Guidance

Overseas business risk: Azerbaijan

Updated 14 April 2022

Information on key security and political risks which UK businesses may face when operating in Azerbaijan.

1. Overview

Azerbaijan is the largest and most prosperous of the South Caucasus states. It is home to about 10 million people and a number of different ethnic groups. In terms of area, Azerbaijan is a similar size to Scotland.

Azerbaijan declared independence from the Soviet Union in 1991. Following the debilitating impact of the First Nagorno-Karabakh (NK) war (1988 to 1994) which resulted in around 750,000 internally displaced people in Azerbaijan and a significant portion of its territory being occupied by Armenia, Azerbaijan has propelled itself into the 21st century by developing its energy resources to drive strong economic growth.

Azerbaijani is the official language of Azerbaijan but Russian is also used in central Baku. English is also quite widely spoken and understood in Baku, although fewer people speak English outside of the capital. Over the last few years Azerbaijan became a host country for global sports events. Azerbaijan hosted the First European Games in 2015, added Formula One to its calendar in 2016 and Baku was one of the host cities of the 2020 Euros.

2. Political

President Ilham Aliyev has been in power since 2003, when he succeeded his late father Heydar Aliyev as President. He won his fourth Presidential term in April 2018 in snap elections, which were boycotted by all major opposition parties. Following these elections, President Aliyev has brought in new faces to his team of Ministers and officials, with the stated aim of accelerating reforms and tackling corruption.

Azerbaijan has a strong bilateral relationship with the UK. Originally founded on engagement through the oil and gas industry, it has expanded to other areas of trade cooperation including the renewables sector, agriculture, ICT and healthcare. There are strong people-to-people links between the two countries, with 1200 British nationals living in Azerbaijan. More than 4000 Azerbaijanis have studied at UK universities and Azerbaijani UK alumni can be found working in the higher echelons across most sectors of society.

Azerbaijan puts a premium on independence when it comes to international relations. Turkey is its closest ally. Azerbaijan is geographically positioned between Russia and Iran, and between Europe and Asia, which brings potential opportunities, including in the transport of oil and gas from the Caspian. Azerbaijan has potential as a transport hub as well, and has carried out significant infrastructure projects including the Baku-Tbilisi-Kars railway and a new port just south of Baku in Alat. A north-south rail link from Iran to Russia through Azerbaijan is under development.

The government of Azerbaijan has spoken for many years about the need for economic diversification, with some progress made in this regard. The government’s priority is to promote the non-oil sector, particularly agriculture, renewable energy, healthcare, technology, tourism and logistics/transport. There may be opportunities for UK businesses in all of these sectors, along with the traditional opportunities in the energy sector.

In September 2020, a 44-day conflict broke out again between Azerbaijan and Armenia. A ceasefire agreement brokered by Russia on 10 November 2020 saw much of the territory lost by Azerbaijan after the First Nagorno-Karabakh war returned to Azerbaijan with a Russian peacekeeping operation deployed to Armenian populated areas. The OSCE Minsk Group Co-Chairs of Russia, France and the US lead peace negotiations on settling the conflict.

Azerbaijan has expressed an eagerness to swiftly redevelop and reconstruct towns and cities located in the areas retaken after the 2020 conflict and for UK companies to participate in this process. The territories offer opportunities particularly in the sectors of agriculture and food processing, mining, renewables and tourism.

3. Economics

• currency: Manat (AZN)
• main exports: oil, gas, agricultural products
• GDP (PPP): $156 billion (2021)
• GDP per capita (PPP): $15,299 (2021)
• UK exports (in the four quarters to the end of Q3 2021): £751 million
• UK imports (in the four quarters to the end of Q3 2021): £300 million
• major trading partners (imports and exports): Italy, Germany, Russia, Turkey, China
• ease of doing business rating: 28th (out of 191) with ‘paying taxes’ rating of 40th

^{[footnote 1]}

Azerbaijan has grown rapidly in recent years, thanks mainly to huge oil revenues. This has enabled poverty in Azerbaijan to be reduced from 50% to below 6% in just 10 years. However, oil prices strongly affect the oil-dominated economy, with low prices putting pressure on the national currency. The Azerbaijan Central Bank devalued the manat twice in 2015, and it has switched from a fixed exchange rate to a de-jure flexible managed float. However de-facto the exchange rate remains tightly managed.

Since 2017, the inflation rate has stabilised and stood at 2.8% in 2020. However since mid-2021, inflationary pressures increased and by the end of 2021, inflation reached 12%. The double devaluations of 2015 hit the banking sector hard. In 2020, four banks were closed and the number of banks declined to 26. There are also plans to privatise the largest state-owned bank, named the International Bank of Azerbaijan. The dollarization level of deposits decreased from 61% in 2019 to 49% in 2021. Output increased by 5.6% in 2021 as COVID related lockdown restrictions were lifted and global energy prices recovered. Over the medium term, GDP growth will remain largely dependent on developments in the oil and gas sectors. The government has committed itself to structural reforms and diversification of the economy by expanding the non-oil sector.

State companies continue to dominate many key industries, including the oil, gas, electricity and telecommunications sectors. The government has suspended a range of license requirements and inspections that were holding back the private sector. To increase the efficiency and transparency of the state-owned enterprises (SOEs), the government established the Azerbaijan Investment Holding, which acts as an umbrella for 17 SOEs.

The establishment of the ASAN public service has reduced bureaucracy and eased the process of registering a business in Azerbaijan.

4. Department for Business and Trade (DBT)

Oil and gas is by far the largest sector in Azerbaijan. The State Oil Company of Azerbaijan, BP and other international and local companies are implementing a number of projects in the oil and gas sector. Owing to the COVID crisis, low oil and gas prices and decreased demand, the industry has had to tighten its belt and make significant cost cuts/ restructuring decisions. These are likely to impact on future exploration/development decisions.

The diversification of the economy, reducing the country’s dependence on hydrocarbons, and increasing investment into the non-oil and gas sector are priorities of the Azerbaijani government.

Azerbaijan has already taken some serious steps towards unlocking it’s solar and wind potential. In 2021, a new Renewables and Energy Efficiency Law has been adopted. New regulation to accelerate energy market reforms and attract direct investment are underway. IFIs are currently providing financial support for renewable projects in Azerbaijan. By 2030, the Azerbaijan government plans to increase the share of renewable energy in the domestic energy sector to 30%. DBT, IFIs and UK exporters are actively supporting Azerbaijan to help develop its clean energy sector.

Outside of energy, DBT is helping UK exporters gain market share in agribusiness, healthcare, ICT and education.

Agriculture currently generates more jobs than any other sector in Azerbaijan. The sector is central to the government’s plans to grow the economy outside of oil and gas and it has, therefore, introduced a range of subsidies. Local demand is growing for soil analysis laboratory, residue analysis, diagnosis labs and greenhouse development work. Requirements for irrigation and water efficiency technologies present opportunities for UK exporters.

Reforming the healthcare sector is a government priority as a new mandatory health insurance scheme is rolled out across the country. Combined public and private healthcare spending is projected to grow 9% from 2021 to 2024. This increase will support the government’s goals to broaden access to care, reduce financial barriers and improve overall quality of healthcare provision. The UK’s deep expertise in healthcare can play an important role in the development and improvement of Azerbaijan’s health sector. Commercial opportunities in Azerbaijan’s public healthcare sector include education and training – particularly in nursing, primary healthcare development, healthcare system strengthening (HSS) and digital health.

The ICT market maintains positive growth rate in 2022, largely due to measures taken in the field of government digitalisation, the spread of broadband Internet, and digital transformation of the private sector. These changes are creating new opportunities in e-commerce, fintech, artificial intelligence, machine learning, internet of things and smart cities.

In the education sector, there is strong demand for English as a foreign language. There is also potential to establish dual degree programmes on various subjects including geology, renewable energy, tourism and agriculture.

The returned territories in Azerbaijan also have significant potential for renewable energy (solar, wind, geothermal and hydro), agriculture and agriculture processing industry (including beekeeping, cattle breeding, fish farming, silk production, seed production, winemaking) and tourism (nature and ecotourism, spa and health tourism and cultural tourism).

5. Business and human rights

Through its membership of the OSCE and Council of Europe, Azerbaijan has committed to upholding international human rights standards. However, reports by a number of respected international human rights groups have highlighted areas of concern such as the lack of independence of the judiciary; government control/influence over large sections of the media; and deficits in the electoral environment.

Azerbaijan joined the international Labour Organisation (ILO) in 1992 and has thus far ratified 57 conventions, including all 8 fundamental and the 4 priority conventions. According to the ILO, there is not enough information regarding child labour, forced labour, and occupational safety. The employment-to-population ratio for 2020 was 58.7% (ILO estimate).

Trade Unions have very limited power, while the National Confederation of Trade Unions (similar to the Trade Union Congress) has strong links with the government.

6. Bribery and corruption

Bribery is illegal. It is an offence for British nationals or someone who is ordinarily resident in the UK, a body incorporated in the UK or a Scottish partnership, to bribe anywhere in the world.

In addition, a commercial organisation carrying on a business in the UK can be liable for the conduct of a person who is neither a UK national or resident in the UK or a body incorporated or formed in the UK. In this case it does not matter whether the acts or omissions which form part of the offence take place in the UK or elsewhere. For more information go to our bribery and corruption page.

In recent years several wealthy Azerbaijani nationals have been subject to legal action by the National Crime Agency.

Companies may face demands for facilitation payments or other informal payments. Anti-corruption laws are in place in Azerbaijan but their implementation is mixed.

In 2021 Azerbaijan was ranked 128 of 180 countries in Transparency International’s Corruption Perception Index (CPI).

7. Terrorism and security

Read the information on the terrorism page of the FCDO travel advice for Azerbaijan.

8. Protective security/organised crime

Crime levels are generally low. Take sensible precautions: be vigilant, avoid carrying large sums of money and don’t walk alone at night.

Many cars and roads are poorly maintained. Accidents are common, mainly due to poor or reckless driving and inconsistent enforcement of traffic rules.

More information is in our travel advice for Azerbaijan.

9. Contact

Contact the DBT team in Azerbaijan for further information.

10. Useful links

• exporting to Azerbaijan
• Azerbaijan Export and Investments Promotion Foundation
• State Agency for Public Service and Social Innovations

1. IMF estimations. Last updated in October 2021 ↩