Azerbaijan

Executive Summary

The overall investment climate in Azerbaijan continues to improve, although significant challenges remain.  Azerbaijan’s government has sought to attract foreign investment, undertake reforms to diversify its economy, and stimulate private sector-led growth.  The Azerbaijani economy, however, remains heavily dependent on oil and gas output, which account for roughly 88 percent of export revenue and over half of the state budget.  The economy of Azerbaijan grew 5.6% year-on-year in 2021, compared to a 4.3% contraction in the previous year.  Both oil and gas (1.7%) and the non-oil and gas (7.2%) sectors of the economy expanded as the economy continued to recover from the pandemic.  While the oil and gas sector has historically attracted the largest share of foreign investment, the Azerbaijani government has targeted four non-oil sectors to diversify the economy: agriculture, tourism, information and communications technology (ICT), and transportation/logistics.  Measures taken in recent years to improve the business climate and reform the overall economy include eliminating redundant business license categories, empowering the popular “Azerbaijan Service and Assessment Network (ASAN)” government service centers with licensing authority, simplifying customs procedures, suspending certain business inspections, and reforming the tax regime.

Community spread of COVID-19 is occurring in Azerbaijan, and COVID-19 infections are present in all regions the country.  The special quarantine regime was extended until May 1, 2022, according to a February 2022 decision by Azerbaijan’s Cabinet of Ministers.  Masks are no longer required in outdoor spaces but remain obligatory indoors.  In 2021, Azerbaijan allocated AZN 800.8 million (USD 471 million) from the state budget to support COVID-19 mitigation measures, including vaccine purchases, bonus payments to healthcare workers, and the operation of modular hospitals.

Despite substantial efforts to open the business environment, progress remains slow on structural reforms required to create a diversified and competitive private sector, and corruption remains a major challenge for firms operating in Azerbaijan.  A small group of government-connected holding companies dominates the economy, intellectual property rights enforcement is improving but remains insufficient, and judicial transparency is lacking.

Under Azerbaijani law, foreign investments enjoy complete and unreserved legal protection and may not be nationalized or appropriated, except under specific circumstances.  Private entities may freely establish, acquire, and dispose of interests in business enterprises.  Foreign citizens, organizations, and enterprises may lease, but not own, land.  Azerbaijan’s government has not shown any pattern of discriminating against U.S. persons or entities through illegal expropriation.  The Bilateral Investment Treaty (BIT) between the United States and Azerbaijan provides U.S. investors with recourse to settle investment disputes using the International Center for the Settlement of Investment Disputes (ICSID).  The average time needed to resolve international business disputes through domestic courts or alternative dispute resolution varies widely.

Following the release in November of a tripartite ceasefire declaration by Armenia, Azerbaijan, and Russia, which brought an end to the fall 2020 intensive fighting in the Nagorno-Karabakh conflict, the Azerbaijani government is seeking new investments in the territories around Nagorno-Karabakh that were previously under the control of Armenian-backed separatists.  Azerbaijan’s 2022 budget includes an allocation of AZN 2.2 billion (USD 1.3 billion) for the restoration and reconstruction of these territories.  These funds will be reportedly used to restore road infrastructure, electricity, gas, water, communications infrastructure, and the education and healthcare sectors, along with the restoration of cultural and historical monuments.  The government is also pursuing green energy projects in this region. Reconstruction is expected to continue over the coming years, along with continued special budget allocations provided for rebuilding and resettling these territories.  Demining these territories as part of reconstruction efforts remains a priority of the Azerbaijani government.

Table 1: Key Metrics and Rankings 
Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2021 130 of 180 http://www.transparency.org/research/cpi/overview
Global Innovation Index 2021 80 of 131 https://www.globalinnovationindex.org/analysis-indicator
U.S. FDI in partner country ($M USD, stock positions) 2021 N/A http://apps.bea.gov/international/factsheet/
World Bank GNI per capita 2020 $4,480 http://data.worldbank.org/indicator/NY.GNP.PCAP.CD

1. Openness To, and Restrictions Upon, Foreign Investment

The Azerbaijani government actively seeks foreign direct investment.  Flows of foreign direct investment to Azerbaijan have risen steadily in recent years, primarily in the energy sector.  Foreign investment in the government’s priority sectors for economic diversification (agriculture, transportation, tourism, and ICT) has thus far been limited.

Foreign investments enjoy complete and unreserved legal protection under the Law on the Protection of Foreign Investment, the Law on Investment Activity, and guarantees contained within international agreements and treaties.  In accordance with these laws, Azerbaijan will treat foreign investors, including foreign partners in joint ventures, in a manner no less favorable than the treatment accorded to national investors.  Azerbaijan’s Law on the Protection of Foreign Investments protects foreign investors against nationalization and requisition, except under specific circumstances.  The Azerbaijani government has not shown any pattern of discriminating against U.S. persons or entities through illegal expropriation.

Azerbaijan’s primary body responsible for investment promotion is the Azerbaijan Export and Investment Promotion Agency (AzPromo).  AzPromo is a joint public-private initiative, established by the Ministry of Economy and Industry in 2003 to foster the country’s economic development and diversification by attracting foreign investment into the non-oil sector and stimulating non-oil exports.  A January 2018 decree called for new legislation, which has not yet been introduced, to ensure Azerbaijan conforms to international standards to protect foreign investor rights.  The Azerbaijani government meets regularly with the American Chamber of Commerce (AmCham) to solicit the input from the business community, particularly as part of AmCham’s biennial white paper process.  In June 2021, AmCham Azerbaijan organized a press conference for publicly presenting subsequent publication of its White Paper on observations and recommendations for improving Azerbaijan’s business climate. The 2021 White Paper covered issues in several fields, including taxation, customs procedures, finance, and information and communications technology. 

Foreigners are allowed to register business entities by opening a fully owned subsidiary, acquiring shares of an existing company, or by creating a joint venture with a local partner.  Foreign companies are also permitted to operate in Azerbaijan without creating a local legal entity by registering a representative or branch office with the tax authorities.

Foreigners are not permitted to own land in Azerbaijan but are permitted to lease land and own real estate.  Under Azerbaijani laws, the state must retain a controlling stake in companies operating in the mining, oil and gas, satellite communication, and military arms sectors, limiting foreign or domestic private ownership to a 49 percent share of companies in these industries.  Foreign ownership in the media sector is also strictly limited.  Furthermore, a special license to conduct business is required for foreign or domestic companies operating in telecommunications, sea and air transportation, insurance, and other regulated industries.  Azerbaijan does not screen inbound foreign investment, and U.S. investors are not specifically disadvantaged by any existing control mechanisms.

Azerbaijan has not conducted an Organization for Economic Cooperation and Development (OECD) investment policy review, a United Nations Conference on Trade and Development (UNCTAD) investment policy review, or a WTO Trade Policy Review.

Azerbaijani law requires all companies operating in the country to register with the tax authorities.  Without formal registration, a company may not maintain a bank account or clear goods through customs.  Registration takes approximately three days for commercial organizations.  Companies may e-register at http://taxes.gov.az.

Azerbaijan does not actively promote or incentivize outward investment, though Azerbaijani entities, particularly the State Oil Company of Azerbaijan (SOCAR) and the State Oil Fund of Azerbaijan (SOFAZ), have invested in various countries, including the United States.  SOFAZ investment is typically limited to real estate, precious metals, and low-yield government securities.  SOCAR has invested heavily in oil and gas infrastructure and petrochemicals processing in Turkey and Georgia, as well as gas pipeline networks in Greece, Albania, and Italy as part of the Southern Gas Corridor that transports Azerbaijani gas to European markets.  The government does not restrict domestic investors from investing overseas.

3. Legal Regime

Azerbaijan’s central government is the primary source of regulations relevant to foreign businesses.  Azerbaijan’s regulatory system has improved in recent years, although enforcement is inconsistent, and decision-making remains opaque.  Private sector associations do not play a significant role in regulatory processes.  The draft legislation process typically does not include public consultations and draft legislation text is rarely made available for public comment.  The government has in some cases engaged business organizations, such as AmCham, and consulting firms on various draft laws.  The website of Azerbaijan’s National Parliament, http://meclis.gov.az/ lists all the country’s laws, but only in the Azerbaijani language.

Legal entities in Azerbaijan must adhere to the International Financial Reporting Standards (IFRS).  These are only obligatory for large companies.  Medium-sized companies can choose between reporting based on IFRS or IFRS-SME standards, which are specially designed for large and medium enterprises.  Small and micro enterprises can choose between reporting based on IFRS, IFRS-SME, or simplified accounting procedures established by the Finance Ministry.

Several U.S. companies with operations and investments in Azerbaijan previously reported they had been subjected to repeated tax audits, requests for prepayment of taxes, and court-imposed fines for violations of the tax code.  These allegations have markedly decreased since 2017.

On October 19, 2015, Azerbaijan suspended inspections of entrepreneurs for two years, but inspections still may occur if a complaint is lodged.  This suspension was subsequently extended through January 1, 2023. Medicine quality and safety, taxes, customs, financial markets, food safety, fire safety, construction and safe usage of hazardous facilities, radioactive substances, and mining fields are not subject to this suspension order and are inspected for quality and safety.

The government has also simplified its licensing regime.  All licenses are now issued with indefinite validity through ASAN service centers and must be issued within 10 days of application.  The Economy Ministry also reduced the number of activities requiring a license from 60 to 32.  

Azerbaijan has held observer status at the World Trade Organization (WTO) since 1997 but has not made significant progress toward joining the WTO for the past several years.  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 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.  In February 2020, Azerbaijani President Ilham Aliyev made public remarks outlining Azerbaijan’s “cautious” approach to the WTO, saying that “the time [had] not come” for Azerbaijan’s membership.  Currently, Azerbaijan is negotiating bilateral market access with 19 economies.

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 Azerbaijani court system or, upon agreement between the parties, in a court of arbitration, including international arbitration bodies.  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.  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, appellate court judgments are published within three days of issuance or within ten days in exceptional circumstances.  The Constitutional Court has the authority to review laws and court judgments for compliance with the constitution.  

Businesses report problems with the reliability and independence of judicial processes in Azerbaijan.  While the government promotes foreign investment and the law guarantees national treatment, in practice investment disputes can arise when a foreign investor or trader’s success threatens well-connected or favored local interests.

Foreign investment in Azerbaijan is regulated by a number of international treaties and agreements, as well as domestic legislation.  These include the Bilateral Investment Treaty (BIT) between the United States and Azerbaijan, the Azerbaijan-European Commission Cooperation Agreement, the Law on Protection of Foreign Investment, the Law on Investment Activity, the Law on Investment Funds, the Law on Privatization of State Property, the Second Program for Privatization of State Property, and sector-specific legislation.  Azerbaijani law permits foreign direct investment in any activity in which a national investor may also invest, unless otherwise prohibited (see “Limits on Foreign Control and Right to Private Ownership and Establishment” for further information).

A January 2018 Presidential decree called for drafting a new law on investment activities to conform to international standards.  The decree also established mechanisms to protect investor rights and regulate damages, including lost profit caused to investors.  The details of the proposed new law have not been publicized as of April 2022.

The State Service for Antimonopoly Policy and Consumer Protection under the Economy Ministry is responsible for implementing competition-related policy.  The law on Antimonopoly Activity was amended in April 2016 to introduce regulations on price fixing and other anti-competitive behavior.  Parliament began revising a new version of the Competition Code in late 2014, but it has not yet been adopted.  Azerbaijan’s antimonopoly legislation does not constrain the size or scope of the handful of large holding companies that dominate the non-oil economy.

The Law on the Protection of Foreign Investments forbids nationalization and requisition of foreign investment, except under certain 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.  By a decision of the Cabinet of Ministers, requisition is possible in the event of natural disaster, an epidemic, or other extraordinary situation.  In the event of nationalization or requisition, foreign investors are legally entitled to prompt, effective, and adequate compensation.  Amendments made to Azerbaijan’s Constitution in September 2016 enabled authorities to expropriate private property when necessary for social justice and effective use of land.  In one recent case U.S. citizen property owners were pressured by local authorities to relinquish property rights at rates perceived to be well below fair market value.  The case has not yet been tested in the courts and the owners maintained their property, resisting government communications regarding an imminent takeover and indicating that the attempted expropriation was not being lawfully carried out under the terms of the Bilateral Investment Treaty or Azerbaijani law.  The Azerbaijani government has not shown any pattern of discriminating against U.S. persons by way of direct expropriations. 

Azerbaijan’s Bankruptcy Law applies only to legal entities and entrepreneurs, not to private individuals.  Either a debtor facing insolvency or any creditor may initiate bankruptcy proceedings.  In general, the legislation focuses on liquidation procedures.  The bankruptcy law in Azerbaijan is underdeveloped, which restricts private sector economic development by deterring entrepreneurship.  Amendments to Azerbaijan’s bankruptcy law adopted in 2017 extended the obligations of bankruptcy administrators and defined new rights for creditors.

4. Industrial Policies

Since early 2016, the government has introduced tax and investment incentives for entrepreneurs and legal entities in non-oil export sectors as part of the overall economic reform and economic diversification efforts.  These measures include certain partial, temporary exemptions from corporate and property taxes; favorable tax treatment for manufacturing facilities and imports of manufacturing equipment; and subsidies for certain exports.  Investment certificate holders are exempt from paying 50 percent of the assessed income tax, 100 percent of the land tax, and 100 percent of customs duties on imported machinery, equipment, and devices.  Certificates are issued for seven years to projects in priority non-oil sectors.

The Law of Azerbaijan “On the Use of Renewable Energy Sources in the Production of Electricity”, was signed into law by the President and published on July 14, 2021, together with a Presidential Decree on the implementation of the Renewable Energy Law. The Renewable Energy Law addresses guaranteed tariffs, foreign investment and other support mechanisms, such as scientific research and the promotion of active consumers. The law prescribes two methods for selecting investors for the generation of electricity using renewable energy sources (RES): auctions and direct negotiations.

 

If the selection of an investor is conducted in the form of an auction, the winner of the auction shall be the lowest bidder in relation to the purchase price for electricity subject to guaranteed offtake. The Ministry of Energy is the authorized body to organize RES auctions. In addition, the government is considering other incentives for investors in RES projects in Azerbaijan, including guaranteed offtake, guaranteed connection, priority in transmission and distribution and long-term land leases.

A government decree established the Alat Free Economic Zone (AFEZ) next to the Port of Alat, located approximately 50 miles south of Baku in March 2016.  President Aliyev signed legislation setting forth the incentives and regulations governing the AFEZ in June 2018.  The law exempts all businesses in the AFEZ from taxes and customs; charges the AFEZ’s administration with setting up its own employment, migration, dispute resolution, and arbitration regulations; provides protections from nationalization; and guarantees the free flow of funds in and out of the free trade area.  While the legal framework is in place and initial construction has begun, the AFEZ is not yet fully operational.

The Ministry of Digital Development and Transport has discussed plans to create other special economic zones, including a petrochemical complex and regional innovation zones to boost telecommunications sector development.  Currently, legal entities and individuals involved in entrepreneurial activities in one of five state-designated industrial or technological parks are exempt from income tax, property tax, land tax, and VAT on imported machinery and equipment until 2023.

The Azerbaijani government does not mandate local employment, although some Production Sharing Agreements (PSAs) in the oil sector include localization provisions.  While performance requirements are not generally imposed on new investments, the government is seeking to increase the number of value-added services and processes performed in Azerbaijan.  American companies have reported that government-connected companies often pressure current or potential partners to establish joint ventures, initiate local production of certain components, facilitate technology transfer, or otherwise invest in Azerbaijan in order to maintain or expand cooperation.

Azerbaijan does not have any data localization requirements.

5. Protection of Property Rights

International organizations, foreign citizens, and foreign legal entities may not own land or be granted a purchase option on a lease, but they are permitted to lease land.  Following independence, the government implemented land reforms that divided state-owned farms into privately held small plots.  Due to poor recordkeeping and titling in rural areas, it is often difficult to determine definitively who owns a plot.  Amendments made to Azerbaijan’s Constitution in September 2016 enabled authorities to expropriate private property with compensation in instances where necessary for “social justice and efficient use of the land.”

Azerbaijan’s State Real Estate Registry Service at the Committee for Property Issues registers real estate.  April 2016 amendments to the Law on Immovable Property Register cut the time to register property from 20 to 10 working days. 

The legal structure covering intellectual property protections in Azerbaijan is relatively strong, but experts and businesspeople report the level of enforcement within the country is weak.  Piracy and blatant infringements on intellectual property rights (IPR) of both digital and physical goods are commonplace and stifle foreign investment and local entrepreneurship.  The Business Software Alliance estimated the prevalence of software piracy at 84 percent in 2015, including in government ministries.  U.S. companies routinely list weak IPR protections as a key concern.  With strong Embassy encouragement, the government is taking steps to increase the use of licensed software in government institutions, but progress thus far has been uneven.

IPR in Azerbaijan are regulated by the Law on Copyrights and Related Rights, the Law on Trademarks and Geographic Designations, the Law on Patents, the Law on the Topology of Integrated Microcircuits, the Law on Unfair Competition, and the Law on Securing Intellectual Property Rights and Combating Piracy.

Azerbaijan is a party to the Convention Establishing the World Intellectual Property Organization (WIPO), the Paris Convention for Protection of Industrial Property, and the Berne Convention for the Protection of Literary and Artistic Works.  Azerbaijan is also a party to the Geneva Phonograms Convention and acceded to the two WIPO Internet treaties in 2005. 

Violation of IPR can result in civil, criminal, and administrative charges.  Azerbaijan tracks and reports on seizures of counterfeit goods but does not publish statistics on this effort.  Azerbaijan is not listed in USTR’s Special 301 Report, nor is it included in USTR’s Notorious Markets List.  For additional information about national laws and points of contact at local IP offices, please see WIPO’s country profiles at http://www.wipo.int/directory/en/.

6. Financial Sector

Access to capital is a critical impediment to business development in Azerbaijan.  An effective regulatory system that encourages and facilitates portfolio investment, foreign or domestic, is not fully in place.  Though the Baku Stock Exchange opened in 2000, there is insufficient liquidity in the market to enter or exit sizeable positions.  The Central Bank assumed control over all financial regulation in January 2020, following disbandment of a formerly independent regulator.  Non-bank financial sector staples such as capital markets, insurance, and private equity are in the early stages of development.  The Capital Market Modernization Project is an attempt by the government to build the foundation for a modern financial capital market, including developing market infrastructure and automation systems, and strengthening the legal and market frameworks for capital transactions.  One major hindrance to the stock market’s growth is the difficulty in encouraging established Azerbaijani businesses to adapt to standard investor-friendly disclosure practices, which are generally required for publicly listed companies.

Azerbaijan’s government and Central Bank do not restrict payments and transfers for international transactions.  Foreign investors are permitted to obtain credit on the local market, but smaller companies and firms without an established credit history often struggle to obtain loans on reasonable commercial terms.  Limited access to capital remains a barrier to development, particularly for small and medium enterprises.

The country’s financial services sector – of which banking comprises more than 90 percent – is underdeveloped, which constrains economic growth and diversification.  The drop in world oil prices in 2014-2015 and the resulting strain on Azerbaijan’s foreign currency earnings and the state budget exacerbated existing problems in the country’s banking sector and led to rising non-performing loans (NPLs) and high dollarization.  Subsequent reforms have improved overall sector stability.  President Aliyev signed a decree in February 2019 to provide partial relief to retail borrowers on foreign-currency denominated loans that meet certain criteria.

As of January 1, 2022, 26 banks were registered in Azerbaijan, including 12 banks with foreign capital and two state-owned banks.  These banks employ 20,601 people and have a combined 480 branches and 2,920 ATMs nationwide.  Total banking sector assets stood at approximately USD 22.3 billion as of January 2022, with the top five banks holding almost 60 percent of this amount.

In December 2019, Azerbaijan carried out a banking management reform that gave the Central Bank of Azerbaijan control over banks and credit institutions, closing the Chamber for Control over Financial Markets, which had held regulatory powers following Azerbaijan’s 2014/2015 economic crisis and resulting currency devaluations.  Concurrently, the Central Bank announced “recovery of the banking sector” would be one of the main challenges it would tackle in 2020.  The Central Bank closed four insolvent banks (Atabank, AGBank, NBCBank, and Amrah Bank) in April/May 2020, bringing the number of banks in the country down from 30 to 26.  Only six banks are able to conduct correspondent banking transactions with the United States.

Foreign banks are permitted in Azerbaijan and may take the form of representative offices, branches, joint ventures, and wholly owned subsidiaries.  These banks are subject to the same regulations as domestic banks, with certain additional restrictions.  Foreign individuals and entities are also permitted to open accounts with domestic or foreign banks in Azerbaijan.

Azerbaijan’s sovereign wealth fund is the State Oil Fund of Azerbaijan (SOFAZ).  Its mission is to transform hydrocarbon reserves into financial assets generating perpetual income for current and future generations and to finance strategically important infrastructure and social projects of national scale.  While its main statutory focus is investing in assets outside of the country, since it was established in 1999 SOFAZ has financed several socially beneficial projects in Azerbaijan related to infrastructure, housing, energy, and education.  The government’s newly adopted fiscal rule places limits on pro-cyclical spending, with the aim of increasing hydrocarbon revenue savings.  SOFAZ publishes an annual report which it submits for independent audit.  The fund’s assets totaled USD 45 billion as of January 1, 2022

7. State-Owned Enterprises

In Azerbaijan, state-owned enterprises (SOEs) are active in the oil and gas, power generation, communications, water supply, railway, and air passenger and cargo sectors, among others.  There is no published list of SOEs.  While there are no SOEs that officially have been delegated governmental powers, companies such as the SOCAR, Azerenerji (the national electricity utility), and Azersu (the national water utility) – all of which are closed joint-stock companies with majority state ownership and limited private investment – enjoy quasi-governmental or near-monopoly status in their respective sectors.

SOCAR is wholly owned by the government of Azerbaijan and takes part in all oil and gas activities in the country.  It publishes regular reports on production volumes, the value of its exports, estimates of investments in exploration and development, production costs, the names of foreign companies operating in the country, production data by company, quasi-fiscal activities, and the government’s portion of production-sharing contracts.  SOCAR is also responsible for negotiating PSAs with all foreign partners for hydrocarbon development.  SOCAR’s annual financial reports are audited by an independent external auditor and include the consolidated accounts of all SOCAR’s subsidiaries, although revenue data is incomplete.

There have been instances where state-owned enterprises have used their regulatory authority to block new entrants into the market.  SOEs are, in principle, subject to the same tax burden and tax rebate policies as their private sector competitors.  However, in sectors that are open to both private and foreign competition, SOEs generally receive a larger percentage of government contracts or business than their private sector competitors.  While SOEs regularly purchase or supply goods or services from private sector firms, domestic and foreign private enterprises have reported problems competing with SOEs under the same terms and conditions with respect to market share, information, products and services, and incentives.  Private enterprises do not have the same access (including terms) to financing as SOEs.  SOEs are also afforded material advantages such as preferential access to land and raw materials – advantages that are not available to private enterprises.  There is little information available on Azerbaijani SOEs’ budget constraints, due to the limited transparency in their financial accounts.

A renewed privatization process started with the May 2016 presidential decree implementing additional measures to improve the process of state property privatization and the July 2016 decree on measures to accelerate privatization and improve the management efficiency of state property.  The State Committee on Property Issues launched a portal to provide privatization information in July 2016.  The portal contains information about the properties, their addresses, location, and initial costs with the aim of facilitating privatization.  Azerbaijan’s current privatization efforts focus on smaller state-owned properties.  While there are no immediate plans to privatize large SOEs, Azerbaijan is moving 21 major government-owned companies to a new state holding company tasked to improve efficiency and corporate governance as well as prepare them for possible privatization.  However, the government has no plans to sell stakes in state companies in 2022, including in state oil company SOCAR.

8. Responsible Business Conduct

 

Responsible business conduct (RBC) is a relatively new concept in Azerbaijan.  Producers and consumers tend not to prioritize responsible business conduct, including environmental, social, and governance issues.  No information is available on legal corporate governance, accounting, and executive compensation standards to protect shareholders in Azerbaijan.  Larger foreign entities tend to follow generally accepted RBC principles consistent with parent company guidelines and aim to educate their local partners, who generally consider basic charitable donations and paying taxes as acts of social responsibility.

AmCham established a Corporate Social Responsibility (CSR) Committee in October 2011 to encourage companies to embrace social responsibility through activities and dialogue with relevant stakeholders.  AmCham also published a corporate social responsibility guide on CSR for businesses in Azerbaijan.  In 2011, the Economy Ministry established standards for corporate governance, which included an evaluation methodology for these standards and a code of ethical behavior.  The Economy Ministry has been tasked with explaining the importance of corporate governance standards to entrepreneurs.  Some companies report that government restrictions on NGO registration have complicated CSR corporate social responsibility efforts.

Azerbaijan’s Extractive Industries Transparency Initiative (EITI) status was downgraded from “compliant” to “candidate” in April 2015, due to concerns about Azerbaijani civil society’s ability to engage critically in the EITI process.  Following the EITI Secretariat’s evaluation in March 2017 that Azerbaijan had not sufficiently implemented required “corrective actions,” Azerbaijan withdrew from the EITI and established a domestic Extractive Industries Transparency Commission in April 2017 to ensure transparency and accountability in the extractive industries of the country.  The Commission has published two Reports on Transparency in the Extractive Industries but has not met since 2019 and does not conform with EITI standards.

Azerbaijan has signed and ratified the Paris Climate Agreement.  In its 2017 Nationally Determined Contributions, the country outlined climate change mitigation actions in several sectors and set a goal to reduce carbon emissions by 35 percent (from 1990 levels) by 2030.  

Department of State

Department of the Treasury

Department of Labor

Azerbaijan has signed and ratified the Paris Climate Agreement.  In its 2017 Nationally Determined Contributions, the country outlined climate change mitigation actions in several sectors and set a goal to reduce carbon emissions by 35 percent (from 1990 levels) by 2030.  

9. Corruption

Corruption is a major challenge for firms operating in Azerbaijan and is a barrier to foreign investment despite government efforts to reduce low-level corruption.  Azerbaijan does not require that private companies establish internal codes of conduct to prohibit bribery of public officials, nor does it provide protections to NGOs involved in investigating corruption.  U.S. firms have identified corruption in government procurement, licensing, dispute settlement, regulation, customs, and taxation as significant obstacles to investment.

The Azerbaijani government publicly acknowledges problems with corruption but does not effectively or consistently enforce anticorruption laws and regulations.  Azerbaijan has made modest progress in implementing a 2005 Anti-corruption Law, which created a commission with the authority to require full financial disclosure from government officials.  The government has achieved a degree of success reducing red tape and opportunities for bribery through a focus on e-government and government service delivery through centralized ASAN service centers, which first opened in February 2013.  ASAN centers provide more transparent, efficient, and accountable services through a “one window” model that reduces opportunities for rent-seeking and petty government corruption and have become a model for other initiatives aimed at improving government service delivery.

Despite progress in reducing corruption in public services delivery, the civil service, public procurement apparatus, and the judiciary still suffer from corruption.  Tax reforms announced in January 2019 were aimed partially at reducing corruption in tax administration and received praise from the local business community.

Azerbaijan signed and ratified the UN Anticorruption Convention and is a signatory to the Council of Europe Criminal and Civil Law Conventions.  Azerbaijan is not currently a party to the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions.

10. Political and Security Environment

On multiple occasions in 2019 and 2020, authorities selectively blocked mobile and fixed-line internet access, temporarily restricted access to foreign media and social networking sites and imposed blocks on virtual private network (VPN) services, apparently in response to political protests and as part of national restrictions during and after Azerbaijan’s armed conflict with Armenian forces in September-November 2020.  Radio Free Europe/Radio Liberty are among the sites permanently blocked in Azerbaijan.  The increase in frequency and lack of transparency regarding internet disruptions raise serious concerns about future Azerbaijani government efforts to control access to information in ways that impede foreign business interests.  

There have been no known acts of political violence against U.S. businesses or assets, nor against any foreign owned entity.  It is unlikely that civil disturbances, should they occur, would be directed against U.S. businesses or the U.S. community.

During 44 days of intensive fighting from September 27 to November 10, 2020, involving Azerbaijan, Armenia, and Armenia-supported separatists, significant casualties and atrocities were reported by all sides.  After Azerbaijan, with Turkish support, reestablished control over four surrounding territories controlled by separatists since 1994, a Russian-brokered ceasefire arrangement announced by Azerbaijan and Armenia on November 9 resulted in the peaceful transfer of control over three additional territories to Azerbaijan, as well as the introduction of Russian peacekeepers to the region.  The ceasefire has largely held, but tensions remain high, particularly along the international border, which has not been fully demarcated.  

Russian forces have played a role in controlling access along highways near the border and into the Nagorno-Karabakh region from Armenia and Azerbaijan.  The Azerbaijani government has suspended or threatened to suspend the operations of U.S. companies in Azerbaijan whose products or services are provided in the area of Nagorno-Karabakh in which Russian peacekeepers are currently deployed and has banned the entry into Azerbaijan of some persons who have visited Nagorno-Karabakh.  The U.S. government is unable to provide emergency services to U.S. citizens in and around Nagorno-Karabakh as access is restricted.

11. Labor Policies and Practices

The 1999 Labor Code regulates overall labor relations and recognizes international labor rights.  The work week generally is 40 hours.  The right to strike exists, though industrial strikes are rare.  Azerbaijan is a member of the International Labor Organization (ILO) and has ratified more than 57 ILO Conventions.  In practice, labor unions are strongly tied to political interests of the government.  Collective bargaining is not practiced.  Azerbaijan has regulations to monitor labor abuses, health, and safety standards in low-wage assembly operations, but enforcement is less effective.

Employment relations are established by an employment contract, which, in most cases, does not necessarily indicate a fixed term of employment.  While a number of workers still work without contracts in Azerbaijan’s informal economy, recent tax and customs reforms have provided incentives for individuals to register their employment to benefit from state financial support.  Under national law, an employer must give an employee two months’ notice of termination, with certain exceptions.  An employee can terminate his/her employment contract at any time but must give one month’s notice.  Upon termination of formally registered employment, employers must pay departing employees monetary compensation for unused vacation leave.  A formally registered employee who becomes unemployed is entitled to 70 percent of his/her average monthly wage, calculated over the past 12 months at the last place of work.  An employee must have worked under a valid labor contract in order to obtain unemployment benefits.  The law “On Unemployment Insurance” signed in August 2017 allows for payments to unemployed individuals registered with the State Employment Fund.  

Azerbaijan has an abundant supply of semi-skilled and unskilled laborers.  An estimated 35 percent of the Azerbaijani population works in agriculture, although this sector only contributes around 6 percent of the country’s GDP.  The construction sector tends to use temporary and contract workers; reportedly many of these workers’ agreements are not formally registered with the government.  The relatively limited supply of highly skilled labor is one of the biggest challenges in Azerbaijan’s labor market.  The average monthly wage as of January 2022 was AZN 766 (USD 451), and the official minimum wage increased in 2022 to AZN 300 (USD 176) per month, compared to the previous level of AZN 250 (USD 147) per month.  The Ministry of Labor and Social Protection took measures to avoid unjustified dismissals, redundancies of employees in a public sector, as well as to preserve salaries of the employees sent on vacation and ensured expansion of unemployment insurance benefits, and the establishment of a proactive support mechanism in this area.  Part of the reform program was to expand services to ensure employment, ensure transparency and prevent corruption.  The number of legalized labor contracts increased by 30 percent during 2017-2021. 

In Azerbaijan, the COVID-19 crisis has deepened socio-economic vulnerabilities and widened disparities across regions, firm sizes, and between the formal and informal sides of the economy.  To respond to the pandemic, a Presidential Decree outlining the emergency response package of measures was signed in March 2020, and the COVID-19 Response Action Plan was agreed by the Cabinet of Ministers in April 2020.  The government extended and scaled up existing support programs and designed new schemes. The initial size of the support package in 2020 was AZN 3.3 billion (around 4.8 per cent of GDP), later increased to include additional tax benefits and a one-off extension of social assistance. The package included social protection measures such as direct cash transfers and an expansion of unemployment insurance to support the unemployed and informal workers, more targeted social assistance to support low-income households and vulnerable groups, the creation of additional public jobs, and energy and education subsidies. The main interventions to support businesses were cash payments to entrepreneurs and employers in COVID-19-affected areas, interest rate subsidies and guarantees for both new and old loans in affected sectors, as well as support to the transport sector and subsidized government rents.

13. Foreign Direct Investment and Foreign Portfolio Investment Statistics

Table 2: Key Macroeconomic Data, U.S. FDI in Host Country/Economy
Host Country Statistical source* USG or international statistical source USG or International Source of Data:  BEA; IMF; Eurostat; UNCTAD, Other
Economic Data Year Amount Year Amount
Host Country Gross Domestic Product (GDP) ($M USD) 2020 $42,607 2019 $48,048 .
Foreign Direct Investment Host Country Statistical source* USG or international statistical source USG or international Source of data:  BEA; IMF; Eurostat; UNCTAD, Other
U.S. FDI in partner country ($M USD, stock positions) N/A BEA data available at https://www.bea.gov/international/direct-investment-and-multinational-enterprises-comprehensive-data
Host country’s FDI in the United States ($M USD, stock positions)  

N/A

BEA data available at https://www.bea.gov/international/direct-investment-and-multinational-enterprises-comprehensive-data
Total inbound stock of FDI as % host GDP  

No reliable data

2020 77% UNCTAD data available at

https://unctad.org/en/Pages/DIAE/World%20Investment%20Report/Country-Fact-Sheets.aspx  

* Source for Host Country Data:  Azerbaijan State Statistical Committee

Table 3: Sources and Destination of FDI
Direct Investment from/in Counterpart Economy Data
From Top Five Sources/To Top Five Destinations (US Dollars, Thousands)
Inward Direct Investment Outward Direct Investment
Total Inward $4,795,271 100% Total Outward $825,793 100%
United Kingdom $1,586,614 33% Turkey $280,542 34%
Turkey $700,186 14.6% United Kingdom $122,306 15%
United States $507,391 5 10.6% United States $65,967 8%
Malaysia $416,620 9% Georgia $64,111 8%
Cyprus $317,602 6.6% Malta $48,503 6%
“0” reflects amounts rounded to +/- USD 500,000.

*Source: Central Bank of Azerbaijan

14. Contact for More Information

Courtney Brasier
Economic and Commercial Officer
U.S. Embassy in Baku, Azerbaijan
+994-12-488-3300
BakuCommercial@state.gov

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