2012 Investment Climate Statement - Azerbaijan

2012 Investment Climate Statement
Bureau of Economic and Business Affairs
June 2012

Over the past few years, the Government of Azerbaijan has worked to integrate the country into the global economic marketplace, attract increased foreign investment, diversify its economy and maintain positive growth during the global financial crisis. Wide-ranging economic reforms implemented by Azerbaijan during the past five years have resulted in notable progress to improve regulatory efficiency and encourage domestic economic diversification, especially in the areas of agriculture, tourism and information and communications technology. Azerbaijan has enjoyed measurable success in diversifying its economy outside of the energy sector, with the non-oil portion of the economy growing by almost ten percent in 2011, while energy sector growth was flat.

During the past few years the overall regulatory reform process has slowed when compared to the period of 2007 to 2009, during which time the country embarked on a series of bold economic reforms. The substantial economic reforms implemented during this period led the World Bank to name Azerbaijan as one of the top ten global reformers for 2009 in its annual Doing Business report. Many of the reforms adopted were designed to facilitate Azerbaijan’s accession to the World Trade Organization (WTO); however, as of 2012, Azerbaijan is not yet a member of the trade organization, partly due the country’s failure to follow through with additional needed domestic reforms.

Substantial economic challenges remain for Azerbaijan, particularly with regards to the implementation of long-term institutional and systemic reforms that are critical to strengthening the foundations for economic freedom. Although Azerbaijan has continued to attract significant foreign investment to further develop its energy sector throughout the past decade, inefficient government bureaucracy, weak legal institutions, requests for illicit payments for cross-border transactions, and predatory behavior by politically connected monopolistic interests continue to hinder investment outside of this sector and present challenges for U.S. companies.

The score and rank of Azerbaijan in the most current World Bank Doing Business Report, Heritage Foundation Economic Freedom Index, Transparency International Corruption Index, and additional Millennium Challenge Corporation (MCC) evaluations for Azerbaijan are included in the table below.




World Bank Doing Business



Heritage Economic Freedom



TI Corruption Index



MCC Government Effectiveness



MCC Rule of Law



MCC Control of Corruption



MCC Fiscal Policy



MCC Trade Policy



MCC Regulatory Quality



MCC Business Start Up



MCC Land Rights Access



MCC Natural Resource Mgmt



Openness To, and Restrictions Upon, Foreign Investment

The Government of Azerbaijan officially welcomes foreign direct investment (FDI), recognizing that FDI plays a vital role in Azerbaijan’s pursuit of economic diversification. In 2011, 440 foreign-owned companies were registered in Azerbaijan, while 126 joint venture companies were registered.

Since 1994, Azerbaijan has attracted significant amounts of foreign investment – though much of it has been in the energy sector. In fact, almost USD 12.8 billion was invested in the Azerbaijani economy from all sources of financing in 2011, representing a 27.3 percent increase from the previous year. Of this figure, foreign investment in Azerbaijan accounted for almost USD 2.52 billion of financing in 2011, increasing 3.2 percent from 2010. Total investments in the non-oil sector from January to November 2011 were USD 7.3 billion and exceeded the amount of investments in the oil sector.

The Law on Protection of Foreign Investments permits FDI in any activity in which a national investor may also invest, unless otherwise prohibited by law. Prohibited areas include those relating to national security and defense. The government also carefully controls other key sectors, such as energy and communications. Foreign investors can participate – according to existing legislation – in the privatization of state and municipal properties. Foreign investments have complete and unreserved legal protection granted by this law, as well as by other laws and international contracts. The law provides that Azerbaijan will not treat foreign investors less favorably than local investors and allows the repatriation of profits, revenues and other investment-related funds as long as applicable taxes have been paid.

Under Azerbaijani law, foreign investors may participate in the Azerbaijan market through joint ventures with local companies, or by establishing subsidiaries that are wholly-owned by foreign investors, as well as through representative offices and branches of foreign legal entities. Azerbaijani law also provides a ten-year grandfather clause in the event new legislation less favorable to foreign investors is adopted; however, this provision does not apply to changes in tax legislation.

In 2008, Azerbaijan transferred responsibility for registering representative offices of foreign businesses, and the creation of business entities with foreign ownership, to the Ministry of Taxes. This reform also established a one-stop shop approach to such registrations, greatly simplifying the process and reducing waiting times. The registration of representative or branch offices of foreign non-commercial entities was not, however, transferred to the Ministry of Taxes. Such entities are required to register at the Ministry of Justice.

While the laws on the books favor foreign direct investment, ultimately, a complex government bureaucracy, weak legal institutions, corruption and predatory behavior by politically connected monopolistic and oligopolistic interests continue to hinder investment outside of the energy sector. Investment disputes can arise when a foreign investor or trader's success threatens well connected or favored local interests. It is also worth noting that Azerbaijan's bankruptcy law does not function effectively and is rarely used. Another hindrance to foreign direct investment is the difficulty of getting established Azerbaijani businesses to adapt to standard investor-friendly practices, such as those associated with the concept of good corporate governance.

Overall, despite the presence of anti-competitive forces, the Government of Azerbaijan has taken important steps in recent years to improve its business environment, expand its banking sector, and strengthen its own fiscal management.

Conversion and Transfer Policies

Azerbaijan has a liberal exchange rate system and, in general, there are no restrictions on converting or transferring funds associated with an investment into freely usable currency at a legal, market-clearing rate. Currency conversion is carried out through the Baku Interbank Currency Exchange Market (BICEX) and the Organized Interbank Currency Market. The Baku Electronic Currency Exchange System (BEST) was launched in July 2002. The average delay for remitting investment returns is two to three business days. Additional requirements relating to the disclosure of the source of currency transfers have been imposed in an attempt to reduce illicit transactions.

Cash exchange is carried out at numerous currency exchange points. No systematic difficulties exist in obtaining foreign exchange. Many cash machines will distribute Euros and U.S. Dollars, in addition to Azerbaijani Manats. The Central Bank of Azerbaijan has required that cash transactions be conducted in Azerbaijani Manats since 2001.

Parliament amended legislation in 2007 to eliminate custom duties for cash currency exports, a move that is in line with WTO requirements and is believed to help ease inflationary pressures. The Ministry of Taxes has occasionally frozen bank accounts of companies that it believes have failed to meet their tax obligations. Legislation on non-bank lending agencies was passed by the Azerbaijani Parliament in December 2009, ostensibly to improve the accessibility of financial services for individuals and entrepreneurs.

Expropriation and Compensation

The Law on 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 cases of 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, epidemic or other extraordinary situation. In the event of nationalization or requisition, foreign investors are entitled by law to prompt, effective, and adequate compensation.

Dispute Settlement

Disputes or disagreements arising between foreign investors and enterprises with foreign investment, state bodies of Azerbaijan, or enterprises, public organizations and other legal entities of Azerbaijan, are to be settled in courts systems of Azerbaijan or, with agreement between the parties, in a court of arbitration, including those abroad.

The judiciary consists of the Constitutional Court of the Republic of Azerbaijan, Supreme Court of the Republic of Azerbaijan, appellate courts of the Republic of Azerbaijan, trial courts and other specialized courts. The Supreme Court and appellate courts have civil, criminal, administrative-economic and military panels. 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. All judgments of the Supreme Court and appellate courts are published within one month of issuance and disseminated electronically. The Constitutional Court has the authority to review laws and court judgments for compliance with the Constitution. The decisions of the Constitutional Court are published.

The procedure for the enforcement of foreign judgments in Azerbaijan is established by the Civil Procedure Code, which only requires enforcement of foreign judgments either pursuant to an international treaty or based on the principle of reciprocity. Azerbaijan has entered into several bilateral treaties – principally with neighboring states – to facilitate the enforcement of foreign judgments, and is a party to the 2004 Commonwealth of Independent States (CIS) Convention on Mutual Legal Assistance in Civil, Family and Criminal Cases. In addition, Azerbaijan is a party to the Convention on Resolving Business Disputes, dated March 20, 1992 (the Kiev Convention). The Supreme Court is responsible for recognition and enforcement issues. The law does not provide specific periods for consideration of applications on the recognition and enforcement of foreign judgments.

A Bilateral Investment Treaty between the U.S. and Azerbaijan – which came into effect in 2001 – provides U.S. investors with recourse to the International Center for the Settlement of Investment Disputes. Azerbaijan is a party to the World Bank Convention on the Settlement of Investment Disputes between States and Nationals of Other States and also is a member of the Multilateral Investment Guarantee Agency (MIGA). Azerbaijan also is a party to the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, which provides for binding international arbitration of investment disputes between foreign investors and the state. The Civil Procedure Code provides that foreign arbitral awards may be enforced in Azerbaijan so long as they do not contravene local legislation or public policy, and if reciprocity exists.

Performance Requirements and Incentives

Azerbaijan has not yet developed effective incentives to attract foreign investment, other than the incentives provided by Production Sharing Agreement (PSA) arrangements in the oil and gas sector. While a law permitting the creation of Special Economic Zones (SEZs) was passed by Parliament in December 2009, no such zones have been established to date. (See section below on SEZs.)

Performance requirements are not imposed on new investments, but investors that participate in the privatization process often assume specific obligations regarding future investment and employment. Foreign investors are not required to purchase from local sources or export a certain percentage of output. Except for certain state monopolies, there is no requirement that nationals own shares in enterprises. Investors in PSAs assume obligations and requirements as provided within the PSA.

There currently is no legal requirement for employment of host country nationals, though this policy could eventually be reviewed by Parliament. Employers wishing to hire foreign workers in Azerbaijan must obtain a license from the Ministry of Labor. Foreigners who wish to work in Azerbaijan must register with local authorities at their place of residence and obtain work permits from the Ministry of Labor. Sole proprietors, heads of representative offices and branches of foreign legal entities and their deputies, short-term (three months or less) secondees, accredited foreign media representatives, education specialists, diplomats and international civil servants do not require work permits. In 2008, the Government introduced a work permit regime for all immigrant employees. Unfortunately, due to the lack of transparency and a printed fee schedule, opportunities for confusion and corruption exist.

As of July 2009, the State Migration Service (SMS) implemented a one-stop shop system. According to a Presidential Decree dated March 4, 2009, foreigners and people without citizenship arriving in Azerbaijan should be granted legal residence and work permits according to the single window principle within seven days of application, although not all applicants experience this level of efficiency. The fee to acquire a one-year license for a migrant worker is equal to AZN 1,000 (approximately USD 1,250).

In 2011, U.S. and other foreign investors encountered problems registering their workers with the SMS due to new requirements for health certifications. The American Chamber of Commerce intervened, and worked with the head of the SMS and member companies to address the issue. SMS confirmed that as of November 2011, only one health certificate attesting that a foreign worker is free from yellow fever, hemorrhagic virus, HIV, Hepatitis B and C and mental disorders will be needed, as opposed to five. SMS will accept health certificates only from approved medical facilities in Azerbaijan; it will not accept foreign certificates. The American Chamber of Commerce, in conjunction with the SMS, is preparing an information booklet for businesses.

Right to Private Ownership and Establishment

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. However, in practice, access to markets, credit and other business operations is often impeded by licensing and other regulatory requirements and by politically connected business interests that can mobilize the powers of the state to their advantage. In sectors of interest to certain senior government and political figures, competition is actively impeded through administrative barriers.

Legislation regulating real property rights include the Law on Mortgage (2005), Land Code of the Republic of Azerbaijan (1999), the Law on Land Reform (1996), the Law on Land Leasing (1999), and the Law on Land Market (1999). Azerbaijani citizens and legal entities, including enterprises with foreign investment, can legally own, buy, sell, and trade property. Foreign citizens and enterprises may lease, but may not own land. Expropriation may occur in the event of natural disaster, epidemic, or other extraordinary situation.

Protection of Property Rights

Amendments to the Civil Code adopted in 2004 and 2007, which allow authorities to forcibly purchase and expropriate property, have created opportunities for the abuse of property rights. The poor quality, reliability and transparency of governance, as well as regulatory abuse and inconsistent contract enforcement, exacerbate this problem. Additionally, in 2006, the Government allegedly centralized the processing of residential real estate transactions through a network of notary offices under the Ministry of Justice. However, in 2012, two State Committees still compete for registration of property: the State Committee on Property Issues and the State Land and Cartography Committee.

The January 2011 Index of Economic Freedom – compiled by the Wall Street Journal and the Heritage Foundation – indicated that private property rights were only weakly protected. In August 2011, a consortium of local NGOs issued a press statement alleging that approximately 20,000 persons in 400 buildings had lost their residences and been unfairly compensated in Baku over the previous two years.

The Government has been working with the World Bank to improve the property registration system, but the system remains awash with bureaucratic requirements and is generally seen as corrupt and inefficient. In late 2011, the bribes to register a private house were reported to be approximately USD 18,000. Bribes for high-rise buildings were estimated to be six figures. Azerbaijan's State Real Estate Registry Service at the Committee for Property Issues has simplified the real estate registration system and has plans to introduce a single-window principle by 2013.

In the mid-1990s, Azerbaijan began implementing a national system for registering and protecting intellectual property rights (IPR) with the assistance of the World Intellectual Property Organization (WIPO), of which it is a member. Azerbaijan enacted improved copyright legislation (Law on Copyright and Related Rights) in 1996, patent legislation (Law on Patents) in 1997, and trademark protection legislation (Law on Trademarks and Geographic Names) in 1998. Azerbaijan also is a party to the Convention Establishing the World Intellectual Property Organization, the Paris Convention for Protection of Industrial Property, and the Berne Convention for the Protection of Literary and Artistic Works. Azerbaijan is a party to the Geneva Phonograms Convention, and acceded to the two WIPO Internet treaties in 2005.

More recently, Azerbaijan amended its copyright legislation in 2008 and formed an anti-piracy commission in May 2010, with representatives from various ministries to enforce the legislation. The Copyright Agency reports that, as a result of its actions, piracy rates in the publishing sector declined from 61 percent in 2005 to 40 percent in 2011, CD/DVD piracy declined from 90 percent in 2005 to 70 percent in 2011, and software piracy also declined from 96 percent to 88 percent. The Government has also worked with a local information technology company to transition to licensed versions of Microsoft products on government computers in accordance with a May 2011 agreement between the Ministry of Communications and Information Technology and Microsoft.

As part of its WTO accession program, Azerbaijan has developed a range of WTO-consistent IPR legal and regulatory reforms, which could significantly strengthen IPR rights and enforcement protections, if consistently enforced. While the Copyright Agency has made some progress by conducting raids and initiating civil court proceedings for violation of copyrights, in practice there is still limited enforcement of intellectual property rights. Pirated software, movies, books, clothing and other luxury items are widely available in Azerbaijan, with legitimate copies of films and other media difficult to find.

Transparency of the Regulatory System

Although the Azerbaijani Government has worked to improve its regulatory system over the past several years, a continued lack of transparency and allegations of corruption remain key problems in this area. The lack of transparent policies and effective laws to establish clear rules and foster competition are particularly serious impediments to investment. Informal bureaucratic control mechanisms often interfere with the application of laws and regulations and hinder competition. While laws and decrees are usually published in one of the country's official newspapers as well as online, implementation often is delayed while regulations are developed. Those regulations, in many cases, are not published or distributed.

Politically connected businesses benefit from government regulatory and other decisions to achieve effective control over lucrative sectors of the economy, and U.S. investors have been among those victimized. Powerful state-owned enterprises, such as the Azerbaijan State Caspian Shipping Company (CASPAR) and Azerbaijan Airlines (AZAL), have regulatory authority that they can exploit to block new entrants into the market – a clear conflict of interest. Major private businesses are run by senior government officials or other politically connected individuals who wield inordinate influence on the market economy. These monopolistic actors often exercise their political connections and economic power in a manner that discriminates against or unfairly burdens foreign investors or foreign-owned investments.

In 2008, the government began a concerted effort to improve the transparency and predictability of the business regulatory environment with the assistance of USAID, the World Bank and the International Finance Corporation (IFC). In fact, Azerbaijan was cited as one of the top ten reformers for 2007 and 2008 in the World Bank Doing Business Report for 2009. More recently, the government established an electronic registry of inspections, designed to reduce overlap of inspections and increase accountability of agencies undertaking such activities. The improvements may generally benefit local small businesses more than they benefit large foreign investors. Significant areas for improvement remain, including in customs operations, business closure, and business permitting systems.

In October 2011, the President of Azerbaijan issued a decree calling on the Cabinet of Ministers to develop a Law on Licenses and Permits. The IFC and USAID are providing assistance on this effort. Further, the decree directed the Ministry of Economic Development to set up an internet portal on which information on all required licenses and permits would be placed. In neighboring countries, similar efforts have led to substantial reductions in the numbers of licenses and permits required for businesses and entrepreneurs. Previously, Azerbaijan announced plans to adopt 29 national accounting standards so as to be in line with International Financial Reporting Standards (IFRS) by 2009. So far, audited financial statements have only been adopted in banking and finance.

Efficient Capital Markets and Portfolio Investment

The banking sector, due to the underdevelopment of capital markets in Azerbaijan, dominates the financial sector with more than 95 percent of total assets. As of December 2011, there were 44 commercial banks operating in Azerbaijan. Total assets of the Azerbaijani banks as of early December 2011 amounted to USD 16.95 billion. Azerbaijan's top five banks hold almost 58 percent of total assets. The majority state-owned International Bank of Azerbaijan accounts for over 40 percent of the country’s banking assets, but it fails to meet minimum capital adequacy requirements.

Foreign ownership in the banking sector is limited to 50 percent ownership on an aggregate basis. There are currently 22 banks in Azerbaijan possessing some investment by foreign capital. In 2007 Azerbaijan established the National Depository Insurance Fund. The amount of guaranteed secure deposits remains at AZN 30,000 (or approximately USD 38,000). The interest rate of the Central Bank of Azerbaijan is five percent and the average interest rate of private banks is 26 percent. The average interest rate on deposits is from 12 to 14 percent. As of early October 2011, the volume of individual deposits in the Azerbaijani banks equaled 4.5 billion USD. Moody’s Investors Service forecast in August 2011 that the outlook for Azerbaijan's banking system will remain stable in 2012.

The Government of Azerbaijan has made significant progress in the area of anti-money laundering and countering terrorism finance (AML/CTF) through the Financial Monitoring Service (FMS). The FMS is charged with monitoring and analyzing suspicious transactions across the banking and finance sector. Because of its considerable efforts to improve legislation, statutes, and procedures, Azerbaijan was removed from the international Financial Action Task Force and MONEYVAL watch lists in October 2010. MONEYVAL’s report on Azerbaijan in December 2011 noted that Azerbaijan has made significant progress in combating money laundering and financing terrorism and has adopted legal and institutional mechanisms in line with international standards. The report also noted the government’s attention to international commitments in this sphere.

Though the Baku Stock Exchange (BSE) was established in 2000, the securities market remains at an early stage of development. As of 2011, the exchange listed only two stocks. The main function of the stock market is to serve as the auction mechanism for the issuance of government securities. In addition to the issuance of Azerbaijan government securities, the stock exchange also conducts auctions of U.S. Treasury Bills, though the BICEX carries out inter-bank auctions of foreign exchange. A major hindrance to the growth of the stock market results from difficulties in encouraging established Azerbaijani businesses to adapt the standard investor-friendly practices of good corporate governance that are required of listed public companies.

The official currency reserves of the Central Bank of Azerbaijan, previously the National Bank of Azerbaijan, increased from 6.4 billion USD at the end of 2010 to 10.48 billion USD at of the beginning of 2012. Reserves had decreased in 2009 primarily in response to the global financial crisis, which facilitated the dwindling of hard-currency reserves in Azerbaijan’s commercial banks, and prompted the Central Bank of Azerbaijan to expend reserves to maintain the convertibility rate of the Azerbaijani Manat in direct support of the Azerbaijani economy. The average annual inflation for 2011 was 7.9 percent. In March 2011, the Central Bank increased its interest rate to avoid inflation; however, in late 2011, the Central Bank urged commercial banks to decrease their interest rates in order to stimulate non-oil sector growth.

Fitch Ratings affirmed the long-term sovereign rating of investment in foreign and domestic currency for Azerbaijan at BBB- and upgraded the outlook for Azerbaijan from stable to positive in September 2011. Fitch Ratings first assigned Azerbaijan the BBB- rating in May 2010. In December 2011, Standard & Poor’s upgraded the sovereign credit rating of Azerbaijan to BBB- investment grade and concluded that the rating had a stable outlook. Additionally, Moody’s Investor Service upgraded the outlook on Azerbaijan’s sovereign rating from stable to positive and confirmed the issuer rating for government debt at Ba1 in March 2011.

The State Oil Fund (SOFAZ), with assets totaling 32.2 billion USD in reserves as of early October 2011, operates as a sovereign wealth fund for Azerbaijan. It was established in 1999 and reports directly to the President of Azerbaijan through its Executive Director. SOFAZ manages all state revenue from oil and natural gas, and is charged with preserving Azerbaijan’s economic stability, helping diversify the economy and preserving the nation’s wealth for future generations. Beginning in 2012, SOFAZ will slowly begin to diversify its largely conservative investment approach – primarily consisting of short-to-medium term fixed income instruments – to include investments in public equities. The Government of Azerbaijan supports an ambitious program of infrastructure investments with the help of budget transfers from SOFAZ.

Although the overall financial sector in Azerbaijan has weathered the recent financial crisis well, the sector nevertheless will require reforms to ensure long-term continued growth and success. As the banking sector is dominated by a large state bank, with too many small private banks to serve the domestic market, it remains fragmented and inefficient. Reforms should promote consolidation and modernization in the banking sector through increased competition.

Competition from State-Owned Enterprises (SOEs)

While there are no state-owned enterprises that officially have been delegated governmental powers, companies such as the State Oil Company of the Azerbaijan Republic (SOCAR), Azerenerji (electricity) and Azersu (water), 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. The International Bank of Azerbaijan – founded in 1992 – is the only state-owned bank still operating in Azerbaijan. International Bank of Azerbaijan is the largest bank in Azerbaijan, holding 42 percent of banking sector assets (roughly six times that of its closest competitor), 43 percent of loans and 36 percent of total deposits in 2010. International Bank of Azerbaijan was partially privatized in 1994 – the Government of Azerbaijan maintained a 50.2 percent controlling stake – but a 1998 decree to completely privatize the bank has not been implemented.

The privatization process of International Bank of Azerbaijan got a boost in May 2011, when the Government of Azerbaijan contracted with an international consortium – led by PWC, Salans and Rothschild – to analyze International Bank of Azerbaijan’s books and develop recommendations on privatization. The recommendations are expected by June 30, 2012. Azerbaijan maintains that the state must retain a controlling stake in companies operating in the mining or oil and gas sectors – strictly limiting foreign or domestic private investment in these sectors, exclusive of those companies that have entered into a PSA.

Corporate Social Responsibility

Corporate social responsibility (CSR) is a relatively new concept in Azerbaijan. Larger foreign entities do tend to follow generally accepted CSR principles and aim to educate their local partners, who generally consider basic charitable donations and paying taxes as forms of social responsibility. The American Chamber of Commerce in Azerbaijan established a Corporate Social Responsibility 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. The Committee unites a number of companies with established CSR programs with companies interested in exploring the concept. Separately, a CSR conference was held in Baku in the fall of 2011.

Political Violence

There have been no known acts of political violence against U.S. businesses or assets, nor against any foreign-owned entity. The risk of political violence affecting foreign investors remains minimal. In 2006 and 2007, the Azerbaijani authorities arrested two separate groups that were accused of plotting terrorist acts against Western interests. Press reporting in January 2012 indicated that two individuals with connections to Iranian intelligence services were arrested by Azerbaijani authorities for allegedly plotting to kill prominent Jewish foreigners working in Baku. In 2011 and 2012, the U.S. Embassy issued two emergency messages to U.S. Citizens about global and regional threats against U.S. and foreign interests in Azerbaijan.


Pervasive public sector corruption – including bribery of public officials – remains a major challenge for U.S. firms operating in Azerbaijan. Although anti-corruption legislation is in place, corrupt practices permeate all spheres of public life. Officials from the lowest ranks of the civil service to the top echelons of government are believed to benefit from systemic corruption in the country.

Laws and regulations that exist to combat corruption have not been effectively enforced. While a new anti-corruption law came into force in January 2005, creating a new commission with the authority to require full financial disclosure from government officials, Azerbaijan has made little progress in implementing this law.

The Azerbaijani government recognizes that corruption is a problem, although it frequently disagrees with the results of international rankings produced by groups such as Transparency International. In 2011, Transparency International ranked Azerbaijan as 143 of 183 countries on its Corruption Perceptions Index, behind neighboring Armenia at 129 and Georgia at 64. Popular opinion identifies the State Customs Committee as the institution of greatest concern to businesses in Azerbaijan, followed by the Ministry of Taxes – though the impression of tax authorities has enjoyed some improvement in the past year as corruption-reducing reforms are implemented.

Transparency’s 2010 Global Corruption Barometer, which examined bribery involved in people’s contact with customs, education, the judiciary, land related services, medical services, the police, registry and permit services, tax authorities and utilities, found that roughly 50 percent of Azerbaijani respondents had paid a bribe to one of the nine service providers in the twelve preceding months. According to the survey, 52 percent of the respondents thought that corruption had increased in 2010, with the most corrupt sector being the police.

With an eye toward the unrest that shook Arab countries, the Azerbaijani government launched a multi-faceted anti-corruption campaign in January 2011. Hundreds of criminal cases were opened against state employees for bribe-taking, over 200 arrests were made and an anti-corruption unit with a hotline for whistleblowers was established in the general prosecutor’s office. The government also incrementally raised civil service salaries. Anecdotal evidence suggests that bribe-taking by traffic police, tax and customs officials dropped significantly at first, but gradually resurfaced over the course of the year. Intermittent and well-publicized anti-corruption actions continue, however. For example, in early 2012, thirty traffic police officers in Baku were fired for accepting bribes. Corruption in property registration reportedly remains especially high.

In May 2011, the government also launched an initiative to automate government services such as business registration, tax payments and applications for documents in order to reduce human interactions and chances for bribery. Implementation of the initiative, however, has been slow and uneven, and may take several years to complete.

In 2009, Azerbaijan became the first participating country to achieve fully compliant status in the Extractive Industries Transparency Initiative (EITI) to promote more transparent management of oil revenues. As part of its obligations under EITI, in June 2011 Azerbaijan published its 14th EITI report disclosing company payments and government revenues from the extractive sector for the period from January to December 2010. The report, prepared by Moore Stephens, covers revenues from the oil, gas, silver and gold industries. It shows that the government received USD 2 billion and in-kind revenues of 215 million barrels of oil and 3.5 billion cubic meters of gas.

Azerbaijan also is a party to the United Nations Convention against Corruption (UN Convention) and a signatory to the Council of Europe Criminal and Civil Law Conventions. Azerbaijan is not currently a party to the Organization for Economic Co-operation and Development Anti-Bribery Convention.

Bilateral Investment Agreements

Azerbaijan has signed agreements on mutual protection of investments with 39 countries – including the United States – and on the avoidance of double taxation with 40 countries.

On October 18, 2000, the U.S. Senate ratified the Treaty between the Government of the United States of America and the Government of the Republic of Azerbaijan Concerning the Encouragement and Reciprocal Protection of Investment – commonly known as a “Bilateral Investment Treaty” (BIT). The United States and Azerbaijan exchanged instruments of ratification on July 3, 2001, and the treaty entered into force on August 2, 2001. The United States currently does not have a taxation treaty with Azerbaijan. Additionally, Azerbaijan does not currently have a free trade agreement in place with the United States.

Azerbaijan has bilateral investment protection agreements with the following countries: Austria, Belarus, Belgium, Bulgaria, China, Croatia, Egypt, Estonia, Finland, France, Georgia, Germany, Greece, Iran, Israel, Italy, Jordan, Kazakhstan, Korea, Kyrgyzstan, Latvia, Lithuania, Lebanon, Moldova, Norway, Pakistan, Poland, Qatar, Romania, Saudi Arabia, Syria, Switzerland, Tajikistan, Turkey, UAE, Ukraine, Uzbekistan and the United Kingdom.

OPIC and Other Investment Insurance Programs

Azerbaijan is a member of the Multilateral Investment Guarantee Agency (MIGA). The Overseas Private Investment Corporation (OPIC) is open for business in Azerbaijan, providing both political risk insurance and financing lines. Other third-country institutions also provide financing and insurance for investment in Azerbaijan.

OPIC provided USD 100 million in political risk insurance to U.S.-based financial institutions and U.S. equity partners for the construction of the Baku-Tbilisi-Ceyhan oil pipeline in 2004. On the financing side, OPIC provided 4.8 million USD to Rabita Bank in 2008 to expand the bank’s Small and Medium Enterprise (SME) lending portfolio and in 2009, OPIC provided USD 7.3 million to Turan Bank for the same purpose, as well as USD 1 million and USD 3 million respectively to FinDev and CredAgro for microfinance lending. Most recently in 2011, OPIC provided Muganbank a loan guarantee for USD 10 million to expand its operations to target SME borrowers.

In its 2010 annual report, the Export-Import Bank of the United States (Ex-Im Bank) states that it has authorized insurance and loan guarantees for Azerbaijan in the amount of USD 7.2 million. These authorizations are primarily in support of aviation and telecommunications sales. In 2011, US Ex-Im Bank endorsed a USD 116.6 million loan with a ten-year repayment period to finance the purchase of the AzerSat-1 satellite from Orbital Sciences by Azerbaijan’s Ministry of Communications and Information Technologies.


A Labor Code that took effect in 1999 still regulates overall labor relations. The workweek generally is 40 hours. The right to strike exists, though industrial strikes are rare. Azerbaijan is a member of the International Labor Organization (ILO) and has ratified more than 57 ILO Conventions. Azerbaijan has an abundant supply of skilled and unskilled laborers. Companies, however, repeatedly cite problems hiring skilled professional staff, which could be the result of a decline in quality education, economic shifts or labor emigration. The collapse of the old Soviet industrial sector during the 1990s resulted in large numbers of Azerbaijanis becoming unemployed or underemployed. Government sources estimate the rate of unemployment at five to six percent, but other sources conclude the figure is 20 percent or more, with underemployment being much higher.

As of December 2011, both the minimum monthly wage and the base compensation for pensions were set at USD 120, a ten percent increase over the 2010 minimum wage. The average monthly salary also rose to AZN 355.7 (or USD 450.25), representing an 8.7 percent increase over 2010. Azerbaijan currently is working with the World Bank and the U.S. Trade and Development Agency on a program to reform the state pension system.

There also has been a significant rise in migrant workers over the past five years, with the registered number increasing from 2,000 to 54,000 in 2010, according to the SMS. Most migrant workers are from neighboring countries, such as Georgia, Russia, Turkey and Iran, but thanks to the significant investment in the energy sector, there also are many workers in Azerbaijan from the United States and Europe. The SMS also receives frequent appeals from foreigners seeking refugee status in Azerbaijan, most of who are from Pakistan and Afghanistan, with some from Iran.

Foreign Trade Zones/Free Ports

Although the government announced its intention to create special economic zones in 2003 – and passed a law to establish such zones in 2009 – currently there are no foreign trade zones or free ports operating in the country.

Azerbaijan’s Cabinet of Ministers has approved simplified rules for customs controls, customs checkpoints, customs clearance of goods, and the crossing of vehicles and individuals at the boundaries of special economic zones. According to these rules, customs checkpoints may be established in the zones by the State Customs Committee. For these purposes, electronic control and declarations may be used. Under the new rules, goods imported into and exported from the zones are not subject to import duties and VAT, or customs duties and taxes (excluding excise duty).

Certain ministries – the Ministry of Economic Development, the Ministry of Finance, and the Ministry of Information and Communications Technologies – continue to discuss plans for new special economic zones. These discussions involve a petrochemical complex near the new Caspian port under development, Regional Innovation Zones to boost development of the telecommunications sector and to turn Azerbaijan into a regional information and communications technologies hub, and a zone for renewable energy.

Foreign Direct Investment Statistics

The following data are the latest available from the State Statistical Committee of Azerbaijan:

Foreign investments (in millions of U.S. dollars)








Total foreign investments

4 893.2

5 052.8

6 674.3

6 847.4

5 468.6

8 247.8

of which:

Financial credits



1 576.6

2 357.9

1 438.3

3 405.9

In oil industry

3 799.9

3 422.3

4 003.3

3 350.7

2 412.7

2 955.3

Foreign companies and joint ventures







of which:




































United Kingdom































































Other countries







Bonus of oil







Other investments






1 225.

Major U.S. Investors:

U.S. Companies with some type of presence and/or representation in the Azerbaijani market include: 3M, ACE Forwarding Ltd., AIG, AECOM, American Bureau of Shipping, American Express Travel Services (local franchise), AMFI Trading, AON, A-USA Holding LLC, AVIRTEL (established by Cybernet Communications), AVIS, Baker & McKenzie, Baker Hughes, Coca-Cola Bottlers, BJ Services Company, Booz Allen Hamilton, Cameron, Caterpillar, BM International LLP, Chevron, Colgate-Palmolive, Cres International, Deloitte & Touche, Emerson, Ernst & Young, Exxon Mobil, Ford, Foxboro, GlobalSantafe, Halliburton, Hertz, Hilton Worldwide, HP, Hyatt Hotels, John Deere International, KBR, Landmark Graphics Corporation, M&M (Agent for FedEx), MARSH Insurance, McDermott, McDonald’s, Verizon, Microsoft, Morgan Stanley, Mozaik Printing, Park Inn, Pepsi Cola, Performance Center (official dealer of Chevrolet and Cadillac in Azerbaijan), Petrofac International, PriceWaterhouseCoopers, Proctor & Gamble, PXPOST, Radisson Blu Plaza Hotel, REB Consulting, ReedHycalog, Salans, Schlumberger, Seabak, Technology Management Company Inc., Smith International, Steelcase, STI Azerbaijan Student Travel International, Trans-Oceanic Projects, UPS, Valmont Irrigation, Washington International, (Azerbaijan Branch of URS Corporation), Weus Holding Inc., Xerox, Varel-NTS (Azerbaijan Branch Office), and Yum Brands. Marriott and Fairmont Hotels are both expected to open hotels in Baku in 2012.