Future of the Azerbaijani Defense Industry Market ...Future of the Azerbaijani Defense Industry –...

Future of the Azerbaijani Defense Industry –

Market Attractiveness, Competitive Landscape

and Forecasts to 2018

Future of the Azerbaijani Defense Industry – Market Attractiveness, Competitive Landscape and Forecasts to 2018

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TABLE OF CONTENTS

1. Introduction ........................................................................................................................... 8

1.1. What is this Report About? ........................................................................................................... 8

1.2. Definitions ...................................................................................................................................... 8

1.3. Summary Methodology .................................................................................................................10

1.4. SDI Terrorism Index ......................................................................................................................12

1.5. About Strategic Defence Intelligence ..........................................................................................12

2. Executive Summary ............................................................................................................ 13

3. Market Attractiveness and Emerging Opportunities ........................................................ 15

3.1. Defense Market Size Historical and Forecast..............................................................................16

3.1.1. Defense expenditure expected to grow at a CAGR of XX% over the forecast period ............................. 16

3.1.2. Strained relations with neighbors and military modernization are expected to be key factors driving

defense expenditure .............................................................................................................................................. 18

3.1.3. Military expenditure to follow the country’s economy ............................................................................... 19

3.2. Analysis of Defense Budget Allocation .......................................................................................21

3.2.1. Capital expenditure allocation to average XX% of the total budget over the forecast period .................. 21

3.2.2. Procurement of advanced equipment to drive capital expenditure over forecast period ......................... 23

3.2.3. Per capita defense expenditure expected to increase over the forecast period ...................................... 25

3.3. Homeland Security Market Size and Forecast ............................................................................27

3.3.1. Critical energy infrastructure protection and combating drug trafficking will be key factors driving

homeland security ................................................................................................................................................. 27

3.3.2. Azerbaijan considered at ‘some risk’ of terrorist attack ............................................................................ 28

3.4. Benchmarking with Key Global Markets .....................................................................................30

3.4.1. Azerbaijan to be amongst the fastest-growing defense spenders ........................................................... 30

3.4.2. Azerbaijan ranks high among the leading military spenders in terms of defense expenditure as a

percentage of GDP ............................................................................................................................................... 33

3.4.3. Azerbaijan faces some risk of terror attacks............................................................................................. 34

3.5. Market Opportunities: Key Trends and Drivers ..........................................................................36

3.5.1. Demand for missiles and missile defense systems expected to increase ............................................... 36

3.5.2. Demand for air defense equipment to surge ............................................................................................ 36

3.5.3. Communications and logistics systems to be enhanced to enable informed actions against attack ....... 36

4. Defense Procurement Market Dynamics ........................................................................... 37

4.1. Import Market Dynamics ...............................................................................................................37

4.1.1. Defense industry heavily relies on imports from foreign countries ........................................................... 37

4.1.2. Russia dominate the arms imports by Azerbaijan .................................................................................... 38

4.1.3. Aircraft to dominate Azerbaijani defense imports ..................................................................................... 39


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4.2. Export Market Dynamics ..............................................................................................................40

4.2.1. Azerbaijan’s defense export market is negligible ..................................................................................... 40

5. Industry Dynamics .............................................................................................................. 41

5.1. Five Forces Analysis.....................................................................................................................41

5.1.1. Bargaining power of supplier: high ........................................................................................................... 42

5.1.2. Bargaining power of buyer: low to medium .............................................................................................. 42

5.1.3. Barrier to entry: high ................................................................................................................................. 42

5.1.4. Intensity of rivalry: low to medium ............................................................................................................ 42

5.1.5. Threat of substitution: low ......................................................................................................................... 42

6. Market Entry Strategy ......................................................................................................... 43

6.1. Market Regulation .........................................................................................................................43

6.1.1. The Azerbaijani defense industry is closed for FDI .................................................................................. 43

6.2. Market Entry Route .......................................................................................................................43

6.2.1. Government to government deals are an attractive entry route to the country’s defense market ........... 43

6.3. Key Challenges .............................................................................................................................44

6.3.1. Corruption poses a challenge to the success of defense procurement deals .......................................... 44

6.3.2. Arms embargo imposed by OSCE ........................................................................................................... 44

7. Competitive Landscape and Strategic Insights ................................................................ 45

7.1. Competitive Landscape Overview ...............................................................................................45

7.1.1. Azerbaijani defense sector is dominated by foreign competitors ............................................................. 45

7.2. Key Foreign Companies ...............................................................................................................45

7.2.1. Uralvagonzavod – overview ..................................................................................................................... 45

7.2.2. Uralvagonzavod – major products and services ...................................................................................... 45

7.2.3. Uralvagonzavod – recent announcements and strategic initiatives ......................................................... 46

7.2.4. Uralvagonzavod – alliances ...................................................................................................................... 46

7.2.5. V.A. Degtyarev Plant – overview .............................................................................................................. 47

7.2.6. V.A. Degtyarev Plant – major products and services ............................................................................... 47

8. Business Environment and Country Risk ......................................................................... 49

8.1. Demographics & Social Statistics ................................................................................................49

8.1.1. Population – Rural .................................................................................................................................... 49

8.1.2. Population - Urban .................................................................................................................................... 50

8.1.3. Population – Number of Households ........................................................................................................ 51

8.2. Economic Performance ................................................................................................................52

8.2.1. GDP per Capita ........................................................................................................................................ 52

8.2.2. Gross Domestic Product ........................................................................................................................... 53

8.2.3. Gross National Disposable Income .......................................................................................................... 54

8.2.4. Manufacturing Output ............................................................................................................................... 55


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8.2.5. Gross National Disposable Income .......................................................................................................... 56

8.2.6. Manufacturing Output ............................................................................................................................... 57

8.2.7. Consumer Price Index .............................................................................................................................. 58

8.2.8. LCU per US$ (period average) ................................................................................................................. 59

8.2.9. LCU per Euro (period average) ................................................................................................................ 60

8.2.10. Lending Rate ............................................................................................................................................ 61

8.2.11. Deposit Rate ............................................................................................................................................. 62

8.2.12. Real Interest Rate ..................................................................................................................................... 63

8.2.13. Goods Exports as a % of GDP ................................................................................................................. 64

8.2.14. Goods Imports as a % of GDP ................................................................................................................. 65

8.2.15. Goods Trade Surplus/Deficit as a % of GDP............................................................................................ 66

8.2.16. Services Imports as a % of GDP .............................................................................................................. 67

8.2.17. Services Exports as a % of GDP .............................................................................................................. 68

8.2.18. Services Trade Surplus/Deficit as a % of GDP ........................................................................................ 69

8.2.19. Net Foreign Direct Investment .................................................................................................................. 70

8.2.20. Net Foreign Direct Investment as % of GDP ............................................................................................ 71

8.2.21. International reserves, including gold ....................................................................................................... 72

8.3. Energy and Utilities .......................................................................................................................73

8.3.1. Total Conventional Thermal Electricity Net Generation ........................................................................... 73

8.3.2. Hydroelectricity Net Generation (Billion Kilowatt hours) ........................................................................... 74

8.3.3. Total Conventional Thermal Electricity Installed Capacity ....................................................................... 75

8.3.4. Total Electricity Exports (Billion Kilowatt hours) ....................................................................................... 76

8.3.5. Total Electricity Imports (Billion Kilowatt hours) ....................................................................................... 77

8.3.6. Proved Reserves of Natural Gas .............................................................................................................. 78

8.3.7. Total Petroleum Consumption .................................................................................................................. 79

8.3.8. Crude Oil Proved Reserves ...................................................................................................................... 80

8.4. Minerals .........................................................................................................................................81

8.4.1. Mining, Manufacturing, Utilities Output ..................................................................................................... 81

8.5. Technology ....................................................................................................................................82

8.5.1. Research and development expenditure .................................................................................................. 82

8.5.2. Patents Granted ........................................................................................................................................ 83

8.6. Telecommunication ......................................................................................................................84

8.6.1. Telephone Lines ....................................................................................................................................... 84

8.6.2. Telephone lines Penetration Rate ............................................................................................................ 85

9. Appendix .............................................................................................................................. 86

9.1. About SDI .......................................................................................................................................86

9.2. Disclaimer ......................................................................................................................................86


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LIST OF FIGURES

Figure 1: Azerbaijani Defense Expenditure, 2009–2013 ............................................................................................................... 16

Figure 2: Azerbaijani Defense Expenditure, 2014–2018 ............................................................................................................... 17

Figure 3: Azerbaijani GDP Growth vs. Defense Expenditure Growth and Defense Expenditures Percentage of GDP

Growth, 2009–2013 ...................................................................................................................................................................... 19

Figure 4: Azerbaijani GDP Growth vs. Defense Expenditure Growth and Defense Expenditure as Percentage of GDP

Growth, 2014–2018 ...................................................................................................................................................................... 20

Figure 5: Azerbaijani Defense Budget Split Between Capital and Revenue Expenditure (%), 2009–2013 ................................... 21

Figure 6: Azerbaijani Defense Budget Split Between Capital and Revenue Expenditure (%), 2014–2018 ................................... 22

Figure 7: Azerbaijani Defense Capital Expenditure (US$ bn), 2009–2013 ................................................................................... 23

Figure 8: Azerbaijani Defense Capital Expenditure (US$ Bn), 2014–2018 ................................................................................... 24

Figure 9: Azerbaijani Per Capita Defense Expenditure (US$), 2009–2013 ................................................................................... 25

Figure 10: Azerbaijani Per Capita Defense Expenditure (US$), 2014–2018 ................................................................................. 26

Figure 11: SDI Terrorism Heat Map, 2013 .................................................................................................................................... 28

Figure 12: SDI Terrorism Index, 2013 ........................................................................................................................................... 29

Figure 13: Benchmarking with Key Markets – 2009–2013 vs. 2014–2018 ................................................................................... 31

Figure 14: Benchmarking with World’s Largest Defense Spenders (US$ Billion), 2013 and 2018 ............................................... 32

Figure 15: Benchmarking with Large Defense Spenders as % of GDP – 2013 ............................................................................ 33

Figure 16: Azerbaijani Defense Import Trend, 2008–2012 (TIV values) ....................................................................................... 37

Figure 17: Azerbaijani Defense Imports by Country (%), 2008–2012 ........................................................................................... 38

Figure 18: Azerbaijani Defense Imports by Weapon Category (%), 2008–2012 ........................................................................... 39

Figure 19: Industry Dynamics – Porter’s Five Forces Analysis ..................................................................................................... 41

Figure 20: Azerbaijani Population – Rural (In Millions), 2009–2018.............................................................................................. 49

Figure 21: Azerbaijani Population – Urban (In Millions), 2009–2018 ............................................................................................ 50

Figure 22: Azerbaijani Population – Number of Households (In Millions), 2008–2017.................................................................. 51

Figure 23: Azerbaijani GDP per Capita (US$), 2008–2017 ........................................................................................................... 52

Figure 24: Azerbaijani GDP (current US$ bn), 2009–2018 ........................................................................................................... 53

Figure 25: Azerbaijani Gross National disposable income (US$ Bn), 2002– 2011 ....................................................................... 54

Figure 26: Azerbaijani Manufacturing Output (US$ Bn), 2002– 2011 ........................................................................................... 55

Figure 27: Azerbaijani Gross National disposable income (US$ Bn), 2002– 2011 ....................................................................... 56

Figure 28: Azerbaijani Manufacturing Output (US$ Bn), 2002– 2011 ........................................................................................... 57

Figure 29: Azerbaijani Consumer Price Index, 2008–2017 ........................................................................................................... 58

Figure 30: Azerbaijani LCU per US$, 2009–2018 ......................................................................................................................... 59

Figure 31: Azerbaijani LCU per Euro, 2008–2017 ........................................................................................................................ 60

Figure 32: Azerbaijani Lending Rate (%), 2002–2011 .................................................................................................................. 61

Figure 33: Deposit Rate (%), 2001–2010 ...................................................................................................................................... 62

Figure 34: Azerbaijani Real Interest Rate (%), 2002–2011 ........................................................................................................... 63

Figure 35: Azerbaijani Goods Exports as a % of GDP, 2002–2011 .............................................................................................. 64

Figure 36: Azerbaijani Goods Imports as a % of GDP, 2002–2011 .............................................................................................. 65

Figure 37: Azerbaijani Goods Trade Surplus/Deficit as a % of GDP, 2002–2011 ......................................................................... 66

Figure 38: Azerbaijani Services Imports as a % of GDP, 2002–2011 ........................................................................................... 67

Figure 39: Azerbaijani Services Exports as a % of GDP, 2002–2011 ........................................................................................... 68

Figure 40: Azerbaijani Services Trade Surplus/Deficit as a % of GDP, 2002–2011...................................................................... 69

Figure 41: Azerbaijani Net Foreign Direct Investment (US$ Bn), 2002–2011 ............................................................................... 70

Figure 42: Azerbaijani Net Foreign Direct Investment as % of GDP, 2002–2011 ......................................................................... 71

Figure 43: Azerbaijani International reserves, including gold (US$ Bn), 2002–2011 .................................................................... 72

Figure 44: Azerbaijani Total Conventional Thermal Electricity net Generation (Bn Kilowatt Hours), 2001–2010 .......................... 73

Figure 45: Azerbaijani Hydroelectricity Net Generation (Billion Kilowatt hours), 2001–2010 ........................................................ 74

Figure 46: Azerbaijani Total Conventional Thermal Electricity Installed Capacity (Million Kilowatts), 2001–2010 ........................ 75

Figure 47: Azerbaijani Total Electricity Exports (Billion Kilowatt hours), 2001–2010 ..................................................................... 76

Figure 48: Azerbaijani Total Electricity Imports (Billion Kilowatt hours), 2001–2010 ..................................................................... 77


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Figure 49: Azerbaijani Proved Reserves of Natural Gas (Trillion Cubic Feet), 2002–2011 ........................................................... 78

Figure 50: Azerbaijani Total Petroleum Consumption (Thousand Barrels per Day), ..................................................................... 79

Figure 51: Azerbaijani Crude Oil Proved Reserves (Bn Barrels), 2002–2011 ............................................................................... 80

Figure 52: Mining, Manufacturing, Utilities Output (in Millions), 2002–2011 ................................................................................. 81

Figure 53: Research and development expenditure (In Mn), 2002–2011 ..................................................................................... 82

Figure 54: Patents Granted, 2002–2011 ....................................................................................................................................... 83

Figure 55: Azerbaijani Telephone Lines (in Millions), 2002–2011 ................................................................................................. 84

Figure 56: Azerbaijani Telephone lines Penetration Rate (per 100 people), 2002–2011 .............................................................. 85


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LIST OF TABLES

Table 1: Azerbaijani Defense Expenditure, 2009–2013 ................................................................................................................ 16

Table 2: Azerbaijani Defense Expenditure, 2014–2018 ................................................................................................................ 17

Table 3: Azerbaijani GDP Growth vs. Defense Expenditure Growth and Defense Expenditure as Percentage of GDP

Growth, 2009–2013 ...................................................................................................................................................................... 19

Table 4: Azerbaijani GDP Growth vs. Defense Expenditure Growth and Defense Expenditure as Percentage of GDP

Growth, 2014–2018 ...................................................................................................................................................................... 20

Table 5: Azerbaijani Defense Budget Split Between Capital and Revenue Expenditure (%), 2009–2013 ................................... 21

Table 6: Azerbaijani Defense Budget Split Between Capital and Revenue Expenditure (%), 2014–2018 ................................... 22

Table 7: Azerbaijani Defense Capital Expenditure (US$ Bn), 2009 – 2013 .................................................................................. 23

Table 8: Azerbaijani Defense Capital Expenditure (US$ bn), 2014 – 2018 ................................................................................... 24

Table 9: Azerbaijani Per Capita Defense Expenditure (US$), 2009–2013 .................................................................................... 25

Table 10: Azerbaijani Per Capita Defense Expenditure (US$), 2014–2018 .................................................................................. 26

Table 11: Benchmarking with Key Markets – 2009–2013 vs. 2014–2018 ..................................................................................... 30

Table 12: SDI Terrorism Index ...................................................................................................................................................... 34

Table 13: Uralvagonzavod – Major Products & Services .............................................................................................................. 45

Table 14: Uralvagonzavod – Alliances .......................................................................................................................................... 46

Table 15: V.A. Degtyarev Plant – Major Products & Services ....................................................................................................... 47


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1. Executive Summary

Azerbaijan’s defense expenditure expected to post strong growth during the forecast period

Azerbaijan, situated in the Caucasus region on the border of Europe and Asia, also called Eurasia, gained

independence from the USSR in 1991. Following this, the country was involved in a long armed conflict

with its neighbor, Armenia, over control of the Nagorno-Karabakh region. Both countries signed a ceasefire

agreement in 1994, through mediation by the Russian Federation. Azerbaijan still considers the disputed

region as its province and has been trying to take back control, which has led to strained relations with

Armenia. Negotiations between both governments, overseen by the OSCE Minsk group (Organization for

Security and Co-operation in Europe), consisting of Russia, France, and the US, ended in a deadlock by

the year 2011. This has resulted in a military build-up in both Azerbaijan and Armenia, with an aim to

assert their respective claims over the disputed region.

Supported by oil exports, Azerbaijan invested in the procurement of weapons from Russia, Belarus,

Ukraine, Israel, South Korea, and other countries, to boost its defense capabilities. The country intensively

purchased military equipment, helicopters, planes, modern air-defense systems, armored vehicles, tanks,

artillery systems, combat vessels, and drones. Azerbaijan procured battle tanks and other sophisticated

weapons from Russia at an approximate value of US$XX billion in the last five years, with its final

deliveries received in June 2013. Consequently, the country’s expenditure on its military increased from

US$XX million in 2003 to US$XX billion in 2013. In the last five years, it registered a growth rate of XX%,

as the country’s economy grew at XX%. The allocation for the procurement of arms and military

technology accounted for XX% of the total defense budget during this period.


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2. Market Attractiveness and Emerging Opportunities

The Azerbaijani defense market, which has grown over the last decade, is expected to demonstrate the

potential to grow at a faster pace than its neighbors, over the forecast period. Its defense and security

budget registered a growth rate of XX% in the last five years and is estimated to grow at a CAGR of XX%,

to value more than US$XX billion by 2018. Strained relations with its neighbor and the aim of increasing its

importance in regional politics through military build-up, mean the country is expected to continue to

procure substantial arms and technology. In addition, Azerbaijan is putting efforts into reviving its arms

manufacturing sector through collaboration with foreign companies in an effort to enhance its ability to

export weapons to other countries. This will provide growth opportunities for foreign companies to enter

the market, either through direct deals or through collaborations with local manufacturers, to tap the fastest

growing military market in the Eurasia region.


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2.1. Defense Market Size Historical and Forecast

2.1.1. Defense expenditure expected to grow at a CAGR of XX% over the forecast period

The strained relationship with its neighbor, Armenia, over the Nagorno-Karabakh region has been driving

the growth of the country’s military expenditure over the past decade. During the review period,

Azerbaijan increased its defense and security budget from US$XX billion in 2009 to US$XX billion, at a

growth rate of XX%. The growth in the defense budget is expected to continue over the forecast period

due to the deadlock in negotiations between the two countries, and Azerbaijan’s aggressive stand on the

conflict. Consequently, the Azerbaijani defense budget is estimated to grow at a CAGR of XX% over the

forecast period, to reach US$XX billion by 2018.

The following table and figure show the Azerbaijani defense expenditure during the review period:

Table 1: Azerbaijani Defense Expenditure, 2009 - 2013

Year Defense expenditure (US$ bn)

Defense growth percentage

2009 XX XX

2010 XX XX

2011 XX XX

2012 XX XX

2013 XX XX

CAGR 2009-2013 XX%

Source: SDI analysis © SDI

Figure 1: Azerbaijani Defense Expenditure, 2009 - 2013


Defe

nse E

xp

en

dit

ure

XX

XX

XX

XX

XX

XX

XX

2009 2011 2012 2013

Revenue Expenditure Capital Expenditure

2010

Growth Rate (%)


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The following table and figure show projected defense expenditure of the Azerbaijani over the forecast period:

Table 2: Azerbaijani Defense Expenditure, 2014-2018

Year Defense expenditure (US$ bn)

Defense growth percentage

2014 XX XX

2015 XX XX

2016 XX XX

2017 XX XX

2018 XX XX

CAGR 2014-2018 XX%


Figure 2: Azerbaijani Defense Expenditure, 2014-2018


Defe

nse E

xp

en

dit

ure

XX

XX

XX

XX

XX

XX

XX

2014 2016 2017 2018


2015

Growth Rate (%)


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2.2. Analysis of Defense Budget Allocation

2.2.1. Capital expenditure allocation to average XX% of the total budget over the forecast period

During the review period, Azerbaijan allocated an average of XX% of its defense budget for capital

expenditure, such as the procurement of defense equipment and services, with the highest share, of

XX%, allocated in 2011. The remaining budget was allocated for revenue expenditure including the

salaries of personnel, logistics, operational costs, training, and the maintenance of the country’s military

force. Over the forecast period, the Azerbaijani MoD is expected to maintain its current level of

allocation for capital expenditure, averaging XX% of the total defense budget.

The following table and chart display the Azerbaijani defense budget share of capital and revenue

expenditure during the review period:

Table 3: Azerbaijani Defense Budget Split Between Capital and Revenue Expenditure (%), 2009-2013

Year Capital Expenditure Share Revenue Expenditure Share

2009 XX XX

2010 XX XX

2011 XX XX

2012 XX XX

2013 XX XX


Figure 3: Azerbaijani Defense Budget Split Between Capital and Revenue Expenditure (%), 2009-2013


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80%

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2009 2010 2011 2012 2013


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The following table and chart display the Azerbaijani defense budget share of capital and revenue

expenditure over the forecast period:

Table 4: Azerbaijani Defense Budget Split Between Capital and Revenue Expenditure (%), 2014 -2018

Year Capital Expenditure Share Revenue Expenditure Share

2014 XX XX

2015 XX XX

2016 XX XX

2017 XX XX

2018 XX XX


Figure 4: Azerbaijani Defense Budget Split Between Capital and Revenue Expenditure (%), 2014 - 2018


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20%

40%

60%

80%

100%

2014 2015 2016 2017 2018


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