Foreign direct investment (FDI) in Azerbaijan

FDI in Figures

According to UNCTAD's 2022 World Investment Report, FDI inflows to Azerbaijan were negative by USD 1.7 billion in 2021. In the same year, the total stock of FDI stood at USD 31.6 billion, around 57.9% of the country’s GDP. Azerbaijan inflows focus on the oil and gas sector, although one of the top priorities of the Azerbaijani Government is to diversify the country’s economy and attract FDI to agriculture, transportation, tourism and information/communication technology. Russia is the main source of FDI, but beyond that the country is part of the customs union between Russia, Kazakhstan, Armenia and Belarus that, in terms of volume, is the most important in the region and is almost exclusively involved in major projects for oil/gas pipelines and related services. According to the latest figures by the Central Bank of Azerbaijan, in the first nine months of 2022, FDI inflows totalled USD 4.57 billion, with the UK holding the biggest share (27.7%) ahead of Turkey (16.4%), Cyprus (13.5%), Russia (8.3%) and Iran (5.6%).
 
The Azerbaijani Government has stressed the importance of improving the business climate and it does not screen inbound foreign investment. To promote FDIs, Azerbaijan established a single online portal to issue business licenses and permits. This was against a backdrop of slow structural and anti-corruption reforms. Nonetheless, the country was also designated as one of the top 20 reformer countries by the UNCTAD for its efforts in registering property, obtaining credit, protecting minority investors, and enforcing contracts. Russian invests heavily in Azerbaijan's construction, trade, services, banking, insurance, information technologies, transportation and agriculture sectors. The EU has prioritized the construction of the Southern Gas Corridor, which would transport Azerbaijani gas through Georgia, Turkey, and Europe. Under the recently amended Customs Tariff law, entrepreneurs importing capital equipment for priority sectors will be exempted from taxes for up to seven years. Following the release in 2021 of a tripartite ceasefire declaration by Armenia, Azerbaijan, and Russia over the conflict in the Nagorno-Karabakh region, the Azerbaijani government is seeking new investments in the nearby territories that were previously under the control of Armenian-backed separatists. The 2022 budget included an allocation of AZN 2.2 billion (around USD 1.3 billion) for the restoration and reconstruction of these territories, more specifically in the fields of road infrastructure, electricity, gas, water, communications infrastructure, and the education and healthcare sectors, as well as for the pursuit of green energy projects in this region. Azerbaijan is expected to continue to attract investment as an alternative transit route due to the risks associated with the Russian route following the invasion of Ukraine. Nevertheless, the problem of corruption remains unresolved and may act as an impediment to the country's development: Azerbaijan ranked 157th out of 180 countries on Transparency International's Corruption Perceptions Index 2022. Furthermore, a small group of government-connected holding companies dominates the economy, the country remains very dependent on the hydrocarbon sector (which represents on average more than 90% of its exports) and has a fragile dollarized banking system with an underdeveloped private sector credit. Azerbaijan ranks 93rd among the 132 economies featured in the Global Innovation Index 2022 and 75th out of 130 in the 2023 Index of Economic Freedom.

What to consider if you invest in Azerbaijan

Strong Points

The country's key strong points include:
- Competitive production costs;
- Low-cost and qualified labour;
- Significant gas potential in the Caspian Sea;
- Perspective of gas exports to Turkey and Europe;
- Connecting link between China and Europe through development of rail corridors with Iran, Turkey and Georgia;
- Substantial foreign currency assets in the State Oil Fund of Azerbaijan (SOFAZ);
- Favourable general business climate (25th position in the World Bank's Doing Business ranking 2019).

Weak Points

The country's main weak points include:
- High regional political instability;
- Relatively poor regional relations, in particular the armed conflict with Armenia over the Nagorno Karabakh enclave;
- Authoritarian political regime;
- Weak government effectiveness and slow progress of structural reforms;
- Significant corruption and weak protection of property rights;
- Heavy dependence on oil and gas sector, creating substantial external vulnerability; limited non-oil sector;
- Decline in oil production (25% reduction over the last 6 years);
- Continued exchange rate risk;
- Weak banking system; largest bank (IBA; 40% of assets) in need of FX debt restructuring.

Government Measures to Motivate or Restrict FDI

The country has signed numerous treaties to encourage FDI. It has also put in place legislation facilitating the creation of companies, limiting corporate taxes and laws to protect FDI.

The biggest share of the foreign investment is directed to the oil and gas sector; nevertheless, one of the top priorities of the Azerbaijani Government is to diversify the country’s economy and to attract foreign investors, in particular in the following sectors: agriculture, transportation, tourism and information/communication technology.

In 2016, President Aliyev signed a decree establishing a free trade zone area next to the Alyat seaport, located 65 km south of Baku. Under the recently amended Customs Tariff law, entrepreneurs importing capital equipment for priority sectors will be exempted of taxes up to seven years.

For more information and to consult the law texts, visit the website of Azerbaijan Export and Investment Promotion Foundation (AZPROMO).

Bilateral investment conventions signed by Azerbaijan

The country has signed conventions with many countries: China, Egypt, Finland, Georgia, France, Germany, United States, Iran, etc. For more information, please visit the investement policy hub website of the UNCTAD.