The overall investment climate in Azerbaijan continues to improve, although significant challenges remain. Over the past few years, the Government of Azerbaijan has sought to integrate the country more fully into the global marketplace, attract foreign investment, diversify its economy, undertake needed market economic reforms, and stimulate growth. However, the Azerbaijani economy is heavily dependent on oil and gas output, which account for roughly 91 percent of export revenue. Real GDP grew 1.4 percent in 2018 as oil prices increased.
While the oil and gas sector has historically attracted the majority 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. Measures taken in recent years to improve the business climate and reform the overall economy include eliminating redundant business license categories, empowering the popular “ASAN” government service centers with licensing authority, simplifying customs procedures, suspending certain business inspections, and reforming the tax regime. These measures helped Azerbaijan rise from 57 to 25 in the World Bank’s Doing Business Report. However, progress on structural reforms required to create a diversified and competitive private sector is mixed. A small group of government-connected holding companies dominate the economy, intellectual property protections are 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.
Azerbaijan considers travel to the region of Nagorno-Karabakh and the surrounding territories unlawful. Engaging in any commercial activities in Nagorno-Karabakh and the surrounding territories, whether directly or through business subsidiaries, can result in criminal prosecution and/or other legal action against individuals and/or businesses in Azerbaijan; it may also affect the ability to travel to Azerbaijan in the future.
Table 1: Key Metrics and Rankings
|TI Corruption Perceptions Index||2018||152 of 180||http://www.transparency.org/research/cpi/overview|
|World Bank’s Doing Business Report||2019||25 of 190||http://www.doingbusiness.org/en/rankings|
|Global Innovation Index||2018||82 of 126||https://www.globalinnovationindex.org/analysis-indicator|
|U.S. FDI in partner country ($M USD, stock positions)||2018||N/A||http://www.bea.gov/international/factsheet/|
|World Bank GNI per capita||2017||$4,080||http://data.worldbank.org/indicator/NY.GNP.PCAP.CD|
1. Openness To, and Restrictions Upon, Foreign Investment
Policies Towards Foreign Direct Investment
Over the past few years, the Azerbaijani government has sought to integrate the country more fully into the global economic marketplace and attract foreign 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 Foundation (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. AmCham completed the 2018 edition and is waiting to present the paper to President Aliyev.
Limits on Foreign Control and Right to Private Ownership and Establishment
Foreigners are allowed to register business entities by opening a fully-owned subsidiary, acquiring shares of an existing company, or 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 Taxes Ministry.
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. Unless there is an international agreement with Azerbaijan providing otherwise, foreign shareholding in media companies is limited to 33 percent in newspaper publishing and is prohibited in TV broadcasting companies. Restrictions on foreign equity ownership in the financial services sectors (banking and insurance) have been abolished; however, there are still limits within these sectors for how much total foreign capital participation is permitted. 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.
Other Investment Policy Reviews
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, nor a WTO Trade Policy Review.
Azerbaijani law requires all companies operating in the country to register. Without formal registration, a company may not maintain a bank account, or clear goods through customs. As part of the ongoing business law reforms, a “Single Window” principle was introduced January 1, 2008, significantly streamlining the registration process. Businesses must now only register with the Taxes Ministry, which takes approximately three days for commercial organizations. Since 2011, companies have also been able to e-register at .
Azerbaijan ranks 25th in the World Bank’s Doing Business Report (rankings are available at: ). Azerbaijan’s improvement in the Doing Business Report ranking was largely due to the creation of a credit registry, the opening of a single window for construction permits, and streamlining the process of connecting to the electricity grid.
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. The government does not restrict domestic investors from investing overseas.
2. Bilateral Investment Agreements and Taxation Treaties
Azerbaijan has signed 51 Bilateral Investment Treaties (BIT). The 2001 BIT in force between the United States and Azerbaijan encourages the reciprocal protection of investment. Azerbaijan also has bilateral investment treaties currently in force with: Austria, Belgium-Luxembourg Economic Union, China, Croatia, Czech Republic, Finland, France, Georgia, Germany, Greece, Hungary, Iran, Israel, Jordan, Kazakhstan, South Korea, Kuwait, Kyrgyzstan, Latvia, Lithuania, Moldova, Montenegro, Poland, Romania, Russia, San Marino, Serbia, Spain, Switzerland, Syria, Tajikistan, Turkey, Ukraine, UAE, the United Kingdom, and Uzbekistan.
Azerbaijan has free trade agreements (FTAs) with: Russia, Ukraine, Georgia, Kazakhstan, Kyrgyzstan, Tajikistan, Uzbekistan, Moldova, and Belarus. Under the FTAs, goods can be imported from those countries free of customs duties.
The United States signed a tax treaty with the USSR, to which Azerbaijan is considered a successor state. The United States and Azerbaijan do not have a separate bilateral taxation treaty. The United States and Azerbaijan are parties to the OECD Convention on Mutual Administrative Assistance in Tax Matters. Azerbaijan signed an intergovernmental agreement with the United States to implement the Foreign Account Tax Compliance Act (FATCA) on October 9, 2015, based on the “IGA Model 1a” form.
Azerbaijan also has double taxation treaties with: Austria, Belarus, Belgium, Bosnia & Herzegovina, Bulgaria, Canada, China, Croatia, Czech Republic, Denmark, Estonia, Finland, France, Georgia, Germany, Great Britain, Greece, Hungary, Iran, Italy, Japan, Jordan, Kazakhstan, Kuwait, Latvia, Lithuania, Luxembourg, Macedonia, Malta, Moldova, Montenegro, Netherlands, Norway, Pakistan, Poland, Romania, Russia, San Marino, Saudi Arabia, Serbia, Slovenia, South Korea, Spain, Sweden, Switzerland, Tajikistan, Turkey, UAE, Ukraine, Uzbekistan, and Vietnam. Treaties with Jordan, Spain, Sweden, Malta and Denmark are pending ratification by the parliament of Azerbaijan.
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 State Oil Company of Azerbaijan (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’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 the 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 and there are no active plans to privatize large SOEs.