Policies towards Foreign Direct 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 2018, AmCham reported the government accepted around 50 percent of the proposals put forth in their white paper. The next white paper, planned for 2020, was postponed due to the COVID-19 pandemic.

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 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.

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, or a WTO Trade Policy Review.

Business Facilitation

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 tax authorities, which takes approximately three days for commercial organizations. Since 2011, companies have also been able to e-register at http://taxes.gov.az .

In the World Bank’s “Doing Business 2020” report, Azerbaijan’s final published score was 78.5, ranking 28 out of 190 countries worldwide. This rank placed Azerbaijan as a “top ten reformer” country per the report.

Outward Investment

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.

Transparency of the Regulatory System

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. Draft legislation is neither routinely made available for public comment nor usually involves a public consultation process. The government has more regularly engaged business organizations, such as the American Chamber of Commerce in Azerbaijan (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, 2022. Food and pharmaceutical products 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. Over the 2020 calendar year, the Economy Ministry continued work to improve the operation of the “Licenses and Permits” portal and the integration of information systems into ASAN systems. In 2020, 358 electronic licenses were issued to entrepreneurs through the portal. 1,790 electronic licenses have been issued from the launch of the portal on March 1, 2018 to January 1, 2021.

International Regulatory Considerations

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.

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 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. According to Freedom House’s 2020 flagship report, Azerbaijan’s court system is “subservient to the executive.” The U.S. business community has complained about inconsistent application of regulations and non-transparent decision-making.

Laws and Regulations on Foreign Direct Investment

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 2021.

Competition and Anti-Trust Laws

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.

Expropriation and Compensation

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. According to Freedom House’s 2020 report, “[property] rights and free choice of residence are affected by government-backed development projects that often entail forced evictions, unlawful expropriations, and demolitions with little or no notice.” The Azerbaijani government has not shown any pattern of discriminating against U.S. persons by way of direct expropriations.

Dispute Settlement

ICSID Convention and New York Convention

Azerbaijan is a member of the International Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID convention) as well as the New York Convention of 1958 on the Recognition and Enforcement of Foreign Arbitral Awards. The Supreme Court of Azerbaijan is responsible for recognizing and enforcing arbitral awards rendered pursuant to the Conventions. For the time being, as a method of resolving disputes in Azerbaijan, international arbitration is unpopular and underdeveloped. Domestic parties still prefer litigation as the main method of dispute settlement. Arbitration practice in Azerbaijan is limited to the recognition of foreign arbitral awards by the Supreme Court and their enforcement by the Ministry of Justice. Although there is an Azerbaijan International Commercial Arbitration Court, at present its activity is limited. Azerbaijan adopted a Law on Mediation on March 29, 2019 which requires attendance at an initial mediation session before bringing an action concerning family, labor, and business disputes. New laws amending the Civil Procedural Code and the Law on Courts and Judges were published in July 2019. Per the amendments, administrative-economic courts charged with administrative and economic disputes are divided into administrative courts and commercial courts. The newly established commercial courts are authorized to hear all commercial disputes and some other disputes affecting entrepreneurial activities. Legal experts anticipate commercial courts and administrative courts will grow to specialize respectively in commercial matters and administrative disputes, with such specialization increasing the quality of justice.

Investor-State Dispute Settlement

Azerbaijan is party to the European Convention on Foreign Commercial Arbitration dated April 21, 1961. 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. Azerbaijan has been a party to three ICSID cases, two of which (Barmek v. Azerbaijan and Fondel Metal Participations and B.V. v. Azerbaijan) were settled and one of which (Azpetrol v. Azerbaijan) was decided in favor of the State. Thus far, the ICSID has not issued arbitral awards against the government of Azerbaijan. 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

International arbitration in Azerbaijan is regulated by the Law on International Commercial Arbitration, based on the UNCITRAL model law. Parties may select arbitrators of any nationality, the language of the proceedings, the national law to be applied, and the arbitration procedure to be used. In cases in which parties did not stipulate the terms of the proceedings, the Supreme Court of the Republic of Azerbaijan will resolve the omission. In 1999 Azerbaijan acceded to the New York Convention on the enforcement of foreign arbitral awards. Azerbaijan also passed a Law “On International Arbitration.” Accession to the New York Convention has greatly increased the utility of overseas arbitrations, while the Law “On International Arbitration” provides for international arbitrations with the place of arbitration in Baku. This law aimed to resolve difficulties in instances where it is impractical or inadvisable to arbitrate abroad (for example, for reasons of cost, language, or law). However, as no procedural mechanism has been established in Azerbaijan for the enforcement of a local arbitral award, arbitration proceedings inside Azerbaijan are fraught with difficulties. Though both the Law “On International Arbitration” and the New York Convention have been in force in Azerbaijan for several years, foreign arbitration is not necessarily effective and attempts to enforce foreign arbitral awards have been largely untested.

Bankruptcy Regulations

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. In the World Bank’s “Doing Business” report’s section on resolving insolvency, Azerbaijan’s ranking decreased from 45 in 2019 to 47 in 2020 out of 190 countries.

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.

Foreign Trade Zones/Free Ports/Trade Facilitation

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 Transport, Communications, and High Technologies 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.

Performance and Data Localization Requirements

The Azerbaijani government does not mandate local employment, although some energy sector 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, or otherwise invest in Azerbaijan in order to maintain or expand cooperation.

Azerbaijan does not have any data localization requirements.

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 World Bank’s “Doing Business” Report ranked Azerbaijan 44 out of 190 countries in 2020 in its country rankings on the Ease of Registering Property.

Intellectual Property Rights

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 the 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/ .

Capital Markets and Portfolio Investment

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.

Money and Banking System

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, 2021, 26 banks were registered in Azerbaijan, including 12 banks with foreign capital and two state-owned banks. These banks employ 18,708 people and have a combined 455 branches and 2,715 ATMs nationwide. Total banking sector assets stood at approximately USD 18.5 billion as of January 2021, 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 (Attabank, AGBank, NBCBank, and Amrah Bank) in April/May 2020, bringing the number of banks in the country down from 30 to 26. Only a limited number of 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.

Foreign Exchange and Remittances

Foreign Exchange

Azerbaijan’s Central Bank officially adopted a floating exchange rate in 2016 but continues to operate under an “interim regime” that effectively pegs the exchange rate at AZN 1.7 per USD. Azerbaijan’s foreign currency reserves are based on the reserves of the Central Bank, those of the State Oil Fund of Azerbaijan (SOFAZ), and the assets of the State Treasury Agency under the Finance Ministry. Foreign currency reserves of the Central Bank increased by 2 percent during 2020 and totaled USD 6.36 billion in January 2021. Between January 2020 and January 2021, SOFAZ assets increased by 0.5 percent to reach USD 43.5 billion.

Foreign exchange transactions are governed by the Law on Currency Regulation. The Central Bank administers the overall enforcement of currency regulation. Currency conversion is carried out through the Baku Interbank Currency Exchange Market and the Organized Interbank Currency Market.

There are no statutory restrictions on converting or transferring funds associated with an investment into freely usable currency at a legal, market-clearing rate. The average time for remitting investment returns is two to three business days. Some requirements on disclosure of the source of currency transfers have been imposed to reduce illicit transactions.

Remittance Policies

Corporate branches of foreign investors are subject to a remittance tax of 10 percent on all profits derived from its business activities in Azerbaijan. There have not been any recent changes or plans to change investment remittance policies that either tighten or relax access to foreign exchange for investment remittances. There do not appear to be time limitations on remittances, including dividends, returns on investment, interest and principal on private foreign debt, lease payments, royalties, and management fees. Nor does there appear to be limits on the inflow or outflow of funds for remittances of profits or revenue.

Sovereign Wealth Funds

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 43.5 billion as of January 1, 2021. More information is available at oilfund.az .

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 is also responsible for negotiating Production Sharing Agreements (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.

Privatization Program

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, privatization.az, 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 2021, including in state oil company SOCAR.

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.

The American Chamber of Commerce in Azerbaijan (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.

Additional Resources 

Department of State

• Country Reports on Human Rights Practices;
• Trafficking in Persons Report;
• Guidance on Implementing the “UN Guiding Principles” for Transactions Linked to Foreign Government End-Users for Products or Services with Surveillance Capabilities and;
• North Korea Sanctions & Enforcement Actions Advisory

Department of Labor

• Findings on the Worst Forms of Child Labor Report;
• List of Goods Produced by Child Labor or Forced Labor.
• Sweat & Toil: Child Labor, Forced Labor, and Human Trafficking Around the World and;
• Comply Chain.

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 has neither effectively nor consistently enforced 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.

Resources to Report Corruption

Kamal Jafarov
Acting Executive Secretary
Commission on Combating Corruption
Baku, Azerbaijan
(+994 12) 492-04-65
kamal.jafarov@antikorrupsiya.gov.az 

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 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 currently under the administration of the Russian peacekeepers 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.

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 7 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 2021 was AZN 707 (USD 415), and the official minimum wage increased in 2019 to AZN 250 (USD 147) 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 in 2020 has increased by 12 percent. Some 600,000 Azerbaijani citizens received monthly benefits in the amount of AZN 190 (USD 111.7) during COVID-19-related lockdowns in 2020.

Table 4: Sources of Portfolio Investment
Data not available.

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