VZCZCXYZ0000
RR RUEHWEB

DE RUEHKB #0051/01 0251312
ZNR UUUUU ZZH
R 251312Z JAN 10
FM AMEMBASSY BAKU
TO RUEHC/SECSTATE WASHDC 2289
INFO RUCPDOC/USDOC WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RUEHMZ/EUROPEAN POLITICAL COLLECTIVE

UNCLAS BAKU 000051 
 
DEPT FOR EB/IFD/OIA 
DEPT PASS TO TREASURY, COMMERCE, USTR 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: EINV EFIN ETRD ELAB KTDB PGOV USTR OPIC AJ
SUBJECT: AZERBAIJAN - INVESTMENT CLIMATE STATEMENT 2010 
 
REF:  09 STATE 124006 
 
¶1.  This cable contains Post's Investment Climate Statement for 2010 
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 Investment 
A.10. Competition from State Owned Enterprises 
A.11. Corporate Social Responsibility 
A.12. Political Violence 
A.13. Corruption 
A.14. Bilateral Investment Agreements 
A.15. OPIC and Other Investment Insurance 
A.16. Labor 
A.17. Foreign Trade Zones/Free Trade Zones 
A.18. Foreign Direct Investment Statistics 
 
INTRODUCTION 
------------ 
 
¶2.  Azerbaijan's strategic development of its oil and gas resources 
continues to drive the country's economic growth, and keeps this 
country of barely nine million people at the forefront of world 
energy security discussions.  Unfortunately corruption, lack of 
transparency, politically connected economic monopolies, and 
cronyism remain significant obstacles to economic progress, 
hindering both domestic as well as foreign investment.  The nearly 
two decade-long,  and as yet unresolved, conflict with Armenia, 
which left the country with over 700,000 refugees and internally 
displaced persons (IDPs) to care for, has also been a notable drain 
on public coffers. 
 
¶3.  2009 once again confirmed the Azerbaijani economy's deep 
dependence on the global prices of oil, its main export commodity, 
and attendant market vagaries.   The global economic crisis 
negatively affected both the opportunities and mood of emerging and 
established Azerbaijani businesses, though the country as a whole, 
with limited foreign debt and a general lack of integration with the 
global financial regime, largely escaped a serious impact.  The 
financial and construction sectors suffered losses, but economic 
growth in real terms continued at a rather strong rate of over 9 
percent.  Fortunately, wide-scale anti-crisis measures and direct 
monetary injections by the Central Bank of Azerbaijan (CBA) helped 
to prevent a failure of the banking system; however, the insurance, 
securities and leasing markets were hit hard. 
 
¶4.  Sharp decreases in Azerbaijan's GDP growth rates, which reached 
25-30 percent in recent years, were certainly noticed, but caused 
different responses from analysts and investors.  Moody's Investor 
Service did not change Azerbaijan's ratings, but decreased the 
forecast on them from Positive to Stable. Fitch Ratings merely 
confirmed previous ratings, while Standard & Poor's changed its 
forecast from Stable to Positive.  Foreign investments decreased 
significantly, mainly because of a slow period in new projects 
related to oil and gas.   Due to increasing resource constraints, 
from decreases in both foreign investment and traditional budgetary 
inputs, Azerbaijan has begun to increase its foreign debt.  This 
debt grew to 3.33 billion USD, an increase of eleven per cent in the 
first nine months of 2009.  Foreign debt now comprises a relatively 
modest 8.7 per cent of Azerbaijan's Gross Domestic Product (GDP), 
and investment project credits made up 90 per cent of the external 
debt.  These credits, also financed by the state budget, helped 
maintain a certain level of business activity in Azerbaijan's 
domestic economy. 
 
¶5.  Azerbaijan's revenues failed to meet state budget projections 
because profit tax incomes were down significantly for the first 
half of the year.  The state budget is normally buttressed by direct 
allotments from the State Oil Fund, up to 50 per cent some years. 
However, receiving only one quarter of the forecast revenues from 
the country's largest sector, oil, which reportedly makes up nearly 
65 per cent of the budget's income, had a strong negative effect. 
Budget incomes were 50 per cent less than projected for H1, 2009. 
The situation began to improve in H2, but experts surmise that full 
income and expenditure forecasts will not be reached.  Also, in 
spite of the global financial crisis, Azerbaijan's strategic 
currency reserves, held by the State Oil Fund and the Central Bank, 
increased to 19.1 billion USD during the year, exceeding the January 
1, 2009 projection of 18.55 billion USD. 
¶6.  Despite public presidential statements promising focused support 
for the agriculture, tourism and telecommunications sectors, 
Azerbaijan's dependence on the oil and gas sector increased.  The 
sector's share in Azerbaijan's industrial production reached 75 per 
cent, an increase of greater than 11.1 per cent.    Recently, the 
Azerbaijani President acknowledged that national economic 
development would depend on oil and gas and not on the non-oil 
sector for the next 10-20 years.  Therefore, in order to decrease 
economic risk, the government of Azerbaijan (GOAJ) intends to manage 
hydrocarbon extraction uniformly until 2020.  The non-oil sector 
strongly diminished, with a surplus of only 1.1 per cent in October 
against 13.9 per cent in February and March, when it seemed the 
non-oil sector might be able to rescue the entire economy. 
 
¶7.  For the first 11 months of 2009, 6.44 billion manat (AZN) was 
invested the Azerbaijan economy from all sources of financing.  This 
was down 18.8 per cent against the same period in 2008.  Local 
investments totaled 5.163 billion AZN or 80.1 per cent of all 
investments during this period, almost four times greater than the 
amount of foreign capital invested in the country's economy during 
those same 11 months.  Local investments decreased by 16.5 per cent 
against the same period in 2008.  Foreign investments reduced by 
37.2 per cent and totaled 1.281 billion AZN. The majority of 
domestic investments, 69.3 per cent, fell to the state sector.  The 
state budget for 2009 allocated 4.718 billion AZN for investment 
purposes, of which only 2.131 billion AZN was used during the first 
11 months of the year. 
 
¶8.  So how does the GOAJ manage to continue to support a constantly 
"growing" economy?  The answer lies in its reliance on enhancements 
from the State Oil Fund of Azerbaijan (SOFAZ), assets f which 
totaled 14.2 billion USD in reserves as f October 31, 2009.  Annual 
transfers from SOFAZto the state budget are significant, but the 
GOAJ has stipulated that such transfers not exceed 50 per cent of 
SOFAZ's accumulated funds, while the rest be preserved as a social 
"safety net".  The GOAJ is encouraged in its fiscal policies by the 
positive results of its efforts to protect the stability of the 
manat, the high level of foreign reserves, the relatively low level 
of foreign debt and increasing export-related incomes against the 
backdrop of recovering oil and gas prices. 
 
¶9.  The search for new exports Azerbaijan could offer to the world 
is still extremely passive.   Sometimes this search for new exports 
is rather unclear or surprising, such as the production of pianos, 
badly assembled machines, or even the production of ostrich meat. 
Late in 2009, the GOAJ also stated its' intention to encourage 
industrial projects supporting the oil and gas sector.  Related 
projects in the works include a methanol production plant and the 
construction of a shipyard in Baku.  Both projects are primarily 
aimed at producing products for export.   In the first, a private 
company will lead the project, estimated to cost over1.1 billion 
AZN.  Construction on the factory began in 2007 and it is now 50 per 
cent complete.  While the EBRD is stated to support this project, 
the first credit input of 120 million USD was received without a 
guarantee from EBRD.  It is estimated that 30 million USD will be 
allotted to a quasi-joint-stock fund, where EBRD will most likely 
participate.   Former UK Prime Minister Tony Blair, attended a 
signing ceremony for the enterprise in the fall of 2009.  As for the 
shipyard, SOCAR has partnered with offshore and marine giant Keppel, 
which will have a 10 per cent stake in the venture. 
 
¶10.  Another hindrance to foreign direct investment is the 
difficulty of established Azeri businesses to adapt to standard 
investor-friendly practices, such as those associated with the 
concept of corporate governance.   Because of their inability or 
unwillingness to comply with the attendant disclosure and financial 
transparency required for potential shareholders to confidently 
invest, many enterprises are unable to successfully market their 
companies on Azerbaijan's nascent stock market.  There is a clear 
shortage of management expertise in the corporate sector. 
 
¶11.  Because of the volumes of money involved, the oil and gas 
sector is considered by many to be one of the greatest sources of 
corruption within the country, despite Azerbaijan being named the 
first participating country to be fully compliant with the 
Extractive Industries Transparency Initiative's (EITI) principles 
and criteria in 2009.  However, corruption continues to plague 
Azerbaijan in every economic sector and is a serious impediment to 
the country's economic development.  The Public Sector continues to 
be a common source of rent seeking, damaging both market reform 
potential and public moral.  This leads to real amalgamation of 
political and economic authorities at even the most basic 
institutional levels.  Under this system, neither commercial nor 
state powers can develop separately from each other.   Thus, losing 
political power often means losing economic power, and vice versa, 
which leads to complete suppression of free economic competition and 
stagnation of true economic development.  The struggle against 
corruption is extremely difficult under these conditions, and makes 
Azerbaijan's economic development even more problematic. 
 
¶12.  The official currency reserves of the Central Bank of 
Azerbaijan (CBA) - previously the National Bank of Azerbaijan - 
decreased from 10.8 billion USD to 5.09 billion in October.  This 
decrease occurred after an increase of 6.6 per cent was observed in 
the previous three months.  According to the CBA, its reserves have 
decreased 1.04 billion USD (17 per cent) since early 2009.  CBA 
experts attribute this decrease to the dwindling of hard-currency 
reserves in Azerbaijan's commercial banks, the expenses of 
maintaining the manat's convertibility rate, and with the direct 
support of Azerbaijan's economy by the CBA that started in H2 of 
¶2009. 
 
¶13.  According to the Heritage Foundation's 2010 Economic Freedom 
Index, Azerbaijan's economic freedom score is 58.8, making its 
economy the 96th freest of the 179 countries ranked.  Its overall 
score is 0.8 points higher than last year, reflecting an improvement 
in investment freedom offset by modest declines in several other 
factors.  Azerbaijan is ranked 16th out of 41 countries in the 
Asia-Pacific region, and its overall score is above the regional 
average but just below the world average. 
 
A.1  Openness to Foreign Investment 
------------------------------ 
 
¶14.  The GOAJ 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. 
However, government bureaucracy, weak legal institutions and 
predatory behavior by politically connected monopolistic interests 
continue to hinder investment outside of the energy sector.  The 
application of the "single window" principle to Azerbaijan's Customs 
Service in January 2009 did not improve the country's rating in the 
World Bank's Doing Business Report for 2010.  Azerbaijan even 
depreciated a step on the International Trade Management rating and 
became 177 of the 183 countries investigated. 
 
¶15.  The Law on Protection of Foreign Investments permits foreign 
direct investment (FDI) in any activity open to a national investor 
unless otherwise prohibited by law.  Foreign investors can 
participate, according to the legislation, in privatization of state 
and municipal properties, as well as in properties with unfinished 
construction.  In Azerbaijan, foreign investments have complete and 
unreserved legal protection granted by this law, other laws and 
international contracts.  The Law on Protection of Foreign 
Investments permits foreign direct investment in most sectors. 
Prohibited areas include those relating to national security and 
defense, and the government carefully controls other key sectors, 
such as energy and communications.  Non-transparent, arbitrary, and 
corrupt government bureaucracy; weak legal institutions; and 
predatory behavior by politically connected monopolistic interests 
have severely hindered investment outside of the energy sector.  The 
law provides that Azerbaijan will treat foreign investors in a 
manner "not less favored" than the treatment accorded to local 
investors and allows repatriation of profits, revenues, and other 
investment-related funds as long as applicable taxes have been paid. 
 Azerbaijan regulates most foreign exchange and capital 
transactions.  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.  Foreign 
investors are legally entitled to adequate compensation. 
 
¶16.  Azerbaijan is not yet a member of the World Trade Organization 
(WTO), but the GOAJ, with much international technical assistance, 
has been working to amend existing legislation in order to accede. 
The progress made in 2008 to achieve its rank as the World Bank's 
"Doing Business 2009" number one reformer ranking, and the adoption 
of many WTO-compliant legal reforms have been a visible result of 
the GOAJ's desire to accede to the WTO. The Ministry of Economic 
Development has been tasked to lead the WTO 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 to 
attract investment to the non-energy sector.  At present, however, 
efforts to improve the practical business environment are yet to be 
realized and Azerbaijan remains a challenging market in which to do 
business. 
 
¶17.  A "one-stop shop" system was applied at the State Migration 
Service beginning July 1, 2009.   According to a Presidential Decree 
dated March 4, 2009, foreigners and people without citizenship 
arriving in Azerbaijan will be granted legal residence and work 
permits according to the single window principle within 7 days of 
application. The fee to acquire a one-year license for a migrant 
worker is equal to 1000 AZN (approximately 1250 USD). 
¶18.  Under Azerbaijani law, foreign investors may participate in the 
Azerbaijan market through joint ventures with local companies, or by 
establishing subsidiaries wholly owned by foreign investors, as well 
as through 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. 
 
¶19.  While the GOAJ 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 this step is required only to determine that the 
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 or other illicit payments when attempting to register their 
enterprises. 
 
A.2  Conversion and Transfer Policies 
------------------------------------ 
 
¶20.  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. 
 
¶21.  Since 2001, the CBA has required that cash transactions be 
conducted in Azerbaijani manatsThe 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. 
 
¶22.  A bill on non-bank lending agencies passed in Parliament on 25 
December 2009, which will considerably improve the accessibility of 
financial services for the population and entrepreneurs.  The State 
Committee for Securities continues to try to create a full-scale 
market of trading at the stock exchange.  Approximately 20 companies 
that have applied for a listing on the Baku Stock Exchange (BSE) 
should appear in the stock market by the middle of 2010.    The 
State Committee for Securities is also looking for new financial 
tools that could be introduced in the market, especially, debt 
conversion bonds.  The value of deals with corporate bonds, state 
bonds and non-investment securities has increased this year. 
Mortgage bonds have also helped to invigorate the market.  The bonds 
of 2009 have been floaed almost completely (44 million AZN of the 
55 million AZN).  The Azerbaijan Mortgage Fund can issue bonds 
totaling at least 100 million AZN. 
 
A.3  Expropriation and Compensation 
------------------------------- 
 
¶23.  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 the 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 
----------------------- 
 
¶24.  Disputes or disagreements arising between foreign investors and 
enterprises with foreign investment; state bodies of the Azerbaijan 
Republic; or enterprises, public organizations and other legal 
entities of the Azerbaijan Republic are to be settled in Law Courts 
of the Azerbaijan Republic or, on agreement between the Parties, in 
a Court of Arbitration, including those abroad.  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, easily intimidated or bought off; 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 basic civil legislation. 
 
¶25.  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 local legislation or public policy, and if 
reciprocity exists. 
 
¶26.  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 continues 
to work directly with the Ministries of Economic Development and 
Justice to promote a legal/regulatory reform of the 
bankruptcy/business closure system. 
 
A.5  Performance Requirements and Incentives 
-------------------------------- 
 
¶27.  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 was created and passed by Parliament on 25 
December 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 certain state monopolies, there is 
no requirement that nationals own shares in enterprises. Investors 
in PSAs assume obligations and requirements as provided within the 
PSA. 
 
¶28.  There are currently no legal requirements for employment of 
host country nationals, though this policy may be under review by 
parliament.  Employers wishing to hire foreign workers in Azerbaijan 
must obtain a license from the Ministry of Labor.  Foreigners who 
wish to work in Azerbaijan must register with local authorities at 
their place of residence and obtain work permits from the Ministry 
of Labor.  Heads of representative offices and branches of foreign 
legal entities and their deputies do not require work permits, 
because they are not considered migrant laborers.  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 exist opportunities for confusion and 
corruption. 
 
¶29.  As of July 1, 2009 Azerbaijan began applying "one window" 
principle to the State Migration Service; however, reports of the 
efficacy of the new system are varied. 
 
A.6  Right to Private Ownership and Establishment 
------------------------- 
 
¶30.  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. 
 
¶31.  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 could significantly strengthen creditor 
rights, and improve the transparency and fluidity with which markets 
for real and moveable property function.  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 cannot own, land. 
 
A.7  Protection of Property Rights 
-------------------------- 
 
¶32.  Azerbaijan's judiciary is corrupt and inefficient and does not 
function independently of the executive.  The poor quality, 
reliability, and transparency of governance, as well as regulatory 
abuse and poor contract enforcement, significantly impede the 
ability of many companies to do business.  Politically connected 
business interests benefit from their control of lucrative sectors. 
Amendments to the Civil Code adopted in 2007 that permit the 
authorities to forcibly purchase property are likely to create 
additional opportunities for the abuse of property rights. 
¶33.  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 the processing of residential real estate transactions 
through a network of notary offices under the Ministry of Justice. 
 
¶34.  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 also 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. 
 
¶35.  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 extremely limited enforcement of intellectual property 
rights.  Pirated software and movies, as well as knock-off clothing 
and luxury items, are widely available in Azerbaijan; whereas, in 
contrast, legitimate movies are not.  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, particularly if 
enforced. 
 
A.8  Transparency of the Regulatory System 
----------------------------- 
 
¶36.  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. 
 
¶37.  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, the 
World Bank (WB) and the International Finance Corporation (IFC). 
This is reflected in the well published 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.  The improvements made generally 
benefit local small businesses more than they benefit large foreign 
investors.  Significant areas for improvement remain, including 
customs operations, business closure, and business permitting 
systems.  And while Azerbaijan maintained its ranking, it did not 
improve significantly from the 2009 to the 2010 report. 
 
¶38.  Previously, Azerbaijan 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. 
 
¶39.  Moore Stephens published a new report covering the Extractive 
Industry Transparency Initiative (EITI) in Azerbaijan in December, 
¶2009.  According to the report, non-resident companies operating in 
Azerbaijan extracted 92.8 million barrels of oil and 2,086 million 
cubic meters of natural gas in H1 of 2009.  Those foreign companies 
paid a total enterprise profit tax of 133.061 million AZN and 
transit fees of 6.2 million AZN. The Local companies paid royalties 
of 40.6 million AZN, a total enterprise profit tax of 136.1 million 
AZN and other taxes of 46.3 million AZN.  The foreign companies 
contributed 62 million USD and 356 million AZN to Azerbaijan's 
government in the period reported.  In Transparency International's 
annual report on corruption perception in the world, Azerbaijan 
ranked 143rd on the list, while neighboring Armenia and Georgia 
ranked 120th and 66th, respectively.  In 2008 Azerbaijan ranked 
158th.  The most corrupt spheres in Azerbaijan are considered to be 
law enforcement agencies, organs of executive power, medicine, and 
education. 
 
A.9  Efficient Capital Markets and Portfolio Investment 
------------------------ 
 
¶40.  As of December 2009, there were 46 banks in Azerbaijan. The 
banking sector is dominated by the International Bank of Azerbaijan 
(IBA), which controls more than 50 per cent of the banking sector. 
Foreign ownership in the banking sector is limited to 50 per cent on 
an aggregate basis.  There are 23 banks with foreign capital. 
According to the CBA, as of December 2009, total assets of the 
Azerbaijan banking system were 13.9 billion USD.  Banks' assets rose 
by 12.7 per cent year-on-year.  As of December 1, 2009 the volume of 
individual deposits in the Azerbaijani banks equaled 2,251,700,000 
AZN.   In 2007 Azerbaijan established the National Depository 
Insurance Fund, which, as of December 2000, had 42 banking members. 
The average cost of credit ranges from 20 to 24 per cent, and the 
maximum interest rate on protected deposits is also quite high (15 
per cent). The amount of guaranteed secure deposits has also 
increased to 30,000 AZN. 
 
¶41.  In early 2009 the Central Bank of Azerbaijan's (CBA) took 
unprecedented measures (as did many other countries) to support the 
banking system, which began to recover in April.   A variety of 
methods were used, including decreasing the refinancing rate for a 
short time to 2 per cent, decreasing the mandatory reserve rates and 
providing direct credit support for several banks, including two 
larger banks.  After stabilizing the bank system, the CBA began to 
directly financing the real economic sector under state guarantees 
at the GOAJ's request.  For the first time the CBA had the right to 
provide long-term credits in AZN and hard currency. The measures 
taken to maintain the economy and banks' liquidity (CBA provided 
them with over 1.8 billion AZN) helped to sustain economic growth in 
Azerbaijan.  After brief reduction in January 2009, the CBA's 
official currency reserves grew by 88.2 million USD (1.7 per cent) 
in November, totally 5.18 billion USD.   Nevertheless this was 955.9 
million USD (15.6 per cent) less than in early 2009.  About 
one-third of these funds were spent on currency interventions. The 
rest of the losses resulted from a decrease in the commercial banks' 
currency reserves created on external liabilities and kept in the 
CBA.  The average annual inflation for the first 11 months of 2009 
against the same period of 2008 was 1.5 per cent. 
 
¶42.  Previously, 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 still do 
not carry POS terminals or, if they do, avoid running card 
transactions to minimize taxation. The Baku Interbank Currency 
Exchange (BICEX) carries out inter-bank auctions of foreign exchange 
and Treasury bill auctions are conducted by the Baku Stock Exchange, 
established in 2000.   Overall the securities market remains at a 
very nascent stage of development.  In June 2009, Fitch Ratings 
affirmed Azerbaijan's long-term issuer default ratings as BB+ with a 
stable outlook.  In December, Standard and Poor's announced an 
upgrade to its outlook on Azerbaijan from stable to positive, while 
maintaining its long- and short-term sovereign credit ratings at BB 
and B, respectively.  In June 2009 Moody's Investor Service lowered 
its outlook on Azerbaijan's Ba1 issuer rating from positive to 
stable.   Moody's Weighted Average Bank Financial Strength Rating 
for Azerbaijan remained "E+". 
 
A.10  Competition from State Owned Enterprises (SOEs) 
--------------------- 
 
¶43.  Private enterprises are not generally allowed to compete with 
public enterprises in strategically important fields, such as oil 
and gas production/export, although there are some small private 
companies operating in this sector.  Other non-competitive fields 
include electricity generation (Azerenerji) and water supply 
(Azersu). 
¶44.  There is no corporate governance structure in any State owned 
enterprises, with the exception of the State Oil Fund of Azerbaijan 
(SOFAZ).  SOFAZ operates as a sovereign wealth fund and Members of 
the Supervisory Board are appointed by the President of Azerbaijan. 
Board members are representatives of state bodies and civil society. 
 There are seven members on the supervisory board, including two 
members of the Milli Majilis (parliament), who are nominated by the 
Speaker of Parliament.  The Executive Director, Shahmar Movsumov, 
was appointed by the President on May 15, 2006.  He is the legal 
representative of the Fund, and is responsible for appointing 
employees, managing the Fund's assets, and preparing the Fund's 
annual budget.  In 2010 SOFAZ will transfer roughly 4.91 billion 
manat to the budget.  It is also charged with funding several social 
welfare projects including construction of the Oguz-Gabala Water 
Supply System (200 million AZN), reconstruction of the 
Samur-Absheron Irrigation System (110 million AZN), improving the 
lives of refugees and IDPs(80 million AZN), construction of the 
Baku-Tbilisi-Kars Railway (80 million AZN) and a youth education 
program which subsidizes study abroad (10 million AZN). 
 
¶45.  SOFAZ, as a member of the Extractive Industries Transparency 
Initiative (EITI), is required to publish an annual report and 
submit its books for independent audit.  Other SOEs are also 
required to fulfill these obligations, but only a very few are made 
available to the public. 
 
 
A.11  Corporate Social Responsibility 
------------------------ 
 
¶46.  The notion of Corporate Social Responsibility is a relatively 
new concept for Azerbaijani companies.  While some major holdings 
companies publish a CSR section on their websites, these sections 
are by and large empty.  Local companies are still learning about 
CSR and what it means for them; many do not yet differentiate CSR 
from charitable donations. Major local and international energy and 
telecom companies (BP, Azercell, Azerfon etc.) have a better grasp 
of CSR and are generally regarded quite well. 
 
A.12  Political Violence 
------------------------ 
 
¶47.  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 of 
conflict in Gaza in January 2009. 
 
A.13  Corruption 
---------------- 
 
¶48.  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 in implementing 
this law.  The Azerbaijani government recognizes that corruption is 
a problem, although it frequently disagrees with the results of 
international rankings produced by groups such as Transparency 
International.  Popular opinions identify the State Customs 
Committee as the institution of greatest concern to 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. 
 
¶49.  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 
Azerbaijan Airlines (AZAL), have protected their commercial 
interests by blocking 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. 
 
¶50.  In 2009 Azerbaijan became the first participating country to 
achieve "fully compliant" status in Extractive Industries 
Transparency Initative (EITI), which it joined in 2004 to promotemore transparent management of oil revenues.  As prt of its 
obligation under this program, Azerbaijan issues annual and 
semi-annual reports and released its 11th EITI report on 14 December 
2009 covering the period Jan-Jun 2009. 
 
¶51.  Over the past few years the GOAJ has spent large amounts on 
developing Azerbaijan's road-transport system; however the absence 
of proper financial controls opens broad opportunities for 
corruption in implementing these projects.  This was the core 
opinion expressed by the EITI Public Unions Coalition, a union of 
social watchdog NGO's, at their December 2009 conference entitled: 
"Prospering Baku: how much does it cost us?"   Local economics 
expert, Gubad Ibadoglu stated in his report that the financing of 
major projects from the state budget do not follow standard best 
practices for cost benefit analyses.  He pointed out that 
contractors for these lucrative projects are not selected through 
tenders; they are appointed.  He also noted that these large social 
investment projects are not even monitored by the state Accounting 
services.  Such projects include: the reconstruction and expansion 
of Heydar Aliyev avenue (estimated  to value over  40,691,000 AZN), 
a new road from Azizbekov metro station to the international airport 
(298,492 AZN), the construction of an intersection near the 
Excelsior Hotel (95,590,100 AZN) , and the construction of an 
intersection near Azizbekov metro (128,896,400 AZN).  Al Jazeera 
broadcast an intriguing report in 2009, claiming that a 
government-funded road from Baku to the airport was built at a cost 
of 23 million USD per kilometer, while a World Bank-funded road 
south of the capital was built at a cost of 1.5 USD million per 
kilometer 
 
A.14  Bilateral Investment Agreements 
--------------------------- 
 
¶52.  Azerbaijan has signed agreements on mutual protection of 
investments with 39 countries and on the avoidance of double 
taxation with 38 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).  Azerbaijan and the 
U.S. exchanged instruments of ratification on July 3, 2001, and the 
treaty entered into force on August 2, 2001. 
 
¶53.  In addition to the above agreements, 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.15  OPIC and Other Investment Insurance Programs 
--------------------------- 
 
¶54.  OPIC provided 100 million USD 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 50 million 
USD in Soros Investment Capital for projects targeted to all three 
Caucasus countries.  OPIC also disbursed a 4.6 million USD 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 Baker Oil 
Tools for a joint venture with the State Oil Company of the 
Azerbaijan Republic (SOCAR).  In 2006, OPIC provided USD 7.5 million 
to ShoreBank International Ltd for SME and mortgage loan portfolio 
expansion in Azerbaijan. 
 
¶55.  In March 2004, the Export-Import Bank of the United States 
(Ex-Im Bank) provided a 19.3 million USD 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. 
 
¶56.  In December 2009, the Israel Export Insurance Corp. Ltd. 
(ASHRA) provided a project loan guarantee to Azerbaijan for the 
first time.  The Ministry of Transport of Azerbaijan announced that 
country's finance and transport ministers signed a loan agreement 
with France's BNP Paribas to reconstruct several highways in 
Azerbaijan.  The 270 million USD loan was designed to reconstruct a 
156 km section of the Baku-Shemakha-Yevlakh (M4) highway, total 
length 280 km, from Muganli-Yevlakh.  The loan was granted for 14 
years with a 4-year grace period, and will be repaid in six-month 
tranches - on 15 June and 15 December every year.  Loan rate is rate 
of 6-month LIBOR in US dollars plus a  margin of 3.5 per cent per 
annum.   70 per cent of the loan will be provided by BNP Paribas 
(189 million USD) and 15 per cent by Israel's BANK LEUMI LE ISRAEL 
B.M. and BANK HAPOALIM B.M (40.5 million USD). 
 
A.16  Labor 
----------- 
 
¶57.  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 six-seven per cent, but other sources quote up to twenty per cent 
or more, with underemployment much higher.   As of September 2008, 
the minimum monthly wage was 75 AZN (a 25 per cent increase). 
President Aliyev ratified a law on December 22, declaring the 
living-wage for 2010 to be 87 AZN.  This means there are many 
workers, including government employees whose official salaries put 
them below the poverty line.  A Labor Code that took effect in 1999 
regulates labor relations.  The workweek is generally forty hours, 
the right to strike exists, but industrial strikes are rare. 
Azerbaijan is a member of the International Labor Organization (ILO) 
and has ratified more than 50 ILO Conventions.  Azerbaijan is 
currently working with the World Bank on a program to reform the 
state pension system.  In the first 11 months of 2009, the State 
Migration Service received over 40,000 registration appeals.  About 
2,000 migrant workers were registered in Azerbaijan three years ago 
during the same period.  Most are from CIS countries such as Georgia 
and Russia, but also Turkey, Iran, the U.S., and UK.  The State 
Migration Service also receives frequent appeals from foreigners 
seeking refugee status in Azerbaijan.  Most are from Pakistan and 
Afghanistan and some are from Iran. 
 
A.17  Foreign Trade Zones/Free Ports 
----------------------- 
 
¶58.  Although the government announced in 2003 its intention to 
create special economic zones, there are currently no foreign trade 
zones or free ports operating in the country.  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 telecommunications sector and to turn 
Azerbaijan into a regional information and communication technology 
hub. 
 
¶59.  Azerbaijan's Cabinet of Ministers has approved simplified rules 
for customs controls, customs checkpoints, customs clearance of 
goods, and the crossing of vehicles and individuals at the 
boundaries of special economic zones (SEZ).  According to these 
rules, customs checkpoints may be established in the SEZ by the 
State Customs Committee unless otherwise provided for customs 
registration by the law.  For these purposes, electronic control and 
declarations may be used.  Under the new rules, goods imported into 
and exported from the SEZ are not subject to import duties and VAT, 
or customs duties and taxes (excluding excise duty). 
 
A.18  Foreign Direct Investment Statistics 
------------------------- 
 
¶60.  Below numbers are the latest available from the State 
Statistical Committee of Azerbaijan: 
Investments (million USD)2004200520062007    2008TOTAL 
INVESTMENTS5922.77118.58300.412066.1  15192.1Foreign 
Investment4575.54893.25052.86674.3   6847.4Domestic 
847.4 
Domestic 
Investments1347.22225.33247.65391.8    8344.7 
 
Foreign Investments (mln. US dollars) 
       2000   2003   2004   2005   2006   2007   2008 
 
Total For. Inv.  927.0 3371.0 4575.5 4893.2 5052.8 6674.3 6847.4 
of which: 
 
Financial Credits 262.9 238.3  293.0  698.4  983.5 1576.6 2357.9 
 
In Oil Industry  546.1 2972.4 4088.1 3799.9 3422.3 4003.3 3350.7 
 
Bonus of Oil      -      58.6   21.6     1.0   17.0  68.2    3.5 
 
Foreign Co.s 
and JVs       118   45.4   104.2   230.5  368.4  439.1  494.1 
 
of which: 
 
Turkey  31.6  17.1    80.1    96.2  136.6  109.2  145.2 
USA        11.2   4.9     8.4    24.8   70.0   78.0   87.9 
Iran               2.9   -       -       1.2   17.5    4.6     - 
Germany        1.7   -       2.1    21.5   17.4   22.9   48.2 
Russia             -     1.2     1.8     5.1   4.6    10.7   5.8 
U.K.               6.8   9.0     4.2    39.5  39.1    80.0  89.9 
UAE                2.8   4.4     4.4     5.7  18.3    12.3  38.5 
Switzerland        -      -      -       0.5   2.7     3.5   3.7 
3.7 
France            39.3   2.2     2.2     2.6  11.1     4.4    - 
Cyprus             -     -       -       0.2   5.4    13.2   2.2 
China              -      -       -      0.2   1.3     1.2   8.1 
Italy              -     -        -      4.6   2.8    14.0   2.0 
Pakistan           -      -      -       -     3.1     -      - 
Japan             16.4    -      -      -      -       -     0.4 
Other Countries  5.3   6.6     1.0    28.4  38.5    85.1  62.2 
Other Investments -     56.3    68.6   163.4 261.6   587.1 641.2 
 
 
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.