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In for a Penny

Looking to diversify its industrial base, Azerbaijan is attracting more and more FDI as doing business in the country has never been easier.

Spearheaded by the Azerbaijan Export and Investment Promotion Foundation (AZPROMO)—a joint Public Private Initiative established by the Ministry of Economic Development in 2003—Azerbaijan is working hard to attract FDI into non-oil extraction sectors and promote exports.

Behind the country’s push to increase the FDI flow lies an extensively reworked business framework, which saw Azerbaijan named the world’s leading reformer of business regulations in the World Bank’s Doing Business Report 2009—and ever developing infrastructure, aimed at opening up regional trade opportunities. In the 2011 edition of the report, Azerbaijan was ranked 54th internationally, a marginally better performance than neighbor Turkey (65th), and significantly better than the other two main economies in the region: Russia (123rd) and Iran (129th).

Of the $95 billion of investment made in the Azerbaijani economy over the last 15 years, $54 billion came from foreign investors. In 2010 FDI inflow was recorded at $3.35 billion. As Adil Mammadov, President of AZPROMO, told TBY, “The largest share of this investment was made in the oil and gas sector; however, we are seeing steady growth in the non-oil and gas sectors, and this is reflected in the FDI figures.”

The improving business environment has developed under a “single window approach”, with no distinction being made between foreign and local companies. Entrepreneurs can now complete the registration process in as little as three days, and companies also benefit from generous tax procedures. Rural companies are incentivized by tax cuts, as rates for companies outside of Baku stand at 2%, while within the capital tax is collected at a rate of 4%. Only once turnover exceeds AZN150,000 is a company is asked to pay VAT, a policy aimed at easing the pressure on startups. In addition, the agriculture sector has been defined as a key part of Azerbaijan’s economic diversification strategy, with tax holidays and exemptions implemented. In order to provide further support, companies are exempt from paying custom duties and VAT when importing agricultural machinery, with similar benefits on offer for the pharmaceuticals sector. The existence of favorable conditions for FDI to develop the country’s export potential is firmly on the government’s agenda. Shahin Mustafayev, Minister of Economic Development, told TBY that “in order to stimulate non-petroleum exports, our strategy is to stimulate export goods production, improve export infrastructure, perfect our quality control system, and develop education for export”.

Infrastructure also forms a large part of the country’s strategy to diversify its industrial base and increase exports through FDI inflows. ICT, defined by President Aliyev as the second national priority after the oil and gas sector, has seen significant investment aimed at improving the network. Major regional infrastructure projects including the Baku-Tbilisi-Kars railway, the re-construction of the Europe-Caucasus-Asia (TRACECA) highway, and the International Sea Trade Port will also promote non-oil regional trade opportunities and help to turn the country into a CIS transit hub. In regional terms, the Ministry of Foreign Affairs is also on a mission to foster FDI and support non-oil exports by “creating Azerbaijani trade chambers in potential export market countries; implementing various export promotion activities in foreign countries; organizing fairs, business-forums, and conferences for exporters; and creating a data system for export products and exporting companies and disseminating this information among the various stakeholders”, Elmar Mammadyarov, Minister of Foreign Affairs,
told TBY.

While the main foreign investors in the country remain the oil giants, including BP, Chevron, and Statoil, Adil Mammadov highlights non-prime target sectors as machinery, construction, the chemical industry, metallurgy, electricity production, construction materials, light industry, the food industry, and tourism as prospective markets for FDI. “There is also big potential for foreign investment in the production of ecologically safe agricultural goods”, the Economic Development Minister Mustafayev told TBY. Alternative energy is a fast emerging sector that is expected to attract FDI, and reduce the country’s reliance on oil and gas. Further sectors looking to gain attention from investors include ICT, “as well as transportation and logistics”,
according to AZPROMO.