Introduction
Situated at the crossroads of East and West – the South Caucasus region, the Republic of Azerbaijan regained its independence in 1991. As the other former socialist countries, Azerbaijan is facing a number of problems of transformation of national economy.
The recently elaborated economic policy of Azerbaijan has put strong emphasis on liberalisation, private sector development and transformation of the country’s planned economy to a market-oriented system.
The economy of Azerbaijan is pretty diversified, including oil and gas production, oil-refining, engineering, metallurgy, chemical, petrochemical, light and food industries, construction materials, agriculture (cotton, tea, tobacco, silk worms, vine-growing, vegetables, fruits) and offers promising prospects for future investors.
Main macroeconomic indicators
Since 1996, the economic decline has been stopped and an upward trend of the GDP growth is currently under way. In 1996 the real GDP growth was 1.3 %; it reached 5.8% in 1997, 11.1 % in 2000, 11.2% in 2003, 34.5% in 2006 and 25% in 2007. In 2007 GDP per capita equals to $3473.9, which is more than 23.6 % in 2006. The country’s domestic product is largely contributed by private sector. Its share in GDP constituted 81% in 2006 and 84% in 2007. Share in GDP by sectors (2007): Industry (including construction) - 72.5%, Services – 20.2% and Taxes – 7.3%. In 2007 (January-November) the foreign trade turnover equals $10461.3 million with positive balance of trade turnover in $461.9 million. The revenues of 2007 (January-November) budget - 5566.1 million manats (AZN) (growth in comparison with January-November of 2006 – 53.6%) and expenditures of the same period of 2007 was 4841.4 million manats (AZN) (growth in comparison with January-November of 2006 – 55.3%). Total FDI to economy of Azerbaijan for 1995-2006 is about $26 bln.
Investment opportunities
The government of Azerbaijan welcomes foreign direct investment (FDI) in the country. In the relatively short period since independence, it has made continuous efforts to open up the economy and establish laws and regulations that are favourable to foreign investors.
New opportunities for FDI have emerged in the process. The clarity of the legal regime and the welcoming policy of the government of Azerbaijan have turned the country into one of the leaders in Central and Eastern Europe in attraction of FDI.
Azerbaijan’s legislation is developing in accordance with government strategy to create “welcoming” policies for foreign business. Foreign investments are protected by certain guarantees provided by the government and legislation, including:
A guarantee against worsening of legislation - the general rule is that the legislation in force at the time an investment was made continues to apply for the following 10 years;
A guarantee against nationalisation or expropriation - foreign investments are not subject to nationalisation (except if they are harmful to people or the interests of the state) and expropriation (except in cases of natural disaster, epidemics, accidents or emergencies). Foreign investors are guaranteed immediate, adequate and effective compensation in the event of nationalisation or expropriation. Such compensation must be commensurate to the amount of the investment at the time of nationalisation or expropriation, is payable in foreign currency and may be freely transferred abroad;
A guarantee of compensatory damages - foreign investors are entitled to compensation for damages, including lost profits, incurred as a result of any unlawful acts of state authorities;
A guarantee of repatriation of profits - foreign investors are entitled to repatriate profits derived from foreign investments, subject to payment of applicable taxes and duties.
The new Foreign Investment Bill that is currently under discussion in the Parliament of Azerbaijan is expected to reinforce the above guarantees and also introduce new legal instruments to protect foreign businesses. The government will continue its policy of industrial development led by the private sector, including foreign businesses.
There are no general trade restrictions or prohibitions for import of any types of goods into Azerbaijan. Naturally, there are special prohibitions for hazardous substances, weapons, drugs etc. In general, Azerbaijan has a liberal trade regime and a minimum level of non-trade barriers to international trade exists. The country is not yet a member of WTO, though the Government has started the accession process. Exported goods are not subject to any customs duties or restrictions, though regulations exist for the export of strategic commodities such as electricity, petrol, cotton and non-ferrous metals.
Azerbaijan has 34 bilateral treaties on the mutual protection of investments. Several more treaties are currently being negotiated.
Oil sector
Oil in Azerbaijan has been produced for 150 years. By 1911, half of the world oil was produced in Azerbaijan. A number of foreign oil companies and powerful investors, including Shell, Rothschild, the Nobel brothers and many others had interests in Azerbaijan. After the collapse of the Russian Empire in 1917 and appearance of a new state, the Union of Soviet Socialist Republics, the gates for foreign businesses to Azerbaijan was closed for a substantial period of 74 years. By the late of XX centuries, Azerbaijan after the restoring its independence again become the hot spot for the oilmen of the world. Azerbaijani government invited the largest international oil companies such as British Petroleum, Amoco, Total, Elf, Lukoil, Itochu and others to jointly develop the previously closed hydrocarbon reserves of the Caspian basin. Now the country is on the verge of the second oil boom. Azerbaijan attracted a large number of foreign investors to operate in oil fields in accordance with Production Sharing Agreements between the government and the prominent western companies. By now most of the global oil & gas corporations either operate or present in Azerbaijan. They are active players on the Azerbaijani oil market.
Around 60% of Azerbaijan's oil output comes from the State Oil Company. Its portion, however, will decrease as the international contracts are developed. The main offshore field known as Azeri-Chiraq-Gunashli (ACG), located in the Azerbaijani sector of the Caspian Sea, has proven crude oil reserves of 5.4 bln barrels (between 40%-70% of Azerbaijan's total reserves). The exploitation of the hydrocarbons in Azerbaijan as well as similar projects in the neighbouring countries led to the development of the regional system of pipelines. Two pipelines were renovated in late 90-s: Azerbaijan-Georgia (Baku-Supsa) and Azerbaijan-Russia (Baku-Novorossiysk).
The new Baku Tbilisi-Ceyhan (Azerbaijan-Georgia-Turkey) pipeline which becomes one of the largest energy projects globally will be the main oil pipeline in the region. Parallel to the BTC a gas pipeline Baku-Tbilisi-Erzerum is envisaged. It is to take the natural gas from the recently discovered major Shahdeniz oil field to Turkey and further to Europe.
Once the BTC pipeline is fully operational (mid 2005) and ACG developed, oil production and exports are expected to increase dramatically. The peak of Azerbaijan oil production is projected for 2009 with 1.3 mln bpd, roughly four times current production.
On December 29, 1999, the Azerbaijani President Heydar Aliyev signed a decree creating a State Oil Fund of Azerbaijan (SOFAZ). It is a mechanism whereby energy-related windfalls will be accumulated and efficiently managed. In so doing, the government is demonstrating its overriding desire and determination to avoid the inherent risks for any nation in the midst of an oil and gas boom to spend excessively and create macroeconomic distortions.
Azerbaijan has proven natural gas reserves of roughly 30 trillion cubic feet (Tcf), and the potential for even larger reserves. The country's leading natural gas producer, the Bahar oil and gas field, is located off the southern tip of the Absheron Peninsula and currently accounts for slightly over half of the country's natural gas output. The Gunashli field accounts for approximately 67% of the oil and 50% of the natural gas produced in the country. Azerbaijan opened the Caspian Sea region for international business. The oil & gas sector of the Azerbaijani economy is an excellent example of a successful cooperation between multinationals and the government of a country in transition. The country's oil & gas policy proved extremely successful in opening it up for the international businesses in other sectors. At the moment a number of international service companies, engineers, shippers in the oil related industries successfully do business in Azerbaijan.
Non-oil sector
Agriculture. Azerbaijan is one of the world's oldest agricultural centres. The country's climatic diversity allows a very broad range of crops to be cultivated. At the moment agriculture accounts for approximately 12% of the domestic product. The sector is growing rapidly. The annual average growth since 2000 in the sector has been 9.7 %. Agriculture and related sectors are the principle employers in the country. The reforms in the agricultural sector of the economy continue, and despite substantial decline in the early years of transition, agriculture in Azerbaijan is now firmly on the way to rehabilitation and growth. Following almost full denationalization of the sector (at the moment about 99% of the sector is in private ownership) a number of steps were taken by the government to support the farmers as well as producers of processed a/c products. Azerbaijani fruits, vegetables, wines and brandy are the trademark of Azerbaijan in the region. Apart from food products Azerbaijan is also traditionally strong in cultivating such non food crops and products as cotton, silk and tobacco. Azerbaijan is also famous with its wine and brandy production, tea, tobacco and hazelnuts.
Substantial business opportunities are now opening up in the agriculture of Azerbaijan for a number of reasons. The Regional Development Programme of Azerbaijan launched by the government, includes development of agriculture and food processing development as one of its key elements. It also includes rehabilitation of major infrastructure, promotion of exports, more effective management of businesses, restoration of existing facilities and development of green-field projects. Along with traditional agricultural products, substantial opportunities exist in export oriented segments. It is definitely worth mentioning that the Government introduced tax holidays for the producers of a/c production that continues up to now. The measure has undoubtedly stimulated the growth in the sector.
Food industry. The food processing industry in Azerbaijan consists of three main segments. These are meat processing, production of dairy products and processing and canning of fruits and vegetables. Food products are high on the Government's agenda for import substitution. Although this policy has been relatively successful, and food products are declining in prominence within Azerbaijan's imports, there are still significant opportunities in a number of areas. Several small businesses are engaged in processing of dairy products and a few medium and large companies undertake packaging and mass sales. There are twelve large meat processing plants in Azerbaijan, mostly in private hands. Forty-three plants are active in the canning industry, and although they were previously state-owned, most of them are also now private. In order to provide markets for local agricultural producers there is still a need for substantial rehabilitation and renovation of storage and processing facilities. Significant opportunities exist in export-oriented agricultural production and processing. Azerbaijan's pomegranate, feijoa and grape juices and its olives, hazelnuts and other produce are all competitive in international terms. Azerbaijani wine and brandy are traditional export products. The major markets include Russia, Ukraine and other countries of the region.
Telecom and IT. Azerbaijani telecommunications is the second largest recipient of foreign investment after the oil industry. The first wave of liberalization took place in 90-s when a number of foreign investors entered the market. The largest FDI stock is in the mobile telephony, followed by a number of enterprises with the foreign capital in land lines operating companies, internet providers and cable TV companies. Foreign investors are represented by Turkish, Israeli, UK, Russian, US etc. capital. The sector now is on the verge of further restructuring. One of the major steps taken is continuing privatization of the state shares in the telecom and IT enterprises. The Azerbaijani telecom market is expanding rapidly. It is one of the leading sectors contributing to the economy growth. Further development of the telecom services is underpinned by the construction of Trans-Asia-Europe fiber-optic cable. It will give an impetus to introduction of new internet related services, international traffic etc. Under the Communications Law, the state has exclusive ownership of all radio frequencies. The State Radio Frequencies Commission is authorized to issue radio frequency use permits to telecommunications businesses. This Commission also prescribes the rules and procedures for obtaining such permits and for operating at various frequencies. The Communications Law also recognizes the right of foreign individuals and legal entities to own and operate networks and devices in Azerbaijan. Such devices must be jointly certified by the Ministry of Informational Technologies and Communications and the Azerbaijan State Standards Agency and their subordinate bodies, as well as accredited test laboratories.
Textile and Cotton. Azerbaijan has a long tradition of production, spinning and weaving of cotton and silk. Industrial weaving started in the late 19th century. Further industrialization of Azerbaijan in the 20th century stimulated rapid development of light industries including textiles. The main raw materials for the domestic textile industry are cotton, wool, silk cocoons, leather and synthetic fibre. They are produced locally in abundance. After a period of crisis in the mid 1990s, cotton cultivation has increased. The sown area for cotton rose by almost 10% between 2002 and 2003, to reach 66800 hectares. Output rose by more than 23% over the same period, to 99500 tonnes. This indicator rapidly grew further to reach circa 130,000 tons of raw cotton in 2005. More than half of the increase was derived from higher productivity. The overall potential production of cotton in Azerbaijan is as much as 800000 tons from approximately 280000 hectares. This level was achieved in mid 1980s with massive capital investment by the Soviet government.
Other raw materials that are also important for the weaving industry of Azerbaijan are wool and silk cocoons. In 2006, the local sheep stock reached circa 8 million, and approximately 13600 tons of wool was produced. There is a potential to produce over 9,000 tons of silk cocoons annually by increasing the area of mulberry plantations to 25000 hectares. Normally, 1 kg of silk cloth is produced from 3.5 kg of local cocoon (the Japanese standard is 1 kg of silk per 2.8 kg of cocoon). So the potential of the local silk industry is 2600 tons or about 18 million m2 of silk cloth (1 kg - 5-7 m2).
There are also opportunities for leather production and processing in Azerbaijan as livestock-breeding has been growing rapidly for the last few years.
Markets for Azerbaijan's textiles, in addition to the local market, include Russia, Central Asia and Iran. No export duty is payable on such products. Textile products exported to the EU are free of quotas and permits, and only the import customs duty is payable. Products of Azerbaijan origin attract import duties significantly lower than those from other countries.
Transport. Azerbaijan has a relatively developed transport infrastructure. It includes 25000 km of roads, over 2000 km of railroads, and 3 international airports, including the largest one in the region, as well as several regional airports. It also has the largest Caspian port. The challenges for Azerbaijan include both upgrading of existing infrastructure, some of which was poorly maintained in 1990s, and construction of new infrastructure to reinforce its status as a transit point for goods from Central Asia to Europe.
The transport sector in Azerbaijan, comprising railway, aviation, roads and maritime shipping, amounts for about 10% of domestic output. Azerbaijan has taken significant steps to implement structural reforms in the transport sector and has implemented significant improvements in rehabilitation and construction of roads, railways, and other infrastructural installations.
Particular focus is being given to the role of multi-modal transport to serve the needs of Euro-Asian logistics. This involves the establishment of a favorable transit environment, delivering smooth transportation of goods and passengers across the region. Azerbaijan stresses the importance of developing efficient Euro-Asian trading links as a means of increasing prosperity and improving the living standards of the people of all countries involved. All this helps Azerbaijan in its effort to integrate into the global economy.
The Government of Azerbaijan together with the private sector is actively involved in the cooperation with international donor agencies and investors in transport. Such institutions as the World Bank, EBRD, EU-TACIS and ADB are active both in the country and in the region.
Azerbaijan strongly supports regional transport initiatives and promotes international transit transportation. Its infrastructure projects include the construction and rehabilitation of railways, highways, ports, and airports. The European Union (EU) sponsors development of the transport sector through both TRACECA and national projects. The EU goals include linking the East-West transport corridor to the Trans-European Networks. The European Bank for Reconstruction and Development (EBRD) is investing in capital projects in ports, railways, and roads, including involvement with TRACECA.
Private investors are currently investigating opportunities for an international logistics centre close to Baku, with access to rail, road and water transportation.
The logistic centre will act as a bridge between transport and industry. Investments in the transport field are welcome in Azerbaijan and the country offers a variety of Public Private Partnership (PPP) investment models.
Tourism. Azerbaijan is aiming at promoting itself as a new tourist destination as opposed to traditional "tourist" countries. It just recently re-entered the maps of global tour operators. Though a comparatively new this business in Azerbaijan proved to be particularly successful. This is mainly due to substantial natural potential of Azerbaijan in respect of tourism development. The natural attractions include: rare climatic and terrain diversity, mountains and warm sea, medicinal hot springs, mud volcanoes and natural gas flames areas. The history of Azerbaijan and the monuments of few civilizations and religions add up to the above. The oldest Early Christian church, the only operating Fire-worshippers Temple in the world, medieval castles scattered all over the country, Old City of Baku and Maiden Tower are located here. Baku has the best developed infrastructure in the region with modern hotels, resorts, international and traditional cuisine, convenient air links to Europe and Asia etc.
The positive impact on the development of tourism in Azerbaijan was made by the years of political stability and economic development in the last decade.
The sector received a further stimulus after establishment of the Ministry with the portfolio which includes tourism. Consistently grows the number of businesses engaged in tourism industry in Azerbaijan.
Measures by the government play key role in sector's development: After implementation of steps stipulated in the Decree "On Tourism" (June 4, 1999) the number of inward tourists increased significantly. As number of tourists visited Azerbaijan in 2002 was three and a half times the number of tourists that visited in 2001.
Opportunities exist for the development of regional tours (the so called Silk Way Tours in countries of the Central Asia & Caucasus).
A number of internationals such as Hyatt, Radisson and Park Inn already have operations in Azerbaijan. Obviously, the potential for development is very high bearing in mind the natural and historical attractions of the country.
The country's main wealth is its diversity. There are 9 climatic zones present with a number of tourist attractions such as sea and mountain resorts, mineral and medicinal waters and clays, unique Naftalan therapeutic oil, fascinating sceneries etc.
The capital and the countryside are rich in historical monuments, religious shrines of ancient and medieval times. Azerbaijani cuisine and rich flavored wines as well as the widely known Caucasian hospitality of the people are the brand of the Republic of Azerbaijan.
The tourism industry, including hotels, resorts, restaurants aimed at the domestic consumer is on the verge of a boom following the rapid growth of population's purchase power.
Banking sektor. In 1999 the government embarked on a program of reform of bank system in coordination with the World Bank and the IMF. Key elements of the strategy included restructuring and privatizing the remaining state-owned banks; consolidating and rationalizing privately-owned banks; enhancing the regulatory, supervisory and banking capacity of the National Bank of Azerbaijan (NBA); improving the legal framework; and developing the institutional and technical infrastructure to support a healthy, efficient, and competitive banking system, including accounting, payment systems, and auditing. At present, role and position of banks in the country's economy is strengthening, their resource base is developing and creditors and investors have more trust in the banking system.
The country's banking system consists of the National Bank of Azerbaijan with functions of the central bank as well as commercial banks dealing with commercial activity and other credit organization, which are not banks. NBA carries out such functions as determination and implementation of monetary policy, regulation cash money turnover, monitoring payment system as well as licensing of commercial banks and control over their activities. As a state regulator in the field of regulation of the banking system, NBA achieved stability in the field of organization of effective bank control system, promotion and application of reforms. During the last 5 years the marked progresses have been achieved.
Legislative base of banking activity has been improved and it fully meets international standards. Advanced international experience and new banking legislature meeting requirements of Bazel Commitee came into force. This fact is very important for protection of interests of depositors, creditors and investors, along with forming new legal base meeting international standards for banking activity.
The favourable macroeconomic situation and implemented reforms accelerated the development of the banking system and supported the strengthening of the mediation role of the banks. In the last 3 year all the parameters of the banking system was have grown 2 times. In 2006 alone, growth on actives of the banking system was 68%, in credits to real sector 64% and in capital 55%.
Licensing. All banking activities, including the acceptance of deposits, maintenance of correspondent accounts, cash operations, money transfers and lending, are subject to licensing. Only the NBA has the right to grant licenses for banking activity.
Standards for Domestic Banks. The Management Board of the NBA establishes standard prudential requirements (including minimum capital and monetary and non-monetary rations of a bank's capital) and reserve fund requirements.
Senior management of all banks (the chairman of the board and his/her deputies, the chief accountant, the head and chief accountant of branches) are subject to certain compulsory standards and are certified by the NBA, which certifies all persons authorized to sign documents in the name of a bank and its branches. Banks are restricted from engaging directly in insurance, commercial and manufacturing activities.
Banks with Foreign Participation. Foreign banks may operate representative offices, branches, joint ventures, and wholly owned subsidiaries in Azerbaijan. Representative offices may not obtain a banking license.
Foreign individuals and foreign entities which are not banks may set up, operate, and acquire shares in banks in Azerbaijan. Azerbaijani law does not define the term "bank with foreign participation" so this term should be broadly construed to embrace virtually all banks with foreign capital, regardless of the extent of foreign ownership.
Banks with foreign participation are subject to the same restrictions as domestic banks, as well as certain additional restrictions. For example, general managers and their deputies of banks with foreign participation (or their branches) must be citizens of the Republic of Azerbaijan.
Insurance. Insurance market is one of the most dynamic sectors of the Azerbaijani financial market. Although insurance market is on the first stage of its development, according to analysis of financial indicators it could be said that growth and development direction of the market in general is on a right path. There are two public organizations in the field: The Union of Azerbaijani Insurers and Union of Insurance Societies of Azerbaijan. Activities are directly contributing to the insurance market development and reinforcement of the companies. Seven insurance majors are also the members of the Insurance Council established by the Ministry of Finance of Azerbaijan. A number of internationals are also involved in local insurance market either directly or through local companies.
It should be noted that since 1993 Azerbaijan is a associate member of international system of automobile owners liability insurance - 'Green Card' and cargo transporters' liability insurance 'TIR Carnet'. Currently work on fulfilment of normative requirements for completing Azerbaijan's full membership is conducted.
There are 35 types of insurance products on the Azerbaijani insurance market. 9 of them are mandatory insurance and 26 are voluntary insurance products. Below is the list of products as per the segment of market they occupy:
1. Motor vehicle insurance (automobile)
2. Property insurance
3. Cargo insurance
4. Accident insurance
5. Third parties liability insurance
6. Health insurance
7. Life insurance
8. Financial risks insurance
During the last five years legal framework operation of the market has been re-established. In particular the Law “On Insurance”, “On mandatory Insurance of Motor Vehicle Owner's Liability”, Law “On Mandatory Fire Insurance of Property”, Law “On Mandatory Ecological Insurance” etc. were adopted.
Periodic increase to the minimum charter capital of insurance companies is aimed at consolidation of the market.
As of beginning 2007 joint charter capital of Azerbaijani insurance companies increased to 41.41 mln AZN. Share of Azerbaijani capital in this figure is 82% the rest is foreign capital. Currently there are 29 insurers, 7 of them are joint ventures, 6 of them are with foreign investment.
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