2013 Investment Climate Statement - Azerbaijan

2013 Investment Climate Statement
Bureau of Economic and Business Affairs
March 2013

Openness to, and Restrictions Upon, Foreign Investment

Over the past few years, the Government of Azerbaijan has worked to integrate the country more fully into the global economic marketplace, attract increased foreign investment, diversify its economy and maintain positive growth during the global financial crisis. Despite an overall economic slowdown in 2011 and 2012 – particularly compared with the double digit growth rates of previous years – investment opportunities in the energy, telecommunications, transportation, and agricultural sectors, among others, continue to attract foreign businesses.

Economic diversification continues to be a stated goal of President Aliyev and the government, despite what appears to be diminished zeal for economic reform compared to a period of rapid reform from 2007 to 2009, which led the World Bank to name Azerbaijan as one of the top ten global reformers in its 2009 Doing Business report. It remains to be seen if less than expected oil production – and its concomitant impact on oil revenues – will refocus Azerbaijan on the need for quick and comprehensive reforms, including completing its WTO accession process.

Consequently, 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 hinder investment outside of the oil and gas 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



MCC Inflation


20.8 (6%)

The Government of Azerbaijan officially welcomes foreign direct investment (FDI), but the recognition of its importance to the development of a robust and diverse economy still lags in some parts of the government. The laws on the books favor foreign direct investment but, ultimately, the complex government bureaucracy, weak legal institutions, corruption and predatory behavior by politically-connected elites continues to hinder investment outside of the energy sector. Thorny investment disputes can arise when a foreign investor or trader’s success threatens well-connected or favored local interests.

The Law on Protection of Foreign Investments permits foreign direct investment 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 of Azerbaijan also exerts some measure of control over other key sectors, such as energy and communications. 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 treat foreign investors in a manner not less favorable than the treatment accorded to national 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 can participate – according to existing legislation – in the privatization of state and municipal properties, and can invest in Azerbaijan through joint ventures with local companies or by establishing subsidiaries that are wholly-owned, 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 still are required to register with the Ministry of Justice.

Over the past few years, Azerbaijan has been in the process of updating several key pieces of legislation that impact the business environment. It passed a new Customs Code in September 2011, and in response to a specific Moneyval recommendation, passed a Corporate Criminal liability law in 2012. The Competition Code currently is undergoing needed revision, with the Parliament expected to pass a new law in 2013. Azerbaijan’s Bankruptcy Law, which does not function effectively and is rarely used, continues to be a hindrance, as does its weak credit reporting institutions, which are weak at best. 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.

Despite its relatively open legal framework for foreign investment, government rules and regulations can complicate even short business trips. In order for business people to come to Azerbaijan, they have to secure a visa at an Azerbaijani Embassy or Consulate. Usually this means that a company or other legal entity in Azerbaijan must prepare a letter of invitation and submit it to the Azerbaijani Ministry of Foreign Affairs. In 2012, Embassies and Consulates of Azerbaijan abroad refused to issue visas to travelers who present passports with Armenian visas. The State Migration Service also informed American Chamber of Commerce members that persons coming to the country should register their business trip documents at the airport with passport control (officials of the State Border Control Service). This is a new process and it is not clear what it entails or how it is to be enforced. Presumably these documents would include an invitation letter – already a requirement for U.S. citizens to obtain a visa – and a notional schedule/itinerary.

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. The Central Bank of Azerbaijan (CBA) has required that cash transactions be conducted in Azerbaijani manats since 2001. The Baku Electronic Currency Exchange System (BEST) was launched in July 2002 and currency conversion is carried out through the Baku Interbank Currency Exchange Market (BICEX) and the Organized Interbank Currency Market. The average delay for remitting investment returns is two to three business days. In more recent years, additional requirements relating to the disclosure of the source of currency transfers have been imposed in an attempt to reduce illicit transactions.

No systematic difficulties exist in obtaining foreign exchange. Cash exchange is carried out at numerous currency exchange points and many cash machines will distribute both Euros and U.S. Dollars, in addition to Azerbaijani manats. In 2007, Parliament amended existing legislation to eliminate custom duties for cash currency exports, a step in line with WTO requirements. The county’s strategic monetary reserves grew by 14.7% to over 46.5 billion USD as of early December 2012. The official currency reserves of the Central Bank of Azerbaijan (previously the National Bank of Azerbaijan) increased to 11.7 billion USD as of early December 2012.

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 known 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, and/or enterprises, public organizations and other legal entities of Azerbaijan, are to be settled in the court systems of Azerbaijan or, on 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. 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. Under the Civil Procedure Code of Azerbaijan, the judgments of the appellate court are published within three days of issuance but may, in exceptional circumstances, be published within ten days. 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. The Code only requires enforcement of foreign judgments either pursuant to an international treaty or based on the principle of reciprocity and provides that foreign arbitral awards may be enforced in Azerbaijan, only so long as they do not contravene local legislation or public policy, and if reciprocity exists. 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 has entered into several other 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 (also known as the Kyiv Convention). Azerbaijan also is a party to the World Bank Convention on the Settlement of Investment Disputes between States and Nationals of Other States, as well as being a member of the Multilateral Investment Guarantee Agency (MIGA). Azerbaijan 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 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. The average length of time that international business disputes take to be resolved, either through the court system or through negotiations and/or arbitration between the two parties, is not clear. Some disputes are resolved quickly, while others drag on with no clear road for resolution. It is difficult to assess whether the length of time it takes to resolve a case is related to the complexity of the issue or the identity of the parties in the case. The Embassy is aware of – and has been actively involved in – one case where a U.S. firm has been unable to collect a monetary settlement to resolve a contract dispute, despite an arbitral award in its favor by the international body designated in the contract. The Embassy also is aware of several other investment disputes that are working their way through the court system and/or arbitration proceedings.

Performance Requirements and Incentives

Azerbaijan has not yet developed or implemented special incentives to attract foreign investment. A law permitting the creation of Special Economic Zones (SEZs) was passed by Parliament in December 2009, but no such zones have been established to date. There are plans to develop an SEZ in Alat, a commercial seaport under construction, and the Baku Heydar Aliyev International Airport. (See section below on SEZs.)

On December 21, 2012, the Parliament passed amendments to the Tax Code, which included an exemption from income, land and property taxes for business parks in the area of information technology and other industries to be established in Azerbaijan. The amendments also envisage tax and customs privileges for the residents of industrial and technological parks for a term of seven-years.

Performance requirements generally 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 normally required to purchase from local sources or export a certain percentage of output. Except for certain state monopolies, there is no explicit requirement that nationals own shares in enterprises. Investors in Production Sharing Agreements (PSAs) assume obligations and requirements as provided within the PSA.

There currently are no formal legal requirements for employment of host country nationals, though this policy could eventually be reviewed by Parliament. Additionally, there is an overall limit on the number of foreign workers permitted in Azerbaijan, as well as sectoral limits. 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. As of July 2009, the State Migration Service (SMS) decreed a one-stop shop system for work and residency permits. According to this single window principle, within seven days of application foreigners applying for residence and work permits should receive these documents, although not all applicants experience this level of efficiency. The fee to acquire a one-year license for a migrant worker is equal to 1,000 AZN (approximately 1,250 USD).

Despite this, major U.S. and other international firms increasingly have encountered problems registering their expatriate employees with the SMS. One of the issues has been the requirement for a certificate attesting that a foreign worker is free from yellow fever, hemorrhagic virus, HIV, Hepatitis B and C and mental disorders. The process was streamlined in 2012 after business complaints, but it should be noted that the SMS still will only accept health certificates from approved medical facilities in Azerbaijan. Additionally, the SMS noted that it intends to implement an online registration system for foreigners sometime in 2013, and it anticipates that foreigners renting apartments will be able to register themselves online by attaching a scanned version of the lease agreement and their passport. The business community has registered its concerns about a number of other issues with the SMS, and requested clarification on: exit and entry authorizations; police registration; possibility of submission of document copies as opposed to originals when applying for a prolongation of stay; possibility of early submission of documents for prolongation of stay; reduction of state duties for work permits issued for less than a year; and discrepancies between validity dates on permit cards versus the actual date when the cards are received. The American Chamber of Commerce, in conjunction with the SMS, is preparing an information booklet for businesses about work and residency permit processes.

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), the 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, have exacerbated this problem.

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. Azerbaijan’s State Real Estate Registry Service at the Committee for Property Issues has plans to simplify the real estate registration system by introducing a single-window principle by 2013.

The Government of Azerbaijan 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 August 2011, a consortium of local non-governmental organizations (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. In late 2011, the bribes to register a private house reportedly were estimated to be approximately 18,000 USD, while bribes for high-rise buildings were estimated to be in the six figures. The January 2012 Index of Economic Freedom – compiled by the Wall Street Journal and the Heritage Foundation – indicated that poor scores on private property rights and freedom from corruption were responsible for a decline in Azerbaijan’s score in 2011.

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.

As part of its WTO accession program, Azerbaijan has continued to develop a range of WTO-consistent IPR legal and regulatory reforms, which could significantly strengthen IPR rights and enforcement protections, if they were consistently enforced. Azerbaijan amended its copyright legislation in 2008 and formed an anti-piracy commission in May 2010, with representatives from various ministries charged with enforcing existing legislation. Most recently, Azerbaijan adopted a new Law on Provision of Intellectual Property Rights and Fight against Piracy in May 2012. This new law brings Azerbaijan’s intellectual property regime more closely in line with the WTO Trade-Related Intellectual Property Rights (TRIPS) agreement, and satisfies many of the requirements and expectations of Azerbaijan’s WTO Working Party members.

Despite this progress, 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.

Despite the fact that software piracy has declined, it remains high at roughly 87%, according to the Business Software Alliance. One bright note in the area of IPR was a May 2011 deal for the Government of Azerbaijan to adopt licensed software on all government computers.

Transparency of the Regulatory System

The Government of Azerbaijan has worked to improve its regulatory system over the past several years, but 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 foreign direct investment. Informal bureaucratic control mechanisms often interfere with the application of laws and regulations and hinder competition. While laws and decrees usually are 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 instances, 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 harmed. 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 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 of Azerbaijan 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). The Government of Azerbaijan established an electronic registry of inspections, designed to reduce overlap of inspections and increase accountability of agencies undertaking such activities, though the improvements likely will benefit local small businesses more than large foreign investors. Significant areas for improvement remain, including in customs operations, business closures, and business permitting.

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 have provided assistance in this effort. Further, the Decree directed the Ministry of Economic Development to establish an internet portal on which information regarding 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. Despite plans to adopt 29 national accounting standards, so as to be in line with International Financial Reporting Standards (IFRS) by 2009, as of 2012 audited financial statements only have been adopted in banking and finance.

Efficient Capital Markets and Portfolio Investment

Azerbaijan has an underdeveloped financial services sector – of which banking comprises more than 90% – that inhibits economic stability, growth and diversification Non-bank financial sector staples such as capital markets, insurance and private equity are in the early stages of development.

With around 40 private banks, Azerbaijan’s banking sector is fragmented; the fragmented structure reinforces oligarchic control of the economy and holds back private sector growth, as smaller firms find it difficult to finance expansion. Because banks rarely compete directly against each other for market share, they have no incentive to offer competitive terms. Furthermore, the lack of effective systems for dealing with collateral and determining credit-worthiness require an additional risk premium, leading to an average private loan interest rate of 26%. The entry of large foreign banks could provide for a much needed transfer of technology and management expertise. Foreign ownership in the banking sector is limited to 50% percent ownership on an aggregate basis; currently there are around 22 banks in Azerbaijan with some investment by foreign capital.

Total banking sector assets were 20.78 billion USD as of November 2012, with the top five banks holding almost 58%. The majority state-owned International Bank of Azerbaijan (IBA) accounts for approximately one-third of the country’s banking assets, but has had problems meeting minimum capital adequacy requirements. The Central Bank of Azerbaijan (CBA) has been focused on encouraging consolidation in the sector and, in August 2012, the CBA raised the minimum capital requirement from 10 million AZN (12.7 million USD) to 50 million AZN (63.7 million USD), effective January 1, 2014.

In its fall 2011 report, the International Monetary Fund (IMF) noted the Government of Azerbaijan’s efforts (with World Bank support) to strengthen capital markets to develop long-term instruments for savers and investors, but called for medium-term measures to deepen the financial sector. Measures to support capital markets development and a broader array of banking and non-banking products and services would provide consumers and private businesses with more options for savings, investment and business expansion. On the positive side, the Azerbaijan Mortgage Fund – administered by the Central Bank – has helped fuel a growing mortgage market and improved credit access by households. Microfinance – the only significant source of non-bank financing to small businesses – has taken off in Azerbaijan.

Several ongoing and planned projects designed to strengthen Azerbaijan’s financial services sector, including the Capital Market Modernization Project (CMMP), diversification of the State Oil Fund’s (SOFAZ) investment strategy, and Pension Reform, present opportunities for U.S. firms providing asset management and global custodian services.

Though the Baku Stock Exchange (BSE) was established in 2000, the securities market still is at an early stage of development. The Capital Market Modernization Project is an attempt by the Government of Azerbaijan to build the foundation for a modern financial capital market, including the development of market infrastructure and automation, and the strengthening of the legal and market frameworks for capital transactions. One major hindrance to the growth of the stock market is the difficulty in encouraging established Azerbaijani businesses to adapt to standard investor-friendly practices of good corporate governance that are required of publically listed companies. In February 2012, the State Oil Company of Azerbaijan realized its first corporate bond offering, the main purpose of which was for financing of capital investment.

The State Oil Fund of Azerbaijan, established in 1999, had 33.9 billion USD in assets as of December 1, 2012, and is the world’s 24th largest sovereign wealth fund, according to the Sovereign Wealth Fund Institute. Beginning in 2012, SOFAZ embarked on a slow process to diversify its conservative holdings away from short-to-medium term fixed income instruments into public equities, gold and real estate. SOFAZ conducted several small international real estate investments in 2012 and in 2013 plans to expand into a globally diversified real estate portfolio.

Pension Reform also has been a priority issue for the Government of Azerbaijan, with the goal of increasing pension payments while minimizing projected shortfalls due to rising wages and demographic shifts. Since 2008, the Government of Azerbaijan has been working on a reform strategy for the State Social Protection Fund (SSPF). Measures under consideration include increasing the size of employees’ personal social security contributions (presently 3%), and the creation of separate, IRA-type accounts.

Fitch Ratings has revised the outlook on Azerbaijan’s long-term foreign and local currency Issuer Default Ratings (IDR) to Stable from Positive and affirmed them at “BBB-” in May 2012. In December 2012, Standard & Poor’s raised Azerbaijan's ratings one notch to triple-B minus, with a stable outlook. Additionally, Moody's Investors Service upgraded Azerbaijan’s foreign- and local-currency government issuer ratings by one notch to Baa3 from Ba1, with a stable outlook in April 2012.

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. 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.

The International Bank of Azerbaijan (IBA) – founded in 1992 – is the only state-owned bank still operating in Azerbaijan. IBA is the largest bank in Azerbaijan, with roughly one-third of banking sector assets. IBA was partially privatized in 1994 – with the Government of Azerbaijan maintaining a 50.2 % controlling stake – but a 1998 presidential decree to completely privatize the bank has not yet been fully implemented, both for political reasons and issues with the overall health of the bank. IBA’s privatization process got a boost in May 2011, when the Government of Azerbaijan contracted with an international consortium – led by PWC, Salans and Rothschild – to analyze IBA’s books and develop recommendations on how to privatize the bank.

Privatization efforts made little progress in 2012, however, as officials from IBA and the Central Bank of Azerbaijan (CBA) argued that stability should come before privatization. The CBA made a capital injection of 100 million AZN in March 2012, raising questions about IBA’s stability. The CBA also argues that finding the right private investors for Azerbaijan’s largest bank will take some time.

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 – 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 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 fall 2011. The American Chamber of Commerce also has published a guide on Corporate Social Responsibility for businesses in Azerbaijan.

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 domestic political violence affecting foreign investors is minimal, though 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 in 2011 and 2012. In September 2012, protests in front of the U.S. and French Embassies in Baku by Islamic groups drew about 100 and 50 protesters respectively, and were dispersed peacefully by local police.

The Government of Azerbaijan is vigilant against regional and global threat against Western interests. In January 2012, Azerbaijan’s Ministry of National Security announced that it had arrested two Azerbaijani citizens, and was pursuing a third Azerbaijani citizen living in Iran, for planning to assassinate two foreign rabbis teaching at a Jewish school in Baku. It publicly linked the three suspects to Iranian intelligence services. In March 2012, Azerbaijani security services reported the arrest of 22 individuals (all Azerbaijani citizens) accused of working with Iran’s Islamic Revolutionary Guard Corps (IRGC) to carry out terrorist attacks against Western embassies and other groups with Western ties. On April 6, 2012 security services conducted a raid on a suspected Sunni extremist group in Ganja. In May 2012, Azerbaijan’s security service – referring to operations in previous months – reported that it had arrested 40 terrorism suspects and thwarted planned terrorist attacks during the May Eurovision Song Contest held in Baku. Planned targets during the event included major hotels frequented by foreigners as well as the song contest venue.


Pervasive corruption – including bribery of public officials – continues to be a major challenge for U.S. and other international 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.

The Government of Azerbaijan recognizes that corruption is a problem but, to date, laws and regulations to combat corruption have not been effectively or consistently enforced. Azerbaijan has made little progress in implementing a 2005 Anticorruption Law, which created a commission with the authority to require full financial disclosure from government officials.

On September 5, 2012, President Aliyev issued a decree for a National Action Plan on Open Government and a National Action Plan on Combating Corruption. While these decrees are encouraging signs, it is still too early to determine what real impact the plans will have. As part of these action plans, the Government of Azerbaijan planned to open in January 2013 a new method for delivering government services called “ASAN” (Azerbaijan Service and Assessment Network). In theory, ASAN centers will provide more transparent and accountable services via the “one window” model for customers of 23 government services from nine state entities, reducing opportunities for rent seeking and petty government corruption.

In 2012, the global anticorruption watchdog Transparency International ranked Azerbaijan 139 out of 176 countries on its Corruption Perceptions Index, meaning only 37 countries scored more poorly on the issue of corruption. 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 reputation of the tax authorities has enjoyed some improvement in the past year as corruption reducing reforms have been implemented. Transparency’s 2010/11 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% of Azerbaijani respondents had paid a bribe to one of the nine service providers in the twelve preceding months. According to the survey, 52%of respondents thought that corruption had increased in 2010, with the most corrupt group being the police. Azerbaijan 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.

Azerbaijan also has been a participant in the Extractive Industries Transparency Initiative (EITI). In 2009, Azerbaijan became the first participating country to become fully compliant with EITI requirements. Azerbaijan’s EITI reports do not currently provide data on a company-by-company basis – which is optional – but citizen groups in Azerbaijan are encouraging companies to do so.

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 bilateral free trade agreement in place with the United States.

Azerbaijan also 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, the United Kingdom, and Uzbekistan.

OPIC and Other Investment Insurance Programs

The Overseas Private Investment Corporation (OPIC) and the U.S. Export-Import (ExIm) Bank are open for business in Azerbaijan, providing political risk insurance and financing lines, as well as financing and loan guarantees. Azerbaijan also is a member of the Multilateral Investment Guarantee Agency (MIGA), and the European Bank for Reconstruction and Development, World Bank, Asian Development Bank and other third-country institutions are active in providing financing and insurance for investment in Azerbaijan.

In 2004, OPIC provided 100 million USD 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. On the financing side, OPIC has repeatedly provided funds for numerous banks operating in Azerbaijan in order to expand their Small and Medium Enterprise (SME) lending portfolio, including 4.8 million USD to Rabita Bank in 2008, and 7.3 million USD to Turan Bank in 2009. In 2011, OPIC provided Muganbank a loan guarantee for 10 million USD to expand its operations to target SME borrowers. OPIC also has provided 1 million USD and 3 million USD respectively to FinDev and CredAgro for microfinance lending. In 2012, OPIC provided loan insurance to Viator Microcredit Azerbaijan LLC (500,000 USD), NBCO Vision Fund Azercredit LLC (2 million USD) and FinDev again (1 million USD).

In its 2012 annual report, the Export-Import Bank of the United States (ExIm Bank) stated that it has authorized insurance and loan guarantees for Azerbaijan in the amount of 133,609,378 USD, primarily in support of aviation and telecommunications sales. In 2011, U.S. ExIm Bank endorsed a 116.6 million USD loan with a ten-year repayment period to finance the purchase of the AzerSat-1 satellite from Orbital Sciences.


A Labor Code that took effect in 1999 still regulates overall labor relations. The workweek 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. Azerbaijan has an abundant supply of skilled and unskilled laborers; however companies repeatedly cite problems hiring skilled professional staff, which likely is a result of the decline in the quality of education, economic shifts and 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% or more, with underemployment being much higher.

As of January 1, 2013, both the minimum monthly wage and the base compensation for pensions were set at 160 USD, a twenty-five percent increase over the 2012 minimum wage. The average monthly salary also rose to 516 USD, representing a 9% increase over 2011. 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 has been a significant rise in migrant workers over the past five years; the International Organization for Migration’s 2011 estimate places the number at 113,118, most of which are from neighboring countries, such as Georgia, Russia, Turkey and Iran. The SMS also receives frequent appeals from foreigners seeking refugee status in Azerbaijan, most of whom are from Pakistan and Afghanistan, and 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 Azerbaijan. Despite this, Azerbaijan’s Cabinet of Ministers Resolution No. 199, signed December 25, 2009, 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 these zones are not subject to import duties and VAT, or customs duties and taxes

Certain ministries – the Ministry of Economic Development, the Ministry of Finance, and the Ministry of Information and Communications Technologies – continue to discuss plans for creating special economic zones, including a petrochemical complex; Regional Innovation Zones to boost development of the telecommunications sector and to turn Azerbaijan into a regional information and communications technologies hub; and a special zone to encourage the production of renewable energy.

Foreign Direct Investment Statistics

Foreign direct investment in Azerbaijan from 1993-2010 exceeded 55 billion USD, 88% of which was in the oil and gas sector. According to the State Statistics Committee, foreign investments totaled 3.6 billion USD between January-November, 2012 – a 29.1% rise over the previous year. The bulk (91%) of all foreign investment came from Great Britain, USA, Japan, Norway, Turkey, Czech Republic and France.

The following data are the latest available from the State Statistical Committee of Azerbaijan on foreign investment (in millions of U.S. dollars) and can be found at: http://www.stat.gov.az/source/finance/indexen.php








Total foreign investments

5 052.8

6 674.3

6 847.4

5 468.6

8 247.8

8 673.9

Of which:







Financial credits

9 83.5

1 576.6

2 357.9

1 438.3

3 405.9

3 692.5

Oil industry

3 422.3

4 003.3

3 350.7

2 412.7

2 955.3

3 407.8

Foreign companies/joint








of which:
















































































































Other countries







Bonus of oil







Other investments





1 225.0


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, Marriott, 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,), Weus Holding Inc., Xerox, Varel-NTS (Azerbaijan Branch Office), and Yum Brands. Fairmont Hotels is expected to open a hotel in Baku in 2013.