Azerbaijan - Foreign investment

Foreign investment plays a major role in financing the development of much of Azerbaijan's industrial sector, especially the oil and gas-related industries. The 1992 Law on Foreign Investment provided many basic guarantees to foreign investors, including nondiscriminatory treatment, the repatriation of profits, guarantees against expropriation, and dispute settlement. The Privatization Law passed in 1995 allowed foreign investors to acquire shares in state companies and purchase real estate jointly. Starting in 1997, foreign tax privileges were revoked. As of 1999, foreign investors were required to obtain a license and pay a fee in order to open business in Azerbaijan.

Only about 100 joint venture projects were registered by mid-1992; these were dominated by Turkish firms and involved primarily trade and textiles. In the oil sector, preliminary agreements were signed with US, Scottish, British, and other foreign companies for the exploration and development of several major oil fields in the Caspian Sea. In 1992, Azerbaijan joined a consortium with Oman, Kazakhstan, and Russia aimed at constructing a pipeline through Armenia, Iran and Turkey, or Georgia. Little action was taken on these agreements, due to heightened political tensions. The Azerbaijan International Operating Company (AIOC), led by BP Amaco, signed an $8 billion contract in 1994 to exploit oil reserves at Azeri, Chirag, and Guneshli (ACG). Foreign direct investment leapt from only $30 million in 1994 to over $1 billion in 2002 (about 17% of GDP), with approximately 90% of FDI concentrated in the hydrocarbons sector. Although the US government had banned public aid to Azerbaijan in 1992, US investors played a large role in exploiting Azerbaijani oil reserves, increasingly so since January 2002 when the Bush administration waived the ban on public assistance (due to Azerbaijan's trade embargo against Armenia and Nagorno-Karabakh) because of Azerbaijan's support in the War on Terror. In the energy sector, by June 2002, the government had concluded Production Sharing Agreements (PSAs) with over 30 companies representing 15 countries. Over 90 US energy-related companies are currently resident in Baku pursing investment opportunities. Significant foreign investors in the energy sector included British Petroleum (BP)—the designated operator for both the ACG oil field and the Shah Deniz natural gas field—Unocal, ExxonMobil, Devon Energy (Pennzoil), Chevron, Conoco, Moncrief Oil, TPAO (Turkish Oil Company), Statoil (Norway), Lukoil (Russia), Itochu (Japan), Agip (Italy), and TotalfinaELF (France). The US State Department projects that as work on the BTC pipeline proceeds and development of Azerbaijan's oil and gas resources intensifies, foreign investment should increase from present levels of 15% to 25% of GDP to 50% of GDP in 2004. The US State Department also noted that data from Azerbaijan is not reliable, and only rough estimates can be made. On this basis, it reported that foreign investments in 2000 amounted to about $927 million, of which $546.1 million (58.9%) was in the energy sector. For the period 1994–1999, as reported by EC-TACIS, the main sources of FDI have been the United States (28%), the UK (15%), Turkey (15%), Russia (6%), Norway (6%), Japan (3%), Germany (3%), Iran (2%), and France (2%).

Azerbaijan - Customs and duties

Tariffs are set at 15%, 5%, 3%, or 0.5%. Most goods carry the 15% import customs duty. Capital goods and some primary goods are exempt. There is also a 20% value-added tax on certain imports. A dividend withholding tax of 15% is applicable to monies sent abroad.

In 1992, Azerbaijan signed trade agreements with all the republics of the former USSR except Armenia and Russia. Azerbaijan joined the Commonwealth of Independent States (CIS) in September 1993 and acceded to the CIS economic union treaty the same year. Azerbaijan is a member of the Economic Cooperation Organization. In 1999, Azerbaijan entered into a Partnership and Cooperation Agreement with the European Union and was seeking membership in the World Trade Organization, but as of 2003 has not yet received it.

Azerbaijan - Taxation

On 1 January 2001, a new tax code went into effect. Personal income rates remained the same, at rates ranging from 12–35%, as did the corporate tax rate, at 27%. The revised depreciation schedule for corporate assets favors investments in high-tech equipment and oil and gas exploration. Depreciation rates are 10% a year for buildings, 25% a year for equipment and computers, 25% for geological and exploratory cost and 20% a year for all other assets. The value-added tax (VAT) was reduced from 20% to 18%, while the property tax was raised from .5% to 1% of assessed value. A .05% Road Fund Tax on turnover was abolished, but there is a highway tax imposed on foreign-registered vehicles collected by customs authorities. There are payroll taxes paid by the employer amounting to 32%, 30% going to the Social Protection Fund, and 2% going to the Employment Fund. There are excise taxes, but excise paid for good used of production can be offset against excise charged for the finished product. In 2001, total government revenue came to an estimated 21.4% of GDP, while total expenditures, including net lending, amounted to only 20% of GDP, producing positive fiscal balance equal to 1.4% of GDP.

Azerbaijan - Public finance

Since 1996, the Azerbaijani government has emphasized privatization as a means towards consolidation of the public debt and revitalization of the economy. Over 70% of all parastatals are set to be privatized; more than 20,600 companies were privatized during 1997 and 1998. Foreign investment was encouraged, especially in the oil sector, however the diversification needed for long-term growth is lacking. The budget deficit in 2001 was a mere 0.5% of GDP.

The US Central Intelligence Agency (CIA) estimates that in 2001 Azerbaijan's central government took in revenues of approximately $786 million and had expenditures of $807 million. Overall, the government registered a deficit of approximately $21 million. External debt totaled $1.4 billion.

Azerbaijan - Banking and securities

The National Bank of Azerbaijan is the central bank of Azerbaijan. The central bank is charged with regulating the money supply, circulating currency, and regulating the commercial banks of the country. However, the banking system in Azerbaijan is minimal and ineffective. An estimated $1 billion is held in cash or outside the banking sector, a considerable amount in comparison with the scope of the country's entire economy.

There are approximately 70 foreign and local banks in Azerbaijan. Of the four state-owned banks, only the International Bank of Azerbaijan (IBA) was solvent in 1999. The IBA was in the process of being privatized in that year. Major commercial banks include the Promtekhbank, Azakbank, Azerdemiryolbank, Bacobank, Gunay International Bank, Halgbank, ILKBANK, and the Universal Bank. Most businesses use the IBA, or the British Bank of the Middle East, Baku.

The central bank increased the minimum bank capital to $1.5 million in 1999, and expected to increase the figure to $3 million in 2001, effectively consolidating the sector. The International Monetary Fund reports that in 2001, currency and demand deposits—an aggregate commonly known as M1—were equal to $363.6 million. In that same year, M2—an aggregate equal to M1 plus savings deposits, small time deposits, and money market mutual funds—was $738.5 million. The discount rate, the interest rate at which the central bank lends to financial institutions in the short term, was 10%.

The Baku Stock Exchange, known as the BSE, opened in 2001 trading short-term treasury bonds and the common stock of recently privatized state-owned enterprises. Trading volume in the first six months was just under $1 million. A regulatory framework for the new exchange is under development and is expected to conform to international transparency standards.

Azerbaijan - Balance of payments

The war with Armenia in and around Nagorno–Karabakh had facilitated Azerbaijan's trade deterioration, which was further exacerbated by the collapse of the local currency. Reviving rublerelated trade links with Russia was a key reason for Azerbaijan's entry into the Commonwealth of Independent States in September 1992. In 1995 inflation fell and the currency was stable until it was devalued in 1999, causing inflation of 10% to 15%. The current account deficit was over one-third of GDP in 1998.

The US Central Intelligence Agency (CIA) reports that in 2002 the purchasing power parity of Azerbaijan's exports was $2 billion while imports totaled $1.8 billion resulting in a trade surplus of $200 million.

The International Monetary Fund (IMF) reports that in 2001 Azerbaijan had exports of goods totaling $2.08 billion and imports totaling $1.47 billion. The services credit totaled $290 million and debit $665 million.

Azerbaijan - Foreign trade

Like other post-Soviet economies, Azerbaijan is highly trade-dependent; however, it is endowed with a more diversified export structure than many other former USSR countries, especially in neighboring Central Asia. While the centrally planned state ordering system is steadily losing its place as the basis for trade in the former Soviet Union, the Azeri Ministry of Foreign Economic Relations still controls the export of all products considered to be of strategic importance to the national economy.

Key to Azerbaijan's trade future will be the development and operations of a major oil pipeline out of the Caspian Sea. Currently, the construction of a major export pipeline to the Mediterranean is under way and scheduled for completion in 2005.

Exports include oil and gas (84%), chemicals, oilfield equipment, textiles, and cotton. Imports include machinery and parts (32%), consumer goods, food, and textiles.