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TITLE:  AZERBAIJAN ECONOMIC POLICY AND TRADE PRACTICES
DATE:  FEBRUARY 1994
AUTHOR:  U.S. DEPARTMENT OF STATE


                            AZERBAIJAN

                    Key Economic Indicators /1
       (Millions of Russian rubles unless otherwise noted)


                                  1991      1992      1993 /2
Income, Production,
 and Employment

Real GDP Growth (percent)          -0.7     -35.2       n/a
GDP (at current prices) /3         26,676   183,186     n/a
By Sector:
 Agriculture                        8,125    49,460     n/a
 Energy and Water                   n/a       n/a       n/a
 Manufacturing                      6,331    83,350     n/a
 Construction                       1,689    13,556     n/a
 Rents                              n/a       n/a       n/a
 Financial Services                 n/a       n/a       n/a
 Other Services                     2,380     8,610     n/a
 Government, Health
  and Education                     2,106     n/a       n/a
Real Per Capita GDP
 (000's of rubles,
  at current prices)                3,684     2,498     n/a
Labor Force (000's)                 3,833     3,849     2.706 /6
Unemployment Rate (pct.)            0.1       0.16      0.7

Money and Prices
 (annual percentage growth)

Money Supply                        n/a       n/a       n/a
Base Interest Rate /4               n/a       n/a       n/a
Personal Saving Rate                n/a       n/a       n/a
Retail Inflation                  1,174.2   1,066.6     n/a
Wholesale Inflation               137.9     463.4     208.7
Consumer Price Index                n/a       n/a       n/a
Exchange Rate
(rubles per US$)
    Official                        0.5571      140       820

Balance of Payments and Trade
(1991-92 in billions of rubles, 1993 in millions of US$)

Total Exports /5                    n/a       1,162       255
  Exports to U.S.                   n/a          67         3.4
Total Imports                       n/a         446       147
 Imports from U.S.                  n/a          22         7.6
Aid from U.S.                       n/a       n/a       n/a
Aid from Other Countries            n/a       n/a       n/a
External Public Debt                n/a       n/a       n/a
Reserves ($ million)                n/a       n/a       n/a
Trade Balance  /5                   n/a         716       108
 Balance with U.S.                  n/a          46        -4.2


Notes:

1/ Figures are from official Azerbaijani sources, which rely on
data from state enterprises.  They indicate orders of magnitude
only.
2/ 1993 Figures are estimates based on available data in
October 1993.
3/ GDP at factor cost.
4/ Figures are actual, average annual interest rates, not
changes in them.
5/ Merchandise trade.
6/ The labor force decrease in 1993 is due largely to
war-related displacements and migrations.



1.  General Policy Framework

    Azerbaijan, a former Soviet republic of 7.4 million people
with rich natural resources, has significant potential as a
trading and investment partner of the United States. 
Exploitation of its enormous oil and gas reserves in the
Caspian Sea will require foreign capital and know-how, and
Azerbaijan's government is negotiating with several U.S.
firms.  Azerbaijan has an array of heavy industries,
particularly oil refining, petrochemicals, oil field equipment,
and air conditioners, that also look to foreign investment for
renewal.  Finally, Azerbaijan is richly endowed with a diverse
agricultural sector producing grapes, cotton, tobacco, silk,
tea, and other fruits for export.

    Azerbaijan has yet to realize its potential largely because
its governments have been preoccupied with issues of survival
and instability arising from the war in Nagorno-Karabakh, a
break-away formerly autonomous province of Azerbaijan inhabited
traditionally by ethnic Armenians.  A military coup in June
1993 brought to power Heydar Aliyev, a former member of the
Soviet Union's politburo and former Communist ruler of
Azerbaijan in the 1970s.  He was elected president of
Azerbaijan in October 1993.  President Aliyev has announced his
government's commitment to democratic and market-based reforms
though he favors a process of gradual reforms rather than
economic shock therapy.  To date, there is no central economic
policy-making body in the government.  Four deputy prime
ministers in the cabinet of ministers have responsibility for
directing different economic ministries, though all answer
ultimately to President Aliyev.

    The economy remains dominated by large state enterprises
and, in the agricultural sector, by large state and cooperative
farms, all producing in theory according to state orders
prepared by the government ministries.  The National Parliament
passed a sweeping but vague privatization law in January 1993,
but no privatization program has been implemented.  Private
business has begun to appear, however, primarily in the form of
thousands of small retail shops in the main cities and towns. 
In addition, many state enterprises are beginning to produce
and even market their products independently of central
government control.

    The economy declined precipitously in the first nine months
of 1993, about 16 percent from the first nine months of 1992. 
The government, continuing its subsidies of key commodities,
allowed budget deficits to increase from about five percent of
GDP in 1992 to about 14 percent of GDP in the first nine months
of 1993.  The government's plan for financing this deficit is
not clear, but it may rely on the inflationary policy of
issuing more currency.

    Azerbaijan introduced its own currency, the manat,
beginning in August 1992 as a means of meeting the shortfall in
cash rubles to pay government salaries.  The emission of manat
gradually increased so that the government was able to pull
Russian rubles from circulation in August 1993.  The manat
remains pegged to the ruble at the official rate of 10 rubles
to one manat, though the finance ministry has plans to let the
manat float against the U.S. dollar and German mark.  There are
also plans to introduce a foreign currency exchange to make the
manat convertible.

    Azerbaijan joined the Commonwealth of Independent States
(CIS) in September 1993 and acceded to the economic union
treaty of the CIS.  It has not signed the proposed new ruble
zone agreement that six other CIS nations have signed.  Joining
the CIS eliminated tariff and other restrictions on
Azerbaijan's critical trade with Russia, Ukraine and other CIS
countries, but the full ramifications on economic policy of
Azerbaijan's revived ties with CIS countries are not yet clear.


2.  Exchange Rate Policy

    The Azerbaijani manat is officially pegged to the Russian
ruble at the rate of 10 rubles to one manat, though
unofficially the manat's value varies between six to eight
rubles.  The government imposes several controls on foreign
exchange.  Under a surrender requirement, export industries
(including foreign-owned enterprises and joint ventures) must
exchange for manats at the national bank up to 90 percent of
their hard currency earnings.  Another foreign exchange control
is the limit on the amount of foreign currency ($1,000) a
private citizen of Azerbaijan may take out of the country.


3.  Structural Policies

    Structural change is coming to Azerbaijan, albeit slowly
and more as a result of breakdown of the centrally planned
system rather than through a government reform plan.

    Pricing policies:  The government removed price controls on
nearly all consumer goods in 1992, except for several key
commodities, including bread, natural gas, and gasoline.  As a
result, there are shortages of these controlled goods, and many
opportunities for corruption as some are sold for higher prices
on the black market.  In addition, nearly all goods are
produced by state enterprise monopolies, and the government
continues to set prices for these enterprises by determining
fixed cost-plus formulas for selling their goods.

    Tax policies:  The government implemented a new tax system
in 1992 through a series of presidential decrees.  This system
is composed mainly of four taxes: a 28-percent value added tax;
an enterprise profit tax, with a standard 35-percent rate and
differential rates allowed on certain enterprises; excise taxes
of up to 90 percent of the price of the good (highest being on
alcoholic beverages but including a 50 percent tax on certain
refined petroleum products); and a personal income tax,
progressive in nature but not strictly enforced.  Other
important sources of government revenue are a royalty on crude
oil production, and a tax on vehicle ownership.

    Regulatory policies:  the government regulates the export
of "strategic commodities" produced in Azerbaijan, which
include the main hard currency earners including refined oil
products, cotton, and wine, through export licenses granted by
the Ministry of Foreign Economic Relations.  Potential buyers
of such commodities must pay this ministry for an export
license or another ministry or state enterprise that has
obtained a general license for a certain commodity.


4.  Debt Management Policies

    Azerbaijan has yet to reach agreement with Russia
concerning Azerbaijan's share of the former Soviet Union's
external debt.  The Azerbaijani position is that this amount
should net to zero if it were set against Russia's trade debt
to  Azerbaijan.  Azerbaijan's offer of a "zero variant" is not
accepted by the Russian government.

    The Azerbaijani budget deficit is growing at an alarming
rate, and amounts to at least 14 percent of gross domestic
production.  It is not clear how Azerbaijan plans to finance
this deficit.  Russia partly financed Azerbaijani budget
outlays in 1992 through ruble credits, but this appears to have
stopped.  Azerbaijani officials have met with representatives
from the IMF, World Bank, and the European Bank for
Reconstruction and Development, but have not yet established
any borrowing programs from these institutions.  Azerbaijan has
no borrowing relationship with commercial banks.  In the short
term, Azerbaijan will finance budget shortfalls through
printing (and importing from France) manat banknotes.


5.  Significant Barriers to U.S. Exports

    The most significant barrier to trade with the United
States is the lack of hard currency reserves.  Azerbaijan pays
for nearly all imports with barter goods, primarily refined oil
products, cotton, oil field equipment and other manufactured
goods, tobacco, tea, and chemicals.  Selling goods or services
to Azerbaijan almost invariably entails receiving barter goods
in exchange and attempting to resell the barter goods for cash.

    Other barriers include the lack of laws and institutions to
ensure fair play in trade and investment, and the lack of
infrastructure supporting trade.  Azerbaijan has no bankruptcy
or commercial transactions laws.  There is no foreign currency
exchange, and limited banking services.  The customs service
and airport officials lack professional training and
attitudes.  Finally, telecommunications, office space, and 
experience with western business practices are in very short
supply.

    Standards and testing requirements:  Azerbaijan produces
oil field equipment, machine tools and other manufactured goods
according to the "GOST" standards used throughout the former
Soviet Union, which are not compatible with American or
European industry standards.

    Investment barriers:  according to the Foreign Investment
Law of 1992, the government's council of ministers must
pre-approve all foreign investments.  Mineral exploration and
extraction rights are granted through concessionary agreements
with the approval of the council of ministers, and usually
require parliamentary approval as well.  There are restrictions
on the number of foreign personnel that an enterprise may
hire.  At present, both locals and foreigners may lease land
but not own it outright.

    To normalize its trade and investment relations with
Azerbaijan, the United States has proposed a network of four
bilateral economic agreements.  A bilateral trade agreement,
which would provide reciprocal most-favored-nation status, was
signed in April 1993 but has yet to be ratified by the
Azerbaijani parliament.  An Overseas Private Investment
Corporation (OPIC) incentive agreement, which would allow OPIC
to offer political risk insurance and other programs to U.S.
investors in Azerbaijan, was concluded in 1992, but it also has
yet to be ratified by Azerbaijan.  The United States has
proposed a bilateral investment protection treaty, which would
establish an open investment legal regime for investments
between the two countries, and a bilateral tax treaty, which
would provide U.S. businesses relief from double taxation.  The
Azerbaijani government has not yet accepted the U.S. offer to
negotiate these two treaties.


6.  Export Subsidies Policies

    The government continues to subsidize production at state
enterprises with the intent of maintaining production levels
and employment.  There is, however, no direct government
support for exports to countries outside the former Soviet
Union.


7.  Protection of U.S. Intellectual Property

    Azerbaijan has yet to adopt adequate laws to protect
intellectual property.  The committee on science and technology
of the presidential apparatus drafted patent and trademark
laws, but the parliament has not passed them into law.  A
presidential decree on patents provides some protection.  There
is no copyright law.  Azerbaijan has not adhered to any of the
international conventions that protect intellectual property. 
Trademarks may be registered with the Ministry of Foreign
Economic Relations, but there is widespread unauthorized use of
corporate trademarks and logos.  There is also a small but
growing market in Azerbaijan for pirated videos, sound
recordings, and computer software, with no government effort to
stop it.

    A privately-owned television channel's programming consists
almost entirely of pirated American films and television 
mini-series, which have been dubbed into Russian and marketed
throughout the former Soviet Union.  There is no evidence,
however, that Azerbaijan produces such pirated works.

    The lack of intellectual property protection is one of the
factors inhibiting the development of U.S. trade and
investment, though its impact is difficult to assess given the
low levels of trade and investment to date.  The United States
and Azerbaijan signed a trade agreement in April 1993 which
contains commitments on protection of intellectual property,
but this agreement has not been ratified by the Azerbaijani
parliament.


8.  Worker Rights

    a.   Right of Association

    Azerbaijani labor unions continued to be highly dependent
upon the government, but are free to form federations, and
participate in international bodies.  Azerbaijan is a member of
the International Labor Organization.  There is a legal right
to strike, and workers do from time to time strike at certain
factories.

    b.   Right to Organize and Bargain Collectively

    Collective bargaining remains at a rudimentary level. 
Wages are decreed by relevant government ministries for
organizations within the government budget.  There are no
export-processing zones.

    c.   Prohibition of Forced or Compulsory Labor

    Forced or compulsory labor is prohibited by law and is not
known to be practiced.

    d.   Minimum Age for Employment of Children

    The minimum employment age is 16, though children of 14 are
allowed to work during vacations with the consent of their
parents and certification of a physician.  Children of 15 may
work if the work place's labor union does not object.

    e.   Acceptable Conditions of Work

    A nationwide minimum wage is set by presidential decree,
and was raised numerous times in the past year to offset
inflation.  Unemployment benefits (5000 rubles or about $4 per
month) were granted to 21,567 people in the period September
1992 to August 1993, though state factories and enterprises
temporarily laid off many more employees.  The legal work week
is 41 hours.  Health and safety standards exist but are not
enforced.


    f.   Rights in Sectors with U.S. Investment

    In the petroleum sector, the only sector with significant
U.S. investment, worker rights do not generally differ from
those in other sectors of the economy, with one important
exception.  In the work places in which U.S. petroleum
companies have invested, the health and safety standards are
dramatically improved.



         Extent of U.S. Investment in Selected Industries

              U.S. Direct Investment Position Abroad
                on an Historical Cost Basis - 1992
                    (Millions of U.S. dollars)

Category                                    Amount

Petroleum                                                D
Total Manufacturing                             0
    Food & Kindred Products                     0
    Chemicals and Allied Products               0
    Metals, Primary & Fabricated                0
    Machinery, except Electrical                0
    Electric & Electronic Equipment             0
    Transportation Equipment                    0
    Other Manufacturing                         0
Wholesale Trade                                           0
Banking                                                   0
Finance and Insurance                                     0
Services                                                  0
Other Industries                                          0

TOTAL ALL INDUSTRIES                                      D


(D) -Suppressed to avoid disclosing data of individual companies

Source:  U.S. Department of Commerce, Bureau of Economic
Analysis, unpublished data.

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