Doing Business in Azerbaijan
Prospects for Trade and Investments
Azerbaijan continues to undergo rapid development, gaining a further role on the world stage. The government’s priorities include continuing its growth as an energy provider and transport country, strengthening infrastructure, creating new jobs, developing the non-oil economy, and creating an anchor of stability and prosperity in the rgion. These developments and policies create new opportunities for foreign investors and firms interested in this region.
Energy
Rapid investment growth and the development of Azerbaijan’s oil sector are boosting export and import volumes. Numerous foreign companies have made investments in extracting Azerbaijan’s significant oil and gas reserves. Azerbaijan already has major oil and gas pipelines exporting energy to Western markets, including the Baku-Tbilisi-Ceyhan (BTC) oil pipeline and the Baku- Tbilisi-Erzurum (BTE) gas pipeline. Others are under consideration, including the Nabucco pipeline to move Caspian gas reserves to European markets, thus creating new opportunities in the field of energy.
Estimates place Azerbaijan’s proven oil reserves at seven billion barrels of oil, and possibly almost double that, and is exporting over one million barrels a day. Natural gas reserves in Azerbaijan’s the massive Shah Deniz field are estimated at 1.2 trillion cubic meters alone, with gas production estimated at 12 billion cubic meters in 2010.
Oil and gas production growth for the rest of this decade, and well beyond, will be driven by the success of two offshore projects in the Caspian: AIOC’s Azeri, Chirag, and deepwater Guneshli (ACG) oil fields and the Shah Deniz gas and condensate field.
With the mid-July 2006 start-up of the BTC oil pipeline, export access has eased. BTC, which cost $4 billion to build, is the first private company-government partnered pipeline that brings oil to western markets without crossing Russian territory. The pipeline’s capacity is eventually expected to be expanded to 1.8 million barrels per day.
Gas transit and exports are increasing through BTE pipeline, also called the South Caucasus pipeline, now in operation. In addition, other gas pipeline projects are expected to only bolster Azerbaijan’s growing role as a key provider of energy security through access to Caspian reserves.
In addition to primary jobs and opportunities created within the energy sector, the growth of the industry is having spillover effects on the services sector as well. In particular, this includes services provided to enterprises, trade and catering, mobile telecommunications, construction and property.
Non-energy
Azerbaijan is increasingly becoming known for its pro-business attitude, helped by its tangible commercial reforms that have liberalized its non-energy economy. One of the most successful of these has been, in 2008, the establishment of what is known widely as the “one-stop shop” for entrepreneurs who wish to register new businesses. This new policy reduced registration time from weeks or even months to just a matter of days. In addition, the government launched a highly popular system of making tax payments online.
These and other reforms helped Azerbaijan jump an unprecedented 64 places in the overall ranking of the World Bank’s annual “Doing Business” report. One World Bank official called these reforms “dazzling.” The reforms were implemented after government staff literally traveled the world to study similar successful systems. Implementation of sound policies, programs that support development of entrepreneurship, and a strong middle class are a part of Azerbaijan’s important development strategy. Successes are already evident, with more than 600,000 new jobs created in the past several years, mostly in the non-oil sector. Average real wages have been in a steady upward trend year-to-year, increasing between 10-20% between 2003 and 2006, and then rising almost 30% (the last year for which statistics are available) in 2007.
Opportunities abound in Azerbaijan’s non-energy sector. The Government of Azerbaijan sees investment in this area as a critical component to achieving economic diversification. Areas of opportunity include the following:
Agriculture
Agriculture is the second largest sector of the economy and the largest employer in Azerbaijan. Rural development is a top priority for the government and demand for agricultural input is growing rapidly. The country’s diverse climate and over 1 million hectares of fertile land grow a wide variety of fruits and vegetables. Farms that were once part of the Soviet collective have now been privatized. Agricultural processing is accelerating, with many food products processed for export. There is current demand for agricultural machinery, as well as food processing and packaging technology.
Recognition of Azerbaijan as a reliable supplier of high-quality agricultural products grew substantially in 2008, with numerous vendors represented, for the first time, at a USACC-sponsored Azerbaijan Pavilion at Food Marketing Institute Annual Convention in Las Vegas, the largest such trade show in North America.
Construction
Construction remains a large sector of the economy and real estate has seen unprecedented growth, particularly in the capital, Baku. This ancient city, which just 10 years ago was filled with low-rise buildings, is now dotted with hundreds of high-rise towers.
Most of the high-quality building materials are imported, although local manufacturing of building products is emerging. Flooring, drywall, doors, windows, electrical systems, bathroom fixtures, paints, and heating and cooling systems are in high demand. American and European goods enjoy a reputation for better quality.
The construction sector offers numerous opportunities for goods and services of interior, design, and architecture firms, including joint ventures to manufacture construction materials.
The construction industry has been largely tied to the ebb and flow of various energy projects, although domestically driven demand appears to be picking up.
Information and Communication Technologies
Azerbaijan engaged in the telecom industry with the impressive announcement that the country will launch its own communication satellite in 2011. The satellite will aid in road navigation in Azerbaijan.
Wireless communication is the fastest growing subsector in the telecom industry, an area in which Azerbaijan has been a regional and global leader. Azerbaijanis are rapidly embracing communications technologies, with computer and cell phone usage seeing major jumps year to year.
Significant foreign investments have been made in this area, with four mobile operators now providing GSM, CDMA, and other technologies. In another new development, communications officials are continuing to move ahead with the launch of third-generation (3G) mobile telephone services. By one estimate, there are 6.5 million cell phones for just over 8 million people in Azerbaijan. The Internet has seen a rapid explosion in usage. From just a handful of Internet cafés in Baku just 10 years ago, there are now an estimated 1.5 million Internet users in Azerbaijan.
Healthcare
Azerbaijan’s medical sector is poised for significant growth, driven largely by government investment in healthcare and increasing incomes from oil revenue and development. In 2007, for example, the government increased its expenditure on health care by 59 percent over 2006, as part of its pledge to reduce poverty. Azerbaijan does not produce medical equipment domestically; consequently, there is a demand for high-quality U.S. or European equipment. The healthcare industry is dominated by state-run clinics and hospitals, although many dental clinics have been privatized.
Primary healthcare and private health insurance remain underdeveloped, particularly in rural areas. There is a shortage of doctors, and while the country has a large number of hospital beds by European standards, well under 50 percent are occupied at any given time, indicating a high level of inefficiency.
Major Trading Partners
Azerbaijan’s main trading partners include the United States, the United Kingdom, Russia, Turkey, Italy, Germany, France, Kazakhstan, Georgia and Indonesia. Azerbaijan maintains its status as an observer at the World Trade Organization (WTO) since it expressed its intention to become a member in June 1997. WTO membership will help Azerbaijan integrate into the world economy and modernize its trade policy. The U.S. Trade and Development Agency has issued a technical assistance grant to the Ministry of Economic Development for WTO accession preparation, and several rounds of talks have already taken place to advance of this process.
Regional Challenges
A territorial conflict surged in 1988 between Azerbaijan and Armenia, when ethnic majority Armenians of the Nagorno-Karabakh region of Azerbaijan sought to secede from Azerbaijan and merge with Armenia or become an independent state. Subsequent events led to aggression and war that left Azerbaijan with almost 20 percent of its territory under occupation. Around one million people from Azerbaijan’s population became refugees and internally displaced people scattered around the country.
A ceasefire was achieved in 1994, although a lasting peace seemed frozen until late 2008, when Azerbaijan and Armenia renewed negotiation efforts. The United States is among key negotiators represented within what is called the Minsk Group, also represented by France and Russia. Turkey, meanwhile, has also taken steps to assist in pursuing a lasting peace.
Pushing—or perhaps complicating—a peace deal was the 2009 rapprochement between Turkey and Armenia. Turkey had previously closed its border with Armenian in protest over the Armenian military’s occupation of Azerbaijan’s territory in the Nagorno-Karabakh region. Some speculate this could precipitate an Azerbaijan-Armenia peace deal. As a long-standing frozen conflict, and given Azerbaijan’s strategic geopolitical position, there is little doubt that long-term regional stability must hinge on a solution to the Nagorno-Karabakh issue.
