VZCZCXRO1309
RR RUEHLN RUEHSK RUEHVK RUEHYG
DE RUEHKB #0040/01 0211011
ZNR UUUUU ZZH
R 211011Z JAN 09
FM AMEMBASSY BAKU
TO RUEHC/SECSTATE WASHDC 0636
INFO RUCPDOC/USDOC WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RUEHMZ/EUROPEAN POLITICAL COLLECTIVE
RUCNCIS/CIS COLLECTIVE

UNCLAS SECTION 01 OF 08 BAKU 000040 
 
DEPT FOR EEB/IFD/OIA, USTR 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: EINV EFIN ETRD ELAB KTDB AJ
SUBJECT: AZERBAIJAN - INVESTMENT CLIMATE STATEMENT 2009 
 
REF:  08 STATE 123907 
 
¶1.  This cable contains Post's Investment Climate Statement for 2009 
and 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. Corruption 
A.12. Bilateral Investment Agreements 
A.13. OPIC and Other Investment Insurance 
A.14. Labor 
A.15. Foreign Trade Zones/Free Ports 
A.16. Foreign Direct Investment Statistics 
 
INTRODUCTION 
------------ 
 
¶2.  Azerbaijan's ongoing transition to a market economy presents 
both significant prospects and challenges.  Over the past decad, 
Azerbaijan has successfully executed a strateg to develop its oil 
and gas resources and is nowbenefiting from the receipt of energy 
revenue inlows.  Much work remains to be done, however, to spead 
the wealth and produce attendant prosperity or the country's 
population of eight and a half illion.  This includes improving 
governance and curbing corruption, diversifying the economy through 
domestic and foreign investment, strengthening public expenditure 
planning, and creating jobs.  The long running and unresolved 
conflict with Armenia over Nagorno-Karabakh has left Azerbaijan with 
approximately 700,000 refugees and internally displaced persons 
(IDPs) for more than a decade and constitutes an enormous burden on 
economic and democratic development. 
 
¶3.  Azerbaijan's macroeconomic situation continued to improve in 
¶2008.  According to the National Bank, GDP exceeded USD 40 billion 
by year-end 2008, largely driven by growth in the energy sector. 
The economy was expected to grow in real terms in 2008 by about 13 
percent, despite relatively high inflation, a second-half decline in 
oil production and export prices, and the dampening effects of a 
weakened global economy.  Growing inflation has become a public and 
private sector concern; official statistics will likely show an 
inflation rate in the range of 15-20% for 2008.  Independent sources 
quote increased public spending and import monopolies as main 
drivers of inflation. 
 
¶4.  The national currency, the manat, appreciated less than one 
percent in real terms against the U.S. dollar in 2008. The nominal 
exchange rate was approximately 1 USD = 0.80 AZN as of January 1, 
¶2009.  In response to the global financial crisis and a decline in 
confidence in financial sector stability, the National Bank 
abandoned its market basket policy, adopted earlier in the year, and 
began re-pegging to the dollar.  The market basket system was 
designed to achieve gradual nominal appreciation against a basket of 
relevant currencies, but was temporarily suspended due to the major 
volatility in the exchange rate between the two currencies in the 
basket, the dollar and the euro.  The National Bank's currency 
reserves grew 75.6 percent and reached USD 3.5 billion as of 
December 2008.  The State Oil Fund continues to support 
macroeconomic stability, transferred over 5.5 billion USD to the 
state budget in 2008 and is slated to provide over 7 billion USD in 
support of the 2009 budget. The Fund's reserves are estimated to 
exceed 14 billion USD. 
 
¶5.  Since the completion of the Baku-Tbilisi pipeline in 2006, oil 
export revenues have expanded dramatically and the energy sector has 
shifted from infrastructure construction to service provision and 
exploration.  Despite offshore technical problems and the disruption 
of oil transportation through Georgia in August, the BTC pipeline 
delivered approximately 700,000 barrels of oil per day from 
Azerbaijan's offshore Azeri-Chirag-Gunashli (ACG) field at year's 
end, down from a peak of approximately 950,000 earlier in the year. 
In addition, the South Caucasus pipeline (SCP) conveyed 9.5 billion 
cubic meters of natural gas from the Shah Deniz field to Georgia and 
Turkey.  Azerbaijan has taken significant steps to implement the 
Extractive Industries Transparency Initiative (EITI), which promotes 
oil revenue transparency, and is taking steps to become the first 
country to be rated "fully compliant" with EITI norms. 
 
¶6.  Azerbaijan continues to cooperate with international financial 
institutions in its reform efforts, and was named the "Number One" 
 
BAKU 00000040  002 OF 008 
 
 
reformer in the World Bank's Doing Business 2009 Report.   It is 
also receiving economic reform and financial development sector 
support as a participant in the EU's "Good Neighbor" Program. 
Azerbaijan is not yet a member of the WTO, but is working closely 
with USAID to develop WTO-consistent legal and regulatory reforms, 
and has made notable progress toward its accession goal.  The United 
States designated Azerbaijan as a beneficiary developing country for 
the purposes of the Generalized System of Preferences program in 
late 2008. 
 
¶7.  In 2005 World Bank estimates showed that 24 percent of the 
population lived in poverty, with slightly more than nine percent in 
extreme poverty.  Government of Azerbaijan statistics state that 
poverty was reduced to 20.8 percent in 2006 and 16 percent in 2007 
despite significant price hikes for basic items - including fuel, 
water, electricity and public transportation, which unavoidably led 
to across-the-board price increases on consumer goods and services 
and would deteriorate the poverty numbers. In 2008 the World Bank 
conducted its own household survey-based poverty assessment, the 
results of which are expected to be made available in early 2009. 
Despite continued strong economic growth (real GDP growth was over 
30 percent from 2006 to 2007, and is estimated to be about 13 
percent for 2008), poverty remains particularly acute in 
Azerbaijan's regions, and developing an investment climate which 
encourages private investment and increases employment opportunities 
in the regions remains crucial for Azerbaijani policymakers. 
 
¶8.  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. Although Azerbaijan adopted a new 
and much-anticipated anti-corruption law in 2005 and a National 
Strategy on Increasing Transparency in Combating Corruption, as well 
as an ethics code for civil servants in 2007, little progress in 
implementing these measures has been made. 
 
A.1. OPENNESS TO FOREIGN INVESTMENT 
----------------- 
 
¶9.  The Government of Azerbaijan officially welcomes foreign direct 
investment, realizing 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.  Government bureaucracy, weak legal institutions and 
predatory behavior by politically connected monopoly interests 
continue to hinder investment outside of the energy sector. 
Azerbaijan made an unprecedented improvement in the World Bank 2009 
"Doing Business" Report, jumping 64 places from 97 to 33, garnering 
it the designation of "Number One" Reformer for the year.  This 
improvement is primarily due to the creation of a one-stop-shop for 
business registration which halved the time, cost and number of 
procedures to start up a business.  Azerbaijan made noteworthy 
advances in seven of the ten criteria covered by the report, but 
still has room for improvement in the areas of Trading Across 
Borders, Construction Permits, and Closing a Business. 
 
¶10.  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 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.  A new regulatory guideline on insurance also eliminated 
foreign ownership restrictions on insurance companies, and a new law 
on investments is being considered. 
 
¶11.  Azerbaijan is not yet a member of the World Trade Organization, 
but the Government, with much international technical assistance, 
has been working to amend existing legislation. The progress made to 
achieve the World Bank Doing Business report ranking, and 
deveopment of WTO-consistent legal reforms have been avisible 
result of the Government's desire to accde to the WTO.  The 
Ministry of Economic Developent has been tasked to lead the WTO 
 
BAKU 00000040  003 OF 008 
 
 
accession process, and Azerbaijan held two WTO Working Party 
Meetings in Geneva in 2008, in addition to bilateral discussions 
with USTR and the EU. 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. 
 
¶12.  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. 
 
¶13.  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. 
 
A.2. CONVERSION AND TRANSFER POLICIES 
--------------------- 
 
¶14.  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. 
 
¶15.  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. 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 
----------------- 
 
¶16.  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 
----------------------- 
 
¶17.  Dispute settlement mechanisms exist 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 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 
 
BAKU 00000040  004 OF 008 
 
 
basic civil legislation. 
 
¶18.  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. 
 
¶19.  Investment disputes have arisen in Azerbaijan when a foreign 
investor's success threatened well connected or favored local 
interests.  Reportedly, resolution of such disputes has occasionally 
involved the foreign investor acquiring a local partner with strong 
ties to influential persons.  Azerbaijan's bankruptcy law does not 
function effectively and is rarely used.  However, USAID will be 
working directly with the Ministries of Economic Development and 
Justice to promote a legal/regulatory reform of the 
bankruptcy/business closure system in 2009. 
 
A.5. PERFORMANCE REQUIREMENTS AND INCENTIVES 
------------------- 
 
¶20.  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; however a 
special economic zone law has been crafted and presented to 
Parliament and is expected to be enacted in 2009.  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. 
 
¶21.  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.  Heads of representative offices and branches of foreign 
legal entities and their deputies do not require work permits.  In 
2008, the Government introduced a work permit regime for all 
immigrant employees.  Unfortunately, due to a lack of transparency 
and printed fee schedule, there are 
 
A.6. RIGHT TO PRIVATE OWNERSHIP AND ESTABLISHMENT 
------------------------ 
 
¶22.  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 actively impeded through 
administrative barriers. 
 
¶23.  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).  New laws on collateral and cadastral law 
have been drafted which would significantly strengthen creditor 
rights, and improve the transparency and fluidity with which markets 
for real and moveable property function.  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. 
 
A.7. PROTECTION OF PROPERTY RIGHTS 
------------------------ 
 
¶24.  Secured interests in property, both movable and real, are 
technically recognized. While the Government, together with World 
 
BAKU 00000040  005 OF 008 
 
 
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. 
 
¶25.  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 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 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. 
 
¶26.  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 thereof 
resulted in Azerbaijan remaining on the U.S. Special 301 Watch List 
 from 2000 to 2005.  Improvements in IPR enforcement allowed 
Azerbaijan's removal from the list in 2006.   As part of its WTO 
accession program, Azerbaijan has recently developed a range of 
WTO-consistent IPR legal and regulatory reforms, which could 
significantly strengthen IPR rights and enforcement protections. 
 
A.8. TRANSPARENCY OF THE REGULATORY SYSTEM 
------------------ 
 
¶27.  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. 
 
¶28.  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.  In 2008, the government began a concerted 
effort to improve the transparency and predictability of the 
business regulatory environment with the assistance of USAID and the 
WB/IFC.  This is reflected in the well publish progress made in the 
World Bank's 2009 Doing Business rankings.   The major areas of 
improvement included establishing a one-stop shop for business 
registration, streamlining property registration and transfer 
procedures, automation of key tax administration processes, 
broadened coverage of the credit registry system, and improved 
corporate governance guidelines.  Significant areas for improvement 
remain, including customs operations, business closure, and business 
permitting systems; however Azerbaijan announced in fall 2008 its 
plan to establish a one-stop shop for customs entry/clearance in 
¶2009. 
 
¶29.  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 
--------------------- 
 
¶30.  As of December 2007, there were 43 banks in Azerbaijan. 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+". 
 
¶31.  According to the National Bank of Azerbaijan (NBA), as of 
December 2007, total assets of the Azerbaijan banking system were 
about 7 billion USD.  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. 
 
BAKU 00000040  006 OF 008 
 
 
 
¶32.  The NBA has taken steps to improve bank supervision, and 
reduced capital requirements in December 2008 in response to the 
global financial crisis.  A presidential decree required 
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.  Overall the securities market 
remains as a very nascent stage of development. 
 
¶33.  In November 2008, Fitch Ratings affirmed Azerbaijan's long-term 
issuer default rating as BB+ with a stable outlook.  In July 2008 
Moody's Investor Service raised its outlook on Azerbaijan's Ba1 
issuer rating from stable to positive. 
 
A.10. POLITICAL VIOLENCE 
------------------------ 
 
¶34.  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 use force to disperse unauthorized 
demonstrations or spontaneous acts of public discontent; police also 
used force to break up a peaceful protest during the January 2009 
conflict in Gaza. 
 
A.11. CORRUPTION 
------------------ 
 
¶35.  Corruption is a significant deterrent to investment in 
Azerbaijan, especially in the non-energy sector.  Laws and 
regulations that exist to combat corruption have not been 
effectively enforced.  A new anti-corruption law came into force in 
January 2005.  Under the terms of the law, a new commission has the 
authority to require full financial disclosure from government 
officials.  However, Azerbaijan made little progress on 
implementation of this law.  The Azerbaijani government recognizes 
that corruption is a problem, although it frequently disagrees with 
the results of international rankings produced by groups such as 
Transparency International.  According to Transparency 
International, the situation in Azerbaijan worsened in 2008 and the 
country ranked 157th out of 163 countries, compared to 130th in 
¶2006.  Popular opinions identify the State Customs Committee as the 
institution of greatest concern of businesses in Azerbaijan, 
followed by the Ministry of Taxation. Corruption appears most 
pervasive in the regulatory, tax and dispute settlement systems. 
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. 
 
¶36.  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. 
 
¶37.  In 2004, Azerbaijan adopted an implementation plan for the 
Extractive Industries Transparency Initiative (EITI) to promote more 
transparent management of oil revenues. 
 
A.12. BILATERAL INVESTMENT AGREEMENTS 
------------------- 
 
¶38.  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. 
 
BAKU 00000040  007 OF 008 
 
 
 
¶39.  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.13. OPIC AND OTHER INVESTMENT INSURANCE PROGRAMS 
----------------- 
 
¶40.  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. 
 
¶41.  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. 
 
A.14. LABOR 
------------- 
 
¶42.  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 60 to AZN 84 in 2009.  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. 
 
A.15. FOREIGN TRADE ZONES/FREE PORTS 
-------------------- 
 
¶43.  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 a new 
Caspian 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. 
 
A.16. FOREIGN DIRECT INVESTMENT STATISTICS 
--------------------- 
 
¶44.  Below numbers are the latest available from the State 
Statistical Committee of Azerbaijan: 
 
                    Investments (million USD) 
                           2004     2005    2006     2007 
TOTAL INVESTMENTS         5922.7   6669.6   8137.8 
Foreign Investment        4575.5   4444.3   5052.8   5160.0 
Domestic Investments      1347.2   2225.3   3085 
 
                       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      48.1 
Iran                           -       1.2      17.5     2.8 
Germany                       2.1     21.5      17.4    19.5 
Russia                        1.8      5.1       4.6     9.6 
 
BAKU 00000040  008 OF 008 
 
 
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 
Italy                          -       4.6       2.8     7.0 
 
¶45.  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 
telephony), Azerfon (mobile telephony), and Hyatt Hotels Baku. 
 
DERSE