Wayzata World Factbook 1996

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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