Foreign direct investment (FDI) in Azerbaijan

FDI in Figures

According to UNCTAD's 2023 World Investment Report, FDI inflows to Azerbaijan were negative by USD 4.4 billion in 2022, marking the second consecutive year of divestment, due to payment of dividends in the extractive industries. In the same year, the total stock of FDI stood at USD 29.4 billion, around 42.1% of the country’s GDP. Azerbaijan inflows focus on the oil and gas sector, although one of the top priorities of the Azerbaijani Government is to diversify the country’s economy and attract FDI to agriculture, transportation, tourism, and information/communication technology. Russia is the main source of FDI, but beyond that, the country is part of the customs union between Russia, Kazakhstan, Armenia, and Belarus that, in terms of volume, is the most important in the region and is almost exclusively involved in major projects for oil/gas pipelines and related services. According to the latest figures by the Central Bank of Azerbaijan, in the six nine months of 2023, FDI inflows totaled USD 3 billion.

The Azerbaijani Government has stressed the importance of improving the business climate and it does not screen inbound foreign investment. According to Azerbaijani law, foreign investments receive comprehensive legal protection and are safeguarded against nationalization or appropriation, except in specific circumstances. Private entities have the freedom to establish, acquire, and divest interests in business enterprises. While foreign citizens, organizations, and enterprises can lease land, ownership rights are restricted to Azerbaijani nationals. Foreigners can establish business entities in Azerbaijan through three avenues: setting up a wholly-owned subsidiary, purchasing shares of an existing company, or forming a joint venture with a local partner. Additionally, foreign companies have the option to operate in Azerbaijan without establishing a local legal entity by registering a representative or branch office with tax authorities. Azerbaijan is expected to continue to attract investment as an alternative transit route due to the risks associated with the Russian route following the invasion of Ukraine. Nevertheless, the problem of corruption remains unresolved and may act as an impediment to the country's development: Azerbaijan ranked 154th out of 180 countries on Transparency International's Corruption Perceptions Index 2023. Furthermore, a small group of government-connected holding companies dominates the economy, the country remains very dependent on the hydrocarbon sector (which represents on average more than 90% of its exports) and has a fragile dollarized banking system with an underdeveloped private sector credit. Azerbaijan ranks 89th among the 132 economies on the Global Innovation Index 2023 and 70th out of 184 countries on the latest Index of Economic Freedom.

What to consider if you invest in Azerbaijan

Strong Points

The country's key strong points include:
- Competitive production costs;
- Low-cost and qualified labour;
- Significant gas potential in the Caspian Sea;
- Perspective of gas exports to Turkey and Europe;
- Connecting link between China and Europe through development of rail corridors with Iran, Turkey and Georgia;
- Substantial foreign currency assets in the State Oil Fund of Azerbaijan (SOFAZ);
- Favourable general business climate (25th position in the World Bank's Doing Business ranking 2019).

Weak Points

The country's main weak points include:
- High regional political instability;
- Relatively poor regional relations, in particular the armed conflict with Armenia over the Nagorno Karabakh enclave;
- Authoritarian political regime;
- Weak government effectiveness and slow progress of structural reforms;
- Significant corruption and weak protection of property rights;
- Heavy dependence on oil and gas sector, creating substantial external vulnerability; limited non-oil sector;
- Decline in oil production (25% reduction over the last 6 years);
- Continued exchange rate risk;
- Weak banking system; largest bank (IBA; 40% of assets) in need of FX debt restructuring.

Government Measures to Motivate or Restrict FDI

The country has signed numerous treaties to encourage FDI. It has also put in place legislation facilitating the creation of companies, limiting corporate taxes and laws to protect FDI.

The biggest share of the foreign investment is directed to the oil and gas sector; nevertheless, one of the top priorities of the Azerbaijani Government is to diversify the country’s economy and to attract foreign investors, in particular in the following sectors: agriculture, transportation, tourism and information/communication technology.

In 2016, President Aliyev signed a decree establishing a free trade zone area next to the Alyat seaport, located 65 km south of Baku. Under the recently amended Customs Tariff law, entrepreneurs importing capital equipment for priority sectors will be exempted of taxes up to seven years.

For more information and to consult the law texts, visit the website of Azerbaijan Export and Investment Promotion Foundation (AZPROMO).

Bilateral investment conventions signed by Azerbaijan

The country has signed conventions with many countries: China, Egypt, Finland, Georgia, France, Germany, United States, Iran, etc. For more information, please visit the investement policy hub website of the UNCTAD.