberries 2010-2018 (2010=1) ...... 24 Graph 22: Cost of Production in Selling Prices for Selected Groups of Products at Private Farms in Azerbaijan (AZN/kilogram) ...... 24 Graph 23: Trends in Vegetable Production Processing and Trade (volume, MT) ...... 29 Graph 24: Production, Export and Import of Perishable Vegetables ...... 29 Graph 25: Russian Import Structure of Tomato ...... 30 Graph 26: Food Price Index in Turkey and World (2006-2007=100) ...... 31 Graph 27: Azerbaijan Export, Russia and UAE Import of Tomato – Prices and Time ...... 31 Graph 28: Share and Price of the Tomato Import to Russia 2010-2014...... 32 Graph 29: Share and Price of the Tomato Import to Russia 2015-2018...... 32 Graph 30: Rank in Area Harvest and Export of Tomato in 2018 in Comparison with World Countries ..... 33 Graph 31: Index of Competitiveness Tomato ...... 34 Graph 32: Tomato Production by Region for Period 2013-2017 in Relation to Azerbaijan’s Average ...... 35 Graph 33: Trend of the Stone Fruit Production in Azerbaijan 2009 - 2018...... 39 Graph 34: Sweet Cherry Trade Balance Azerbaijan ...... 40 Graph 35: Sweet Cherry Export Destinations...... 40 Graph 36: Peach Trade Balance Azerbaijan 2013 - 2018 ...... 40 Graph 37: Peach Export Destinations 2013 2018 ...... 40 Graph 38: Top 10 UAE Peach Suppliers ...... 42 Graph 39: Top 10 UAE Sweet Cherry Suppliers ...... 42 Graph 40: Production Growth of Selected Countries and Average Production of Country Groups in Relation to World Growth and Their World Share for Period 2014-2017 ...... 45 Graph 41: Monthly Import of Russia by Top Four Suppliers ...... 45 Graph 42: Monthly Distribution of Apple Import to Russia (average 2015 – 2018) ...... 46 Graph 43: Export of Apples from Azerbaijan 2010-2014 ...... 46 Graph 44: Export of Apples from Azerbaijan 2018 ...... 46 Graph 45: Apple Competitiveness Index – Country Comparison ...... 47 Graph 46: Export of Grapes from Azerbaijan by Month...... 52 Graph 47: Import of Grapes to Azerbaijan by Month ...... 52 Graph 48: Production of Grapes by Region ...... 54 Graph 49: World Kiwi Export Quantity, Value and Unit Value ...... 54 Graph 50: Main Exporter of kiwi in World ...... 54 Graph 51: Area Harvest of Kiwi in Azerbaijan by Region ...... 55 Graph 52: Production of Kiwi in Azerbaijan by Region ...... 55 Graph 53: Production and Area Harvest of Feijoa in Lankaran and Azerbaijan ...... 55 Graph 54: Azerbaijan Production by Region ...... 60 Graph 55: Azerbaijan Hazelnut Export ...... 60 Graph 56: Azerbaijan Hazelnut Import ...... 60 Graph 57: Azerbaijan Persimmon Production and Area Harvested ...... 66 Graph 58: Export Persimmon Azerbaijan 2010-2018 ...... 67 Graph 59: Import Persimmon Azerbaijan 2010-2018 ...... 67 Graph 60: Azerbaijan Persimmon Trade Balance ...... 67 Graph 61: Persimmon Area Harvested by Region ...... 68 Graph 62: Top 5 Exporters on Russian Market ...... 69 Graph 63: Azerbaijan Pomegranate Production and Area Harvested ...... 72 Graph 64: Regional Production of Pomegranate in Azerbaijan 2010 - 2018 ...... 72

FIGURES Figure 1: Value Chain Groupings ...... 7 Figure 2: Support Institutions in Agriculture ...... 13 Figure 3: Steps in the Selection Process ...... 15 Figure 4: Grouping Products ...... 16 Figure 5: Selection Criteria ...... 17 Figure 6: Typical Roles in the Hazelnut Value Chain ...... 61 Figure 7: Bottlenecks, Improvements and Investments ...... 69

6

I EXECUTIVE SUMMARY

The objective of this Value Chain Prioritization, Analysis and Action Plans report is to assist the USAID Private Sector Activity in Azerbaijan (PSA) to identify priority value chains, identify gaps in the selected value chains, and develop Value-Chain Action Plans (VCAP) to achieve improvements in the selected value chains. This document will first offer a general overview of agriculture in Azerbaijan, followed by a detailed discussion of the value-chain analysis and selection process. Following these general sections, the document will offer detailed value-chain analyses and action plans for each of the selected product groups, with a focus on particular products: • Berries: Focus on strawberry, considering raspberry, blueberry, blackberry (Group I: Priority Group) • Perishable Vegetables: Focus on tomato (Group II: Market Diversification and Quality Group), considering pepper and cucumber (Group III: New Technology Dissemination Group) • Nuts: Focus on Hazelnut (Group I: Priority Group) • Pomegranate: (Group I: Priority Group) • Persimmon: (Group II: Market Diversification and Quality Group) • Stone Fruits: (Group III: New Technology Dissemination Group) • Pome Fruits: Focus on apple (Group II: Market Diversification and Quality Group) • Table grape / Kiwi / Feijoa (Group III: New Technology Dissemination Group)

Figure 1: Value Chain Groupings

II OVERVIEW OF AZERBAIJAN AGRICULTURE

The agricultural sector of Azerbaijan contributes 5.6% of the country’s GDP, but it is a key employer providing employment for about 36.4% (1.75 million jobs) of the country’s labor supply and generating two-fifths of household incomes in rural areas. The total gross output of agriculture in 2017 was 6.58 billion AZN, of which 3.01 billion AZN was attributed to plant products and 3.57 billion AZN to livestock products. The value of the output of the food industry has been increasing continuously – from 7.03 billion AZN in 2012 to 9.72 billion in 2017. The arable land resources in Azerbaijan are limited. Azerbaijan has over 4.5 million hectares of agricultural land, of which only 1.67 million hectares were sown area in 2017. II.1 STRUCTURE Structure of production. In the structure of the production, 37% are cereals, 33% fruits and vegetables and 27% dairy in terms of volume. The structure of the production is more diversified than in countries in the region where cereal production prevails. Food processing industry. Share of the food processing in overall manufacture industry in Azerbaijan in 2017 was 7.4% with a decreasing trend from 2015 in percentage terms but increasing in value from 2.3 billion AZN to 3 billion AZN. Graph 1: Comparison of the Structure of Production of Graph 2: Comparison of the Export Structure of Different Different Groups of Agricultural Products (volume, MT) Groups of Agricultural Products (value, USD) 100% 100% 90% 90% 80% 80% 70% 70% 60% 60% 50% 50% 40% 40% 30% 30% 20% 20% 10% 10% 0% 0%

Cereals Oilcrops Fruits Cereals Oilcrops Fruits Vegetables Meat Dairy Vegetables Meat Dairy

Source: UN FAO Source: COMTRADE

Farm structure. Five years after the transition in 1996,1.46 million out of 1.7 million hectares of land had been privatized, creating approximately 800,000 small farms, leading to extreme land fragmentation. Consequently, family farms, with around 93% in total number of farms, dominate the total number of farms. Viable companies have also invested in agriculture and today Azerbaijan has a dual structure of production, dominated by big companies and farmers on one side and small-scale producers on the other. Small farmers and individual farmers with 0-10 hectares of land make up 87.6% of the land base; growing mid-sized farmers with 10-50 hectares comprise 0.3% of the land base; and companies with land over 50 hectares have 12% of the land. The average farm size among family farms is 1.6 hectares per household, while among enterprises the average size is 132 hectares. In 2017, 1,727 agricultural enterprises1 and 955 individual entrepreneurs2 operated under tax registration.

1 Agricultural enterprises (joint stock companies, collective enterprises, cooperatives) 2 Private owner – citizen (individual) engaged in agriculture sector and registered by tax authority having certificate of registration without becoming the legal entity

8

Agricultural employment. In 2017, the number of people employed in agriculture was 1,752,900 (36.4% of the country’s total employment). The number of hired workers in agriculture was 49,400 or 3.2% of the total paid employees in Azerbaijan. Trade. Azerbaijan is a net importer of cereals (wheat, rice and maize), potatoes (Azerbaijan was a net exporter until 2011), meat (except poultry), dairy products, fish and vegetable oils. Azerbaijan’s agricultural exports are still relatively small and lagging behind world trends, with the structure of exports concentrated in fruits and vegetables. About 70% of the export share is from fruits and 28% of the export share is from vegetables. The main export market is the Russian market.

Graph 3: Agricultural Trade Balance Azerbaijan 2 000 1 500 1 000

MillionUSD 500 - 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 -500 -756 -639 -853 -951 -952 -952 -957 -1 000 -1 112 -1 081 -1 101 -1 069 -1 500

Export Import Trade balance

Source: COMTRADE

Regional production distribution. Azerbaijan has diversified climatic and land conditions that allow for the production of various crop types, from Mediterranean (citrus, olives) to typical continental crops. The main production is in the Aran region (although it is also by far the largest region by total land area) . Only in Absheron and Baku region are cereals not dominant by area harvested. In addition, in Lankaran, Ganja- Gazakh, Nakhchivan and Guba-Khachmaz, the quantity of other crops produced is higher than cereals. Graph 4: Agricultural Production in Regions (2013-2017)

Kelbajar-Lachin Baku Yukhari Garabagh Absheron Nakhchivan AR Guba-Khachmaz Ganja-Gazakh Daghlig Shirvan Aran Sheki-Zagatala Lenkaran ER 0 500 1 000 1 500 2 000 2 500 Thousands tons

Cereals Cotton Potato Vegetable Fruit and berry Watermelon Grapes Tea

Source: SSC Graph 5: Area Harvested in Regions (2013-2017)

Kelbajar-Lachin Baku Yukhari Garabagh Absheron Nakhchivan AR Guba-Khachmaz Ganja-Gazakh Daghlig Shirvan Aran Sheki-Zagatala Lenkaran ER 0 50 100 150 200 250 300 350 400 450 500 Thousand hectares

Cereals Cotton Potato Vegetable Fruit and berry Watermelon Grapes Tea

Source: SSC

Agricultural financing. In Azerbaijan in 2018, 30 banks were operating, out of which 15 were banks with a foreign capital share. Analysis of bank lending (performed in 2018 by Baku Research Institute) showed that apart from the construction and property sector, all sectors experienced growth. Lending to the trade and service sector rose by 0.4%, industry and manufacturing 9.1%, transportation and communication 14.4%, agriculture and processing 8.1% and consumer loans 9.7%. The share of loans for agriculture was about 3.8% (approximately 460 million AZN). In 2017, investments in fixed assets in agriculture were 617.8 million AZN, increasing twice over the 2014-2016 period and comprising 3.4% of total investments. II.2 MAIN TRENDS Production. Overall agricultural production in terms of quantity increased from 2012-2017 faster than the world average growth, but was still slower than in CIS countries and the NMS. Several fruit sectors (apple, strawberry, citrus and hazelnuts) have increasing production trends, while the production of persimmon and pomegranate is stagnating. Apple production increased to 275,000 MT in 2017. Pomegranate has stable production of 150,000 MT and persimmon 140,000 MT. Introduction of new technologies. New plantings are introducing new approaches to fruit growing based on high density orchards, modern varieties, special trellising and pomological interventions, irrigation and intensive use of fertilizers and pesticides. Restructuring in the sector. Large-scale fruit producing companies use modern technologies and knowledge. Trade. Agricultural trade increased 13% faster than average world growth over the 2013-2018 period. Export is accelerating primarily due to increases in the fruit sector (from 170 million USD in 2013 to 330 million USD in 2018) and vegetables (from 50 million USD in 2013 to over 200 million USD in 2018).

10

Graph 6: Average Agricultural Production Graph 8: Average Agricultural Export Graph 7: Average Agricultural Export (World growth = 0, 2012-2017) (World growth = 0, 2013-2018) (World growth = 0, 2013-2018) 0,90% 0,80% 3,00% 0,70% 2,50% 0,60% 2,00% 0,50% 1,50% 0,40% 1,00% 0,30% 0,50% 0,20%

0,10% 0,00% Share in the World Export the World in Share

Share in the World Prodution the in World Share 0,00% -0,50% -4% -2% 0% 2% 4% 6% -5% 0% 5% 10% 15% 20% Average yearly growth Average yearly growth

Azerbaijan Region Rest of CIS NMS EU15 Azerbaijan Region Rest of CIS NMS EU15

Source: COMTRADE

Source: UN FAO Source: UN FAO Devaluation of the local currency has positively impacted price competitiveness of Azerbaijan products in export markets, making Azerbaijan more price competitive for agricultural goods in international markets. Russia is the dominant market for all exported agricultural products; however, there are signs of market diversification in the case of apples, berries, stone fruits, and persimmon, following the lead of hazelnuts and pomegranate, which have already diversified their markets. Graph 9: Fruit Trade – Export and Import (Value) 2013 – Graph 10: Vegetable Trade – Export and Import (Value) 2018 2013 – 2018 Millions USD Millions USD 6 4 2 0 30 20 10 -

Persimmons Tomatoes Hazelnut Apples Potatoes Cherries Peach Cucumbers and Plum gherniks Grapes Pears Onions Strawberries Apricots Carrots Quinces Mandarin Eggplants Watermelons Melon Leeks Lemon 0 50 100 - 100 Millions USD Millions USD Export Value Import Value Export value Import value

Source: COMTRADE Source: COMTRADE Imports and the trade deficit in agriculture have been stable over the last several years and have remained at a level of 1.7 billion USD of imports and around 1 billion in trade deficit. A unique characteristic of Azerbaijan is that many products that are exported are also imported. II.3 COMPARATIVE ADVANTAGES Azerbaijan has many comparative advantages, and while some of them are being exploited, others have yet to be utilized. Below are the main comparative advantages that need to be better utilized: • Family farms, around 93% of the total number of farms, dominate in terms of total number. They are more vital and sustainable. On the other hand, comparative advantages also include large farms, since they are leaders in innovations, implementation of new modern technologies and becoming regional models for the rest of the farming community. • Good market access, in particular o Russian and Middle Eastern markets. This is a result of the improved infrastructure and good geographical position, together with the fact that many individual traders and companies have good connections and representatives in those markets. • Good agroclimatic conditions, especially for fruit and vegetable sector, providing diversification of products, season and markets. • Already established trading channels for existing exports which can be diversified to other products. • Diversified production portfolio and opportunities to diversify products. Azerbaijan’s Gini coefficient is 0.86 (Turkey 0.9, Morocco 0.91) which would be significantly lower if there were no strong signals and subsidies for growing food security crops, in particular wheat.3 Graph 11: Azerbaijan Production Share in World (left), Region and CIS (right) 5% 100% 4% 80% 3% 60% 2% 40% 1% 20%

0% 0%

Tea

Plum

Pears

Leeks

Maize

Peach

Sheep

Barley

Carrot

Melon

Wheat

Apples

Lemon

Cotton

Grapes

Onions

Spinach

Quinces

Cherries

Apricots

Hazelnut

Potatoes

Mandarin

Eggplants

Tomatoes

Cucumbers…

Persimmons

Bovine Bovine meat

Strawberries Watermelons Cereals Fruit Ind. Anim. Tea Vegetables

Source: FAO Graph 12: Azerbaijan Export Share in World, CIS and Region 1 0,8 0,6 0,4 0,2

0

Tea

Plum

Pears

Leeks

Maize

Peach

Sheep

Barley

Carrot

Melon

Wheat

Apples

Lemon

Cotton

Grapes

Onions

Spinach

Quinces

Cherries

Apricots

Hazelnut

Potatoes

Mandarin

Eggplants

Tomatoes

Cucumbers…

Persimmons

Bovine Bovine meat

Strawberries Watermelons Cereals Fruit Ind. Anim. Tea Vegetables

World share CIS share Region share

Source: COMTRADE

• Good entrepreneurial attitude among stakeholders involved in agriculture.

3 The Gini index measures the degree of inequality in the distribution of family income in a country. The more nearly equal a country's income distribution, the lower its Gini index. The more unequal a country's income distribution, the higher its Gini index. If income were distributed with perfect equality the index would be zero; if income were distributed with perfect inequality, the index would be 100. 12

• The Government of Azerbaijan (GoAJ) strongly recognizes the importance of agriculture and agribusiness in achieving economic growth and social stability in rural areas, ensuring food security and driving diversification beyond oil. • The GoAJ seeks to improve the market situation through: liberalization of input supply market by cancellation of state monopoly company Agroleasing, which created market distortions; significant effort of the GoAJ to improve the financing focused on investments (AKIA and EDF credit lines). • Capacity for MoA policy implementation has increased. There is serious investment in building capacity in the support institutions in agriculture at the national and regional level. Figure 2: Support Institutions in Agriculture

Ministry of Agricultural Horticulture Agrarian Economy Ministry of Economics AKIA AFSA Research Services regional Agriculture Research Institute Agency level Center

Deputy of Agrarian District Regional Science DAIM in Executive SPS testing and EDF AzPromo ABAD districts Power in laboratory Innovation districts Centre

• The competitive costs of seasonal labor (10-12 AZN per day). • High level of subsidies in comparison with the region: o Agriculture is exempt from taxes; o Customs privileges are applied to most production equipment imported for the agriculture and processing industries; o A subsidy of 50 AZN is provided for each hectare of sown areas o Subsidy of 50% of the cost of fuel and motor oils used for agricultural production; o The rate for each 1,000 cubic meters of irrigation water has been fixed at 0.5 AZN for those engaged in agricultural production; o 70% of the price of the fertilizers, pesticides and industrially produced biohumus is paid from the GoAJ budget; o Subsidies are given for the production and sale of seeds and seedlings (0.5 AZN /kilogram certified seeds and 0.20 AZN per plant out of the certification scheme); o To support the purchase of agricultural machinery and equipment, 40% of their purchase price is paid from the state budget; o 50% of the insurance premiums on agricultural property is paid by the state; and o The subsidy program includes state preferential loans by the Entrepreneurship Development Fund (EDF). • MoA has introduced a new and improved subside scheme and implementation body, the Azerbaijan Agency for Agro Credit and Development (AKIA). II.4 CHALLENGES There are many challenges facing Azerbaijani agriculture: external, internal, structural, market, production, directly linked with agriculture and value chains, and not connected to agriculture but influencing it significantly. Some of them are easy solved and it is worthwhile to invest efforts to resolve them (either at the country, group or individual level), while some take time and investment beyond the scope of the project. Below are listed the primary challenges:

• Mid-size producers, which usually carry the agriculture sector in other countries, are missing. Experience from other countries shows that the mid-sized farming segment is typically a growth sector which results from land consolidation among small-scale farmers as well as fragmentation of larger farmers. • Small producers are still not market oriented and not willing to cooperate to improve input purchase or product marketing. • Although improving, support institutions are not yet delivering adequate services, especially to the small-scale farmers who most need it. • Access to finance, in particular for small and medium producers, is complicated. Also, collateral in rural areas is not considered by the banks, only Baku city collateral is accepted. • The annual interest rate for national currency loans for the country as a whole is 14.2%; the figure for Baku is lower at 12%, while for the regions it ranges from 16% to 25%. This is high in comparison to the main competitors in Europe. • Lack of educated agronomists with relevant knowledge of modern technologies. • Small number of SME initiatives in the food processing sector due to restricted competitiveness in the local market, due to presence of large companies and a lack of understanding that the processing industry is not based on nonmarketable, lower-quality inputs. • The Russian market is not stable or predictable although some relationships are stable and historic. Regardless, dependence on one export market – Russia – is very risky. • GoAJ provides support to agriculture which has a positive effect on agricultural development but also creates many market distortions, dead weight and bad investments, and sends misleading market signals. • Although the input market is developing, quality control of inputs should be strengthened. Often, Azerbaijan producers don’t have access to the best seed and planting material due to registration or intellectual property issues. • Lack of irrigation and limited access to water. • A challenge for the domestic agricultural supply chain is compliance with quality, food safety and environmental standards of modern food retail channels, and with international standards. • Contract farming is still not in common practice. • Few associations at the state level. Lack of farmers’ associations to support farmers’ initiatives (bottom-up approach) aimed at collectively marketing their produce or purchasing inputs. • Lack of investments to adopt international good agricultural practices and techniques to be competitive in the market especially among small-scale farmers. • Limited access to high-end markets; small farmers do not meet the requirements of the market (cold chain, GlobalG.A.P.) and their volumes are too small to be attractive to traders involved in supplying supermarkets or selling to foreign markets. • Competition in international horticultural markets is strong and organized, with growing presence of competitors from CIS countries and Central Asia. • Poor environmental management at the farm level.

14

III PRIORITIZATION AND SELECTION

The approach to value-chain selection was developed and agreed with USAID and it is based on the positive experience from other countries where a similar methodology was utilized. This methodology is based on extensive study which included position, competitiveness and specific product analysis for a wide range of products. This approach to value-chain selection has the advantage of capturing synergies across similar product value chains. Grouping products and targeting product groups will allow PSA to:

• Be focused yet flexible; • Leverage logical synergies between products; • Avoid market distortion; • Have country-wide impact; • Maximize multiplication effect; and • Account for absorptive capacity. Figure 3: Steps in the Selection Process

1 Data 2 Comparison 3 4 Criteria Grouping collection analysis identification

Specific Data 5 Competitive- 6 7 8 product collection for Scoring ness analysis competitive- scoring ness

Presentation 9 Dilemma 10 11 and 12 VC analysis Activity table analysis discussion report with USAID

Step 1: Data collection. All relevant data was collected including: production, harvest area, trade, unit values, and prices. Analysis drew on all available data and reports including FAO, EUROSTAT, International Trade Center, Trade Map and UN COMTRADE official statistics; all available Azerbaijan official statistics and data received; and other reports including the OECD-FAO Agricultural Outlook and the World Bank Doing Business Report.

Step 2: Comparison analysis. Comparison analysis was used to rank all products in the area harvested/ production (x axis) and value and quantity (y axis) and compared to 188 countries worldwide and 47 countries in Europe and the CIS.

Below is presented one of 8 combinations: World/production/export. Position analysis helped to identify that: cucumber is high on the list, pepper is surprisingly low, hazelnuts are in 3rd place in exports and production in the world. Group of stone fruits (sour cherry, cherry, apricots) together with pome (apple and pear) are high in position at both axis (much better among EU), which provides clear potential for those products.

Graph 13: Position Analysis Azerbaijan in World – Production / Value of Export

Step 3: Grouping the products. Then, products were grouped based on value-chain commonalities in storage, investment, and marketing, taking into account Azerbaijan’s specific characteristics and products grown. Based on this approach, the value-chain analyses that follow will use the following product groupings: Figure 4: Grouping Products

Step 4: Criteria identification. The criteria were linked with PSA objectives and indicators and proposed criteria were coordinated and discussed with USAID.

16

Figure 5: Selection Criteria Diversification Possibility for Competitiveness Trends Market risk Job creation ASAP experience potential adding value

Production Market Single market Through Continuation Labor intensity focus processing need Export Currently Season competitive Import Small Scale Production Market risk farmers Through quality Experience Price technology involvement

Step 5: Competitiveness analysis of the most important products grown in Azerbaijan. Competitiveness was one of the key criteria in the selection process and offered a first lens through which to examine product selection. Competitiveness was examined both in relation to the world, and in relation to CIS countries, and while both were analyzed, for scoring purposes the world data was used. • The most competitive products produced in Azerbaijan in relation to the world are persimmon, hazelnut, and quince. • Cotton is among the most competitive in the world, but not in the CIS, since few countries in the world are producing cotton, which is not the case in the CIS. • Apricot, cherry, sour cherry, and plums are better positioned in the world (EU as well) than in the CIS, which shows potential for accessing those markets. Graph 14: Competitiveness in Relation to the World 0,9 0,8 0,7 0,6 0,5 0,4 0,3 0,2 0,1 0

Cereals Fruit Vegetables Tea Industrial crop

Source: SEEDEV competitiveness analysis With slight shifts along the scale, some of the product become less competitive in relation to the CIS, but generally there are no major changes. Hazelnuts dominate, followed by persimmons and quince.

Graph 15: Competitiveness in Relation to the CIS 0,9 0,8 0,7 0,6 0,5 0,4 0,3 0,2 0,1 0

Cereals Fruit Vegetables Tea Industrial crop

Source: SEEDEV competitiveness analysis

These competitiveness scores were then incorporated into the broader scoring table. Step 6: Scoring data collection. Filling in the complete scoring table required additional data collection drew on different data bases, experience or interviews (ASAP experience). Table 1: Detailed Scoring Methodology Criteria Ranking method 1. The rank of product is based on Competitiveness index 1. Competitiveness 2. The position of the products in relation to competitiveness position 2010 - 2015

1. Trends in production during 2013 – 2018 period 2. Trends in export during 2013 – 2018 period 2. Trends 3. Trends in import during 2013 – 2018 period 4. Trends of farmgate price 5. Trends of export unit price

1. Export market – Demand in CIS, European, and world markets 3. Potential for 2. Potential for season extension diversifications 3. Potential for production improvements 1. Single market focus – Research how diversified is current market by calculation of Gini index (if needed) 4. Market risk 2. Research possibility for losing this single market, looking at the trends at the market where the export is concentrated. 1. Number of days per production year: 5 > 250, 4: 150 - 250 days, 3: 100 – 150, 2: 50 to 100, and 1 < 50 (>250 raspberry, strawberry, gherkins, 150 - 250 pepper and blueberry, 100 - 150 apple, cherry, plum, sour cherry, 50 - 100 peach, apricot, pear, 5. Job creation potato, carrot, onion, tomato, < 50 quince) 2. Number of small-scale farmers involved in production (high score) vs few large producers (low score)

6. Possibility for 1. Through processing adding value 2. Trough quality

18

Giving different score for those products which have higher potential for processing or quality example: stone fruits has many options for processing (drying, canning, juicing, freezing) which is less the case for non-perishable vegetables and even less with cereals.

1. Need for continuation. If sustainability is not yet reached with previous 7. ASAP beneficiaries/sectors/products recommendation 2. Experience based on previous work Step 7: Scoring. After collecting all necessary data, scoring was performed by giving marks from1-5, where the highest mark means better position (better trend, more competitive, more labor needed, less risky). The average mark for group - competitiveness, trends, diversification potential, market risk, job creation, possibility for adding value, ASAP experience (group trends consist of production, export, import, and price) is taken into account for final scoring. Graph 16: Rank at the Product Level after Scoring 5,0 4,5 4,0 3,5 3,0 2,5 2,0 1,5 1,0 0,5

0,0

Tea

Kiwi

Peer

Garlic

MAPs

Onion Beans

Apple

Herbs

Maize

Plums

Fejhoa

Barley

Potato

Melon

Wheat

Pepper

Lemon

Quince

Tomato

Apricot

Cherries

Zucchini

Oranges

Walnuts

Cabbage

Almonds

Soybean

Eggplant

Hazelnuts

Cucumber

Perssimon

Blueberries

Raspberries

Manadarins

Blackberries

Table grapes

Strawberries

Water melon

Sour cherries

Pomogranate

Herbs& MAPs

Sunflowerseed

Carrot and parsley

Peachandnectarine

Cauliflower and broccoli Lettuce,radish and chicory

Source: SEEDEV calculation

As described above, products were considered individually and as a group, with groupings by value-chain commonalities rather than strictly agronomic considerations. When groups of products were aggregated and ranked using the same criteria, the results were slightly different, since the same group may contain highly ranked and lower-ranked products.

Graph 17: Group of the Products’ Rank

Industrial crops Cereals Herbs MAPs Non perishable Vegetables Tea ad olives Table grapes Perishable vegetables Citrus fruits Nuts Apple group Stone fruit Berries 0,0 0,5 1,0 1,5 2,0 2,5 3,0 3,5 4,0

Step 8: Specific product competitiveness. For the main products for which comparative data existed at the world level, competitiveness analysis was performed. This allowed comparisons of level of competitiveness vis-à-vis other countries and not only between products in Azerbaijan. Graph 18: Index of Competitiveness 1 0,9 0,8 0,7 0,6 0,5 0,4 0,3 0,2 0,1

0

Italy

B&H

Spain

Malta

Latvia

Serbia

France

Cyprus

Poland

Ireland

Greece

Austria

Croatia

Finland

Estonia

Belarus

Albania

Ukraine

Georgia

Sweden

Belgium

Bulgaria

Slovakia

Slovenia

Armenia

Hungary

Portugal

Moldova

Romania

Germany

Denmark

Lithuania

Tajikistan

Azerbaijan

Czech Rep. Czech

Macedonia

Kyrgyzstan

Uzbekistan

Kazakhstan

Netherlands

Montenegro

Luxembourg

Turkmenistan

United Kingdom United Russian Federation Russian

CEFTA CIS NMS EU15

It was discovered that cherry is high on the list of competitive countries. Only two CIS countries are better positioned than Azerbaijan.

Step 9: Dilemma analysis. Focus was given by performing a detailed analysis of each product that was studied. For example, dilemma analysis was used to help to answer the following questions: • Is it possible to diversify the apple, tomato and potato markets? • What is the possibility that Azerbaijan producers lose the Russian market for tomato and apple? • Why do peppers have low results in Azerbaijan? • What is the expectation for local berry demand? Step 10: Preparation of the activity table. The problems, gaps throughout the value chains, and opportunities are not the same for all products analyzed. Consequently, the selected products should not all have identical activities. Together with PSA staff and selected stakeholders, an activity table was prepared. Table 2: Activity table MARKET DIVERSIFICATION & NEW TECHNOLOGY DISSEMINATION PRIORITY GROUP QUALITY GROUP GROUP Pomegr Hazelnu Persim Stone Perisha Kiwi/Fei Berries Tomato Apples Grapes anate ts mon fruits ble Veg. joa TA activities Work with input suppliers

Export market access Local market access Developing knowledge Sharing knowledge Aggregations & Associations Grants Nurseries Greenhouse production Open field production Precooling and cold storage Post-harvest ULO storage Processing

20

Step 11: Presentation to USAID and discussion about selected products. All the results and dilemmas were presented to the USAID and a final round of discussion was conducted that led to final acceptance and rejection. For example, at this stage it was decided to remove potatoes from Group II, based on the following process: Step 1: Data collection Potato has very good set of data which are collected and analyzed. 44th place in area harvest, 46th in production and 18th in export is at Step 2: Comparison analysis the level of overall position in agricultural land availability (46th) and better than average export. Potato is grouped in the non-perishable vegetables, together with Step 3: Grouping onion, carrot, and garlic. All identified criteria are applied for tomato same as for other Step 4: Criteria identification products. Potato was ranked as 14th at the list of competitive products in Step 5: Competitiveness analysis Azerbaijan in comparison with World and 19th in comparison with CIS countries among 27 analyzed products. Step 6: Data collection for There was no problem to collect all needed data. scoring Potato’s position after scoring was 10th among 47 products and Step 7: Scoring perishable vegetables were 9th among 13 groups of products. Potato’s competitiveness at the product’s level in comparison with Step 8: Specific product other countries’ potatoes was ranked 13th among 45 European and competitiveness CIS countries. Specific dilemma solving show us that potato can be exported only for two months to Russia, that there are no signs (as with other Step 9: Dilemma analysis products in Group II) that market started to be diversified, nor that this is possible without large structural changes. Step 10: Activity table Very focused activities are identified as possible Step 11: Presentation and Discussion led to the conclusions that potato should not be selected discussion with USAID Final decision not to include potato in the selected group of Step 12: VC analysis report products Step 12: Final decision and value-chain analysis report. Based on assessment of both the individual product results and the grouped product results, as well as extensive key stakeholder discussions, PSA made the following target product selections: Table 3: Selected Products and Groups of Products Group II: Group III: Group 1: MARKET NEW TECHNOLOGY PRIORITY GROUP DIVERSIFICATION & DISSEMINATION QUALITY GROUP GROUP Competitive, good trends, Have potential due to some Main Large Russian export-oriented diversified market, increased competitive advantage but characteristics: products demand small in size Main Replicate good trends: Diversify export and prepare Introduce new technology objectives: production, export, number products for new market and promote VC of farmers opportunities Beneficiary All potential VC actors Those who are ready to Lead farmers willing to focus: diversify market introduce new technology Activity focus: Dealing with all gaps through Market access, quality New varieties, other inputs VC improvement, post-harvest introduction, demonstration preparation plots, new marketing technologies Selected • Berries – Focus on • Perishable Vegetables – • Stone Fruits products: strawberries / considering focus on tomato • Table grapes/Kiwi/Feijoa raspberries, blueberries, considering pepper and blackberries cucumber (although Group • Nuts: Focus on Hazelnuts III) • Pomegranate • Pome Fruits – Focus on apples • Persimmon

22

IV BERRIES

Global demand. The berry market is a growing market driven by consumer demand. Several factors occurred parallelly and attracted consumers: 1) Health trend and demand for natural products, organic products, superfoods (super fruits); 2) Increased demand for convenience food; and 3) Versatility and availability during a very short summer season changed to availability throughout the year. While the global value of fresh strawberry exports has increased four times since 2000, the global export of fresh blueberries and raspberries increased by 21 times. The strawberry frozen market has been increasing slowly but steadily. Berry production and processing are versatile and have diversified over time from fresh fruit into frozen, extracts, juices, pulps, dried, beverages, oils and other highly specialized ingredients and products. Graph 19: Fresh Strawberry, Blueberry and Raspberry Graph 20: Frozen Strawberry, Blueberry and Raspberry Global Export Value Global Export Value

3 500 1 200

3 000

1 000

Millions Millions 2 500 800 2 000

1 500 600 1 000 400 500

0 200

2014 2016 2018 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2015 2017 2000 0

Fresh strawberry Fresh raspberry

2002 2000 2001 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Fresh blueberry Frozen strawberry Frozen raspberry

Source: Trade map Source: Trade map Growing sector in Azerbaijan. According to State Statistical Committee (SSC) data, berry production in 2016 was about 2,201 MT and by 2018 production had increased ten times to 20,830 MT. The harvested area in 2018 was 3,320 hectares and the major production regions are Lankaran, Ganja and Guba-Khachmaz. The size of the sector determines not only the quantity but also the quality of the product by the extended season and diversified offer. Strawberry production has to be extended to other berry production and to expand the cold chain into frozen products to provide a market for the surpluses in the peak season.

Demand in export markets. Middle Eastern countries are importers of strawberries and becoming consumers of fresh raspberries. The demand for fresh strawberries in this market increased several times in the last eight years. In well-organized markets such as in the Middle East, demand is consistent throughout the year and well-established supply chains are already present.

Graph 21: Base Import Index at Several Markets – Graph 22: Base Import Index at Several Markets – Fresh Strawberries 2010-2018 (2010=1) Frozen Strawberries 2010-2018 (2010=1) 7 5

4,5 6 4

5 3,5

3 4 2,5 3 2

2 1,5

1 1 0,5

0 0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2010 2011 2012 2013 2014 2015 2016 2017 2018 MENA GULF Russia MENA GULF Russia Turkey World Turkey World

Source: COMTRADE Source: COMTRADE Domestic market opportunities. There is potential to increase the domestic demand further. It requires the improvement of quality, but also packaging in convenient boxes (125 or 250 grams instead of the most common 500 grams) for retail sale. There are also domestic market opportunities in extension of production to other berries such as raspberries, blackberries and blueberries.

Labor intensity. Indicative number of working labor days for strawberry is 283 days and 10 mechanization working hours per hectare.

Profitability. Azerbaijani producers are exporting strawberries when they can get the price over 1.5 USD. Average selling price in the 2019 season was from $1.2 to $3.5. Marketing export costs per 10-ton vehicle are 4,800 AZN for the customs tariff fee, 1,000 AZN for the market entrance fee, and 2,800 AZN for transport in a refrigerator truck. Besides the high marketing costs, the gross margins are over 50% (according to information provided by producers). Graph 23: Cost of Production for Selected Groups of Products at Private Farms in Azerbaijan (AZN/kilogram) 1,6 1,4 1,2 1 0,8 0,6 0,4 0,2

0

2012 2017 2013 2014 2015 2016 2012 2013 2014 2015 2016 2017 2012 2013 2014 2015 2016 2017 2012 2013 2014 2015 2016 2017 2012 2013 2014 2015 2016 2017 2012 2013 2014 2015 2016 2017 2012 2013 2014 2015 2016 2017 Grain crops Row cotton Green tea leaf Potato Vegetables Fruit and berry Grape

Selling price Private farms Cost price Private farms

Source: SSC

24

IV.1 KEY CHARACTERISTICS OF THE BERRY VALUE CHAIN In Azerbaijan, there is no certified strawberry planting material. The common practice is propagation from current production and scattered attempts for establishment of nurseries. ASAP raised awareness of this issue, and the Azerbaijan Berry Producers and Exporters Association developed an initiative for establishing a nursery. At present, there are nine strawberry varieties registered in the Azerbaijani Variety Register. Producers are purchasing new varieties in Italy and Spain and other countries and introducing them into production. Various berry varieties have been introduced into production in Azerbaijan, but there is lack of a systematic approach and research on the fruit varieties in Azerbaijani growing conditions. There is an urgent need for variety modernization. The food safety system is advancing under the authority of Azerbaijani Food Safety Agency (AFSA). AFSA is responsible for the phytosanitary system (pesticide registration), phytosanitary monitoring and risk assessment, and issuing and control of phytosanitary certificates. AFSA is also the National Plant Protection Organization responsible for the major SPS issues. AFSA is also conducting the legislative approximation process related to phytosanitary issues, developing standard operating procedures, and creating a register of phytosanitary food business operators. The value chains in the strawberry sector are still not developed and structured. Based on value-chain actors and their relationships, three major types of developments are noticeable: 1. Small producer/local market. Short chain is important for the strawberry marketing keeping in mind that berries have to be marketed within a few hours or precooled to 4 C within two hours. Thus, small producers are selling the berries at local green markets or local retail shops. 2. Extended chain with integrator. In the future this will be the prevailing structure of the value chain. Aggregators with cold storage capacities are the central players in strawberry value chains. In Azerbaijan, at present, those are large producers or emerging companies or traders which are collecting and marketing products. In most cases, they are supplying the traders, which are then supplying to the retail market or exporting the berries. 3. Export-oriented strawberry chain. Several companies are involved in strawberry production with acreage above 20 hectares. They are targeting the export market and exporting directly or via traders. The strawberry producers are profiled as the ones with production on more than 10 hectares and aggregating other producers as well as medium producers growing on one to several hectares. In Jalilabad there are 35- 40 producers with more than 5 hectares and 3 producers with over 20 hectares. The leaders were supported already under ASAP, and improved production technology, established the cold chain and started to address challenges by creating an association. The second group of producers, medium-sized ones, have clear business ideas about the necessity to diversify their household economy to more profitable non-traditional production, but still are not able to eliminate obstacles to development (financing, land, knowledge). The fresh strawberry supply chain is much more sensitive compared to frozen and more demanding than the regular fruit supply chain. While other fruits are mostly selected after harvesting according to criteria such as dimensions, weight, color and main quality characteristics, berries for the fresh market are selected directly during harvest. After harvest berries require specific handling to maintain the freshness and quality of the fruit, which involves more limited delivery times and more controlled conditions such as temperature and post-harvest treatments and more optimized transfers from production to the stores. Fresh strawberries require the direct consignment distribution method and it is necessary to consider the need for frequent deliveries and development of a short order-to-delivery system due to the perishability of the product. In the frozen strawberry chain, the integrator is a cold storage with freezing capacities and -18 C capacities for storing the frozen product. These capacities usually are dealing with several types of berries and stone fruits to improve the sustainability. Trading companies specialized in marketing fruits and vegetables, including strawberries, usually already have cold chain organization as well as customers for fresh or frozen products and are also aggregators. They are influencing diversification of production. IV.2 KEY CHALLENGES AND SPACE FOR IMPROVEMENT Input supply. Strawberry varieties in production in Azerbaijan are rapidly changing. The majority of the producers are setting up new orchards with varieties imported from EU nurseries. However, there is a need for a systematic approach, development of a nursery with a certification scheme and introduction of new varieties, but with full respect of plant breeders’ rights. There is an urgent need for pesticide registration and regulations that will not only improve food safety, but also attract the best competition in the pesticide market. Pesticide residue monitoring would support the sector to decrease the MRL risk and support the producers to export the product to higher-value markets. Production. There is a lack of knowledge and lack of technical experts on production technologies (fertigation, irrigation, plant protection, post-harvest management, cold chain organization, marketing strategies, costs of the production, farm management). Cold chain organization. Cold chain constraints are a critical issue in the berry value chain, and while cold storages are an important element in the cold chain, they are not the only one. More small pre-cooling facilities in the field or in an area with concentrated production would help greatly in preparing products for market and increasing shelf life. There is also a need for improved knowledge of harvest and post-harvest techniques, storage maintenance, and cold storages to preserve the cold chain. Marketing. Market access is constrained by a lack of export market linkages, as well as a lack of awareness of Azerbaijani strawberry production in the export markets.

Rationale for Including Berries in Group I: Priority Group • Even though the sector is not among the most competitive ones at present, there are several reasons for focusing on it 1) growing demand in Europe and other markets; volumes and values are increasing year on year. Consumers are more health conscious and buy more berries. 2) Berry production is typically small-scale farmer intensive production that generates income and employment in rural areas. • Potential for diversification at the household and production level to other berries (raspberry, blackberry, red and black currant, blueberry), but also to stone fruits and perishable vegetable (similarities in pest management, irrigation, fertilization, cold chain organization and marketing). • Several options for production approach – open field/greenhouse, primocane/floricane varieties (for raspberries), and out of season production. • Demand for semi- processed (frozen) berries in the processing industry and for processed products due to traditional use in sweets. • Fresh berry market is more profitable and has export potential in the Middle East and CIS countries. • Berry cold storage and transport hubs can serve many small growers and provide them with technical advice, centralized buying and other support services. IV.3 RECOMMENDATIONS FOR DEVELOPMENT There are two clear and distinct opportunities for development of the strawberry value chain: one for higher- value production and distribution of fresh fruits, and one for development of a frozen strawberry value chain oriented primarily at processing and the export market. While these share similar needs across inputs and production, the two chains then diverge and will be treated differently. PSA will emphasize research-based decision making on the introduction of new varieties and diversification of berry production to minimize risks, improve product offerings and market access, and develop a sustainable fruit sector.

PSA activities should be directed towards the development of nurseries with capacity to multiply high-quality planting material. For intensive and profitable berry production, it is important that the plants are grown by specialized growers and that no plants are used from their own reproduction. PSA should identify and work with innovative producers willing to adopt new technologies and leverage these producers to disseminate knowledge and practices to wider numbers of growers, including developing an 26 online Production Guide for strawberry and other berries. As producers seek to access new markets, they will be supported in achieving necessary certifications including, as appropriate, Organic and GlobalG.A.P. The present harvesting (marketing) season is about three months in open field production and 6-8 months in greenhouses. This can be expanded by diversification to different varieties as well as by improved growing practices in greenhouses. The costs of production in greenhouses are higher, but according to producers’ experience the profit is 30% higher. Increases in production will soon require solutions other than fresh product marketing. One potential solution is freezing the berries (quick freezing tunnels, sorting lines, - 18 C regime cold storage) and marketing to the frozen fruit market or to the processing sector. This will require support in meeting and obtaining quality certifications for processing facilities such as ISO, IFS, BRC, and HACCP. For the export market, PSA might focus on strengthening of packaging, branding, and advertising materials, while in the domestic market PSA should support producers to build awareness and increase consumption through educational and promotional events.

Table 4: Berry Action Matrix BERRY VALUE CHAIN ACTION MATRIX Group I: Priority Group (Rationale) Context & Trends Gaps & Challenges PSA Interventions & Investments Azerbaijan Input Supply: • Development of diversified fresh market berry • Significant area and production increases in the last two • Planting material production is not well chain and strengthened frozen strawberry years of strawberry production organized chain • Increased cold storage capacities • Systematic development of introduction • Research-based introduction of high-quality • Increased local demand for berries of new varieties planting material and new varieties • Liberalization of the input market (pesticides, fertilizers) • To develop nurseries with certification • High quality inputs: fertilizers, pesticides, • New varieties are introduced – 9 varieties in the Variety schemes herbicides register and 10 in experimental fields • Respect Plant Breeders Rights • Diversification of production • Present harvesting (marketing) season is about 3 months in Production: • Adoption of new technologies and open field production and 6 to 8 months in the greenhouse • Berry producers and support services dissemination to wider numbers of growers production (extension, consultants) are lacking • Support in obtaining production certifications • Specialization of producers knowledge and experience with high (i.e., GlobalG.A.P.) • Aggregators are present: cold storage owners, lead farmers, quality input application • Plastic tunnels for fresh berry production traders, exporters • Lack of knowledge on production • Sensors and fertigation equipment for large • Market is already diversified technologies (fertigation, irrigation, plant farms • Labor days for strawberry - 283 days, mechanization protection) and application of new • ICT platforms for sharing knowledge among working hours – 10 (per hectare) generation of fertilizers producers, advisors, buyers • Strawberry production margins are over 50% • Lack of drip irrigation and water sources • Small pre-cooling facilities at the farm or close Cold Chain Organization to the farm World • Lack of knowledge about post-harvest • Cold storage • Berry production has become global –large suppliers are techniques • Investments in processing to support organizing production in different climatic zones • Lack of small pre-cooling facilities at the increased production: • Decreasing demand for frozen berries due to increased off- farmer’s field (or in area with o Freezing tunnels for quick freezing season production in southern hemisphere concentrated production) o Processing equipment for drying or • Frozen berry products have become a commodity • Lack of freezing capacity lyophilization • Increasing supply and demand for frozen berries Marketing o Improved packaging, branding, and • Growing demand in world and trade increase of fresh advertising: • Missing links with foreign buyers of fresh berries and frozen berries o Sorting and packing equipment for • Competitive development of new varieties but controlled small (0.5 kilogram retail) and bulk • Foreign buyers don’t know about by the large berry producers and traders production increases packages (5-20 kilograms) • Demand for fresh strawberries in the Middle East market o Small 250-500 gram boxes for increased by several times over the last eight years packaging fresh berries

28 V PERISHABLE VEGETABLES

Vegetables are an important part of the economy, rural life and consumption in Azerbaijan. Perishable vegetables grown in Azerbaijan include tomato, cucumber, eggplant, lettuce and other leaf vegetables, and cabbage (categorized as perishable or non-perishable depending on variety). For the purpose of this report, perishable vegetables focus on tomato, cucumber, pepper, and eggplants. All of these products have the same investment needs, often they are produced by the same farmers, traded by the same traders and sold in the same points of sale. Despite these supply chain commonalities, they are significantly different in market size, product demand, consumption, competitiveness level, and export potential. Due to its high importance, development potential, and interesting trends, specific attention is given to the tomato. Graph 24: Trends in Vegetable Production Processing and Trade (volume, MT) 1 600 000 The average production of vegetables in 2013-2018 was 1,316,240 MT and 1 400 000 although it has grown significantly since 1 200 000 2017 it is at the level of average world 1 000 000 growth over that period. 800 000 600 000 Vegetables were cultivated on 69,300 hectares and in the last 10 years the 400 000 area has been decreasing. Perishable 200 000 vegetable is around 60% of the area 0 planted and 69% of vegetable Production Import Production of Consumed as Export canned food products production. In the same period, the vegetable (without export growth is faster than average food processing) growth by over 20 percentage points 2012 2013 2014 2015 2016 2017 2,018 led by the tomato export increase.

Source: SSC Perishable vegetables are produced in all countries of the world and are in wide use, but the specific products in this group differ based on the consumption patterns and production conditions in different parts of the world. Typically, in European countries, tomatoes, peppers and cucumbers dominate. One characteristic of Azerbaijan is very low production and consumption of peppers. On the other hand, Azerbaijan has high consumption and production of eggplants (more than two times higher than pepper). More than a million metric tons of the main perishable vegetables are produced in Azerbaijan. Significant growth has been achieved since 2014, when tomato production increased by 130,000 MT in four years. Besides increases in quantity, there are also structural changes (more indoor production with modern greenhouses) and quality improvement. Graph 25: Production, Export and Import of Perishable Vegetables Production • Tomato is the most 1200000 produced perishable 1000000 vegetables at over 600,000 MT in 2018 800000 600000 • Export of tomato 400000 reached 177 million USD in 2018 200000 0 • Production of cucumber 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 is stable at 220,000 MT, and eggplants at 75,000 Tomoto Cucumber Cabbage Eggplant Sweet pepper MT.

Export 200 • Import of pepper increased by ten times in 150 four years, from 0.25 million USD in 2014 to 100 2.5 million in 2018.

MILLIONS USD MILLIONS 50 • Similar figures of import - (2.4 million USD) and 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 similar increasing trends Tomato Cucumber Cabbage Eggplant Sweet pepper are observed in eggplants. Import 25 20 15 10

MILLIONS USD MILLIONS 5 - 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Tomato Cucumber Cabbage Eggplant Sweet pepper

Source: COMTRADE

Tomato production is increasing, and exports even more significantly, reaching 177 million USD. The dominant market with above 99% share is Russia. Azerbaijan’s share of tomatoes in overall Russia imports in 2018 was above 28%, increasing from the 3.7% that was recorded in 2013. What are the main drivers for the increase and how sustainable is it? What will happened in future, is it needed and possible to diversify tomato market? Those are the main questions that will define future trends in tomato production and export, as well as determining whether the tomato value chain should be selected for support through PSA. Graph 26: Russian Import Structure of Tomato 900 Others 800 Ukraine Poland 700 Netherlands 600 Spain Belgium 500 THOUSANDS TONSTHOUSANDS Uzbekistan 400 Iran 300 Turkey Armenia 200 Belarus 100 China Morocco 0 Azerbaijan 2010 2011 2012 2013 2014 2015 2016 2017 2018

Source: COMTRADE

Exports of tomatoes have increased due to internal and external factors, as well as Azerbaijani supply and demand in the Russian market. External factors that are influencing the tomato market: • Russian trade sanctions affecting trade with EU countries, Ukraine and Turkey; • Turkey losing competitiveness due to its macroeconomic problems (see Graph 26); • Decrease in consumption and import from 2014 in Russia; 30

• Sanctions that increase price/decrease quality of tomato consumed; and • Investment in the Russian market in tomato production and re-establishing trading channels from 2016. Graph 27: Food Price Index in Turkey and World (2006-2007=100)

300 Turkey is facing macroeconomic problems, redirecting their 250 exports to satisfy increased local consumption. Food prices are 200 increasing faster than overall prices in Turkey. As of March

150 2019, the Turkish food index was 2007=100 - 23.4% higher than the core index 100

2006 level [0.6% higher in the EU; 5.6% - lower in the US] 50 This, together with the fact that

0 Turkey is still a highly protected

1/2013 1/2003 1/2004 1/2005 1/2006 1/2007 1/2008 1/2009 1/2010 1/2011 1/2012 1/2014 1/2015 1/2016 1/2017 1/2018 market (Producer Support

Estimates as % of gross farm Food Price Index Price Food incomes, averages 26% in 2014 – Turkey World - FPI 2016)

Source: World Bank staff using data from FAO

Internal factors that are influencing the tomato market: • Significant investment potential supported by GoAJ investment support programs that coincide with favorable external factors; and • Introduction of new technology in tomato production, post-harvest management and logistics that result in knowledge buildup. There are also threats that positive export trends will not continue: • Russian producers are establishing indoor modern production of tomato; • Uzbekistan, Iran and others are having significant investment and export growth; • Turkey’s currency devaluation will foster decreases in imports and prices; and • Complacency with current situation among producers in Azerbaijan.

Graph 28: Azerbaijan Export, Russia and UAE Import of Tomato – Prices and Time Russian Import 1 500 $/t 20% • 67% of Azerbaijan’s tomato export is in May 15% 1 000 $/t and June. May is the 10% month when Russia has 500 $/t the highest demand for 5% tomato. 0 $/t 0% • In those two months jan feb mar apr may jun jul aug sep oct nov dec prices are the lowest in Import unit value Weight distribution UAE.

Azerbaijan Export • Azerbaijan exports small 1 200 $/t 60% 1 000 $/t quantities of tomato in 800 $/t 40% other months. 600 $/t Organizing production 400 $/t 20% 200 $/t and increasing export in 0 $/t 0% April to Russia and jan feb mar apr may jun jul aug sep oct nov dec September and October to UAE could be a goal. Import unit value Weight distribution

UAE Import 1 200 $/t 20% 1 000 $/t 15% 800 $/t 600 $/t 10% 400 $/t 5% 200 $/t 0 $/t 0% jan feb mar apr may jun jul aug sep oct nov dec It is not needed to diversify fully since the Russian market will continue to be the main export destination for tomatoes from Azerbaijan. Additionally, market diversification has already started to happen since 2018 with export of tomato to Latvia, Hungary, Estonia, Poland, UAE, Georgia, Qatar, Ukraine, and Belarus, besides existing exports to Russia and Kazakhstan. Graph 29: Share and Price of the Tomato Import to Graph 30: Share and Price of the Tomato Import to Russia 2010-2014 Russia 2015-2018 $/kg $/kg 2,00 1,50 1,00 0,50 0,00 1,50 1,00 0,50 0,00

Turkey 356 663 1,15 Azerbaijan 106 265 1,00 China 76 927 1,21 Morocco 78 732 1,33 Ukraine 58 820 0,79 China 70 807 1,23 Morocco 55 381 1,42 Belarus 53 822 0,82 Netherlands 47 116 1,38 Armenia 22 824 0,57 Azerbaijan 44 494 0,83 Iran 12 741 1,28 Spain 40 997 1,55 Uzbekistan 9 583 0,79 Poland 27 924 1,16 Turkey 9 139 1,13 Belarus 26 417 0,95 Kazakhstan 8 994 0,68 Uzbekistan 16 397 1,23 Macedonia 4 404 1,25

- 200 000 400 000 - 50 000 100 000 150 000 Tons Tons Import quantity Import price Import quantity Import price

Azerbaijan’s main competitors in the Russian market are Morocco, China (higher quality and out of season), Belarus, and Armenia (price competitiveness). Azerbaijan producers are positioned in the middle quality category. Azerbaijan managed to increase the average price of exported tomato from 0.83 to 1 USD positioning at the mid-price level. Morocco, China, and Uzbekistan reduced the average export prices from 2015-2018 in comparison with 2010-2014 at the Russian market.

32

Consequently, it is worthwhile for PSA to invest in tomato, especially in market diversification, because: • There is potential for export of tomato to other countries, especially the Middle East markets and the EU in the period out of May and June targeting the middle quality category; and • Producers will continue to export to Russia regardless of the threats because Azerbaijan has enough competitive advantages: o Lower transport cost than main competitors (Morocco, China, Iran, Turkey, Uzbekistan); o Good trading infrastructure with many traders and trucks; o Expectation that Russian consumption will continue to increase; and o External factors will not be changed: sanctions to EU will continue, Turkey will continue to have high prices. To be able to continue good export trends and diversify the market further, investment is needed throughout the value chain as described in the recommendations later in this section. V.1 KEY CHARACTERISTICS OF THE PERISHABLE VEGETABLES VALUE CHAIN In Europe, the main consumption trends of perishable vegetables are quality and varieties orientation. This was followed by price increases. The main priorities are: good taste and high level of brix (tomatoes above 10 brix level, peppers above 11, cucumbers above 9), different colors of tomato and pepper, product diversification into cherry, cocktail, roma, heirloom, and other varieties of tomatoes, bell, jalapeño and other types of peppers, and year-round availability of products (through indoor production or import). Supermarkets in Western European countries and the U.S. are not very interested in low quality perishable vegetables and seasonality almost doesn’t exist. The average import price for tomatoes for the 2012-207 period in Germany was 1.9 USD/kilogram based on Germany’s demand for higher quality produce and higher out-of-season consumption. Most of these consumption trends are also already present in Azerbaijan and those that are not, will very likely become popular soon enough. Graph 31: Rank in Area Harvest and Export of Tomato in 2018 in Comparison with World Countries

Iraq Kuwait

Montenegro Bosnia and Herzegovina Qatar Tajikistan Bahrein Kyrgyzstan

Malta Republic of Moldova Finland Luxembourg Romania CyprusEstonia United Arab Emirates SwedenIreland Russian Federation Czechia Saudi Arabia Bulgaria RANK IN EXPORT IN RANK Lithuania Denmark Oman Latvia Slovenia Serbia GeorgiaHungary Croatia Slovakia United Kingdom Turkmenistan Austria Ukraine Greece Kazakhstan North Macedonia Armenia Albania Portugal Uzbekistan Poland Belarus France Italy Azerbaijan Germany Turkey Belgium Spain Netherlands RANK IN AREA HARVETS

CEFTA CIS NMS EU15 GULF

Source: FAO, COMTRADE, processing SEEDEV

In 2018, Azerbaijan with 21,330 hectares was ranked 29th among world countries in area harvested under tomato and, with 177 million USD of tomato exports, was 8th in exports. Lack of knowledge. Although significant improvement has been made in recent years, largely due to foreign experts (mainly from Turkey), there is still significant room for yield and technology improvement, in particular plant feeding using fertigation. Graph 32: Index of Competitiveness Tomato 0,9 0,8 0,7 0,6 0,5 0,4 0,3 0,2 0,1

0

Italy

B&H

Spain

Malta

Latvia

Serbia

France

Cyprus

Poland

Ireland

Greece

Austria

Croatia

Finland

Estonia

Belarus

Albania

Ukraine

Georgia

Sweden

Belgium

Bulgaria

Slovakia

Slovenia

Armenia

Hungary

Portugal

Moldova

Romania

Germany

Denmark

Lithuania

Tajikistan

Azerbaijan

Czech Rep. Czech

Macedonia

Kyrgyzstan

Uzbekistan

Kazakhstan

Netherlands

Montenegro

Luxembourg

Turkmenistan

United Kingdom United Russian Federation Russian

CEFTA CIS NMS EU15

Source: COMTRADE, FAO, ITC, calculation SEEDEV

Pepper production in Azerbaijan is small. A similar situation is observed in the whole region. The volume of production is small (Georgia 4,300 MT, Azerbaijan 49,200 MT) but has been increasing over the last three years (Georgia 9%, Azerbaijan 4%), as are exports. The highest export growth was in Georgia, it doubled in quantity and more than quadrupled in value, but average exports in the 2012-2017 period were still a very modest 22,000 USD. Highest export is recorded in Armenia at 173,800 USD. Market chain of the perishable vegetable is often short. Small farmers supply perishable vegetables at the farm, neighborhood or local green market. However, backyard production is decreasing due to an increase in production by medium and large producers who are export oriented. Large-scale producers and their investments are the main drivers of growth. The major investors in greenhouse production are businesses outside of the agricultural sector. They are bringing innovations since they are not restricted by traditional knowledge, and they are purchasing high-quality inputs including varieties, fertilizers and foreign expertise. Also, the trend is toward development of branded company products. Production is organized in all Azerbaijan regions. The biggest production is in Guba, Aran, Lankaran, and Ganja regions, while the biggest growth from 2013-2017 was recorded in Absheron and Baku city.

34

Graph 33: Tomato Production by Region for 2013-2017 Period Versus Azerbaijan’s Average 35% 30% 25% 20% 15% 10%

Azerbaijanshare 5% 0% -5% -100% -50% 0% 50% 100% 150% 200% 250% Average in relation to Azerbaijan

Lenkaran economic region Aran economic region Ganja-Gazakh economic region Yukhari Garabagh economic region Sheki-Zagatala economic region Daghlig Shirvan economic region Guba-Khachmaz economic region Nakhchivan Autonomous Republic Absheron economic region Baku city

Azerbaijan Statistical Office

Tomato prices in Azerbaijan are determined by export potential and a 15% custom import duty that restricts competition from Turkey. Consequently, in certain periods of the year, tomato prices in Azerbaijan are high in comparison with open countries. V.2 KEY CHALLENGES AND SPACE FOR IMPROVEMENT Increased competition. Regional tomato production is increasing. Iran produced 6 million MT of tomatoes (2013-2017 average), in Armenia the production was about 300,000 and in Georgia 62,000 MT on average per year in the 2000-2014 period. Uzbekistan has had high state, donor, and private investment in the agricultural sector in recent years, which will contribute to its increased competitiveness. Yield is low. Tomato growers in greenhouses only achieve 25-30 kilograms per square meter, while normal yields are 40-45, and in the Netherlands even reach 60-90 kilogram per square meter. Seasonality constraints include excessively high temperatures in summer and a lack of light in the winter. It would be possible to extend the season in winter by adding lighting, and this seems like a viable option to explore. Better penetration of new varieties and new technology. In recent years, vegetable producers switched to using new hybrid seeds for cucumber, eggplant, pepper, onion, carrot, and potato. The seeds of new varieties are mainly imported from Turkey, Russia, and the Netherlands. These highly productive varieties are replacing traditional local varieties. However, there is a need for further research and variety improvement since those varieties are not bred for Azerbaijani conditions and very often do not match the level of technology. Productivity in open field production needs to be improved. The average yield of 17 MT/hectare compares poorly to neighboring leaders Turkey’s 35 MT/hectare, Iran’s 36 MT/hectare and Armenia’s 42 MT/hectare. Some of the main problems are lack of effective irrigation, high costs and low control of quality inputs, and insufficient knowledge of modern technologies. Inclusion of small-scale perishable vegetable producers into modern value chain. Their inclusion into the modern market chain is important for Azerbaijan and the easiest way to do it is through co-existence and cooperation between small and large producers where large growers introduce new technologies and small ones spread it on a large scale. Access to competitive labor. Production of perishable vegetables requires high numbers of workers, both full-time and seasonal. This number depends on the level of automation (investment) and yield, with high yields requiring significantly more people.

Rationale for Product Categorization Tomato is Included in Group II: Market Diversification and Quality Pepper and Cucumber are Included in Group III: New Technology Dissemination • Competitiveness analysis showed that tomato is among the most competitive agricultural products in Azerbaijan (6 of the 27 analyzed products) as well as in CIS and European countries analyzed (7th place among 41 countries analyzed). • Increasing domestic demand for all perishable vegetable products, in particularly pepper, which is already increasing and will further increase from a very low level. • Possibility for import substitution, in particular with pepper and cucumber. • Stable Russian market and possibility to export tomato to other more valued markets such as the Middle East and EU. • Significant potential for production and marketing improvement and diversification, primarily yield and quality increases, post-harvest techniques and market diversification. • Existing producers are ready, willing and have resources to move ahead. • It is a market, policy and subsidy-driven value chain. • Revenue gained from indoor and outdoor perishable vegetable production is higher than in other sectors. • Pepper and cucumber value chains are dominated by small-scale farmers. • It is a logical next step that technology transfer will occur from the large tomato growers to medium producers. • Azerbaijan, through different state investment support programs, is offering many advantages for producers who would like to increase or start production of perishable vegetables. • Azerbaijan still has cheaper labor than does the majority of its competitors, which matters in perishable vegetable production.

V.3 RECOMMENDATIONS FOR DEVELOPMENT Tomato production is very important for Azerbaijani producers (small-scale in open field production and large export-oriented indoor producers), the economy (high value of production and export, high share in credit portfolio), supporters to the sector (input suppliers, traders, truck owners, drivers), and buyers, both processors and consumers (available product at good quality and affordable, competitive price). The goal of interventions in this sector should be continuation of production and export increases, adding value by quality improvement and market diversification. To achieve this, the primary focus should be on high-quality production, through improved production practices disseminated at scale to large numbers of growers, and improved access to inputs and equipment. Based on these production improvements, other improvements will then be required along the post-harvest, processing, and marketing chain. Improved Access to New Varieties and Inputs. PSA should compile a list of the primary input supply companies involved in perishable vegetable input supply, helping producers to better sort hybrid seeds, fertilizers, biostimulators and pesticides and organize an input supply sector meeting which will identify and make plans to address key problems in the sector. PSA will identify and support nurseries interested in the commercial production and marketing of hybrid seedlings of perishable vegetables. To address regulatory issues related to the import and propagation of hybrid varieties, PSA should also facilitate cooperation between input suppliers, nurseries, and the relevant GoAJ agencies. Improved Production Technologies. PSA will identify innovative producers willing to diversify markets and adopt new technologies and will leverage these producers to disseminate knowledge and practices to wider numbers of growers. Demonstration fields and study tours will play a key role in educating producers on new technologies. PSA will support digital farms, introducing sensors to collect, input, and analyze

36 production data to improve productivity. As producers seek to access new markets, they will be supported in achieving necessary certifications including, as appropriate, Organic and GlobalG.A.P.

Post-Harvest Handling and Processing. PSA will conduct a detailed analysis of existing processing facilities and look for enterprises willing to invest in upgrading or introducing processing, particularly in areas of high market demand (such as frozen) that also can benefit multiple value chains. Support will focus on identifying needed investments, obtaining the most appropriate equipment, and pursuing certifications such as ISO, IFS, FSSC, BRC, and HACCP, as required.

Market Linkages. The key focus will be given to the market diversification, focusing on the Middle East, EU and other market opportunities. Therefore, market linkages, both domestic and export, will be strengthening and formalizing grower-distributor relationships through organization of meetings, education on benefits of contract farming, and capacity building for large intermediary actors. PSA will also introduce modern packaging and labeling technologies aimed at extending shelf life and meeting high-end buyer requirements.

Table 5: Perishable Vegetable Action Matrix PERISHABLE VEGETABLE VALUE CHAIN ACTION MATRIX Group II: Market Diversification and Quality (Rationale) – Tomato Group III: New Technology Dissemination (Rationale) – Pepper and Cucumber Context & Trends Gaps & Challenges PSA Interventions & Investments Azerbaijan: Increased global competition means that Azerbaijan Need to increase production and increase fresh • Main open field crops: tomato, cucumber, onion must address gaps across the entire value chain. supply to the domestic market as well as processing. • Nine-month production season Input Supply • Improve access to new varieties and inputs • Cultivated area in open field is decreasing, most • Need for new varieties researched and tested in • Identify and support nurseries interested in prominently for tomatoes Azerbaijani conditions commercial, timed production of seedlings • High-tech greenhouse area is expanding • Lack of certified seeds and specialized professional • Facilitate coordination among input suppliers, • There is almost no freezing capacity although seedling producers nurseries, and GoAJ agencies market demand for frozen vegetables is increasing • Restricted number of pesticides and fertilizers • Identify innovative producers and use them to • High diversification of offer due to the different available on the market adopt and disseminate advanced production local varieties and climatic zones • Lack of knowledge and advice about high-quality technologies • Investors outside the sector see opportunities and input (fertilizer, irrigation, plant protection) use • Support investments in plastic tunnels for fresh are investing in indoor production perishable vegetables, fertigation equipment, digital • Increasing production and export of tomato Production farms • Investment in large high-tech greenhouses in • Low yields compared to competitors • Promote organic and GlobalG.A.P. certification Absheron pushed out producers in Masalli region • Seasonality of production • Develop ICT platforms for sharing knowledge • Increasing sales in modern outlets which require • Open field production needs improvement among producers, advisors, buyers consolidated offer standards and traceability (irrigation, inputs, production technologies) • Identify and support post-handling and processing • Increased demand for new varieties of vegetables • Include small-scale producers in the modern value facilities interested in upgrading facilities or World and Regional Trends: chain introducing new technologies • Increasing demand for all types of perishable • Access to competitive labor • Invest in: vegetables, both fresh and frozen o Small pre-cooling facilities at/near farm • Production moving from countries with high labor Post-Harvest o Processing equipment costs to countries with lower labor cost • Lack of knowledge about post-harvest techniques o Cold storages for frozen vegetables • Consumers are becoming quality sensitive and • Lack of post-harvest equipment: precooling, sorting, o Freezing tunnels for quick freezing ready to pay for quality packaging, which will increase shelf life and add o Small-scale sorting and packing equipment • Longer shelf-life has increased competitiveness of value to the products • Support quality improvements and certification southern-hemisphere suppliers (ISO, IFS, FSSC, BRC, HACCP) • Turkey is a regional leader in production but has Marketing • Market diversification study reduced exports significantly • Lack of consolidation at the aggregator level • Introduce modern packaging and labeling • Missing links with foreign buyers • Improve cooperation along the market chain

38 VI STONE FRUITS

Stone fruits are the most diversified fruit subsector, as it is characterized by a wide range of species and varieties. Although diversified, the varieties share common investment needs and value-chain commonalities; in many cases different stone fruits are produced by the same producers, traded by the same traders and sold at the same points of sales. Stone fruit, for example peach, can be easily substituted by other popular stone fruits such as plum, nectarines or various hybrids. Supermarket development influenced stone fruit diversification since they required not only year-round supply but also attractive products. The issue in the sector is that in the last twenty years the cultivars were created in private breeding programs, thus the access to innovation was restricted. Other trends which are also very pronounced are smaller and easily managed trees, reduced pesticide use, the expansion of production zones into the milder winter regions to allow year- round availability of stone fruit, the need for better and more consistent quality, and, given the global marketing of these fruits, an increased need for enhanced post-harvest management. Breeding should also be focused on selection of fruits with natural antioxidants and smaller fruits, which are a good option for snacking. In Azerbaijan, production of stone fruits increased from 80,000 MT in 2009 to 140,000 MT in 2018. Sweet cherry production has continuously increased since 2014. Plum production has the same trend, while peach and cherry plum production are stagnating. Graph 34: Trend of Stone Fruit Production in Azerbaijan 2009-2018 45000 40000 35000 30000 25000 20000 15000 10000 5000 0 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Peach Apricot Sweet cherry Sour cherry Plum Cherry plum

Source: SSC Sweet cherry is a traditional fruit in Azerbaijan, but over the last 6-8 years, new intensive orchards have been established using high productive Lapins, Cordia, Regina and other varieties and planting material imported from Turkey and the EU. The average yield of these new variety sweet cherry orchards at full production (5th year of growth) is 25 MT/hectare. Not only intensified production, but also post-harvest practices such as precooling by hydrocooler, improved the marketability of sweet cherries. Guba-Khachmaz region is the main sweet cherry growing region of Azerbaijan. Out of the total 38,000 MT of sweet cherry production in 2018, 21,000 MT was produced in the Guba-Khachmaz region. The export of sweet cherries reached 38 million USD in 2018. The export is mainly focused on Russia, but there are attempts to market sweet cherry in Kazakhstan, Malaysia, Great Britain, and the UAE. Graph 35: Sweet Cherry Trade Balance Azerbaijan Graph 36: Sweet Cherry Export Destinations 45 45 40 40 35 35

30 30 Millions Millions USD 25 Millions USD 25 20 20 15 15 10 10 5 5 0 0 2013 2014 2015 2016 2017 2018 2013 2014 2015 2016 2017 2018

Export Import Trade Balance Russian Federation Kazakhstan Others

Source SSC Source SSC

Peach production is about 20,000 MT. There are producers who are diversifying their varieties and they are focused on quality and not only production volume. Peach export recovered from a 2015 drop and gradually increased back to 10 million USD in 2018. The peach depends on the Russian market, which requires high phytosanitary standard compliance and also imposes other non-tariff barriers. Graph 37: Peach Trade Balance Azerbaijan 2013 - 2018 Graph 38: Peach Export Destinations 2013 2018 12 12

10 10

8 8

Millions Millions USD Millions Millions USD 6 6 4 4 2 2 0 0 2013 2014 2015 2016 2017 2018 2013 2014 2015 2016 2017 2018 Russian Federation Kazakhstan Others Export Import Trade Balance

Source SSC Source SSC

Plum species in commercial trade are both the hexaploid European plum (Prunus domestica) and the diploid Japanese plum (Prunus salicina). In Azerbaijan, the Japanese plum varieties are produced, and they are suitable for fresh consumption. Plum exports in 2017 and 2018 were over 4 million USD and the dominant export market was Russia. Azerbaijan, with its different climatic zones, provides opportunities for off-season production of stone fruits (early plum varieties ripening in July reach a price that is 40% higher than in season in the region, EU and Russia). VI.1 KEY CHARACTERISTICS OF THE STONE FRUITS VALUE CHAIN Dual structure of the producers. Intensive stone fruit orchards are being planted by companies or fruit producers engaged in apple production as a business extension and diversification of production. Estimates are that 40% of total orchards are these new orchards and 60% are traditional small-scale orchards. The focus is on sweet cherries but also on nectarine, peach and plum. Different marketing channels. Small-scale production at family farms is sold at local markets, through street vendors, or to middlemen/collectors who transport and sell at wholesale markets. Trade relations are based on verbal agreements. Companies and large producers supply the retail markets or export via traders

40 who provide services such as logistics, grading, standardization, packaging and activities related to shipment and cargo handling. Trader/intermediaries are aggregators and key players in the distribution channels. The processing of stone fruits is performed both on an industrial level by Gilan, Azersun, and small industrial canning plants as Qafqaz Konserv and Saf, as well as at the household level. VI.2 KEY CHALLENGES AND SPACE FOR IMPROVEMENT Marketing stone fruits is about innovation, product differentiation, and variety of product offering. There are a range of opportunities for adding value by differentiation of varieties, extension of the fresh marketing season through diversification of varieties, and the potential for stone fruits to be marketed as frozen or dried product. Stone fruit production is compatible with other fruit production at the same farm. Usually good apple growers are planting stone fruit orchards to extend the production season – the stone fruit season is from May to September continuing into apple season. Also, stone fruits are compatible with berries. The common practice of cold storages with freezing regime or processing plants is to purchase different stone fruits and berries to extend the season and product offering and offset risks. Intensive stone fruit production requires both seasonal workers as well as highly skilled workers for pruning and harvest operations. The labor engagement per hectare of intensive stone fruit orchard is in the range of 120 to 150 days per year. Highly educated and skilled agronomists are necessary for the development of the sector. There are a number of processing opportunities which are not used by the stone fruit producers in Azerbaijan. But processing should not be based on second-class product, but on specific varieties and quality fruits. Stone fruit processing includes freezing, drying, processing by heat for the production of concentrates, jams and other products for other food processing activities (dairy products, baked goods). Fruit juice production in Azerbaijan should be further developed towards production of cold pressed juices with innovative fruit and vegetable combinations and opening of new markets. Market diversification: Although Russia is the major export market, demand for stone fruits exists and must be investigated in other markets. Sweet cherry has market potential as follows: • EU: the biggest importers are Germany, the Netherlands, Italy and the UK, while Luxembourg offers the highest unit value. The largest importer among the NMS is Bulgaria, while the highest import growth is enjoyed by Latvia and Slovenia. • CIS: the biggest importer is Russia, while Kazakhstan, Belarus and Georgia have high import growth. • Middle East: there is an increase in imports in the UAE. Plum also has significant market potential: • EU: biggest importers are Germany, Netherlands, UK, Spain and Italy. Luxembourg and Greece offer the highest unit value. • CIS: the biggest importer is Russia, while Kyrgyzstan, Tajikistan, Belarus and Kazakhstan have significant import growth. Graph 39: Top 10 UAE Peach Suppliers Graph 40: Top 10 UAE Sweet Cherry Suppliers

$/kg $/kg 4 3 2 1 0 12 10 8 6 4 2 0

Egypt Uzbekistan Turkey Greece Lebanon Turkey Morocco Chile Jordan Spain USA USA Tunisia Argentina Spain Lebanon Australia Australia South Africa Canada

0 2 4 6 8 0 0,2 0,4 0,6 0,8 1 Million USD Million USD

Source: COMTRADE Source: COMTRADE

There is a lack of extension services and research and development for introduction of new cultivars. New cultivars are protected by the breeders and intellectual property rights have to be respected, which is slowing or restricting the introduction of new varieties.

Rationale for Including Stone Fruits in Group III: New Technology Dissemination • Competitiveness analysis showed that 3 of the 10 most competitive agricultural products in Azerbaijan are stone fruits. This does not necessarily indicate that the sector is competitive in international market, but it does indicate that other countries are leaving this space because it is less profitable for them than some other agricultural products. • Diversity of stone fruit species and cultivars offers constant improvement and innovation in the domestic and export markets. • There is potential to expand the production of off-season cultivars (cherries, peaches and plums (early season marketing), marketing the plum cultivar President in the EU market (late maturing). • Consumption trends for frozen, dried, and ready-to-eat packaged fruits favor stone fruits. • There are many opportunities for processing stone fruits (freezing, drying, canning, juices). • Azerbaijan still has less expensive labor than do the majority of its competitors. • Increased domestic demand for stone fruits especially through supermarket channels. VI.3 RECOMMENDATIONS FOR DEVELOPMENT Value-chain upgrading strategies exploit opportunities related to the two dynamic trends identified above, namely 1) working with stone fruit producers to improve quality and introduce the varieties demanded in domestic and export markets, and 2) working with exporters and traders to take advantage of opportunities for supplying high quality, higher priced fruits in the CIS and Middle Eastern markets.

Identify Leaders. PSA should identify leaders in the stone fruit sector who are willing to coordinate and even provide investment support for portions of an integrated production and post-harvest handling support package. Potential lead partners might include advanced fruit producers willing to diversify production, large fruit producers and traders who are willing to support and invest in production and cooperate with smaller fruit producers organizing the input supply, production support, post-harvest storage, packing and marketing and developing long relationships. PSA activities should support the introduction of innovative cultivars and intensive production technologies and improve marketing through improved post-harvest treatments and introduction of quality standards to increase and homogenize quality. Key aspects of production training can include the development of online Production Guides for each stone fruit, and study tours for innovative producers to introduce new technologies.

42

Work with retailers. Some of the retailers may be interested in securing a consistent supply line providing traceability guarantees that they are unable to obtain in wholesale markets. While these players are unlikely to be major investors in production, they may be promising partners in alliances with producers who need sales outlets.

Invest in additional cold storage. Improved pre-cooling and cold storage management has to maximize the utilization and efficacy of existing cold storage as well as new facilities. PSA can assist cold storage operators to base their business plans on diversification, maximizing utilization rates taking into consideration the different timeframes and storage needs of different products (stone fruits, berries, and perishable vegetables).

Processing Initiatives. Special attention has to be provided to stone fruit processors’ initiatives in drying, freezing, cold-press juices and other innovative technologies. As appropriate, support should be given for quality certifications such as ISO, IFS, BRC, and HACCP. Table 6: Stone Fruit Action Matrix STONE FRUIT VALUE CHAIN ACTION MATRIX Group III: New Technology Dissemination (Rationale) Context & Trends Gaps & Challenges PSA Interventions & Investments Azerbaijan: Need for innovation and differentiation: • Support introduction of new cultivars • Production of stone fruits is increasing • Introduce intensive production technologies (i.e., • Sweet cherry, the primary stone fruit, is • Introduction of new varieties: new cultivars are plastic tunnels for cherry production, sensors concentrated in Guba-Khachmaz, production and protected by the breeders and intellectual and fertigation equipment) exports are increasing, with a focus on the property rights have to be respected, which is • ICT platforms for sharing knowledge among Russian market but there is some market slowing or restricting the introduction of new producers, advisors, buyers diversification varieties • Introduction of quality standards and certification • Plum production and exports are increasing, • Diversification of production (combine with for production, post-harvest, and processing primarily to Russia berries) • Study tours to introduce new technologies • Peach production is stagnating and dependent on • Need for laborers and extension advisors • Invest in pre-cooling and cold storage to improve the Russian market • Fruit producers and support services (extension) cold chain management; assist cold store • 3 of the 10 most competitive agricultural are lacking knowledge of modern training operators to diversify product and increase products are stone fruits systems and production models and experience utilization rates • New intensive orchards are being established with high quality input application (fertigation, • Invest in processing initiatives in drying, freezing, using new varieties plant protection) and cold-press juices • Investments in post-harvest practices improve • Lack of knowledge of post-harvest techniques • Work with retailers to improve supply chain the marketability of stone fruits • Processing – should be based on high-quality management • Different climatic zones provide opportunities production, not as a secondary market for fresh for out-of-season production of stone fruits “seconds” • Market diversification required to reduce World: dependence on Russia • Stone fruits are one of the more diversified fruits with many cultivars within the species • Expansion of production zones to satisfy continuous global supply • Peach trade is decreasing, cherry is increasing, and plum is stable • The price of stone fruits varies depending on type, fruit marketing and packaging • Supermarket development influenced stone fruit diversification since the offer must not only be continuous but also attractive

44 VII APPLES

Azerbaijan has a favorable climate for apple production, is proximate to a large market, and enjoys good trade links with most of the neighboring countries. Azerbaijan apple production was 259,500 MT per year over the 2014 -2017 period. Over the same period, the growth in production was faster than average world apple production growth. The major trigger for this growth was privileged access to the Russian market and investors from other sectors who recognized the opportunity. Graph 41: Production Growth of Selected Countries and Average Production of Country Groups in Relation to World Growth and Their World Share for the 2014-2017 Period

3,0% 3,1 mill. t 2,5%

2,0% 1,7 mill. t

1,5% share

d 1,1 mill. t

1,0% Worl 505,0 thsd. t 386,8 thsd. t 0,5% 375,6 thsd. t

348,2 thsd. t 468,9 thsd. t 0,0% 259,5 thsd. t 151,9 thsd. t -0,5% -14% -12% -10% -8% -6% -4% -2% 0% 2% 4% 6% 8% Growth in relation with World average NMS EU15 Ukraine CIS CEFTA Serbia Poland Azerbaijan Moldova Russian Federation

The value of apple exports increased from 15 million USD in 2015 to 36.4 million in 2018. The export increase was achieved by taking advantage of the absence of EU producers in the Russian market and investments in apple production. Azerbaijan became the fourth supplier on the Russian market. Graph 42: Monthly Import of Russia from Top Four Suppliers 40 35 30

25 Thousand tons Thousand 20 15 10 5

0

Jul Jul Jul

Jan Jan Jan Jan

Jun Jun Jun Jun

Sep Sep Sep

Feb Feb Feb Feb

Apr Apr Apr Apr

Aug Aug Aug

Oct Oct Oct

Mar Mar Mar Mar

May May May May

Dec Dec Dec

Nov Nov Nov 2015 2016 2017 2018

Serbia Moldova China Azerbaijan

Graph 43: Monthly Distribution of Apple Import to Russia (average 2015 – 2018)

25%

20% The Azerbaijan monthly export pattern to Russia indicates that the majority of 15% exports occur after harvest when the supply of apple is highest and prices 10% lowest. The exports from Serbia and Moldova are extended into April and 5% May due to over 100,000 MT of ULO cold storage capacities. 0% Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Serbia Azerbaijan Moldova China

Source: SSC In 2018, attempts to diversify export of apple from Azerbaijan to markets other than Russia are visible. There is obvious export to Middle Eastern countries (UAE, Saudi Arabia, Qatar) and the prices obtained in these markets are significantly higher than the average price in Russia. Graph 44: Export of Apples from Azerbaijan 2010-2014 Graph 45: Export of Apples from Azerbaijan 2018 $/kg $/kg 2,5 2 1,5 1 0,5 0 1,5 1 0,5 0

Russian Federation 43 496 0,32 Russian Federation 82 0,39 Kazakhstan 3 158 0,51 Kazakhstan 5 0,82 Georgia 21 0,97 United Arab Emirates 1 0,99 Senegal 7 0,64 Saudi Arabia 0 1,23 Yemen 5 0,27 Maldives 0 0,99 Togo 4 1,14 Malaysia 0 0,23 United Arab Emirates 4 0,38 Burkina Faso 0 0,83 Mali 4 1,31 Qatar 0 1,32 United Kingdom 3 2,03 Bahrain 0 0,91 Bahrain 1 1,18 Mongolia 0 0,48

- 40 000 - 20 40 60 80 100 Tons Thousands tons Export quantity Export price Export quantity Export price

Source: COMTRADE Source: COMTRADE

The competitiveness analysis based on trend and shares of production and trade indicates that Azerbaijan is a competitive producer of apple compared to selected countries.

46

Graph 46: Apple Competitiveness Index – Country Comparison 0,9 0,8 0,7 0,6 0,5 0,4 0,3 0,2 0,1

0

Italy

B&H

Spain

Malta

Latvia

Serbia

France

Poland

Ireland

Finland

Estonia

Austria Cyprus

Albania

Belarus

Greece

Croatia

Sweden

Belgium Bulgaria

Ukraine

Slovakia

Georgia

Slovenia

Portugal

Hungary

Armenia

Moldova

Romania

Lithuania

Germany

Denmark

Tajikistan

Azerbaijan

Macedonia

Kyrgyzstan

Uzbekistan

Kazakhstan

Czech Rep. Czech

Montenegro

Netherlands

Luxembourg

Turkmenistan

United Kingdom United Russian Federation Russian

CEFTA CIS NMS EU15

Source: COMTRADE, FAO, ITC, calculation SEEDEV

VII.1 KEY CHARACTERISTICS OF THE APPLE VALUE CHAIN Dualism at the producer level. On the one hand, there are companies investing in fruit growing and applying modern technologies, and on other hand, there are traditional small growers. Their performance, productivity and marketing differ. Large producers and their investments are the main drivers for growth. They implement innovations such as new varieties, new intensive high-density orchards, irrigation, and fertigation. Small producers have low productivity, since they are producing in small orchards. The income from these small orchards barely covers the financial need of a family, so the orchard becomes of secondary interest to the owners, who in turn become reluctant to make additional investments to upgrade production, resulting in low productivity. The efficient model would be gathering farmers around a service center. Apple producers need different kinds of services at all value-chain levels; from good quality planting material, to pesticides and fertilizers, to machinery and equipment, to technical advice, to reliable traders and quality cold storage. These types of services seem to be common between all farmers; this could be a way to unify small farmers and make them work together. Market channels. 1) Direct farmer-to-retailer sales. This channel comprises direct sales of farmers to retail stores and even on occasion to consumers themselves. Farmers selling into this channel usually are smaller farmers who have good quality product with volumes that can be absorbed by one or two retail stores with which they maintain relations. 2) Wholesale market sales. Apples in this channel flow through the main wholesale market in Baku. Most apples arrive in wholesale markets through middlemen, traders and collectors. 3) Direct packer/exporter sales. This channel is directed to export and the exporters are either companies, producers or traders. Concentrated production. The main areas of apple production in Azerbaijan include Guba, Khachmaz, Balakan, Ismailli, Shamkir, Gabala, and Tovuz regions, with intensive technology orchards. 73% of the total apple production is from Guba-Khachmaz region and more than 10% from the Sheki-Zagatala region, but production in Guba region is also growing faster than overall Azerbaijan production. The growth area with new orchards is in Dagligh-Shirvan region. VII.2 KEY CHALLENGES AND SPACE FOR IMPROVEMENT Export diversification. Although Russia is one of the largest apple importers and apples from Azerbaijan are currently competitive there, diversification into other markets is necessary for the stability of expanding and modernizing production. There are exporters who have already reached Saudi Arabia, the UAE and Qatar. These markets strictly prefer high quality, high value apples. Competition in the Middle Eastern markets is very high. The import of apples to Saudi Arabia is still growing and over the 2014-2018 period the growth of imports was about 3% per year, while UAE imports decreased over the same period by 8% yearly. Indonesia is a very large apple importer and Indonesian imports over 2014-2018 increased by 27% per year. The country imports from the U.S., New Zealand, South Africa and China. Other large importers are Vietnam, India and Bangladesh, and in these countries, imports are increasing every year. Iraq and Algeria prefer smaller, lower quality apples at some of the lowest prices globally. Egypt seems to be the only country that takes in high volumes of both high- and low-quality apples. Table 7: Selected Apple Importers from all Origins (080810)4 Value Quantity Unit value Average Concentration Average imported in imported in (USD/kilogram) distance of the tariff 2018 (USD) 2018 (MT) from supplying applied supplying countries by the countries country, (kilometer) % Indonesia 355,718 163,385 2.177 6,079 0.7 4.7 India 304,008 280,094 1.085 12,420 0.35 48.5 Vietnam 254,708 158,480 1.606 6,134 0.4 10.6 Bangladesh 157,262 201,518 0.780 4,843 0.6 25 Egypt 227,649 180,396 1.262 1,745 0.2 30.2 Iraq 115,315 273,734 0.421 762 0.67 Saudi Arabia 193,525 187,414 1.033 7,898 0.18 0 UAE 162,636 169,855 0.957 8,156 0.11 0 Russia 517,411 843,463 0.613 4,126 0.13 4.4 Focus on quality and standards. In recent years, apple producers have been using modern rootstocks (M9) and modern varieties in intensive planting systems (2,500 to 3,000 trees per hectare). Investments in cooling/storing capacity and quality improvements (including complying with GlobalG.A.P. and HACCP) will further enhance the sector’s competitive position. Inclusion of small-scale producers into the modern value chain. Their entry into the modern market chain is important for Azerbaijan and the easiest way to do it is through co-existence and cooperation between small and large producers, where large ones are introducing new technologies while small are then spreading it farther.

Rationale for Including Apples in Group II: Market Diversification and Quality • Competitiveness analysis showed that Azerbaijan has become a competitive apple producer. • Stable Russian market and opportunity to export apple to other higher value markets such as Middle Eastern and Asian markets. • Significant potential for quality increases, post-harvest techniques, and market diversification. • Existing producers are ready and willing, and have resources to move ahead and invest in access to other markets. VII.3 RECOMMENDATIONS FOR DEVELOPMENT The apple value chain is a high-potential value chain in Azerbaijan. Production is intensified by the group of producers applying modern technologies. Countries with intensive production such as France, Austria or Italy have average yields of 40-60 MT/hectare. Good producers in Azerbaijan can achieve the same yields. This competitive production enables opportunities for exporters to reach markets other than Russia. The sector should develop, expand, and promote Azerbaijani apple products in compliance with international regulations, social responsibility, and ethical trade. Supply Chain strengthening. PSA should develop the capacity of producers and exporters to identify new market opportunities; understanding and conveying market requirements to producers; and reaching mutually beneficial business arrangements with new buyers. It is important to provide technical support for packaging, branding, and consumer awareness.

4 DG Agri Dashboard: Apples last update 25 November 2019

48

Market Diversification. PSA should assist apple producers, traders, and exporters to identify new market opportunities and establish relationships with new buyers in the UAE and Saudi Arabia. This will include participation in relevant trade shows, study tours to the Middle East to meet with prospective buyers to identify the quality requirements demanded, and assistance in supplying trial shipments to target buyers. It is important that production and post-harvest handling improvements are responsive to actual market demands. In addition to the Middle East, PSA should analyze the Asian apple market and investigate trade opportunities there. Table 8: Apple Action Matrix

APPLE VALUE CHAIN ACTION MATRIX Group II: Market Diversification & Quality (Rationale) Context & Trends Gaps & Challenges PSA Interventions & Investments Azerbaijan: • Need to diversify markets and reduce • Identification of new market opportunities • Dual structure of producers: company dependency on Russia • Supply chain strengthening production on hundreds of hectares of • Investments in cooling and storage capacity • Technical support for packaging, branding, modern high-density plantings on one hand (especially ULO cold storage) could improve and consumer awareness and traditional production at small-scale on competitiveness • Market information on export opportunities the other • Need for quality standards and certification • Information on requirements for access to • Concentrated: 73% of total apple production (GlobalG.A.P., HACCP) different markets is from Guba-Khachmaz and more than 10% • Need to include small-scale producers in the • Research on trade channels in different from Sheki-Zagatala modern value chain markets • Exports concentrated on the Russian market • Participation in trade shows and study tours • Growing production trends, faster than the in different markets world average • Apple producers are using modern rootstocks (M9) and modern varieties in intensive planting systems (2,500 to 3,000 trees per hectare) • A competitive apple producer in the international market • Apple export values are increasing • While Russia is the dominant market, there have been efforts to diversify, especially to more lucrative Middle Eastern markets

50 VIII TABLE GRAPES/KIWI/FEIJOA

Table grapes, kiwi and feijoa are selected for inclusion in Group III; they have potential due to some competitive advantages, but are small in size. The focus of activities is to introduce new technology and promote the value chain by working with leading farmers on the introduction of new varieties and other inputs, and organizing demonstration plots to introduce new marketing technologies. For the purposes of this report, these crops are considered one product group, since they share many commonalities: • Small production value; • No reliable data – no specific data for table and wine grapes,5 no international tariff code for feijoa and table grapes;6 • High concentration of production in Lankaran region. Kiwi and feijoa are almost exclusively in Lankaran region, where table grapes have a growing trend and very good climatic conditions; • Have potential, but require a lot of time and investment to be recognized as an Azerbaijani strength (kiwi, table grapes) or as a product in general (feijoa); • Marketing is the same, a focus on the local market, perishable products with similar need for precooling, high potential to expand shelf life with proper storage; • Local demand for all three products, but in very specific time periods; • Production needs significant improvement and investment in equipment and knowledge; • High potential for processing for all products; and • Have started sector product associations, but in rudimentary stage. There are unique characteristics for each product, as summarized in the following table and described in more detail in the sections below. Table 9: Characteristics of each product Feijoa Kiwi Table grapes High market demand Significantly high (around 2.7 Extremely low, limited to reaching 1.5 million MT million MT annual trade), Export demand and Caucasus region, some small world trade in 2018, while growing demand, especially market size trade in feijoa from New 126 countries regularly in Asia, Middle East and Zealand import kiwi Russia Almost all locally produced Import of 3,170 MT and No data about import and Domestic market feijoa is consumed in domestic production of export for table grapes per demand and size Azerbaijan, with very limited around 200 MT. Stable local se export to Russia price Production Extensive, much heritage Varies from modern to No modern table grape technology from Soviet time extensive orchards Number and type Many small backyard Small and medium innovative of farmers involved production operations as All variety of producers farmers, large companies in production part time income and few

5 There is confusion on production data for table and wine grapes: According to the SSC, 59% of the grapes by volume are consumed as table grapes and only 41% as wine (most likely champagne and cognac are included). In contradiction to the data provided by the SSC, other sources convey that table grape production is only 30,000-40,000 MT. In that case, the ratio between table grapes and wine grapes would be 23% to 76% by weight. MoA: approximately 4,500 hectares of grapes are for fresh consumption and the rest of 11,900 hectares are for wine production. The Institute of Viticulture and Winemaking: around 30% of the grapes are being sold as table grapes, whereas 70% as technical (wine) grapes. Although there are different opinions regarding the ratio between table and technical grapes, all experts agreed that 80% of technical grapes are for red wine and 20% for white wine. 6 In international statistics, the production of table and wine grapes are counted as one and it is impossible to compare countries by table grape production because some national statistics have data and others do not. medium-sized producers, that see opportunity for almost no companies diversification of production There is limited possibility 26 countries record export for successful production of of over 1 million USD while Competitors No competition modern table grapes. They 50 over 0.1 million USD in can be produced only in the 2018 south. VIII.1 KEY CHARACTERISTICS OF THE TABLE GRAPE/KIWI/FEIJOA VALUE CHAIN VIII.1.1 TABLE GRAPES Table and wine grapes are two very distinct value chains with different production demands and marketing channels. The world production of table grapes is around 22.2 million MT.7 South Africa and Australia are the major producers and exporters of table grapes, while regionally Turkey’s production is significant at around 1.9 million MT. Azerbaijan was one of the most significant grape producers in the Soviet Union ,with over 2 million MT in annual production. In May 1985, anti-alcohol campaigns started and since then grape production has been steadily decreasing. Since 2005, there has been a slow recovery and the harvested area has nearly doubled. Although grape production in Azerbaijan is increasing, competition in the region has higher production or faster production growth. Regional leaders Turkey and Iran have around 10% of global grape production, while in comparison with them Azerbaijan is a negligible producer. Graph 47: Export of Grapes from Azerbaijan by Month 1000 800 600 400 200

Thousands USD 0

Jul Jul Jul Jul Jul Jul

Jan Jan Jan Jan Jan Jan

Sep Sep Sep Sep Sep Sep

Nov Nov Nov Nov Nov

Mar Mar Mar Mar Mar Mar

May May May May May May 2014 2015 2016 2017 2018 2019

Bahrain Kazakhstan Mongolia Russian Federation Latvia France Kuwait

Graph 48: Import of Grapes to Azerbaijan by Month 800 700 600 500 400 300

Thousadns USD 200 100

0

Jul Jul Jul Jul Jul Jul

Jan Jan Jan Jan Jan Jan

Sep Sep Sep Sep Sep Sep

Nov Nov Nov Nov Nov

Mar Mar Mar Mar Mar Mar

May May May May May May 2014 2015 2016 2017 2018 2019

Turkey South Africa Netherlands Chile Greece Luxembourg Russian Federation

7 December 2018, USDA FAS Report.

52

Source: ITC

Azerbaijan is a net exporter of grapes. From January 2014 to October 2019, exports were around three times more than imports (10,713 MT of export and 3,719 MT of import). One of the main characteristics of this trade in both directions is its variability. Exports varied from 351 MT in 2014 to 2,785 in 2016, while imports varied from 334 MT in 2017 to 1,639 in 2016. Today, good quality, well-prepared for market table grape production in Azerbaijan is modest, with a small number of commercial, export-oriented table grape producers. Production is mainly a backyard endeavor, the supply chain is short, and the end market is at the local green market or in small local grocery stores. As a result, almost all export (99%) is aimed at the Russian market. It is encouraging that recently exports were recorded to Kuwait, France, and Latvia. The main import source is Turkey (66%), followed by the Netherlands (25%), South Africa, and Chile. On the other hand, Azerbaijan has great potential for successful production of modern table grapes. Only a few countries in the world have the conditions to produce table grapes. The table grape producing area is a sub-set of the wine grape-producing belt. The limiting production factor is susceptibility to the fungus Botrytis cinarea; an insufficient number of sunny days causes high humidity and the ideal conditions for fungus growth. In Europe, a few countries have good climatic conditions for successful commercial production: Spain, Portugal, Italy, Montenegro, Macedonia, Croatia, Greece, Georgia, Turkey, France, Armenia, Uzbekistan and Tajikistan. However, the majority of EU countries are able to make high profits with wine grapes and therefore do not focus on table grape production. Grapes are probably the most labor-intensive fruit, as they are all hand-picked, hand sorted and hand-packed; there is no machine that does much of the operations, offering great opportunities for job creation. Grapes are produced in the majority of the regions. The Ganja region dominates with a strong growth trend in production, primarily due to yield increases in the last three years of the period analyzed. Aran and Nakhchivan have had significant production growth while Dagligh-Shirvan has the highest growth in area harvested. There are about 12,000 small producers who produce mainly for their own needs, green market and wineries and about 40 companies, which have large areas of vineyards and wineries. Wineries are organizing both the downstream and upstream value chain. In most cases, they are producing the grape to control the process and the quality. Traders dealing with wine grapes buy from smallholders and sell them to wineries; most likely they act as agents, arranging the flow of goods and money.

Graph 49: Production of Grapes by Region 180000 160000 140000 120000 100000 80000 60000 40000 20000 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Baku city Absheron Ganja-Gazakh Sheki-Zagatala Lenkaran Guba-Khachmaz Aran Yukhari Garabagh Daghlig Shirvan Nakhchivan

Source: SSC

VIII.1.2 KIWI Kiwi is consumed by many consumers, but in small quantities in select time periods, when the price is affordable. It is not a premium product that is consumed only by wealthy consumers, but it is considered a niche product. However, consumption is increasing followed by trade increases, especially in values, which is a clear sign that demand is higher than supply. The average world trading unit value has increased, from 1.6 to 2.05 from 2016 to 2018.

Graph 50: World Kiwi Export Quantity, Value and Unit Graph 51: Main Exporter of Kiwi in World Value 100% 3 500 2,50 Other exporters 90% 3 000 2,00 80% 5-10 next 2 500 70% exporters Greece 2 000 1,50 60% 50% Belgium 1 500 1,00 million inmillion 40% 1 000 Chile 0,50 30% 500 20% Italy - - 10% New Zealand 2014 2015 2016 2017 2018 0% Export USD Export quantity (kg) UV 2014 2015 2016 2017 2018

Source: COMTRADE Although the growing area is more prevalent in the southern hemisphere and Mediterranean climatic zone, kiwi is not an exotic crop with a narrow growing zone. Over 50 countries record kiwi exports, although some of them are engaged in re-export. However, though it is produced and traded in many countries, there is a huge concentration of production and trade. The biggest producers are China, Italy, New Zealand, Iran, and Greece, while the main exporters are New Zealand, Italy, Chile, Belgium (which records huge imports as well), and Greece. New Zealand, as the biggest exporter, accounts for more than 50% of overall world trade, while the top five exporters constitute almost 90%, and the top ten exporters above 97%. Kiwi in Azerbaijan is not a completely new crop; there are orchards that are more than a decade old and producers with good experience and knowledge of the production challenges. However, the area under kiwi 54 cultivation is not large, around 100 hectares in 2017, when it began to increase as large companies established new modern orchards. Annual production varies, but is around 200 MT, and is expected to increase after the new orchards start yielding fruit. ASAP supported producers and had a positive experience working in the sector. There is major production concentration in the Lankaran region and recently some production was initiated in the Sheki-Zagatala region as well. Import of kiwi in Azerbaijan doubled from 2015 to 2018, from 1,470 MT to 3,170 MT, which offers good import substitution potential. The neighboring countries import significant quantities: Russia 75,000 MT, Kazakhstan 4,600 MT, and Georgia 1,500 MT in 2018. Graph 52: Area Harvest of Kiwi in Azerbaijan by Region Graph 53: Production of Kiwi in Azerbaijan by Region

200 250

150 200 150 100 100 50 50

0 0

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Sheki-Zagatala Lenkaran Sheki-Zagatala Lenkaran

Source: SSC VIII.1.3 FEIJOA Feijoa is the fruit of Acca sellowiana, originating in the highlands of South America. Feijoa was first brought to Azerbaijan in 1928 and planted in Masalli and Lankaran regions. Today, besides South America and Azerbaijan, feijoa is grown in Iran, Georgia, Russia, New Zealand and Tasmania in Australia. Graph 54: Production and Area Harvest of Feijoa in Lankaran and Azerbaijan

16000 1200 14000 1000 12000 800 10000 8000 600 6000 400 4000 200 2000 0 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

AZ area Lankaran area AZ production Lankaran production

In 2018, there were 1,008 hectares of feijoa, of which 949 were in Lankaran region. Since the average yield varies from 6-14 MT per hectare, production also varies, but is around 10,000 MT per year. Almost all product is sold in the local market, to be consumed fresh or processed. Some is exported, but there is no official data. Estimates are that around 500-700 MT of fresh product are exported to Russia. Current production satisfies local demand for feijoa. Production increases will lead to price decreases, and lower interest in growing it. Consequently, it is necessary to increase demand to be able to increase production. Demand increases could come from: local market for fresh and processed products, export to Russia and regions where feijoa is a well-known product, and export to European and Middle East markets, where prices could be higher, but the product is not well-known. Each option would require a specific strategy. Of particular interest is the question of whether it is possible to make feijoa recognized and sought after by the consumers in European and Middle East countries. It is possible, but it requires branding as a GI (geographical indication) product, a promotional campaign highlighting all the good features of feijoa (maybe even promoting it as a superfood), packaging improvements that meet international standards, and development of transport infrastructure. This would require a specific product strategy managed by the association of the producers and supported by the GoAJ. VIII.2 KEY CHALLENGES AND SPACE FOR IMPROVEMENT Establish modern orchards of feijoa, table grapes and kiwi. Production of all three products needs improvement. There is room for development by focusing on production improvement. Table grapes can be grown with the tendone system, which should be applied for premium varieties, including seedless, as this trellising and protection system provides much higher quality that is necessary for selling in high-end markets. However, the system also demands higher initial capital, replacement, and maintenance costs. Modern kiwi orchards are established following different growing practices from the U.S., Georgia and other countries. ASAP helped in this stage. Now it is necessary to continue to support production improvements by introducing management of modern kiwi orchards, applying lessons learned, and further disseminating information. Feijoa production is very extensive in Azerbaijan, but there is limited pruning, fertigation, or irrigation. In some cases, the only orchard management is to harvest the fruit when it ripens. Feijoa can provide much better results if it has optimum water, nutrition, macro- and microelements, and space for growing. Rationale for Including Table Grapes, Kiwi, and Feijoa in Group III: New Technology Dissemination Table grapes: • Azerbaijan has investors and a GoAJ support scheme to foster investment in setting up modern high- quality seedless table grape vineyards, which requires significant investment. • Azerbaijan has a long history of grape production and a base of existing production and grape producers can diversify production to modern table grapes and achieve better profits. • There is potential for import substitution (and an expectation that local consumption will increase) as well as export potential in Russian and Kazakhstani markets and new entry into more lucrative markets. • More stable and increasing prices than other fruits due to the fact that there is often a shortage. • As table grape production is labor intensive, Azerbaijan’s comparatively cheap labor is an advantage. • A limited number of countries have the conditions to produce table grapes and Azerbaijan has a long potential production season, from June to October. • There is significant potential for production and marketing improvements, yield increases and quality improvements, improved post-harvest techniques and market diversification. Kiwi: • Azerbaijan has climatic conditions for growing kiwi, which is not the case for most countries, and it is at the border of the climatic area of production offering comparative proximity to markets to the north. • Azerbaijan has experience in growing kiwi. • Large companies have already started production on a large scale (some over 10 hectares). • There is significant import substitution potential. • ASAP had good experience working with kiwi producers, which offers a solid foundation. Feijoa: • Existing production and overall value of production is substantial. • Feijoa is perfectly linked with other products, since the late autumn harvest allows potential to utilize cold storage facilities’ unused capacity. • Feijoa is a recognized brand in Azerbaijan and contributes to the country’s image and health. • There are few products that offer such an opportunity for improvements in the existing orchards. • ASAP experience and work on association development provides a foundation for future work. Open market for premium table grape. The EU is a major consumer of table grapes, total imports in 2017 were estimated at 2.1 billion MT, of which a quarter came from developing countries. The biggest 56

European importers are Germany, the UK, and the Netherlands, as a transit market. The modern European consumer has an increasing preference for seedless varieties, with a balanced ratio of fruit acids and sugars instead of high sugar levels, and bigger bunches, without damage from sun and wind, packed in clamshell packages or smaller snack-sized packages. Premium consumers in Russia and Middle East markets have similar preferences. To reach those markets, besides production improvement it will be necessary to solve specific challenges in post-harvest handling of table grapes: proper post-harvest treatments to limit the rate of deterioration, quick transport to a facility where they can be cooled rapidly to reduce field heat, and organized logistics to bring products to supermarket shelves quickly (for local markets: 1-3 days; for export: 7-30 days). Stabilize production of kiwi with new technology which will substitute imports and establish export channels. Kiwi exports to the EU will require a well-organized supplied chain and controlled production processes while export to the region doesn’t have those requirements. Consequently, Azerbaijan should target to establish two supply chains, one high value (controlled, EU export oriented, high quality), and the other low value (driven by local and regional market, diversify quality). However, for both targets Azerbaijan producers must improve production quantity and decrease production costs, regulate quality, introduce certification of production, and improve packing and labeling - communicate with consumers through labels and pack for immediate consumption. Create brand and promote feijoa. Feijoa has the potential to be a superfood - the new term for products with health benefits resulting from an exceptional nutrient density. Feijoa is good source of vitamin-C antioxidant that works well against viral illness through immune-boosting means, contains folic acid so it is good for pregnant women, and has potassium, magnesium and other vitamins and minerals. Feijoa is also a traditional product in Azerbaijan with specific characteristic in the Lankaran area, which allows it to be registered as a GI (geographical indication) product, a designation which is appreciated, especially among EU consumers. VIII.3 RECOMMENDATIONS FOR DEVELOPMENT PSA should work on these three products to lay the foundation for future development, which may yield real results after the life of the project. Activities should be considered as a pilot to demonstrate viability and profitability and stimulate interest and replication from the private sector. Therefore, the focus will be on lead farmers. Table 10: Main development directions Feijoa Kiwi Table grapes

Common • Investigate and improve growing technology • Introduce and test new varieties • Establish modern table grape, kiwi and feijoa orchards • Develop storage and logistics facilities to increase shelf life

Specific • Promote consumption, • Focus on high quality branding, geographical product, packaging and identification labeling • Investigate different processing options • Investigate IPM and organic production since there is already low use of synthetic pesticides Table 11: Table Grapes, Kiwi and Feijoa Action Matrix TABLE GRAPE, KIWI, FEIJOA VALUE CHAIN ACTION MATRIX Group III: New Technology Dissemination (Rationale) Context & Trends Gaps & Challenges PSA Interventions & Investments Table Grapes: Input Supply: PSA interventions will lay the foundation for future • Production is low, no modern orchards • Lack of understanding of importance of high- development and are a pilot for continued growth • Almost no cold storage capacity for table grape quality seedlings for production beyond the life of the project, with a focus on lead • Market demand is increasing • Significant space for introduction of new varieties farmers. • Profitable export to Russia in certain periods of the of all three crops Across All Three Products: year • Lack of appropriate knowledge and advice about • Investigate and improve growing technologies • Export is increasing to Russia and there are signs of new high-quality input (fertigation, irrigation, plant • Introduce and test new varieties an increasing Middle East market protection) • Establish modern orchards • World demand is increasing, especially for high • Cold storages to help in preparation of products quality seedless table grapes in the off-season Production: for market and increase shelf life of the products • Lack of knowledge of improved production • Packing equipment Kiwi: technologies for all three crops • High quality inputs – fertilizers, bio stimulators, • Small production with no exports • Lack of knowledge on post-harvest management pesticides, herbicides • Mostly old orchards • Different sensors and fertigation equipment • A few large modern kiwi orchards established Marketing: • ICT platforms for sharing knowledge among recently by companies • Lack of cold storage facilities in area with producers, advisors, buyers • Production concentrated in Lankaran but beginning concentrated production which would help in • Formalize supply chain linkages to diversify preparation of products for market and increase • Increased production knowledge based on foreign shelf life of the products Table Grapes: experience • Improved post-harvest handling for table grapes – • Introduce equipment for tendone system • Significant increase in world trade and world improved supply chain management, efficient • Focus on quality improvements in product, demand, followed by price increases transportation, and pre-cooling/cold storage packaging, and labeling • Regional demand is increasing • Regulate and certify quality of kiwi Feijoa: • Establish export channels for Kiwi • Create brand and promotional strategy, Feijoa: • Create brand and promote feijoa geographical identification • Extensive production in old orchards • Stimulate local market demand • Little orchard management and low investment • Investigate processing options • Concentration of production in Lankaran region • Consider IPM and organic production • Stagnation in production, export and prices Kiwi: • Quality of post-harvest is increasing as a result of • Regulate and certify quality increased cold storage • Establish export channels • Stable local demand

58 IX HAZELNUT

Hazelnut production is well-established in Azerbaijan. It is one of the few countries in the world with appropriate weather conditions for hazelnut cultivation; hazelnuts grown in the northern regions are generally ripe by the end of July and harvested from mid-August to mid-September. The introduction of new technologies and other reforms have made Azerbaijan one of the top 3-5 hazelnut- producing countries in the world. Having fully satisfied domestic consumption, the export of hazelnuts accounted for over 45,000 MT in 2018. Not only hazelnuts in their shells, but all types of processed hazelnuts are exported from Azerbaijan to EU and CIS countries, such as Russia, Ukraine, Germany, Spain, and Italy. In addition, Middle Eastern countries have emerged as potential markets. Over the past 10 years, the area under hazelnut orchards nearly doubled. In 2009 there were around 29,000 hectares of cultivated hazelnuts, while the figure increased to over 53,000 hectares of current (2018) production. The target is to increase this number to 80,000 hectares in coming years, supported by subsidies. However, hazelnut yields are modest compared with neighboring countries Georgia and Turkey, which is a major producer. Hazelnut production is a top priority of GoAJ policies, and this is one of the most competitive Azerbaijani products. Most of the country's economic zones, 57 regions in all, are involved in some hazelnut production. Several varieties of nuts are grown in the country. In Zagatala, Gabala, and Balakan grow traditional ancestral and oily nuts varieties, distinguished by the quality of the products. Production is organized mainly in cooperation with the processing facilities. Processors are mainly exporters which offer a wide range of final products. Processing facilities are equipped with modern technology. The European market offers a high unit value and Azerbaijan could improve market share and price competitiveness in the EU market with improvements in supply chain efficiency. Though global hazelnut prices seem steady in the short run, the market demonstrates a substantial volatility as Turkey, which accounts for about 56.5% of global hazelnut production and 62.2% of global shelled hazelnut export, experiences fluctuation in the wholesale price. As the leading producer of hazelnuts, Turkey has been the price setter in the hazelnut market. The recent climatic changes and production limits in the Turkish Black Sea area contributed to price fluctuations in the past few years. Regions in Turkey that are climatically favorable to hazelnut production have reached maximum capacity, and frost in the Black Sea region in 2014 and 2016 resulted in huge losses in hazelnut yields. Global prospects of the hazelnut market. Turkey dominates hazelnut production, with a production share of 71%, and trading share of 59% globally. When it comes to consumption, Europe is expected to register the highest annual growth trend with 7.6% during the forecast period, due to the increasing demand for hazelnuts from the chocolate industries of Europe. Due to the increasing demand from consumers and high health benefits, the market is expected to grow over the forecast period, both in the health segment and in countries and industries where hazelnuts are mostly used in desserts and in chocolates. Azerbaijan hazelnuts have strong prospects on the global markets. About 45,000 SME producers are involved in hazelnut production in Azerbaijan. Hazelnut exports from Azerbaijan in 2018 were 115 million USD (105 million USD in 2016) and more than 68% of exports were to Germany, Italy, France, Poland, Spain and other EU countries in 2018. Currently, Azerbaijan ranks third in hazelnut production and export. Its export and production quantity both increased from the previous year, thanks to favorable weather conditions. As the main goal of the development of the agrarian sector in Azerbaijan is moving from ensuring food security to achieving competitiveness in export-oriented products, Azerbaijan has a significant share in the Russian market (41.1%) where it is in group of imports with a lower unit value. European markets are important for Azerbaijani exporters, but competition is higher mainly from European producers Turkey and Georgia. Shares in this market are modest but growing, with German market share of 5.6%, but Azerbaijani exports have doubled since 2010 and in the Italian market Azerbaijan’s share is 2.7% and exports have more than tripled. Graph 55: Azerbaijan Production by Region 80 70 60 50 Thousands haThousands 40 30 20 10 0 2010 2011 2012 2013 2014 2015 2016 2017 2018

Baku city Absheron economic region Ganja-Gazakh economic region Sheki-Zagatala economic region Lenkaran economic region Guba-Khachmaz economic region Aran economic region Yukhari Garabagh economic region Daghlig Shirvan economic region Nakhchivan Autonomous Republic

Graph 56: Azerbaijan Hazelnut Exports Graph 57: Azerbaijan Hazelnut Imports 120 8 100 7 80 6

60 5

Mllions USD Mllions Millions USD Millions 40 4 20 3 0 2 2010 2011 2012 2013 2014 2015 2016 2017 2018 1 Russian Federation Italy 0 Germany Georgia 2010 2011 2012 2013 2014 2015 2016 2017 2018 Poland Others Area Nes Turkey Germany Others

Source: COMTRADE

IX.1 KEY CHARACTERISTICS OF THE HAZELNUT VALUE CHAIN Though hazelnut production fully relies on small-scale family production, value-chain development is driven by the processing industry. The reason is a largely disorganized value chain with significant power disbalances along the value chain. • More than 90% of hazelnuts are produced by family-run hazelnut producers. The average size of these orchards varies from 1 to 5 hectares, while the majority are under 2 hectares. There is no collective farming and only a few vertically integrated companies combining production and export. • There are professional traders in Azerbaijan who offer different types of final product (shelled, kernels, blanched kernels) of various caliber, and their markets are in mainly in the region and the EU. • The main exporters are large processors with their own and contracted production. Processing facilities with modern equipment are situated in the main production region of Zagatala and increasingly in Khachmaz as well. Buyers have a wide range of final products, including shelled nuts, kernels, chopped, and hazelnut flour. Azerbaijani hazelnuts in the biggest EU import markets have a relatively high unit value, and some exporters are opening storage facilities in EU countries to lower transport costs. • Processors are usually hazelnut exporters and hazelnuts are exported from Azerbaijan in processed form. • The farm gate price of hazelnuts in Azerbaijan is set by processors. Disorganized small producers cannot influence the price. 60

• There are organized attempts to join forces at the end of the chain, as the processors join networks and organizations to improve visibility and negotiation position on the export market. The Azerbaijan Hazelnut Exporters Consortium (AHEC) was formed to promote an increase in exports of hazelnuts by Azerbaijani enterprises. It consists of five manufacturing plants which are exporters of hazelnut. • Currently, NGOs (such as Ganja Agribusiness Association (GABA)) seek to improve the productivity and sustainability of hazelnut production. Their activities with farmers involve human resource development and knowledge, agricultural inputs and grantmaking. Figure 6: Typical Roles in the Hazelnut Value Chain

Table 12: Key characteristics of the value chain

Competitors Azerbaijan

Producer/ Hazelnuts are usually produced by many small Hazelnut production relies on both small cooperative holders in the regions particularly beneficial for individual holders that represent the majority production: Black Sea regions in Turkey, Georgia, of the Azerbaijan agricultural sector, and Piedmont, Avellino in Italy. The level of farmer processing companies organizing their organizations differs from that of the highly production such as AZERSTAR Manufacturing organized groups in Italy and similar stage of and Trading, one of the largest national organization in Turkey, Georgia. companies with 50 hectares of hazelnut production in Zagatala. Cooperative/ The aggregation of production is done by the Aggregation is usually done by the processors middleman middleman in Turkey and Georgia and by producer who are directly purchasing from the organizations /cooperatives in Italy and Spain. The producers. second model allows for the producers to keep part of the higher value within their price. Processing/ They are often the drivers of VC development, There are over 20 medium-sized domestic cracking organizing purchase, quality control and processors, and all of them are approved to production, acting as aggregators of supply and export hazelnuts. Most of the processing improving quality of raw material. operations are located in the Sheki-Zagatala region and only three plants are operating in the Guba-Khachmaz region. Traders/ Today large European enterprises have long-term Azerbaijan Hazelnut Exporters Consortium exporters relationships with suppliers. For example, the accounts for over 50% of all hazelnut exported Turkish exporters control the market, not the from Azerbaijan. importers, based on the fact that the demand is higher than the supply. The choice here is usually The bulk of revenue comes to a few producer- dependent on the size of the exporter. Large- exporting enterprises or mediators. Hazelnut volume importers buy directly from the producer; traders to foreign markets, or the end-user are smaller exporters usually use a traditional the ones which benefit from the margin. wholesaler or importer as middleman. Packers Packers are the most important channel in terms There is no retail packing in Azerbaijan, so bulk of quantity of traded edible nuts once imported, as is sold in wholesale packaging, almost all more than 50% of all products are re-packed in producers sell in bulk packages of 50 kilograms Europe into smaller packs for the retail and food or larger. service sector. Packers increasingly pack under private-label brands for retailers. Many wholesalers also have packing facilities, but this is more common for suppliers to the food-service segment than for retail suppliers. Consumers Confectionery industry, bakeries and the breakfast Hazelnuts are an important part of the cereal industry, other food industries and retail and Azerbaijani diet and a widely used ingredient. food service. Hazelnuts are consumed raw (mostly However, there is not much processing that roasted but also in their natural dried state) and uses hazelnuts for final products. processed. Italy, Germany and Switzerland are major importers due to a developed processing industry. Processors (Ferrero, Nestle) also work on the establishment of production and improvement of value chain abroad. IX.2 KEY CHALLENGES AND SPACE FOR IMPROVEMENT Both demand and global nut prices are increasing so there is an opportunity for Azerbaijan to enter new markets with upside potential: • Though global nut prices are increasing, the costs of transport and logistics are also on the rise. This contributes to a tighter, more competitive market. EU buyers are responding to these pressures by opting for quality over quantity. They are imposing tougher requirements with respect to pricing, food safety, product documentation, innovation and sustainability. • With organic or fair-trade products, value addition of 30-50% is achievable by producers, despite the additional costs for certification. The best opportunities to add value to the product are in production (Organic, Fair Trade) and export processing. • In terms of traceability and certification, clear, correct and comprehensive documentation is the basis for value addition at the product stage. A European Commission FVO audit in 2013 outlined a number of recommendations that would improve the ability of the certifying agencies to ensure that hazelnuts exported to the EU do not contain aflatoxins exceeding the maximum levels. These recommendations are related to export procedures, staff knowledge of EU sampling requirements, management of non- compliant lots, and laboratory performance. • For international exporters, the EU markets are a particularly important information channel when it comes to grades, quality, sanitation, equipment and packaging. Currently, half of the exports are directed towards Russia, which is completely import dependent and due to political issues has unstable relations with Turkish suppliers. On the other hand, many of the processors look to diversify market channels to reduce risk. • There is still a yield gap between Azerbaijan and Italy and the U.S., which have better organized market chains and more intensive production. Expanded orchard area, improved production techniques and higher export volumes are required to close the gap.

Most Needed Improvements along Most Profitable Potential Investment along Hazelnut Value Chain Hazelnut Value Chain

• Improved technical and advisory support for • Expansion of new intensive hazelnut orchards production practices • Higher levels of hazelnut processing, in addition to • Improved quality through farmer training deshelling

62

• Lack of long-term and formal relationships • Develop food safety control and certification along the value chain, in particular regarding programs purchasing and price setting • Enter new markets and promote awareness of • Need for improved aflatoxin control systems to quality Azerbaijani hazelnuts prevent contamination in hazelnuts intended

for export to the EU • Need to improve food safety control measures to enhance competitiveness in the export market

IX.3 RECOMMENDATIONS FOR DEVELOPMENT Quality orientation along the whole value chain is a precondition to compete in demanding markets. Azerbaijani hazelnuts have the following advantages in the world market:

• Variety: 90% of all hazelnut orchards in Azerbaijan is considered to have the Ata-Baba variety, although recent research has suggested that what is deemed to be Ata-Baba may actually represent a number of different varieties). Its round shape and insect resistance allow for standard and high quality in the international market. Ata-Baba is very similar to the Giresun Quality Turkish hazelnut that is synonymous with optimum quality in Europe.

• Size: The crop produced in Azerbaijan meets the international size requirements of hazelnuts and hazelnut kernels.

• Proximity to the market: Proximity to the Russian, Ukrainian and Baltic markets decreases transportation costs and customs duties are also lower vis-à-vis competitors. Good relationships with EU companies and more than 20 years’ experience have also earned Azerbaijan a market position as a reliable partner. Azerbaijan also enjoys relative proximity to eastern markets, China and Japan, which rely on U.S. imports.

• Organic production: Due to growing without use of chemical fertilizers, Azerbaijan hazelnuts command a premium on the world market.

To leverage these advantages and better position Azerbaijani hazelnuts to compete, the following activities are a priority:

Promote expansion of new intensive hazelnut orchards. It is important to increase areas harvested by paying more attention to the quality of seedlings, technology, efficiency and quality of their products. The primary support for hazelnut farmers is from NGOs and the GoAJ through subsidy schemes for new seedlings, but training on hazelnut production and harvesting technology is also important. Support processors in identifying and investing in a higher level of hazelnut processing. Adding value is the key to increased unit value and better value addition, regardless of whether it is done through processing or implementation of quality standards. Apart from Organic, where there is a significant niche, the UTZ Code of Conduct is also a very attractive certification option. It contains requirements for management and for implementing good agricultural, social and environmental practices, which contribute to sustainability outcomes. Also, there are locally registered international certification bodies in Azerbaijan, which are specialized in ISO 22000, ISO 9001, ISO 14001 and OHSAS 18001 audits. Establish linkages and integration along the Value-Chain. Some actors, particularly farmers, still face restrictions relating to information asymmetry, trust issues regarding which organizations are authentic and the subsidy process, and need support to plan their production and set prices as well as to reach the market. It is important to systematically build long-term contractual relations to improve confidence and trust. Promotion to enter new markets and awareness of the quality of Azerbaijani hazelnut. Hazelnut production will increase (double) in Azerbaijan in a few years (the new orchards will start bearing in the near future). As competition in the export market also increases, it is necessary to expand and diversify the market. Rationale for Including Hazelnuts in Group I: Priority Group • Good development, production and export growth need to be multiplied. Azerbaijan has competitive production with good potential for expansion. • The market is already diversified with significant penetration of the EU market. However, it is possible to open new markets and increase share in high value markets. • Existing producers are ready, willing and have the resources to move ahead and invest in access to other markets • Significant potential for production and marketing improvement in particular yields and post-harvest techniques • It is expected that production consolidation will happen, and PSA can support that process.

64

Table 13: Hazelnut Action Matrix HAZELNUT VALUE CHAIN ACTION MATRIX Group I: Priority Group (Rationale) Context & Trends Gaps & Challenges PSA Interventions & Investments Azerbaijan: The market is tightening even as prices rise, due to • Support expansion of the new intensive hazelnut • Ranks fourth in hazelnut production and export increased quality and food safety requirements, and orchards by improved access to high quality • One of the most competitive products in the increasing transport and logistics costs. This increases seedlings, technology, efficiency and quality of their country competitive pressure and makes it even more products • A top GoAJ priority with significant government important to address current gaps in the value chain: • Support to technical, advisory support for support production practices • Relations with importers are still new and evolving • Insufficient traceability and control of the product, • Improve quality by exchange of know-how and due to relatively recent entry on the global market HACCP plans though introduced are not fully training for farmers • Entering new markets as there is high demand for implemented • Support processors in identifying and investing in this product • Resorting the product for the markets with higher higher level of hazelnut processing • Overall a strong strategy for this value chain, but aflatoxin tolerance • Support quality improvements and certification room for improvements at all points • Lack of consistent quality: opportunity to add value (ISO, OHSAS) through certified production • Establish supply chain linkages and support value World and Regional Trends: • Small land plots and poor yield and productivity chain integration • Both demand and global nut prices are increasing compared to competitors • Promote entry to new markets and awareness of • Europe growth is highest, due to increasing from • Fluctuation in volumes of production due to climatic the quality of hazelnut the chocolate industry influence • Improve control systems to prevent aflatoxin • Improved quality due to increase in high-quality • Dependency on Russian market in spite of high contamination hazelnut production, but also improvement of potential of other markets • Gain competitiveness at the export market by processing technology • Buyers are the main conduits for technical and improving food safety controls • Potential for packaging under proprietary brands or market information • Explore opportunities, interest, resources for private labels emphasizing quality and origin • Significant opportunities for value-added processing organic hazelnut production

X PERSIMMON

Azerbaijan is one of the largest persimmon producers globally, with good rankings in production and trade. There are many different species of persimmon, the most popular being the Japanese persimmon or kaki. Only 15 countries in the world produce persimmon, and only ten of them have annual production over 3,000 MT. Azerbaijan has a dominant share in the region, CIS, NMS, and EU15, while other producers include Iran, Uzbekistan, Spain, Italy and Slovenia. Production in Azerbaijan is extensive and based on fruit gathering (rather than intensive cultivation). Nevertheless, Azerbaijan has the highest yield of all selected countries at 18.1 tons/hectare and the most extensive harvested area under persimmon. There are increasing trends in both area harvested and total quantities. Persimmon as a fruit is gaining ground on market shelves, as it is a fresh, sweet, directly edible low-calorie fruit with high fiber content and antioxidants. Persimmon is a highly marketable product, as over half of Azerbaijan’s production is exported. In spite of slight oscillations, exports are high, and mostly dependent on the Russian market, which makes them vulnerable to market fluctuations. Diversification of export markets, particularly to other neighboring countries, will be important in reducing market vulnerabilities. Graph 58: Azerbaijan Persimmon Production and Area Harvested 180 12 160 10 140 120 8 100

Thousands Thousands tons 6

80 Thousand Thousand hectares 60 4 40 2 20 0 0 2010 2011 2012 2013 2014 2015 2016 2017 2018

Production Area harvested

Source: FAO

International trade in persimmons amounts to about 600,000-700,000 MT per year, which is worth 500-600 million USD. Russia is the main importer worldwide by far, importing more than 160,000 MT of persimmons, which is worth 130 million USD annually. Germany takes second place, and Kazakhstan, which mainly re-exports the fruit, stands third. The ranking also includes Ukraine, France, Italy, Belarus, Lithuania, Thailand, and Poland. The global leaders in persimmon exports are Spain and Azerbaijan, which in 2018 exported 168,300 MT and 135,200 MT of the fruit, respectively. The top twenty largest persimmon exporters also include Georgia, Tajikistan and Armenia, all of which have seen their exports increase.

66

Graph 59: Export Persimmon Azerbaijan 2010-2018 Graph 60: Import Persimmon Azerbaijan 2010-2018 160 45 140 40 120 35 30 100 Millions Millions USD 25 80 20 60 15 40 10 20 5 0 0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2010 2011 2012 2013 2014 2015 2016 2017 2018

Russian Federation Ukraine Russian Federation Algeria Others Georgia Belarus Others

Persimmon exports from Azerbaijan increased significantly. Presumably, part of the export volume of Azerbaijani persimmons was accounted for by the re-export of fruits from other countries.

Graph 61: Azerbaijan Persimmon Trade Balance 160 Trade balance for 140 Azerbaijani persimmon 120 is strong and positive. 100

80 Millions Millions USD 60 40 20 0 2010 2011 2012 2013 2014 2015 2016 2017 2018

Export Import Trade balance

X.1 KEY CHARACTERISTICS OF THE PERSIMMON VALUE CHAIN Persimmons are a well-known crop in Azerbaijan and can be grown in many regions of the country. Not all production is done professionally; some growers do not have a way to sell the fruits and then these fruits are not picked or sold. A long production tradition has created good know-how and a vast range of producers. Still, persimmon is mostly a secondary crop, used to prolong the production season as its harvest is in late autumn (October-December). Luckily, persimmon is a hardy plant and there is no need for large investments in plant protection, nor extensive crop management during the production season. While persimmon can be grown nationwide, it is prevalent in the regions of Aran, Ganja, Barda, and Sheki. 10,474 hectares were harvested in 2018, with an upward trend of quadrupled production over the last 20 years. Constant expansion of production is crucial for growth and stability over time, securing the base for the processing industry. This is particularly important since persimmon trees have late maturation and the first few years of fruit bearing are not good harvest years. It takes up to 7 to 10 years for persimmon trees to reach their full production potential.

Graph 62: Persimmon Area Harvested by Region

14,0 Nakhchivan Autonomous 12,0 Republic Daghlig Shirvan 10,0 Yukhari Garabagh Thousands ha 8,0 Aran 6,0 Guba-Khachmaz 4,0 Lenkaran

2,0 Sheki-Zagatala

0,0 Ganja-Gazakh 2010 2011 2012 2013 2014 2015 2016 2017 2018

10,474 hectares were harvested in 2018, with a consistent upward trend; all the areas increased four times in the last 20 years.

At the same time, persimmon trees are prone to bearing biannually or even having a multi-year bearing cycle. This alternate bearing means that you can have a large crop one year but not see anything the following year, waiting until two, or even several, years later, if the tree has fallen into a multi-year bearing cycle. This is common with persimmons. To prevent this, constant irrigation needs to be introduced, as well as growing persimmon in unpolluted areas with few stressors. However, even well-cared-for persimmons may still not produce crops every year due to damage to the reproductive organs or the tree's self-protection measures when it bears an especially heavy crop. Lately export promotion initiatives have begun to integrate actors along the value chain. The Persimmon Producers and Exporters Association was established in August 2017, on the initiative of entrepreneurs and with the support of the Ministry of Economy of Azerbaijan, to increase the number of persimmon orchards, expand persimmon production, and maximize exports. The annual production capacity of the association is more than 6,000 MT and the focus is on improvement of storage and processing facilities, and offering consumers abroad a wide variety of Azerbaijani persimmon products - high quality products in different stages of drying (dried, chips, and frozen semi-dried), in attractive packaging and with prolonged shelf-life.

Rationale for Including Persimmon in Group II: Market Diversification and Quality • Being the second largest trading nation for this crop puts Azerbaijan in the spotlight when it comes to supply of persimmon. • Azerbaijani producers are export oriented, as only 10% of the yield is locally consumed. Still, there is very little market diversification and current export is predominantly to Russia. The market should be expanded beyond Russia as very few countries have persimmon production. • Finding export buyers has been one of the strongest barriers in export. • Production is extensive and mainly based on fruit gathering. Nevertheless, Azerbaijan has the highest yield of all selected countries at 18.1 MT/hectare and the biggest harvested area under persimmon. • If processing, packaging and standardization are improved, there is a strong potential for higher prices on the export market based on quality improvements. • Persimmon is a super fruit with very high health properties: fiber, minerals, carotene, organic acids, and is becoming globally appreciated for its health properties.

68

Internationally, the production of and demand for persimmon is growing strongly. Azerbaijani persimmon is mainly exported to Russia, Ukraine, Belarus, Kazakhstan and the UAE. In 2017, Azerbaijan sold persimmons for a total amount of 97 million USD. In 2018, cultivation reached 135.2 million USD, which indicates an increase of 17.5% over the previous year. Graph 63: Top 5 Exporters on Russian Market

180 Azerbaijani persimmon 160 dominates the Russian 140 market. 120

100 Millions Millions USD 80 60 40 20 0 2012 2013 2014 2015 2016 2017 2018

Azerbaijan Spain Uzbekistan Israel China Others

X.2 KEY CHALLENGES AND SPACE FOR IMPROVEMENT Persimmon is a true niche, specialty product where Azerbaijani agriculture is naturally positioned, and this competitive advantage could be further improved.

Despite relatively low production demands, there is a need for improvements in knowledge of modern growing techniques and introduction of modern varieties and certified planting material.

Also, there are very few processing facilities (drying, storage) as well as other processing techniques, so improvement of these capacities could improve access to different markets.

Dependence on one market, Russia, also makes the whole value chain vulnerable to the shocks and overly dependent on prices and conditions in one country. Considering the lack of competition in the global market, Azerbaijan should make a concerted effort to penetrate other export markets.

Figure 7: Bottlenecks, Improvements and Investments Lack of quality Lack of Lack of modern Very little Persimmons are planting material knowledge of ULO cold processing considered an Inputs Access to new specific growing storages Processing exotic fruit and technologies consumption per varieties Lack of Processing mostly in drying Production capita is low Competition in Lack of knowledge of and development Consumption the fertilizer and knowledge of appropriate of concentrate pesticide market nutrition post-harvest production still technologies for not introduced Postharvest (storage) harvest, handling, storage

X.3 RECOMMENDATIONS FOR DEVELOPMENT Persimmon is highly recognized for its economic value in Azerbaijani agriculture. It is a profitable agricultural product, but the processing of this product still needs coordination and enhancement.

Most Needed Improvements along the Most Profitable Potential Investments along the Persimmon Value-Chain Persimmon Value-Chain • Access to certified planting material • Modernization of orchards: new varieties and new • Development of fertilizer, pesticides and best growing technologies, intensification of production management practices • ULO and cold storages • Marketing through multiple channels to reduce • Sorting and packaging lines reliance on a single market • Strict internal control and third-party certification to • Enter into sales or price contracts with buyers meet the requirements of developed markets. • Improve post-harvest handling and storage • Conduct market research to connect with potential buyers

Development of storage and post-harvest infrastructure. There is not much adequate storage and that affects the quality of persimmon, particularly in the later season. The competition (Israel) is developing modified atmosphere packaging, which allows longer storage of persimmons, which can create a year-round market for the fruit and facilitate longer shipping distances. After going through the de-astringency process to make them more pleasant for consumption, the persimmons are treated in a modified atmosphere environment with a low oxygen, high carbon dioxide, concentration for storage of up to 3-4 months. The new packaging and treatment ensure a firmer fruit while staving off Persimmon Black Spot Disease, a fungal disease which affects up to 50% of persimmon yields, and which usually appears during long periods of refrigeration. With the extended storage technologies, the fruit can be stored for up to five months with little wastage. Find export buyers. There is very little diversification of the market destinations in export. This can be addressed by creating links with new buyers and by looking at what the competition does. The EU fruit market had a strong crisis and was much affected by the Russian market closure. EU persimmon producers (Spain) have focused on the internal EU market as well as on entering other markets with competitive prices and good quality. Spanish Persimmon is on the rise, due to increased demand, little competition, and production set to soar in the coming years. PDO Spanish persimmon from Ribera del Xúquer To ensure excellent quality, a Regulatory Council was founded in 1998 to regulate the production, quality, flavor, appearance and packaging of persimmons grown and certified in the Ribera del Xúquer area. The Council administers a strict and efficient control system to ensure the persimmons from this region are grown to the highest possible standards, and that all its grower members comply with international food safety regulations. Since 2001, it is a Protected Denomination of Origin by the European Union.

Continuous efforts to enter new markets and promotion of the quality of Azerbaijani persimmon should be the focus of interventions, together with the strengthening of the value-chain network.

70

Table 14: Persimmon Action Matrix

PERSIMMON VALUE CHAIN ACTION MATRIX Group II: Market Diversification & Quality (Rationale) Context & Trends Gaps & Challenges PSA Interventions & Investments Azerbaijan: • Lack of modern varieties and certified planting • Access to certified planting materials • One of the biggest persimmon producers globally, material • Modernization of orchards to intensify and upgrade ranking high in production and trade • Restricted competition among the fertilizer and production (infrastructure, irrigation) • Long tradition of persimmon production, good pesticide dealers • Sorting and packing lines quality and yield, good environmental conditions, • Lack of intensive production and technical • Strict internal control and third-party certification low pest and climate risk knowledge on modern growing techniques • Invest in more ULO cold storages to extend • Production is traditional, with minimum • Very few processing facilities (drying, storage) as marketing season, along with new packaging and investments in plant protection well as other processing techniques post-harvest treatments • Over half of the production is exported • Dependence on one (Russian) market leads to • Develop export promotion strategy to reach new • Exports are dependent on the Russian market, increased vulnerability markets which make it vulnerable to fluctuations, but • Promote and position a branded, Azerbaijani demand is strong, and the market is easily persimmon accessible

General: • Persimmon as a fruit is gaining ground on the shelves • Sweet, low-calorie delicacy with high fiber content and antioxidants • Easily transportable fruit that stores well • The fruit can be consumed when it is green or ripe, and can be ripened to taste at room temperature XI POMEGRANATE

The pomegranate has become an Azerbaijani trademark and made its way into culture and art, becoming part of Azerbaijan’s identity and gastronomic tradition. Although cultivated in Azerbaijan for millennia, only in recent decades has the pomegranate started to be systematically researched and improved, with noticeable market and production expansion. Globally, pomegranate and its derivatives are gaining in popularity, both for fresh consumption and processed in the food, beverage, pharmaceutical, and cosmetics industries. The area of pomegranate orchards in Azerbaijan has been growing since 2000, increasing from 9,300 hectares to almost 23,000 hectares in 2018. In 2018, about 155,105 MT of pomegranates were harvested in Azerbaijan. However, the information on exports is difficult to verify since pomegranates do not have their own individual Harmonized System code. They are included in the code for “fresh fruit not included elsewhere,” therefore the exact and mirror data on trade are difficult to obtain. Still, there are noticeable positive trends in exports and Azerbaijan is becoming more recognized in the global market. Several strong processors have developed local brands for premium juices, oil and other products that are certified and exported to regional, European and Asian markets. Graph 64: Azerbaijan Pomegranate Production and Area Harvested 180 24 160 20 140 120 16 100 12 Thousands Thousands tons 80

60 8 Thousand hectares 40 4 20 - - 2010 2011 2012 2013 2014 2015 2016 2017 2018

Production Area Harvested

Source: SSC Graph 65: Regional Production of Pomegranate in Azerbaijan 2010 - 2018

25,0 Pomegranates are cultivated in almost all 20,0 regions of Azerbaijan, but those in Goychay region 15,0 are considered to be the best. The Azerbaijani Thousands ha 10,0 pomegranate has become 5,0 synonymous with the 0,0 Goychay pomegranate and 2010 2011 2012 2013 2014 2015 2016 2017 2018 is appreciated interna- tionally. The secret of the taste and quality is the Baku city Absheron unique microclimate and Ganja-Gazakh Sheki-Zagatala productive soil. Lenkaran Guba-Khachmaz Aran economic region Yukhari Garabagh Daghlig Shirvan Nakhchivan Autonomous Republic

Source: SSC

72

There is growing interest at the international level on the part of the food, pharmaceutical, and cosmetics industries in including pomegranate on their lists of ingredients because of its nutritional value, bright color, sweet and sour flavor, and health properties. Cultivation of pomegranate has expanded to five continents, with India, Iran, China, Turkey, the U.S., Spain, South Africa, Peru, Chile and Argentina being the major players in production, as well as international trade in this fruit. Since 2013, India has been the world’s largest pomegranate producer and one of the largest exporters of fresh and processed pomegranates, with a production of 745,000 MT that year. Iran is in second place, followed by China. Table 15: Trends Favorable For Pomegranate Market Growth and Consumption NEW AND EXOTIC IN THE NORTH: Unlike Southern European countries, consumers in northern countries are less familiar with the characteristics and uses of pomegranates. Pomegranates are not considered mainstream in northern countries. Nevertheless, these consumers prefer variety in the supply of products. Promotional materials such as recipes and media attention to new exotic or healthful products have the potential to boost the consumption of a product quickly.

HEALTH PROPERTIES INCREASING DEMAND CONVENIENCE

In the European media, pomegranates have recently been classified as a ‘super fruit’ - exotic fruits with higher than Consumers are increasingly average levels of antioxidants, Both for fresh consumption and expressing a preference for fruit nutritional content and success processed in the food, beverage, that is easy to prepare and eat. with modern consumers. Given pharmaceutical or cosmetic Pomegranates are sold per piece the tendency of European industry, pomegranate and its as whole fruits, but supermarkets consumers to embrace fruits that derivatives are gaining in are also offering the fruity seeds are healthful and tasty, health popularity. packaged as a fresh or deep- benefits are one of the main frozen product.

drivers of market success.

Pomegranate juice improves appetite and treats anemia and other diseases.

Flavor is becoming increasingly important to European consumers, as is the appearance of the fruit. An attractive pomegranate skin color and skin structure is appealing to retail consumers. Since pomegranates are more exclusive fruits, consumers put more emphasis on specific flavor.

Relative price stability over the past decade (2.5-3 Euros) has been disturbed by the steeply rising supply, which has led to import prices dropping every year, a sign of market maturation. Current production is beginning to saturate existing and consolidated markets such as the EU, U.S., and Middle East. With strong competitors in the global arena, Azerbaijan has had to carefully define its advantages in the market, which is still primarily Russia and regional markets. XI.1 KEY CHARACTERISTICS OF THE POMEGRANATE VALUE CHAIN Pomegranate value-chain development is strongly supported and influenced by public policy interventions. Recognizing its export market potential, and the global focus on healthy and natural superfoods, the GoAJ took a number of steps in recent years, such as subsidies and organization of pomegranate festivals, to promote the pomegranate industry. As a result, the improved value-chain organization is now a showcase and example for the development of other value chains in the agricultural sector. Initially, based on traditional and small-scale production, the sector benefited from significant intensification in primary production, which provided a supply base for the processing capacities that are worth further expanding. Some of the large processors are: • Gabala Canning Plant: a member of Gilan Company, known for fruit processing, and with a capacity to process 210,000 MT of fruit juice and nectar; • Az-Granata: one of the largest beverage producers in the South Caucasus region, is a juice and wine producer founded in 2011. It produces fruit juices, concentrates, compotes, wines and vodka, with a focus on exports of pomegranate juice and concentrate; and • Aznar: a pomegranate processing factory famous for its GRANTE brand - natural pomegranate juices produced in Goychay district in Azerbaijan with fruit production on around 1,000 hectares. Juices are widely supplied and sold globally. In addition to the domestic market, they are sold in the U.S., Greece, Germany, Russia, Ukraine, Belarus, Estonia, Latvia, and Georgia. Rationale for Including Pomegranate in Group I: Priority Group Pomegranate offers a globally strong niche market opportunity, with value-adding potential in both fresh and processed products, making it a unique feature of the Azerbaijani agricultural sector. There are many reasons for focusing on pomegranate: • Growing interest at the international level on the part of the food, pharmaceutical and cosmetic industries in pomegranate as an ingredient because of its nutritional value, bright color, sweet and sour flavor, and health properties. • Not an investment intensive crop; net costs per hectare are relatively modest compared to other high-intensity crops, so there is potential for many small farmers to participate in production. • Processors have been developing a number of high-quality products – not-from-concentrate (NFC) juices, seed oil, nectar, compotes that have export potential • Long tradition in production, with a legacy that helps to differentiate the product • Developed value chain with high potential for coordinated swift introduction of interventions • Strong and cooperative players have a joint voice advocating for the sector with policymakers and in the marketplace.

The export of pomegranate is promoted under a national Made In Azerbaijan campaign and the coordinated efforts of the Pomegranate Producers and Exporters Association of Azerbaijan. This organization started in 2016 to serve as a uniting point for producers and processors and to play a role in providing technical advice and assistance to members. The figures on the overall processed volume for 15 large companies in 2018 range from 60,000 MT to 70,000 MT. The expected delivery to foreign markets was 12,000-15,000 MT in the same year, which is a significant increase over the 10,000 MT of the previous year. PPEAA serves as an umbrella organization for export partners, promoting the Azerbaijani pomegranate on the global market and serving as a platform for strategic planning and advocacy for the value-chain actors. PPEAA’s technical support activities include: • Advice and training on the use of advanced production technologies in the pomegranate harvest; • Assistance to pomegranate producers in obtaining necessary documents and certificates (GlobalG.A.P., Organic, Bio) for export; • Support for the establishment of cooperatives for quality products supplying domestic and foreign markets; and • Establishing a brand for Azerbaijani pomegranate to sell products under one brand. XI.2 KEY CHALLENGES AND SPACE FOR IMPROVEMENT The global demand for pomegranates is increasing constantly; the product group in which pomegranates are included shows a year-on-year import increase. The total import volume increased from 67,000 MT in 2013 to 95,000 MT in 2017. This global growth is driven by suppliers worldwide, with Turkey and Peru as the main drivers, but also Israel and Chile. Regulations and compliance with buyer requirements pose a major obstacle for producers and exporters seeking to enter the market. To position on the market and face growing competition, the pomegranate sector needs to address a number of challenges: Variety selection to meet market demand. Selection of pomegranate varieties on a scientific basis has been going on for about 50 years, a short period compared to millennia of local traditional selection. 74

Azerbaijan is considered the only country where all major varieties of pomegranate grow. Guloysha, Vesel, Shandi, Shirin and Bala Mursal are the varieties primarily cultivated in local orchards. To further develop pomegranate production, cultivation of new varieties and planting of new orchards needs to be an ongoing process. Irrigation and production technology to improve the yield and productivity. Intensification of pomegranate production is one of the key needs. Practices must be improved to increase yields to the averages of other pomegranate producing countries. Improvements start from varietal selection and planting to pruning, irrigation fertigation, and harvesting. Each of these steps requires a horizontal upgrade to all actors in the value chain. Post-Harvest Challenges. The harvest begins in the final weeks of September and continues until mid- November. The rains that are typical in this season, combined with a lack of available labor, cause the loss of 30 to 40 percent of the harvest. The issue of appropriate storage is also critical for many producers, as post-harvest treatment of the harvested fruit indicates a lack of storage facilities for extended fresh sales.

Introduction of standards. GlobalG.A.P. and organic or other voluntary standards opens the doors to new or specialized markets. Tracking and tracing are needed for importers and traders and certification for consumers to address the buyer requirements can be an obstacle to market entry. Premium Product for Premium Price. A lot has been done to develop the processing sector and produce juices, pomegranate seed oil and pomegranate sauce, as well as tannins from the skin, but the trends and latest industry leads need to be followed to address the consumer’s need for convenience, health properties and premium quality. There is growing consumer interest in direct sourcing of products from small brands that build their communication and consumer confidence based on the proximity to the production base rather than the power of the brand. XI.3 RECOMMENDATIONS FOR DEVELOPMENT Azerbaijani pomegranate, which is specific in taste and tradition, struggles to find its place in the markets, not only in Russia and the rest of the CIS, which are traditional markets for the Azerbaijani pomegranate, but also in European, Middle Eastern and North American countries. Until now, the barriers have been significant when it comes to strict maximum residue limits, high quality, food safety certifications and additional social compliance. As a new supplier, Azerbaijani producers need not only to prove their compliance with all regulations, but also to work on infrastructure and governance of the value chain to accommodate market entry. Some of the possible measures include: Intensification of Production. This will be achieved through promotion and introduction of new production practices from establishing new orchards to irrigation, pruning, and fertigation. This complements the capacity building efforts of PPEAA, which need to be further backed by investment support. Post-harvest. Post-harvest handling and storage interventions are required to address the critical points along the value chain. PSA should explore different ways of preserving harvest quality for extended sale, but also enable picking the fruits at their peak and with the necessary machinery. Association development. PPEAA should be supported in its efforts to improve organization of the value- chain to access new markets and be able to respond to needs all along the chain. Market Positioning. PSA should work with pomegranate producers and enterprises on promotion and positioning to enter new markets and increase awareness of the quality of Azerbaijani pomegranate. Table 16: Pomegranate Action Matrix POMEGRANATE VALUE CHAIN ACTION MATRIX Group I: Priority Group (Rationale) Context & Trends PSA Interventions & Gaps & Challenges Investments Azerbaijan: • Need for scientifically based • Promote intensification of • Traditional crop varietal selection, cultivation of production through improved • Quality reputation in CIS market new varieties production technologies: • Development of new varieties by • Practices must be improved to implementation of drip irrigation local research institutions increase yields, which are lower systems, fertigation, pruning • Processing industry is getting a than in other countries (pruning, • Introduce advanced harvesting reputation for quality fertilization, irrigation, harvesting) technology to reduce losses • Farmers interest in production • Proliferating varieties bring • Assist in obtaining documents and • Good climatic conditions that diversity, but also are difficult to certificates for export could favor earlier varieties manage • Support educational activities in • Value-chain organization is a • Long harvest season combined logistics flagship for the whole agricultural with lack of labor leads to high • Provide technical support and for sector (30-40%) losses quality maintenance of the product • Post-harvest treatment and lack of in cold storages Global: storage facilities limits fresh sales • Organize courses and work • Competitors are also growing, • Need for GlobalG.A.P., organic, or experience exchange to increase and massive investment projects other voluntary standards the skills and knowledge of aimed at the export market are • Market is demanding more professionals in manufacturing and emerging processed products from processing areas • Market maturation as indicated by pomegranate (juice, oil, sauce, • Strengthen industry associations steep rises in supply and tannins) as well as branded • Create a brand for Azerbaijani reductions in import prices products pomegranate and sell products • Production beginning to saturate under one brand – promotion and existing and consolidated markets positioning • New production countries (Peru, South Africa, Chile, Australia) entering the market

76