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.
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.
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.