BUSINESS CLIMATE

The Republic of Azerbaijan is the leading FDI destination in the region. In the last decade the total FDI stock in Azerbaijan exceeded 25 bln USD. Azerbaijan has achieved gradual improvement in the overall legal framework for the investment activities in the country for last several years with a number of practical regulations liberalizing conduct of business and reducing red tape obstacles. It carried out a revolutionary legal reform several years ago with adoption of new Tax code, Civil and Civil Procedure Codes, Land Code, Labor Code, Customs Code, Foreign Exchange Law as well as Law on International Arbitration made the system a way more transparent and friendly for local and foreign businesses.

The Government managed to open up economy for the international business and introduce investments friendly laws and regulations. Generally, the Azerbaijani legislation establishes a very permissive national regime for FDI (which means that FDI are welcome in any sectors where the local investor is allowed to invest). Such regime also basically exists for the privatization of the state owned property. There are no special permissions or specific registration requirements for foreign investment. The licensing was substantially simplified with foreign investors' interest in mind.

As of now a foreign investor in Azerbaijan enjoys a non-discrimination regime. The major economic policies are FDI element inclusive. E.g. the Government lifted limitations for foreign participation in the banking sector. Privatization process is open for foreign investors as well. Few sector based restrictions for FDI are limited to national security related.

The major factors that turned Azerbaijan into a leading FDI destination and provide for justification to do business here are:

- Abundant resources

Azerbaijan is rich in mineral and climatic resources. The Caspian Sea oil & gas reserves are one of the major deposits globally. Azerbaijani proper has also substantial explored deposits of precious metals (including gold and silver), ferrous and non-ferrous metals, various construction raw materials deposits etc.

One of the major resources the country has is its natural diversity. Despite relatively small size the Azerbaijani territory due to complex terrain and geography has a number of distinct climatic zones: from humid subtropical climate to semi-arctic. This creates unique opportunities in agriculture and tourism.

- Favorable location

Azerbaijan is located on the very south-eastern border of the European continent and serves as the natural bridge between Europe and Central Asia as well as it is the most convenient route from the north-east of Europe to the Middle East. The country is the logistics hub for the Caspian region. Excellent infrastructure of Baku (including largest regional sea and air terminal) is the best choice for any business entering the markets of the Caspian Sea region.

- Competitive cost of production

Azerbaijan has long lasting industrial and trade traditions. The industrial revolution has taken place here in the late XIX century due to expanding and advanced oil production and processing sector. Further industrial development led to growing R&D base. A large R&D centre, Academia of Sciences with circa 7,000 researches exists in Azerbaijan in parallel with a number of universities and colleges.

The country is rich in engineering skills yet the wages are still very competitive. Azerbaijani government’s policies in respect of utilities tariffs are manufacturer friendly.

- FDI friendly laws

Azerbaijani legislation is evolving in accordance with the strategic goal of the Government which implements the "welcoming policy" for foreign businesses.

Foreign investments are protected by certain guarantees provided by the government and legislation, including:

I. Guarantee against deterioration of legislation - the general rule is that legislation in force at time of making an investment continues to apply for subsequent 10 years;

II. Guarantee against nationalization and requisition - foreign investments are not subject to nationalization (except in cases of harm to population and state) and requisition (except in cases of natural disaster, epidemics, accidents, emergencies). Foreign investors are guaranteed immediate, adequate and effective compensation in case of nationalization and requisition. Compensation should be commensurate to the amount of the investment at time of nationalization or requisition, payable in foreign currency and may be freely transferred abroad;

III. Guarantee of compensation of damages - foreign investors are entitled to compensation of damages, including lost profits, incurred as a result of unlawful acts of state authorities;

IV. Guarantee of repatriation of profits - foreign investors are entitled to repatriate profits derived from foreign investments subject to payment of applicable taxes and duties.

The new Foreign Investment Bill that is being discussed in the Parliament at the moment is expected to reinforce the above guarantees as well as to introduce new legal instruments to protect foreign businesses.

The Government will continue the policy of support to industries with the domination of privately held enterprises including those owned by foreigners.

There are no general trade barriers or prohibitions for import of any types of goods in Azerbaijan and a minimum non trade barriers level for international trade exists. The country is not a member of WTO yet, though the Government started the accession process. The export is not subject to any customs duties and restrictions. Regulations exist for the export of strategic commodities such as electricity, petrol, cotton and non-ferrous metals.

A foreign investor is particularly welcome to enter the Azerbaijani market with a so called green field project. This is particularly attractive bearing in mind the regional markets and the geographic location of the country as the transportation hub for the Caspian region and Central Asia.

The Government has introduced a number of initiatives recently aimed at the improvement of the dialogue with the business community. Apart from the usual ways of policy lobbying and communication with the government via its ministries and agencies the avenues exist for a foreign investor to deliver the messages via such structures as the Azerbaijan Export & Investment Promotion Foundation (AZPROMO) aimed at the promotion of export & investment mainly in the non-oil sector (for more information please refer to www.azpromo.org ).

Steps aimed at the simplification of the process of business start up were undertaken recently. Azerbaijani legislation is permissive in respect of expatriate staff employment.

Other substantial comparative advantages of doing business in Azerbaijan include such important factors as macroeconomic stability and political predictability and Baku being the only metropolitan and capital on the Caspian Sea.

Pursuant to the 1992 Foreign Investment Law in force, foreign investment, may take any of the following forms:

• Participation in enterprises and organizations established with legal entities and citizens of the Republic of Azerbaijan on a shared basis;

• Establishment of enterprises wholly-owned by foreign investors;

• Purchase of enterprises, property, buildings, structures, shares in enterprises, other shares, bonds, securities, and certain other property, which, under the law of the Republic of Azerbaijan, may be owned by foreign investors;

• Acquisition of rights to use land and other natural resources, and also other proprietary rights; and

• Conclusion of agreements with legal entities and citizens of the Republic of Azerbaijan providing for other forms of foreign investments.

Enterprises with foreign investment include joint ventures, enterprises wholly-owned by foreign investors, and representations (offices and branches) of foreign legal entities.