The investment climate in Azerbaijan continues to improve in certain sectors, although significant challenges remain. Azerbaijan’s government has sought to attract foreign investment and has introduced reforms to diversify its economy. The Azerbaijani economy remains heavily dependent on oil and gas output, which accounts for roughly 92 percent of export revenue and over half of the state budget. The economy of Azerbaijan grew 4.6percent year-on-year in 2022, compared to a 5.6percent increase in the previous year. The non-oil and gas sector of the economy expanded as the economy continued to recover from the pandemic. Russia’s further invasion of Ukraine, lingering effects from the COVID-19 pandemic, and global inflation impacted Azerbaijan’s economy in 2022. These issues contributed to increased prices in Azerbaijan in 2022. Azerbaijan’s official statistics agency estimated that Azerbaijan’s overall inflation rate in 2022 to be 14.3 percent.
In June 2022, Azerbaijan and the European Commission signed a memorandum of understanding to double Azerbaijan’s gas exports to Europe by 2027. By the year 2027, Azerbaijan plans to increase its gas transportation through the Trans Adriatic Pipeline (TAP) from the current 11 billion cubic meters to 20 billion cubic meters. In 2021, Azerbaijan supplied Europe with 19 billion cubic meters of gas. Volumes increased to 22.6 billion cubic meters in 2022 and are expected to reach 24.5 billion cubic meters in 2023. While the oil and gas sector has historically attracted the largest share 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/logistics. Azerbaijan is also expected to continue to develop Azerbaijan’s central position on the east-west Middle Corridor, an increasingly important trade route because it avoids Russia.
Despite substantial efforts to open the business environment, progress remains slow on structural reforms required to create a diversified and competitive private sector, and corruption remains a major challenge for firms operating in Azerbaijan. A small group of government-connected holding companies dominates the economy, intellectual property rights enforcement is improving but remains 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.
Following the release in November of a tripartite ceasefire declaration by Armenia, Azerbaijan, and Russia, which brought an end to the fall 2020 intensive fighting in the Armenia-Azerbaijan conflict, the Azerbaijani government is seeking new investments in the territories previously under Armenian control. Azerbaijan’s 2023 budget includes an allocation of USD 1.76 billion for the restoration and reconstruction of these territories. These funds will be used to restore road, rail, electricity, gas, water, and communications infrastructure as well as invest in the education and healthcare sectors, and restore cultural and historical monuments. The government is also pursuing green energy projects in this region. Reconstruction is expected to continue over the coming years, along with continued special budget allocations provided for rebuilding and resettling these territories. Demining these territories as part of reconstruction efforts remains a priority of the Azerbaijani government.