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U.S. DEPARTMENT OF STATE
AZERBAIJAN: 1994 COUNTRY REPORT ON ECONOMIC POLICY AND TRADE PRACTICES
BUREAU OF ECONOMIC AND BUSINESS AFFAIRS





                            AZERBAIJAN

                     Key Economic Indicators 
        (Millions of U.S. dollars unless otherwise noted)


                                     1992      1993      1994 1/

Income, Production and Employment:

GDP (current prices)                  131       331       166
Real GDP Growth (pct.)              -35.2     -13.3     -25.6
GDP Growth by Sector:  (pct.)
  Agriculture                       -32.5     -29.4     -11.5
  Energy/Water                        N/A       N/A      -7.7
  Manufacturing                     -50.5     -45.6     -25.6
  Construction                       -8.8     -13.7     -25.0
  Rents                               N/A       N/A       N/A
  Financial Services                  N/A       N/A     131.0
  Other Services                     -4.8      -3.6       N/A
  Government/Health/Education         N/A       N/A       N/A
Real Per Capita GDP 2/              179.0       N/A       N/A
Labor Force (000s)                  3,849     2,706     2,639
Unemployment (pct.)                  0.16      0.70     27.90

Money and Prices:  (annual growth percentage)

Money Supply                          N/A       N/A       507
Base Interest Rate (pct.)             N/A       N/A       150
Personal Saving Rate                  N/A       N/A    60-200
Retail Inflation (pct.)           1,066.6     833.0   1,742.6
Wholesale Inflation                 463.4     208.7     890.0
Consumer Price Index (actual)         N/A       N/A     1,403
Exchange Rate (avg/manats:USD)        N/A       N/A     2,000

Balance of Trade and Payments:

Total Exports (FOB)                   N/A     255.0     397.2
  Exports to U.S.                     N/A       3.4       0.0
Total Imports (CIF)                   N/A     147.0     577.0
  Imports from U.S.                   N/A      10.8       4.2
Trade Balance                         N/A     108.0    -179.8
  Trade Balance with U.S.             N/A       7.4       4.2
Aid from U.S. 3/                      N/A       N/A      25.0
Aid from Other Countries              N/A       N/A       N/A
External Public Debt                  N/A       N/A       N/A
Debt Service Payments                 N/A       N/A       N/A
Gold and Foreign Exch. Reserves       N/A       N/A       N/A


N/A--Not available.

1/ January-August 1994.
2/ Figure obtained using the 1992 average annual exchange rate
of 20 manat = 1 dollar.
3/ Some U.S. assistance was available through regional programs
for which a country-by-country breakdown is not available.
Figures should be considered as indicators of order of
magnitude only.  Most data was furnished by the State
Statistics Committee of Azerbaijan.



1.  General Policy Framework

    Azerbaijan, a country of 7.5 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 has taken the
first step toward developing these resources by signing a
production sharing agreement with a consortium of western oil
firms, including several U.S. companies, in September 1994. 
Azerbaijan has an array of heavy industries, particularly oil
refining, petrochemicals, oil field equipment, and air
conditioners, that will require foreign investment to make them
viable in a world economy.  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
recent governments have been preoccupied with issues of
survival and instability arising from the conflict in
Nagorno-Karabakh, a break-away, formerly autonomous province of
Azerbaijan inhabited mostly by ethnic Armenians.  Azerbaijan
has been unable to resolve the conflict and approximately 20
percent of its territory has been occupied by Nagorno-Karabakh
Armenian forces.  President Heydar Aliyev, a former member of
the Soviet Union's Politburo and former communist ruler of
Azerbaijan in the 1970s, has announced his government's
commitment to democratic and market-based reforms, though he
favors a process of gradual reform rather than economic shock
therapy.  First Deputy Prime Minister Quliyev is responsible
for economic performance and reform, while four deputy prime
ministers in the Cabinet of Ministers have responsibility for
directing different economic ministries, though all answer
ultimately to President Aliyev.  Ministerial and
sub-ministerial changes are taking place following an internal
political crisis in October 1994 which resulted in the
dismissal of the Prime Minister.  Some of these changes will
affect economic decision-makers.

    The economy remains dominated by large state enterprises
and, in the agricultural sector, by large state and cooperative
farms, all of whose production is theoretically based on state
orders prepared by the government ministries.  The national
parliament passed a privatization law in August 1994, but the
process has languished as no implementing legislation has yet
been approved.  Private business has begun to appear, primarily
in the retail sector 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 about 25 percent in the first nine
months of 1994 compared to the same period in 1993.  The
government, continuing its subsidies of key commodities,
allowed budget deficits to remain above ten percent of GDP in
the first nine months of 1994.  The government does not yet
have a realistic plan for financing this deficit, and will
probably continue to rely on the inflationary policy of issuing
more currency.

    Azerbaijan declared its currency, the manat, sole legal
tender January 1, 1994, and has allowed the manat to float
against major currencies since April 1994.  Foreign currency
exchanges have been introduced to help make the manat
convertible, but are still operating at very low volumes.

    Although Azerbaijan became an active member of the
Commonwealth of Independent States (CIS) in 1993, it has not
signed the proposed ruble zone agreement.  Joining the CIS
eliminated tariff and other restrictions on Azerbaijan's
critical trade with Russia, Ukraine, and other CIS countries,
but commercial ties continue to slump due to payment problems
on Azerbaijan's part and disagreements over Azerbaijan's debts
with some CIS members, especially Russia.  The conflict in
Chechenya has disrupted Azerbaijan's main trade route with
Russia, and  Moscow has imposed restrictions on Azerbaijani use
of the Volga-Don Canal, the only water route linking Baku to
the outside world.


2.  Exchange Rate Policy

    The Azerbaijani manat has been allowed to float against
major currencies, and has suffered a sharp, steady devaluation
as a result of Baku's expansionary fiscal and monetary
policies.  The manat has lost more than 90 percent of its
value.  In October 1994, the rate reached 2,500 manats to the
dollar.  The government imposes several controls on foreign
exchange, including a surrender requirement and a limit on the
amount of foreign currency that can be taken out of the country.


3.  Structural Policies

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

    Pricing Policies:  Several key commodities, including
bread, natural gas and gasoline, remain under price controls. 
While the government raises these controlled prices
periodically, they remain artificially low, and shortages of
these goods occur, along with corruption and black market
activity.  In addition, nearly all goods are produced by state
enterprise monopolies, and the government continues to set
prices it will pay to these enterprises based on fixed
cost-plus formulas.

    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 for selected goods; 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 such as refined oil products,
cotton, and wine.  Potential buyers of such commodities must
pay for an export license or cooperate with an Azerbaijani
partner that has obtained a general license for that commodity.


4.  Debt Management Policies

    In September 1993, Azerbaijan signed a "zero option
agreement" with Russia under which Russia will pay Azerbaijan's
share of the external debt of the former Soviet Union in return
for Azerbaijan's share of the former Soviet Union's assets.

    The Azerbaijani budget deficit remains at high levels,
amounting to over 10 percent of GDP in 1994.  Since Russia has
stopped financing Azerbaijani debt outlays with rubles,
Azerbaijani officials increased contacts with the International
Monetary Fund (IMF), World Bank, and the European Bank for
Reconstruction and Development (EBRD).  However, borrowing
programs will not be granted until Azerbaijan tightens its
policy to meet generally accepted financial criteria, which has
proposed to do by the end of 1994.  Azerbaijan has no borrowing
relationship with commercial banks, and in the short term is
likely to finance budget shortfalls through printing manats and
issuing credit through the National Bank.


5.  Significant Barriers to U.S. Exports

    Corporate 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 oil-based products, cotton, oil field
equipment, diesel fuel, chemical products of organic synthesis,
silk, waste metals and tobacco.  Selling goods or services to
Azerbaijan almost always entails receiving barter goods in
payment.

    Lack of laws and institutions which regulate fairness in
trade, and poor infrastructure create barriers.  Azerbaijan has
no bankruptcy or commercial transactions laws.  Only some banks
have access to foreign exchange.  The customs service and
airport officials lack professional training and attitudes. 
Entry and exit regulations at the airport change frequently and
without warning.  Office space is at a premium and costly,
telecommunications are not reliable and experience with western
business practices is rare.

    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 up to U.S. or European industry
standards.  There are a few Western companies here with joint
ventures which have brought or are bringing products and
facilities up to American or European standards.  It is assumed
that with the recent signing of the oil contract, foreign
companies and banks will be more likely to move forward on
planned projects.

    Trademarks and Logos:  There is 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.

    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 granted through concessionary agreements with
the approval of the Council of Ministers usually require
parliamentary approval as well.  There are restrictions on the
number of foreign personnel that an enterprise may hire.  At
present, both Azeris and foreigners may lease land but not own
it outright.  The exception is the .05 percent of land owned by
private farmers.

    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.  The Azerbaijani government has not
yet accepted the U.S. offer to negotiate this treaty.


6.  Export Subsidies Policies

    The government continues to subsidize production at state
enterprises to maintain production levels and employment
(although most factories work below capacity).  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 pirated films.

    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 trade
agreement of April 1993 contains commitments on protection of
intellectual property.  This agreement has not been ratified by
the Azerbaijani parliament.


8.  Worker Rights

    a.  The Right of Association

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

    b.  The 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 (5,000 rubles or about $4 per
month) were granted to 21,567 people between September 1992 and
August 1993, although 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 have
dramatically improved.



  Extent of U.S. Investment in Selected Industries.--U.S. Direct
Investment Position Abroad on an Historical Cost Basis--1993

                    (Millions of U.S. dollars)
                                                                
              Category                          Amount          

Petroleum                                             (1)
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/Insurance/Real Estate                           0
Services                                                0
Other Industries                                        0
TOTAL ALL INDUSTRIES                                  (1)      

(1) Suppressed to avoid disclosing data of individual companies
Source: U.S. Department of Commerce, Bureau of Economic
Analysis

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