Azerbaijan Market of the Month
Pumpjacks at Azerbaijani Oilfields |
Table of Contents Best prospects for U.S. Exporters Doing Business in Azerbaijan - Practical Challenges |
With a population of a little over eight million, the Republic of Azerbaijan offers a small but fast developing market that has shown impressive, sustained economic growth. Azerbaijan, which gained independence from the former Soviet Union in 1991 and continues its integration with the world economy, is now attracting billions in foreign investment, particularly from companies seeking to gain a market presence in the oil rich Caspian region. The country’s second largest sector is agriculture.
Azerbaijan’s hydrocarbons have attracted approximately $7.3 billion in foreign investment over the past five years and $23 billion total to date. This influx of investment and petrodollars into Azerbaijan’s relatively small market has the economy working on overdrive and offering U.S. export opportunities to satisfy the country’s growing purchasing power. GDP growth in Azerbaijan averaged over 10% per year for 2001 – 04, and reached an unprecedented 26.4% increase in 2005. Growth in GDP is expected to reach over 30% in 2006, driven by substantial increases of oil and gas production and exports.
The main U.S. exports to Azerbaijan include industrial capital equipment, boilers, parts, machinery, aircraft, meat products, electronic equipment, and various services (legal, financial, engineering). The U.S. has maintained a positive trade balance with Azerbaijan, averaging about $120-30 million in annual exports since 2000.
Azerbaijan is in the process of negotiating its accession to the World Trade Organization (WTO). The United States and Azerbaijan have signed a Bilateral Investment Treaty, which entered into force in August 2001. In November 2004, Fitch, the international ratings agency, raised Azerbaijan's sovereign Long Term Credit Rating on its obligations in foreign and national currencies from BB- to BB, giving the country a "stable" outlook; Fitch reaffirmed this assessment in January, 2006.
Key challenges for Azerbaijan include implementing anti-corruption legislation, improving the legal and regulatory framework for business, maintaining fiscal discipline, and continuing privatization.
Baku Academy of Sciences
Azerbaijan, located in the South Caucasus, is bordered by Russia to the north, the Caspian Sea to the east, Iran to the south, and Georgia and Armenia to the west. Azerbaijan is slightly smaller than the state of Maine.
The official language is Azerbaijani, although Russian and Turkish are also widely spoken. The monetary unit in Azerbaijan is the Manat (AZM); 1 USD = 0.8982 AZN as of June 7, 2006 (Click here for more updates)
Oil production and transportation: Azerbaijan 's government has forecasted a 61.6% rise in oil exports in 2006 over 2005 targets, to 22.3 million tons, and subsequent growth the next several years, reaching 55 million tones in 2009. Azerbaijan has signed 22 Production Sharing Agreements (PSAs) with many of the major international oil companies, worth up to $50 billion.
The Baku-Tbilisi-Ceyhan pipeline (BTC): transports crude oil 1,760 km (1,093 miles) from the Azeri-Chirag-Guneshli oil field in the Caspian Sea to the Mediterranean Sea. It passes through Baku, the capital of Azerbaijan; Tbilisi, the capital of Georgia; and Ceyhan, a port on the southeastern Mediterranean coast of Turkey.
A view of an Azerbaijani Mountain Village
Agriculture is Azerbaijan's next largest sector after energy, and further development of agribusiness is understood to be essential to creating employment opportunities and increasing family incomes in Azerbaijan. Agriculture employs more than 30 percent of the work force and accounts for approximately 12 percent of GDP; agricultural output rose by 4.6% in 2005. Small and medium-sized farms, ranging from one or two hectares to several hundred hectares have increased production of nuts, fruits, vegetables, grain, dairy products, meat, and some poultry under labor-intensive conditions. The sector presents potentially profitable business opportunities, but the country's regulatory system must become more transparent and less arbitrary in order to attract significant foreign investment to the sector.
Trade and Foreign Business: Major trading partners are the United Kingdom, Russia, USA, Turkey, Germany, France, Italy, Kazakhstan and Georgia. More than 120 U.S. companies are now resident in Baku, a 25 percent increase since 2000. The American Chamber of Commerce in Azerbaijan has over 140 members, a 30 percent increase since 2000. The Top U.S. Subsidiaries in Azerbaijan include Bechtel International, Inc., ChevronTexaco, ConocoPhillips, ExxonMobil Azerbaijan Operating Co. L.L.C., Halliburton International Azerbaijan, McDermott Caspian Contractors, Inc., Schlumberger Logelco, Inc., Unocal.
Baku Beach and Off Shore Drilling Platforms
Best Prospects for U.S. Exporters
As Azerbaijan’s major hydrocarbon projects move toward a less intensive development stage, foreign investment will drop in the near future but is expected to be partially offset by inflows of concessional funds and grants for the next few years, estimated at about $3 billion. The main driver of growth, however, is expected to be domestic investment. According to official sources, local investment is predicted to increase by approximately 20% a year, fueling growth in the services sectors such as transportation, communications, and construction.
Current best prospects for U.S. non-oil products and services include:
 | architectural, construction & engineering services |
| building materials |
| transportation (aviation) |
| telecommunications equipment and services |
| food processing/packaging equipment |
| agricultural machinery |
Learn more about the best prospects for U.S. business in the non-oil and gas sectors in our video presentation by U.S Ambassador to Azerbaijan, Hon. Reno Harnish.
Every year the Multilateral Development Banks (MDBs) spend millions procuring consultants and products necessary to meet in-country project objectives. Related tender opportunities are available through the BISNIS Trades & Tenders program.
For a brief summary of MDB activities in Azerbaijan, visit the BISNIS Azerbaijan page.
ISR Plaza and McDonald's Restaurant , downtown Baku
Doing Business in Azerbaijan - Practical Challenges
Doing business in Azerbaijan is not without challenges. According to the International Finance Corporation report, “Doing Business in 2006,” which evaluates countries by the requirements and costs of fulfilling business needs (licensing, hiring and firing, etc.), the steps, time, and costs of complying with licensing and operating requirements in Azerbaijan can be very demanding.
U.S. companies should closely evaluate the market and conduct careful due diligence before entering Azerbaijan. As with other emerging markets, finding a qualified, reliable, and motivated partner can be central to a company’s success.
U.S. firms looking for opportunities in Azerbaijan should focus on medium-sized, private Azeri firms with a minimum three-year track record and credit history. Azeri firms generally have poor cash flow, given the lack of affordable credit and other structural disincentives. Training and flexible stock/inventory options will help U.S. goods and services penetrate the Azeri market. Given Baku’s dominance of the market, it is best to work with a Baku-based firm for onward distribution throughout the country.
U.S. companies seeking to better understand specific business conditions in Azerbaijan may wish to consult the November 2005 American Chamber of Commerce in Azerbaijan (AmCham) white paper, “Observations and Recommendations for Improving Azerbaijan’s Business Climate.” The paper addresses issues of concern to American companies doing business in the country, making recommendations in a number of areas, including: Corruption, Taxation, Customs, Banking, Finance and Insurance, Communication and Information Technology, Labor, Tourism, Agriculture, and Protection of Intellectual Property Rights.
Baku Maiden Tower
Since 2003, the Commercial Service’s BISNIS program has facilitated more than $60 million in U.S. exports and other business activities in Azerbaijan, primarily in non-oil & gas sectors, including telecommunications, medical equipment and services, engineering and construction, border security, and others. Recent examples include:
| In 2004, a U.S. engineering and construction company was able to successfully pursue a large communication systems tender in Azerbaijan. The company had received market information and referrals from BISNIS and the U.S. Embassy in Azerbaijan that helped the company to identify qualified, capable Azeri professionals and establish in-country operations. This project helped place Azerbaijan in the company’s top ten revenue countries for 2005. |
| In 2005, a small U.S. medical laboratory equipment company exported four medical laboratories to the oil and gas industry in Azerbaijan, adding to earlier sales of 6 such mini labs. Completing the sales begun after receiving BISNIS counseling, market information, and referrals to develop this new market segment. BISNIS had initially helped the company enter the market in 2003 and develop a new niche in Azerbaijan in 2004. |
Additional resources on doing business in Azerbaijan include:
1. BISNIS Azerbaijan page (includes links to trade and partner leads, as well as events)
2. U.S. Embassy in Baku, Azerbaijan
3. U.S. Department of State, Azerbaijan Profile
4. U.S. Energy Information Administration, EIA
5. The American Chamber of Commerce in Azerbaijan (AmCham)
6. The U.S. - Azerbaijan Chamber of Commerce (USACC)
7. The Asian Development Bank Resident Mission in Azerbaijan
8. The International Finance Corporation Resident Mission in Azerbaijan
9. The European Bank for Reconstruction and Development Resident Mission in Azerbaijan
Azerbaijan 2006 International Business Events
| 13 June - 14 June 2006; Caucasus Banking & Finance Conference 2006; 1st Caucasus International Banking & Finance Conference |
| 19 September - 22 September 2006; BakuMebel 2006; 4th International Furniture and Woodworking, Interiors and Design Exhibition |
| 26 September - 29 September 2006; BIHE 2006 ;12th Azerbaijan International Healthcare Exhibition |
| 3 October - 6 October 2006; BakuTel 2006; 12th Azerbaijan International Telecommunications and Information Technologies Exhibition and Conference |
| 3 October - 6 October 2006; AzPrintMedia 2006; 3rd Azerbaijan International Printing, Advertising and Stationery Exhibition |
| 11 October - 14 October 2006;BakuBuild 2006; 12th Azerbaijan International Construction Exhibition |
| 9 November - 11 November 2006; Moda Azerbaijan 2006; 1st Azerbaijan International Fashion and Accessories Exhibition |
| 9 November - 11 November 2006; Textile Azerbaijan 2006; 1st Caspian International Textile Exhibition |
Chris D. Christov
Economist/Azerbaijan Trade Specialist
BISNIS, U.S. & Foreign Commercial Service
U.S. Department of Commerce
Tel: (202) 482-4199
Fax: (202) 482-2293
Email: chris.christov@Mail.doc.gov
www.bisnis.doc.gov
Sources for this report other than U.S. Department of Commerce include: U.S. Embassy in Baku, Azerbaijan, U.S. Department of State, Azerbaijan Profile, U.S. Energy Information Administration (EIA), The American Chamber of Commerce in Azerbaijan (AmCham), the U.S. - Azerbaijan Chamber of Commerce (USACC), Asian Development Bank Resident Mission in Azerbaijan, IFC Resident Mission in Azerbaijan, EBRD Resident Mission in Azerbaijan, Fitch Rating, the Economist Intelligence Unit, EBRD Transition Report 2005, IFC Doing Business 2006.