Azerbaijani investments

Mahmud Mamed-Kuliyev
Azerbaijani Ambassador to the UK

Washed by the Caspian Sea, Azerbaijan is an ancient land with an area of over 86,600 km2 and a population of 7.5 million inhabitants. Situated at the cross-roads of East and West, Azerbaijan combines influences from both cultures.

The Azerbaijan Democratic Republic was founded on 28 May 1918. Being the first democratic republic in the East, it was occupied by the Red Army in April 1920 and incorporated into the Republic of the Soviet Union. In October 1991, after the collapse of the USSR, Azerbaijan re-established its sovereignty. This was followed by a period of political instability, but by 1993 the new leadership had managed to restore internal political stability and strengthen the sovereignty of the country.

The major political problem facing Azerbaijan today is the conflict with Armenia over the Nagarno Karabakh region, which has resulted in the occupation of 20 per cent of Azerbaijani territory and the creation of one million refugees. Azerbaijan's stance in the conflict is internationally acknowledged and supported, and the principles of a settlement based on the territorial integrity and inviolability of the frontiers of Azerbaijan have been approved by all OSCE members, the UN and many other international organisations.

The period of Azerbaijan's transition to a market economy has also resulted in the determination of a new Azerbaijani economic policy, based on the creation of a balanced, self-sustained and self-sufficient economy that is integrated into the world economy and based on market principles and the comparative advantages of the country.

Azerbaijan's principle natural resource is oil which it has been producing industrially since the turn of the century, when Azerbaijan was responsible for half of the oil production in the entire world. Azerbaijan also functioned as a main oil supplier during the Soviet period.

The overall oil reserves of the region are estimated at 200 billion barrels; there are also up to 800 billion metre3 of gas. This makes the Caspian one of the top petroleum regions in the world. In Baku on 20 September 1994, after nearly four years of negotiation, Azerbaijan signed a US$8 billion agreement with a multi-national consortium of leading oil companies led by the BP/Statoil alliance. Over the lifetime of this project alone, the total cashflow to Azerbaijan is estimated to be $94 billion.

At the time of writing, the Government of Azerbaijan has signed four more oil contracts on joint exploitation, altogether accounting for over $12 billion in investments.

Western experts and local officials anticipate that each dollar invested in petroleum will bring an additional three dollars' worth of investment into other branches of Azerbaijan's economy.

Industry is the leading sector in Azerbaijan's economy; it makes up 30 per cent of GDP. The principal industrial sectors are metallurgy (iron, aluminium, copper, bronze, etc), metal processing and machine building, building materials, light industry and food.

The Azerbaijani chemical and petrochemical industries are concentrated in Sumgait, a main industrial city, and these make up eight per cent of GDP. By comparison, these industries account for 9.6 per cent of GDP in Japan and 12 per cent in Germany.

Chemistry is one of the most promising branches of the Azerbaijani economy, based on a relatively well developed industrial sector. The major strength of this sector is its well educated, experienced and competent workforce; the major disadvantage is a lack of finance and old equipment, which is why the chemical industry is running at only 30 per cent of capacity. The United Nations Development Program is promoting the creation of an estimated $8 billion Special Economic Zone in Sumgait to speed up the development of the chemical industry and to provide more favourable conditions for foreign investors. The main chemical products produced and exported from the country are polyethylene, superphosphate, caustic soda, chlorine, various acids, sulphanol, and dichloroethane, as well as various types of vehicle tires and mechanical rubber goods, synthetic rubber and latex, polymers, etc. The country is also rich in raw materials including gold, silver, iron ore, cobalt, rock salt, clay, marble, diamond, gypsum, sand, etc.

Another important branch of industry is telecommunication. The Government is giving a high priority to the modernisation of the network since a modern system can significantly accelerate the development of the economy. A number of exchanges have already been modernised. Azerbaijan is participating in the domestic section of the project to lay a fibre optic cable between Frankfurt in Germany and Shanghai in China. A number of joint ventures have been established with companies from the United Kingdom, Sweden, Israel, USA, Turkey and others.

The network of road, rail, sea and telephone communications needs investment in order to maintain service.

Azerbaijan is at the geographical cross-roads of Europe, the Middle East and Central Asia, and foreign business is increasing rapidly; development of tourist potential either inland or on the seaside is very significant. Furthermore, being one of the most ancient places in the world, Azerbaijan has a lot of fascinating historical sites, some of which are more than two thousand years old.

The agricultural sector, with its rich potential, offers enormous opportunities for foreign companies. Azerbaijan enjoys nine different climatic zones which makes it possible to cultivate a very wide range of produce and thus potentially makes the republic self-sufficient in food as well as giving enormous export potential. This sector accounts for 36 per cent of GDP. Crops represent two thirds of agricultural production, livestock the other third. The main crops are cereals, cotton, fruit, vegetables, rice, grain, nuts, olives, and herbs. At present, cotton and tobacco are the main products which are traded for foreign currency.

At present there are more than 1.4 million hectares of arable land largely cultivated with tobacco, cotton, grapes, fruits, cereals, herbs, potatoes and other vegetables. However, the productivity of arable land is two to three times less than its potential level, due to a prevalence of outdated farm machinery and poor transport and storage facilities.

The development of agriculture and food processing is a priority; the industry is a driving force in the transition to a market economy and is an important focus for Azerbaijani exporters.

The privatisation of land has already begun and it is expected to increase rapidly. In a relatively short time, 18,000 private farms have been created. Private farms already account for 90 per cent of the total fruit crop, 85 per cent of milk production and 70 per cent of the vegetable crop.

Due to rich fauna of the Caspian Sea, fish farming and processing can be also very profitable. Several Azerbaijani enterprises are engaged in breeding valuable and productive types of fish. Azerbaijan produces about ten per cent of the world's Caspian Sea caviar and sturgeon.

All these things make Azerbaijan very attractive to foreign investments and once again confirm the importance of a favourable investment climate based on economic reforms, a programme of privatisation and a stable political situation.

The reform process was accelerated in early 1995 when price liberalisation, an ownership law, foreign currency regulation, property reform, and banking legislation were adopted. The creation of a favourable climate for investments is a fundamental aim of Government policy. The law on the protection of foreign investments adopted in 1992 determines the legal and economic principles for realising foreign investments. In addition to guaranteeing the protection of foreign investors' rights, the law is aimed at the attraction and efficient use of a range of positive foreign influences including materials, modern equipment and technology, managerial experience and financial resources.

Azerbaijan legislation guarantees foreign investors the following: a free transfer of profits; a two year tax holiday if the share of the partner in the joint venture is 30 per cent or more and the joint venture is involved in material production; a fixed 25 per cent profit tax on joint ventures with a foreign share of 30 per cent or more (this profit tax drops further to ten per cent for operations located in mountainous areas); that profits used for the formation of enterprises' reserve funds are exempt from taxes; that taxes are reduced on amounts reinvested into enterprises, protection of the environment or research programmes; that all equipment imported for the enterprise is exempt from customs duties.

The Privatisation Law adopted in 1994 determines the principles of state property in Azerbaijan which allows foreign legal entities and physical persons to participate in the privatisation of state property jointly with local capital. Whenever foreign legal entities and individuals participate in the privatisation of state property in partnership with local capital, the foreign partners will have priority. A voucher privatisation programme started in March. The Land Reform Law adopted in July 1996 has facilitated land privatisation and is regarded by experts as the most progressive land law in the CIS. Azerbaijani company law also confirms that enterprises have a right to be freely engaged in foreign economic activity in compliance with the legislation of the Azerbaijan Republic.

The country offers a safer investment climate than many of the transition economies of Eastern Europe and CIS countries.

Azerbaijan is actively involved in international co-operation. The major foreign trade agreements are as follows: the EU Partnership and Co-operation Agreement signed in April 1996; WTO observer status; some OECD countries have granted most favoured nation and/or GSP status; economic union with CIS countries in 1993; bilateral barter and intergovernmental agreements in place with CIS countries; member of Economic Co-operation Organisation established by Turkey, Iran and Pakistan; membership of Black Sea Co-operation Organisation.

In 1994 the Government of the United Kingdom and Northern Ireland and the Government of Azerbaijan signed a convention for the avoidance of double taxation on income and capital gains. In January 1996, the two governments signed an agreement on the promotion and protection of investments.

The European Bank for Reconstruction and Development (EBRD) is assisting with the development of the private sector and the financing of priority areas. The Bank has already been involved in a number of projects in different fields, and has so far loaned Azerbaijani projects more than $140 million. Another priority of the Bank is to set up a small and medium size enterprise credit line to give the private sector access to funding.

The World Bank has already earmarked $50 million for different projects; apart from this it is also preparing a pilot agricultural privatisation project.

The EU is providing technical and humanitarian assistance to Azerbaijan through the Tacis programme supporting economic and social reform. The European Union is also financing various projects in transport, the environment, education, regional banking, legal advice and the monitoring of food aid operations.

The International Monetary Fund has concluded that the inflation rate in Azerbaijan is the lowest of all the transition republics and is going to allocate a credit of $280 million for the development of the reform process.

In 1996, the Paris Club countries made an overall commitment of $670 million for Azerbaijan. According to forecasts by international experts, the economy is expected to grow by more than five per cent in 1997; this figure is projected to reach nine per cent by 1998-9.

Foreign trade volumes exceed $1.5 billion. Azerbaijan currently trades with more than 60 nations. The major trade partners are Turkey, Iran, the CIS, the USA, the UK, and the United Arab Emirates.

Taking into consideration the enormous business opportunities and favourable legal environment in Azerbaijan, many foreign countries are trying to encourage their own businesses to work there. An American-Azerbaijan Trade Chamber has been established in the USA; a similar organisation, the Azerbaijan-British Trade and Industry Council, has been set up in the United Kingdom. The UK, the USA, France, Turkey, Germany, and Japan all provide export credit guarantees to their private businesses working in Azerbaijan.

Taking into consideration the rich potential of Azerbaijan, its enormous opportunities, and its favourable investment climate, there is no doubt that the flow of investment will be of great benefit both for the Azerbaijani people and for foreign partners; it will provide a substantial impetus for the further integration of Azerbaijan into world co-operation.

This article appears courtesy of the Azerbaijani Embassy to the UK