Abundant hydrocarbon resources made Azerbaijan the birthplace of the global oil industry. Over a hundred years later, the oil and gas sector remains an important part of the Azerbaijani economy. But as the world economy changes, the new policies launched by the Government aim to diversify the Azerbaijani economy, make the country less dependent on oil & gas revenues, increase the role of private sector and establish a sustainable development trend in non-oil sector. The new initiatives of recent years have produced some significant results in the services sector.
The financial sector is undergoing regulatory reform to improve the stability and resilience of the sector, and to assist the development of the non-oil sector. To this end, the Strategic Roadmap for the Development of the Financial Services includes provisions for the development of transparency, customer focused services and digitization. The industry is going through a period of reforms to increase the capitalization of the banks and stability of insurance companies.
The demand for alternative forms of finance has grown steadily. Microfinance has developed quickly in Azerbaijan, and the alternative finance sector remains a segment with room for substantial growth. Trade finance and leasing are relatively new, but demand for these services is increasing as Azerbaijan diversifies its economy. This will create opportunities for companies with expertise in these areas. Financial consultancy is also growing to meet the demand for business plans and financial statements.
Azerbaijan has a two-tiered banking system, with the Central Bank of Azerbaijan ("CBA") and Financial Markets Supervisory Authority ("FIMSA") making up the first tier and the remaining banks making up the second.The CBA is a public legal entity that operates as the central banking authority and establishes and implements state monetary and currency policy. FIMSA is a public legal entity that regulates and supervises participants of the securities market, investment funds, insurance and credit organizations (banks, non-banking credit organizations and postal operators) and payment systems, and ensures transparency and flexibility in its supervision. FIMSA can adopt legal acts regulating the financial markets, issue and revoke the licenses of the participants of financial markets and carry out inspections of participants.
Banking in Azerbaijan is primarily regulated by the Law "On Banks", the Law "On the Central Bank of the Republic of Azerbaijan", the Charter of FIMSA and normative acts of the CBA and FIMSA. Both banks and non-bank credit organizations are classified as credit organizations. However, while banks are allowed to conduct all types of banking operations under the Law "On Non-Bank Credit Organizations', non-bank credit organizations may only conduct certain types of banking operations, such as extending loans, selling and purchasing debt obligations (factoring, forfeiting), financial leasing, issuing guarantees, etc., and are expressly prohibited from accepting deposits.
All banking activities, including the acceptance of deposits, maintenance of correspondent accounts, cash operations, money transfers and lending are subject to licensing. Only FIMSA has the right to grant and revoke licenses for banking activity and also has the right to permit the establishment of a bank’s subsidiaries, branches and representative offices. Bank licenses are issued for an indefinite term and are effective as of the date they are issued by FIMSA. Bank licenses cannot be transferred to third parties.
In addition to core banking operations, a bank may engage in other operations (such as factoring, clearing, professional activity on the securities market and other activities) if its license allows. Banks are prohibited from conducting the following activities: wholesale and retail trade, production, transportation, agriculture, mining, construction, and insurance. With the exception of insurance, banks cannot engage in these activities either as an affiliate, shareholder or partner. FIMSA establishes prudential regulations for banks (including requirements for minimum capital as well as the monetary and non-monetary proportions of a bank’s capital) and reserve fund requirements. In 2012, the aggregate capital requirement for banks was increased under the Rules on the Calculation of Bank Capital and Its Adequacy. Pursuant to these rules, from 1 January 2015 the minimum aggregate capital requirement for banks is AZN 50 million.
Foreign banks may operate representative offices, branches, joint ventures and wholly-owned subsidiaries in Azerbaijan. Foreign individuals and foreign entities registered in offshore areas specified by FIMSA, as well as foreign banks and foreign bank holding companies, may not be founders or shareholders of local banks or founders of local subsidiary banks, branches or representative offices. Foreign individuals and foreign entities that are not banks may set up, operate and acquire shares in banks in Azerbaijan.
The insurance industry is relatively new, but the increasing income of the population is playing a significant role in the development of a viable insurance market. A major driver of growth in the insurance market is the newly enforced Law "On compulsory insurance". This is evidenced in the increasing volume of car and mortgage credits, because insurance for these loans is now obligatory.
There are 48 types of insurance services in Azerbaijani market: 16 of them are compulsory insurance and 32 are voluntary insurance products. At present, there are 23 insurance and reinsurance companies in the Azerbaijani market. The low level of capitalization of local insurance companies is one of the major disadvantages affecting the development of the insurance market. Many insurance companies depend on local banks in terms of capital growth.
Azerbaijan has been at the center of trade between Asia and Europe for millennia, as the Silk Road passed through Azerbaijan. Today, as trade flows increase between Europe and Asia, Azerbaijan is emerging as a transport and logistics hub at the crossroad of Eurasia.
Azerbaijan is a home for the “Transport Corridor Europe-Caucasus-Asia” ("TRACECA"), the international programme on creation of a transport corridor from Europe to Asia through the Caucasus. It involves the European Union and 14 states of Eastern Europe, Caucasus and Central Asia. Its permanent secretariat is located in Baku, Azerbaijan. It is no wonder that Azerbaijan hosts the programme, as the Trans-Caspian East-West Corridor is considered to be the shortest linkage between China and Europe, both in distance and time. The average length of the corridor is 4,200 km, and possible transit period is about 12 to 14 days which enables cargo shippers to have 70% time saving in comparison with traditional ocean shipment.
In the meantime, this route provides plenty of opportunities for emerging economies of Central Asia to reach European markets. In addition, Azerbaijan is currently cooperating with its partners on the creation of faster South-to-North transport corridor. Theoretically, using both corridors Azerbaijan can attract additional trade volume of almost 230 million tonnes. According to the Strategic Roadmap for the Development of Logistics and Trade, Azerbaijan will become a strategic international logistics hub by 2025. This will require attraction of additional investment in transport infrastructure, logistics and trade. The projection for investment into the mentioned sectors to be attracted by 2020 exceeds AZN 3 billion. The Strategic Roadmap breaks down the projected share of Azerbaijan in the international transit of goods by 2020: Central Asia-Black Sea route – 40%, Central Asia-Europe route – 25%, China-Europe route – 3%, Russia-Iran route – 40%, Iran-Black Sea route – 25%.
To ensure Azerbaijan can meet this potential as a strategic location, investment has been made to upgrade the transport infrastructure to EU standards, and to meet this increasing intercontinental traffic. This includes 10,185 km of constructed and rehabilitated roads and highways; the Baku-Tbilisi-Kars railway line, to connect the Trans-European and Trans-Asian railway networks; the new Baku International Sea Trade Port with capacity of 10-11.5 mln tons of cargo and 50 thsd TEU (to be increased up to 21-25 mln tons of cargo and 1 mln TEU); the new Heydar Aliyev terminal at Baku International Airport with its state-of-the-art services and significant capacity for transit passengers, as well as the new air cargo terminal.
Moreover, Azerbaijan invests in creation of logistic centers in strategic markets. The first such center was established in Aktau, Kazakhstan in order to increase export of Azerbaijani products into the Central Asian markets. The Government of Azerbaijan set high priority for further improvement of country’s transit potential. The Coordinating Council of the Republic of Azerbaijan on Transit Freight was established in 2015 with the aim to increase the competitiveness and effectiveness of the transit corridors passing through its territory, involvement of additional transit flows to these corridors, including improvement of transportation quality, decreasing delivery time and lowering transport expenses.
Information and Communication Technologies ("ICT") is one of the most attractive and dynamic sectors of economy for investors. It is the fastest growing non-oil sector in terms of increasing revenues. The number of consumers is growing rapidly. Azerbaijan recognizes that high technology is a key contributor to its future prosperity. It has high ambitions to inspire the younger generation that are the main users of technology. Internet penetration in Azerbaijan is 75.5%.
Currently, there are four mobile operators in the country. Three of them provide mobile services in 2G, 3G and 4G frequencies. 3G technology has been operating in Azerbaijan since 2009. Azerbaijani consumers started using 4G technology from 2012. Azerbaijan has 23 television stations and 15 radio stations. Currently, there are 39 telecommunication service enterprises in the country, in addition to 48 internet providers. The ICT sector is pioneering the application of innovative technologies into Azerbaijan. The ‘ASAN’ services is a ‘one-stop-shop’ for the delivery of public services, which has been commended by the Asian Development Bank for reducing corruption.
Azerbaijan owns two satellites, which provide communication services including digital broadcasting, internet access, data transmission and VSAT multi-service network to public and private sector representatives in Azerbaijan, Central Asia, Europe and Africa. The Government wants to encourage entrepreneurship in ICT. As a result, the ICT Development Fund was established with financing in the form of soft loans and grants. The Fund started financing projects in 2014.
Azerbaijan announced a Strategic Roadmap for the development of the telecommunication and information technologies sector. The document was approved by a Decree of President of the Republic of Azerbaijan of December 6, 2016. According to the Roadmap, the long-term vision for the period up to 2025 in the information and communication technologies sector is to continue the innovation-driven reform in this sector. This will increase the range and scope of modern services, expand the coverage of broadband networks, ensure the country’s development through international telecommunication standards, and improve the level of technical literacy of the society to achieve the formation of a digital economy.
Telecommunications is an area of great potential growth in Azerbaijan. The Law "On Telecommunications" is the main legislative act regulating the industry. Additionally, the Law "On Television and Radio Broadcasting" and the Law "On Postal Services" are among the laws governing the telecommunications sector. In addition, the Law "On Information, Informatization and Protection of Information" regulates some points in the area of ICT.
Since the telecommunications services must be licensed, the Ministry of Economy became the agency authorized to issue licenses for express courier services and specific types of telecommunications services including provision of fixed line telephone communication services, cellular (mobile) telephone communication services, radio trunk and wireless communication services, organization of local and international telecommunication channels, and IP-telephony communication services. The Ministry of Transport, Communications and High Technologies continues to act as a policy-maker and national regulatory authority in the area of telecommunications, although there have been some initiatives in recent years to establish an independent regulatory authority.
Additionally, there is a body that regulates the implementation of a general policy in the field of television and radio broadcasting which appears to be the main part of the telecommunication regulation. The National Television and Radio Council of Azerbaijan operates under a Decree of the President of 5 October 2002.
International events held in Baku, such as the 1st European Olympic Games 2015, the 4th Islamic Solidarity Games and the Formula-1 Grand Prix 2016-2018, are raising the international profile of Azerbaijan as a tourist destination. The Government policy of hosting international business conferences and events, targeting key sectors continues this trend. As a result, Trip Advisor announced Baku among top 10 world destinations on the rise in 2016, taking the top spot for Asia.
The Government of Azerbaijan has initiated some key improvements to the visa application process. As a result, tourists from most of the countries can apply for a pre-entry visa through the special online ASAN e-visa system. Generally, visas are issued as fast as within 3 working days. This has encouraged a tourism boom, with an 11% increase in tourists visiting from the Gulf, Middle East, and Europe in 2016. The improving transport links with Azerbaijan, resulted in Baku being attractive to 26 cities, with a population of more than 90 million. The World Economic Forum named Azerbaijan the most-improved country in the Travel & Tourism Competitiveness Index 2017.
To serve the demand created by international sports, business and political events, the tourism and hospitality infrastructure is developing quickly. A number of top class international hotel chains such as Four Seasons, Marriott, Pullman, Hilton, Excelsior, Rixos, Fairmont and others operate in Azerbaijan. In 2012, Shahdag Winter-Summer Tourism Complex in Gusar was put into operation. The complex includes two hotels (“Shahdagh” and “Peak Palace”), trade centers, a restaurant, café, game hall, equestrian sports, skiing and other services. Continuously increasing volume of international visitors stimulates direct investment into the development of tourism industry and related services. A new incentive mechanism for investors was put in place in 2016. According to the World Travel & Tourism Council, Azerbaijan is placed 17th in the world for the travel & tourism long-term growth forecast 2017-2027 (Travel & Tourism Economic Impact 2017: Azerbaijan).
The Strategic Roadmap for the Development of the Tourism Industry aims to push the sector into the next stage of development. This includes the promotion of tourism based on national values of Azerbaijan in the international market-place and locally. Moreover, it includes improvements in the tourism communications infrastructure (including signage), and international hotel certification. This will create opportunities for companies with expertise in the service industry, investing in human capital and practical know-how within the country.
Although the medium term prospects for the construction industry are challenging, there are opportunities in the long-term due to the demographic changes in Azerbaijan and the need for new technologies in building design. The ongoing, rapid urbanization of Azerbaijan is a key driver of opportunities in the sector. The cities are growing and this has driven growth in the sector. Value of construction works was more than AZN 7 billion in 2016, constituting 10.6% of the GDP.
The rapid growth of construction in the past decade has encouraged increased production of construction materials. Between 2006-2016, the total production of construction materials in actual prices grew by more than 2 times. The next stage of development in the sector is the adoption of new technologies. The implementation of EU technical standards is a key development in the industry. In 2012, the EU “Energy Saving Initiative in the Building sector” was launched in Azerbaijan as part of the EU-funded Innogate project. The UK's BREEAM system, a design and assessment method for sustainable building, is being increasingly applied.
Accordingly, there is significant demand for resource-efficient technologies for insulation, heating, cooling, water supply, architectural and engineering services, designs and methods following green building standards to local firms, development of smart complexes (including housing, offices and shopping centres), and interior design consultancy. According to the targets set forth in the Strategic Road Map on Provision of Affordable Housing in the Republic of Azerbaijan, the construction sector will attract over AZN 900 million of investment by 2020. This shall create an additional 10,000 jobs in the construction sector. This will also stimulate the demand in construction materials to be supplied locally.
The main legislative acts regulating construction are the Code on Urban Planning and Construction, dated 29 June 2012, and the Civil Code. Other legal documents in this area are normative acts of a general nature such as property, land, safety, environmental protection, fire and sanitary regulations; construction rules, norms, and standards; and legislative acts regulating specific sectors where structures or facilities are constructed. Many construction rules and standards of the USSR (GOST and SNIP) are still effective in Azerbaijan. Foreign nationals and foreign legal entities may conduct construction work in accordance with the Construction Code.
Foreign employees who are employed by enterprises (subsidiaries), branches or representative offices operating in Azerbaijan are subject to Azerbaijani labour law, except for those working in branches or representative offices located in Azerbaijan under employment contracts concluded with the foreign state’s enterprise in that State. Foreign nationals travelling to Azerbaijan to take employment in the country have to obtain work and temporary residence permits. These permits are issued by the State Migration Service for the period of up to one year. The term of validity can be extended every time for another period of up to one year.
Permanent residents, persons engaged in entrepreneurship activities in Azerbaijan, staff of diplomatic missions, consulates and international organizations, heads and deputy heads of organizations established by international agreements, persons employed by relevant executive authorities, persons on secondment in certain statutorily listed areas for no more than 90 days a year, heads and deputy heads of branches and representative offices of foreign legal entities in Azerbaijan, heads and deputy heads of legal entities founded in Azerbaijan by a foreign legal entity or a foreign individual and some other categories of foreign nationals would not require work permits.