Hey Ho, Inflow!

According to figures released by the Central Bank of Azerbaijan (CBAR), inward FDI totaled $6.29 billion in 2013, 83.3% of which was destined for the oil and gas sector. Major works are underway at the $45 billion Shah Deniz II gas field project to ramp up production in anticipation of the construction of the Trans-Anatolian Pipeline (TANAP), which will carry Azerbaijani gas through Turkey, and the Trans-Adriatic Pipeline (TAP), which will then shift it onward to Europe. Works at the Azeri-Chirag-Gunashli block of oil fields, run by the Azerbaijan International Operating Company (AIOC), also drew in investment over the year.

Azerbaijan’s own outward FDI made a larger splash, however, coming in at $11.8 billion, $1.48 billion of which was direct investment, $322.8 million portfolio investment, and $9.96 billion falling into the other investments category. One of the main drivers behind growth in outward investment is the State Oil Fund of Azerbaijan Republic (SOFAZ), which, since a presidential decree in 2012, has been working to acquire new asset classes, including equities, real estate, and gold. Headline investments for SOFAZ over 2013 included a $500 million investment in Russia’s VTB Group, and the completion of a program to purchase 30 tons of gold begun in 2012. It will also be financing the TANAP project, a continuation of the organization’s commitment to support major projects, with a priority on the energy industry.

The country’s growing tally of inward investment—$160 billion over the last 10 years according to the Ministry of Economy and Industry, 65% of which was destined for the hydrocarbon sector—has risen along with the recognition the country has received for reforms to its business environment. Following a program to ensure the protection of investor rights, the inviolability of property, the simplification of administrative procedures, the application of transparency mechanisms, and the expansion of e-services, the World Bank named the country the world’s most reformed environment in its Doing Business 2009 report. And the accolades have kept on coming. In the WEF’s Global Competitiveness Report 2013-2014, Azerbaijan rose to eighth position in terms of its macroeconomic environment, 10th in the national-savings-to-GDP ratio, and 13th in terms of its government debt-to-GDP ratio. The country also ranks 81st among 178 countries on the Heritage Foundation’s Index of Economic Freedom-2014, which placed it in the moderately free economy grouping.

Heading up efforts to promote Azerbaijan abroad is the Azerbaijan Export and Investment Promotion Foundation (AZPROMO), which organized 277 events, including business forums, B2B meetings, trade missions, roundtables, and seminars over 2013. Azerbaijan also marked the Year of ICT in 2013, a well-timed designation considering the $63 million invested into the industry over 2012. “Half of the top-20 [global] ICT companies… are operating in Azerbaijan,” said Rufat Mammadov, President of AZPROMO, adding that “their operation is substantial evidence of… the business friendly environment in Azerbaijan.” AZPROMO is also looking to promote exports, which ties into Azerbaijan 2020: Outlook for the Future. “We have undertaken a number of legislative and institutional reforms to facilitate exports,” continued Mammadov, including “the introduction of a one-stop shop at customs, the simplification of export procedures, the abolition of customs duties on exports, and the internationalization of Azerbaijani companies.”

As investments continue to get the Shah Deniz gas field ready for exports, and as Azerbaijan looks to upgrade its transport infrastructure in order to better utilize its position on the East-West corridor, FDI inflows are sure to continue. A more robust SOFAZ, which is also now targeting real estate in Asian markets, will ensure that Azerbaijan’s hydrocarbon wealth is put to good use on foreign shores over the coming years.