Executive Summary

The overall investment climate in Azerbaijan continues to improve, although significant challenges remain. Over the past few years, the government has worked to integrate the country more fully into the global marketplace, seeking to attract foreign investment, diversify its economy, undertake further needed market economic reforms, and maintain growth. However, as a country that remains dependent on oil and gas output for roughly 86 percent of its export revenue, continued low world oil prices have hit Azerbaijan’s economy hard. Real GDP grew 0.1 percent in 2017, recovering from a 3.8 percent contraction in 2016, with the non-oil economy growing by 2.7 percent year-on-year.

While the oil and gas sector has historically attracted the majority of foreign investment, the Azerbaijani government has targeted four non-oil sectors as key to diversifying the country’s economy and ensuring future prosperity: agriculture, tourism, information/communication technology, and transportation – including Azerbaijan’s place on the new Silk Road. Measures taken in recent years to improve the business climate and reform the overall economy include suspending certain government inspections of businesses, doing away with certain redundant business license categories, empowering the popular Azerbaijani Service and Assessment Network (“ASAN”) government service centers with licensing authority, simplifying customs procedures, and creating tax incentives for investors. Most notably, President Aliyev signed the Strategic Roadmap of the National Economy Prospects in December 2016. The 11 roadmaps that make up the strategy lay out objectives and action plans for 2016- 2025 and cover the following sectors: the oil and gas industry, manufacturing and processing of agricultural products, stimulation of small and medium enterprises, heavy industry and mechanical engineering, tourism, logistics and trade, construction of affordable housing, development of vocational training and education, financial services, telecommunications and information technologies, and public utilities.

Under Azerbaijani law, foreign investors may engage in investment activities not prohibited by law. 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 Law on the Protection of Foreign Investments protects foreign investors against nationalization and requisition, except under specific circumstances. The government of 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 being taken against individuals and/or businesses in Azerbaijan; it may also affect the ability to travel to Azerbaijan in the future.

Table 1

Measure Year Index/Rank Website Address
Transparency International Corruption Perceptions Index 2017 122 of 180 http://www.transparency.org/
research/cpi/overview
World Bank’s Doing Business Report “Ease of Doing Business” 2017 57 of 190 http://www.doingbusiness.org/rankings
Global Innovation Index 2017 82 of 128 https://www.globalinnovation
index.org/analysis-indicator
U.S. Foreign Direct Investment in partner country 2015 N/A http://www.bea.gov/
international/factsheet/
World Bank GNI per capita 2016 USD 4,760 http://data.worldbank.org/
indicator/NY.GNP.PCAP.CD

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Toward Foreign Direct Investment

Over the past few years, the Azerbaijani government has worked to integrate the country more fully into the global economic marketplace and attempted to attract foreign investment in order to diversify its economy and boost economic growth and employment. The flows of foreign direct investment to Azerbaijan have risen steadily in recent years, primarily in the energy sector. The government continues to seek to attract FDI to the agriculture, transportation, tourism, and information and communication technology (ICT) sectors in an effort to diversify the economy, but foreign investments in these areas have 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 not 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 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 sectors of the economy and stimulating expansion of Azerbaijan’s exports of non-oil goods to overseas markets. In January 2018, President Aliyev issued a decree promoting foreign investment and protecting foreign investors’ rights. The decree called for the drafting of a new law on investment activities that will conform with international standards and establishes mechanisms to protect investors’ rights and regulate damages. The draft law has not yet been released. Additionally, the government regularly meets with the American Chamber of Commerce (AmCham) to solicit the input of the business community, particularly as part of AmCham’s biennial white paper process. AmCham is currently finalizing the 2018 edition and preparing for consultations with appropriate government officials.

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 partners. Foreign companies are also permitted to operate in Azerbaijan without creating a local legal entity by registering a representative or branch office with the Ministry of Taxes.

Foreigners are not permitted to own land in Azerbaijan, but are permitted to lease land and own real estate. Foreigners are also restricted from holding a majority share in certain sectors.

Furthermore, 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, or a WTO Trade Policy Review.

Business Facilitation

Azerbaijan ranks 57th in Ease of Doing Business and 5th in Starting a Business out of 190 countries in the World Bank’s 2017 Doing Business Report (rankings are available at: http://www.doingbusiness.org/rankings). In 2017, the Doing Business Report highlighted reforms that simplified the process of obtaining a new electricity connection, eliminated the vehicle tax for residents, and introduced an electronic system for submitting import and export declarations. The 2018 Doing Business Report noted reforms related to the establishment of credit bureaus, protection of minority investors, electronic payment of court fees, and processes for resolving insolvency.

Azerbaijani law requires all companies operating in the country to register. Without formal registration, a company may not do business in Azerbaijan (e.g., maintain a bank account, or clear goods through customs). As part of the ongoing business law reforms, a “One Window” principle was introduced January 1, 2008. The registration procedures involving several government bodies (Ministry of Justice, Social Insurance Fund, and State Statistics Committee) have been eliminated, and businesses must register onlywith the Ministry of Taxes. The established period for registration with the Ministry of Taxes is officially set at three days for commercial organizations. Since 2011, companies have been able to e-register, reducing the number of procedures required from six to two and the number of days from eight to three. Online registration is available at http://taxes.gov.az/modul.php?lang=_eng&name=birpencere&bolme=registration.

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. 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 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.

Several U.S. companies with operations and investments in Azerbaijan report they have been subject to repeated tax audits, requests for prepayment of taxes, and court-imposed fines for violations of the tax code.

3. Legal Regime

Transparency of the Regulatory System

The Azerbaijani government has worked to improve its regulatory system over the past several years, and legal, regulatory, and accounting systems are approaching international norms. However, continued limited transparency and allegations of corruption in regulatory matters remain a problem. Tender procedures remain opaque and a small number of businesses dominate certain sectors of the economy.

The Azerbaijani legal system is based on civil law and the central government is the primary source of regulations relevant to foreign businesses. Azerbaijan’s regulatory system remains opaque, despite efforts to foster competition and establish clear rules. U.S. companies have complained about a lack of transparency and consistency in the application of regulations. Azerbaijan has yet to develop informal regulatory processes managed by private sector associations. Limited transparency and inconsistent enforcement of rules to foster competition are serious impediments to foreign direct investment. Draft legislation is neither made available for public comment nor usually run through a public consultation process. However, the government has begun engaging business organizations, such as the American Chamber of Commerce in Azerbaijan (AmCham) and consulting firms on various proposed draft laws. 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 National Accounting Standards (NAS), which are based on the International Financial Reporting Standards (IFRS) with some modifications. “Publicly important” businesses, such as insurers, banks, and other large commercial entities, must adhere to IFRS. Certain small businesses can be registered as simplified taxpayers and are not obliged to maintain accounts in accordance with IFRS or NAS.

On October 19, 2015, the President of Azerbaijan approved a law suspending inspections of entrepreneurs for two years. This suspension was extended on October 31, 2017 to last until January 1, 2021. The suspension includes an exception to allow for inspections of food and pharmaceutical products for quality and safety control purposes, as well as inspections in certain other areas. 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 Ministry of Economy 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. 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 that 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. On February 3, 2016, President Aliyev signed the Decree on Establishment of the Board of Appeal in the Central and Local Executive Authorities for the investigation of recurring complaints by entrepreneurs regarding the executive authorities or their local organizations.

Businesses report problems with the reliability and independence of judicial processes in Azerbaijan. While the government promotes foreign investment and the laws guarantee national treatment, in practice investment disputes can arise when a foreign investor or trader’s success threatens well-connected or favored local interests. 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-EC 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, and the Second Program for Privatization of State Property, as well as by laws regulating specific sectors of the Azerbaijani economy. This legislation permits foreign direct investment in any activity in which a national investor may also invest, unless otherwise prohibited by law.

On January 2018, President Aliyev issued a decree on promoting foreign investment and protecting foreign investors’ rights. The decree called for the drafting of a new law on investment activities that is in conformance with international standards and establishes mechanisms to protect investors’ rights and regulate for damages, including lost profit caused to investors. The details of this law have not yet been made public.

Competition and Anti-Trust Laws

The State Service for Antimonopoly Policy and Consumer Protection under the Ministry of Economy is responsible for implementing competition-related policy. On April 28, 2016, President Aliyev signed an amendment to the law on Antimonopoly Activity and an Amendment to the Criminal Code. The amendments introduced the concept of cartel agreements, which are identified as anti-competitive arrangements that may include increasing or decreasing prices; maintaining prices at the same level; implementing privileges, rebates or bonuses; or other methods of restraining competition. A new version of the Competition Code began undergoing revision in Parliament in late 2014, but has not yet been passed.

Expropriation and Compensation

The Law on the Protection of Foreign Investments protects foreign investors against nationalization and requisition, except under certain specified circumstances. Nationalization of property can occur when authorized by parliamentary resolution, although there have been no known cases of official nationalization or requisition against foreign firms in Azerbaijan. Requisition – by a decision of the Cabinet of Ministers – is possible in the event of natural disaster, an epidemic, or other extraordinary situation. In the event of nationalization or requisition, foreign investors are entitled under the law to prompt, effective, and adequate compensation. Amendments made to Azerbaijan’s Constitution in September 2016 enable authorities to expropriate private property 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.

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. 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. Republic of 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.

Bankruptcy Regulations

Azerbaijan’s Bankruptcy Law continues to restrict economic development. 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. 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 2017 Doing Business Report’s section on resolving insolvency, Azerbaijan’s ranking advanced from 84 in 2017 to 47 in 2018.

4. Industrial Policies

Investment Incentives

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, and favorable tax treatment for manufacturing facilities and imports of manufacturing equipment, and subsidies for certain exports. In 2016, a presidential decree introduced an investment promotion certificate that provided additional incentives for investment promotion. Investment certificate holders are exempt from paying 50 percent of income tax and land tax owed, and from paying customs duties on machinery, equipment, and devices imported for investment purposes in priority industries of the economy for up to 7 years. The priority projects include work in industrial parks, creation of manufacturing plants, and research work.

Foreign Trade Zones/Free Ports/Trade Facilitation

President Aliyev signed a decree in March 2016 establishing a free trade zone next to the Port of Alat (approximately 80 km south of Baku) and Parliament passed implementing legislation in February 2018. According to the bill, the Alat free trade zone authority, administrative enterprises, legal entities and their employees, and residents will be exempt from all taxes and no customs duties or taxes will be paid for goods and services imported to Free Zone.

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 development of the telecommunications sector and to turn Azerbaijan into a regional information and communications technologies hub. The government has also discussed establishing a special zone to encourage the production of renewable energy. Such projects represent consulting, engineering, and other potential commercial opportunities for international firms.

Performance and Data Localization Requirements

The Government of Azerbaijan does not mandate local employment, although some Production Sharing Agreements (PSAs) 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 local production of certain components in order to maintain or expand cooperation.

5. Protection of Property Rights

Real Property

Azerbaijani law recognizes equal rights to land ownership by state and municipal governments and private individuals and entities. The Law on the Protection of Foreign Investments protects foreign investors against nationalization and requisition, except under certain specified circumstances. 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 of Azerbaijan 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 the owner of a plot is. Amendments made to Azerbaijan’s Constitution in September 2016 enable authorities to expropriate private property with compensation in instances when necessary for social justice and effective use of the land.

Since 2013, Azerbaijan’s State Real Estate Registry Service at the Committee for Property Issues has been the lead agency managing the real estate registration system. In April 2016, Azerbaijan’s President approved amendments to the Law on Immovable Property Register. The amendments cut the period of registration of property rights and the provision of extracts from the Register from 20 to 10 working days. The Azerbaijan Mortgage Fund has issued 19,601 mortgages as August 2017. The total sum of mortgage loans has amounted USD 488.2 million. As of August 2017, the government of Azerbaijan also launched issuance of mortgage loans in electronic format.

The World Bank’s Doing Business Report ranked Azerbaijan 21 out of 190 countries in 2017 in its country rankings on the Ease of Registering Property.

Intellectual Property Rights

Intellectual property rights (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. The legal structure covering intellectual property protections in Azerbaijan is relatively strong, but experts note the level of enforcement within the country is weak. Piracy and blatant infringements on intellectual property rights, such as fake international computer shops openly doing business in the capital, are commonplace. The Business Software Alliance put the software piracy figure at 84 percent in 2015, though Azerbaijan’s Copyright Agency announced in January 2018 that software piracy in Azerbaijan was less than 75 percent, unlicensed printing of books accounted for 28 percent of the total market, and 65 percent of audio and video products were pirated.

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 intellectual property rights 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

Azerbaijan’s stock market, the Baku Stock Exchange, opened in 2000. An effective regulatory system that encourages and facilitates portfolio investment, foreign or domestic, is not fully in place. There is not sufficient liquidity in the markets to enter or exit sizeable positions, and existing policies limit the free flow of financial resources into the product and factor markets. In February 2016, the government established the Financial Market Supervisory Authority (FMSA), a new financial supervisory authority, to take over all functions of the Azerbaijan State Committee for Securities, the State Insurance Supervision Service under the country’s Ministry of Finance, and the Financial Monitoring Service under the Central Bank of Azerbaijan. 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 for combatting money laundering and preventing 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. Several recent projects designed to strengthen Azerbaijan’s financial services sector, including the Capital Market Modernization Project (CMMP), the diversification of the State Oil Fund’s (SOFAZ) investment strategy, and pension reform represent opportunities for U.S. firms that provide asset management and global custodian services. The CMMP 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 practices that are generally required for publicly listed companies.

The Government of Azerbaijan and Azerbaijan’s Central Bank respect IMF Article VIII by refraining from restrictions on payments and transfers for current international transactions, and credit is allocated on market terms. Foreign investors are able to obtain credit on the local market, and the private sector has access to a variety of credit instruments. However, two currency devaluations in 2015 led to further dollarization of the economy, weakened bank balance sheets, and raised concerns about the country’s financial stability. Lending has still not recovered and 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 – remains underdeveloped, a factor that 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. Furthermore, the resulting depreciation generated challenges for banks, given the high proportion of foreign currency loans to residents with local currency earnings. One of the banking sector’s main problems is the continuing growth in non-performing loans. According to the country’s Financial Market Supervisory Authority, about 19 percent of all consumer loans in Azerbaijan account for non-performing loans of over USD1 billion. According to other reports, the current volume of non-performing loans exceeds one-third of the capital in the country’s banks. The Institution of Banking Ombudsman was established in Azerbaijan in September 2017. The ombudsman considers appeals on disputes that amount to about USD 2,000.

As of December 2017, there were 30 banks registered in Azerbaijan, including 15 banks with foreign capital and two state-owned. As of December 31, 2017, there are 509 branches, 142 sub-branches, 2,431 ATMs of 30 banks throughout the country. A total of 16,171 people are employed in the banking sector. Bank regulator FMSA closed 10 banks in 2016 and completed restructuring of the country’s largest bank, the International Bank of Azerbaijan (IBA) in 2017. As of January 1, 2018, 47 non-bank credit organizations and 109 credit unions operate in the country. Lending by global banks to Azerbaijan’s financial sector has been minimal.

Total banking sector assets stood at approximately USD16.5 billion as of December 2017, with the top five banks holding almost 58 percent of this amount. The state-owned International Bank of Azerbaijan (IBA) accounts for approximately 40 percent of the country’s banking assets and has received several large cash infusions over the past several years from the government. In January 2017, the Ministry of Finance increased the government’s stake in the IBA from 54.96 percent to 76.73 percent. The government undertook a substantial cleanup of the assets of IBA, including 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 transfer 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.

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.

In December 2017, the Central Bank of Azerbaijan announced plans for a pilot project to create a digital identification system for transactions between banks and customers based on blockchain technology.

Foreign Exchange and Remittances

Foreign Exchange Policies

There are no statutory restrictions on converting or transferring funds associated with an investment into freely usable currency at a legal, market-clearing rate. Foreign exchange transactions are governed by the Law on Currency Regulation. The Central Bank administers the overall enforcement of currency regulation. Among those regulations is a requirement that local cash sales be conducted in Azerbaijani manats (AZN), in accordance with the country’s constitution. Foreign companies and individuals may have both manat and foreign currency accounts at a local bank. Currency conversion is carried out through the Baku Interbank Currency Exchange Market (BICEX) and the Organized Interbank Currency Market.

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. Azerbaijan’s foreign currency reserves are based on the reserves of the Central Bank of Azerbaijan, those of the State Oil Fund of Azerbaijan (SOFAZ), and the assets of the State Treasury Agency under the Ministry of Finance. Foreign currency reserves of the Central Bank) increased by USD 1.3 billion (34.2 percent) during 2017 and totaled USD 5.3 billion. As of January 1, 2018, SOFAZ assets increased by 8.02 percent to reach USD 35.8 million compared to the beginning of 2017 (USD 33.1 million).

The Central Bank of Azerbaijan officially adopted a floating exchange rate in 2016, but continues to operate under an “interim regime” which appears more like a managed float in practice, as it transitions to a full float.

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, 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.

Azerbaijan is a permanent member of the international Financial Action Task Force (FATF) and is listed as a country of concern. (The continuum of FATF lists countries as being of primary concern, concern, or monitored.) The main obstacle Azerbaijan faces is the endemic level of corruption, but other generators of illicit funds include robbery, tax evasion, smuggling, trafficking, and organized crime.

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. The State Oil Fund publishes an annual report which it submits for independent audit. The fund’s assets totaled USD 35.8 billion as of January 1, 2018. More information is available at 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. Statistics are not available on the percentage of resources SOEs allocate to research and development (R&D). 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 auditors and include the consolidated accounts of all SOCAR’s subsidiaries, although revenue data is incomplete.

There have been cases where many powerful state-owned enterprises have used their regulatory authority to block new entrants into the market. 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 facing 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. However, SOEs are in principle subject to the same tax burden and tax rebate policies as their private sector competitors. The 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 19, 2016 presidential decree implementing additional measures to improve the process of state property privatization and the July 19, 2016 decree on measures to accelerate privatization and improve the management efficiency of state property. The State Committee on Property Issues launched the portal providing information on privatization, http://www.privatization.az/index.php/en/, in July 2016. It contains information about the facilities, their addresses, location, and initial costs with an aim facilitating the process. In addition, the State Committee on Property Issues has developed a draft of the Third State Privatization Program (the “Privatization Program”). The main objectives of the Privatization Program are to attract foreign investment, increase efficiency and transparency in respective sectors, particularly the oil, metallurgy, light industry, sports, tourism, and other sectors. Bidding and tender processes in Azerbaijan, however, are generally considered non-transparent.

8. Responsible Business Conduct

Responsible business conduct (RBC) is a relatively new concept in Azerbaijan. Producers and consumers do not have a general awareness of 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 – mainly in line with their international corporate ethos – 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 the concept of social responsibility and encourage a positive impact through activities and dialogue with relevant stakeholders. In addition, AmCham published a guide on RBC/corporate social responsibility for businesses in Azerbaijan. In 2011, the Ministry of Economy established standards for corporate governance, which included an evaluation methodology for these standards and a code of ethical behavior. The Ministry has been tasked to meet with entrepreneurs and explain the importance of using corporate governance standards. Restrictions on registration of NGOs have complicated the efforts of some corporations to implement their CSR plans.

Azerbaijan’s Extractive Industries Transparency Initiative (EITI) status was downgraded from “compliant” to “candidate” on April 14, 2015, due to concerns about the ability of civil society to engage critically in the EITI process in Azerbaijan. Following a review in October 2016, and the EITI Secretariat’s subsequent evaluation in March 2017 that Azerbaijan had not sufficiently implemented required so-called “corrective actions,” Azerbaijan withdrew from the EITI, but stated it remained committed to continuing to provide transparency and accountability in the extractive industries. In April 2017, Azerbaijan established its own national body, the Extractive Industries Transparency Commission (EITC); since then, it has held multiple meetings and published a 2016 report.

9. Corruption

Pervasive corruption continues to be a major challenge for firms operating in Azerbaijan. Although anti-corruption legislation is in place and the government has acted to tackle low-level corruption, corrupt practices remain a barrier to greater foreign investment. Azerbaijan does not require private companies to establish internal codes of conduct that, among other things, prohibit bribery of public officials, nor does it provide protections to NGO’s involved in investigating corruption. Nevertheless, some private companies use internal controls, ethics, and compliance programs to detect and prevent bribery of government officials. U.S. firms have identified pervasive corruption as an obstacle to FDI and cite its prevalence in the following areas: government procurement, awarding of licenses or concessions, dispute settlement, the regulatory system, customs, and taxation.

The Azerbaijani government recognizes that corruption is a problem and has been a participant in regional anti-corruption initiatives, but to date laws and regulations to combat corruption have not been effectively or consistently enforced. 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.

Anti-corruption reforms to reduce red tape and promote open government started in licensing regulations, tax, and customs sectors. Azerbaijan continues to focus on e-government, service delivery, and simplification of regulations to prevent corruption, particularly through the ASAN service centers opened in February 2013. Eleven centers across Azerbaijan provide 30 government services from nine state entities, including the registration of commercial legal entities and taxpayers, notary services, state registration of civil status acts, and the renewal of identity cards/passports of citizens. ASAN centers have been regarded as successful in providing more transparent and accountable services through a “one window” model that reduces opportunities for rent-seeking and petty government corruption, and as such ASAN is expanding the number of services provided and state entities engaged.

Despite the progress made in reducing corruption in public services delivery, other serious and complex challenges have yet to be tackled, particularly in reducing corruption in the civil service, public procurement, and the judiciary. Popular opinion identifies the Ministry of Taxes and the judiciary as difficult barriers to business in Azerbaijan. The business community has welcomed improvements in customs procedures in 2016, though some contacts have begun to report instances of backsliding. Since late 2016, there have been extensive reforms in the tax regime, but these remain to be fully understood and analyzed by the business community. Local and foreign business leaders have also welcomed the appointment of the new Minister of Taxation as a sign the government recognizes the need for further reforms.

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

Contact at government agency or agencies are responsible for combating corruption:

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

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 government has also suspended the importation and 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 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 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. A labor contract between employer and employee technically may be written or oral, but in order to be official there must be a signed agreement. This employment agreement is required for the employee to receive any unemployment or other employment related benefits.

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.

The Law On Unemployment Insurance signed in August 2017 allows for payments to be made to unemployed individuals registered within the State Employment Fund. The amount of payments will depend on the length of employment insurance records and past average monthly salary. Benefits can be paid for up to 26 weeks within a 12-month period, with the possibility of extending payments if a jobseeker is unable to find work within 12 months. In this case, unemployment benefits are set at the minimum level approved by law, which is USD 50. Azerbaijan is currently working with the World Bank and the European Union to reform the state pension system.

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 contractual workers; reportedly many of these workers’ agreements are not formally registered with the government. The relatively limited supply of highly skilled labor remains one of the biggest challenges in Azerbaijan’s labor market. As of 2017, government sources estimate the rate of unemployment at 5 percent, but other sources estimate the figure at 15 percent or higher, with underemployment being much higher. The average monthly wage as of December 2017 was USD 310, and the official minimum wage increased in 2017 to approximately USD 76 (130 AZN) per month, compared to the previous level of approximately USD 68 (116 AZN) 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 small and medium enterprise (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 Turanbank 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 Azerbaijani 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

Economic Data

Year

Amount

Year

Amount

Host Country Gross Domestic Product (GDP)

2017

USD 41.225 billion

2015

USD 37.848 billion

www.worldbank.org/en/country

Foreign Direct Investment Inward Flows

N/A

2016

4.5 million

www.worldbank.org/en/country

U.S. FDI in partner country (value of stock positions)

N/A

Host country’s FDI in the United States (value of stock positions)

N/A

Total inbound stock of FDI as % host GDP

N/A

2016

11.9%

https://data.worldbank.org/indicator/
BX.KLT.DINV.WD.GD.ZS?locations=GE-AZ&name_desc=false

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 26.683 100% Total Outward 17.88 100%
UK 5.565 21% Turkey 9.215 52%
Turkey 5.111 19% Georgia 2.934 16%
Norway 3.075 12% Switzerland 0.976 5%
Iran 2.263 8% UK 0.946 5%
Russia 2.211 8% U.S. 0.563 3%

Source: IMF

Table 4: Sources of Portfolio Investment

Data not available.

14. Contact for More Information

Phillip Guthrie
Commercial Officer
U.S. Embassy in Baku, Azerbaijan
+994-12-488-3300
BakuCommercial@state.gov

2018 Investment Climate Statements: Azerbaijan
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