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 http://taxes.gov.az/modul.php?lang=_eng&name=birpencere&bolme=registration .
Azerbaijan ranks 25th in the World Bank’s Doing Business Report (rankings are available at: http://www.doingbusiness.org/rankings ). 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.
3. Legal Regime
Transparency of the Regulatory System
The Azerbaijani 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 opaque. Private sector associations do not play a significant role in regulatory processes. Draft legislation is neither made available for public comment nor usually involves a public consultation process. However, the government has 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 chose between reporting based on IFRS or IFRS-SME standards, which are specially designed for large and medium enterprises. Small and micro enterprises can chose 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 subject to repeated tax audits, requests for prepayment of taxes, and court-imposed fines for violations of the tax code. These allegations have decreased since 2017.
On October 19, 2015, Azerbaijan suspended inspections of entrepreneurs for two years. This suspension was subsequently extended through January 1, 2021. 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 the 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.
International Regulatory Considerations
Azerbaijan has had 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. 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. In February 2016, Azerbaijan also established a Board of Appeal to address complaints filed by entrepreneurs against local executive authorities.
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 2017 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 with 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 had not been publicized as of April 2019.
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. Requisition – by a decision of the Cabinet of Ministers – is possible in the event of natural disaster, an epidemic, or other extraordinary situation. In the event of nationalization or requisition, foreign investors are 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 2016 report, “[p]roperty 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.
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. While there are no specialized commercial courts in Azerbaijan, the Azerbaijan International Commercial Arbitration Court (AICAC) was established by a non-governmental organization in 2003 as an independent arbitral institution. The AICAC, a third-party tribunal, is the only arbitration institution functioning in Azerbaijan, but public information on the case load of the AICAC is not available.
Investor-State Dispute Settlement
Azerbaijan has also ratified 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. Azerbaijan has incorporated the provisions of the New York Convention into the Law on International Commercial Arbitration. The Supreme Court may refuse to enforce a foreign arbitral award on specific grounds contained in Article 476 of the Civil Code.
Azerbaijan’s Bankruptcy Law applies only to legal entities and entrepreneurs, not to private individuals. Bankruptcy proceedings may be initiated by either a debtor facing insolvency or by any creditor. In general, the legislation focuses on liquidation procedures. Bankruptcy law in Azerbaijan is under-developed, which restricts 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 advanced from 47 in 2018 to 45 in 2019.
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/diversification effort. 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 a free trade zone (FTZ) 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 Alat FTZ in June 2018. The law exempts all businesses in the FTZ from taxes and customs; charges the FTZ’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 FTA. While the legal framework is in place, implementing regulations are still pending.
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.
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.
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 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 record keeping and titling in rural areas, it is often difficult to determine definitively who owns a particular 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 17 out of 190 countries in 2018 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 business people 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. U.S. companies routinely list weak IPR protections as a key concern. Intellectual property rights 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 listed in the Notorious Markets report. 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
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 markets to enter or exit sizeable positions. In February 2016, the government established the Financial Market Supervisory Authority (FMSA) to combine the Azerbaijan State Committee for Securities, the State Insurance Supervision Service, and the Financial Monitoring Service. The FMSA aims to license, regulate and control the securities market, investment funds, insurance, credit organizations (banks, non-banking credit organizations and operator of postal communication), and payment systems. It also aims to improve the oversight system to combat money laundering and prevent the financing of terrorism as well as to provide transparency and efficiency in this sphere.
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. Although foreign investors are permitted to obtain credit on the local market, bank lending remains extremely limited following the 2015 currency devaluations and heavy dollarization of deposits. 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. NPLs accounted for 12 percent of all outstanding loans as of January 2019. 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 December 2018, 30 banks were registered in Azerbaijan, including 15 banks with foreign capital and two state-owned banks. These banks employ 17,415 people and have a combined 508 branches and 2,502 ATMs nationwide. Total banking sector assets stood at approximately USD 17.3 billion as of December 2018, with the top five banks holding almost 58 percent of this amount.
The banking sector is still recovering from the drop in world oil prices which began in in 2014/2015 and the resulting devaluations. The Financial Markets Supervisory Agency closed 10 insolvent banks in 2016. The government subsequently bailed-out the International Bank of Azerbaijan (IBA) which held approximately 40 percent of the country’s banking assets. In January 2017, the Finance Ministry increased the government’s stake in the IBA from 54.96 percent to 76.73 percent. The government undertook a substantial cleanup of IBA assets, transferring IBA’s non-performing assets at book value to AgrarKredit, a government-owned non-financial enterprise funded by the Central Bank. The amount of transferred assets totaled USD 6 billion in 2015-2016 and a further USD 3 billion was transferred in 2017 (25 percent of 2016 GDP in total). In May 2017, IBA entered formal restructuring, similar to U.S. Chapter 11 bankruptcy, and completed its restructuring process in September 2017. IBA is still updating its commercial strategy.
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
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 5 percent during 2018 and totaled USD 5.6 billion. Between January 2018 and January 2019, SOFAZ assets increased by 7 percent to reach USD 38.5 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 in an effort to reduce illicit transactions.
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, return 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. Since it was established in 1999, SOFAZ has financed several projects relating to infrastructure, housing, energy infrastructure, and education. According to its bylaws, SOFAZ is not permitted to invest domestically. A newly adopted fiscal rule aims to limit pro-cyclical spending and increase hydrocarbon revenue savings. SOFAZ publishes an annual report which it submits for independent audit. The fund’s assets totaled USD 38.5 billion as of January 1, 2019. More information is available at http://oilfund.az .
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, 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 and there are no active plans to privatize large SOEs.
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.
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 and encourage a positive impact through activities and dialogue with relevant stakeholders. AmCham also published a 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 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.
Pervasive 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 NGO’s 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 anti-corruption laws and regulations. Azerbaijan has made modest progress in implementing a 2005 Anticorruption 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 are partially aimed at reducing corruption in tax administration.
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
Acting Executive Secretary
Commission on Combating Corruption
(+994 12) 492-04-65
10. Political and Security Environment
There have been no known acts of political violence against U.S. businesses or assets, nor against any foreign owned entity.
A cease-fire with Armenia has been in effect since 1994 for the conflict surrounding the disputed region of Nagorno-Karabakh. However, intermittent gunfire along the cease-fire line and along the border with Armenia continues, often resulting in injuries and/or deaths. There have been no threats to commercial enterprises from skirmishes in the border areas. It is unlikely that civil disturbances, should they occur, would be directed against U.S. businesses or the U.S. community. The Azerbaijani government has suspended or threatened to suspend the operations of U.S. companies in Azerbaijan if the companies’ products or services are provided in Nagorno-Karabakh. Azerbaijan considers travel to the region of Nagorno-Karabakh and the surrounding occupied territories unlawful. Engaging in any commercial activities in Nagorno-Karabakh and the surrounding occupied territories, whether directly or through business subsidiaries, can result in criminal prosecution and/or other legal action being taken against individuals and/or businesses in Azerbaijan; it may also affect the ability to travel to Azerbaijan in the future. Due to the existing state of hostilities, consular services are not available to U.S. citizens in Nagorno-Karabakh.
11. Labor Policies and Practices
The 1999 Labor Code regulates overall labor relations and recognizes international labor rights. The work-week generally is considered to be 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. 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. 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 40 percent of the Azerbaijani population works in agriculture, although this sector only contributes 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. As of 2018, government sources reported 5 percent unemployment, but other sources estimate the figure at 15 percent or higher, with significant underemployment. The average monthly wage as of December 2018 was AZN 545 (USD 320), and the official minimum wage increased in 2019 to AZN 180 (USD 106) per month, compared to the previous level of AZN 130 (USD 76) per month.
12. OPIC and Other Investment Insurance Programs
The Overseas Private Investment Corporation (OPIC) and the U.S. Export-Import (Ex-Im) Bank provide political risk insurance and financing and loan guarantees in Azerbaijan. Azerbaijan is also a member of the Multilateral Investment Guarantee Agency (MIGA) and the European Bank for Reconstruction and Development (EBRD). The World Bank, Asian Development Bank, and other third-country institutions are active in providing financing and insurance for investment in Azerbaijan.
Over the past two decades, OPIC has invested around USD 230 million in Azerbaijan across 24 business projects. While Azerbaijan’s financial services sector has been a major area for investments, OPIC-funded projects have included investments in the energy (such as the BTC oil pipeline completed in 2006), franchising, banking, microfinance, and hotel and hospitality sectors of Azerbaijan. OPIC has repeatedly provided funds for numerous banks operating in Azerbaijan in order to expand their SME lending portfolios, including USD 4.8 million to Rabita Bank in 2008 and USD 7.3 million to Turan Bank in 2009. In 2011, OPIC provided MuganBank a loan guarantee for USD 10 million to expand its operations, targeting SME borrowers. OPIC has also provided USD 1 million and USD 3 million to FinDev and CredAgro for microfinance lending, respectively. In 2012, OPIC provided loan insurance to Viator Microcredit Azerbaijan LLC (USD 500,000), NBCO Vision Fund Azercredit LLC (USD 2 million), and FinDev again (USD 1 million). In 2013, OPIC signed a memorandum with Turan Bank for a loan in the amount of USD 7 million with a term of seven years for SME financing. As of 2015, OPIC has active loan projects with two non-banking credit organizations, KredAgro and TBC Kredit.
In its 2014 annual report, Ex-Im Bank reported outstanding insurance and loan guarantees for Azerbaijan in the amount of USD 211.9 million, primarily in support of aviation sales. In 2011, Ex-Im Bank closed a USD 116.6 million loan with a ten-year repayment period to finance the Azerbaijan space agency’s purchase of the AzerSat-1 satellite from Orbital Sciences. In June 2015, Ex-Im Bank finalized a USD 211.9 million loan to finance Azerbaijan Airline’s purchase of Boeing commercial aircraft.
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
|Host Country Gross Domestic Product (GDP) ($M USD)||2018||$46,939||2017||$40,748||https://data.worldbank.org/country/azerbaijan|
|Foreign Direct Investment||Host Country Statistical Source*||USG or International Statistical Source||USG or International Source of Data:
BEA; IMF; Eurostat; UNCTAD, Other
|U.S. FDI in partner country ($M USD, stock positions)||No reliable data||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)||No reliable data||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||2017||76.6%||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, Millions)|
|Inward Direct Investment||Outward Direct Investment|
|Total Inward||$29,314||100%||Total Outward||$20,461||100%|
|“0” reflects amounts rounded to +/- USD 500,000.|
Table 4: Sources of Portfolio Investment
Data not available.
14. Contact for More Information
U.S. Embassy in Baku, Azerbaijan