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This publication is available at https://www.gov.uk/government/publications/overseas-business-risk-azerbaijan/overseas-business-risk-azerbaijan
Information on key security and political risks which UK businesses may face when operating in Azerbaijan.
Azerbaijan is the largest and most prosperous of the South Caucasus states. It is home to about 9 million people and a number of different ethnic groups. In terms of area, Azerbaijan is a similar size to Scotland.
Azerbaijan declared independence from the Soviet Union in 1991. Having come close to collapse at independence and following the debilitating impact of the Nagorno-Karabakh (NK) war (1991 to 1994), it has propelled itself into the 21st century on the back of impressive development of its energy resources. Strong economic growth in recent years made it one of the fastest changing countries in the world.
Azerbaijani is the official language of Azerbaijan but Russian is also widely used in central Baku, and most people (at least in Baku) are bilingual. English is also quite widely spoken and understood in Baku, although fewer people speak English outside of the capital. Over the last few years Azerbaijan became host country for global sports events. In 2015 Azerbaijan hosted First European Games and in 2016 Azerbaijan become the latest addition to the Formula One calendar.
President Ilham Aliyev has been in power since 2003, when he succeeded his late father Heydar Aliyev as president. He has won 3 presidential elections, receiving at least 75% of the vote in each. The most recent presidential election (2013) was made possible by a 2009 referendum that removed the 2-term limit. In February 2017 President appointed Mehriban Aliyeva as First Vice President. The majority of President Aliyev’s government have also been in place for a long period of time, including Prime Minister Artur Rasizade, who, apart from a few months in 2003, has held his position since 1996. The weakness of Azerbaijan’s political opposition is down to a variety of factors, including the government’s control of much of the media, and a lack of access to funding.
Azerbaijan is fiercely independent when it comes to international relations. It has cordial relations with its largest neighbours Russia and Iran, and considers Turkey to be its closest ally. Azerbaijan is geographically positioned between Russia and Iran, and between Europe and Asia, which brings potential opportunities, including in the transport of oil and gas from the Caspian. The government of Azerbaijan is also trying to improve rail and sea links, including through the completion of a north-south rail link from Iran to Russia, a Baku-Tbilisi-Kars railway, and a new port just south of Baku.
The government of Azerbaijan has spoken for many years about the need for economic diversification. There has been little progress made in this regard, although the oil price crash has led to a flurry of new government initiatives and proposed reforms to address Azerbaijan’s economic problems. The government’s priority is to promote the non-oil sector, particularly agriculture, tourism and transport. The government is also focused on strengthening Azerbaijan’s financial sector. There may be opportunities for UK businesses in all of these sectors, along with the traditional opportunities in the energy sector.
The 1988 to 1994 war in Nagorno-Karabakh left Azerbaijan with no control over 20% of its internationally recognised territory and around 750,000 internally displaced persons. The dispute has remained unresolved ever since, and although a ceasefire is in place, there are regular incidents along the frontline, and tensions have increased in recent years. In 2015 over 70 people were killed and more than 200 injured on the frontline. Peace negotiations have been led by the OSCE Minsk Group since 1994.
- currency: Manat (AZN)
- main exports: oil, gas, agricultural products
- GDP (PPP): $168.4 billion (2016)
- GDP per capita (PPP): $17,253 (2016)
- UK exports (July 2017): £137,280,418
- UK imports (July 2017): £16,996,479
- major trading partners (imports and exports): Italy, Germany, Russia, Turkey, the USA
- ease of doing business rating: 65th (out of 190) with ‘paying taxes’ rating of 40th
Azerbaijan has grown rapidly in recent years, thanks mainly to huge oil revenues. This has enabled poverty in Azerbaijan to be reduced from 50% to below 6% in just 10 years. However, the collapse of oil prices has affected the oil-dominated economy, putting real pressure on the national currency (manat). The Azerbaijan Central Bank devalued the manat twice in 2015, and it has switched from a fixed exchange rate to a more flexible managed float.
According to World Bank annual inflation rate remains high at 13.9% in June 2017. This figure is higher than the last year’s 10.5% despite 15% interest rate and tight monetary policies of the Central Bank. Other effects from the oil price fall include pressure on the financial sector from the high level of dollarization (85% of deposits); over-supply in the real estate market; remittances from Azeris working in Russia and Turkey are down; and unemployment has increased. Double devaluations of 2015 hit the banking sector hard. Eleven of 42 banks have been closed down since, while many continue to struggle. With high level of non-performing loans. The country completed 2016 with 3.9% recession, which is expected to deepen further by 1.4% according to the World Bank. The country is expected to come out of the recession next year and put up modest growth figures as the Shah Deniz II gas field comes into operation in 2019, and a gas pipeline to transport gas to Europe is constructed. Over the medium term, GDP growth will remain largely dependent on developments in the oil and gas sectors. The drop in the oil price has reinvigorated the government’s attempts at structural reforms. These are focussed on the financial sector and trying to revive the non-oil sector. Consolidation of the banking sector is in progress, and the large state-owned bank dominating the financial sector is to be privatised in future.
State companies continue to dominate many key industries, including the oil, gas, electricity and telecommunications sectors. The government has suspended a range of licenses and inspections that were seen as holding back the private sector. However, the private sector, particularly small and medium-sized enterprises (SMEs), continue to suffer from bureaucratic hurdles and corruption.
4. Department for International Trade (DIT)
Oil and Gas is by far the largest sector in Azerbaijan and therefore currently attracts the most DIT attention. DIT currently operates an OIL and GAS High Value Campaign (HVC) in Azerbaijan which in 2016 to 2017 was worth some £1.3 billion to the UK, making it the second most successful DIT HVC. Since October 2015, to support the HVC, DIT, together with the Ministry of Economy, BP and SOCAR, runs the UK/Azerbaijan Partnership Programme to promote and support collaboration between UK and Azerbaijani companies in the oil and gas sector. To date, this Programme has been responsible for some 65 partnerships. The Programme is set to continue for the next 3 to 5 years.
On 14 September 2017, BP, together with SOCAR, signed the extension of the Azeri Chirag Guneshli PSA Agreement until 2049. This agreement will lead to significant new business in the oil and gas sector in Azerbaijan for resident and new UK companies. Other major contracts are in the pipeline.
Outside of oil and gas, DIT is looking to diversify into other sectors including healthcare, mining, renewable energy, agri-business, tourism and education.
5. Business and human rights
Through its membership of the OSCE and Council of Europe, Azerbaijan has committed to upholding international human rights standards. However, Azerbaijan’s record remains an area of concern. Reports by a number of respected international human rights groups have highlighted the independence of the judiciary; inconsistent application of laws; politically motivated convictions; government control/influence over large sections of the media; and widespread mistrust of the police/law enforcement as areas of concern.
Azerbaijan joined the international Labour Organization (ILO) in 1992 and has thus far ratified 57 conventions, including all 8 fundamental and the 4 priority conventions. According to the ILO, there is not enough information regarding child labour, forced labour, and occupational safety. The employment-to-population ratio for 2016 was 62.7%.
Trade Unions have very limited power, while the National Confederation of Trade Unions (an umbrella organisation similar to the Trade Union Congress) has strong links with the government.
6. Bribery and corruption
Bribery is illegal. It is an offence for British nationals or someone who is ordinarily resident in the UK, a body incorporated in the UK or a Scottish partnership, to bribe anywhere in the world.
In addition, a commercial organisation carrying on a business in the UK can be liable for the conduct of a person who is neither a UK national or resident in the UK or a body incorporated or formed in the UK. In this case it does not matter whether the acts or omissions which form part of the offence take place in the UK or elsewhere. For more information go to our bribery and corruption page.
Despite improvements in regulation and a series of reforms in recent years, corruption and the perception of it remains a major issue at all levels of Azeri society although the government is working on eliminating the level of corruption across borders. The establishment of the ASAN public service under the President of Azerbaijan has reduced bureaucracy and eased the process of registering a business in Azerbaijan. However in 2015 Azerbaijan was ranked 119 of 167 countries in Transparency International’s Corruption Perception Index (CPI).
7. Terrorism and security
Please read the information provided on the terrorism page of the FCO travel advice for Azerbaijan.
8. Protective security/organised crime
Crime levels are generally low, but muggings do occur from time to time. Take sensible precautions: be vigilant, avoid carrying large sums of money and don’t walk alone at night.
Many cars and roads are poorly maintained, and the standard of driving is erratic. Accidents are common, mainly due to poor or reckless driving and inconsistent enforcement of traffic rules.
More information is available in our travel advice for Azerbaijan.