Investment Projects

Economy

Macroeconomic Background
Following the break up of the Soviet Union, Azerbaijan’s economy suffered from serious macroeconomic imbalances.  Real GDP declined by about 60 percent from 1991 to 1995.  During this period, high inflation had eroded real incomes, the exchange rate had weakened and international reserves were nearly depleted.  These developments reflected the collapse of traditional trade links with the Soviet Union, the military conflict in the Nagorno Karabakh region, and fiscal deficits.

In 1995 Azerbaijan began a comprehensive stabilization program.  Fiscal and credit policies were tightened and structural reforms were introduced.  During this period, macroeconomic conditions stabilized and substantially improved, as demonstrated by a resumption of growth, a drastic reduction in inflation, substantial inflows of foreign investment and a strengthened current account balance.

Following this initial recovery, the Azerbaijani economy is now poised to meet the challenges of the transition to a market economy, while at the same time, developing oil resources that will provide the engine for long-term sustainable growth and rising per capita incomes across all segments of the population.

Azerbaijan’s extensive oil resources have formed the basis for the economy in the past and remain an important factor for future economic prospects in the first half of the 21st century.  Oil exports are projected to increase from the current modest level of 180,000 barrels per day (bpd), to more than 1 million bpd by the early part of the decade.

The government of President Aliyev is aware of the potential dangers of building an economy that is overly dependent on a single industry or economic sector — oil — and the risk that this industry could inadvertently hinder the development of other sectors of the economy.  The goal of Azerbaijan’s economic policy is to achieve balanced growth.  Traditionally, industry and agriculture have been the leading economic sectors.  Industry accounted for 23 percent of Azerbaijan’s GDP in 1996, while agriculture contributed 22.9 percent.

To help achieve balanced growth, Azerbaijan has been implementing economic reforms supported by advice and the financial resources of the International Monetary Fund (IMF), the World Bank and other bilateral and multilateral creditors.  The government’s broad program of reforms includes the following:

• Liberalization of prices;
• Widespread cuts in government subsidies;
• Tight budgetary and fiscal controls to limit inflation;
• Restructuring the banking sector to improve transparency;
• Modernizing the tax structure;
• Instituting a land reform program; and
• Privatizing state-owned assets.  

Economic Reforms Are Yielding Impressive Results

During the past two years that economic reforms have been in place, Azerbaijan’s economy has been undergoing a structural shift, in which services, transportation, communications, trade and construction sectors are rapidly expanding.

Macroeconomic indicators are in line with the reform program’s targets.  In the first half of 1998, Azerbaijan achieved a 9 percent increase in GDP, building on the 5.8 percent growth level for all of 1997.  In addition, inflation (which in 1994 had reached a level of 1,664 percent) has fallen almost to zero.  Azerbaijan’s currency — the manat — has appreciated against the U.S. dollar in recent months.  Azerbaijan is also building up its foreign reserves, which have more than doubled since the end of 1996.

In addition to the economic reforms, Azerbaijan undertook several important structural changes in 1997 and early 1998.  These included: 1) a significant strengthening of banking supervision and changes in the regulations for commercial banks; 2) full trade liberalization; 3) enactment of legislation to improve tax collection; and 4) measures to improve accountability in government purchases.In the coming months, Azerbaijani officials plan to speed up implementation of their reform efforts by:

1) completing the restructuring of the four state-owned banks;

2) restructuring public expenditures by reducing public sector employment and improving health and education services;

3) improving transparency of the privatization process and accelerating large scale privatization projects; and

4) enacting market-oriented legislation.

Recently, the IMF commended Azerbaijan for its success in achieving macroeconomic stabilization under the economic reform program.  IMF officials also supported Azerbaijan’s approach to exchange rate policy, which sought to smooth the short-term fluctuations, as well as the country’s plan to address transparency issues, to study the best uses for future oil revenues, and to implement difficult structural reforms.

The following is an overview of recent developments in key economic sectors:

Energy:  Total proven oil reserves are estimated at 9 to 11 billion barrels, with potential reserves of several times that amount.  To date, 15 Production Sharing Agreements (PSAs) with a total value of almost $40 billion have been signed.

One such agreement is with Azerbaijan International Operating Company (AIOC), a consortium that includes the State Oil Company of Azerbaijan and several Western energy firms.  Other examples include contracts worth $13 billion with three major British firms to develop the Caspian Sea oil field.  These agreements build on earlier deals with several American energy firms for exploration and production sharing.

Efforts are now focused on developing a system of pipelines to transport Azerbaijani oil (and that of neighboring states) to world markets.  Azerbaijan is backing a plan for a Main Export Pipeline (MEP) from Baku to Georgia to the port of Ceyhan, located on the Mediterranean coast of Turkey.  Alternative routes would transport oil either north through Russia, or south through Iran.  The Baku-Ceyhan route has the strong support of the United States.  A final decision on pipeline routes should be made in the coming months.

The Azerbaijani government’s energy strategy is two-fold: (1) attract significant new foreign investment for oil development and related industries, and (2) increase the efficiency of domestic energy use.  The government is also seeking private investment in the power generation and gas processing sectors.  Efforts are beginning to develop the legal and institutional framework for the oil and gas sectors.

Manufacturing: The oil equipment and related machine-building sectors constitute the most promising manufacturing sectors.  Since Azerbaijan’s independence, there has been a shift in manufacturing from oil-based industries, such as chemicals, to sectors such as finished metal goods, including pipes, machine tools and computers.

Soviet-era plants and equipment are in need of modernization.  Petrochemical products, including synthetics, rubber, detergents and polymeric materials, as well as aluminum smelting, textiles and clothing, and food and beverages, comprise the bulk of other manufacturing operations.  The government has designated the industrial zone of Sumgayit, located just north of Baku, as a free economic zone in an effort to attract foreign investors to produce goods for export.

Agriculture: More than 30 percent of Azerbaijan’s workforce is engaged in some form of agriculture.  Most of the country’s farming activity is centered in the fertile lowlands of central Azerbaijan, along the Kura and Araz rivers.  Leading crops have traditionally been cotton, grains, vegetables and grapes.  However, production has declined in recent years because much of the most valuable farmland is now under Armenian control or is adjacent to the conflict area in Nagorno Karabakh.

Mining: Azerbaijan is endowed with iron, gold, aluminum, zinc, copper, marble and fire clay.  In particular, the country has large reserves of iron ore and aluminum ore.  Foreign investment is needed to develop and modernize existing mining operations.

Infrastructure: Internal and international transportation and communications routes have been seriously disrupted by the conflict with Armenia over Nagorno Karabakh and by broader regional instability.  Since re-establishing its independence, Azerbaijan has relied on two international routes to the West:  through Georgia to the Black Sea, and south through Iran.  Unfortunately, northern routes through Russia have been disrupted by instability in the Caucasus.

There are 2,089 km of railways, which provide the main source of transportation for freight.  The network of roads for vehicles serves domestic cargo traffic and provides access to international main highways.  However, the roads are generally in poor condition.Sea cargo transportation is very important for Azerbaijan, connecting the country with other states of Central Asia, Iran and Russia.  Baku is the largest port on the Caspian Sea for cargo-handling facilities and for ferry lines connecting Europe and Asia.  Azerbaijan maintains regular flights with Commonwealth of Independent States (CIS) countries, as well as with Germany, Israel, Iran, Turkey, Switzerland, Pakistan, the Netherlands, Greece, Poland, China, Italy, the United Kingdom and the United Arab Emerites.  British Airways, Lufthansa, Swissair, KLM, Turkish
Airlines and other regional carriers maintain air service. The country’s telecommunications infrastructure is in the process of being rebuilt and modernized, but additional investments are needed for the future.

Financial Services: Azerbaijan has made progress in establishing its own banking system.  Since 1992, the country has adopted new laws to establish a two-level banking system:  1) the National Bank of Azerbaijan, or state-run banks; and 2) commercial banks.  At present, there are approximately 125 commercial banks with total authorized capital of more than $70 million.  Most of these banks have established relations with foreign banks.  In addition, there are more than a dozen foreign and joint-venture banks, representing the United States, the United Kingdom, Turkey, Iran, Russia, Austria and others.

Trade and Foreign Investment Trends
Azerbaijan has traditionally depended heavily on trade, with imports and exports each comprising more than 35 percent of GDP during the latter half of the 1980s.  Since re-establishing its independence, Azerbaijan has moved swiftly to reorient itself towards new markets outside those of the former Soviet Union.  Major export markets include Iran, Russia, Georgia and Turkey.  Major import markets are Turkey, the United Arab Emirates, the Ukraine and Germany.  Major exports are oil, chemicals, textiles, machinery, equipment and food industry products.  Major imports are food products, machinery and equipment, light industry materials and chemicals.

The Environment

Azerbaijan is the largest of the South Caucasus countries.  Of its total area, approximately 50 percent is agricultural land, 2.5 percent is urban land (with Baku comprising 2.15 percent) and 13 percent is forest territory.  Lowlands occupy more than half of the country.

Azerbaijan is notable for its ecological diversity.  Its territory includes vast plains below sea level, mountain peaks with heights of over 4,000 meters, deserts, Alpine meadows, salt marshes and sub-tropical woods.  The country has nine of the earth’s 13 climate zones.

Azerbaijan accounts for 15 percent of all water resources in the South Caucasus countries.  All of the country’s rivers flow into the Caspian Sea basin.  The irrigation system is regulated by water reservoirs.  The Caspian Sea fishing stock is capable of producing six times more fish than the Black Sea, however, water pollution is a growing concern that must still be addressed.

Azerbaijan is notable for its diversity of species, both flora and fauna.  Of the 4,500 plant species, 143 are considered endangered.  Of the 20,000 fauna species, 109 types of animals are endangered.  More than 2,100 century-old trees are protected by the state.

Today, the State Committee for Ecology and the Use of Natural Resources, which reports directly to the President, has responsibility for developing and managing environmental protection programs. The Committee has made important progress by introducing a number of important laws and regulations to safeguard Azerbaijan’s natural resources.

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