Azerbaijan

Azerbaijan
Updated as of Dec 2017
Original Publication Date: August 2017
Country Report
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AZERBAIJAN
ISSN: 1099-2278
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Political Risk Services
29-Dec-2017 Reproduction without written permission of The PRS Group is strictly prohibited.
Azerbaijan
Country Update
MOST LIKELY REGIMES AND THEIR PROBABILITIES
18-Month: YAP 80%
Five-Year: YAP 65%
FORECASTS OF RISK TO INTERNATIONAL BUSINESS

Financial Direct Export
Turmoil Transfer Investment Market
18-Month: High B B+ B-
Five-Year: Moderate B- B B-
( ) Indicates change in rating. * Indicates forecast of a new regime.
KEY ECONOMIC FORECASTS

Real GDP Current
Years Growth % Inflation % Account ($bn)
2012-2016(AVG) 1.8 4.3 7.36
2017(F) -0.9 13.2 1.45
2018-2022(F) 2.5 5.4 2.20
Implications
• With the economy set to contract for a second consecutive year in 2017,
government officials are keen to talk up the country’s upside potential, not only
by projecting self-confidence that a recovery is just around the corner, but also
by assuring investors that reforms are in the works to address their concerns.
These include bureaucratic impediments, the lack of transparency in financial
dealings, and the perennial problem of corruption, which has been highlighted
recently by the so-called “Laundromat” scandal, involving the diversion of some
$3 billion of state funds into a bribery and money-laundering operation.
• The troubled state-owned IBA reached a restructuring deal with creditors in

September, and with oil prices making gains and inflation easing, Fitch
upgraded the bank’s credit status in November. Nevertheless, the episode has
left a bad taste, and reports that some of the funds involved in the Laundromat
scandal were diverted from IBA highlight yet again the risks stemming from a
lack of transparency within the banking system itself.
Country Update 29-Dec-2017 • Page U-1

Political Risk Services Azerbaijan Country Update
• For its part, the government has assumed a larger liability by underwriting
IBA’s NPLs, and guarantees to state-owned entities now account for more than
one-half of a gross public-sector debt burden estimated at around 52% of GDP.
Considering the possibility that the government’s disclosure of its liabilities
could be incomplete, debt-related risks will be higher in the near term than the
headline indicators—the foreign-debt burden, the supply of foreign exchange,
and inflows of foreign capital—might otherwise suggest.
• According to the Financial Market Supervisory Authority, close to one-fifth of

all consumer loans have been classified as NPLs, of which almost 40% are more
than one year overdue. The high level of NPLs has dampened new bank
lending, reinforcing the obstacles to obtaining credit that are cited as one of the
biggest deterrents to investment outside of the hydrocarbons sector. The
government is working on a law that will create a single legal framework for
regulating and supervising the financial markets. In the meantime, the
government will offer some $60 million in credit guarantees aimed at
encouraging bank lending to support the growth of SMEs.
Banking Risks Remain

With the economy set to contract for a second consecutive year in 2017,
government officials are keen to talk-up the country’s upside potential, not
only by projecting self-confidence that a recovery is just around the corner, but
also by assuring investors that reforms are in the works to address their
concerns. These include bureaucratic impediments, the lack of transparency in
financial dealings, and the perennial problem of corruption, which has been
highlighted recently by the so-called “Laundromat” scandal, involving the
diversion of some $3 billion of state funds into a bribery and money-laundering
operation.
In recent public pronouncements, President Ilham Aliyev has boldly stated the
economy is strong, and that there are no financial problems, despite obvious
evidence to the contrary, such as the bankruptcy filing of the state-owned
International Bank of Azerbaijan (IBA) earlier this year. Other prominent
officials have chimed in with assurances, noting the manageable level of public
debt, and the added guarantees of sovereign repayment provided by the assets
in the sovereign wealth fund (SOFAZ), which were reported to total $34.8
billion in June 2017.
The government did not dip into the oil fund to prevent IBA’s default, a
decision that raised questions as to whether SOFAZ’s assets might actually be
less than reported. IBA reached a restructuring deal with creditors in
Page U-2 • 29-Dec-2017 Country Update

September, and with oil prices making gains and inflation easing, Fitch
upgraded the bank’s credit status in November, citing its determination that
SOFAZ is managed with greater transparency than many other sovereign
wealth funds. Nevertheless, the episode has left a bad taste, and reports that
some of the funds involved in the Laundromat scandal were diverted from IBA
highlight yet again the risks stemming from a lack of transparency within the
banking system itself.
The government plans to privatize IBA with help from the European Bank for
Reconstruction and Development (EBRD), and the director of SOFAZ, Samir
Sharifov, is under pressure to deliver results. The sale of IBA would produce a
welcome windfall for the Treasury, improve the management and profitability
of the bank, and provide a big lift to the Baku Stock Exchange. However,
action on that front is unlikely before the second half of 2018, and, even if the
privatization of IBA is successful, the banking sector will remain vulnerable to
the destabilizing effects of persistently low oil prices, and would face a crisis in
the event of another negative shock that sends oil prices into a renewed slide.
For its part, the government has assumed a larger liability by underwriting
IBA’s non-performing loans (NPLs), which have been transferred to
Aqrarkredit, a new non-bank management vehicle, pending resolution. In
total, underwritten guarantees to state-owned entities account for more than
one-half of a gross debt burden estimated at around 52% of GDP. Considering
the possibility that the government’s disclosure of its liabilities could be
incomplete, debt-related risks will be higher in the near term than the headline
indicators—the foreign-debt burden, the supply of foreign exchange, and
inflows of foreign capital—might otherwise suggest.
According to the Financial Market Supervisory Authority (FMSA), close to one-

fifth of all consumer loans have been classified as NPLs, of which almost 40%
are more than one year overdue. The high level of NPLs has dampened new
bank lending, reinforcing the obstacles to obtaining credit that are cited as one
of the biggest deterrents to investment outside of the hydrocarbons sector. The
government is working on a law that will create a single legal framework for
regulating and supervising the financial markets, but meanwhile the
government will offer some $60 million in credit guarantees aimed at
encouraging bank lending to support the growth of small and medium-sized
enterprises (SMEs).

Zero Tolerance for Dissent

The government has approved a 20% increase in state funding for political
parties, along with a 12% hike for non-governmental organizations (NGOs),
from 2018, and the Central Electoral Commission is promising that the
presidential and legislative elections required by late 2020 will be free and fair.
Such nods toward creating a level electoral playing field reflect the
government’s recognition that economic hardship is fueling discontent, but the
near-term prospects for genuine democracy in the former Soviet republic are
rather dim.
The Aliyev regime continues to enforce a harsh crackdown on dissent, a recent

example being the arrest of more than 80 gay and transgender citizens on
trumped-up charges in mid-September. All of the detainees were released,
underscoring the fact that the roundup was an exercise in intimidation.
Anyone spreading anti-government messages via social media faces arrest. In

late November, Namik Sadigli, a prominent blogger and an activist in the
opposition Azerbaijan Popular Front Party (AXCP), was arrested and will be
held for 30 days after posting video clips of opposition protest demonstrations.
Sadigli is one of 10 journalists and bloggers who are currently being held for
criticizing the government. Many others have been released without charge,
but restricted by travel bans, and are often unable to gain work.
With the government enjoying the full support of the state security apparatus,
little change is expected, despite pressure from the Council of Europe (CoE).
Azerbaijan faces an infringement procedure for keeping opposition leader Ilgar
Mammadov behind bars for more than three years, which could result in the
suspension of the country’s voting rights, or its expulsion from the body, if
Baku does not address the CoE’s concerns to the group’s satisfaction.
Against that backdrop, there is a danger that Aliyev will seek to exploit the
simmering conflict with Armenia over the disputed Nagorno-Karabakh enclave
as a means of stirring nationalist fervor and discouraging diplomatic allies from
applying to much pressure on the regime. The president has lately called for
the imposition of sanctions on Armenia, but more forceful action cannot be
ruled out.
Barring a damaging split in its ranks, the governing New Azerbaijan Party
(YAP) is unlikely to face a real challenge to its dominance at the 2020 elections.
In the meantime, Aliyev will press his Cabinet to move forward with
implementation of a diversification program that is recognized as key to
economic stability over the longer term, and he will not hesitate to reshuffle the

government if it fails to make adequate progress. In that vein, the government

will remain sensitive to signs of spreading popular discontent, and will retreat
if controversial measures, such as a proposed doubling of the excise duty on
beer in 2018, spark a public backlash.
Rising Oil Prices Point to Positive Growth in 2018

Although the volatility of oil prices remains a huge concern for a country where
hydrocarbons extraction accounts for roughly 75% of all state revenue and 45%
of GDP, the recent rise above the $60 per barrel mark holds out the promise of
improving economic conditions in 2018.
The lingering effects of the currency shock associated with the steep slide in oil
prices that began in mid-2014 and the negative impact of reduced state
spending on growth in the non-oil sector will produce a real contraction of
GDP in 2017, although the downturn will be less pronounced than the 3.8%
decrease recorded last year.
Industrial production fell by 4.6% (year-on-year) in January–October 2017, and

fixed capital investments decreased by 3% compared to the first 10 months of
2016. However, agricultural output registered a year-on-year increase in the
same period, holding the overall contraction of the economy to less than 1%.
Assuming oil prices remain above $60 per barrel on average in 2018, real GDP
growth of up to 2% is possible next year.
The lagged effect of a sharp slide in the value of the manat after the currency
was permitted to float freely in January pushed year-on-year inflation up to
14% in July–August. With the exchange rate stabilizing at AZN1.7-1.75 to the
dollar, after sinking to AZN1.92 in early February, inflation has more recent
eased, a trend that is forecast to continue into 2018. The currency will remain
well supported unless oil prices crash again, and most indicators of fiscal and
external economic risk are, as the government routinely points out, indicative
of an underlying strength when ignoring the longer-term difficulties posed by
an over-reliance on the extractive industry for wealth creation.
The current account balance is on track to return to positive territory in 2017,

and the surplus will widen over the medium terms as an oil price recovery sets
in. Foreign exchange reserves stood at $5.1 billion at the end of August, which
is sufficient to provide more than a year of import cover, but still far below the
total accumulated prior to the slump in oil prices. The government has tapped
into SOFAZ to help finance the very large non-oil budget deficit, but higher oil
prices will enable officials to make compensatory deposits to the fund,
providing a fairly substantial buffer in the near term.

Economic Forecasts for the Three Alternative Regimes
YAP Broad Alliance Military

Growth Inflation CACC Growth Inflation CACC Growth Inflation CACC
(%) (%) ($bn) (%) (%) ($bn) (%) (%) ($bn)
2017 -0.9 13.2 1.45 -1.3 13.6 1.15 -1.5 13.8 0.90
2018-2022 2.5 5.4 2.20 1.6 6.1 -0.40 0.5 10.7 -1.80

Azerbaijan
Table of Contents
Page
Country Update ................................................................................................................................................... U-1
Country Forecast
Map....................................................................................................................................................................2
Highlights .........................................................................................................................................................3
Current Data ....................................................................................................................................................5
Comment & Analysis .................................................................................................................................... 11
Forecast Scenarios
Most Likely Five-Year Regime Scenario: YAP (65% Probability) ................................................... 15
Second Most Likely Five-Year Regime Scenario: Broad Alliance (20% Probability) ................... 26
Third Most Likely Five-Year Regime Scenario: Military (15% Probability) .................................. 28
Forecast Summary ................................................................................................................................. 30
Political Framework
Players To Watch ................................................................................................................................... 33
Country Conditions
Climate for Investment & Trade
Overview ..................................................................................................................................................1
Tariff and Non-tariff Barriers ................................................................................................................7
Policies ......................................................................................................................................................7
Legal Framework ....................................................................................................................................9
Infrastructure ......................................................................................................................................... 11
Corruption and other Bureaucratic Obstacles ................................................................................... 12
International Agreements .................................................................................................................... 13
Labor Conditions ................................................................................................................................... 14
Background
Geography .............................................................................................................................................. 17
Social Conditions ................................................................................................................................... 17
Government ........................................................................................................................................... 18
© 2017, The PRS Group, Inc. ISSN: 1099-2278

Political Risk Services Azerbaijan Country Forecast
Reproduction without written permission of The PRS Group is strictly prohibited.
Russia
Georgia Khudat
●
●
Khachmaz
●
Guba
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Sheky ●
● Gazakh
Shuraabad
Armenia Azerbaijan ● Lyaki Sumqayit●
● Agdam Baku (Baki) ✪

● Khankendi
● Lachin
● Bilasuvar
●
Nakhchivan
Caspian
Turkey
● Astara
Sea
Iran
REV2007
Page 2 Map
31-Aug-2017 Reproduction without written permission of The PRS Group is strictly prohibited.
Azerbaijan
Country Forecast
Highlights
MOST LIKELY REGIMES AND THEIR PROBABILITIES
18-Month: YAP 70%
Five-Year: YAP 65%
FORECASTS OF RISK TO INTERNATIONAL BUSINESS

Financial Direct Export
Turmoil Transfer Investment Market
18-Month: High B B+ B-
Five-Year: Moderate B- B (B-) B-
( ) Indicates change in rating. * Indicates forecast of a new regime.
KEY ECONOMIC FORECASTS

Real GDP Current
Years Growth % Inflation % Account ($bn)
2012-2016(AVG) 1.8 4.3 7.36
2017(F) -0.9 12.5 1.30
2018-2022(F) 2.6 5.4 1.40
Bank Default Highlights Transparency Risks

Key Points To Watch…
 Investors were shocked on May 10, when the International Bank of Azerbaijan (IBA), the
country’s largest commercial lender, accounting for more than one-third of the country’s
total bank assets, unexpectedly missed a payment of principal and interest on $100 million
worth of subordinated debt owed to the Dublin-registered Rubrika Finance Company, and
attempted a write-down of principal. IBA filed for bankruptcy protection in New York,
and devised a restructuring deal for all of its creditors, who include some big US investors,
such as Cargill and Citi…
 A plan to restructure some $3.3 billion of debt was approved by nearly 94% of IBA’s
creditors in mid-July, who will swap existing debt for new dollar bonds to be issued by the
government and IBA. It is unclear whether IBA executives hid the bank’s problems from
authorities, or if the government knew about the troubled state of the bank and simply
decided that it could no longer continue to prop up a loss-making institution…
 The incident raises questions about transparency, competence, and corruption in a former
Soviet bloc country that is attempting to emerge from the shadow of Russia and carry out
an economic diversification program aimed at reducing its dependence on hydrocarbons
extraction. Consequently, even if the restructuring deal is implemented seamlessly, the
Highlights 31-Aug-2017 • Page 3

government has harmed its reputation among potential investors who are already deterred
by a corrupt and burdensome bureaucracy and the sometimes obstructive role played by
the state in economic affairs…
 Whether the self-inflicted wound causes lasting damage will become more apparent as the
government pushes ahead with the planned privatization of IBA, which is scheduled to be
completed next year. In any case, the doubts about financial transparency could negatively
affect funding for the Southern Gas Corridor, resulting in delays in completing the
$45 billion pipeline project…
Slow Progress on Diversification Will Limit Growth

 President Ilham Aliyev will do his utmost to present a picture of “business as usual”
domestically as his government scrambles to mitigate the negative impact of the oil crunch,
but a lasting solution will require a reduction of economic dependence on oil. Even an
aggressive push for diversification will not bear significant fruit for some time…
 In the meantime, the government will be tempted to distract attention from poor economic
conditions by stoking tensions with Armenia over the disputed enclave of Nagorno-
Karabakh. Neither Azerbaijan nor Armenia, nor their backers—Turkey and Russia,
respectively—has an interest in opening yet another theater of instability in the region.
But, as ever, the possibility of a disastrous miscalculation cannot be ruled out…
 A sovereign wealth fund with assets valued at more than $30 billion has enabled the
government to finance a widening budget gap, but officials are wary of further depleting
the national nest egg. Efforts to check the expansion of the fiscal deficit have focused
primarily on cuts to the investment budget that will dampen non-oil growth…
 The government has acknowledged the need to reduce the country’s dependence on sales
of oil and gas, which account for 95% of exports, but achieving that objective will require
higher levels of foreign investment outside the most attractive sectors. Progress has been
evident in some areas, but troublesome impediments remain, among them widespread
corruption, the maintenance of monopolies in potentially attractive sectors of the economy,
the sometimes arbitrary application of laws, and the inefficiency and lack of transparency
in the legal system…
 Even assuming a recovery in global oil prices over the five-year forecast period, the average
price will remain well below the peak reached in mid-2008, and such production increases
as are realized will fall far short of the levels that contributed to real economic expansion
averaging more than 20% annually in 2005–2009. The easing of fiscal pressures will create
room for increased investment that will contribute to an acceleration of non-oil growth later
in the forecast period, but overall real GDP growth will be held to an average of just 2.6%
per year through 2022.
Economic Forecasts for the Three Alternative Regimes

Growth Inflation CACC Growth Inflation CACC Growth Inflation CACC
(%) (%) ($bn) (%) (%) ($bn) (%) (%) ($bn)
2017 -0.9 12.5 1.30 -1.5 14.4 0.40 -2.0 15.9 -0.80
2018-2022 2.6 5.4 1.40 1.7 6.1 -0.20 0.6 10.7 -2.10
Page 4 • 31-Aug-2017 Highlights

Political Fact Sheet
CAPITAL: HEAD OF STATE:

Baku President Ilham Aliyev (2003)
CONSTITUTION:
November 12, 1995 HEAD OF GOVERNMENT:
Prime Minister Artur Rasizade (2003)
ADMINISTRATIVE SUBDIVISIONS:
59 regions
OFFICIALS:
POPULATION: Yaqub Eyyubov, First Deputy Prime Minister
2016: 9.73 million Elchin Efendiyev, Deputy Prime Minister
AREA: Ali Hasanov, Deputy Prime Minister
86,600 sq. km. Abid Sharifov, Deputy Prime Minister
OFFICIAL LANGUAGE: Ismat Abbasov, Deputy Prime Minister
Azeri Ali Akhmedov, Deputy Prime Minister
STATUS OF PRESS: Mehriban Aliyeva, Vice President
completely controlled Heydar Asadov, Agriculture
Zakir Hasanov, Defense
SECTORS OF GOVERNMENT
Shahin Mustafayev, Economy & Industry
PARTICIPATION:
Parviz Shahbazov, Energy
the government plays at least a partial role
Samir Sharifov, Finance
in most economic sectors
Elmar Mammadyarov, Foreign Affairs
CURRENCY EXCHANGE SYSTEM: Oqtay Shiraliyev, Health
managed float Ramil Usubov, Internal Affairs
EXCHANGE RATE: Fikrat Mammadov, Justice
11/27/2017 $1=1.730 new manats Salim Muslumov, Labor & Social Security
ELECTIONS: Ramin Guluzade, Transport, Communications &
The president serves a seven-year term. Last High Technologies
elections October 9, 2013; next, scheduled
October 2020. The National Assembly LEGISLATURE:
serves a maximum five-year term. Last Unicameral: 125-member National Assembly
elections November 1, 2015; next, by October (Milli Majlis). Seat distribution: New Azerbaijan
2020. Party (YAP), 69; other, 12; independent, 43;
vacant, 1.
Current Data 29-Dec-2017 • Page 5

Political Risk Services Reproduction without written permission of
The PRS Group is strictly prohibited.
29-Dec-2017
Azerbaijan
Databank
2007-2011 2012-2016
Average Average 2007 2008 2009 2010 2011
Domestic Economic Indicators
GDP (Nominal, $bn) 48.99 62.34 33.05 48.83 44.28 52.88 65.93
Per Capita GDP ($) 5497 6587 3816 5568 4992 5882 7229
Real GDP Growth Rate (%) 10.0 1.8 25.0 10.8 9.3 5.0 0.1
Inflation Rate (%) 10.5 4.3 16.7 20.8 1.5 5.7 7.9
Capital Investment ($bn) 9.48 16.01 7.07 9.07 8.33 9.61 13.30
Capital Investment/GDP (%) 19.4 25.7 21.4 18.6 18.8 18.2 20.2
Budget Revenues ($bn) 13.40 19.70 7.00 13.09 12.84 14.20 19.87
Budget Revenues/GDP (%) 26.8 31.4 21.2 26.8 29.0 26.9 30.1
Budget Expenditures ($bn) 13.49 19.80 7.09 13.11 13.14 14.65 19.48
Budget Expenditures/GDP (%) 27.1 31.6 21.5 26.9 29.7 27.7 29.6
Budget Balance ($bn) -0.09 -0.10 -0.09 -0.02 -0.30 -0.45 0.39
Budget Balance/GDP (%) -0.3 -0.2 -0.3 0.0 -0.7 -0.9 0.6
Money Supply (M1, $bn) 7.32 11.86 4.26 6.26 6.52 8.37 11.17
Change in Real Wages (%) 13.6 3.7 34.8 11.4 4.9 14.1 2.8
Unemployment Rate (%) 5.8 5.1 6.3 5.9 5.7 5.6 5.4
International Economic Indicators
Foreign Direct Investment ($bn) 0.15 6.89 -4.75 0.01 0.47 0.56 4.44
Forex Reserves ($bn) 6.41 10.27 4.26 6.47 5.13 6.17 10.04
Gross Reserves (ex gold, $bn) 6.56 10.49 4.27 6.47 5.36 6.41 10.27
Gold Reserves ($bn) 0.00 0.89 0.00 0.00 0.00 0.00 0.00
Gross reserves (inc gold, $bn) 6.56 11.38 4.27 6.47 5.36 6.41 10.27
Total Foreign Debt ($bn) 3.53 7.87 2.54 3.17 3.41 3.91 4.63
Total Foreign Debt/GDP (%) 7.3 13.1 7.7 6.5 7.7 7.4 7.0
Debt Service ($bn) 1.64 2.67 0.80 1.51 1.68 1.35 2.84
Debt Service/XGS (%) 5.2 8.3 3.3 4.4 6.8 4.4 7.1
Current Account ($bn) 13.56 7.36 9.02 16.45 10.17 15.04 17.14
Current Account/GDP (%) 27.7 9.8 27.3 33.7 23.0 28.4 26.0
Current Account/XGS (%) 43.7 17.7 37.3 48.0 41.1 49.0 42.9
Exports ($bn) 26.77 25.40 21.27 30.59 21.10 26.48 34.41
Imports ($bn) 7.33 9.55 6.05 7.57 6.51 6.75 9.76
Trade Balance ($bn) 19.44 15.84 15.22 23.02 14.59 19.73 24.65
Exports of Services ($bn ) 1.88 4.22 1.25 1.55 1.78 2.11 2.73
Income, credit ($bn) 0.64 1.21 0.33 0.60 0.55 0.68 1.02
Transfers, credit ($bn) 1.46 1.40 1.31 1.50 1.29 1.42 1.77
Exports G&S ($bn) 30.75 32.22 24.16 34.24 24.72 30.69 39.93
Liabilities ($bn) 0.37 0.47 0.11 0.09 0.56 0.54 0.54
Net Reserves ($bn) 6.19 10.91 4.16 6.38 4.80 5.87 9.73
Liquidity (months import cover) 9.9 13.6 8.3 10.1 8.8 10.4 12.0
Currency Exchange Rate 0.815 0.984 0.858 0.822 0.804 0.803 0.790
Currency Change (%) 2.4 -16.5 3.9 4.2 2.2 0.1 1.6
Social Indicators
Population (million) 8.88 9.50 8.66 8.77 8.87 8.99 9.12
Population Growth (%) 1.3 1.3 1.2 1.3 1.1 1.4 1.4
Infant Deaths/1000 51 27 58 58 56 53 30
Persons under Age 15 (%) 24 23 25 25 24 23 23
Urban Population (%) 52 54 52 52 52 52 52
Urban Growth (%) 2.1 2.5 5.3 1.3 1.1 1.4 1.5
Literacy % pop. 99 99 99 99 99 99 99
Agricultural Work Force (%) 39 38 39 39 39 38 38
Industry-Commerce Work Force (%) 12 12 12 12 12 12 12
Services Work Force (%) 49 50 49 49 49 50 50
Unionized Work Force (%) 5 5 5 5 5 5 5
Energy - total consumption (1015 Btu) 0.59 0.60 0.59 0.64 0.58 0.58 0.56
Energy - consumption/head (109 Btu) 0.07 0.06 0.07 0.07 0.07 0.06 0.06
Note:
Current Data 29-Dec-2017 ~ Page 6-7

Political Risk Services Reproduction without written permission of
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29-Dec-2017
Azerbaijan
Databank
2007-2011 2012-2016
Average Average 2012 2013 2014 2015 2016
Domestic Economic Indicators
GDP (Nominal, $bn) 48.99 62.34 69.65 74.12 75.27 53.89 38.76
Per Capita GDP ($) 5497 6587 7530 7894 7923 5602 3984
Real GDP Growth Rate (%) 10.0 1.8 2.2 5.8 2.8 1.1 -3.1
Inflation Rate (%) 10.5 4.3 1.1 2.4 1.4 4.0 12.4
Capital Investment ($bn) 9.48 16.01 15.64 19.12 20.65 15.00 9.62
Capital Investment/GDP (%) 19.4 25.7 22.5 25.8 27.4 27.8 24.8
Budget Revenues ($bn) 13.40 19.70 21.99 24.83 23.47 17.00 11.23
Budget Revenues/GDP (%) 26.8 31.4 31.6 33.5 31.2 31.6 29.0
Budget Expenditures ($bn) 13.49 19.80 21.76 24.38 23.85 17.63 11.39
Budget Expenditures/GDP (%) 27.1 31.6 31.2 32.9 31.7 32.7 29.4
Budget Balance ($bn) -0.09 -0.10 0.23 0.45 -0.38 -0.63 -0.16
Budget Balance/GDP (%) -0.3 -0.2 0.3 0.6 -0.5 -1.2 -0.4
Money Supply (M1, $bn) 7.32 11.86 14.13 16.23 16.37 6.84 5.75
Change in Real Wages (%) 13.6 3.7 11.4 7.8 4.0 0.5 -5.4
Unemployment Rate (%) 5.8 5.1 5.2 5.0 4.9 5.1 5.5
International Economic Indicators
Foreign Direct Investment ($bn) 0.15 6.89 5.29 6.29 8.05 7.48 7.32
Forex Reserves ($bn) 6.41 10.27 11.04 14.16 14.42 6.08 5.63
Gross Reserves (ex gold, $bn) 6.56 10.49 11.28 14.40 14.65 6.29 5.84
Gold Reserves ($bn) 0.00 0.89 0.00 0.61 0.90 1.62 1.31
Gross reserves (inc gold, $bn) 6.56 11.38 11.28 15.01 15.55 7.91 7.15
Total Foreign Debt ($bn) 3.53 7.87 6.32 8.60 10.52 6.73 7.17
Total Foreign Debt/GDP (%) 7.3 13.1 9.1 11.6 14.0 12.5 18.5
Debt Service ($bn) 1.64 2.67 3.08 3.52 3.37 1.64 1.72
Debt Service/XGS (%) 5.2 8.3 7.5 8.9 8.9 7.0 9.0
Current Account ($bn) 13.56 7.36 14.98 13.08 10.31 -0.22 -1.36
Current Account/GDP (%) 27.7 9.8 21.5 17.7 13.7 -0.4 -3.5
Current Account/XGS (%) 43.7 17.7 36.5 33.0 27.2 -0.9 -7.1
Exports ($bn) 26.77 25.40 34.16 32.84 30.22 16.56 13.21
Imports ($bn) 7.33 9.55 9.65 10.71 9.19 9.22 9.00
Trade Balance ($bn) 19.44 15.84 24.51 22.13 21.03 7.34 4.21
Exports of Services ($bn ) 1.88 4.22 3.84 4.13 4.30 4.44 4.37
Income, credit ($bn) 0.64 1.21 1.15 1.03 1.67 1.26 0.92
Transfers, credit ($bn) 1.46 1.40 1.85 1.58 1.71 1.23 0.62
Exports G&S ($bn) 30.75 32.22 41.00 39.58 37.90 23.49 19.12
Liabilities ($bn) 0.37 0.47 0.52 0.50 0.49 0.58 0.25
Net Reserves ($bn) 6.19 10.91 10.76 14.51 15.06 7.33 6.90
Liquidity (months import cover) 9.9 13.6 13.4 16.3 19.7 9.5 9.2
Currency Exchange Rate 0.815 0.984 0.786 0.785 0.784 1.009 1.558
Currency Change (%) 2.4 -16.5 0.5 0.1 0.1 -28.7 -54.4
Social Indicators
Population (million) 8.88 9.50 9.25 9.39 9.50 9.62 9.73
Population Growth (%) 1.3 1.3 1.4 1.5 1.2 1.3 1.1
Infant Deaths/1000 51 27 29 28 27 26 26
Persons under Age 15 (%) 24 23 23 23 23 23 23
Urban Population (%) 52 54 54 54 54 55 55
Urban Growth (%) 2.1 2.5 5.5 1.5 1.2 3.1 1.1
Literacy % pop. 99 99 99 99 99 99 99
Agricultural Work Force (%) 39 38 38 38 38 38 38
Industry-Commerce Work Force (%) 12 12 12 12 12 12 12
Services Work Force (%) 49 50 50 50 50 50 50
Unionized Work Force (%) 5 5 5 5 5 5 5
Energy - total consumption (1015 Btu) 0.59 0.60 0.60 0.60 0.61 0.61 0.60
Energy - consumption/head (109 Btu) 0.07 0.06 0.06 0.06 0.06 0.06 0.06
Note:
Current Data 29-Dec-2017 ~ Page 6-7

Azerbaijan Country Forecast
31-Aug-2017 Comparison: Azerbaijan
Regional Real GDP Growth (2016): Central & South Asia
Bangladesh
India
Pakistan
Sri Lanka
Kazakhstan
Azerbaijan
-4 -2 0 2 4 6 8
(percent)
Regional Inflation Rates (2016): Central & South Asia
Kazakhstan
Azerbaijan
Bangladesh
India
Sri Lanka
Pakistan
0.0 2.0 4.0 6.0 8.0 10.0 12.0 14.0 16.0

(percent)
Page 8 • 31-Aug-2017 Current Data

Reproduction without written permission of The PRS Group is strictly prohibited
Azerbaijan Country Forecast
31-Aug-2017 Comparison: Azerbaijan
Regional Current Account/GDP (2016): Central & South Asia
Bangladesh
India
Pakistan
Sri Lanka
Azerbaijan
Kazakhstan
-7.0 -6.0 -5.0 -4.0 -3.0 -2.0 -1.0 0.0 1.0

(percent)
Economic Performance Profile

Country's Ranking Relative to All Countries Covered by Political Risk Services
2012-2016
GDP Per Capita ($)  6587
Real GDP Growth (%)  1.8
Inflation (%)  4.3
Unemployment (%)  5.1
Capital Investment  25.7

(% of GDP)
Budget Balance  -0.2

(% of GDP)
Current Account  9.8

(% of GDP)
Debt Service Ratio  8.3
Currency Change (%)  -16.5
BEST 25% NEXT 25% NEXT 25% WORST 25%
Current Data 31-Aug-2017 • Page 9

Reproduction without written permission of The PRS Group is strictly prohibited
Social Indicators as of 2016
Primary Energy
Energy Consumption (1015 Btu): 0.60
Per Capita Consumption (109 Btu): 0.06
Population
Annual Growth 1.1%
Infant Deaths per 1,000 26
Persons Under Age 15 23%
Urban Population 55%
Urban Growth 1.1%
Literacy 99%
Work Force Distribution

Agriculture 38%
Industry-Commerce 12%
Services 50%
Unions 5%
Ethnic Groups
Azeri (92%), Lezgian (2%), Russian (1%), Armenian (1%), Talysh (1%), other (3%)
Languages
Azeri, Lezgi, Russian, Armenian, other
Religions
Muslim (93%), Russian Orthodox (3%), Armenian Orthodox (2%), other (2%)
Page 10 • 29-Dec-2017 Current Data

Azerbaijan
Country Forecast
Comment & Analysis
Bank Default Highlights Transparency Risks
Investors were shocked on May 10, when the International Bank of Azerbaijan (IBA), the
country’s largest commercial lender, accounting for more than one-third of the country’s
total bank assets, unexpectedly missed a payment of principal and interest on
$100 million worth of subordinated debt owed to the Dublin-registered Rubrika Finance
Company, and attempted a write-down of principal. IBA filed for bankruptcy protection
in New York, and devised a restructuring deal for all of its creditors, who include some
big US investors, such as Cargill and Citi.
A plan to restructure some $3.3 billion of debt was approved by nearly 94% of IBA’s
creditors in mid-July, who will swap existing debt for new dollar bonds to be issued by
the government and IBA. Assuming all goes according to plan, the bank will be restored
to health with tier-1 capital amounting to more than double the 6% requirement imposed
on banks in the euro zone. The liability will push the public-sector debt ratio above 40%
of GDP, but the debt burden will begin to decrease once the budget balance moves back
into surplus, likely from 2018 onward.
The crisis at IBA did not hit like a bolt out of the blue. A rising level of risk in the banking
sector was indicated by a rise in the non-performing loans ratio, which is now above 20%,
and has increased in line with the deterioration of other stability measures, including the
regulatory capital to risk-weighted assets, return on assets, and return on equity
indicators. Several smaller banks have shut down since the oil crisis began, along with
some credit unions, and consolidation of the banking sector has led to numerous branch
closures.
However, IBA remains largely state-owned, and creditors reasonably assumed that the
bank would be able to count on government help in the event of a crisis. It has come to
light that the Central Bank of Azerbaijan (CBA) had already shifted $5.9 billion worth of
bad debt off IBA’s balance sheet, as part of some $7.8 billion in support provided to the
bank over the past decade, mainly since 2015. The fact that troubles have persisted is
indicative of a failure to address poor management at the bank.
It is unclear whether IBA executives hid the bank’s problems from authorities, or if the
government knew about the troubled state of the bank and simply decided that it could
no longer continue to prop up a loss-making institution. If the latter, the failure to rescue
Comment & Analysis 31-Aug-2017 • Page 11

the bank could be an indication that the assets held by the state-owned sovereign wealth
fund (SOFAZ) are actually much smaller than the current estimate of $33 billion, or that
the government is carrying significant off-budget liabilities that are a higher priority than
ensuring full payment to IBA’s creditors.
The incident raises questions about transparency, competence, and corruption in a former
Soviet bloc country that is attempting to emerge from the shadow of Russia and carry out
an economic diversification program aimed at reducing its dependence on hydrocarbons
extraction. Consequently, even if the restructuring deal is implemented seamlessly, the
government has harmed its reputation among potential investors who are already
deterred by a corrupt and burdensome bureaucracy and the sometimes obstructive role
played by the state in economic affairs.
Whether the self-inflicted wound causes lasting damage will become more apparent as
the government pushes ahead with the planned privatization of IBA, which is scheduled
to be completed next year. In any case, the doubts about financial transparency could
negatively affect funding for the Southern Gas Corridor, resulting in delays in completing
the $45 billion pipeline project.
Aliyev Tightens His Grip

As fiscal austerity, a devalued currency, and rising unemployment have contributed to
hardship for many ordinary citizens, the president is assiduously laying the ground for
the prolongation of the Aliyev dynasty established by his father, while continuing to use
the repressive power of the state to neutralize organized political opposition and silence
media critics.
In February, Aliyev named First Lady Mehriban Aliyeva to fill the newly created post of
first vice president, placing her first in line to succeed to the presidency in the event of his
death, incapacitation, or early retirement. President Aliyev is just 56 years old, and has
no known serious health issues. Consequently, it is unlikely that his wife might actually
become president. Instead, it appears that her role is merely to serve as a reliable
placeholder until the first couple’s son, Heydar Aliyev, who is just 20 years old, has
gained the experience required to become his father’s heir-apparent.
Aliyeva could take over for her husband on a temporary basis in the event of an
emergency. She has been a legislative representative since 2005, oversaw Azerbaijan’s
Olympics bid, and heads the Heydar Aliyev Foundation, an influential charity set up in
memory of the current president’s father, who ruled post-Soviet Azerbaijan until forced
by health issues to turn over control to his son in 2003. Nevertheless, she is generally
seen as poorly informed on most political issues, and she has not displayed the level of
ambition required to head a one-party state on a permanent basis.
Page 12 • 31-Aug-2017 Comment & Analysis

In any case, Aliyev is taking no chances in allowing anti-government movements to

flourish and is fully utilizing the state apparatus to ensure the voices of disquiet are
silenced. In May, a court ruled in favor of the Ministry of Transport, Communications,
and Technology, allowing it to block independent media outlets for “inciting unrest” or
otherwise undermining the government. The ruling was prompted by a case involving
the Radio Free Europe Azeri service, and Meydan TV, a Berlin-based not-for-profit
multilingual service set up by Emin Milli, a renowned activist who spent years in prison
and is now living in exile.
The court ruling has wide-ranging implications for state intimidation of government
critics. Although the government cannot eliminate criticism from all social media
platforms, known activists, such as Bayram Mammadov and Qiyas Ibrahimov, are
routinely jailed, and even showing support for them is deemed an offense.
Aliyev is also intent on preventing any viable candidates from challenging him for the
presidency in elections that are now to be held in 2020, following approval of a
constitutional amendment that extended the presidential term from five years to seven.
Parliament recently rubber-stamped a series of bills that among other things revoke the
citizenship rights of anyone who is declared a terrorist (a designation that will no doubt
be applied rather liberally), and prevent independent candidates from running for the
presidency. The latter restriction will at the very least limit the threat that ambitious
members of the governing New Azerbaijan Party (YAP) might leave the fold to challenge
Aliyev for the top office.
For the moment, the potential rival the president most fears is Mukhtar Ablyazov, a
prominent and wealthy former banker, who served as energy minister in Heydar Aliyev’s
government, but parted ways with the YAP in 2001. Ablyazov formed his own party, the
Democratic Choice of Kazakhstan, but was unable to contest the 2013 presidential
election because of his dual Russian citizenship.
Ablyazov was detained by French authorities pending consideration of Russia’s request

for extradition on embezzlement charges, but was released by order of the French
Council of State, which found the allegations to be politically motivated. While it is
highly doubtful that Ablyazov will be able to contest the next elections, he will enjoy
greater freedom to be a thorn in Aliyev’s side now that he is not facing the possibility of
extradition by his French hosts.
Falling Oil Output Will Delay Recovery

The economy contracted by 1% (year-on-year) in real terms through the first seven
months of 2017, based on the central bank’s monthly GDP indicator, reflecting the
negative impact of falling oil production and a reduction in capital investment. With the
leading economic index remaining in negative territory in July, and oil prices recently
Comment & Analysis 31-Aug-2017 • Page 13

dipping to less than $50 per barrel, the prospects for a return to positive growth in 2017
are dimming.
Positively, a more competitive exchange rate has supported non-oil manufacturing, led
by chemicals, food, and pharmaceuticals, and agricultural output has been boosted by
increased production of cotton, tea, and tobacco. However, industrial production fell by
5.6% (year-on-year) in the first half of 2017, and fixed capital investment fell by 2.9% in
the same period, as construction activity remained weak. With households tightening
their belts against a backdrop of rising unemployment and double-digit inflation, retail
growth is unlikely to make a positive contribution to economic growth. On balance, GDP
is forecast to contract by 0.5%–1% in real terms in 2017, with the trajectory of oil prices
influencing where the figure falls within that range.
The higher average oil price in 2017 has helped to push the current account balance back
into positive territory, following two consecutive years of deficits. The current account
surplus totaled $785 million over the first half of the year, but, with oil production falling,
sustaining the positive trajectory will depend on a continued rise in prices. The effort by
OPEC and major non-OPEC oil producers to boost prices by limiting global output will
continue at least through March 2018, which at the very least will provide some
protection against a prolonged fall in prices. On that basis, the current account surplus is
forecast to top 3% of GDP in 2017.
Consumer price inflation has remained firmly in double-digit territory in 2017, the result
of a combination of a weaker manat and increases in regulated prices of agricultural and
energy products. The inflation rate has risen slowly but steadily since January, reaching
14% (year-on-year) in July. Nevertheless, Central Bank of Azerbaijan Gov. Elman
Rustamov has expressed unwavering confidence that inflation will ease to single digits by
the end of the year, creating room for a reduction in the discount rate, which was hiked to
a record-high 15% last September, in an effort to support the currency.
The transition to a fully floating exchange rate in early 2017 initially sent the manat
plummeting by 15% against the dollar, but the currency quickly rebounded, and has
stabilized at around AZN1.7 to the dollar. Given the transparency issues raised by the
troubles at IBA, it cannot be assumed that monetary authorities’ assurances that there is
no need for central bank intervention will be accepted at face value, particularly if
investors begin to doubt official claims that the assets held by SOFAZ amount to more
than three times the country’s external liabilities.
Page 14 • 31-Aug-2017 Comment & Analysis

Azerbaijan
Country Forecast
Forecast Scenarios
SUMMARY OF 18-MONTH FORECAST
YAP Divided Military

REGIMES & PROBABILITIES 70% Government 20% 10%
SUMMARY OF FIVE-YEAR FORECAST

REGIMES & PROBABILITIES 65% 20% 15%
Most Likely Regime Scenario
18-Month Forecast Period: YAP Growth Inflation CACC

YAP (70% Probability) (%) (%) ($bn)
Five-Year Forecast Period: 2017 -0.9 12.5 1.30
YAP (65% Probability) 2018-2022 2.6 5.4 1.40
Since succeeding his strongman father, Heydar Aliyev, in 2003, President Ilham Aliyev
has steadily tightened his grip on power. A package of 41 constitutional amendments
approved by voters in March 2009 included one that lifted the two-term limit on the
presidency. Aliyev stood for re-election in October 2013, and won a third five-year term
with 85% of the vote. The governing New Azerbaijan Party (YAP) won 55% of the
125 seats in the National Assembly at the last legislative elections held in November 2015,
and the president also enjoys the reliable support of most of the more than 40 lawmakers
elected as independents.
Aliyev can expect to rule virtually unchallenged as long as he retains the backing of the
YAP, but that support cannot be taken for granted. A steep fall in global oil prices that
began in mid-2014 has produced a similarly sharp decline in state income, leaving
Aliyev’s regime with less lubrication for a patronage machine that is a key source of its
power, even as a steep slide in the currency, rising unemployment, and the imposition of
fiscal austerity have brought hardship for a large portion of the population.
Forecast Scenarios 31-Aug-2017 • Page 15

Public demonstrations in 2016 forced the government to lower taxes on essential food
items, and a steep rise in suicides since 2015 has been noted as an indicator of dangerous
socioeconomic stresses that in extremis could provoke a popular rebellion. Aliyev is
pressing his Cabinet to devise a formula to mitigate the economic decline, but he is taking
no chances, and authorities have stepped up their repression of dissent.
In May 2017, a court ruled that the Ministry of Transport, Communications, and
Technology is permitted to block independent media outlets for “inciting unrest” or
otherwise undermining the government. The Majlis has also recently approved a series
of bills that among other things revoke the citizenship rights of anyone who is declared a
terrorist (a designation that will no doubt be applied rather liberally), and a rise in
incidents of police brutality over the last two years has resulted in the de facto elimination
of any right to demonstrate publicly.
Aliyev has also taken steps to firm up the foundation of dynastic rule. In late September
2016, voters approved more than two dozen amendments to the constitution. Notable
changes included the lengthening of the presidential term from five years to seven—with
Aliyev’s current term now scheduled to expire in 2020—and the creation of two vice-
presidential posts, whose occupants will be at the head of the line to succeed the
president in the event of an unexpected vacancy in the top office.
Other changes include the reduction of the minimum age for holding the presidency or a
seat in the legislature, previously 35 and 25, respectively, to just 18. The latter reforms are
clearly intended to ensure that Aliyev’s only son, Heydar, who is currently just 20 years
old, faces no impediments to succeeding his father. First Lady Mehriban Aliyeva has
been appointed to the first vice president’s post, but she is widely seen as little more than
a reliable placeholder who will surrender the position to her son once he has gained the
experience required to become his father’s heir-apparent.
In all likelihood, President Aliyev will stand for re-election and win in 2020. Term limits
were previously scrapped in 2009, and the president is not particularly old, having turned
56 this year. Nor is there any indication that he is in poor health.
Taking those factors into consideration, and given the weakness of the organized
opposition, the biggest near-term threat to the political status quo is the possibility that
political and economic strains might undermine the unity of the YAP, resulting in
defections that cost Aliyev his claim to a legislative majority. The growing sense of
urgency over the economy at the top levels of the government points to a risk that failure
to produce a recovery may lead to divisive finger-pointing and personnel changes that
alienate important political allies. The risk of disunity within the YAP will increase the
Page 16 • 31-Aug-2017 Forecast Scenarios

longer the oil-price slump persists, as is reflected in the lower (albeit still quite high)
probability of this scenario beyond the 18-month forecast horizon.
Open for Investment, but Further Reform Needed

Numerous sources of political risk—a high level of corruption, the threat of popular
unrest, the possibility of renewed armed conflict with Armenia over the disputed enclave
of Nagorno-Karabakh, the danger that the EU might impose penalties over human rights
violations—should neither be ignored nor overblown by investors. Despite various signs
of brewing conflict, Azerbaijan offers a more hospitable climate for oil and gas investors
than many of the oil-producing countries in the Middle East and Africa. The policy
framework is oriented toward attracting inward investment, and foreign firms have not
been specifically targeted by political unrest. Moreover, there is scant evidence of an
undercurrent of the jihadist extremism prevalent in many Muslim countries, despite the
fact that Azerbaijan maintains excellent relations with Israel.
That said, boosting investment outside of oil and gas will require greater effort on the
part of the government to eliminate the deterrents that account for Azerbaijan’s failure to
crack the top 50 in the World Bank’s most recent Doing Business survey. Although the
country ranks in the top 25 with regard to the ease of starting a business, protection of
minority investors, and registering property, Azerbaijan is in the bottom half of the 190
countries surveyed in the areas of obtaining adequate power supplies (102), gaining
access to credit (122), and dealing with construction permits (161).
The non-oil economy has exhibited strength in recent years, but it is narrowly
concentrated in construction and services, and relies heavily on public-sector capital
expenditures. The current weakness of oil and gas prices has underscored the need for
diversification, but has at the same time contributed to fiscal constraints that will limit the
feasibility of relying on government contracts to stimulate non-oil growth and
employment in the private sector.
On that basis, officials have conceded that a diversification program will necessarily
occur in tandem with continued efforts to attract investment in oil and gas. However,
even before oil prices plummeted in 2014, it was clear that Azerbaijan could not count on
oil to carry the economy indefinitely, and in its search for alternative sources of state
income, the YAP regime has focused its efforts on creating a foundation for exploiting the
country’s enormous gas potential.
The discovery of another large Caspian gas field off the Absheron Peninsula near Baku in
2011 boosted the country’s proven gas reserves to 2.55 trillion cubic meters. Although
Azerbaijan’s reserves are rather small by regional standards—Russia’s reserves are 20

times larger, and Turkmenistan’s three times larger—they are of sufficient size to make it
a realistic possibility that Azerbaijan could become a major energy supplier for Europe.
However, progress has been delayed as a result of indecision with regard to how the gas
will be transported to European markets, a choice complicated by the EU’s strong desire
that the chosen route should bypass both Iran and Russia. The BP-led consortium
developing the Shah Deniz gas field ultimately settled on a proposed Trans-Adriatic
Pipeline (TAP), which, together with the existing South Caucasus Pipeline and a
proposed Trans-Anatolian Pipeline (TANAP) approved by Turkey and Azerbaijan in
2011, would carry gas from Azerbaijan to Italy, and from there to other markets in
southern Europe.
Investors in the Shah Deniz II gas project signed a final agreement in Baku in late 2013.
The $45 billion Southern Gas Corridor, which includes the construction of TANAP and
TAP, could potentially supply up to 20% of the EU’s gas in the long term. Azerbaijan’s
national oil company, SOCAR, and the partners in the Shah Deniz consortium have
agreed to extend terms for the project by 12 years, to 2048. A separate BP-led consortium
is in negotiations to extend its production-sharing agreement (PSA) for the Azeri-Chirag-
Gunashli (ACG) oil fields by 25 years, to 2049, as part of a plan to develop the gas
potential of the deep-water Gunashli field.
One obstacle could soon be removed, as Azerbaijan, Russia, Iran, Kazakhstan, and
Turkmenistan appear to be nearing a final agreement on the division of resources in the
Caspian Sea. In addition to determining the boundaries of the reserves claimed by each
of the five littoral states, the agreement will clear the way to move forward with the
construction of an underwater pipeline that will transport gas from Turkmenistan (and
possibly Kazakhstan) to Europe via the Southern Gas Corridor, positioning Azerbaijan to
be a linchpin of the EU’s long-term energy strategy.
However, the Southern Gas Corridor project still faces some potential significant
impediments. Azerbaijan is struggling to raise the estimated $4 billion it needs to cover
its share of TANAP (to say nothing of the $2 billion–$3 billion for TAP), and access to
loans from EU institutions has been cast into doubt by the country’s withdrawal from the
Extractive Industries Transparency Initiative (EITI) in March 2017.
The project also faces competition from a Russian-backed plan to transport gas to Europe
across the Black Sea. In contrast to the South Stream project shelved by Russia in late
2014, which entailed the delivery of Russian gas to Bulgaria, the new project, dubbed
TurkStream, would deliver gas to Turkey, and so would not be subject to the EU
regulations that prompted Moscow to abandon the South Stream plan.

Even with an eastern extension of the Southern Gas Corridor that taps into gas supplies
from Turkmenistan and Kazakhstan, the Azeri project will not be able to match
TurkStream in terms of the amount of gas it can actually deliver to customers; increased
domestic consumption has contributed to a drop in the volume of exportable gas over the
last two years, and new production from the Gunashli deep-water field is not scheduled
to begin until 2026.
Indeed, Alexander Medvedev, the deputy chairman of Russia’s Gazprom, has cast doubt
upon Azerbaijan’s ability to fill the pipeline at its scheduled startup in 2020. Adding
insult to injury, an EU rule banning a monopoly in the transport of gas means that
SOCAR must share TAP on a 50/50 basis with competitors, which, for all intents and
purposes, means Gazprom.
All of these considerations, along with the fact that the timeline for completing the
Southern Gas Corridor has become clouded amid delays resulting from political protests
against the pipeline project in Europe, raise questions about the viability of the venture.
And if Gazprom manages to win the bidding for a 66% stake in Greece’s DEFSA, which
would effectively give Russia control of the flow of Azerbaijan’s gas at the European end,
the political considerations underpinning EU support for the project would be rendered
moot.
Sales of oil and gas account for more than 90% of exports and more than 50% of state
revenue. As a result, both the external and fiscal balances are very sensitive to movement
in energy prices. With oil prices remaining far below the pre-slump highs and the gas
strategy looking shaky, and, in any case, unlikely to yield significant benefits for several
years, the expansion of non-energy industries will hold the key to macroeconomic
stability in the near-to-medium term.
Cooperation with the World Bank’s International Finance Corporation (IFC) has
contributed to significant progress toward creating a more hospitable climate for private
business activity in a broad range of industries, including tourism, financial services, and
telecommunications. However, successful diversification will require a broader
expansion of the non-energy industrial base.
In the World Economic Forum’s most recent Global Competitiveness Report, Azerbaijan
ranked 35th out of 140 countries surveyed. The deterrent factors most cited by investors
included the limited access to financing, macroeconomic instability (in particular, high
inflation), currency regulations, and the poor quality of the work force.

The development agenda of the government aims to address these concerns by

facilitating better coordination of fiscal and monetary policy to ensure macroeconomic
stability, improving the competitiveness of state-owned companies (including through
privatization), investing in human capital development and improvements to
infrastructure in order to meet the needs of companies in the manufacturing and services
sectors, and continuing to implement business-friendly administrative and legal reforms.
The government has drawn up a series of sector-based “strategic road maps,” a raft of
policies directed at key growth industries that are intended to give the economy a lift
over the medium-term and, more immediately, to see Azerbaijan through to 2020, when
the next stage of the Shah Deniz gas field is due to come on stream. The diversification
program entails the promotion of investment in the ICT sector, expansion of the tourism
industry, an increase in agricultural yields, improved logistics, support for the
proliferation of small and medium-sized enterprises (SMEs), and training for those who
will fill the jobs that will be produced as a result.
Plans for the transport sector are encouraging, but, as with all of the program’s ambitious
aims, the inadequacies of existing infrastructure will pose an obstacle to rapid
implementation. There are also question marks over how the strategy is to be financed
and whether the obstacles posed by national security risks and powerful vested interests
can be overcome.
The government recognizes the potential for tapping into the European travel market,
and is planning a major overhaul of the national airline fleet to upgrade the existing
Airbus and Embraer aircraft by 2020, while investing in the air transport infrastructure,
including Baku international airport and its cargo facilities, and launching a new low-cost
air carrier (Buta Airways). The state carrier Azerbaijan Airlines controls a 50% share of
the European market among domestic lines, but the government is planning to double
the number of destinations that Azerbaijan serves in Europe, simultaneously opening up
new routes for competing airlines.
Fiscal strains have revived the government’s interest in privatization, but plans remain
unclear. Preparations have been made to privatize the International Bank of Azerbaijan
(IBA), which owns 35% of the nation’s bank assets, but the timeline for the sale has been
made uncertain by the forced restructuring of some $3.3 billion of IBA’s debt following a
missed debt payment earlier this year.
The rising level of risk in the banking sector more generally was indicated by a rise in the
non-performing loans ratio, which is now above 20%, and has increased in line with the
deterioration of other stability measures, including the regulatory capital to risk-weighted

assets, return on assets, and return on equity indicators. Several smaller banks have shut
down since the oil crisis began, along with some credit unions, and consolidation of the
banking sector has led to numerous branch closures.
It is unclear whether IBA executives hid the bank’s problems from authorities, or if the
government knew about the troubled state of the bank and simply decided that it could
no longer continue to prop up a loss-making institution. If the latter, the failure to rescue
the state-owned institution could be an indication that the assets held by the state-owned
sovereign wealth fund (SOFAZ) are actually much smaller than the current estimate of
$33 billion, or that the government is carrying significant off-budget liabilities that are a
higher priority than ensuring full payment to IBA’s creditors.
The incident raises questions about transparency, competence, and corruption that cannot
help but harm the country’s reputation among potential investors, and is a troubling sign
for those looking for evidence of a commitment to addressing obstacles to accessing
domestic financing, which, as noted, is among the top deterrents to foreign investment.
Whether the self-inflicted wound causes lasting damage will become more apparent as
the government pushes ahead with the planned privatization of IBA, which is scheduled
to be completed next year. The doubts about financial transparency could also
undermine Azerbaijan’s ability to obtain the funding required for the Southern Gas
Corridor.
In 2011, amid growing anxiety that the Arab Spring rebellions might ignite an uprising in
Azerbaijan, President Aliyev visibly stepped up his government’s anti-corruption efforts.
Significantly, he issued a decree requiring that all traffic fines be paid through banks,
thereby reducing the opportunities for bribes, and that one-quarter of the proceeds from
traffic and customs fines be used to increase the pay of police and customs officials,
thereby reducing the temptation to demand (or accept) bribes.
In addition, the government established a web site that provides the public with
information on the official levels of all fees, tariffs, taxes, and state-controlled prices.
Anecdotal evidence suggests that demands for bribes from police and customs officials
have been greatly (if not completely) reduced, and the government has pledged to
enforce similar professional discipline in health, education, and tax agencies.
According to local media reports, dozens of lower- and mid-level bureaucrats were
dismissed on the grounds of corruption in the early stages of the reinvigorated campaign,
and two higher level officials—the heads of the prison service and the national water
company—were removed for the same reason. However, some of Aliyev’s more senior
allies could become dangerous rivals if the president’s actions threaten flows of income

on which they have come to depend, and given the current state of the domestic political
climate, it is doubtful that Aliyev will risk stepping too hard on sensitive toes. Moreover,
the freedom of civil servants to extort payments from those who require their services is
an essential component of the glue that binds the bureaucracy to the regime.
The central bank adopted a new exchange rate arrangement in March 2009 under which
the manat was pegged to the US dollar. The combination of sharply lower oil prices and
serious economic difficulties in Russia contributed to strong downward pressure on the
currency in early 2015, forcing intervention to maintain the peg that resulted in an
alarming depletion of foreign currency reserves.
In February 2015, the manat was devalued by 33% against the US dollar, with the
exchange rate moving to AZN1.05. However, the currency remained under pressure, the
result of Russia’s continuing economic problems, the persistent weakness of oil prices,
and regional exchange-rate turbulence triggered by the anticipated initiation of monetary
tightening in the US.
The differential between the official and unofficial exchange rates widened through the
summer and fall months, even as the central bank burned through some $7 billion of its
reserves (or about one-half of the total at the start of the year) in an unsuccessful effort to
maintain an effective one-to-one peg of the manat to the US dollar. In December 2015,
central bank Gov. Elman Rustamov announced the abandonment of the peg, and the
manat immediately lost one-third of its value, plummeting to AZN1.51 to the dollar.
In a bid to stabilize the currency, the central bank stopped short of allowing the market to
set the exchange rate, and instead introduced an exchange-rate corridor that required
banks to trade manat for no more than 4% above or below the official exchange rate.
Banks responded by cutting back on foreign-currency sales, which again led to the rapid
widening of the differential between the official and black-market exchange rates. By the
time the central bank abandoned the corridor in January 2017, the manat was trading at
close to AZN1.8 to the dollar. The stabilization of the exchange rate at around AZN1.7 to
the dollar has created room for an easing of exchange controls.
The 2017 budget includes substantial spending cuts to address the widening of the
consolidated deficit to around 10% of GDP in 2016, which is to be partly financed by
drawing on the assets of the State Oil Fund (SOFAZ). However, the government must
take care not to deplete the fund, and Azerbaijan could face financing difficulties if the
oil-price slump persists. Consequently, in the absence of a strong rebound in oil prices,
the risk of a tightening of exchange controls, the imposition of restrictions on the

repatriation of profits from foreign investment, and/or an increase in payment delays

will be somewhat higher in the five-year forecast period.
External Threats the Main Source of Turmoil Risk in the Near Term
The government’s favored response to signs of domestic unrest is stepped-up
enforcement of restrictions on the exercise of civil rights. Crackdowns are frequently
accompanied by the deliberate stoking of tensions with Armenia, with which Azerbaijan
fought a war over control of the disputed enclave of Nagorno-Karabakh. The territorial
issue remains unresolved more than three decades after the suspension of hostilities, and
the periodic flaring of cross-border tensions provides the YAP regime with both a pretext
for cracking down on critical journalists, non-governmental organizations (NGOs), and
human rights activists, as well as a nationalistic cause into which to channel domestic
discontent.
The strategy has worked as well as needed to date, but the boycott of the 2015 legislative
elections by most of the opposition parties means that opponents of the YAP regime have
limited legal avenues for airing their grievances, a fact that increases the risk that dissent
will instead take the form of illegal (and possibly violent) acts down the road. Likewise,
the government’s reliance on jingoism as a tool for managing domestic political threats
carries an inherent risk of a miscalculation that plunges the country back into war with
Armenia.
Nagorno-Karabakh is internationally recognized as part of Azerbaijan, but it is presently

under the de facto rule of a regime backed by Armenia, and efforts to resolve the dispute
remain at an impasse. Aliyev’s government has steadfastly maintained that it is clearly in
the right, and so has no obligation to compromise on any of its demands, which include
the unconditional return of five regions adjacent to Nagorno-Karabakh that remain
wholly under the control of Armenia and the parts of two others that Armenia continues
to occupy. Baku has expressed a willingness to grant significant autonomy to the
inhabitants of Nagorno-Karabakh within the framework of a united Azerbaijan, but
Aliyev has unequivocally rejected independence for the enclave.
The issue of Nagorno-Karabakh strikes an emotional chord with military and political
leaders in Azerbaijan, including many among the opposition, and Aliyev has not
hesitated to stoke the fires of nationalism to boost his support at home. To the extent that
the poor performance of the economy contributes to an increased risk of domestic unrest,
Aliyev will be that much more inclined to engage in provocative actions toward Armenia.
Both President Aliyev and Defense Minister Zakir Hasanov have warned that Azerbaijan
is prepared to retake control of the enclave by military force if leaders of the self-

proclaimed Nagorno-Karabakh Republic and their Armenian backers fail to engage fully
in international efforts to achieve a negotiated settlement of the longstanding dispute.
Hasanov has cited a UN Security Council resolution calling for Armenia’s withdrawal of
support for the separatists as sufficient justification for the use of military force, and
Azerbaijan has prepared itself to win in the event of a renewal of hostilities by investing
very heavily in enhancing its military capability.
Neither Turkey nor Russia, which back Azerbaijan and Armenia, respectively, in the
dispute, has an interest in opening yet another theater of instability in an already deeply
troubled region. But, as ever, the possibility of a disastrous miscalculation cannot be
ruled out. Moreover, broader geopolitical considerations, including a struggle between
the EU and Russia over access to Azerbaijan’s energy supplies and the potential for a
shared animosity toward the EU to encourage closer cooperation between Russia and
Turkey could alter the prospects for achieving a brokered resolution of the territorial
dispute in such a way that Aliyev and his advisors conclude that Nagorno-Karabakh can
only be reclaimed by means of force.
Azerbaijan’s military capability dwarfs that of Armenia; indeed, its $3 billion outlay for
defense spending in 2013 alone was larger than Armenia’s entire state budget in that
same year, and the 2015 budget included a 27% increase in military spending. But the
very fact that a one-on-one fight between Azerbaijan and Armenia would be a lop-sided
affair increases the likelihood that other countries might intervene, with Russia providing
support to Armenia and the US and the EU lining up behind Azerbaijan. In that event,
the region could be transformed into a second front in the proxy war between Russia and
NATO launched in Ukraine in 2014, with all that that would imply for the main
combatants’ access to deadly military hardware and other supplies.
In November 2011, the National Assembly approved changes to the country’s criminal
and administrative codes that mandate heavy fines and possible jail terms for
disseminating religious literature without the approval of the State Committee for
Religious Affairs (SCRA), for promoting “forced” religious participation, and for the
performance of religious rituals by persons who received their religious training outside
of Azerbaijan. The moves point to growing concern on the part of the government about
the threat posed by the politicization of domestic religious groups, an unintended
consequence of the regime’s extremely successful neutralization of the secular political
opposition. The crackdown also revealed the Aliyev government’s deep suspicions about
the intentions of the Islamist regime in Tehran, which have no doubt been heightened by
Iran’s backing of Houthi rebels in Yemen.

Fiscal Constraints Will Impede Non-oil Expansion

The economy contracted by 1% (year-on-year) in real terms through the first seven
months of 2017, based on the central bank’s monthly GDP indicator, reflecting the
negative impact of falling oil production and a reduction in capital investment. With the
leading economic index remaining in negative territory in July, and oil prices recently
dipping to less than $50 per barrel, the prospects for a return to positive growth in 2017
are dimming.
Positively, a more competitive exchange rate has supported non-oil manufacturing, led
by chemicals, food, and pharmaceuticals, and agricultural output has been boosted by
increased production of cotton, tea, and tobacco. However, industrial production fell by
5.6% (year-on-year) in the first half of 2017, and fixed capital investment fell by 2.9% in
the same period, as construction activity remained weak. With households tightening
their belts against a backdrop of rising unemployment and double-digit inflation, retail
growth is unlikely to make a positive contribution to economic growth. On balance, GDP
is forecast to contract by 0.5%–1% in real terms in 2017, with the trajectory of oil prices
influencing where the figure falls within that range.
The higher average oil price in 2017 has helped to push the current account balance back
into positive territory, following two consecutive years of deficits. The current account
surplus totaled $785 million over the first half of the year, but, with oil production falling,
sustaining the positive trajectory will depend on a continued rise in prices. The effort by
OPEC and major non-OPEC oil producers to boost prices by limiting global output will
continue at least through March 2018, which at the very least will provide some
protection against a prolonged fall in prices. On that basis, the current account surplus is
forecast to top 3% of GDP in 2017.
Consumer price inflation has remained firmly in double-digit territory in 2017, the result
of a combination of a weaker manat and increases in regulated prices of agricultural and
energy products. The inflation rate has risen slowly but steadily since January, reaching
14% (year-on-year) in July. Rustamov has expressed unwavering confidence that
inflation will ease to single digits by the end of the year, creating room for monetary
authorities to reduce the discount rate, which was hiked to a record-high 15% last
September, in an effort to support the currency.
The manat has stabilized at around AZN1.7 to the dollar but given the transparency
issues raised by the troubles at IBA, it cannot be assumed that monetary authorities’
assurances that there is no need for central bank intervention will be accepted at face
value, particularly if investors begin to doubt official claims that the assets held by
SOFAZ amount to more than three times the country’s external liabilities. As such, there

is some risk of inflationary currency volatility in the second half of the year. In any case,
the average inflation rate for the year will remain firmly in double digits.
Political factors are likely to slow the implementation of reforms required to successfully
diversify the economy, which will in any case be a long-term project. In the meantime,
economic growth rates will continue to reflect conditions in the oil sector, which will in
turn affect the government’s ability to support the expansion of the non-oil economy. As
long as investors have faith that the government is stable enough to ensure a secure
climate for investment, ongoing projects in the oil and gas sector will proceed.
Even assuming a recovery in global oil prices over the five-year forecast period, the
average price is likely to remain well below the peak reached in mid-2008, and such
production increases as are realized will fall far short of the levels that contributed to real
economic expansion averaging more than 20% annually in 2005–2009.
Fairly strong non-oil growth will ensure positive real expansion beyond the current year,
but the relative weakness of the growth contribution from the oil sector will hold the pace
of expansion to an average of just 2.6% through 2022. Slower rates of growth will be
reflected in more moderate wage increases that will ease domestic demand pressures
over the medium term, holding average inflation to 5.4% per year through 2022. The
current account balance will remain in positive territory, but surpluses will average just
$1.4 billion annually over the five-year forecast period, compared to the average of
slightly more than $14 billion registered in 2010–2014.
Second Most Likely Regime Scenario
18-Month Forecast Period: Broad Growth Inflation CACC

Divided Government (20% Probability) Alliance (%) (%) ($bn)
Five-Year Forecast Period: 2017 -1.5 14.4 0.40
Broad Alliance (20% Probability) 2018-2022 1.7 6.1 -0.20
Constitutional amendments approved by voters in September 2016 broadened the

president’s powers to include the authority to dissolve the National Assembly and call
early elections in the event of two no-confidence votes in the government within a single
year, or if the president’s nominees for the Constitutional Court, the Supreme Court, or
the Central Bank of Azerbaijan are rejected by lawmakers. Consequently, President
Aliyev would continue to hold the upper hand even if strife within the YAP were to
result in defections that left his government without the support of a legislative majority.

That said, the YAP’s loss of political dominance as a consequence of defections by

disaffected members could make it more difficult for the government to use repression to
control its opponents, and a regime dependent upon the backing of a weakened and
factious YAP would be more vulnerable to pressure from foreign governments and
multilateral organizations to hold fair elections. Under those circumstances, Aliyev’s re-
election could not be taken for granted, and it would become harder for the YAP to
reclaim a legislative majority at elections that must be held by November 2020.
Given Azerbaijan’s geopolitical importance, the international community would be keen

to ensure that political stability is maintained, and would encourage the formation of a
broad coalition to provide President Aliyev, or, possibly, a victorious challenger for the
presidency, with a firm basis for governing.
Less Inviting Policies

While generally favoring foreign investment, the current opposition contains a significant
nationalist component, most notably in the case of the New Equality Party (Musavat),
which would be expected to play a leading role in what would effectively be a national-
unity regime. Among other criticisms, Musavat leader Isa Gambar has denounced the
YAP regime’s privatization policies and its contracts with foreign oil companies as being
excessively generous.
Even so, this regime would seek to firm up international ties. It would be unlikely to
increase tariffs, except as a revenue-raising measure to meet shortfalls in the government
budget. The YAP would likely treat the loss of its political monopoly as a temporary
setback, and would resist efforts by its coalition partners to dismantle the patronage
networks that are the foundation of the party’s popular support. Consequently, little
progress would be expected with regard to reducing corruption or improving the
efficiency of the bureaucracy.
The YAP would resist pressure from its unwanted partners to renegotiate existing oil
contracts, a move that would prove extremely troublesome unless major new reserves are
found, giving the government greater leverage. The much-criticized privatization
process would be delayed and overhauled. Furthermore, some elements among Aliyev’s
opponents reject privatization as a matter of principle; their influence could produce even
further slowing.
Greater Threats of Turmoil

Both the Popular Front Party of Azerbaijan (AXCP) and Musavat fiercely criticized the
1993 cease-fire with Armenia and have in the past called for a resumption of the war to
recover Nagorno-Karabakh. One of the AXCP’s first successes after independence was to

mobilize Azeris to defend the enclave. Consequently, the inclusion of both of those
parties in a coalition government would bring a risk of heightened tensions with Armenia
that could endanger the cease-fire. However, international pressure, including threats
from Russia, which would be better-positioned than the west to halt a march to war,
would help to contain the risk of a generalized resumption of armed hostilities.
Uncertainty Would Lead to Reduced Economic Gains

The political disorder accompanying the YAP’s loss of absolute power would create
economic difficulties. Backsliding on free-market reform measures would jeopardize
relations with investors, who would adopt a cautious posture until the policies of the new
regime became clearer. Consequently, real GDP growth would average only 1.7%
annually through 2022, and the deterioration would be more severe in the event of
renewed conflict with Armenia. Domestic conditions would leave political leaders
disinclined to practice fiscal restraint, and spending increases designed to purchase social
peace would contribute to persistent inflation averaging 6.1% over the five-year forecast
period.
The current account balance would fall back into deficit under this scenario, as political
uncertainty encouraged caution by investors in oil and gas projects, resulting in a lower
level of output (and, by extension, revenues). Weak domestic demand would dampen
the growth of imports, reducing the risk of a dangerous expansion of the current account
deficit, which would average $200 million annually over the five-year forecast period.
Even in the event of a resumption of hostilities with Armenia, unrest would not be so
widespread as to interrupt critical hydrocarbons production.
Third Most Likely Regime Scenario
18-Month Forecast Period: Military Growth Inflation CACC

Military (10% Probability) (%) (%) ($bn)
Five-Year Forecast Period: 2017 -2.0 15.9 -0.80
Military (15% Probability) 2018-2022 0.6 10.7 -2.10
President Aliyev has significantly consolidated his control over the governing party, and
the extension of his current term from five years to seven means that he will retain a legal
claim to office until at least 2020. Even so, the possibility that Aliyev could make a
tremendous blunder (such as a bungled attempt to reclaim Nagorno-Karabakh by force)
that undermines his authority and unleashes a destabilizing power struggle within the
YAP cannot be ruled out. Under such circumstances, an accompanying breakdown in
civilian political control could provoke intervention by the military.

However, YAP leaders recognize that their political fortunes are closely tied to the
government’s success at containing disorder, and that the long-term satisfaction of their
ambitions would more likely be achieved through cooperation rather than open conflict
with rivals. Furthermore, all potential rivals for power appreciate that widespread
fighting would devastate the prospects for the investment that is vital to economic
development. The greater sense of national identity that has developed in the years since
independence would also limit the ability of a regional military leader to seize power.
Deteriorating Business Environment

Under a military-led regime, security concerns would likely prompt the implementation
of a wide variety of additional restrictions on investment. Battling military factions
would attempt, with doubtful success, to shield oil companies from the violence, hoping
to maintain the country’s main source of revenue. Infrastructure would deteriorate
further because of neglect, lack of funds, and damage caused by the fighting.
Some leaders might try to raise tariffs as a revenue enhancement measure, but collection
would be difficult and erratic. In any event, international trade would substantially
decrease. Corruption would become even more pervasive.
Serious Economic Disorder in the Early Going

Foreign investment would virtually disappear in the period following a military
takeover, making any chance of a return to positive growth all the more dependent on an
oil-price recovery. Assuming the turmoil and instability accompanying the change of
regime did not create long-term impediments to oil production, the economy may begin
to recover by the second half of the forecast period, but average annual growth for the
five-year time frame would be barely positive, at best.
Assuming political and social upheaval would not escalate to such intolerable levels as to
convince foreign oil and gas companies to pull their operations out of the country,
hydrocarbons output would remain sufficient to limit the danger of a crisis-inducing
expansion of the current account deficit. Conditions that resulted in the emergence of a
military regime would contribute to declining demand for consumer and capital imports,
but the caution of foreign investors would result in lower levels of oil and gas production
that would dampen growth of exports, resulting in persistent current account shortfalls
averaging $2.1 billion per year through 2022.

Forecast Summary
SUMMARY OF 18-MONTH FORECAST
YAP Divided Military

REGIMES & PROBABILITIES 70% Government 20% 10%
RISK FACTORS CURRENT
Turmoil Moderate SLIGHTLY MORE MORE MUCH MORE
Investment
Equity Moderate Same SLIGHTLY MORE MORE
Operations Moderate Same MORE MORE
Taxation Moderate Same Same MORE
Repatriation Low Same SLIGHTLY MORE MORE
Exchange Moderate Same SLIGHTLY MORE MORE
Trade
Tariffs Moderate SLIGHTLY LESS Same MORE
Other Barriers High Same Same SLIGHTLY MORE
Payment Delays Low SLIGHTLY MORE SLIGHTLY MORE MORE
Economic Policy
Expansion Low SLIGHTLY MORE MORE MUCH MORE
Labor Costs Low Same Same SLIGHTLY MORE
Foreign Debt High Same Same SLIGHTLY MORE
SUMMARY OF FIVE-YEAR FORECAST

REGIMES & PROBABILITIES 65% 20% 15%
RISK FACTORS BASE
Turmoil Moderate Same SLIGHTLY MORE MORE
Restrictions
Investment Moderate Same SLIGHTLY MORE MORE
Trade Moderate SLIGHTLY LESS Same MORE
Economic Problems
Domestic Moderate Same Same SLIGHTLY MORE
International High Same Same SLIGHTLY MORE
* When present, indicates forecast of a new regime



Azerbaijan
Country Forecast
Political Framework
Players To Watch
Ilham Aliyev: Aliyev became president upon the death of his father, longtime strongman
ruler Heydar Aliyev, in 2003, and was elected to a third five-year term in October 2013,
winning 85% of the popular vote in a contest that the opposition claimed was marred by
widespread fraud. Constitutional amendments approved in 2011 lifted the presidential
term limit, and Aliyev, who will turn 55 later this year, has given every indication that he
plans to remain in office as long as he is able to do so. The president benefited politically
from a rapid improvement in living standards fueled by a prolonged period of high oil
prices that came to an end in the second half of 2014. A significant reduction in oil
income contributed to a deepening economic downturn that poses a political problem for
Aliyev. However, a constitutional amendment that extended the presidential term from
five years to seven means that Aliyev will not be required to renew his mandate until
2020, and divisions among the opposition parties will limit the risk that he might face a
strong challenge, assuming he is able to avoid divisive power struggles within the
governing YAP.
New Azerbaijan Party: The YAP was very much Heydar Aliyev’s party, and factions
within the party only grudgingly accepted the longtime leader’s decision to hand power
to his son. Ilham Aliyev has established firm control over the party, but a sharp
reduction in oil revenues has threatened his ability to maintain the extensive patronage
system that binds the various factions together. On matters of policy, the YAP generally
supports the cautious implementation of economic reforms, but resistance from the
oligarchs who worked in close alliance with Heydar Aliyev will continue to pose an
obstacle to efforts to improve the climate for foreign investment and trade.
Traditional Opposition: The leading opposition parties are Isa Gambar’s New Equality
Party (Musavat) and Ali Kerimli’s Azerbaijan Popular Front Party (AXCP), which have
made repeated attempts to establish a united electoral front with the aim of loosening the
YAP’s stranglehold on power. The most recent effort resulted in the formation of the
National Council of Democratic Forces (NCDF), a multiparty organization that aligned
behind the presidential candidacy of Jamil Hasanly in 2013. The opposition candidate
won just 5% of the vote, an unsurprising outcome given the ruling party’s vast advantage
Political Framework 31-Aug-2017 • Page 33

in access to state resources and media, and the limitations imposed on the opposition’s
freedom to campaign. The aftermath of the elections highlighted the central weakness of
the opposition, namely, the fact is that there is little to bind the parties together beyond
their shared hostility to President Aliyev. Following the failed attempt to unseat the
president, the incompatible ideologies, personal enmities, and disagreements over
strategy that had been held in check during the campaign came to the fore. Although the
NCDF regrouped ahead of the 2015 legislative elections, the bloc ultimately boycotted the
vote, resulting in its exclusion from the National Assembly. Deepening economic
difficulties resulting from the steep fall in oil prices since mid-2014 could undermine the
ruling regime’s support among Azerbaijan’s growing bloc of middle-class voters, but the
combination of state repression and internal divisions will limit the opposition’s ability to
exploit popular discontent.
Republican Alternative: Frustrated by the repeated failure of the old guard opposition
leaders to build a mass following, a younger generation of activists formed Republican
Alternative (ReAl) as a vehicle for promoting a liberal challenger in the 2013 presidential
election. However, the party’s leader, Ilgar Mammadov, was arrested in February 2013
on charges of inciting rioting in the northern town of Ismayili the previous month,
thereby preventing him from contesting the presidential election held later that year. The
addition of several defectors from the NCDF convinced the leaders of ReAl to formally
register the organization as a party, but ReAl’s prospects for reshaping the country’s
political landscape have been cast into doubt by the sentencing of Mammadov to a prison
term of seven years in March 2014. Like the NCDF, ReAl boycotted the 2015 legislative
elections, a decision that will limit its ability broaden its base of support ahead of the next
presidential election in 2020.
Page 34 • 31-Aug-2017 Political Framework

1-Jul-2017 Reproduction without written permission of The PRS Group is strictly prohibited.
Azerbaijan
Country Conditions
Climate for Investment & Trade
Overview
Openness to Foreign Investment
Over the past few years, the Government of Azerbaijan has worked to integrate the country more fully into
the global economic marketplace, attract foreign investment, diversify its economy, and boost economic
growth and employment. Attracting foreign direct investment to support economic diversification
continues to be the government’s stated goal with President Aliyev and his government particularly
targeting the following sectors: agriculture, transportation – including the infrastructure needed to realize
the new Silk Road connecting East and South Asia with western Europe, tourism, and
information/communication technology.
The drop in world oil prices that began in summer 2014 – and their concomitant impact on government
budget revenues – contributed to the Azerbaijani government’s efforts to undertake more comprehensive
reforms. In February 2016, the government introduced amendments to the Tax Code, which provides tax
benefits to legal and physical entities engaged in certain investment activities. With these amendments,
physical and legal entities can be exempt from paying taxes for 50% of their revenues and incomes,
respectively, for up to seven years. Moreover, amendments to the law On Customs Tariff allow legal and
physical entities to be exempted from customs duties and value-added tax (VAT) on import of capital
equipment for up to seven years. In addition, any organization or industrial or technology park operator
who plans to import capital equipment in certain designated sectors may apply for permission to construct
production facilities, or conduct research, test, and development activities. Also, in June 2016 Azerbaijan’s
parliament amended the country’s Tax Code, launching a tax-free system, under which the goods
purchased in the country’s territory by foreigners and stateless persons are exempted from VAT. On
December 16, 2016 President Azerbaijan signed a law amending the Tax Code (the “Amendment Law”),
which included 201 modifications to the tax code. The amendments that have come into force since January
2017, including those on tax amnesty, have attracted significant business interest; especially changes
regarding taxation of e-trade.
In 2015, Azerbaijan twice devalued its local currency, the manat (AZN), by 35% in February and again by
48% in December as a result of continued low world oil prices. While the move relieved pressure on the
country’s foreign currency holdings, since early 2015 many Azerbaijanis have converted their savings
accounts into dollars such that the rate of dollarization of deposits is believed to exceed 80%, and for loans
60%. However, there are no restrictions on converting or transferring funds associated with an investment
into freely usable currency at a legal, market-clearing rate.
The country’s financial services sector – of which banking comprises more than 90% – remains
underdeveloped, a factor that constrains economic growth and diversification. Many state-owned
enterprises (SOE’s) enjoy quasi-governmental or near-monopoly status in their respective sectors, with
unclear lines of separation between regulatory bodies and state corporate interests. Responsible Business
Conduct (RBC) is a relatively new concept in Azerbaijan and local companies generally consider basic
Climate for Investment & Trade 1-Jul-2017 • Page 1

Political Risk Services Azerbaijan Country Conditions
charitable donations and paying taxes as acts of social responsibility. There have been no known acts of
political violence against U.S. businesses or assets, nor against any foreign owned entity.
The Azerbaijan Export and Investment Promotion Foundation (AZPROMO) is a joint public-private-
initiative, established by the Ministry of Economy and Industry in 2003 to foster the country’s economic
development and diversification by attracting foreign investment into the non-oil sectors of the economy
and stimulating expansion of Azerbaijan’s exports of non-oil goods to overseas markets. AZPROMO has
been involved in a number of business forums on investment opportunities in Azerbaijan and training
events for SMEs looking to export their products both in Azerbaijan and internationally.
President Aliyev signed a decree in March 2016 establishing a free trade zone area next to the Alat seaport,
located 65 km south of Baku, and tasked the Ministry of Economy with drafting the necessary legislation to
complete the project. Those documents, however, have not yet been released. Amendments to the Customs
Tariff law provide exemptions of up to seven years to entrepreneurs importing capital equipment for any of
the priority sectors previously mentioned. Additionally, up to 50% of their revenues can be exempted from
income, property, and land taxes for up to seven years. Azerbaijan’s business community reported seeing
real improvements in customs processing in 2016, including better transparency and improved,
systematized customs fee collection procedures. Azerbaijan has worked to improve its regulatory system
over the past several years, but opaque procedures in a number of areas and continued allegations of
corruption remain barriers to more direct investment and overall economic development.
In early 2016, several roundtable discussions brought government and business community representatives
together, including an April-session President Aliyev held with the board of the American Chamber of
Commerce in Azerbaijan. Both sides welcomed and applauded that initiative to increase communication
and engagement. This robust public-private dialogue continues.
On January 26, 2017 President Aliyev signed a decree to appoint trade representatives in the Azerbaijani
embassies and consulates. Under that decree, the trade representatives will work to expand Azerbaijan’s
trade and economic relations with the countries where they are appointed.
Azerbaijan is also set to strengthen its position as a Digital Trade Hub and expand its foreign trade
operations. Under a February 23, 2017 Presidential Decree, the Center for Analyses of Economic Reforms
and Communications is tasked with creating a “Digital Trade Hub of Azerbaijan” section at its export
promotion portal azexport.az, which makes Azerbaijani locally produced products available to potential
buyers anywhere in the world.
The Azerbaijani government has focused on developing its agricultural sector, noting that exports have
increased 30% over the past five years. However, 90% of agricultural exports are to the Russian market.
Azerbaijan is interested in applying modern machinery and equipment to increase productivity and
efficiency in the sector. The country’s priority is the production of export-oriented products, including
products such as hazelnut, chicken meat, carrots, wine, butter, cottonseed, apples, pomegranates, rock salt,
and tea.
To develop Azerbaijan’s tourism potential, the government enacted various reforms, including simplified
visa procedures and reduced costs for tourist visas. On January 10, 2017 the State Agency on Public Services
and Social Innovations (ASAN) started to provide electronic tourist visas for citizens of specific countries,
including the U.S., through the “ASAN Visa” system. The E-visas are adjudicated within three working
days after the visa application is submitted. The tourist visas are valid for 30 days and the fee is $20.
According to the State Statistics Committee of Azerbaijan, 2.25 million tourists visited Azerbaijan in 2016,
Page 2 • 1-Jul-2017 Climate for Investment & Trade

up 12.1% from 2015. The majority of this increase was from Arab tourists, after Azerbaijan implemented a
visa-upon-arrival system for a variety of countries. The government also continues to host large,
international events, such as the Formula 1 Grand Prix and the Islamic Solidarity Games of 2017, as part of
its effort to attract tourists.
Azerbaijan considers travel to the region of Nagorno-Karabakh and the surrounding territories unlawful
and could make a traveler ineligible to visit Azerbaijan in the future. These areas have been occupied by
pro-Armenian forces as a result of a conflict that began in the late 1980s. Engaging in any commercial
activities in Nagorno-Karabakh and the surrounding territories, whether directly or through business
subsidiaries, can result in criminal prosecution and/or other legal action being taken against individuals
and/or businesses in Azerbaijan; it may also affect the ability to travel to Azerbaijan in the future.
Limits on Foreign Control and Right to Private Ownership and Establishment. Azerbaijan imposes more
than average restrictions on foreign equity ownership compared to countries in the Eastern Europe and
Central Asia region included in the IFC’s Investing Accross Borders Report. Sectors where investment is
restricted include those relating to national security and defense. The Government of Azerbaijan also exerts
some control over other key sectors, such as agriculture, communications, oil, and mining. Under
Azerbaijani laws, the state must retain a controlling stake in companies operating in the mining or oil and
gas sectors. Thus, foreign (as well as domestic) capital participation is limited to a maximum of 49%
ownership. Foreign ownership in the media sector is strictly limited as well. Unless there is an international
agreement with Azerbaijan providing otherwise, foreign shareholding in media companies is limited to
33% in newspaper publishing and is prohibited in TV broadcasting companies. Restrictions on foreign
equity ownership in the financial services sectors (banking and insurance) have been abolished; however,
there are still limits within these sectors for how much total foreign capital participation is permitted.
Foreign investments enjoy complete and unreserved legal protection under the Law on the Protection of
Foreign Investment, in addition to any guarantees contained within international agreements or treaties.
This law stipulates that Azerbaijan will treat foreign investors, including foreign partners in joint ventures,
in a manner not less favorable than the treatment accorded to national investors. The law also allows
repatriation of profits, revenues, and other investment-related funds as long as applicable taxes have been
paid. Azerbaijan has endorsed limits on foreign control in the domestic insurance market. In compliance
with the amendments to the Law on Insurance Activity, which Azerbaijan’s Parliament approved in 2013, a
foreign individual cannot hold more than ten percent of the total equity capital of an insurance company
while the total share of foreign capital in insurance companies’ equity cannot exceed 50%. International
financial institutions of which Azerbaijan is a member are exempt from these limits.
Privatization Program. A renewed privatization process started with President Aliyev’s decree on
additional measures to improve the process of state property privatization on May 19, 2016, as well as the
presidential decree from July 19, 2016, on measures to improve the management efficiency and accelerate
privatization of state property. Under these decrees, accelerating privatization is defined as an important
direction of economic policy. The portal providing information on privatization, privatization.az, launched
in July 2016, contains information about the facilities, their addresses, location, and even initial costs with
an aim facilitating the process. In addition, the State Committee on Property Issues has developed a draft of
the Third State Privatization Program (the “Privatization Program”). The main objectives of the
Privatization Program are to attract foreign investment, increase efficiency and transparency in respective
sectors, and save government funds. Nevertheless, the government does not plan to privatize certain
strategic assets. Funds derived from the Privatization Program are planned to be invested in further
developing the non-oil sectors.

Other Investment Policy Reviews. Azerbaijan has not conducted an Organization for Economic
Cooperation and Development (OECD) investment policy review in the past three years nor a United
Nations Conference on Trade and Development (UNCTAD) investment policy review. However, it made
gradual progress over the past years in The World Bank’s Doing Business Report:
http://www.doingbusiness.org/data/exploreeconomies/azerbaijan
Business Facilitation. Azerbaijani law requires all companies operating in the country to be registered.
Without formal registration, a company may not do business in Azerbaijan (e.g., maintain a bank account,
clear goods through customs). As part of the ongoing business law reforms, a “One Window” principle was
introduced January 1, 2008. The registration procedures involving several government bodies (Ministry of
Justice, Social Insurance Fund, and State Statistics Committee) have been eliminated, and businesses only
have to register with the Ministry of Taxes. The established period for registration with the Ministry of
Taxes is officially set at three days for commercial organizations. Online registration is available at
http://taxes.gov.az/modul.php?lang=_eng&name=birpencere&bolme=registration and works adequately.
Azerbaijan ranks 63rd in Ease of Doing Business and 7th in Starting a Business out of 189 countries in The
World Bank’s Doing Business Report (rankings are available at: http://www.doingbusiness.org/rankings).
Outward Investment. Azerbaijani entities have made outward investments in various countries.
Investments by state-owned enterprises, such as SOCAR or through the State Oil Fund of Azerbaijan
(SOFAZ), the country’s sovereign wealth fund, are particularly important. According to government
officials, Azerbaijan has invested $3 billion in the United States. Azerbaijan also has large investments in
Turkey, mainly in the oil and gas sector through projects such as the Star Refinery and Southern Gas
Corridor (SGC) pipeline, and in Ukraine with gas stations. The lower oil receipts, resulting from the levels
of world oil prices prevailing since late 2014, have had an impact on Azerbaijan’s outward investment. As a
result, the government’s focus has shifted to boosting economic diversification and increasing local
production of goods to decrease dependence on imports and expand non-hydrocarbon exports.
Transparency of the Regulatory System

The Azerbaijani government has worked to improve its regulatory system over the past several years, using
transparent policies and effective laws to foster competition and establish clear rules of the game. Legal,
regulatory, and accounting systems are approaching international norms. However, continued limited
transparency and allegations of corruption in regulatory matters remain a problem. Draft legislation is
neither made available for public comment nor usually run through a public consultation process.
However, the government has begun engaging business organizations, such as the American Chamber of
Commerce in Azerbaijan (AmCham) and consulting firms on various proposed draft laws, including the
Strategic Roadmaps, which address the country’s economic diversification/reform thinking, released in
December 2016. Azerbaijan has yet to develop informal regulatory processes managed by private sector
associations. Limited transparency and inconsistent enforcement of rules to foster competition are serious
impediments to foreign direct investment.
In August 2013, Azerbaijan’s Parliament passed a law on the regulation of inspections in entrepreneurship
and the protection of the rights of entrepreneurs. Under the law, businesses are to be divided into high,
medium, and low risk groups, with the frequency of inspections determined by the category of risk.
Entrepreneurs who have not committed any legal infraction for a specified period of time were categorized
as low risk, which will result in less frequent inspections. Subsequently, on October 19, 2015 President
Aliyev signed a decree that suspending inspections for entrepreneurs for two years as of November 1, 2015.

On December 21, 2015 President Aliyev signed a Decree “On Certain Measures in the area of Licensing.” In
accordance with the new regulations, all licenses will be issued indefinitely. The Ministry of Economy was
designated as the authority responsible for issuing, suspending, resuming, and cancelling licenses (except
for licenses issued for activities related to national security). The Ministry will conduct these licensing
activities through ASAN centers (http://www.asan.gov.az/en). Licenses are to be issued within 10 days of
application (previous regulations provided for a 15-day period). In accordance with the List of Licensable
Activities, the number of activities requiring a special permit (license) was reduced from 60 to 32, while the
amount of fees payable for the issuance of licenses was reduced by up to 50%. Activities no longer requiring
a special license include tourism services and the sale of tobacco and alcoholic drinks.
On April 20, 2016 President Aliyev signed a decree on the implementation of Law No. 176-VQ “On Licenses
and Permits”, dated March 15, 2016 (the “Law”). The Law’s main purposes are to enhance the
entrepreneurial environment, eliminate barriers to business, encourage new businesses, and simplify
procedures for issuing licenses and permits. The Law sets the criteria for when licenses and permits are
required to do business in Azerbaijan, lists the relevant activities, and sets out the principles of the state
regulation of the licensing and permit system. It also covers the issuance of licenses/permits, rules on the
re-issuance, suspension, renewal and cancellation of licenses /permits, and the responsibility of the
authorities issuing licenses/ permits and license/permit holders. One of the Law’s innovations is the
creation of the legal basis for permits. Thus, the Law explains the concept of a “permit” as an official
document issued by the relevant body (permission, approval, certification, authorization, accreditation) for
carrying out certain specific business activities. The other major innovation in the Law is the “one-stop
shop” principle, which simplifies administrative processes governing licenses/permits and reduces the
number of required documents, as well as time and costs. Moreover, all licenses effective as of June 1, 2016
(the date on which the Law entered into force) are deemed to be issued indefinitely.
Legal System and Judicial Independence. Azerbaijan’s legal system is based on Civil Law. Disputes or
disagreements arising between foreign investors and enterprises with foreign investment, Azerbaijani state
bodies and/or enterprises, and other Azerbaijani legal entities, are to be settled in the court systems of
Azerbaijan or, upon agreement between the parties, in a court of arbitration, including international
arbitration bodies. Businesses, however, report problems with the reliability of judicial processes in
Azerbaijan. While the government promotes foreign investment and the laws guarantee national treatment,
in practice investment disputes can arise when a foreign investor or trader’s success threatens well-
connected or favored local interests.
The judiciary consists of the Constitutional Court of the Republic of Azerbaijan, the Supreme Court of the
Republic of Azerbaijan, the appellate courts of the Republic of Azerbaijan, trial courts, and other specialized
courts. The Supreme Court and appellate courts have civil, criminal, administrative, economic, and military
panels. Trial court judgments may be appealed in appellate courts and the judgments of appellate courts
can be appealed in the Supreme Court. The Supreme Court is the highest court in the country. Under the
Civil Procedure Code of Azerbaijan, the appellate court judgments are published within three days of
issuance but may, in exceptional circumstances, be published within ten days. The Constitutional Court has
the authority to review laws and court judgments for compliance with the Constitution. The decisions of
the Constitutional Court are published in print and online. In addition, on February 3, 2016, President
Aliyev established Boards of Appeal in the State Committee for Property Issues and the State Customs
Committee to ensure transparency and impartiality in the review of complaints from entrepreneurs
concerning their business operations.
The procedure for the enforcing foreign judgments in Azerbaijan is established by the Civil Procedure
Code. The Code only requires the enforcement of foreign judgments either pursuant to an international

treaty or based on the principle of reciprocity and 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. A
Bilateral Investment Treaty between the United States and Azerbaijan – which went into force in 2001 –
provides U.S. investors with recourse for the settlement of investment disputes through the International
Center for the Settlement of Investment Disputes.
The Law on Protection of Foreign Investments, dated January 15, 1992 (the Foreign Investment Law),
provides guidance to foreign investors seeking to resolve investment disputes, either through Azerbaijani
courts or, alternatively, through dispute resolution procedures agreed to by the parties involved.
Resolution of investment disputes may include international arbitration, either in Azerbaijan or abroad. The
Law on International Arbitration, dated November 18, 1999 (the Arbitration Law), provides guidance on
the conduct of international arbitration in Azerbaijan.
Azerbaijan has entered into several other bilateral treaties – principally with neighboring states – to
facilitate enforcement of foreign judgments, and is a party to the 2004 Commonwealth of Independent
States (CIS) Convention on Mutual Legal Assistance in Civil, Family and Criminal Cases. In addition,
Azerbaijan is a party to the Convention on Resolving Business Disputes, dated March 20, 1992 (also known
as the Kyiv Convention). Azerbaijan is also a member of the Multilateral Investment Guarantee Agency
(MIGA).
Laws and Regulations on Foreign Direct Investment. Foreign investment in Azerbaijan is regulated by a
number of international treaties and agreements, as well as by domestic legislation. These include the
Bilateral Investment Treaty (BIT) between the United States and Azerbaijan, which encourages the
reciprocal protection of investment, dated August 1, 1997; the Azerbaijan-EC Cooperation Agreement dated
April 22, 1996; the Law on Protection of Foreign Investment dated January 15, 1992 (the Foreign Investment
Law); the Law on Investment Activity dated January 13, 1995 (the Investment Activity Law); the Law on
Investment Funds dated October 22, 2010 (the Investment Funds Law); the Law On Privatization of State
Property dated May 16, 2000 (the Privatization Law); and the Second Program for Privatization of State
Property of the Republic of Azerbaijan dated August 10, 2002 (the Second Privatization Program), as well as
by-laws regulating specific sectors of the Azerbaijani economy. This legislation permits foreign direct
investment in any activity in which a national investor may also invest, unless otherwise prohibited by law.
Azerbaijani law is evolving in accordance with the government’s strategic goal of creating a more
welcoming environment for foreign businesses; as such, foreign investments are protected by guarantees
provided under Azerbaijani law. The website of Azerbaijan’s National Parliament, http://meclis.gov.az/,
lists all the country’s laws, but only in the Azerbaijani language.
Competition and Anti-Trust Laws. Over the past few years, Azerbaijan has updated several key pieces of
legislation that affect the business environment. On April 28, 2016, President Aliyev signed an amendment
to the law on Antimonopoly Activity and an Amendment to the Criminal Code. The amendments
introduced the concept of cartel agreements or arrangements into Azerbaijan’s antimonopoly legislation. A
cartel agreement is now understood as “a voluntary combination of two or more financially and legally
independent businesses competing in the same market to exclude others or prevent new competitors from
entering the market by dividing territories, sales volumes, types of goods or customers, or by refusing to
purchase or sell goods (services)”. Increasing or decreasing prices, maintaining prices at the same level,
implementing privileges, rebates or bonuses, or other methods of restraining competition are also included
in the definition of a cartel agreement. A new version of the Competition Code began undergoing revision
in Parliament in late 2014, and some observers expect the law to pass in 2017. The difficulty of getting
established Azerbaijani businesses to adopt standard investor-friendly practices, such as those associated

with the concept of good corporate governance or international accounting norms, is regarded as a factor
hindering foreign direct investment.
The State Service for Antimonopoly Policy and Consumer Rights’ Protection under the Ministry of
Economy is another venue where businesses can seek to address claims of monopolies and competition-
related concerns.
Foreign/Free Trade Zones/Ports

Although the government announced its intention to create special economic zones in 2003 – and passed a
law to establish such zones in 2009 – there are no foreign trade zones or free ports operating in Azerbaijan
to date. President Aliyev signed a decree on March 17, 2016 on measures to create a free trade zone/special
economic area next to the Alat seaport, 65 km of Baku, and the government announced in May 2017 a draft
of the Free Trade Zone Law is ready to be presented to Parliament. With these developments, there may be
commercial opportunities for international firms to be involved in this project with consulting,
management, and engineering.
The Ministry of Transport, Communications, and High Technologies has discussed plans to create other
special economic zones, including a petrochemical complex and regional innovation zones to boost
development of the telecommunications sector and to turn Azerbaijan into a regional information and
communications technologies hub, and a special zone to encourage the production of renewable energy.
Such projects represent consulting, engineering, and other potential commercial opportunities for
international firms.
Tariff and Non-tariff Barriers

There are several non-tariff barriers that can make doing business difficult. These non-tariff barriers
include a weak and unpredictable legal regime, arbitrary customs administration (although AmCham
members have reported that customs has improved significantly and the Azerbaijani government has taken
steps in 2016 to improve customs collection and management), clear conflicts of interest in regulatory and
commercial matters often leading to export/import monopolies, and corruption. The government’s
inadequate enforcement of IPR protections also constitutes a significant trade barrier.
Policies
Conversion and Transfer
Foreign Exchange. There are no statutory restrictions on converting or transferring funds associated with
an investment into freely usable currency at a legal, market-clearing rate. Foreign exchange transactions are
governed by the Law on Currency Regulation. The Central Bank administers the overall enforcement of
currency regulation. Among those regulations is a requirement that local cash sales be conducted in
Azerbaijani manats (AZN), in accordance with the country’s constitution. Foreign companies and
individuals may have both manat and foreign currency accounts at a local bank. Currency conversion is
carried out through the Baku Interbank Currency Exchange Market (BICEX) and the Organized Interbank
Currency Market. The average time for remitting investment returns is two to three business days. Some
requirements on disclosure of the source of currency transfers have been imposed in an effort to reduce
illicit transactions. Azerbaijan’s foreign currency reserves are based on the reserves of the Central Bank of
Azerbaijan, those of the State Oil Fund of Azerbaijan (SOFAZ), and the assets of the State Treasury Agency
under the Ministry of Finance. As of January 1, 2017, the Central Bank’s foreign exchange reserves totaled
$3,997,400,000. Compared to the same period in 2016, foreign exchange reserves of the Central Bank
dropped 20.77% or $1,042,300,000. The SOFAZ’ assets as of January 1, 2017 stood at $33.15 billion. On

January 12, 2017, Azerbaijan dropped the band it had used for foreign-exchange transactions in a move to
let the country’s manat currency float freely. The exchange rate band had controlled the rates commercial
banks could buy and sell the manat at +/- 4% the official rate set by the Central Bank. The SOFAZ
continues to convert foreign assets into manats and transfers these local currency proceeds to the
government.
Remittance Policies. Foreign investors are subject to a corporate branch remittance tax of 10% on the
remittances of all profits derived from business activities in Azerbaijan. There have not been any recent
changes or plans to change investment remittance policies that either tighten or relax access to foreign
exchange for investment remittances. There do not appear to be time limitations on remittances, including
dividends, return on investment, interest and principal on private foreign debt, lease payments, royalties,
and management fees. Nor does it appear to be limits on the inflow or outflow of funds for remittances of
profits or revenue. Azerbaijan is a permanent member of the international Financial Action Task Force
(FATF) and is listed as a country of concern. (The continuum of FATF listings are countries of primary
concern, countries of concern, and monitored.) The main obstacle Azerbaijan faces is the endemic level of
corruption, but other generators of illicit funds include robbery, tax evasion, smuggling, trafficking, and
organized crime.
Performance Requirements
According to Azerbaijani law, foreign individuals wishing to work in Azerbaijan must obtain a work
permit from the State Migration Service through their employers. A work permit is issued for a term of up
to one year and may be extended for an unlimited number of times, but each permit will have a duration of
no more than one year. However, one does do not require a work permit if one is:
• a permanent resident of Azerbaijan,
• married to an Azerbaijani citizen, provided that person’s spouse is registered at his/her place of
residence,
• engaged in entrepreneurial activity,
• employed in a managerial position at an organization established under an international
agreement,
• employed at a diplomatic representative office or an international organization,
• the head or deputy head of a branch or representative office of a foreign legal entity in
Azerbaijan, or
• assigned to a business trip for up to 90 days during a year.
A work permit is issued upon the foreigner’s employer’s application to the State Migration Service. The
timeframe for obtaining a work permit is 20 working days after submission of the complete application
package. The fee payable for a work permit and for any extension of the term of the permit is AZN 350
(approximately $200) for up to three months, AZN 600 (approximately $350) for up to six months, AZN
1,000 (approximately $550) for one year.
Azerbaijan has had observer status at the World Trade Organization (WTO) since 1997. A working party on
Azerbaijan’s succession to the WTO was established on July 16, 1997, and Azerbaijan began negotiations
with WTO members in 2004. The working party met for the thirteenth time in July 2016. The WTO
Secretariat reports Azerbaijan is less than a quarter of the way to full membership. In 2016, Azerbaijan
imposed higher tariffs on a number of imported goods, including agricultural products, to promote
domestic production and reduce imports. Currently, Azerbaijan is negotiating bilateral market access with
19 economies.

Investment Incentives. Since early 2016, the government introduced tax and investment incentives for
entrepreneurs and legal entities in non-oil export sectors as part of the overall economic
reform/diversification effort. These measures include certain partial, temporary exemptions from corporate
and property taxes, and favorable tax treatment for manufacturing facilities and imports of manufacturing
equipment. In 2016, an investment promotion certificate was introduced by the Presidential decree on
additional measures in investment promotion. Investment certificate holders are exempt from paying 50%
of income tax and land tax owed, and from paying customs duties on machinery, equipment, and devices
imported for investment purposes in priority industries of the economy for up to 7 years. The priority
projects include work in industrial parks, creation of manufacturing plants, and research work.
Legal Framework
Expropriation and Compensation
The Law on the Protection of Foreign Investments protects foreign investors against nationalization and
requisition, except under certain specified circumstances. Nationalization of property can occur when
authorized by parliamentary resolution, although there have been no known cases of official
nationalization or requisition against foreign firms in Azerbaijan. Requisition – by a decision of the Cabinet
of Ministers – is possible in the event of natural disaster, an epidemic, or other extraordinary situation. In
the event of nationalization or requisition, foreign investors are entitled under the law to prompt, effective,
and adequate compensation.
Amendments made to Azerbaijan’s Constitution in September 2016 enable authorities to expropriate

private property under in instances where necessary for social justice and effective use of land: “The
property rights over land plots might be limited by law to ensure social justice and effective use of land
plots.” (Article 29, VI.) The Azerbaijani government has not shown any pattern of discriminating against
U.S. persons by way of direct expropriations.
Dispute Settlement
Azerbaijan is a member of the International Convention on the Settlement of Investment Disputes between
States and Nationals of Other States (ICSID convention). Azerbaijan is also a party to the 1958 Recognition
and Enforcement of Foreign Arbitral Awards (New York Convention), which provides for the recognition
of foreign arbitral awards resulting from international arbitration. The Bilateral Investment Treaty (BIT)
between the United States and Azerbaijan, which went into force in 2001, provides U.S. investors recourse
to settle any investment dispute using the ICSID convention.
Over the past 10 years, the U.S. Embassy in Baku has been notified of three investment dispute cases
regarding U.S. citizens. None of these cases, however, have been resolved.
International Commercial Arbitration and Foreign Courts. The Law on International Arbitration guides
the process of international arbitration in Azerbaijan:
“Under these rules, parties may select independent arbitrators of any nationality, proceedings may be
conducted in any language chosen by the parties, the applicable law (except for those matters that must be
exclusively resolved under Azerbaijani legislation) and arbitration procedure may be chosen by the parties,
and, in general, parties may stipulate the terms of the arbitration process. Where the terms have not been
stipulated by the parties, any omission may be resolved by the Supreme Court of the Republic of
Azerbaijan.”

Source:
http://www.bakermckenzie.com/files/Uploads/Documents/Supporting%20Your%20Business/Global%2
0Markets%20QRGs/DBI%20Azerbaijan/bk_dbi_azerbaijan_judicialsystem.pdf
In addition, on February 3, 2016, Azerbaijan’s President established Boards of Appeal in the State
Committee for Property Issues and the State Customs Committee to ensure transparency and impartiality
in reviewing complaints from entrepreneurs. “All physical and legal entities engaged in entrepreneurship
activities can make a complaint to the appropriate boards of appeal in the case of absolute or partial
dissatisfaction with the decision taken on their business activities by the central or local authorities, refusal
to make a decision, and an action or inaction.”
“If a complaint of an entrepreneur submitted to an executive body is not considered, or if there is a dispute
in decision-making, the entrepreneur will have an opportunity to submit a complaint directly to the Boards
of Appeal of the central and local executive authorities, and if he/she is not satisfied with their decision
he/she can appeal to the Board of Appeal under the President of Azerbaijan.”
Bankruptcy. Azerbaijan’s Bankruptcy Law, which experts report does not function effectively and is rarely
used, remains a factor affecting economic development, as do the country’s weak credit reporting
institutions. Under Azerbaijan’s Bankruptcy Law, which applies only to legal entities and entrepreneurs –
not to private individuals – bankruptcy proceedings may be initiated by either a debtor facing insolvency or
by any creditor. In general, the legislation focuses on liquidation procedures. For instance, a court-approved
“rehabilitation plan” may not exceed two years.
The World Bank’s Doing Business Report includes in its country rankings the ease of “resolving
insolvency” (rankings are available at:
http://www.doingbusiness.org/data/exploreeconomies/azerbaijan/resolving-insolvency). Azerbaijan
ranks 84 out of 189 countries in this category.
Protection of Property Rights

Real Property. In 2006, the Government centralized the processing of residential real estate transactions
through a network of notary offices under the Ministry of Justice. Since 2013, Azerbaijan’s State Real Estate
Registry Service at the Committee for Property Issues has been the lead agency managing the real estate
registration system. In April 2016, Azerbaijan’s President approved amendments to the Law on Immovable
Property Register. The amendments cut the period of registration of property rights and the provision of
extracts from the Register from 20 to 10 working days.
Amendments to the Law “On State Registration of Real Estate” (the “Law”) dated November 14, 2016 are
intended to simplify the state registration of residential houses. According to the new edition of Article
8.0.9.1. of the law, the state registration of houses requires only the document certifying property rights of
the owner of the land where the house is situated.
The World Bank’s Doing Business Report includes Azerbaijan in its country rankings on the Ease of
Registering Property. Rankings are available at:
http://www.doingbusiness.org/data/exploreeconomies/azerbaijan/#registering-property. Azerbaijan
ranked 22nd out of 189 countries in this category in 2015.
Intellectual Property Rights. Since 1996, Azerbaijan has implemented a national system to register and
protect intellectual property rights. Intellectual property rights in Azerbaijan include all rights to industrial

property (including inventions, industrial designs, utility models, trademarks, geographic names, and
domain names) and copyright and related rights. Current legislation pertaining to intellectual property
includes the Law on Copyrights and Related Rights (the Copyright Law), the Law on Trademarks and
Geographic Designations (the Trademark Law), the Law on Patents (the Patent Law), the Law on the
Topology of Integrated Microcircuits, the Law on Unfair Competition (the “Unfair Competition Law”) and
the Law on Securing Intellectual Property Rights and Combating Piracy (the “Anti-Piracy Law”). The legal
structure covering intellectual property protections in Azerbaijan is relatively strong, but experts note the
level of enforcement within the country is weak. Piracy and blatant infringements on intellectual property
rights, such as fake international computer shops that are open for business in the capital, are
commonplace. The Business Software Alliance put the software piracy figure at 85% in 2013. Moreover, the
estimated value of unlicensed software in Azerbaijan was $103 million in 2013, compared to $52 million in
2009.
Azerbaijan is a party to the Convention Establishing the World Intellectual Property Organization (WIPO),
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. Violation of intellectual property rights can result in civil,
criminal, and administrative charges.
Azerbaijan tracks and reports on seizures of counterfeit goods but does not publish statistics on this effort.
Infrastructure
Azerbaijan is positioning itself as a transportation hub for East-West trade in the region through major
infrastructure investments, designed to make talk of a new “Silk Road” a reality. The completion of the
Baku-Tbilisi-Kars railway and the Alat Port, if coupled with improved trade facilitation policies, would
position Azerbaijan as a viable transit route for trade between East, Central, and South Asia and Europe.
Azerbaijan has also vastly expanded its air cargo facilities with new cold storage and a new cargo terminal
at the Heydar Aliyev International Airport in Baku, which is an important commercial cargo route for
supplying NATO and other partners in Afghanistan. These air cargo facilities will complement
Azerbaijan’s investments in road, port, and rail infrastructure.
The most significant transportation project in Azerbaijan is the Baku-Tbilisi-Kars (BTK) railway. The Baku-
Tbilisi-Kars railway will link the Soviet-era rail systems of Azerbaijan and Georgia to the systems in
Turkey, and eventually the rest of Europe. Georgia, Azerbaijan and Turkey signed an intergovernmental
agreement in 2007 to establish a rail link using the existing Tbilisi-Baku railway. The project includes
construction of a 98-kilometer Kars-Akhalkalaki railway, of which 68 kilometers will run through Turkey
and 30 kilometers through Georgia. Reconstruction of the 183-kilometer Akhalkalaki-Tbilisi section is also
underway and nearing completion. The State Oil Fund of Azerbaijan (SOFAZ) allocated $588.2 million (as
of January 1, 2016) since the beginning of the financing of the railway’s construction. The project is now
scheduled for completion in late 2016, when Turkey expects to complete its 68 kilometer leg. The peak
capacity of the corridor will be 17 million tons of cargo per year. At the initial stage, this figure will include
one million passengers and 6.5 million tons of cargo. Freight trains are planned to run first on BTK railway.
The passenger service is expected to start in 2017.
The government of Azerbaijan is also building a new Caspian Sea port at Alat, approximately 85 km south
of Baku. The construction started in November 2010 and is designed to replace Baku’s urban port as the
main commercial and industrial port in Azerbaijan. As planned, it will be larger than all other Caspian
ports combined and there will still be ample room to expand as necessary. Additionally, Alat is situated at

a rail and road hub, allowing for easy multimodal North/South and East/West transit. When completed, a
train ferry system will operate between the Central Asian ports of Turkmenbashi in Turkmenistan and
Aktau in Kazakhstan. Alat port is designed to accommodate rail ferries that can transport 52 train cars at a
time. The funds directed to the implementation of all three phases of the port construction are expected to
reach 870 million manats ($544.74 million). In general, the first phase is planned to be completed by late
2017. During the first phase, the port will have capacity for 10 million tons of cargo, increasing to 25 million
tons in the third phase.
Corruption and other Bureaucratic Obstacles

Pervasive corruption continues to be a major challenge for U.S. and other international firms operating in
Azerbaijan. Although anti-corruption legislation is in place and the government has acted to tackle low-
level corruption, corrupt practices remain a barrier to greater foreign investment. Azerbaijan does not
require private companies to establish internal codes of conduct that, among other things, prohibit bribery
of public officials, nor does it provide protections to NGO’s involved in investigating corruption.
Nevertheless, some private companies use internal controls, ethics, and compliance programs to detect and
prevent bribery of government officials. United States firms have identified pervasive corruption as an
obstacle to FDI in the following areas: government procurement, awarding of licenses or concessions,
transfers, performance requirements, dispute settlement, regulatory system, customs, and taxation.
The Government of Azerbaijan recognizes that corruption is a problem and has been a participant in
regional anti-corruption initiatives, but to date laws and regulations to combat corruption have not been
effectively or consistently enforced. Azerbaijan has made modest progress in implementing a 2005
Anticorruption Law, which created a commission with the authority to require full financial disclosure
from government officials.
Azerbaijan continues to focus on e-government, service delivery, and simplification of regulations to

prevent corruption. Anti-corruption reforms started in licensing regulations, and in the tax and customs
sectors. Azerbaijan has explicitly stated its goal to reduce red tape and promote open government.
However, fundamental results in key anti-corruption areas such as the civil service, public procurement,
and the judiciary are yet to be achieved. Nevertheless, financial resources allocated to some measures such
as improving service delivery, specifically ASAN centers demonstrates the political will to reform this
particular area.
On September 5, 2012, President Aliyev issued a decree for a National Action Plan on Open Government
and a National Action Plan on Combating Corruption. On April 27, 2016, President Aliyev approved the
“National Action Plan on Promotion of Open Government for 2016-2018. ASAN service centers created by
the State Agency for Public Service and Social Innovations under the President of the Republic of
Azerbaijan were established in July 2012 by Presidential decree and became operational in February 2013.
Eleven centers across Azerbaijan provide 30 government services from nine state entities, including the
registration of commercial legal entities and tax payers, notary services, state registration of civil status acts,
and the renewal of identity cards/passports of citizens. ASAN centers are intended to provide more
transparent and accountable services through a “one window” model that reduces opportunities for rent-
seeking and petty government corruption. ASAN Communal Centers were launched with the Presidential
Decree of May 4, 2016. Azerbaijan’s President signed a decree on the launch of ASAN Service Index to
measure the quality of public service delivery in June 2016.
Azerbaijan has made progress in preventing corruption in several sectors, such as public services delivery,
traffic police, and public education, and reforms have started in customs and business licensing. However,

serious and complex corruption challenges have yet to be tackled. Popular opinion identifies the Ministry of
Taxes and the judiciary as difficult barriers to business in Azerbaijan. The business community has
mentioned that there has been real improvement and transparency in customs procedures in 2016. Since
late 2016, there have been extensive reforms in the tax regime, but these remain to be fully understood and
analyzed by the business community. Transparency International’s 2013 Global Corruption Barometer –
which examined bribery involved in people’s contact with customs, education, the judiciary, land related
services, medical services, the police, registry and permit services, tax authorities and utilities – found that
roughly 50% of Azerbaijani respondents had paid a bribe to one of the nine service providers in the twelve
preceding months.
UN Anticorruption Convention, OECD Convention on Combatting Bribery. Azerbaijan signed and ratified
the UN Anticorruption Convention and is a signatory to the Council of Europe Criminal and Civil Law
Conventions. Azerbaijan is not currently a party to the OECD Convention on Combating Bribery of Foreign
Public Officials in International Business Transactions.
International Agreements
Trade Agreements. Azerbaijan is working to accede to the World Trade Organization. Azerbaijan has
signed bilateral free trade agreements with seven countries in the former Soviet Union, although some
trade liberalizing provisions have yet to take effect. Azerbaijan signed agreements with: The Russian
Federation (September 30, 1992); Moldova (May 26, 1995); Ukraine (July 28, 1995); Turkmenistan (March 18,
1996); Uzbekistan (May 27, 1996); Georgia (June 10, 1996); Kazakhstan (June 10, 1997); and Tajikistan (July
13, 2007).
Bilateral Investment Agreements. Azerbaijan has signed 48 Bilateral Investment Treaties (BIT) – including
one with the United States – as well as 51 tax treaties to protect against double taxation.
The 2001 BIT between the United States and Azerbaijan encourages the reciprocal protection of investment.
Azerbaijan also has bilateral investment treaties with Albania, Austria, Belarus, Belgium, Bulgaria, Czech
Republic, China, Croatia, Egypt, Estonia, Finland, France, Georgia, Germany, Greece, Hungary, Iran, Israel,
Italy, Jordan, Kazakhstan, Korea, Kyrgyzstan, Kuwait, Latvia, Lithuania, Lebanon, Macedonia,
Montenegro, Moldova, Norway, Pakistan, Poland, Qatar, Romania, Russia, San-Marino, Serbia, Saudi
Arabia, Syria, Switzerland, Tajikistan, Turkey, UAE, Ukraine, the United Kingdom, and Uzbekistan.
Azerbaijan has free trade agreements (FTAs) with Russia, Ukraine, Georgia, Kazakhstan, Kyrgyzstan,
Tajikistan, Uzbekistan, Moldova and Belarus. Under the FTAs, goods can be imported from those countries
free of customs duties.
The United States signed a tax treaty with the USSR, to which Azerbaijan is considered a successor state.
The United States and Azerbaijan are also parties to the OECD Convention on Mutual Administrative
Assistance in Tax Matters. Azerbaijan signed an intergovernmental agreement with the United States to
implement the Foreign Account Tax Compliance Act (FATCA) on October 9, 2015, based on the “IGA
Model 1a” form.
In February 2016, the government amended the Tax Code to provide tax benefits to legal and physical
entities engaged in certain investment activities. These amendments potentially exempt physical and legal
entities from paying taxes on 50% of their revenues and incomes for up to seven years. Moreover, the
government approved amendments to the Law on Customs Tariff, under which legal and physical entities

can be exempt from customs duties and value-added tax (VAT) on imports of capital equipment for up to
seven years. In addition, any organization or industrial or technology park operator who plans to import
capital equipment in certain sectors may apply for permission to construct production facilities, or conduct
research, test, and development activities, and their equipment will be exempt from customs duties.
In addition, in June 2016, Azerbaijan’s parliament approved amendments to the country’s Tax Code,
launching a tax free system under which the goods purchased in the country’s territory by foreigners and
stateless persons are exempted from paying VAT. On December 16, 2016 Azerbaijan’s President signed a
law amending the Tax Code (the “Amendment Law”), which included as many as 201 tax code
amendments. The amendments that came into force in January 2017, including a tax amnesty, received
much attention from the business community, especially changes in the taxation of e-commerce and move
to mandate cashless payments. Companies and consulting firms report they are still analyzing these
amendments, their expected impact, and implementation.
Several U.S. companies with operations and investments in Azerbaijan report they have been subject to
repeated tax audits for several years and have also been subject to court-imposed fines for violations of the
tax code.
OPIC and Other Investment Insurance Programs. The Overseas Private Investment Corporation (OPIC)
and the U.S. Export-Import (Ex-Im) Bank are open for business in Azerbaijan, providing political risk
insurance, as well as financing and loan guarantees. Azerbaijan is also a member of the Multilateral
Investment Guarantee Agency (MIGA), and the European Bank for Reconstruction and Development
(EBRD). The World Bank, Asian Development Bank, and other third-country institutions are active in
providing financing and insurance for investment in Azerbaijan.
Over the past two decades, OPIC has invested around $230 million in Azerbaijan in 24 business projects.
While Azerbaijan’s financial services sector has been the major area for investments, OPIC-funded projects
include investments in the energy (BTC oil pipeline), franchising, banking, microfinance, and hotel and
hospitality sectors of Azerbaijan. OPIC has repeatedly provided funds for numerous banks operating in
Azerbaijan in order to expand their small and medium enterprise (SME) lending portfolios, including
$4.8 million to Rabita Bank in 2008 and $7.3 million to Turan Bank in 2009. In 2011, OPIC provided
Muganbank a loan guarantee for $10 million to expand its operations, targeting SME borrowers. OPIC has
also provided $1 million and $3 million to FinDev and CredAgro for microfinance lending, respectively. In
2012, OPIC provided loan insurance to Viator Microcredit Azerbaijan LLC ($500,000), NBCO Vision Fund
Azercredit LLC ($2 million), and FinDev again ($1 million). In 2013, OPIC signed a memorandum with
Turanbank for a loan in the amount of $7 million with a term of seven years for SME financing. As of 2015,
OPIC has active loan projects with two non-banking credit organizations: “KredAgro” and TBC Kredit.
In its 2014 annual report, Ex-Im Bank stated that it has outstanding insurance and loan guarantees for
Azerbaijan in the amount of $211.9 million, primarily in support of aviation sales. In 2011, Ex-Im Bank
closed a $116.6 million loan with a ten-year repayment period to finance the Azerbaijani space agency’s
purchase of the AzerSat-1 satellite from Orbital Sciences. In June 2015, Ex-Im Bank finalized a $211.9 million
loan to finance Azerbaijan Airline’s purchase of Boeing commercial aircraft.
Labor Conditions
A Labor Code that took effect in 1999 still regulates overall labor relations and recognizes international
labor rights. The work week generally is considered to be 40 hours. The right to strike exists, though
industrial strikes are rare. Azerbaijan is a member of the International Labor Organization (ILO) and has

ratified more than 57 ILO Conventions. In practice, labor unions are strongly tied to political interests.
Collective bargaining is not practiced. Azerbaijan has regulations to monitor labor abuses, health, and
safety standards in low-wage assembly operations, but enforcement is less effective. A labor contract
between employer and employee technically may be written or oral, but in order to be official there must be
a signed agreement. This employment agreement is required for the employee to receive any
unemployment or other employment related benefits.
Employment relations are established by an employment contract, which, in most cases, does not
necessarily indicate a fixed term of employment. An employer must give an employee two months’ notice
of termination in the event the employee is made redundant. However, certain exceptions to this rule are
available (e.g., in the case of a gross violation of the employee’s duties). An employee can terminate his/her
employment contract at any time, but must give one month’s notice. Upon termination of formally
registered employment, employers must pay departing employees monetary compensation for unused
vacation leave. A formally registered employee who becomes unemployed is entitled to 70% of his/her
average monthly wage, calculated over the past 12 months at the last place of work.
Unemployment benefits can be paid for a maximum of 26 weeks within a 12 month period. People who
become unemployed and are unable to find suitable employment within 12 months of registering as
unemployed are entitled to an extension of unemployment benefits. In this case, unemployment benefits
are set at the minimum level approved by law, which is $50. Azerbaijan currently is working with the
World Bank and the European Union on a program to reform the state pension system.
Azerbaijan has an abundant supply of semi-skilled and unskilled laborers. Approximately 40% of the
Azerbaijani population works in agriculture, although this constitutes only 6% of GDP. The construction
sector tends to use temporary and contractual workers; reportedly many of these workers’ agreements are
not formally registered with the government. The relatively limited supply of highly skilled labor remains
one of the biggest challenges in Azerbaijan’s labor market. As of 2017, government sources estimate the rate
of unemployment at 5%, but other sources estimate the figure at 15% or higher, with underemployment
being much higher. The average monthly wage as of December 2016 was $285, and the official minimum
wage increased to AZN 116 per month (approximately $68) in 2017.
Sources: 2017 INVESTMENT CLIMATE STATEMENT–AZERBAIJAN, BUREAU OF ECONOMIC AND BUSINESS

AFFAIRS, US DEPARTMENT OF STATE; AZERBAIJAN COUNTRY COMMERCIAL GUIDE FY 2016, US & FOREIGN
COMMERCIAL SERVICE AND US DEPARTMENT OF STATE; PRS Data files.


Azerbaijan
Country Conditions
Background
Geography
Azerbaijan is located in the region of the Caucasus Mountains on the southeastern shore of the Caspian Sea.
Georgia and Russia border it to the north, Iran to the south, and Armenia to the west. Nagorno-Karabakh,
an enclave amounting to 20% of Azerbaijan’s territory, is under Armenian military control. Azerbaijan’s
land area constitutes only 0.4% and its population 2.5% of the former USSR, but the country possesses vast
oil reserves. Despite its small size, Azerbaijan contains a remarkably varied topography, and nine of the
world’s eleven climate zones are represented within Azerbaijan.
During January, the capital, Baku, averages low temperatures of 3ºC, high temperatures of 6ºC, and receives
an average of eleven days of significant precipitation; during July, its average low and high temperatures
are 22ºC and 26ºC, respectively, and it receives an average of three days of precipitation.
Social Conditions
Ethnic and Racial Divisions. The majority of ethnic conflicts are between Armenians and Azeris. In fact,
the major domestic and international issue affecting Azerbaijan has been the dispute over Nagorno-
Karabakh, a predominantly ethnic Armenian region within Azerbaijan. In the final years of Soviet rule,
many Armenians were expelled or fled because they feared for their safety. After the collapse of the Soviet
Union, a war broke out between the two groups, resulting in a split in Azerbaijan in 1994. The Armenian
occupation of nearly 20% of previously Azeri-held territory has perpetuated international tensions, but has
decreased ethnic friction within Azerbaijan because few Armenians remain in the country, and those that
do are typically of mixed ancestry. Several indigenous ethnic minorities, such as the Talysh, Avars and
Georgians, live peacefully in Azerbaijan. Other groups, such as the Meskhetian Turks, the Kurds and ethnic
Russians, have suffered discrimination. More than 90% of the people are Muslim. According to the
constitution, adherents of all religions should be allowed to practice their faiths, but many religious sects
are the targets of harassment. Official harassment has been reported among non-Orthodox Christians and
among ethnic Azeris who have converted to Christianity.
Regional and Class Divisions. Regional divisions generally mirror ethnic divisions; Armenians live in the
area of Azerbaijan occupied by Armenia, while most Azeris and mixed Azeri-Armenians live in the urban
and fertile farming areas of Azerbaijan proper.
Education. Illiteracy is widespread, although the official rate of literacy is 99%. The quality of education
has declined since the USSR dissolved. Azerbaijan has moved slowly toward meeting its pledge to improve
the quality of education. By law, education is free and mandatory for all children until the age of 17.
Health. Average life expectancy is about 72 years of age. The quality of health care has plummeted since
the collapse of the Soviet Union. In 2016, government spending on health care was predicted to be 4.6% of
the state budget. Minimum health care services are provided for children, but many adults do not have
access although it is officially available to all citizens. Both medicines and equipment are frequently in short
supply. The infant mortality rate stands at a high rate of 26 per 1,000 live births.
Background 1-Jul-2017 • Page 17

Government
Although the government of Azerbaijan consists of three branches, Azerbaijan has a strong presidential
system in which the president dominates the legislative and judicial branches. The executive branch is
made up of a president, his administration, a prime minister, and a cabinet of ministers. The legislative
branch consists of the 125-member parliament (Milli Majlis). Members, all of whom are elected from
territorial districts, serve five-year terms. The judicial branch, headed by a Constitutional Court, is only
nominally independent.
Azerbaijan declared its independence from the former Soviet Union on August 30, 1991, with Ayaz
Mutalibov, former First Secretary of the Azerbaijani Communist Party, becoming the country’s first
president. Following a March 1992 massacre of Azerbaijanis at Khojali in Nagorno-Karabakh (a
predominantly ethnic Armenian region within Azerbaijan), Mutalibov resigned and the country
experienced a period of political instability. The old guard returned Mutalibov to power in May 1992, but
less than a week later his efforts to suspend a scheduled presidential election and ban all political activity
prompted the opposition Popular Front Party (PFP) to organize a resistance movement and take power.
Among its reforms, the PFP dissolved the predominantly Communist Supreme Soviet and transferred its
functions to the 50-member National Council, the upper house of Parliament at the time.
Page 18 • 1-Jul-2017 Background

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Updated as of Dec 2017

Original Publication Date: August 2017

FORECASTS OF RISK TO INTERNATIONAL BUSINESS

KEY ECONOMIC FORECASTS

• The troubled state-owned IBA reached a restructuring deal with creditors in

Country Update 29-Dec-2017 • Page U-1

• According to the Financial Market Supervisory Authority, close to one-fifth of

Banking Risks Remain

Page U-2 • 29-Dec-2017 Country Update

According to the Financial Market Supervisory Authority (FMSA), close to one-

Country Update 29-Dec-2017 • Page U-3

Zero Tolerance for Dissent

The Aliyev regime continues to enforce a harsh crackdown on dissent, a recent

Anyone spreading anti-government messages via social media faces arrest. In

Page U-4 • 29-Dec-2017 Country Update

government if it fails to make adequate progress. In that vein, the government

Rising Oil Prices Point to Positive Growth in 2018

Industrial production fell by 4.6% (year-on-year) in January–October 2017, and

The current account balance is on track to return to positive territory in 2017,

Country Update 29-Dec-2017 • Page U-5

Economic Forecasts for the Three Alternative Regimes

YAP Broad Alliance Military

Page U-6 • 29-Dec-2017 Country Update

© 2017, The PRS Group, Inc. ISSN: 1099-2278

● Agdam Baku (Baki) ✪

FORECASTS OF RISK TO INTERNATIONAL BUSINESS

KEY ECONOMIC FORECASTS

Bank Default Highlights Transparency Risks

Highlights 31-Aug-2017 • Page 3

Slow Progress on Diversification Will Limit Growth

Economic Forecasts for the Three Alternative Regimes

YAP Broad Alliance Military

Page 4 • 31-Aug-2017 Highlights

Political Fact Sheet

CAPITAL: HEAD OF STATE:

Current Data 29-Dec-2017 • Page 5

Current Data 29-Dec-2017 ~ Page 6-7

Current Data 29-Dec-2017 ~ Page 6-7

Regional Real GDP Growth (2016): Central & South Asia

Regional Inflation Rates (2016): Central & South Asia

0.0 2.0 4.0 6.0 8.0 10.0 12.0 14.0 16.0

Page 8 • 31-Aug-2017 Current Data

Regional Current Account/GDP (2016): Central & South Asia

-7.0 -6.0 -5.0 -4.0 -3.0 -2.0 -1.0 0.0 1.0

Economic Performance Profile

GDP Per Capita ($)  6587

Real GDP Growth (%)  1.8

Inflation (%)  4.3

Unemployment (%)  5.1

Capital Investment  25.7

Budget Balance  -0.2

Current Account  9.8

Debt Service Ratio  8.3

Currency Change (%)  -16.5

BEST 25% NEXT 25% NEXT 25% WORST 25%

Current Data 31-Aug-2017 • Page 9

Social Indicators as of 2016

Work Force Distribution

Page 10 • 29-Dec-2017 Current Data

Comment & Analysis 31-Aug-2017 • Page 11

Aliyev Tightens His Grip

Page 12 • 31-Aug-2017 Comment & Analysis