US Report Highlights Challenges in Azerbaijan's Investment Climate
On July 22, the US State Department released its 2024 Investment Climate Report.
The section on Azerbaijan highlights that while the Azerbaijani government is making efforts to attract foreign investments and has implemented reforms aimed at diversifying its economy and improving transparency in the tender process, the investment environment remains challenging.
The report notes that Azerbaijan's economy relies heavily on oil and gas production, constituting approximately 90 percent of export revenues and over half of the state budget. In 2023, Azerbaijan's economy grew by 1.1 percent, while the consumer price index rose by 8.8 percent year-on-year. The Ministry of Economy forecasts an annual inflation rate of 5.3 percent in 2024 and 4.9 percent in 2025.
Although the oil and gas sector has historically attracted the largest share of foreign investment, Azerbaijan's government has targeted four non-oil sectors to diversify the economy: agriculture, tourism, information and communication technologies (ICT), and transport/logistics.
The report highlights the inauguration of a 230-megawatt solar power plant in Azerbaijan in October 2023 and the ongoing efforts to establish a green energy corridor from the Caspian Sea to Europe. It notes that increased competition in the renewable energy sector could lead to positive outcomes, such as greater investment, innovation, and socio-economic benefits.
The State Department also mentions that Azerbaijan will host the United Nations Climate Change Conference (COP29) in November 2024, which presents an opportunity to showcase the country's leadership in renewable energy and climate change.
Furthermore, the report indicates that the EU, Azerbaijani government, and third-party analysts anticipate Azerbaijan will continue leveraging its strategically important position on the East-West Trans-Caspian International Transport Route, known as the Middle Corridor. This route connects the container rail freight networks of China and the European Union through Central Asia, the Caucasus, Turkey, and Eastern Europe. Azerbaijan is investing in its railway system and expanding its port facilities to manage increased cargo flow.
Despite these efforts, the report acknowledges slow progress in implementing structural reforms necessary to create a diversified and competitive private sector. Corruption remains a significant issue for companies operating in Azerbaijan. The economy is dominated by a small group of government-linked holding companies, and while there have been improvements in intellectual property rights enforcement and industrial infrastructure, challenges persist, including a lack of judicial transparency.
The US-Azerbaijan Bilateral Investment Treaty (BIT) allows US investors to resolve investment disputes through the International Center for Settlement of Investment Disputes (ICSID). The average time required to resolve such disputes through domestic courts or alternative dispute resolution varies.