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Azerbaijan
Country Overview |
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- BASIC FACTS:
Capital: Baku
Area: 86,600 square kilometers
Population: 7.57 million (1997)
Currency: Manat
Exchange Rate: $1 = 3,887 (3/99)
GNP: $3.9 billion (1997)
GDP Growth: 1.3% (1996); 5.8% (1997);
6.7% (1998 prel.)
GDP per capita: $509 (1997)
Inflation: 3.9% (1998)
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EXECUTIVE SUMMARY
Azerbaijan lies to the west of the Caspian Sea, and is
strategically located between Russia to the north and Iran to the south. The country is
one of the oldest oil exporters in the world and used to service much of the former Soviet
Union with tools and equipment for the oil and gas industry. It also has fertile
agricultural land and a well-educated labor force. With a cease-fire agreement with
Armenia over the disputed Nagorno-Karabakh region now in its fifth year, prospects look
quite good for a sustained period of economic growth and development.
Future
Opportunities |
·Telecommunications
·
Water/wastewater treatment
·
Oil & Gas Tools
· Environment
· Ports ·
- Railroads
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Despite the recent
fall in world oil prices, with oil reserves estimated at 4.0 billion barrels, the
potential medium-term economic benefits from further development of oil and gas in
Azerbaijan are very large. Over the next 10 years, the United States Commerce Department
has projected that total investment in Azerbaijan’s oil and gas sector could reach $23
billion. Realization of this potential will require the establishment of a framework for
development rights to offshore oil among the states bordering the Caspian Sea, as well as
transport rights through neighboring countries and the construction of new export
pipelines. Outside of oil exploration and production, the strongest prospects for U.S.
businesses are in transportation (pipelines, railroads, highways, ports);
telecommunications; agriculture; and the environment (via a World Bank program).
Realization of these opportunities has been assisted by the
implementation of market-oriented legal and institutional reforms. As in other countries
in the region, Azerbaijan has gone from a period of severe economic contraction during the
early 1990s to a period of positive GDP growth rates (estimated at 6.7% in 1998). During
this transition, the Government has been able to reduce inflation from more than 1,600% to
less than 4% last year. Privatization has resulted in 90% of the agricultural land and
most small businesses being transferred to private ownership. A number of laws are in
place that protect foreign investment and allow for repatriation of profits and
convertibility of currency. To date, 14 production sharing agreements (PSAs) have been
signed with foreign oil companies, resulting in $1.6 billion in investment. Azerbaijan’s
ability to achieve its full potential will depend on establishing the rule-of-law, through
resolution of conflicting laws or administrative decrees and ensuring the transparency and
consistency of enforcement among all state bodies. Government licensing and regulatory
practices in particular are characterized by overly broad discretionary authority and a
lack of transparency in enforcement. While the giving or accepting of a bribe is a
criminal act, corruption is still a major problem facing investors in Azerbaijan.
The condition of Azerbaijan’s public infrastructure, representing one
of the most pressing constraints to successful development of the oil and gas industry, is
also an area that represents good opportunities for U.S. companies. Since independence
there has been almost no public investment or maintenance of public infrastructure. Roads
are inadequate and deteriorating. The electrical generation and distribution system is in
poor condition. Eighty percent of arable land is irrigated, but the irrigation system is
collapsing. In an effort to address these issues, the World Bank and other donors are
developing programs which will result in significant investments in the short term.
ECONOMIC OUTLOOK
In the medium term,
Azerbaijan’s economic prospects are strong. They could be enhanced further by continued
progress in economic and political liberalization, and the construction of necessary
pipeline and other transport links to international markets. The Government of Azerbaijan
will need to continue implementing a serious economic reform program, and wisely invest
the revenue generated by the development of its energy resources, for this to occur.
Development of Azerbaijan’s substantial oil and gas resources will
depend on its ability to attract foreign investment, which in turn depends in part on
making continued progress in economic and institutional reform. The GOAZ has made good
progress in improving its external sector balances. The current account deficit of $915
million in 1997 was financed mainly through foreign direct investment (FDI) inflows of
about $1 billion, mostly related to oil exploration and development. Official foreign
exchange reserves by end-1997 had risen to four months worth of imports, compared to
almost non-existent reserves in 1994. Preliminary figures for 1998 indicate that FDI
continued to increase, although the current account deficit rose faster. The exchange rate
has remained steady and there was no discernible premium in the black market as of early
1999.
The Government’s structural reforms have also made considerable
headway. Both domestic and foreign trade regimes have been substantially liberalized with
the abolition of the state order system, export and import quotas, licensing requirements
and the export registration scheme. External tariffs have been simplified with reduced
dispersion. There are three tariff rates (i) 1.5 percent for most items, (ii) 5 percent
for intermediate goods, and (iii) zero for investment goods. State-owned trading companies
involved both in exports and imports, including the cotton monopoly, have been either
privatized or liquidated.
A privatization program providing for the sale of two-thirds of state
assets in the productive sector has proceeded at a quick pace. About 13,000 small
enterprises have been sold through cash auctions, while more than 500 medium-scale
enterprises have been privatized through voucher auctions. About 95 percent of the
population has received vouchers which can be used to purchase shares in the privatized
enterprises. A key aspect of the Government’s reform program is land reform and
restructuring. In early 1995, it introduced laws on agrarian reform and reform of state
and collective farms. The July 1996 Land Reform Law has facilitated the transfer of land
to private and collective ownership. Land titling and land registration systems have been
put into place In the near term, the GOAZ will most likely continue to face a difficult
situation concerning its finances. Despite Azerbaijan’s oil wealth, the actual flow of
revenues from oil will be limited during the next five years. This is true in part because
of the fall in world oil prices in mid-1998, but also because of the nature of production
sharing arrangements (PSAs), which may require 7 – 8 years to achieve “zero
balance,” or investment payoff, during which time royalties are typically circumscribed.
Nonetheless, the most viable strategy for Azerbaijan over the medium term will be to
continue to adopt measures to attract foreign investment to develop its oil and gas
reserves. It is projected that through the promotion of production sharing agreements with
the GOAZ, foreign companies will be able to help Azerbaijan increase its oil production to
between 1.5 and 2 million barrels per day between 2010 and 2015.
BUSINESS AND
INVESTMENT CLIMATE
As in other countries in the
Caspian Sea region, the GOAZ’s official policy is to promote foreign investment. In 1992
the GOAZ passed the Law on Protection of Foreign Investments, which establishes the basic
principles of foreign investment in Azerbaijan and extends guarantees of legal protection
to foreign investors. Contract enforceability is also guaranteed; any subsequent
legislation which may change the status of the contract is not retroactive. Foreign
participation is possible through joint ventures with local companies, wholly
foreign-owned enterprises, and representative offices. Participation of foreign investors
in certain areas, such as the energy sector, requires prior approval of the Cabinet of
Ministers (and in some cases, President Aliyev).
According to the privatization law passed on September 29, 1995,
foreign investors may participate in Azerbaijan’s mass privatization by acquisition of
state privatization options. On July 16, 1996, Azerbaijan’s parliament passed a land
law, which allows for private ownership of land (90% of the farmland is in private
hands),but precludes ownership
of land by individual foreigners. However, experts believe that the new law will enable
companies owned by foreigners to own land in Azerbaijan. Finally, there are no
restrictions on converting or transferring funds; nor are there any restrictions on the
remittances of profits.
Despite the above positive developments and legal assurances, there
still remain a number of constraints which affect both Azerbaijan and the region in
general. Poorly defined and/or vague laws often only take on meaning through implementing
decrees and regulations ¾ some of which are not published. There are often
differences between policies established by the GOAZ and procedures followed by executive
agencies. Also, there can be a lack of co-ordination among Parliament, the various
Ministries and the President's Office resulting in some laws being passed which may appear
to conflict with one other. Finally, corruption is perhaps the major problem foreign
investors face in Azerbaijan. Although state leaders have repeatedly proclaimed the
struggle against corruption the most urgent task, the situation has not improved.
POLITICAL CLIMATE
Azerbaijan became an independent
republic in December, 1991 and established diplomatic relations with the United States in
early 1992. The two countries maintain close political and economic relations, and in FY98
the U.S. Government transferred more than $60 million in assistance to Azerbaijan. A
U.S.-Azerbaijan bilateral trade treaty, ratified in April 1995, is in effect. The U.S. and
Azerbaijan signed a bilateral investment treaty in August 1997.
During the past several years the political climate in Azerbaijan has
stabilized. Still, there remain a number of issues on which the Government is making
intermittent progress. The first post-independence parliamentary election, in November
1995, was flawed, although some opposition candidates were seated. Azerbaijan's system of
Government grants broad powers to the President. The presidential elections in October
1998, the major political event of 1998, were an improvement over previous elections, but
still fell short by international democratic standards. Azerbaijan has taken several steps
toward a more open society, including the elimination of censorship. Still, the lack of an
independent court system and a scarcity of qualified lawyers makes it difficult to protect
the legal rights of individuals.
A key issue that will continue to affect economic development in the
country is the on-going conflict with Armenia. A cease-fire agreement with Armenia over
the disputed Nagorno-Karabakh region has been in effect since may 1994, and this has
clearly been a factor underpinning the return to strong economic growth in Azerbaijan.
SOURCES OF
FINANCING
The Azerbaijani banking system is
small, weak, and as yet plays a minimal role in the economy, which mostly functions on
cash. As of July 1997, there were four state-owned banks, ninety-three private Azerbaijani
banks, and six foreign-owned banks. Private banks are small and are expected to decline
following the increase of minimum capital requirements from $600,000 to $800,000. Some of
the stronger ones service foreign companies and have correspondent relationships with U.S.
banks. These include Rabitobank and Demiryol Bank.
Most western businesses use one of two banks for their local
transactions ¾ International Bank of Azerbaijan, the healthiest
state-owned bank, or British Bank of the Middle East's Baku branch, a subsidiary of the
HSBC Group. Both of these have correspondent relationships with U.S. banks. Western
businesses generally use local banks only for local payments. Of the four state-owned
banks, only International Bank is a fully-functioning commercial bank, while the other
three are insolvent and going through a World Bank-designed restructuring program.
As regards U.S. Government financial institutions, Ex-Im Bank has
signed a limited Project Incentive Agreement with Azerbaijan, and makes short- and
medium-term loans. OPIC is operative but has not made investments in Azerbaijan to date.
SECTORAL OVERVIEWS
OIL AND GAS
Caspian Sea oil production and
transport remains expensive relative to other sites, a critical consideration given the
current soft price of oil and the consolidation that is engulfing the oil industry
worldwide. This, in addition to disappointing early results from offshore oil exploration,
has tended to reduce the attractiveness of the Caspian Sea relative to other oil and gas
exploration and development sites around the world. Nonetheless, good prospects remain in
the region even in the near term, including enhanced exploitation of already-productive
oil fields and transportation of natural gas to regional markets. American companies can
do very well in both types of project, as illustrated by the project profiles highlighted
below and in the Regional Overview (see “Trans-Caspian Pipeline”). Over the medium
term, the Caspian Sea is likely to be an attractive site for exploration and development,
and this will entail opportunities as well for the oil services industry.
· Chirag - Azeri Deepwater Guneshli Offshore Field. The IFC and the EBRD have recently placed $400 million
in long-term financing on the table to develop the Chirag - Azeri Deepwater Guneshli
offshore field. The most likely project configuration at this time appears to be one new
platform at Chirag and a shadow pipeline to augment the capacity of the Baku-Supsa
pipeline. AIOC’s upgraded Chirag platform produces 100,000 barrels per day. An
additional platform would bring capacity to between 200,000 and 250,000 barrels per day.
An additional pipeline following AIOC’s current pipeline route to Supsa, Georgia would
bring transport capacity from 10,000 barrels per day to 200,000 -250,000 barrels per day.
The primary source of financing of this estimated $1.1 billion project would be the AIOC,
which upgraded the Russian-built Chirag platform and built the original Baku-Supsa
pipeline. American suppliers will be very competitive regarding the offshore platform and
related equipment.
Oil and Gas Tool
Manufacturing. Azerbaijan was the largest
manufacturer of tools and equipment for the oil and gas industry in the former Soviet
Union, and continues to manufacture more than 80 types of tools and machines to Soviet
standards. An infusion of modern management and manufacturing technologies would be
required to bring this industry to international standards. Interested foreign companies
are encouraged to enter into Revenue Sharing Agreements (RSAs) to manufacture one or more
tools and/or machines. The RSAs will enjoy similar operating privileges (with respect to
taxes and profit repatriation) as now are enjoyed by the consortia that currently hold oil
and gas Production Sharing Arrangements (PSAs). There are potentially 5-6 viable interest
opportunities, and start-up investment costs for each one would range from $10 - $15
million.
AGRICULTURE
Azerbaijan has great potential as
a supplier of fruits and vegetables, particularly in the former Soviet Union. The demand
for agricultural equipment and investments will steadily increase as land reform and other
modernization of the agricultural sector takes place. The World Bank has instituted a
credit line to improve Azerbaijan’s agricultural productivity as illustrated in the
following project summary. · Agricultural Development and Credit. This project represents phase one of an assistance
program designed to increase rural incomes and agricultural productivity. The project’s
objectives are: (a) to create land markets; (b) to develop sustainable rural advisory and
information services; and (c) to build a viable rural financial system. The project is
estimated to cost $35 million, financed in large part by the IDA of the World Bank, and
will be implemented over a four-year period.
TRANSPORTATION
Over the next few years, there
will be a significant need to improve the public infrastructure and transportation systems
in Azerbaijan. The development of the oil and gas industry will require improved port
facilities and railroad upgrades. For improved access of all goods, it will be necessary
to upgrade the main highway between Azerbaijan and Georgia.
· Baku Port Facilities. A $44 million project, funded in part by an EBRD loan of
$30 million, would rehabilitate the port facilities at Baku to ensure its autonomous and
profitable status. Trade facilitation will be improved by increasing the efficiency of the
port and Caspian Shipping Company, reviewing legal and regulatory networks and removing
trade barriers. This project is complemented by another designed to rehabilitate the port
facilities at the oil reception port north of Baku on the Absheron Peninsula. The existing
slips can offload approximately 10 million tons per year. Rehabilitation would increase
port capacity to 20 million tons (150 million barrels) per year and cost an estimated $25
million.
Highway Rehabilitation/Reconstruction.
This $85 million project consists of
reconstructing and rehabilitating the existing main highway connecting Baku with the
Georgia border near Tblisi in order to improve access and lower transport costs for goods
flowing into and out of Azerbaijan. Project funds will also be used to support equipment
procurement and provide for technical assistance consulting services.
· Railroad Upgrade. Increased demand for rail traffic in support of the oil
and gas industry requires immediate upgrading of selected portions of the railroad track
between Baku and the Georgia border. The EBRD, together with TACIS and the Government of
Azerbaijan, will provide $36 million to rehabilitate some of the worst sections, where
safe passage speeds have been reduced to 25 km. per hour.
TELECOMMUNICATIONS
Azerbaijan has rapidly expanding
telecommunications needs, including the development of internet access, offering good
opportunities for U.S. companies. The growing number of foreign companies established in
Azerbaijan represent a high-value demand for such services.
· Telephone System Improvements. The Azerbaijan Ministry of Communications plans to expand
and modernize its entire telecommunications network, anticipating that funding will come
from local internal sources, foreign investment and credits. Partial foreign ownership of
joint ventures in some market sectors will be encouraged. One possible constraint to
investors is that the Ministry would like to retain full control and revenue from long
distance calling services.
ENVIRONMENT
Azerbaijan faces serious
pollution problems on the Absheron Peninsula. In addition, the consortia involved in
on-shore oil development will need anti-pollution equipment. · Urgent
Environmental Investment Project. As part
of a $25 million environmental investment project, funded in part by a $20 million
concessional World Bank loan, a $5.1 million pilot activity will test cleanup methods and
mitigate existing pollution in one offshore oilfield of the Absheron peninsula. A second
activity, costing $8.1 million, will decontaminate one area which is currently heavily
polluted by mercury in a chlor-alkkaline production plant in Sumgait city, also located on
the Absheron Peninsula. An additional component will strengthen the Azerbaijani
environmental management system at a cost of $1.4 million.
WATER AND SEWERAGE
SERVICES
Development of Baku and
surrounding areas is severely constrained by lack of adequate municipal infrastructure,
including water and sewerage services. · Baku Water and Sewerage Rehabilitation. The Baku water and sewerage utility now suffers from over
70 percent loss of its water supply. The World Bank and EBRD have initiated an $80 million
project to rehabilitate and upgrade the utility, but the World Bank and the Government of
Azerbaijan are already planning a Phase II that will carry on the work at a cost of not
less than $40 million. Build-Operate-Transfer schemes are under consideration; a
conference will be held in Baku in June to explore the role of the private sector in
operating and managing water and sewerage services. |
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