Foreign Direct Investment to Azerbaijan is concentrated primarily in the oil sector and as a result fluctuates with oil prices. For example, FDI to Azerbaijan peaked in 1998, reaching $948.2 million, but was $355.3 million the following year. Outside the oil sector, on the other hand, Azerbaijan attracts little foreign direct investment. While there are a number of opportunities for foreign investors in the service industries (financial services and telecom) and agricultural businesses, Azerbaijan’s unfavorable environment for FDI is likely to keep these investors at bay. The lack of a certain and predictable legal regime is one of the primary reasons why Azerbaijan is not only not attracting foreign investment, but is also forcing many of the existing foreign businesses to close down their operations. The assessment team met with two prominent international banks with operations in Baku that have decided to terminate their investment and pull out of Azerbaijan. It was also reported that more than 150 Turkish investors disinvested last year.
The problems/difficulties with doing business in Azerbaijan were summarized in a White Paper titled “Business Today in Azerbaijan” that was issued by AmCham Azerbaijan in May of 2001. These difficulties include:
- A legal framework that is unclear, inconsistent and unfairly implemented
- Non-transparent and non-open enforcement of laws
- Problems with contract law and security
- Lack of international accounting standards
- Lack of coordination among government agencies
- Lack of regional customs harmonization
- Inadequate market liberalization
It should be noted that the unfavorable FDI environment stems not from discrimination against foreigners and their investments but rather from a generally difficult Azeri legal and institutional business framework as indicated above. Azeri businesses and entrepreneurs suffer equally from an environment that is fundamentally antithetical to business growth and private sector development, as evidenced by growth in the informal economy as entrepreneurs give up on the official system and find ways to survive in the gray market.
