Transparency of the Regulatory System
The Azerbaijani government has worked to improve its regulatory system over the past several years, using transparent policies and effective laws to foster competition and establish clear rules of the game. Legal, regulatory, and accounting systems are approaching international norms. However, continued limited transparency and allegations of corruption in regulatory matters remain a problem. Draft legislation is neither made available for public comment nor usually run through a public consultation process. However, the government has begun engaging business organizations, such as the American Chamber of Commerce in Azerbaijan (AmCham) and consulting firms on various proposed draft laws, including the Strategic Roadmaps, which address the country’s economic diversification/reform thinking, released in December 2016. Azerbaijan has yet to develop informal regulatory processes managed by private sector associations. Limited transparency and inconsistent enforcement of rules to foster competition are serious impediments to foreign direct investment.
In August 2013, Azerbaijan’s Parliament passed a law on the regulation of inspections in entrepreneurship and the protection of the rights of entrepreneurs. Under the law, businesses are to be divided into high, medium, and low risk groups, with the frequency of inspections determined by the category of risk. Entrepreneurs who have not committed any legal infraction for a specified period of time were categorized as low risk, which will result in less frequent inspections. Subsequently, on October 19, 2015 President Aliyev signed a decree that suspending inspections for entrepreneurs for two years as of November 1, 2015.
On December 21, 2015 President Aliyev signed a Decree “On Certain Measures in the area of Licensing.” In accordance with the new regulations, all licenses will be issued indefinitely. The Ministry of Economy was designated as the authority responsible for issuing, suspending, resuming, and cancelling licenses (except for licenses issued for activities related to national security). The Ministry will conduct these licensing activities through ASAN centers (http://www.asan.gov.az/en). Licenses are to be issued within 10 days of application (previous regulations provided for a 15-day period). In accordance with the List of Licensable Activities, the number of activities requiring a special permit (license) was reduced from 60 to 32, while the amount of fees payable for the issuance of licenses was reduced by up to 50%. Activities no longer requiring a special license include tourism services and the sale of tobacco and alcoholic drinks.
On April 20, 2016 President Aliyev signed a decree on the implementation of Law No. 176-VQ "On Licenses and Permits", dated March 15, 2016 (the "Law"). The Law’s main purposes are to enhance the entrepreneurial environment, eliminate barriers to business, encourage new businesses, and simplify procedures for issuing licenses and permits. The Law sets the criteria for when licenses and permits are required to do business in Azerbaijan, lists the relevant activities, and sets out the principles of the state regulation of the licensing and permit system. It also covers the issuance of licenses/permits, rules on the re-issuance, suspension, renewal and cancellation of licenses /permits, and the responsibility of the authorities issuing licenses/ permits and license/permit holders. One of the Law’s innovations is the creation of the legal basis for permits. Thus, the Law explains the concept of a "permit" as an official document issued by the relevant body (permission, approval, certification, authorization, accreditation) for carrying out certain specific business activities. The other major innovation in the Law is the "one-stop shop" principle, which simplifies administrative processes governing licenses/permits and reduces the number of required documents, as well as time and costs. Moreover, all licenses effective as of June 1, 2016 (the date on which the Law entered into force) are deemed to be issued indefinitely.
International Regulatory Considerations
Azerbaijan has had observer status at the World Trade Organization (WTO) since 1997. A working party on Azerbaijan’s succession to the WTO was established on July 16, 1997, and Azerbaijan began negotiations with WTO members in 2004. The working party met for the thirteenth time in July 2016. The WTO Secretariat reports Azerbaijan is less than a quarter of the way to full membership. In 2016, Azerbaijan imposed higher tariffs on a number of imported goods, including agricultural products, to promote domestic production and reduce imports. Currently, Azerbaijan is negotiating bilateral market access with 19 economies.
Legal System and Judicial Independence
Azerbaijan’s legal system is based on Civil Law. Disputes or disagreements arising between foreign investors and enterprises with foreign investment, Azerbaijani state bodies and/or enterprises, and other Azerbaijani legal entities, are to be settled in the court systems of Azerbaijan or, upon agreement between the parties, in a court of arbitration, including international arbitration bodies. Businesses, however, report problems with the reliability of judicial processes in Azerbaijan. While the government promotes foreign investment and the laws guarantee national treatment, in practice investment disputes can arise when a foreign investor or trader’s success threatens well-connected or favored local interests.
The judiciary consists of the Constitutional Court of the Republic of Azerbaijan, the Supreme Court of the Republic of Azerbaijan, the appellate courts of the Republic of Azerbaijan, trial courts, and other specialized courts. The Supreme Court and appellate courts have civil, criminal, administrative, economic, and military panels. Trial court judgments may be appealed in appellate courts and the judgments of appellate courts can be appealed in the Supreme Court. The Supreme Court is the highest court in the country. Under the Civil Procedure Code of Azerbaijan, the appellate court judgments are published within three days of issuance but may, in exceptional circumstances, be published within ten days. The Constitutional Court has the authority to review laws and court judgments for compliance with the Constitution. The decisions of the Constitutional Court are published in print and online. In addition, on February 3, 2016, President Aliyev established Boards of Appeal in the State Committee for Property Issues and the State Customs Committee to ensure transparency and impartiality in the review of complaints from entrepreneurs concerning their business operations.
The procedure for the enforcing foreign judgments in Azerbaijan is established by the Civil Procedure Code. The Code only requires the enforcement of foreign judgments either pursuant to an international treaty or based on the principle of reciprocity and provides that foreign arbitral awards may be enforced in Azerbaijan, so long as they do not contravene local legislation or public policy, and if reciprocity exists. A Bilateral Investment Treaty between the United States and Azerbaijan – which went into force in 2001 – provides U.S. investors with recourse for the settlement of investment disputes through the International Center for the Settlement of Investment Disputes.
The Law on Protection of Foreign Investments, dated January 15, 1992 (the Foreign Investment Law), provides guidance to foreign investors seeking to resolve investment disputes, either through Azerbaijani courts or, alternatively, through dispute resolution procedures agreed to by the parties involved. Resolution of investment disputes may include international arbitration, either in Azerbaijan or abroad. The Law on International Arbitration, dated November 18, 1999 (the Arbitration Law), provides guidance on the conduct of international arbitration in Azerbaijan.
Azerbaijan has entered into several other bilateral treaties – principally with neighboring states – to facilitate enforcement of foreign judgments, and is a party to the 2004 Commonwealth of Independent States (CIS) Convention on Mutual Legal Assistance in Civil, Family and Criminal Cases. In addition, Azerbaijan is a party to the Convention on Resolving Business Disputes, dated March 20, 1992 (also known as the Kyiv Convention). Azerbaijan is also a member of the Multilateral Investment Guarantee Agency (MIGA).
Laws and Regulations on Foreign Direct Investment
Foreign investment in Azerbaijan is regulated by a number of international treaties and agreements, as well as by domestic legislation. These include the Bilateral Investment Treaty (BIT) between the United States and Azerbaijan, which encourages the reciprocal protection of investment, dated August 1, 1997; the Azerbaijan-EC Cooperation Agreement dated April 22, 1996; the Law on Protection of Foreign Investment dated January 15, 1992 (the Foreign Investment Law); the Law on Investment Activity dated January 13, 1995 (the Investment Activity Law); the Law on Investment Funds dated October 22, 2010 (the Investment Funds Law); the Law On Privatization of State Property dated May 16, 2000 (the Privatization Law); and the Second Program for Privatization of State Property of the Republic of Azerbaijan dated August 10, 2002 (the Second Privatization Program), as well as by-laws regulating specific sectors of the Azerbaijani economy. This legislation permits foreign direct investment in any activity in which a national investor may also invest, unless otherwise prohibited by law. Azerbaijani law is evolving in accordance with the government’s strategic goal of creating a more welcoming environment for foreign businesses; as such, foreign investments are protected by guarantees provided under Azerbaijani law. The website of Azerbaijan’s National Parliament, http://meclis.gov.az/, lists all the country’s laws, but only in the Azerbaijani language.
Competition and Anti-Trust Laws
Over the past few years, Azerbaijan has updated several key pieces of legislation that affect the business environment. On April 28, 2016, President Aliyev signed an amendment to the law on Antimonopoly Activity and an Amendment to the Criminal Code. The amendments introduced the concept of cartel agreements or arrangements into Azerbaijan’s antimonopoly legislation. A cartel agreement is now understood as "a voluntary combination of two or more financially and legally independent businesses competing in the same market to exclude others or prevent new competitors from entering the market by dividing territories, sales volumes, types of goods or customers, or by refusing to purchase or sell goods (services)". Increasing or decreasing prices, maintaining prices at the same level, implementing privileges, rebates or bonuses, or other methods of restraining competition are also included in the definition of a cartel agreement. A new version of the Competition Code began undergoing revision in Parliament in late 2014, and some observers expect the law to pass in 2017. The difficulty of getting established Azerbaijani businesses to adopt standard investor-friendly practices, such as those associated with the concept of good corporate governance or international accounting norms, is regarded as a factor hindering foreign direct investment.
The State Service for Antimonopoly Policy and Consumer Rights' Protection under the Ministry of Economy is another venue where businesses can seek to address claims of monopolies and competition-related concerns.
Expropriation and Compensation
The Law on the Protection of Foreign Investments protects foreign investors against nationalization and requisition, except under certain specified circumstances. Nationalization of property can occur when authorized by parliamentary resolution, although there have been no known cases of official nationalization or requisition against foreign firms in Azerbaijan. Requisition – by a decision of the Cabinet of Ministers – is possible in the event of natural disaster, an epidemic, or other extraordinary situation. In the event of nationalization or requisition, foreign investors are entitled under the law to prompt, effective, and adequate compensation.
Amendments made to Azerbaijan’s Constitution in September 2016 enable authorities to expropriate private property under in instances where necessary for social justice and effective use of land: “The property rights over land plots might be limited by law to ensure social justice and effective use of land plots.” (Article 29, VI.) The Azerbaijani government has not shown any pattern of discriminating against U.S. persons by way of direct expropriations.
Azerbaijan is a member of the International Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID convention). Azerbaijan is also a party to the 1958 Recognition and Enforcement of Foreign Arbitral Awards (New York Convention), which provides for the recognition of foreign arbitral awards resulting from international arbitration. The Bilateral Investment Treaty (BIT) between the United States and Azerbaijan, which went into force in 2001, provides U.S. investors recourse to settle any investment dispute using the ICSID convention.
Over the past 10 years, the U.S. Embassy in Baku has been notified of three investment dispute cases regarding U.S. citizens. None of these cases, however, have been resolved.
International Commercial Arbitration and Foreign Courts
The Law on International Arbitration guides the process of international arbitration in Azerbaijan:
“Under these rules, parties may select independent arbitrators of any nationality, proceedings may be conducted in any language chosen by the parties, the applicable law (except for those matters that must be exclusively resolved under Azerbaijani legislation) and arbitration procedure may be chosen by the parties, and, in general, parties may stipulate the terms of the arbitration process. Where the terms have not been stipulated by the parties, any omission may be resolved by the Supreme Court of the Republic of Azerbaijan.”
In addition, on February 3, 2016, Azerbaijan’s President established Boards of Appeal in the State Committee for Property Issues and the State Customs Committee to ensure transparency and impartiality in reviewing complaints from entrepreneurs. “All physical and legal entities engaged in entrepreneurship activities can make a complaint to the appropriate boards of appeal in the case of absolute or partial dissatisfaction with the decision taken on their business activities by the central or local authorities, refusal to make a decision, and an action or inaction.”
“If a complaint of an entrepreneur submitted to an executive body is not considered, or if there is a dispute in decision-making, the entrepreneur will have an opportunity to submit a complaint directly to the Boards of Appeal of the central and local executive authorities, and if he/she is not satisfied with their decision he/she can appeal to the Board of Appeal under the President of Azerbaijan.”
Azerbaijan’s Bankruptcy Law, which experts report does not function effectively and is rarely used, remains a factor affecting economic development, as do the country’s weak credit reporting institutions. Under Azerbaijan’s Bankruptcy Law, which applies only to legal entities and entrepreneurs – not to private individuals – bankruptcy proceedings may be initiated by either a debtor facing insolvency or by any creditor. In general, the legislation focuses on liquidation procedures. For instance, a court-approved “rehabilitation plan” may not exceed two years.
The World Bank’s Doing Business Report includes in its country rankings the ease of “resolving insolvency” (rankings are available at: http://www.doingbusiness.org/data/exploreeconomies/azerbaijan/resolving-insolvency). Azerbaijan ranks 84 out of 189 countries in this category.