VZCZCXRO2949
RR RUEHLN RUEHVK RUEHYG
DE RUEHKB #0071/01 0281139
ZNR UUUUU ZZH
R 281139Z JAN 08
FM AMEMBASSY BAKU
TO RUEHC/SECSTATE WASHDC 4643
INFO RUCNCIS/CIS COLLECTIVE
RUEHAK/AMEMBASSY ANKARA 2588
RUEHIT/AMCONSUL ISTANBUL 0098
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS SECTION 01 OF 10 BAKU 000071 
 
SIPDIS 
 
SIPDIS 
 
STATE FOR EUR/CACEN AND EB/IFD/OIA; 
STATE PLEASE PASS TO OPIC AND USTR 
ANKARA FOR FCS 
DEPT PASS TO TDA FOR STEIN, EXIM FOR GLAZER 
COMMERCE FOR 4231 ITA/MAC/ORUE FOR DSTARKS 
COMMERCE FOR 3004 ITA/FCS/ ADVOCACY FOR ACHAMS-EDDINE 
 
E.O. 12958: N/A 
TAGS: KTDB ECON EFIN EINV ELAB ETRD OPIC PGOV AJ
SUBJECT: AZERBAIJAN: INVESTMENT CLIMATE STATEMENT 2008 
 
REF: STATE 158802 
 
¶1.  This cable contains post's Investment Climate Statement 
for 2008.  The Statement includes the following sections: 
 
Introduction 
A.1.  Openness to Foreign Investment 
A.2.  Conversion and Transfer Policies 
A.3.  Expropriation and Compensation 
A.4.  Dispute Settlement 
A.5.  Performance Requirements and Incentives 
A.6.  Right to Private Ownership and Establishment 
A.7.  Protection of Property Rights 
A.8.  Transparency of the Regulatory System 
A.9.  Efficient Capital Markets and Portfolio Investments 
A.10. Political Violence 
A.11.a. Corruption 
A.11.b. Bilateral Investment Agreements 
A.11.c. OPIC and Other Investment Insurance 
A.11.d. Labor 
A.11.e. Foreign Trade Zones/Free Ports 
A.11.f. Foreign Direct Investment Statistics 
 
------------ 
INTRODUCTION 
------------ 
 
¶2. Azerbaijan's continued efforts to modernize and reform its 
economy into a market economy presents both significant 
prospects and challenges.  Many outdated laws have been 
replaced with modern legislation to encourage foreign 
investment, to protect intellectual property, to permit 
bankruptcies, and to rationalize the Government's revenue 
collection policies.  Since the mid-1990s, Azerbaijan has 
successfully executed a strategy to develop its oil and gas 
resources and has begun to receive energy revenue inflows. 
Much work remains to be done, however, to produce prosperity 
for the country's population of eight and a half million. 
This includes improving governance and curbing corruption, 
diversifying the economy through domestic and foreign 
investment, and creating jobs.  A long running and unresolved 
conflict with Armenia over Nagorno-Karabakh has left 
Azerbaijan with approximately 800,000 refugees and internally 
displaced persons (IDPs) for more than a decade and 
constitutes an enormous burden on economic and democratic 
development.  The World Bank estimated in 2005 that 24 
percent of the population lived in poverty, with slightly 
more than nine percent in extreme poverty.  Poverty remains 
particularly acute in Azerbaijan's regions, and developing an 
environment in which private investors can help create 
employment opportunities in the regions remains an imperative 
for Azerbaijani policymakers. 
 
¶3. Cooperation with the international financial institutions 
has been a key element in Azerbaijan's reforms efforts. 
Azerbaijan is a member of the International Bank for 
Reconstruction and Development (IBRD), the European Bank for 
Reconstruction and Development, the International Monetary 
Fund (IMF) and the Asian Development Bank.  Azerbaijan is not 
yet a member of the World Trade Organization, but USAID is 
providing assistance in preparing Azerbaijan's bid for 
accession.  Azerbaijan's macroeconomic situation continued to 
improve in 2007. According to the National Bank of 
Azerbaijan, compared to the first 11 months of 2006, GDP 
increased 25.4 percent and reached USD 24.6 billion. 
Developments in the oil and gas sector continued to be the 
primary force behind this growth. Oil and gas production 
increased 30 and 61 percent respectively.  Inflationary 
pressures increased in 2007 with estimates ranging from 18 to 
27 percent through November 2007. 
 
¶4. The national currency, the manat, appreciated 
approximately 3.1 percent in real terms against the U.S. 
dollar in 2007.  The nominal exchange rate was approximately 
1 USD = 0.845 AZN as of January 1, 2008.  The National Bank's 
currency reserves grew 75.6 percent and reached USD 3.5 
billion in December 2007.  The State Oil Fund continued to 
play a critical role in promoting macroeconomic stability and 
in sterilizing massive energy revenues.  As of September 30, 
2007, the Oil Fund had more than USD 2 billion in assets.  In 
2008, the Government of Azerbaijan is expected to receive 
approximately USD 5 billion in additional energy revenues. 
 
BAKU 00000071  002 OF 010 
 
 
Over the next 15 years, Azerbaijan is expected to receive 
more than USD 200 billion in energy revenues. 
 
¶5. With completion of the Baku-Tbilisi-Ceyhan oil pipeline 
and the South Caucasus gas pipelines in 2006, the nature of 
business activity within the energy sector is shifting from 
infrastructure construction to services provision.  In 2007 
the BTC pipeline transported approximately 750,000 barrels of 
oil a day from Azerbaijan's offshore Azeri-Chirag-Gunashli 
(ACG) field.  In addition, the South Caucasus Pipeline (SCP) 
transported natural gas from Azerbaijan's offshore Shah Deniz 
field to Turkey and Georgia.  Azerbaijan has taken 
significant steps to implement the Extractive Industries 
Transparency Initiative (EITI), which promotes oil revenue 
transparency.  Azerbaijan remains an active participant in 
the Extractive Industries Transparency Initiative (EITI).  In 
June 2007, the United Nations awarded Azerbaijan and its 
State Oil Fund a public service award for its work to improve 
transparency, accountability and responsiveness in public 
service. 
 
¶6. Corruption is a significant deterrent to investment in 
Azerbaijan, especially in the non-energy sector.  Laws and 
regulations that exist to combat corruption are not 
effectively enforced, with corruption in the regulatory, tax, 
and dispute settlement systems most pervasive.  Problems in 
the quality, reliability, and transparency of governance, as 
well as abuse of the regulatory system and poor contract 
enforcement, significantly impede the ability of many 
companies to do business in Azerbaijan. These problems have 
driven many companies, including some major Western firms, 
from the market. In the summer of 2007, the government took 
several positive steps aimed at tackling the problem of 
corruption by adopting a new National Strategy on Increasing 
Transparency and Combating Corruption and an ethics code for 
civil servants. 
 
¶7. The New Anti-Corruption National Strategy, set to run from 
2007 to 2011, replaces and expands upon Azerbaijan's previous 
State Program on Combating Corruption.  The new National 
Strategy commits the GOAJ to undertake a number of important 
reforms in a wide range or areas, including adopting a 
comprehensive anti-money laundering/counter terrorist 
financing law, increasing accountability in government 
purchasing, improvement in the operations of the 
anti-corruption commission, streamlining government licensing 
and regulation, and increasing transparency throughout 
government operations.  Shortcomings in its intellectual 
property rights laws and enforcement of such laws resulted in 
Azerbaijan being placed on the U.S. Special 301 Watch List 
from 2000 to 2005; however, Azerbaijan was removed from the 
Watch List in 2006 due to steps taken to enforce intellectual 
property rights enforcement. Azerbaijan remained off the 
Watch List in 2007. 
 
----------------------------------- 
A.1. OPENNESS TO FOREIGN INVESTMENT 
----------------------------------- 
 
¶8. The Government of Azerbaijan officially welcomes foreign 
direct investment, recognizing that it plays a vital role in 
development of the country's economy.  Since 1994, Azerbaijan 
has attracted significant amounts of foreign investment to 
develop further its energy sector.  However, government 
bureaucracy, weak legal institutions and predatory behavior 
by politically connected monopoly interests have severely 
hindered investment outside of the energy sector.  The 2008 
World Bank/IFC "Doing Business" report ranks Azerbaijan at 96 
(out of 178), an improvement of five positions compared to 
the previous ranking  when taking into account that two 
countries were added to the ranking in 2008.  Azerbaijan's 
improvement is primarily due to the creation of a 
one-stop-shop for business registration at the Ministry of 
Taxation. 
 
¶9. The Law on Protection of Foreign Investments permits 
foreign direct investment (FDI) in any activity open to a 
national investor unless prohibited by law.  Prohibited areas 
include those relating to national security and defense.  The 
government carefully controls other key sectors, such as 
energy and communications.  In the past, the process of 
investment in the oil and gas sector has been to conclude a 
 
BAKU 00000071  003 OF 010 
 
 
Production Sharing Agreement (PSA) with the State Oil Company 
of Azerbaijan (SOCAR), which is subsequently ratified by 
parliament.  The establishment of a Ministry of Fuel and 
Energy, renamed the Ministry of Energy and Industry (MEI) in 
2004, has not meaningfully changed this procedure, although 
the MEI has been given nominal responsibility for conclusion 
of PSAs.  A limitation on FDI in the banking sector was 
reduced when the National Bank of Azerbaijan (NBA) increased 
the limit on participation of banks with foreign ownership 
from 30 to 50 percent of the commercial banking market. 
 
¶10. Azerbaijan is not yet a member of the World Trade 
Organization, but the Government, with U.S. and international 
technical assistance, has been working to draft new 
legislation.  The Ministry of Economic Development has been 
tasked to lead the WTO accession process.  The Government 
expects to start WTO negotiations in 2009. Creating a stable 
and predictable business environment is especially crucial 
for attracting investment to the non-energy sector. At 
present, however, Azerbaijan remains a challenging market in 
which to do business.  Following international 
recommendations, the Government of Azerbaijan established a 
new business registration mechanism on principles of a 
one-stop-shop at the Ministry of Taxation.  The time to 
register new businesses has dropped from several weeks to 
three days. 
 
¶11. Under Azerbaijani law, foreign investors may participate 
in the Azerbaijani market through joint ventures with local 
companies, establishment of subsidiaries wholly owned by 
foreign investors, and representative offices and branches of 
foreign legal entities.  The Law on Protection of Foreign 
Investments provides that the Azerbaijani government will 
treat foreign investors in a manner "not less favored" than 
the treatment accorded to local investors.  This law provides 
for repatriation of profits, revenues, and other 
investment-related funds so long as applicable Azerbaijani 
taxes have been paid.  The law also provides a 10-year 
grandfather clause in the event new legislation less 
favorable to the foreign investor is adopted.  However, this 
provision does not apply to changes in tax legislation. 
 
¶12. While the Azerbaijani government employs no formal 
screening mechanisms for general foreign investment, the 
process of registering an enterprise with the Ministry of 
Justice serves as a de facto screening process.  Although by 
law required only to determine that documents of enterprises 
seeking registration are in order, the Ministry operates in a 
non-transparent and arbitrary manner.  Credible reports 
indicate that ministry officials make extra-legal 
determinations of whether individual foreign investments are 
of an appropriate nature before making decisions about 
registration.  Some investors have alleged that they have 
received demands for bribes when attempting to register their 
enterprises. 
 
¶13. In September 2005, a presidential decree transferred 
control of privatization from the Ministry of Economic 
Development to an autonomous State Agency for Privatization. 
Implementation of a second stage privatization program, which 
began in 2001 and could include some of Azerbaijan's largest 
state-owned enterprises, has been slow.  Foreign investors 
may participate, though it is not clear what role vouchers 
and options purchased previously by foreigners will play in 
these and other privatizations. Several attempted 
privatizations or placements of large state enterprises under 
private management failed for lack of qualified bidders.  In 
general, participation in the privatization program continues 
to be hindered by a lack of resources to properly prepare 
assets for privatization, as well as insufficient information 
about the assets of enterprises to be privatized.  The 
Government of Azerbaijan announced at the end of 2007 that 
the validity of privatization vouchers had been extended 
until 2010. 
 
¶14. The Ministry of Economic Development maintains a web site 
with information about investment opportunities available in 
English, Azerbaijani and Russian (www.economy.gov.az).  The 
Azerbaijani Export & Investment Promotion Foundation 
(AZPROMO) (http://www.azpromo.az/) is a joint Public Private 
Initiative established by the Government of Azerbaijan in 
¶2003. AZPROMO is empowered to play a key role in 
 
BAKU 00000071  004 OF 010 
 
 
public-private dialogue serving as a bridge between 
investors, local producers and the Government.  AZPROMO is an 
independent organization with the key objective to contribute 
to achieving balanced development of the economy of the 
country and to implement measures necessary for the 
attraction and promotion of inflow of investments for 
creation of new jobs, particularly in its rural regions 
within the poverty reduction strategy framework.  In August 
2005, AZPROMO was also empowered with the mandate to promote 
export of local non-energy sector products. 
 
¶15. The Azerbaijan Investment Company (AIC) is a state-owned 
joint-stock company, established by presidential decree in 
2006, in order to promote investment in the non-oil sector. 
Key priorities of AIC are to participate in joint-venture 
projects (especially export-oriented and import substitute) 
of Azerbaijani enterprises and to promote local and foreign 
investments in the non-oil sector.  AIC's investment 
decisions are based on the analysis of business plans, 
description of effectiveness of organization's commercial 
activity, experience and achievements of shareholders of 
potential partners. AIC invests in both existing and 
newly-established joint-ventures. 
 
------------------------------------- 
A.2. CONVERSION AND TRANSFER POLICIES 
------------------------------------- 
 
¶16. Azerbaijan has a liberal exchange system, and, in 
general, there are no restrictions on converting or 
transferring funds associated with an investment into freely 
usable currency and at a legal, market-clearing rate. 
Conversion is carried out through the Baku Interbank Currency 
Exchange Market and the Organized Interbank Currency Market. 
The Baku Electronic Currency Exchange System (BEST) was 
launched in July 2002.  Cash exchange is carried out at 
numerous currency exchange points and no difficulties exist 
in obtaining foreign exchange. 
 
¶17. Since 2001, the NBA has required that cash transactions 
be conducted in Azerbaijani manats. In 2006, the NBA 
completed the denomination of the national currency, and 
starting from January 2007 new Azerbaijani manats (1 AZN 
equals 5000 old Azerbaijani manats are the only legal cash 
tender.  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. The Parliament amended legislation in 2007 to 
eliminate custom duties for cash currency exports, a move 
that is in-line with a WTO requirement and is believed to 
help ease inflationary pressures. The Tax Ministry has 
occasionally frozen bank accounts of companies that it 
believes have failed to meet their tax obligations. 
 
----------------------------------- 
A.3. EXPROPRIATION AND COMPENSATION 
----------------------------------- 
 
¶18. The Law on Protection of Foreign Investments protects 
foreign investors against nationalization and requisition 
except under certain specified circumstances. 
Nationalization of property to prevent harm to the population 
or damage to state interests of Azerbaijan is possible by 
parliamentary resolution.  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.  There have been no cases of nationalization or 
requisition against foreign firms in Azerbaijan. 
 
----------------------- 
A.4. DISPUTE SETTLEMENT 
----------------------- 
 
¶19. Dispute settlement mechanisms are improving in 
Azerbaijan, but effective means of protecting and enforcing 
property and contractual rights are by no means assured. 
While the Azerbaijani government does not officially 
interfere in the court system, in practice courts are weak, 
judges often inexperienced, and progressive new tax and other 
 
BAKU 00000071  005 OF 010 
 
 
economic legislation poorly understood.  The Economic Court, 
which has jurisdiction over commercial disputes, is weak, 
widely regarded as corruptible, and its decisions are often 
inconsistent.  The Civil Procedure Code of September 2000 
sets forth basic civil legislation. 
 
¶20. Since 2000, the Law On International Arbitration provides 
for the possibility of local arbitration in international 
commercial matters.  However, in practice arbitration is 
seldom used to resolve disputes.  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 is also a member of the 
Multilateral Investment Guarantee Agency (MIGA).  Azerbaijan 
is also 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 
legislation or public policy, and if reciprocity exists. 
Azerbaijan's bankruptcy law does not function effectively and 
is rarely used. 
 
-------------------------------------------- 
A.5. PERFORMANCE REQUIREMENTS AND INCENTIVES 
-------------------------------------------- 
 
¶21. Azerbaijan has not yet developed effective incentives to 
attract foreign investment, other than the incentives 
provided by Production Sharing Agreements in the oil and gas 
sector.  Performance requirements are not imposed on new 
investment, but investors who participate in the 
privatization process of enterprises 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 
those state monopolies identified above, there is no 
requirement that nationals own shares in enterprises. 
Investors in PSAs assume obligations and requirements as 
provided within the PSA. 
 
¶22. There are no legal requirements for employment of host 
country nationals.  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.  Foreign 
workers in Azerbaijan are subject to income taxes and Social 
Protection Fund contributions.  Heads of representative 
offices and branches of foreign legal entities and their 
deputies do not require work permits. In 2008, the Government 
expects to introduce a work visa for all immigrant employees. 
 
--------------------------------------------- ---- 
A.6. RIGHT TO PRIVATE OWNERSHIP AND ESTABLISHMENT 
--------------------------------------------- ---- 
 
¶23. 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.  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 not tolerated. 
 
¶24. 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 Azerbaijani legal entities, 
including enterprises with foreign investment, can legally 
own, buy, sell, and trade property.  Foreign citizens and 
enterprises may lease, but cannot own, land. 
 
---------------------------------- 
 
BAKU 00000071  006 OF 010 
 
 
A.7. PROTECTION OF PROPERTY RIGHTS 
---------------------------------- 
 
¶25. Secured interests in property, both movable and real, are 
technically recognized. While the Government, together with 
World Bank, has been working to improve the property 
registration system, the system is filled with bureaucratic 
requirements and is generally seen as corrupt and 
inefficient. In 2006, the Government centralized processing 
of residential real estate transactions through a network of 
notary offices under the Ministry of Justice. 
 
¶26. In the mid-1990s, Azerbaijan began implementing a 
national system for registering and protecting intellectual 
property rights with the assistance of the World Intellectual 
Property Organization (WIPO), of which it is a member. 
Azerbaijan enacted modern 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 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 also a party to the Geneva Phonograms 
Convention, and acceded to the two WIPO Internet treaties in 
¶2005. 
 
¶27. The State Copyright Agency has formed an anti-piracy 
commission, with representatives from various ministries. 
While the Agency has made some progress by conducting raids 
and initiating civil court proceedings for violation of 
copyrights, in practice, there is limited enforcement of 
intellectual property rights.  Pirated software and movies, 
as well as knock-off clothing and luxury items, are widely 
available in Azerbaijan. Shortcomings in its intellectual 
property rights laws and enforcement of such laws resulted in 
Azerbaijan being placed on the U.S. Special 301 Watch List 
every year from 2000 to 2005.  Improvements in IPR 
enforcement, however, resulted in Azerbaijan's removal from 
the Watch List in 2006.  Azerbaijan remained off the Watch 
List in 2007.  Azerbaijan became a member of the World 
Intellectual Property Organization (WIPO) Performances and 
Phonograms Treaties (WPPT) and Copyright Treaty (WCT) in 
April 2006. 
 
------------------------------------------ 
A.8. TRANSPARENCY OF THE REGULATORY SYSTEM 
------------------------------------------ 
 
¶28. Although the Azerbaijani government has improved its 
regulatory system in the past several years, 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 
impede with application of laws and regulations and hinder 
competition. 
 
¶29. While laws and decrees are usually published in one of 
the country's official newspapers, implementation is often 
delayed while regulations are developed.  Those regulations 
in many cases are not published or distributed.  Despite some 
improvement in recent years, many persons doing business in 
Azerbaijan continue to complain that bureaucratic procedures 
contribute to long delays in gaining necessary permits and 
licenses. 
 
¶30. Azerbaijan has announced plans to adopt 29 national 
accounting standards to be in-line with International 
Financial Reporting Standards (IFRS) by 2009. Audited 
financial statements have only been adopted in banking and 
finance, where foreign ownership is most advanced. 
 
--------------------------------------------- ---------- 
A.9. EFFICIENT CAPITAL MARKETS AND PORTFOLIO INVESTMENT 
--------------------------------------------- ---------- 
 
¶31. As of December 2007, there were 43 banks and 94 non-bank 
credit organizations in Azerbaijan. Two more banks have been 
granted banking licenses and are expected to start operations 
 
BAKU 00000071  007 OF 010 
 
 
soon.  The banking sector is dominated by the International 
Bank of Azerbaijan (IBA), which controls more than 50 percent 
of the banking sector.  Foreign ownership in the banking 
sector is limited to 50 percent on an aggregate basis. There 
are 18 banks with foreign capital. As of November 2007, 
Moody's Weighted Average Bank Financial Strength Rating for 
Azerbaijan was "E ". 
 
¶32. According to the National Bank of Azerbaijan (NBA), as of 
September 2007, total assets of Azerbaijan banks grew 54 
percent and reached AZN 5821.4 million.  Total capital of 
banks grew by 77 percent and reached AZN 1 billion as of 
December 1, 2007. Deposits grew by 39 percent and reached AZN 
3100 million. Azerbaijan in 2007 established the National 
Depository Insurance Fund, which, as of December 2007, has 37 
banking members. 
 
¶33. The NBA has taken steps to improve bank supervision and 
raise capital requirements.  The capital requirement for 
banks is currently set at AZN 10 million (roughly USD 11.7 
million). A presidential decree requires installation of 
point of sale (POS) terminals in all shops within two years 
beginning in January 2006. Despite some progress in 
installation of POS terminals, the vast majority of stores 
and restaurants do not carry POS terminals or, if they do, 
avoid running card transactions to minimize taxation. The 
Baku Interbank Currency Exchange (BICEX) carries out 
interbank auctions of foreign exchange. Treasury bill 
auctions are conducted by the Baku Stock Exchange, which was 
established in 2000. Since then, the number of participants 
and volume of transactions have increased, but this is not 
yet a truly competitive market. 
 
¶34. In February 2007, Fitch Ratings upgraded Azerbaijan's 
long-term issuer default rating to BB  with a stable outlook. 
Moody's issuer rating for Azerbaijan is Ba1. 
 
------------------------ 
A.10. POLITICAL VIOLENCE 
------------------------ 
 
¶35. There have been no 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.  Police 
periodically uses force to disperse unauthorized 
demonstrations or spontaneous acts of public discontent; 
police also used force to break up a peaceful protest 
following parliamentary elections in 2005. 
 
------------------ 
A.11.a. CORRUPTION 
------------------ 
 
¶36. Corruption is a significant deterrent to investment in 
Azerbaijan, especially in the non-energy sector.  Corruption 
is a significant deterrent to investment in Azerbaijan, 
especially in the non-energy sector.  Laws and regulations 
that exist to combat corruption are not effectively enforced, 
with corruption in the regulatory, tax, and dispute 
settlement systems most pervasive.  Problems in the quality, 
reliability, and transparency of governance, as well as abuse 
of the regulatory system and poor contract enforcement, 
significantly impede the ability of many companies to do 
business in Azerbaijan. These problems have driven many 
companies, including some major Western firms, from the 
market. In the summer of 2007, the government took several 
positive steps aimed at tackling the problem of corruption by 
adopting a new National Strategy on Increasing Transparency 
and Combating Corruption and an ethics code for civil 
servants.  The New Anti-Corruption National Strategy, set to 
run from 2007 to 2011, replaces and expands upon Azerbaijan's 
previous State Program on Combating Corruption.  The new 
National Strategy commits the GOAJ to undertake a number of 
important reforms in a wide range or areas, including 
adopting a comprehensive anti-money laundering/counter 
terrorist financing law, increasing accountability in 
government purchasing, improvement in the operations of the 
anti-corruption commission, streamlining government licensing 
and regulation, and increasing transparency throughout 
 
BAKU 00000071  008 OF 010 
 
 
government operations. 
 
¶37. According to Transparency International, the situation in 
Azerbaijan worsened in 2007 and the country ranked 157 out of 
180 countries, compared to 130 of 163 in 2006.  Corruption 
appears most pervasive in the regulatory, tax, and dispute 
settlement systems; business officials indicate that their 
dealings with the State Customs Committee and Ministry of 
Taxation pose the greatest concern.  Throughout the country, 
problems in the quality, reliability and transparency of 
governance, as well as abuse of the regulatory system and 
poor contract enforcement, significantly impede the ability 
of many companies to do business in Azerbaijan and have 
driven many companies, including some major Western firms, 
from the market. 
 
¶38. In the past several years, politically connected 
businesses appear to have benefited from government 
regulatory and other decisions to achieve effective control 
over several lucrative sectors of the economy, and U.S. 
investors have been among those victimized.  Currently, 
powerful state-owned enterprises, such as the Azerbaijan 
State Caspian Shipping Company (CASPAR) and the State 
Airlines (AZAL), have protected their commercial interests by 
blocking entrance of new entrants into the market through the 
exercise of their regulatory authority -- a clear conflict of 
interest.  A focus of current international community work in 
Azerbaijan is combating corruption and improving governance. 
In 2004, Azerbaijan joined the Council of Europe's Group of 
States against Corruption (GRECO), but Azerbaijan is not a 
signatory to the OECD Convention on Combating Bribery. 
 
¶39. In 2004, Azerbaijan adopted an implementation plan for 
the Extractive Industries Transparency Initiative (EITI) to 
promote more transparent management of oil revenues.  See 
Introduction, above. 
 
--------------------------------------- 
A.11.b. BILATERAL INVESTMENT AGREEMENTS 
--------------------------------------- 
 
¶40. 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). 
Azerbaijan and the U.S. exchanged instruments of ratification 
on July 3, 2001, and the treaty entered into force on August 
2, 2001. 
 
¶41. In addition to the above agreement, Azerbaijan has 
bilateral investment protection agreements with the following 
countries: Austria, Belgium, Bulgaria, China, Egypt, Finland, 
France, Georgia, Germany, Greece, Iran, Italy, Kazakhstan, 
Kyrgyzstan, Latvia, Libya, Moldova, Pakistan, Poland, Saudi 
Arabia, Switzerland, Turkey, UAE, Ukraine, and the United 
Kingdom. 
 
--------------------------------------------- ------- 
A.11.c. OPIC AND OTHER INVESTMENT INSURANCE PROGRAMS 
--------------------------------------------- ------- 
 
¶42. OPIC provided USD 100 million in political risk insurance 
to U.S.-based financial institutions and U.S. equity partners 
in the Baku-Tbilisi-Ceyhan oil pipeline. In 2002, OPIC 
invested USD 50 million in Soros Investment Capital for 
projects targeted to all three Caucasus countries. OPIC also 
disbursed a USD 4.6 million loan to Caucasus Airlines, a 
regional air carrier based in Tbilisi. Caucasus Airlines 
ceased operations in late 2004 after a dispute arose with 
Azerbaijan's state air carrier AZAL over terms on the 
Baku-Tbilisi route. In 2005, OPIC provided financing to Baku 
Oil Tools for a joint venture with the State Oil Company, 
SOCAR. In 2006, OPIC provided USD 7.5 million to ShoreBank 
International Ltd for SME and mortgage loan portfolio 
expansion in Azerbaijan. 
 
¶43. In March 2004, the Export-Import Bank of the United 
States (Ex-Im Bank) provided a USD 19.3 million loan 
guarantee to Saba, Inc., a mid-sized U.S. company, for 
engineering, design, and construction services to build a 
business and residential center in Baku. 
 
BAKU 00000071  009 OF 010 
 
 
 
------------- 
A.11.d. LABOR 
------------- 
 
¶44. Azerbaijan has an abundant supply of qualified, trained 
technicians and skilled and unskilled laborers at attractive 
rates to employers. At the same time, companies cite 
increasing problems with hiring skilled professional staff, 
which could be result of a decline in quality education and 
labor emigration. The collapse of the old Soviet industrial 
sector in this country during the 1990s resulted in large 
numbers of Azerbaijanis becoming unemployed or underemployed. 
Government sources estimate the rate of unemployment at seven 
percent, but other sources quote up to twenty percent or 
more, with underemployment much higher.  The Government has 
announced plans to increase the minimum monthly wage 
increased from AZN 40 to AZN 60 in 2008.  A Labor Code that 
took effect in 1999 regulates labor relations.  The workweek 
is generally forty hours, the right to strike exists, and 
industrial strikes occur occasionally.  Azerbaijan is a 
member of the International Labor Organization and has 
ratified more than 50 ILO Conventions.  Azerbaijan is 
currently engaged with the World Bank in a program to reform 
the state pension system. 
 
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A.11.e. FOREIGN TRADE ZONES/FREE PORTS 
-------------------------------------- 
 
¶45. Although the government announced in 2003 its intention 
to create special economic zones, there are currently no 
foreign trade zones or free ports operating. The Ministry of 
Economic Development has announced plans to create a special 
economic zone near the new port to be completed in 2012. The 
Ministry of Communication and Information Technologies has 
conducted a feasibility study to create Regional Innovation 
Zones with an aim to boost development of the sector and to 
turn Azerbaijan into a regional information and communication 
technology hub. 
 
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A.11.f. FOREIGN DIRECT INVESTMENT STATISTICS 
-------------------------------------------- 
 
¶46. Below numbers are provided by the State Statistical 
Committee of Azerbaijan. 
 
Investments (million USD) 
                         2004        2005       2006     2007 
Total investments:      5922.7      6669.6    8137.8      N/A 
Foreign investments:    4575.5      4444.3    5052.8   5160.0 
Domestic investments:   1347.2      2225.3    3085.0      N/A 
 
FDI (million USD) 
 
                         2004       2005        2006     2007* 
Total                  4575.5     4444.3      5052.8   5160.0 
Foreign companies 
   and joint ventures   104.2      230.5       368.4    276.9 
Turkey                   80.1       96.2       136.6     78.8 
USA                       8.4       24.8        70.0     48.1 
 
Iran                      N/A        1.2        17.5      2.8 
Germany                   2.1       21.5        17.4     19.5 
Russia                    1.8        5.1         4.6      9.6 
United Kingdom            4.2       39.5        39.1     70.5 
UAE                       4.4        5.7        18.3     10.2 
France                    2.2        2.6        11.1      4.0 
China                     N/A        0.2         1.3      N/A 
Italy                     N/A        4.6         2.8      7.0 
 
NOTE: 2007 data is January-September 2007. 
 
¶47. Major Foreign Investors: 
Significant foreign investors in the energy sector include 
BP, Unocal, ExxonMobil, Devon Energy (Pennzoil), TPAO, 
Statoil, Lukoil, Itochu, Agip, ChevronTexaco, ENI, 
Halliburton, Schlumberger, Kvaerner, and Aker Maritime 
(Technip-Coflexip). Significant non-energy investments 
include Garadagh Cement, Castel (brewery), Coca Cola, Pepsi 
Cola, Azercell (mobile telephony), Bakcell (mobile 
 
BAKU 00000071  010 OF 010 
 
 
telephony), Azerfon (mobile telephony), and Hyatt Hotels 
Baku. 
DERSE