Operating Environment in Azerbaijan

=Overview=

While strategic development of Azerbaijan's oil and gas resources has driven strong economic growth and attracted high levels of foreign investment since the second oil boom period, the US State Department highlights issues such as corruption, lack of transparency, politically connected economic monopolies and cronyism as significant obstacles to economic progress, hindering both domestic and foreign investment.

In the World Bank's Doing Business 2012 ratings, Azerbaijan was ranked 66th out of 183 economies, according to a series of key indicators, including enforcement of contracts, protection for investors and dealing with construction permits.

=Deterioration of business environment=

Azerbaijan's business environment in 2006 was described by the Economist as 'hazardous and getting worse', the principal problems being rampant corruption on the part of state officials, particularly in the tax and customs departments, a court system that is open to abuse and at odds with the country's legal code, and the maintenance of a number of artificial monopolies run for the benefit of well-connected individuals.

A report by think tank Chatham House notes that key productivity-enhancing reforms, such as the privatisation of Kapital Bank and the introduction of an anti-monopoly code are seen as crucial in improving the investment climate, and that the introduction of a single-point registration for commercial entities was an important step forward. Public sector reforms to improve business operating conditions have also been implemented, however the process of economic reform has been slow. As a result, local capital markets suffer from institutional weakness, a lack of trust from shareholders, and non-transparent financial management.

A considerable hindrance to foreign direct investment (FDI), according to the US State Department, is the difficulty of getting established Azeri businesses to adapt to standard investor-friendly practices, such as good corporate governance principles. Due to the inability or lack of will to comply with the disclosure and financial transparency required for potential shareholders to confidently invest, many enterprises find it difficult to successfully market their companies.

In his report, consultant Gojar Gojayev notes that Western countries with oil and gas interests in Azerbaijan have chose to mute their criticism of the regime or avoid it altogether in return for continued access to the vast natural resources and safe transport of oil.

=State intervention in the private sector=

According to reports by the Economist, the phenomenon of well-connected Azerbaijanis intervening in successful private sector businesses became more notable since Ilham Aliyev succeeded his father Heydar Aliyev as president in 2003, and the country's political elite began to encroach further on the private sector. According to the newspaper's analysis, these artificial monopolies exacerbate the effects of Dutch Disease and must be tackled in order to avoid the consequences this could have for the nation's economy. One example of this were the events surrounding the forced transfer of shares in Azerbaijani oil company Azpetrol.

A leaked US diplomatic cable from 2006 reported that President Aliyev retains final economic decision-making power in Azerbaijan, and 'most certainly makes some economic decisions based upon his personal and family wealth interests', relying on a small close group of business contacts and trusted government advisors. The cable also notes that most government officials in the country operate large, powerful personal businesses that deal directly with the government. Former Economic Development Minister Heydar Babayev and Minister of Emergency Situations (as of 2012) Kemalladin Heydarov were highlighted as exerting significant influence over economic decision making.

A further cable fro 2010 comments that although the Heydar Aliyev Fund, a 'humanitarian organisation' run by the current President's wife Mehriban Aliyev, tends to be non-transparent, many assume that oil revenues fill the coffers, and that employees from government ministries are forced to make contributions to the Fund. These donations were described as a type of 'get out of jail free card' for local officials, and if they donate regularly they are allowed to operate businesses and other activities locally without interference.

=Transparency=

Revenue Watch Institute (RWI) reported in 2012 that press freedom and freedom of expression had deteriorated in recent years due to a series of concerning trends - the arrests of prominent journalists and bloggers who express critical opinions, low accountability for those committing violence against journalists and restrictive criminal defamation rules that remain part of Azerbaijani law. RWI concluded that this made it increasingly difficult to publish information that could hold public officials accountable.

Transparency International commented in 2012 that Azerbaijan was plagued by endemic corruption that prevents ordinary Azerbaijanis from sharing in natural resource wealth, and scored only 2.4 (on a scale of 1-10) in their Corruption Perceptions Index (CPI). However the Azerbaijani government claims to have taken steps to improve transparency in the extractives sector, endorsing the Extractive Industries Transparency Initiative (EITI) in 2004, later becoming the first 'compliant country'.

=References=