Prof. Dr.

Osman Nuri Aras

Assoc. Prof. Dr. Elchin Suleymanov
Assoc. Prof. Dr. Karim Mammadov

Bakı – 2016
ECONOMY OF AZERBAIJAN
25 Years of Independence

Prof. Dr. Osman Nuri Aras

Fatih University,
Istanbul, Turkey
Assoc. Prof. Dr. Elchin Suleymanov
Qafqaz University,
Baku, Azerbaijan
Assoc. Prof. Dr. Karim Mammadov
Western University,
Baku, Azerbaijan

DESIGN
Sahib Kazımov

PRINTING AND BINDERING

“Sharg-Garb” Publishing House
Aşıq Ələsgər küç., No: 17, Xətai rayonu, Bakı, Azərbaycan;
Tel: (+994 12) 374 83 43

ISBN: 978-9952-468-57-1

© Prof. Dr. Osman Nuri Aras, Bakı, 2016

© Assoc. Prof. Dr. Elchin Suleymanov, Bakı, 2016
© Assoc. Prof. Dr. Karim Mammadov, Bakı, 2016
 Foreword

During every work, whether it is academic or professional, we interact, get

assistance and are guided by certain group of people who value and assist us to
achieve our targets. We are sure that the people who support us and provide
valuable contribution to the English version of this book will not be limited in a
short list, but we would like to mention, and in certain ways, express our
acknowledgement to the people who enabled us to get on a track and deliver
the book in a few months. Thanks to Turan Agayeva, Ulker Gurbaneliyeva, Khayala
Mahmudlu and especially to Tural Hasanov for their help in preparing and
delivering this book to your valuable consideration.
 GENERAL INFORMATION ABOUT AZERBAIJAN
General Information:
The Establishment of the Republic of Azerbaijan 28 May 1918
The Independence Day 18 October 1991
Joining to the Organization for Security and Cooperation in Europe 30 January 1992
Joining to the United Nations 2 March 1992
Joining to the Commonwealth of Independent States 19 September 1995
Joining to the Council of Europe 17 January2001
2
Area (thousand km ) 86.6
Population, (thousand person) (According to the beginning of 2015) 9593.0
2
Density of population in 1km (person) 111
Capital Baku
Official Language Azerbaijan
Currency Manat
The course of Manat to Dollar (07.02.2016) 0.6389

Political Structure:
The Head of State President

Administrative-territorial units:
Autonomous Republic 1
Districts 66
Cities 78
City based Districts 14
Settlements 261
Villages 1727
Village-settlements 4249
Geographical Information:
Area: 86600 km2 (12% forests, 1.7% water basin, suitable lands,
31.1% pastures and hay fields, 31.4 other lands). Azerbaijan
lies between latitudes 38° and 42° N, and longitudes 44°
and 51° E.
The distance from Baku to North Pole is 5550 km, and the
distance from Baku to equator is 4440 km.
Neighbours: The total length of Azerbaijan's land borders is 2,650 km, of
which 1007 kilometers are with Armenia, 765 kilometers
with Iran, 471 kilometers with Georgia, 392 kilometers with
Russia and 15 kilometers with Turkey.
The biggest lakes: Sarisu: 67.0 km2
Aggol: 56.2 km2
Agzibirchala: 37.0 km2
Mehman: 35.0 km2
Boyukshor: 9.2 km2
Hacigabul: 8.4 km2
The biggest lake in the world: Caspian Sea (Area: 400000 km2; Depth: 1025 m)
The highest mountain: Bazarduzu - 4466 m
The biggest islands: Pirallahi- 14.4 km2
Chilov- 11.5 km2
Khere-Zire- 3.5 km2
Boyuk Zire- 1.4 km2
The longets rivers: Kur- 1515 km
Araz - 1072 km
Alazan (Ganix)- 413 km
Iorri (Gabirri)- 389 km
Samur- 216 km
Tartar- 200 km
 Table of Contents
INTRODUCTION ............................................................................................... 1

CHAPTER ONE
THE TRANSITION PERIOD IN AZERBAIJAN ECONOMY .................................... 3
1.1. AZERBAIJAN BEFORE THE INDEPENDENCE ........................................................ 4
1.1.1. SOVIET UNION AND THE COLLAPSE OF THE USSR .............................................. 4
1.1.2. AZERBAIJAN IN SOVIET UNION ............................................................................ 5
1.2. FIRST PERIOD AFTER THE INDEPENDENCE......................................................... 7
1.2.1. THE FIRST PERIOD REFORMS .............................................................................. 8
1.3. SECOND PERIOD AFTER THE INDEPENDENCE (1995-2003) ................................ 9
1.3.1. THE SECOND PERIOD REFORMS ....................................................................... 14
1.4. THE THIRD PERIOD AFTER THE INDEPENDENCE (FROM 2003) ......................... 16
1.5. GENERAL ASSESSMENT OF THE TRANSITION PERIOD ..................................... 17

CHAPTER TWO
MACRO-ECONOMIC ANALYSIS OF AZERBAIJAN ECONOMY ......................... 21
2.1. GROSS DOMESTIC PRODUCT .......................................................................... 22
2.2. INFLATION ....................................................................................................... 27
2.3. EMPLOYMENT ................................................................................................. 30
2.4. PRIVATIZATION ................................................................................................ 33
2.4.1. THE COMPARISON BETWEEN PUBLIC AND PRIVATE SECTOR ........................... 37
2.5. STATE BUDGET ................................................................................................ 38
2.6. MONETARY POLICY ......................................................................................... 40
2.7. FOREIGN TRADE .............................................................................................. 42
2.7.1. THE MAIN COUNTRIES IN FOREIGN TRADE ........................................................ 45
2.7.2. FOREIGN TRADE RELATIONS WITH CIS COUNTRIES .......................................... 46
2.8. FOREIGN DEBTS .............................................................................................. 47
2.9. ENVIRONMENT AND ECOLOGY ......................................................................... 51
2.10. POPULATION ................................................................................................... 53
CHAPTER THREE
SECTORIAL ANALYSIS .................................................................................. 55
3.1. INDUSTRY ....................................................................................................... 55
3.1.1. MINING INDUSTRY ............................................................................................. 58
3.1.2. ELECTRICITY ..................................................................................................... 58
3.2. AGRICULTURE AND CATTLE-BREEDING ........................................................... 60
3.2.1. STOCK-BREEDING ............................................................................................. 72
3.2.2. FISHING ............................................................................................................. 77
3.2.3. BEEKEEPING ...................................................................................................... 80
3.3. SERVICE SECTOR ............................................................................................ 81
3.3.1. EDUCATION ....................................................................................................... 81
3.3.2. HEALTH ............................................................................................................. 84
3.3.3. TOURISM ........................................................................................................... 85
3.3.4. FINANCE ............................................................................................................ 90
3.3.4.1. Bank .......................................................................................................................... 90
3.3.4.2. Insurance ................................................................................................................. 100
3.3.4.3. Securities Exchange ................................................................................................. 104
3.3.5. TRANSPORT AND COMMUNICATIONS ............................................................. 106
3.3.5.1. Sea transport ........................................................................................................... 107
3.3.5.2. Road transport ......................................................................................................... 110
3.3.5.3. Railway Transport .................................................................................................... 113
3.3.5.4. Airport Road Transport ............................................................................................. 115
3.3.5.5. The pipeline transport ............................................................................................... 116
3.3.5.6. Communication ........................................................................................................ 117
3.3.5.7. New Silk Road Project .............................................................................................. 120
3.3.5.8. North-South transport corridor .................................................................................. 123
3.3.6. CONSTRUCTION .............................................................................................. 123

CHAPTER FOUR
REGIONAL ANALYSIS .................................................................................. 127
4.1. ECONOMIC REGIONS ..................................................................................... 128
4.1.1. ABSHERON ECONOMIC REGION....................................................................... 128
4.1.2. GANJA-GAZAKH ECONOMIC REGION ............................................................... 130
4.1.3. SHEKI-ZAGATALA ECONOMICAL REGION ......................................................... 132
4.1.4. MOUNTAINOUS SHIRVAN ECONOMICAL REGION ............................................. 134
4.1.5. ARAN ECONOMICAL REGION ........................................................................... 136
4.1.6. NAKHCHIVAN ECONOMICAL REGION ............................................................... 137
4.1.7. LANKARAN ECONOMIC REGION ....................................................................... 139
4.1.8. GUBA-KHACHMAZ ECONOMIC REGION ............................................................ 141
4.1.9. UPPER KARABAKH ECONOMIC REGION ........................................................... 143
4.1.10. KALBAJAR-LACHIN ECONOMIC REGION ........................................................ 143
4.2. IMPORTANCE OF REGIONAL DEVELOPMENT PROGRAMS .............................. 144
4.3. REGIONAL DEVELOPMENT PROGRAM (2004-2008) ....................................... 147
 4.3.1. GENERAL OBJECTIVES OF THE PROGRAM ....................................................... 148
4.3.2. REGIONAL TARGETS OF PROGRAM ................................................................. 150
4.3.3. DEVELOPMENT AFTER THE PROGRAM ............................................................ 151
4.3.5. EXPECTATIONS FROM APPLICATION ............................................................... 154
4.4. THE PROGRAM OF SOCIO-ECONOMIC DEVELOPMENT OF
AZERBAIJAN REPUBLIC REGIONS IN 2009-2013 ............................................ 156
4.4.1. THE GOAL OF OF THE STATE PROGRAM, OBJECTIVES AND PRIORITIES OF
REGIONAL DEVELOPMENT .............................................................................. 157
4.4.2. SOURCES OF FUNDING MEASURES ENVISAGED IN THE STATE PROGRAM ...... 170
4.5. SOCIO-ECONOMIC DEVELOPMENT PROGRAM OF REGIONS OF AZERBAIJAN
REPUBLIC FOR 2014-2018............................................................................. 171
4.5.1. SOURCES OF FUNDING MEASURES ENVISAGED IN THE STATE PROGRAM ...... 184

CHAPTER FIVE
CASPIAN ENERGY RESOURCES AND ECONOMIC IMPORTANCE ................. 185
5.1. POTENTIAL OF OIL AND NATURAL GAS ............................................................ 185
5.2.1. THE CONTRACT OF THE CENTURY: “AZERI-CHIRAG-GUNESLI” FIELDS
AGREEMENT ................................................................................................... 191
5.2.2. “SHAHDENIZ” FIELD CONTRACT ...................................................................... 195
5.2.3. OTHER CONTRACTS ........................................................................................ 197
5.2.3.1. The contracts on offshore fields ................................................................................ 197
5.2.3.2. Contracts on Onshore Fields ..................................................................................... 201
5.3. OIL AND NATURAL GAS PRODUCTION............................................................ 204
5.4. FOREIGN INVESTMENTS IN OIL AND NATURAL GAS SECTOR.......................... 207
5.5. OIL EXPORT LEVEL AND INCOMES ................................................................. 208
5.6. THE PIPELINES .............................................................................................. 212
5.6.1. BAKU-NOVOROSSIYSK OIL PIPELINE ............................................................... 212
5.6.2. BAKU-SUPSA OIL PIPELINE.............................................................................. 213
5.6.3. BAKU-TBILISI-CEYHAN OIL PIPELINE ............................................................... 213
5.6.4. BAKU-TBILISI-ERZURUM NATURAL GAS PIPELINE ........................................... 215
5.6.5. TANAP PROJECT AND ITS PERSPECTIVE ......................................................... 216

CHAPTER SIX
“DUTCH DISEASE” IN ECONOMY AND THE MEASURES AGAINST IT .......... 223
6.1. DUTCH DISEASE ............................................................................................ 223
6.2. DUTCH SYNDROME IN AZERBAIJAN AND ITS COMPLICATIONS ...................... 225
6.3. THE MEASURES TAKEN AGAINST DUTCH DISEASE ........................................ 227
6.3.1. THE STATE OIL FUND....................................................................................... 227
6.3.1.2. The Independence or Privatization of the State Oil Company ....................................... 232
6.3.2. THE ACTIVITIES ON THE ESTABLISHMENT OF FREE ECONOMIC ZONES ........... 233
CHAPTER SEVEN
THE ECONOMIC POLICY OF AZERBAIJAN ................................................... 235
7.1. MONETARY POLICY ....................................................................................... 235
7.2. FINANCIAL POLICY ......................................................................................... 243
7.3. EXCHANGE RATE POLICY ............................................................................... 251

CHAPTER EIGHT
THE PROCESS OF AZERBAIJAN’S INTEGRATION
TO THE WORLD ECONOMY ......................................................................... 263
8.1. THE LEVEL OF INTEGRATION .......................................................................... 264
8.2. THE TIES WITH INTERNATIONAL ECONOMIC ORGANISATIONS ....................... 264
8.2.1. RELATIONS WITH THE IMF ............................................................................... 266
8.2.2. RELATIONS WITH THE WORLD BANK .............................................................. 268
8.2.2.1. Cooperation with the Multilateral Investment Guarantee Agency (MIGA) ...................... 271
8.2.2.2. Cooperation with the International Finance Corporation (IFC) ...................................... 272
8.2.3. RELATIONS WITH THE EUROPEAN BANK FOR RECONSTRUCTION
AND DEVELOPMENT (EBRD)............................................................................ 272
8.2.4. RELATIONS WITH THE JAPAN BANK FOR INTERNATIONAL
COOPERATION (JBIC) ...................................................................................... 273
8.2.5. TIES WITH THE ASIAN DEVELOPMENT BANK ................................................... 274
8.2.6. TIES WITH THE ISLAMIC DEVELOPMENT BANK (IDB) ........................................... 274
8.2.7. RELATIONS WITH THE GERMAN DEVELOPMENT BANK.................................... 275
8.2.8. RELATIONS WITH THE BLACK SEA TRADE AND
DEVELOPMENT BANK (BSTDB) ........................................................................ 276
8.3. STRUCTURE OF FOREIGN DEBT ON RESOURCES ........................................... 276
8.4. TIES WITH THE EUROPEAN UNION ................................................................. 276
8.4.1. TRACECA......................................................................................................... 277
8.4.2. TACIS .............................................................................................................. 279
8.4.3. INOGATE.......................................................................................................... 280
8.5. REGIONAL ECONOMIC RELATIONS................................................................. 280
8.5.1. THE COMMONWEALTH OF INDEPENDENT STATES .......................................... 280
8.5.2. ORGANIZATION OF THE BLACK SEA ECONOMIC COOPERATION....................... 291
8.5.3. ECONOMIC COOPERATION ORGANIZATION ...................................................... 292
8.5.4. GU(U)AM ......................................................................................................... 292
8.6. NEW GOALS OF INTEGRATION ....................................................................... 293
8.6.1. MEMBERSHIP IN WORLD TRADE ORGANIZATION ............................................ 294
8.6.2. “TURKISH ECONOMIC UNION” OR IDEA OF
“EURASIAN ECONOMIC UNION” ....................................................................... 297
CHAPTER NINE
FOREIGN INVESTMENTS IN AZERBAIJAN AND INVESTMENT POTENTIAL .. 299
9.1. FOREIGN INVESTMENTS ................................................................................ 299
9.2. INVESTMENT ENVIRONMENT ......................................................................... 305
9.2.1. NEGATIVE CASES IN INVESTMENT ENVIRONMENT........................................... 306
9.2.2. LEGAL REGULATIONS ...................................................................................... 307
9.2.3. LEGAL ENTERPRISES REGISTRATION PERIOD ................................................. 308
9.2.4. PROPERTY RIGHTS PROTECTION AND RESPECT FOR CONTRACTS ................. 309
9.2.5. PROTECTION OF INTELLECTUAL PROPERTY RIGHTS ......................................... 310
9.2.6. STATE FINANCIAL AID TO PRIVATE SECTOR .................................................... 310
9.2.7. TRANSPARENCY OF REGULATORY SYSTEM, GENERAL STANDARDS
MANAGEMENT AND COMBATING CORRUPTION .............................................. 310
9.2.8. NATIONAL REGULATIONS ................................................................................ 311
9.2.9. NATIONALIZATION ........................................................................................... 311
9.2.10. THE TRANSFER AND REPLACEMENT OF THE INCOME ................................... 311
9.2.11. RESOLUTION OF CONFLICTS.......................................................................... 312
9.2.12. BILATERAL INVESTMENT TREATIES ............................................................... 312
9.2.13. CAPITAL PARTICIPATIONS AND SUPPORT ..................................................... 312
9.2.14. TAXES AND TAX RATES ................................................................................. 312
9.3. INVESTMENT POTENTIAL ................................................................................ 315
9.4. INVESTMENT AND TRADE SPHERES ................................................................ 316
9.4.1. AGRICULTURE AND FOOD ............................................................................... 316
9.4.2. CHEMICAL INDUSTRY ...................................................................................... 317
9.4.3. LIGHT PROCESSING INDUSTRY ....................................................................... 317
9.4.4. CONSTRUCTION AND TOURISM ....................................................................... 318
9.4.5. TRANSPORT .................................................................................................... 318

CHAPTER TEN
SWOT ANALYSIS OF COUNTRY’S ECONOMY .............................................. 319
10.1. THE STRENGHTS ........................................................................................... 320
10.1.1. THE STRENGTHS FROM MACROECONOMIC PERSPECTIVES .......................... 320
10.1.2. THE STRENGTHS FROM SECTORIAL AND REGIONAL PERSPECTIVES ............ 321
10.1.3. NON-ECONOMIC STRENGTHS ........................................................................ 323
10.2. THE WEAKNESSES ........................................................................................ 323
10.2.1. THE WEAKNESSES IN MACROECONOMIC PERSPECTIVES ............................. 323
10.2.2. WEAKNESSES IN SECTORIAL AND REGIONAL PERSPECTIVES ....................... 325
10.2.3. NON-ECONOMIC WEAKNESSES ..................................................................... 326
10.3. THREATS ...................................................................................................... 327
10.3.1. ECONOMIC THREATS ..................................................................................... 327
10.3.2. NON-ECONOMIC THREATS ............................................................................ 327
10.4. OPPORTUNITIES ............................................................................................ 328
 10.4.1. ECONOMIC OPPORTUNITIES .......................................................................... 328
10.4.2. NON-ECONOMIC OPPORTUNITIES .................................................................. 329
10.5. PROPOSALS .................................................................................................. 330

CHAPTER ELEVEN ....................................................................................... 333

ECONOMIC RELATIONS BETWEEN AZERBAIJAN AND TURKEY ................... 333
11.1. LEGAL BASICS OF ECONOMIC RELATIONS ..................................................... 333
11.1.1. COOPERATION IN THE AGRICULTURE FIELD .................................................. 334
11.1.2. COOPERATION IN THE INDUSTRIAL FIELD...................................................... 334
11.1.3. COOPERATION IN THE FIELD OF STANDARDS ................................................ 335
11.1.4. COOPERATION IN ENERGY SECTOR ............................................................... 335
11.1.4.1. Baku-Tbilisi-Ceyhan Oil Pipeline Project................................................................... 336
11.1.4.2. Baku-Tbilisi-Erzurum Natural Gas Pipeline Project .................................................... 336
11.1.5. COOPERATION IN TOURISM SECTOR ............................................................. 336
11.1.6. COOPERATION IN MINING SECTOR ................................................................ 336
11.1.7. COOPERATION IN EDUCATION SECTOR ......................................................... 337
11.1.8. COOPERATION IN TRANSPORT SECTOR ........................................................ 337
11.1.9. CUSTOMS PARTNERSHIP .............................................................................. 337
11.1.10. COLLABORATION IN SOCIAL SECURITY SPHERE ......................................... 337
11.1.11. EXIMBANK LOANS ....................................................................................... 338
11.1.12.TURKISH COOPERATION AND DEVELOPMENT AGENCY (TIKA)
CONTRIBUTIONS .......................................................................................... 338
11.2. TRADE RELATIONS ........................................................................................ 339
11.3. THE ADVANTAGE OF TURKISH INVESTMENTS IN AZERBAIJAN ....................... 341
11.3.1. THE SECTORAL DISTRIBUTION OF TURKISH INVESTMENTS ........................... 342
11.3.2. AZERBAIJAN INTERNATIONAL SOCIETY OF TURKISH
INDUSTRIALISTS AND BUSINESSMEN (TUSIAB) ............................................ 344
11.4. AZERBAIJAN INVESTMENTS IN TURKEY ......................................................... 344
11.5. THE NEW ERA ............................................................................................... 345

CHAPTER TWELVE
THE IMPACT OF GLOBAL FINANCIAL
CRISIS ON AZERBAIJAN’S ECONOMY ......................................................... 351
12.1. THE GLOBAL FINANCIAL CRISIS AND ITS REASONS ....................................... 351
12.2. THE IMPACT OF FINANCIAL CRISIS ON THE ECONOMY OF AZERBAIJAN .......... 352
12.2.1. THE IMPACT ON ECONOMIC DEVELOPMENT.................................................. 352
12.2.2. THE IMPACT ON OIL AND NON-OIL SECTOR .................................................. 353
 12.2.3. THE IMPACT ON AGRICULTURAL SECTOR ..................................................... 353
12.2.4. THE IMPACT ON TRADE SECTOR ................................................................... 354
12.2.5. THE IMPACT OF AZERBAIJAN ON FOREIGN STATE DEBT ............................... 355
12.2.6. THE IMPACT ON CONSTRUCTION SECTOR .................................................... 356
12.2.7. THE IMPACT OF DIRECT INVESTMENT ........................................................... 356
12.2.8. THE IMPACT ON STATE BUDGET ................................................................... 358
12.2.9. THE IMPACTS ON MACROECONOMICS .......................................................... 359
12.2.10. THE IMPACTS ON MICROECONOMIC SYSTEM.............................................. 360

THE RESULTS AND PROPOSES ................................................................... 363

LİST OF REFERENCES ................................................................................. 373

BY SPONSOR ... .......................................................................................... 386

 INTRODUCTION
The social and political processes, started in 1980s, resulted with the collapse of
the USSR, and all union republics became independent. Azerbaijan was one of the
first countries, which gained independence in those years.
Azerbaijan declared independence on 18th of October 1991. Thus Azerbaijan
became one of the countries, which balances economic and political relationships
in the region. This characteristic comes from the geopolitical position of Azerbaijan.
Located in the region of the Southern Caucasus, Azerbaijan has borders with the
Caspian Sea to the east, Georgia and Russia to the north, Iran to the South, and
Armenia to the southwest and west. A small part of Nakhchivan Autonomous
Republic also has borders with Turkey to the northwest.
The transition period in Azerbaijan was observed some problems. However the
country could maintain independence. To do so, several economic, social and
political problems were resolved.
The main problem, which Azerbaijan confronted, was structural. Therefore, it
was important to create economy, which can manage itself independently.
Throughout the years, some important steps have been taken in order to
liberalize the economy.
Azerbaijan has huge natural resources, which triggered the development of
economy. Oil and gas resources are the most important wealth of Azerbaijan. In
2015, 90% of the export belongs to the energy carriers. This figure also shows
the importance of the energy sector in Azerbaijan economy. For this reason,
energy resources should be used relevantly.
It was not possible to have investment and then divert it to the relevant sectors,
without the interference of the government in the transition period. Therefore
regulator also should play role, with the invisible hand in order to stabilize free
market economy.
The political stability was obtained during Heydar Aliyev’s government. The
strong political power triggered economic development. Ilham Aliyev, the
successor of nationwide leader Heydar Aliyev continues to realize the political
program of his father.

1
 CHAPTER ONE
THE TRANSITION PERIOD IN
AZERBAIJAN ECONOMY
The most important trade relationships were realized via the Mediterranean and
Black Seas in ancient times and medieval. The caravan routes, especially Great
Silk Way were extended from China and India to Mediterranean and Black Seas
and passed through Azerbaijan. Well-known caravan route which made connection
between Eastern Europe and South Caucasus, Iran, and Central Asia via Darband
passage also crossed Azerbaijan. Thus, abovementioned international caravan
routes attracted the other countries from ancient times. Azerbaijan played “Golden
Bridge” role in the region.
However this geopolitical position caused deep problems throughout the history.
Thus, Azerbaijan was separated between Russia and Iran in 1813 and 1828
according to the Gulustan and Turkmenchay contracts, relevantly. Therefore
Azerbaijan territories started to be named Southern and Northern Azerbaijan.
After the Bolshevik revolution, Azerbaijan Democratic Republic was established
in 28 May 1918. However Azerbaijan was invaded by the Russian troops in 27
April 1920. Azerbaijan became the part of USSR in 1922 and named “Azerbaijan
Soviet Socialist Republic” from 1936. Eventually northern Azerbaijan, which was
the colony of USSR, declared independence in 1991, after the collapse of the
Soviet Union.
In 1980s, “glasnost policy” which was implemented by Michael Gorbachev
caused the collapse of the USSR and Azerbaijan regained independence in 1991.
“Milli Majlis”, the Parliament of the Republic of Azerbaijan declared 18th October
as a National Independence Day. Azerbaijan got rid of soviet imperialism,
totalitarian soviet regime, and utopic communist ideology via the independence.
Azerbaijan becomes the independent state now. There is no any foreign army in
the territories of Azerbaijan. Furthermore independent government organizations
resolve the problems of the citizens in the country. Naturally, the political
independence plays much more important role in the forming of national economy.

3
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

The second important aspect in terms of economic development and integration

to the world economy is characterized by the climate and suitable geographical
position. 9 climate zones of 11 are observed in Azerbaijan. Azerbaijan has suitable
geography for the development of agriculture and tourism, fertile lands, long
coastlines, large pastures, forests, and nice climate.
Great Silk Way, the oil and gas pipelines, which carry Central Asian energy
resources to the world market also cross Azerbaijan. The relevant geographical
position of Azerbaijan plays more important role between Asia and Europe.
Azerbaijan became the member of the United Nations Organization after the
independence and continued to make good relationships with foreign countries.
Azerbaijan, which is located on the crossroad of Europe and Asia, has a potential
to be strong communication center in the region. Therefore Azerbaijan is very
interested in the establishment of Europe-Caucasus-Asia corridor. One of the
most important aspects due to realize the economic development is the natural
resources. Azerbaijan has several significant natural resources such as lead,
zinc, copper, iron, gunpowder, cobalt, marble, lime, mineral water, salt mine,
rock salt and etc. Azerbaijan also has golden and silver mines.
The most significant natural resources of Azerbaijan are oil and gas. The oil
reserves can be finding in the Caspian Sea, Absheron peninsula, and coastline of
Kur River, Gobustan, and Ganja. Oil revenues are huge part of the Azerbaijan’s
budget.
The economic development of Azerbaijan is consisted of three important periods
after the independence. The period before the independence, and the transition
period will be analyzed.

1.1. AZERBAIJAN BEFORE THE INDEPENDENCE

1.1.1. SOVIET UNION AND THE COLLAPSE OF THE USSR
Soviet nations have lived in three different socio-economic periods since 18th
century, which is symbolized by Peter the Great, Lenin and Gorbachev. The first
transition period with the Peter the Great was followed by the revolution of
19171. The revolution initially happened in 1905, destroyed the Tsarist Empire in
1917. Bolsheviks also supported the revolution and Russians rejected the

Daniel Yergin– Thane Gustafson, Rusiya 2011 və Dünyadakı Yeri, (Transl: Özden Arıkan), Sabah Yayınları, Istanbul,
1

1994, p.1.

4
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

democracy and market economy. Socialism, economic model based on the

central planning was started to be implemented in Soviet Union. Thus Russians
started to control themselves and 1/6 of the world population via totalitarian
dictatorship and central planning system. Furthermore the nationality was formed
according to the Leninist ideology.
Soviet Union entered new era from 1985. Thus the collapse of the Marxist-
Leninist ideology was observed in those times2. The natural development of the
humanity and dialectic theory injured the socialism and rejected the Marxist-
Leninist doctrine as utopist system. This was observed in the totalitarian Soviet
Union, which includes 1/6 of the world.
Socialist system was successful only in industrialization period in Soviet Union.
Unreasonable employment, no more equipment production, no more import of
the new technologies, lack of the organization caused the stagnation in the
economy.

1.1.2. AZERBAIJAN IN SOVIET UNION

The management mechanism of the economy of Azerbaijan was formed based
on the USSR during the Soviet period. The industrial structures were formed
according to the demands of the Soviet Union. In Soviet Union, the countries
were specialized in line with the central planning. In this frame, the driving force
of Azerbaijan economy was oil. The huge amount of the export was realized to
Russia and Ukraine and oil products, machine building, weaving and winemaking
were the main part of it. The huge amount of the import was based on the oil
products, which come from the abovementioned countries as a crude material.
The specialists claimed that Azerbaijan is one of the two countries that were
ready for the independence during the last years of the Soviet Union. Certainly
that was based on not only the oil resources of the country, but also the
development perspective of the country’s economy. Thus the budget revenues of
Azerbaijan were more than the budget expenditures. The produced national
income was more than the used national income.
Azerbaijan reached certain development level during the soviet period, if the
economic indicators were considered. However the loss of Azerbaijan was more
than the profits, which were attained. Thus the economic conditions of the

Ken Jowitt, “Yeni Dünya Düzensizliği”, (Transl: Levənt Köker), Demokrasinin Küresel Yükselişi, (Der: Larry Diamond – Marc
2

F. Plattner), Yetkin Yayınları, Ankara, 1995, p.303

5
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

country are not considered because of the central planning3. Several products
and crude materials were sold to the union countries for cheap price and again
imported as a finished product for an expensive price. Azerbaijan did not have a
property rights on its own resources, so, the incomes came from the oil products,
cotton, tobacco and winemaking industries were collected in the central
government.
Azerbaijan economy reached high level within the economy of the USSR.
However that was not evaluated relevantly. The economy of Azerbaijan was not
stable during the last 20 years of the soviet period. For instance the average
economic growth rate was 5.2% in 1960-1970, while increased 7.4% in 1970-
1980. From 1980 until 1990, this figure decreased sharply.
If the abovementioned analyses are considered, it can be clear that the collapse
of the USSR was not political but economic. The administration of the union,
which was consisted of the several countries, caused problems in terms of the
realization of the socio-economic development. The current position of the
Soviet Union was behind of the developed and some developing countries. The
most important problems of the planned economy remaining from the Soviet
Union are listed below4;
1. The economic structure was not suitable.
2. The production power was not same in terms of the regional and sectorial
division.
3. The quality of the products was low. Furthermore the amount of the products
two times less than the other union states. Only 50% of the consumption was
met by the domestic production at the beginning of the 1990s in Azerbaijan.
4. As a result of the irrelevant economic structure the export was more than the
import about 30-40% at the end of the 1980s. In fact, this should be explained
as a positive indicator. However that was undesirable because of the
landscape and the geographical structure of the country. Thus 55-60% of the
export belonged to crude materials and intermediate products. Generally 45-
50% of the export and import were realized with Russia and this trend caused
the lagging of the economy in the next years5.

Ismail Özsoy, Dağıstan’ın Sosyo-Iqtisadi Tarihi, Kaynak Yayınları, Izmir, 1997, p.246;
3

Marc F Plattner, “Demokrasi Anı”, (Transl: Ergun Özbudun), Demokrasinin Küresel Yükselişi, (Edt: Larry Diamond – Marc F.
4

Plattner), Yetkin Yayınları, Ankara, 1995, p.55.

Ilhan Uludağ–Salih Mehmedov, Sovyetler Birliği Sonrası Bağımsız Türk Cumhuriyetleri ve Türk Gruplarının Sosyo-Iqtisadi
5

Analizi- Türkiye Ilişkileri, TOBB Yayınları, Istanbul, 1992, p.28.

6
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

1.2. FIRST PERIOD AFTER THE INDEPENDENCE

The developments which happened during the first years of the independence
should be assessed in order to understand the economic development period
after the independence. Therefore the first years of the independence as well as
the processes which happened in those years will be explained in this
subchapter6.
The period from 1989 to 1991 was the years that Azerbaijan intended to attain
the independence. In this period the main struggle was the issues which made
barrier against the independence. The period from 1991 to 1994 could be
considered as a first period after the independence. On 18th October, 1991 the
Azerbaijan declared the independence and 25 years have been passed on that
event. 18th October takes very important place in the economic process of
Azerbaijan. Certainly the maintenance of the independence was more difficult
than the attaining of it. The processes which happened after the independence
proved it. The economic structure based on the specialization and the division of
labor ended as a result of the collapse of the USSR and Azerbaijan lost the
common market. The production was suspended because of the crude material,
semi-products, supply of equipment, market, finance and the management
based on the old central planning7. The economic relations were abolished
between the former union states and the production decreased. Armenian war
and Chechnya problem caused the closing of the trade routes.
There were some important problems at the end of the 1980s. However those
problems were not resolved because of the irrelevant management. As a result
of it the stagnation period was observed in Azerbaijan. The political instability
and the transition to the market economy caused deep crises. High
unemployment and hyper-inflation was observed in the country those years.
High inflation and unstable socio-political environment deterred the economic
growth, especially the development of the industry and the agriculture.
Decrease of the production and high inflation rate caused the increase of the
economic crisis and socio-economic tensions. Azerbaijan confronted with the
armed aggression of the Armenian armed forces and lost 20% of its territories
until 12th May, the signing of the cease-fire.

Rasim Həsənov, “Azərbaycanın Iqtisadi Inkişaf Paradiqması və Iqtisadi Təhlükəsizlik Konsepsiya-sının Seçimi”, Məşvərət
6

Bülleteni, No:7(43), Baku, October-2001, pp. 6-8

Azər Əmiraslanov, “Dövlət Müstəqilliyi və Milli Iqtisadiyyatın Formalaşması Problemləri”, Məşvərət Bülleteni, No:7(43),
7

October 2001, pp.50-52.

7
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

The lack of the relevant economic reforms, the budget expenditures for Karabakh
war, the loss of the 20% of the country’s territories, the refugee more than 1
million people and lack of the foreign investment and poor implementation of
privatization caused deep crises in Azerbaijan economy. The strategy in line with
the transition to the market economy was not identified and the economic
decisions were not irrelevant during that period8.
The war with Armenia, the transportation embargo of Russia on Azerbaijan and
the inactivity of two oil pipeline and military challenges negatively influenced
crisis9.
The worst situation in Azerbaijan economy was observed in 1992. The GDP
decreased twice in 1992-1994 and became the 48% of the indicator of 1991.
From 1990 to 1994 the GDP decreased 13-20% annually and became $1629.3
million dollars in 1994. The GDP decreased 53% and industry, agriculture, the
consumption and the extraction of the tax decreased 62%, 44%, 75% and 45%
respectively in comparison with 1990. Wrong economic policies caused
problems in finance and foreign trade sectors.
The inflation increased to four-digit numbers in 1992-1994. The shortcomings in
the monetary policies caused economic crisis. The loans were given in
accordance with the wishes of the bank managers.
The economic crisis resulted with the decrease in production, price increase and
the deficits in the state budget. The shortcomings in the tax collection also
resulted with budget discharging. The inefficient use of the loans aggravated the
economic crisis. One of the other negative of the economic crisis was the
devaluation of the national currency.

1.2.1. THE FIRST PERIOD REFORMS

The “Law on Private Property” was enacted in June, 1991. The price liberalization
was realized at the beginning of 1992. In January 1992, the value-added tax
started to be implemented. The ‘Law on Foreign Investment” was enacted in
April and National Bank Law was enacted in August, 1992. Manat became a
national currency for the local market.

Heydər Əliyev, “Azərbaycan Respublikasının dövlət müstəqilliyinin onuncu ildönümü haqqında”, Azərbaycan Respublikası
8

Prezidentinin 20 Mart 2001 Tarixli Fərmanı, Baku, 20 Mart 2001;

9
Asəf Nadirov, “Iqtisadiyyatın Yeni Inkişaf Mərhələsi”, Azərbaycan Qəzeti, 15 September 2001, p.2.

8
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

The slowdown was happened in the economy because of the ongoing war in
1993-1994. The “Law on the Privatization of the small-sized organizations came
to force in January, 1993. Manat became the only acceptable currency in
Azerbaijan in 1994. The transition to the market economy accelerated as a result
of the signing of the cease-fire with Armenia. In June, “Execution-Bankruptcy
Law” was enacted and the consolidation processes of the banks were started10.
Banking, privatization, the liberalization of the foreign trade and some structural
changes were realized during 1995-2000.

1.3. SECOND PERIOD AFTER THE INDEPENDENCE

(1995-2003)
Heydar Aliyev, who had 30 years’ political management experience, came to
power via the elections in summer, 1993. Some improvements were observed
after he came to government. The reforms in accordance with law system were
realized after he took the post in the government.
The program in accordance with economic reforms and new economic models
were prepared that time. Some significant laws were enacted in order to form
free market economy. Those laws included the privatization, the development of
the private ownership, the reconstruction of the economic structure, customs,
tax and finance systems, the liberalization of the trade, the realization of the land
and agricultural reforms, the improvement of the social welfare, and the
improvement of the education and health systems.
The attempts to create free market economy, the steps towards the liberalization
of foreign trade and rate of the exchange reduced the inflation rate, and
minimized the budget deficits.
The privatization of the small organizations concluded, the service sector was
given to the private owners, the privatization of the medium and large-sized
organizations was started, macroeconomic stability was attained, and collective-
farms were given to the private owners as a result of the reforms. Furthermore
except land tax, no any tax was collected from the agriculture sector for 5 years.
93.2% of the agricultural assets were privatized according to the plan. 7%
increase was observed in farming and cattle-breeding products in 1997.

10
Ayhan Karaca, “Azerbaycanda Ekonomik Dönüşüm Süreci ve Reformların 10 Yılı”,
http://www.foreigntrade.gov.tr/ead/DTDERGI/ocakozel2002/ayhan.htm. (13.03.2015)

9
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

International economic and financial systems were started to be applied in

Azerbaijan in order to attract foreign investments. The social, political and
economic reforms, which were realized after the second half of 1993, caused
stability and economic prosperity in Azerbaijan. Some significant steps were
taken in order to reorganizing of the bank and finance systems. The steps
towards free market economy increased the relationships between Azerbaijan
and international organizations.
The “Contract of the Century”, includes several oil agreements, was signed in
this period. The huge amount of investments were started to enter Azerbaijan
economy as a result of signing “Contract of the Century” into Adoption of the
Constitution of the Republic of Azerbaijan on 12th November 1995.
One of the most important steps towards the reconstruction of the economic
system was the adoption of the first Constitution of the Republic of Azerbaijan.
The new constitution considered the formation of the public administration,
identification of the rights and duties of citizens and the state, as well as the
establishment of the liberal market based on the democratic values.
The legal framework for integration of the private ownership with the world
economy was identified via the Constitution. In terms of it, 1995 is considered
as a beginning of the economic regulation.
Consequently, it’s time of the reforms, after attaining cease-fire in frontline and
stability domestic policy. Strict economic regulations were realized from 199411.
The inflation rate reduced, the GDP rate started to increase as a result of the
cooperation with the International Monetary Fund (IMF). The stagnancy in
Azerbaijan economy ended in 1996. The new economic models yielded results.
Thus GDP increased 26.3% last 5 years, the welfare of the people increased two
times, share of the private sector increased from 29% to 68% in the economy.
Approximately $3.4 billion dollars were invested to Azerbaijan economy from
1994 until 2000, by the companies which participated in the oil agreements. The
total amount of the foreign investments was $15.9 billion dollars from 1994 until
2000. 22.8% of this amount was diverted to finance sector, while 53.6% was
invested in oil sector. The rest (approximately 20.9%) was diverted into the other
areas12.

Imran Cəfərzadə, “Əsaslı Inkişaf Illəri”, Iqtisadiyyat Qəzeti, 18 October-1 November 2001, p.3
11

Ş.E.Yaqubov, A.M.Mahmudzadə, “Azərbaycan Respublikasında Aparılan Aqrar Islahatların Qiymətləndirilməsi, Azərbay-

12

canda Iqtisadi Islahatların Həyata Keçirilməsi Xüsusiyətləri və Probləmlər, Iqtisadi Inkişaf Nazirliyi Iqtisadi Islahatlar Mərkəzi,
Baku, 2001, ss.60-63; Cəfərzadə, p.3

10
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

Azerbaijan was the fastest growing economy among the former USSR countries
because of the oil investments. The increase in GDP was 10% and 7.2% in 1998
and 1999 respectively. The reasons of the growth were the incomes from oil,
construction and agriculture sectors.
In comparison with the figures of 1990, the GDP was 2 times less in 2000.
Furthermore the production in industry and agriculture was 3.3 and 2.4 times
less than the figures of 1990 respectively. The total amount of the investments
decreased until 1996. However it was increased until 2000 and became 55%
more than the figures of 1989.
On the other hand newly applied monetary and exchange rate policies deterred
the price increase, and new currency manat became stable against foreign
currencies. In fact the inflation increased by 1763% in 1994. However the
inflation dropped to 1.8% in 200013.
Direct foreign investments played key role in the economic recovery of Azerbaijan.
The most important part of the direct foreign investments was spent to the oil
production sector. From 1995 until 1998, 59.1% increase was observed in the
amount of the foreign investments. The share of the stable investment in the GDP
was 40.6% in 1998, and this figure two times more than the statistics of 1995.
However only 0.5% of the foreign investments were spent for the Agriculture
sector, which was the second employment source in the country. Foreign
investors avoided investing for the manufacturing industry. As a result, the
production in the sector decreased sharply.
From 2000, Azerbaijan made economic relations with 122 countries, and total
amount of the trade relationships was more than $2.9 billion dollars14. This
amount was 2.2 times more than the figures of 1993.
The occupation of Azerbaijan territories by Armenian armed forces was another
important factor in Azerbaijan economy. Thus, Azerbaijan lost 20% of its territo-
ries; as a result the country lost 1/5 part of production potential, and 300.000
workplaces. Furthermore 12% of the inhabitants immigrated. Approximately
290.000 family or 1.000.000 people left their ancestral homelands. The total area
of the occupied lands was 22700 km2. The borderlines of Nakhchivan were also
affected by the invasion of Armenian armed forces, at the same time with the
Mountainous Karabakh. 17100 km2 territories of Azerbaijan lands (approximately

Akif Musayev, “Azərbaycan Respublikasının Iqtisadi Inkişaf Strategiyası və Vergi Siyasəti”, Iqtisadiyyat və Audit Jurnalı,
13

No:10, October-2001, p.12

Məzəddin Eyyubov, “Bazar Iqtisadiyyatına Keçid və Sənaye Kompleksi” Məşvərət Bülleteni, No:7(43), October-2001,
14

pp. 66-67.

11
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

20%) are under occupation currently. Furthermore, 87 settlements, 7 administrative

districts, 11 cities, 1.3 million ha sown area 600.000 large and small cattle, 7000
agriculture organizations, 850 education organizations, 650 health center, as
well as 120.000 habitation were left in the occupied lands.
Furthermore there were 160 bridges, 2300 km irrigation channels, 1500 km
electricity lines, 2500 transformers, 23000 km water channels, 2000 km gas
pipelines, 20 km sewer lines, 160 water tanks, 34 km gas distribution system,
communication stations for 35000 users, 4 airport, and Baku - Aghdam, and
Baku - Nakhchivan - Yerevan railways in the region.
Additionally, there were 800 health center, hospital and polyclinics, 179 culture
houses, 825 libraries, 6 parks, 47 musical and art schools, 3 theatres, 3 galleries,
and more than 300 historical memorials in the region.
More than 180 industrial organizations, such as food industry, engineering-
industry, and electrical industry were existed in the occupied territories of
Azerbaijan. And more than 18000 workers were working for those organizations.
The climate and land resources of the region were suitable for the agriculture.
Therefore, there were 320 collective farms, more than 90 state farms, state farms
and some agricultural associations in Mountainous Karabakh. This region
provided 24% of wheat production, 41% of grapes production, 46% of potato
production, 18% of meat production and 34% of the daily animal products.
Furthermore there were 649.000 hectares lands suitable for the plantation.
The occupied lands are rich with the iron, mercury, chrome, marble, limestone,
gold, and mineral waters. For that reason, Azerbaijan deprived from 39.6 thousand
tons of gold reserves in 3 gold mines. The occupied region was rich of animals
and plants.
Approximately 20000 Azerbaijan citizens were killed, 5000 citizens were missed
and 1050 became invalid from 1988 as a result of the Armenian barbarism.
210000 students deprived from education and 23000 people lost their job in
education institutions. 100 km highway, electricity, water, gas lines and other
infrastructures were destroyed.
The connection with the Nakhchivan Autonomous Republic was cut, and this
region was surrounded by Armenian forces. Furthermore 130 km railway was
invaded. For that reason, the only connection in terms of passenger and cargo
transportation is possible via Iran15.

15
Azerbaijan Economic Damages and Heavy Tolls Caused by Armenian Aggression’,
www.economy.gov.az/HTML/aggression.html (09.04.2015).

12
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

The huge amount of cargo from Europe to Asia, and vice-versa was passed from
the Azerbaijan territory before the invasion. Approximately 300 wagons were
passing from Azerbaijan territory in a month. Naturally Azerbaijan deprived from
the transit revenues after the occupation.
Generally, 150000 civilian residential houses, 7000 industrial and agriculture
institutions and 4400 education, culture, health and public institution were
destroyed in Mountainous Karabakh region. It is possible to mention that,
Azerbaijan lost more than $100 billion dollars in Karabakh war.
Armenian terrorists continued their terror actions in other parts of Azerbaijan, in
metro, sea transport, and highways. As a result more than 2000 people were
killed, and 10000 people injured. Terror actions only in two metro stations
amounted millions of dollars.
Drug plants are bred in the occupied lands and transported to Iran, Russia and
other countries. Armenian armed forces controls 128 km territory from Horadiz
(Fizuli) to Nakhchivan and so the traffic of drug plants in the region increased in
the region. The gold mines in Kalbajar and Zangilan territories are used by
Armenian invaders. The raw materials of abovementioned mines are transported
to Zod gold mine in Vardenis district of Armenia. The prepared products are sold
to Russia and other countries. The revenues come from the abovementioned
mines are the 51% of Armenian budget. The occupied lands are polluted also.
The nuclear wastes are transported to the Mountainous Karabakh region.
Furthermore the flora and fauna of the region are destroyed in the region.
According to the calculations 8-10% of the forest resources are ruined in the
occupied region16. The economic loss is estimated about $30 billion dollars. 500
m3polluted waters are fluid the Armenia and Georgia to the Caspian basin.
The war with Armenia injured Azerbaijan’s international relations also in the
economic transition period. The most important problems which the refuges
confronted with are education, health, and employment. The refuges live in the
70 various cities and districts of Azerbaijan now. “The State Commission for
Refugees and IDPs” as well as the international and domestic organizations are
responsible for the problems of the refugees and IDPs. The most significant
problem is education. Thus the parents cannot provide their children with the
school uniform and healthy food. As a result the children could not access to the
education facilities. The schools which are established in refugee camps are lack
of technical capabilities. Furthermore these schools are part of the any other
schools. The death rate, especially child mortality increased in the refugee

Təbriz Vəfalı, “Qarabağın Iqtisadıyyatımızda Izi”, Hərbi And Qəzeti, 1-15 April 2003, p.3
16

13
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

camps recent years. The diseases such as tuberculosis, jaundice, and malaria
also increased in the tent camps and refugee dormitories. Additionally the people
suffer from the rheumatism and skin diseases.
Poor nutrition of the people, who live in the tent camps, also caused the
diseases. The number of the disabled people increased among the refugees last
25 years. These cases are observed with the newborn children. According to the
researches, the children who were born at home confronted with some
problems. The people could not access the health facilities because of the
unemployment problem17. Heydar Aliyev Fund and the State Oil Fund of the
Republic of Azerbaijan allocated $10 billion dollars in order to abolish the tent
camps and increase the social welfare of the refugees.

1.3.1.THE SECOND PERIOD REFORMS

The stability in the economy was attained after Heydar Aliyev came to power18.
Azerbaijan economy re-entered economic growth period after aids of IMF and
other international organizations.
Laws Dates
The Law on Unfair Competition January, 1995
IMF Stabilization Program April, 1995
The Law on the Privatization of the Small-sized Enterprises September, 1995
The Amendments on National Bank June, 1996.
The Law on the Land Reform August, 1996
The Law on Public Procurement February, 1997
Executive Bankruptcy Law June, 1997
Customs Law June, 1997
The Law on Telecommunication July, 1997
The Law on Electro-energy 1998
Bail Law August, 1998
Securities Law September, 1998
Employment Law February, 1999
The Decree on the Establishment of the Oil Fund December, 1999
The Abolishment of the Estate Committee December, 1999
The Law on the Establishment of the Estate Department February, 2000
New Privatization Law May, 2000
The Tax Code June, 2000

17
Azerbaijan Economic Damages and Heavy Tolls Caused By Armenian Aggression’,
www.economy.gov.az/HTML/aggression.html (09.04.2015)
18
Ayhan Karaca, “Azərbaycanda Iqtisadi Keçid Dövü və Islahatları 10 Ili”,
http://www.foreigntrade.gov.tr/ead/DTDERGI/ocakozel2002/ayhan.htm. (12.03.2015)

14
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

Three important issues were intended to be realized in this phase of the transition
period.
1. The use of the natural resources of the country
2. The establishment of the relevant economic structure according to the liberal-
democratic market principles
3. Integration with the world economy in global and regional level
The progresses attained in this period can be listed as follows;
1. The stability was attained in the economy
2. The significant improvements was attained in accordance with the activation
of the natural resources of the country
3. The new socio-economic situation was established via the privatization of the
lands
4. The liberal economy, the improvement of the foreign relations, and the foreign
investments caused economic development
President Heydar Aliyev signed the “State Program on Poverty Reduction and
Economic Development” in March, 2001 in order to improve the welfare of the
people, via attaining economic development, and the establishment of the new
workplaces. The Board of Directors of the International Monetary Fund approved
the “State Program on Poverty Reduction and Economic Development” on 2nd
July, 2001.
There are some obligatory reasons in order to reduce poverty in Azerbaijan.
According to the information of World Bank, the income of 40-50% of people
was less than $1 dollar per day, those years. Furthermore, according to another
survey, $86 dollars were demanded per month for minimum living conditions.
The average monthly salary was $64.4 dollars. These figures show that most of
the people were under the poverty level (Approximately 40-45%). As a result of
the successful economic programs, the number of the people under poverty
level dropped to 4-5% in 2015.
President Heydar Aliyev met with the local and foreign entrepreneurs in April and
May, 2002. He supported local and foreign investors, via the decree on tax,
customs, and licensing, which he signed in August and September, 2002. The
new era was started via these regulations. The newly established investment
environment started to catch the attention of the foreign investors.
The number of the taxes reduced and the programs were made in order to
improve the small and medium-sized enterprises as a result of the meetings
between the president and the entrepreneurs.

15
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

1.4. THE THIRD PERIOD AFTER THE

INDEPENDENCE (FROM 2003)
The period after 2003 is considered as a third period after the independence.
Ilham Aliyev, the successor of the President Heydar Aliyev came to power in
2003 and continued his father’s successful economic and political reforms. The
main objectives of this period are;
1. To contribute economic growth and the strengthening of the economic
policies,
2. The reconstruction of the energy sector via the programs in accordance with
the second state privatization,
3. The strengthening of the social directions of the economic policies,
4. Enhancing the social welfare,
5. The diversification of the economy.
Azerbaijan’s government intended to increase the social welfare, via the
establishment of the relationships with the international organizations. Therefore,
the main target of the economic policies applied in this period was the
development of the non-oil sector.
The oil refining, chemical industry, petrochemical and electricity industry
increase the importance of the oil in the economy. If necessary conditions
provided, Azerbaijan has a potential to create oil products market in global level.
Such kind of strategic industries were invested by the foreign investors recently.
The modernization and reconstruction processes are realized in industrial sector.
Electricity industry increases the profitableness of the usage of the oil and gas
products. This area attracted much more foreign investments. The main goal of
the economic development strategy is the attaining of the new development
stage according to the modern market relationships. This strategy considers; the
conversion of the oil and gas resources of the Caspian Sea to the economic
growth, the development of the transportation system and the human resources
of the country.
The economic development strategy which was started in 1994 continued until
2015. The GDP reached $9.000 dollars. “The State Program on the Socio-
economic Development of Regions” was approved by President Ilham Aliyev on
11th February 2004. The socio-economic development program included three
various periods; 2004-2008, 2009-2013 and 2014-2018. The program intended

16
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

to revive the non-oil sector, as well as agriculture sector via assessing the
economic potentials of the regions. To do this, the government planned to
increase employment and social welfare.
Some significant achievements were attained in accordance with the development
of the non-oil sector in recent years. Thus, the development of non-oil sector is
observed in the regions of the country.

1.5. GENERAL ASSESSMENT OF

THE TRANSITION PERIOD
The integration of Azerbaijan economy with the world economy and transition to
free market economy were the choice of Azerbaijan. On the other hand,
Azerbaijan attained progress in accordance with financing its existence and
development. All natural resources, investments and economic potentials belong
to Azerbaijan. The country has internationally recognized currency, Manat. Manat
is on the way to be the strongest currency in South Caucasus. The macro-
economic advancements, which were attained in transition period, can be listed
as follows;
- The GDP increased 4 times or 400%
- Industrial production increased 30%
- The production in agriculture and livestock sector increased 61%
- The volume of the investments increased 18.8 times
- The volume of the foreign trade increased 5.5 times
- The budget revenues increased 8.6 times
Furthermore 17 short-term and long-term state programs were approved during
this period. The recently approved regional socio-economic program was the
most important one, in terms of the regional and sectorial development.
Although the natural resources belonged to Azerbaijan, there were some
problems in terms of economic aspects. The existence of such kind of problems
should be assessed as the strengthening of the independence and transition to
the free market economy.
The significant changes were realized from the beginning of the transition period.
The instable foreign exchange regime was approved it. The quantity restrictions,
which are implemented in foreign trade, were abolished. On the other hand, the

17
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

economic stability was attained in last 25 years. The value of the Manat is
stable. Furthermore the inflation and budget become very low, the GDP stablized.
The Organizations such as World Bank, International Monetary Fund, United
Nations Development Program and Asian Development Bank supported the
government’s policy on the security of the macro-economic area. These Organi-
zations also emphasize that the monopoly and illegality continue in the country.
According to the Human Development Index, published by United Nations, the
human development index stabilizedfrom 1996. Human Development Index has
been published by United Nations since 1990. This index shows the welfare of
the people better than the GDP. Human Development Index (HDI) includes 3
important characteristics of human being.
- Long and healthy life (calculated according to the average life expectancy)
- Education level (calculated according to the ratio of the people according to
their education level; primary, secondary and high school, university)
- Living standards (Purchasing Power Parity/PPP, calculated according to the
income)
However this index is not the detailed indicator of human development. For
instance, income and gender inequality and ensuring political freedoms are not
included in human development index. The rating is divided into 3 categories
until 2009. According to the previous system;
Places of Countries Human Development Index
1-63 High Human Development
64-146 Medium Human Development
146- Low Human Development

“Very High Human Development” category has been added to the index since
2009.
Places of Countries Human Development Index
1-49 Very High Human Development
50-105 High Human Development
106-143 Medium Human Development
144- Low Human Development

According to the Human Development Report of 2014, which was prepared

according to the results of 2013, the human development index in Azerbaijan is
equal to 0.747. Azerbaijan takes 76th place with this result and enters “High
Human Development” category.

18
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

“Converting Black Gold into Human Gold Initiative” was planned to be started
incorporation with the United Nations Development Program in 2005. The
Program on “Converting Black Gold into Human Gold” was approved by
President Ilham Aliyev on 27th September, 2004. The abovementioned project
was signed between the Ministry of Economic Development of Azerbaijan
Republic and United Nations Development Program. The project included the
provision of the sustainable development via investing into the education system.
The political stability should be provided in order to attain macro-economic
stability in any country. The political stability was attained after Heydar Aliyev
came to power and continued during the presidency of Ilham Aliyev. Public
policies and economic reforms, as well as the operation of Baku-Tbilisi-Ceyhan
pipeline resulted with the growth in economy.
As a result of the macro-economic stability in last two decades, successful oil
strategies, reviving of the economic potential, radical economic reforms and
reconstruction processes, the transition period was ended. The President Ilham
Aliyev emphasized that, the transition period is ended and Azerbaijan entered
new development era.

19
 CHAPTER TWO
MACRO-ECONOMIC ANALYSIS OF
AZERBAIJAN ECONOMY
Azerbaijan economy attained more achievements in comparison with the other
former soviet republics during the transition period. The existence of rich natural
resources caught the attention of foreign investors. Foreign investments were
one of the most important factors which stipulate economic growth. The
economic development continued in the stable environment in terms of the
macro-economy. According to the information of International Monetary Fund,
the growth rate of the world economy was equal to 3.4% in 2015.
The growth rate in developing countries was equal to 4.6% in 2014. This figure
is 0.4% less than the result of 2013. The reasons for the reduction of the growth
rate are listed as follows;
- The low commodity prices in world markets
- The reduction of the growth rate in China economy
- The political situation in CIS (Commonwealth Independent States), and MENA
(Middle East and North Africa) regions.
The growth rate in developed countries is equal to 1.8% in 2014. The acceleration
of the growth rate in these countries is related to the growth of demands and
investments in the United States and reviving of the economy in Eurozone. Thus
there was 0.4% reduction in growth rate in 2013 and then 0.8% increase in
2014. According to the information of International Monetary Fund, the growth
rate in the world market should be reduced 3.3% in 2015. On the other hand
3.8% increase should be observed in 2016. According to the predictions of World
Bank the growth rate will be 2.0% and 2.4% respectively. According to the
calculations of International Monetary Fund the growth rate was supposed to be
4.2% and 4.7% respectively in 2015-2016 in Developing Countries. These figures
will be 2.1% and 2.4% respectively in Developed Countries. The socio-economic
development strategy of the government triggered the dynamic progress, the
diversification of the economy, entrepreneurship and the regional development.

21
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

Table 1. The Macroeconomic Forecast For 2016-2019 Of The Republic of Azerbaijan

Measurment Report Predictions

Indicators
Unit 2013 2014 2015 2016 2017 2018 2019
The Real Sector
GDP (market
mln AZN 58182,0 58977,8 57151,7 57735,1 60190,4 63143,2 67511,7
price)
Real Growth Rate % 5,8 2,8 3,3 1,8 2,6 3,6 5,0
Deflator % 0,4 -1,4 -6,2 -0,8 1,6 1,2 1,8
Oil sector, GDP
mln AZN 24968,4 23009,2 17829,0 16285,3 15940,5 16103,2 17348,5
(market prices)
Real Growth Rate % 1,0 -2,9 -0,6 -1,7 -2,4 0,3 4,9
Deflator % -3,0 -5,1 -22,0 -7,1 0,3 0,7 2,7
Share (in GDP) % 42,9 39,0 31,2 28,2 26,5 25,5 25,7
Non-Oil sector,
GDP (market mln AZN 33213,6 35968,6 39322,7 41449,8 44249,9 47040,0 50163,2
prices)
Real Growth Rate % 10,0 7,0 5,9 3,4 4,6 4,8 5,0
Deflator % 3,2 1,2 3,3 2,0 2,1 1,4 1,5
Share (in GDP) % 57,1 61,0 68,8 71,8 73,5 74,5 74,3

Source: http://www.economy.gov.az/images/pdf/konsepsiya_2016.doc

2.1. GROSS DOMESTIC PRODUCT

The reduction was observed in the national income in the first years of the
independence because of the lack of modern tax system, the limitations in foreign
trade, and the war. Approximately 60% reduction was observed in the economy
of Azerbaijan from 1991 to 1995. In those years, significant lagging was observed
in GDP rate. Azerbaijan started cooperation with International Monetary Fund and
World Bank in 1995. The cooperation included the reformation of the economy
and privatization programs. Since 1996, the stagnation in the economy has been
replaced by progression. Azerbaijani economy was one of the fastest growing
economies in the former USSR republics in the transition period19. The most
important growth was observed in the hydrocarbon sector because of the huge
amount of foreign investments.

Saleh Məmmədov, Inflyasiya və Maliyyə Bazarı, Baku 1998, p.48.

19

22
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

Table 2. Gross Domestic Product

Per Capita
Years Million Manat Million U.S. Dollar
manat $
1995 2133.8 2415.2 282.1 319.3
1996 2732.6 3180.8 357.5 416.1
1997 3158.3 3960.7 409.2 513.2
1998 3440.6 4446.4 441.5 570.6
1999 3775.1 4583.7 480.1 582.9
2000 4718.1 5272.8 595.1 665.1
2001 5315.6 5707.7 665.2 714.3
2002 6062.5 6235.9 752.9 774.4
2003 7146.5 7276 880.8 896.8
2004 8530.2 8680.4 1042 1060.3
2005 12522.5 13238.7 1513.9 1600.4
2006 18746.2 20983 2241.1 2508.5
2007 28360.5 33050.3 3351.8 3906.1
2008 38005.7 46258.2 4439.9 5403.9
2009 34060.8 42575.7 3917.3 4874.1
2010 42465.0 52909.3 4753.0 5922.0
2011 52082.0 65951.6 5752.9 7285.0
2012 54743.7 69683.9 5966.1 7594.3
2013 58182.0 74164.4 6258.3 7977.4
2014 58977.8 75188.4 6264.1 7985.9
2015 54352,1 51471.7 5661.2 5361.2
Source: The Publications of the State Statistical Committee of the Republic of Azerbaijan, 2016

The Gross Domestic Product of Azerbaijan was 11.8% in 1995. From 1996, the
GDP rate started to increase. Azerbaijan was affected by the Russian crisis in
1998. However, later the economy increased 10%. The reasons of the growth
were the increase oil prices and foreign investments connected in terms of the
oil contracts. The stability was observed in the economy of Azerbaijan in 1999.
However the amount of the investments in oil and gas sectors increased
significantly20.

20
E. S. Imanov - E. M. Babaşov-R. H. Dayıyev, “Iqtisadi Islahatlar Şəraitində Əhalinin Sosyal Müdafiəsinin Təşkili Məsələləri”,
Azərbaycanda Iqtisadi Islahatların Həyata Keçirilməsi Xüsusiy-yətləri və Problemlər, Iqtisadi Inkişaf Nazirliyi Iqtisadi
Islahatlar Mərkəzi, Baku, 2001, p.102

23
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

In 2000, Azerbaijan was the first place, in terms of the economic growth in United
Nations states. In 2001-2002, 10% economic growth was attained. This growth
mostly based onconstruction and manufacturing industries. The value-added
growth was 61% and 17.7% respectively in these sectors. The volume of the
domestic production increased from 60.1% to 63.1% in 2003. The volume of the
service sector decreased from 31.9% to 30%.
The growth in production was observed in all sectors in 2008. As a result 5.8%
growth rate of GDP in 1997 increased to 24% in 1998-2008. The GDP of Azerbaijan
reached 75 billion dollars in 2014 as a result of the oil revenues. Gross Domestic
Product per capita dropped sharply because of the economic crises in the first
half of 1990s. The living conditions decreased 7 times in 1990-1993. The GDP
continues to grow since 1995. Eventually the GDP reached 7986 dollars in 2014.
The income growth caused the strengthening of the purchasing power and the
development of the real sector.
The President approved the “State Program on Poverty Reduction and Economic
Development on 20th February 2003. The “State Program on Poverty Reduction”
focused on the strengthening of the macro-economic stability, the increasing of
incomes, the increasing of the investments on health and education systems, the
provision of the social security and improvement of the life standards. The
government plans to resolve the unemployment problem via;
- Social policy and the development of human resources
- Regional policy
- Structural development
- Improvement of existence potential
Azerbaijan government realized new program that includes period from 2006 to
2015, after the “State Program on Poverty Reduction and Economic Development”
which includes the period from 2003 to 2005. When the first program was
approved in 2003, the poverty rate was 44.7%. However this figure dropped to
11.5% in 2010. The program of 2006-2015 is called “Long-term Strategy for
Sustainable Human Development” and plans to reduce the poverty to 5-6%.
The minimum wages and living costs have been increased in last 10 years. The
average limit in accordance with the minimum wages is listed as follows:

24
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

Table 3. Minimum wages (AZN)

Years Minimum wages (AZN)
2004 25
2005 52
2006 58
2007 64
2008 70
2009 84
2010 87
2011 102
2012 108
2013 116
2014 125
Source: http://www.tradingeconomics.com/azerbaijan/minimum-wages

The government planned to increase the economic welfare of people, and reduce
the poverty via increasing the minimum salary. From 2001 to 2015, the minimum
salaries increased 200%. The activities based on private property and private
initiatives take an important place in the incomes of the people.
Figure 1. Sectorial Distribution of GDP (%)

Source: http://www.stat.gov.az
The wages are in the second place among the incomes. According to the
statistics, the average monthly salary was $14 dollars in 1995 and $50 dollars in
2000. In 2003 the minimum salary was 78 dollars and this figure was 21.4%
more than the indicators of 2002. Azerbaijan is ahead of Armenia and Georgia in
terms of the average monthly salary. However the country stays behind of
Russia and Kazakhstan in this area. If we consider the minimum living costs,

25
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

Azerbaijan ($136) took the second place after Russia ($217) among the CIS
countries in 2011. The government plans to increase average monthly salaries
3.9% about in 2015. Furthermore it’s expected that, the average monthly salary
will be 562.7 manat in 2016.
The salaries of people who work in industry, energy, construction and finance
sector are more than the others’.
The implementation of tight monetary and budget policies with the recommen-
dation of the International Monetary Fund has negative effects on people.
Furthermore the cut of subsides which were provided in gas, fuel and bread
caused some problems in the transition period. Abovementioned subsidies were
available for only refuges and IDPs. On the other hand income level in Baku was
twice more than the regions.
There were significant changes in the sectorial distribution of the GDP and the
volume of private sector in economy as a result of the implementation of the
reforms. The volume of the private sector in GDP was 34% in 1995. This figure
increases gradually and reached 79% in 2015. Industry and agriculture sectors
have more shares in GDP. The volume of oil production in GDP increased as a
result of the investments21. Furthermore there were significant achievements in
transportation and construction sector.
Figure 2. Sectorial Distribution of GDP in 2015 (%)

Others
29%
Industry
39%

Trade
8%
Communication Agriculture
2% 5%
Construction Transportation
13% 4%

Source: http://www.stat.gov.az

Faruk Arslan, “Azərbaycan Ekonomisində Geçiş Dönemi”, Hazar Bilim Sanat ve Kültür Dergisi, S.1, Bahar-2000, p.17.
21

26
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

Azerbaijan needed high economic growth rate for completion of industrialization,

modernization of the agriculture sector and attaining of full working capacity.
High economic growth rate demnaded reforms. Therefore the resolution of the
problem should be considered as long-term goal22. The regulation of income
distribution is the first request of the high growth rate.

2.2. INFLATION
The people in Azerbaijan were acquainted with the inflation concept of the first
years of last decade of the 20th century. The closing of the companies caused
the reduction of the total supply. The inflation rate increased as a result of it. The
total supply was demanded by the goods, which people had previously.
Therefore, the inflation rate in 1990-1991 was less than the indicators of the next
years’. The price increase was accelerated as a result of the abolishment of price
regulation, and government spending in line with the war. The lack of indicators
in line with the money supply until 1994, constant application to the emission of
money in order to meet the budget deficits caused the hyper-inflation via
devaluation of Manat23. Furthermore the closing of the northern railway line, in
line with the Russia-Chechen war caused the reduction of import and that was
another factor in accordance with the increase of inflation rate. On the other
hand, the methods of international organizations in foreign trade also triggered
the increase of inflation. Despite of the intervention of National Bank, Azerbaijan
Manat was devalued against the United States Dollar and consumer preferences
were diverted to the import. The last two also played important role in line with
the increase of inflation.
Briefly, as a result of the economic problems remained from the former USSR as
well as the war in the first years of independence, the inflation increased to four
digits. In 1994, the inflation has reached the peak with 1763.5%. Despite the
attaining of cease-fire in May, 1994, and reduction of inflation as a result of the
reforms, the inflation rate was identified as 511.8. Due to tight monetary policy,
Azerbaijan economy started to get rid of the high inflation rate from 1996.
Consequently, stability program was implemented by the government after the
cease-fire agreement ended high inflation rate. As a result the inflation was
single-digit in 1997.

E. Ö. Hüseynov, “Reformatika və Onun Hiper dövrə Uyğunlaşdırmanın Zəruriliyi”, Azərbaycanda Iqtisadi Islahatların
22

Həyata Keçirilməsi Xüsusiyyətləri və Problemlər, Iqtisadi Inkişaf Nazirliyi Iqtisadi Islahatlar Mərkəzi, Baku, 2001, p.92.
Nəsimi Kamalov, “1990-2000 ci Illər Arasında Azərbaycan’da Inflyasiya”, Journal of Qafqaz University, Number 6, Fall-
23

2000, pp.67-70.

27
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

The prices reductions were observed in 1998-1999. The prices reduced approxi-
mately 8.5% in 1999. As a result of the softening of tight monetary policy in
1999, the price increase was started to be observed again from 2000. The
inflation reached 12.4% as a result of the price increase in 2005.
1/3 of the inflation of 2008 was the result of the increase of the volume of
national currency. Inflation is explained by the increase of oil and euro in the
region. The supply factors, 30% increase in incomes of people and investment
played significant role in the inflation, which happened in 2008. Furthermore the
increase in government expenditures also affected the inflation. In 2008, prices
of the production of industrial materials increased by 10.9%.
Figure 3. Annual inflation rates over period 1991-2014 years

Source: http://www.stat.gov.az
The traditional factors such as increase of the demanding, utility reforms and the
increase of the prices of the import products (sugar, wheat and etc.) in world
market caused inflation in 2007. The inflation rate was 16.7% in comparison
with the previous year. The prices of the food, non-food products, and services
increased 16.2%, 10.5%, and 25.3% respectively. The inflation rate was 15.4%
less than the predictions (20-22%) of international organizations. In 2009, the
average annual inflation rate decreased to 1.5%. It was 10 times less than previous
year’s result. The maintenance of the average annual inflation in low level caused
the increasing of all social indicators. The abundance of food and price dynamics
affected the inflation rate in 2010. The annual inflation was 7.9% and average

28
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

annual inflation was 5.7% that year. The average annual inflation forms from the
increasing of the food prices 3.9%, non-food prices 0.6% and service prices
1.2% respectively. The monthlyseasonal deflation observed in May-July, was
substituted by price increase from August. The main factor in line with the price
increase of the non-food sector was the forest fires happened in Russia. Thus
the prices of the imported construction materials increased that time in line with
the fires.
The inflation was completely affected by the external factors in 2011. The
inflation was 7.9% that year. As happened in previous year, the increase of the
food prices affected inflation in 2011. Generally, the country’s average annual
inflation was less than all CIS and oil exporter developing countries for last three
years. The average annual inflation was 1.1% in 2012 and that was the lowest
figure for last three years. The inflation was observed 7.9% in the food prices.
The stability in prices was secured and the average annual inflation was 2.4% in
2013. The prices of the services were more than the previous years in the inflation
rate in 2013. As a result of the implemented policy, the price stability was
secured again in 2014 and inflation was observed at low level. The price for
products in Azerbaijan was less in comparison with the trade partners and this
influenced competitiveness positively. In 2014, the average annual inflation rate
dropped to 1.4%. The inflation was observed 0.4% in food products, 0.8% in
non-food products and 0.2% in the service prices.
The increase of oil prices in world market, the increase of the production costs in
the trade partner countries, and the strong euro were most significant factors in
line with price increase. Furthermore problems which happened in the Russian
borders, as well as the abolishment of the discounts on value-added taxes in line
with the wheat import were another significant inflation factors.
Inflation environment in the economy of the country is inevitable, in terms of the
price increase. The increasein prices of the energy products will accelerate it.
The hidden increase of the prices, lack of real numbers in statistics will
negatively affect the budget in the future. The price increase will negatively affect
the socio-economic situation of the people. The price increase will also increase
the poverty in the country.
The inflation had a structural character in Azerbaijan during the transition period.
It is very difficult to balance supply and demand during the dynamic development
period. In Azerbaijan, the inflation rate about 10-15% is considered normal, if it is
regulated.

29
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

2.3. EMPLOYMENT
The great amount of able-bodied people was unemployed during the transition
and stagnation period in Azerbaijan. As a result of the Armenian invasion, there
were more than 1.000.000 refuges in Azerbaijan and that was one of the most
significant factors which increased the unemployment rate. The international
turnover of the employment potential created some problems in Azerbaijan. The
turnover level of the employment is very fast in Azerbaijan. This influences the
demographic situation in Azerbaijan. On the other hand, the experienced people
are not used in relevant jobs, so they leave the country. The unemployment
people go to the neighbor countries such as Russia, Iran and Turkey. The young
and middle-aged men leave the country mostly. It is possible to see such kind of
brain drain in recent years. The government started to realize social reforms in
order to provide their returning to the country from 2005.
The 60% of the people who left Armenia and occupied lands were considered
active people in terms of economy, however great amount of them were jobless.
The government enacted some important laws in order to reduce the unemploy-
ment rate. The opening of the new workplaces, the establishment of the relevant
market system and social security initiatives are the main activities of the
government in this direction. The development of the private sector triggered the
reduction of the unemployment.
The total employment level is increased very slowly. The provision of people with
the job was 53.4% in 1998, 56.9 in 2001 and 80% in 2015 respectively.
The distribution of the employment within the sectors is continiouslychanging.
The employment rate in industry and construction sector is decreasing, while the
employment rate in service sector is increasing24. The ratio of the people who
work in agriculture sector was stable until 1998, and started to increase after
that date. The employment rate has been increased in transportation, commu-
nication agriculture, tourism and construction sectors. The distribution of the
employment is listed below in the table 6.

Azər Mehdiyev, “Azərbaycan’ın Dünya Iqtisadiyyatına Inteqrasiyasının Reallıqları”, Ekspert Iqtisad Jurnalı, No.7-8, 2001,
24

p.26

30
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

Table 4. The Sectorial Distribution of Employment (thousand people)

2005 2010 2011 2012 2013 2014

Economy - Total 4062.3 4329.1 4375.2 4445.3 4521.2 4602.9
Agriculture, Forestry, and
1573.6 1655.0 1657.4 1673.8 1677.4 1691.7
Fishing
Mining Industry 42.3 41.5 41.2 41.8 42.3 41.5
Processing industry 198.4 208.9 210.3 215.6 224.1 227.1
Electric energy, gas and
steam production, distribution 27.9 30.6 30.8 31.2 32.3 29.8
and supply
Water supply, Waste
23.9 25.2 24.6 24.7 25.7 25.8
treatment and processing
Construction 211.9 287.5 308.9 321.8 325.5 334.1
Trade; repair of motor
634.8 626.7 635.4 646.8 664.0 681.9
vehicles
Transportation and storage 174.6 179.1 181.8 182.7 183.8 185.1
The placement of the tourists
25.1 46.9 48.1 48.9 49.2 55.7
and public catering
Information and
32.3 55.8 58.0 58.7 58.1 59.2
communication
Finance and Insurance 18.1 24.4 26.3 26.9 30.6 32.8
Operations linked to real
82.1 69.6 71.2 74.8 79.4 85.6
estate
Scientific and technical
43.4 45.6 46.7 54.6 56.3 58.5
activities
Administrative and subsidiary
38.7 46.5 47.4 49.2 52.4 53.7
activities
Public administration and
256.6 279.1 281.0 281.7 282.3 285.2
defense, social security
Education 345.1 349.8 349.9 349.0 366.2 367.3
Health and social services 188.8 170.3 165.2 165.4 171.8 176.5
Entertainment and art 52.4 59.6 60.3 61.1 61.8 67.8
Other sectors 92.3 127.0 130.7 136.6 138.0 143.6
Source: http://www.stat.gov.az

The average monthly income is high for the jobs in line with the oil and gas
industry. The lowest average monthly income is observed in the health sector.
The numbers of people who work for the public sector have been decreased
since 199025. Thus, the share of the public sector in employment was 70%,
however this figure decreased to 25.6% in 2014.

Investment Possibilities of Azerbaijan”, Ekspert Iqtisad Jurnalı, No.7-8, 2001, p.20;

25

31
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

Figure 4. The share of the public and private sector in employment (%)

Public Private
80
70
60
50
40
30
20
10
0

Source: http://www.stat.gov.az

The number of the economically active population in Azerbaijan was 4.840.700

in 2014. According to the official statistics 4.602.900 of them are occupied. The
economically active people are 50.04% of the total population of Azerbaijan. The
great amount of the jobless people is middle-aged ones. According to the official
statistics 15077 people between 25-30 years, 30033 people are over 35 years
intended to find job. However they cannot manage it.
In 1995, 59.7% of the women were jobless. This figure decreased to 42% in
2008 and increased to 44.7% in 2015.
If the statistics reflects the real numbers, the unemployment rate is less than the
figures of the developed countries. However the real unemployment level is quiet
more than the numbers, which are displayed in statistics.
Though, the unemployment is increased day after day officially. The statistics of
the state organizations show that the unemployment rate is 1.5%, however, the
calculations of the international organizations shows that this figure is between
16-25%.
There are several reasons of the unemployment. The main factors in line with the
unemployment are socio-economic situation, transition from one socio-economic
system to other, and potential war. The number of the unemployed people, whose
workplaces were closed as a result of the wrong management, should be noted

Azər Mehdiyev, “Azərbaycan’ın Dünya Iqtisadiyyatına Inteqrasiyasının Reallıqları”, Ekspert Iqtisad Jurnalı, No.7-8, 2001,
p.26

32
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

especially. On the other hand, the technological development also caused

unemployment in terms of middle-aged people. In fact, such kind of problem is
emerged in the market economies.
Unemployment is one of the most actual problems in Azerbaijan, which is
waiting for its solution. The life conditions of 6-7% of the people are under the
poverty level from the beginning of 2015. According to the calculations of the
World Bank, the daily income of such people is $1.20 dollars.
Figure 5. Official Unemployment Rate (%)

1.6
1.4
1.2
1
0.8
0.6
0.4
0.2
0

Source: http://www.stat.gov.az
Unemployment problem is one of the most important problems for the government
also. The development of the economy in regions and offers to in open 600.000
new workplaces can be example for this.

2.4. PRIVATIZATION
Azerbaijan decided to practice market economy after the attaining of the
independence. First of all, Azerbaijan government enacted the Privatization Law
in 1993, however it is started to be realized after 1995.
One of the most important steps towards the realization of the market economy
was the enacting the “Law on the Privatization of State Property” on 7th January,
1993 by Azerbaijani Parliament. The principles of Azerbaijani economy should be

33
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

based on the state property, private property and municipal property according
to abovementioned law26.
The basis of the market economy was formed via the enacting the “Law on the
Privatization of State Property” in 1993, and the first phase of the privatization
was started after it. However the program was not ratified by the Parliament of
the Republic of Azerbaijan. “The State Program on Privatization” was ratified by
the Parliament in 1995, after the long-term discussions. The privatization was
the agenda of the government with the recommendations of the International
Monetary Fund and the World Bank. Systematic privatization and the liberalization
of the economy accelerated the transition from planned economy to free market
economy. The 2.3% of the state property in the production level was privatized in
the first phase. The privatization of the trade organizations such as restaurants,
cafés, hairdressing salons, shops and tailor’s shops should be realized in the
first phase of the privatization program. The organizations in line with the oil,
gas, telecommunication and cultural centers as well as mines are not privatized.
Yet such kind of organizations can be privatized with the decision of the President
or the Prime Minister of Azerbaijan Republic.
The privatization was realized by the State Property Committee, which was
established in 1992. From 1993 to 1996, only apartments and taxis were
privatized. 7.183.803 of 8 million privatization vouchers was given to the people
by the state, according to the decree of President on 8th February, 1997. Those
privatization vouchers were distributed to the people without any payment. The
citizens can take part in the privatizations with these vouchers, and the foreigners
can participate with the privatization vouchers which are called “option”.
The first privatization program which included 1995-1998, was completed only
in 2000. The great amount of the small and medium-sized enterprises was
privatized during the first phase of the privatization. Almost 15.000 small
enterprises were privatized until the end of 1997.
The second privatization program was started only 10.08.2000, because of the
delays with the first phase of the privatization27. Thus the second privatization
program was started to be realized with two years delay. The privatization of the
medium and large-sized enterprises was planned in the second phase of the

26
Process of Privatization’, www.msp.gov.az/html/eng/xod.html, (18.04.2015)
N. Ö. Hacıyev, “Sahibkarlıq Sektorunun Inkişafının Sürətləndirilməsi ilə Bağlı Problemlər”, Azərbaycanda Iqtisadi Islahatla-
27

rın Həyata Keçirilməsi Xüsusiyyətləri və Problemlər, Iqtisadi Inkişaf Nazirliyi Iqtisadi Islahatlar Mərkəzi, Baku, 2001, p.117

34
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

privatization program. Mr. Heydar Aliyev, the President of the Republic of Azerbaijan
accelerated the privatization on the onset of 2001. 100 large companies in the
processing, energy and chemical industries were privatized this year. Almost
450 large companies are included in the second privatization phase.
The organizations and enterprises which should be privatized in the second
phase of the privatization program are categorized in 3 groups; small, medium
and large enterprises. 15% of the small enterprises were given to the employees
and 85% was sold in the voucher auctions. Medium and large-sized companies
were changed to the joint stock company firstly and then privatized. These
enterprises; 50% of their shares are privatized via voucher auctions, 15% of their
shares are privatized via giving to the employees in exchange with vouchers,
10% is privatized via auctions in exchange with cash money. The other 25% of
the shares was privatized via giving to the government based investment fund.
The privatization of the communication, transportation, chemical industry, and
energy sectors were realized in the second phase of the program28. From the first
date of privatization until 2005, 40700 small-sized companies were privatized.
Furthermore 1537 state companies and 356 medium and large-sized companies
are changed to joint stock companies. As a result more than 150.000 thousand
people became private property owner. The total economy of the country after
the second privatization program is consisted of;
- State property: 56.9% (4.913.639 hectares)
- Municipal property: 23.5% (2.032.744 hectares)
- Private property: 19.6% ( 1.695.123 hectares)
The small and medium-sized enterprises, which were privatized during the first
phase of the program, are currently developing in the economy29. Almost 47.000
small and medium-sized companies were existed in Azerbaijan at the beginning
of 2005. Supporting of small and medium-sized companies was one of the
priorities of the government. National Fund for Entrepreneurship Support was
established in order to assist to small and middle-sized companies with financial
resources.
The privatization was realized much more rapidly in Nakhchivan Autonomous
Republic, Baku, Ganja, Minghachevir, Sumgayit, Absheron, Barda, Goygol,
Khachmaz, Sheki, Goychay, Masalli, Qusar, Ucar, Qax and Balakan.

Nazim Imanov, “Ilk On Ilin Yekunları: Iqtisadiyyat”, Məşvərət Bülleteni, No:7(43), October-2001, pp.29-30.
28

Ercan Sancak, Azəbaycan Iqtisadiyyatı, Qafqaz Unviersiteti Nəşriyyatı, Baku, 1999, p.32
29

35
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

From the first date of the privatization until 2005, approximately 361.900 buildings
were privatized and this number was the 59.5% of the planned buildings. One of
the main goals of the “State Program on Socio-economic Development of
Regions of Azerbaijan Republic” (11th February, 2004) was the acceleration of
the privatization of the state enterprises and organizations.
Though the second phase of the privatization program considered the
privatization of the medium and large-sized enterprises, the completion of the
privatization of the small enterprises was much more significant.
As a result of the reforms, almost all small enterprises were privatized. Significant
steps were taken in the economy. The total value of the all privatized small
enterprises was the 6.5% of the GDP. However the same success was not
attainedduring the privatization of big companies. From the beginning of the
reformation period, approximately 1065 medium and large-sized companies were
privatized via the auctions after transformation into the joint stock companies.
The privatization process of the large-sized companies was slowly in comparison
with the small and medium-sized enterprises. The investments of the foreign
investors, who joined the privatization processes later, are increased day after
day.
Despite of the successes, the privatization and formal reforms are realized very
slowly. Unfortunately, the reforms (privatization), which were started since 1995
was not successful. Some reforms caused the economic contraction in some
sectors of the economy. Furthermore, the unemployment which was emerged
after the privatization was another problem.
On the other hand the privatization process, which is realized via the vouchers,
was anotherdisappointment. The citizens could not participate actively, because
of almost hardly of the joint stock companies. The joint stock companies were
established at the beginning. However lack of government control caused
problems with these enterprises. As a result, the people started to sell privatization
vouchers. The number of the joint stock companies was 100.000. However, there
are only 50.000 joint stock companies in Azerbaijan, now. The privatization on
markets negatively affected the amount of resources in the state budget.

36
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

2.4.1. THE COMPARISON BETWEEN PUBLIC

AND PRIVATE SECTOR
As a result of the privatization of the state property and the establishment of the
private enterprises via the private initiatives of the people, the private sector is the
basement of the economy. The private sector is much more in several sectors of
the economy, especially agriculture. The share of the private sector as a
macroeconomic indicator increased as a result of the reforms. The share of the
private sector in GDP was 46% in 1997, 68% in 2000 and 79% in 2015 respectively.
This shows that, the role of the state in GDP is gradually decreasing.
The taxes collected from the private sector plays significant role in the formation
of the state budget. In fact, the privatization of the state property is the most
important factor in line with the private sector’s growth for the economy.
In 2015, 60% of the industrial production, 99% of the agriculture, 80% of the
transport sector, 75% of the communication sector belonged to the private
sector. However the monopoly of the state played important role in the strategic
sectors. The state monopoly, which is the legacy of the former USSR prevent the
economic development. The only way in order to get rid of the state’s monopoly
is the privatization of the big companies. However this process is realized very
slowly in Azerbaijan.
Figure 6. The Predominance of the Private Sector in GDP (%)

90
80
70
60
50
40
30
20
10
0
2010 2011 2012 2013 2014 2015
Public Sector Private Sector

Source: http://www.stat.gov.az

37
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

The role of the private sector in the GDP has been increased in recent years as
well. If all information is considered, the private sector plays important role. State
companies are inactive in economy of modern Azerbaijan (especially industrial
companies). Furthermore some companies in private sector should not be con-
sidered as a private company. For instance, most of the anonymous companies
(joint-stock companies) are considered as a state company. On the other hand
the private sector is formal in energy production.

2.5. STATE BUDGET

The defense spending of Azerbaijan increased because of the Karabakh War.
Therefore the balance sheet of the state budget was out of order from 1993. The
budget deficits which was very high at the beginning of the last decade of the
20th century, has started to decrease since 1995. The budget deficit was 9.4% of
the GDP in 1994. However this figure was changed in next years and became
2.4% in 1999 and 1% in 2000 respectively. The budget deficit was started to
decrease from 2001 and substituted by budget surplus in 2007-2008. The budget
expendituresare increased simultaneously with the budget revenues. The share of
the social defense and security expenditures are increased from year to year.
The share of the revenues comes from the oil resources are listed below: The
share of the State Oil Company of Azerbaijan Republic (SOCAR) in the budget
was 36.5% in 2002, and 31% in 2003. If the transfers from the State Oil Fund
are considered, the share of the revenues comes from the oil resources was
39.1% in the budget. In 2009, this figure was 47.9% in 2009 (38.6% for SOCAR
and 9.3% for SOFAZ).
The oil plays important role in line with the growth in the budget revenues.
Statistics display that oil revenues increased within the budget revenues. The
share of the revenues come from the oil export have been increased since 2010.
The oil transfer from the Oil Fund was at peak level (54%) in 2012.
The budget of 2015 mainly focused on the salaries, education and defense
expenditures. In this frame, the salaries were increased 30% in comparison with
the previous year. To do this, the government planned to deter the corruption and
bribery. Generally the budget of 2012 was $20 billion dollars and the budget of
2013 was $24 billion dollars respectively. The 14 billion dollars of the 2013’s
budget were transferred from the SOFAZ (State Oil Fund of Azerbaijan Republic).
The price of the oil has started to decrease since 2014. As a result of the
decreasing of the oil price in the world market influenced budget negatively.

38
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

Table 5. State budget revenues and expenditures (million manats)

2016
2010 2011 2012 2013 2014 2015
(Prog)
Total Revenues 11403,0 15700,7 17281,5 19496,3 18400,6 19438 16822
Including:
Income tax of
590,2 715,7 813,0 859,7 980,3 982, 0 957
physical person
Income tax of legal
1429,9 2134,0 2252,0 2374,8 2302,7 2211 1806
entity
Land tax 35,3 35,3 30,6 33,1 35,4 48 50
Property tax 101,8 103,9 105,1 125,1 141,3 148 174 ,2
Value-added tax 2082,5 2222,7 2366,9 2710,0 3119,6 3 456 3336
Excise tax 514,9 480,2 531,5 593,3 797,3 684 ,0 637
The Mining tax 130,1 129,8 125,8 121,5 116,2 116 107
Taxes in line with
291,8 433,1 592,5 675,2 684,7 684,7 1120
the foreign relations
Other taxes 90,3 140,6 157,6 161,5 192,7 180 458
Other receipts 6136,2 9305,4 10306,5 11842,1 10030,4 9559 7 010
Total costs 11765,9 15397,5 17416,5 19143,5 18709,0 21100 18495
Including:
Economy 4889,9 6803,2 6960,7 8207,5 7598,7 7598,7 3554.2
Socio-cultural
2901,4 3447,2 4072,9 4081,8 4484,4 4484,4 4564
ceremonies
From them:
Education 1180,8 1268,5 1453,2 1437,7 1553,9 1711 1713
Health 429,2 493,4 609,4 618,9 665,3 777 744,8
Social security and
1123,0 1495,4 1769,5 1750,3 1971,2 2040 1896,5
social defense
The activities in
culture, art,
168,4 189,9 240,8 274,9 294,0 348,3 652,7
information and
physical education
Science 92,8 106,1 116,7 117,0 124,2 124,0 131,7
Judiciary, law
enforcement 668,5 710,3 929,2 1049,3 1103,6 1240,2 1138,7
andprosecution
Legislation and
execution, local 303,0 281,9 342,3 349,3 449,7 2047,6 542,3
governments
Other expenditures 2910,3 4048,8 4994,7 5338,6 4948,4 4498,7 4328,7
Source: http://www.finance.gov.az

39
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

2.6. MONETARY POLICY

Manat became the national currency of Azerbaijan Republic in 1992, after the
enacting of “Law on the Circulation of the National Currency”. The national
currency of the Republic of Azerbaijan was used with the Russian currency
Ruble simultaneuosly. The government declared that, the economy will be diverted
to free market economy, and the privatization will be realized by Manat30.
From 1994, Manat became the only currency in the country. As a result of the
enacting of “Law on the Currency Regulation” and implementation of monetary
and loan policies, Manat started to be valued from 1996. Manat was devalued
against the United States Dollar in the first years. As a result of the economic
reforms and strict monetary policies, which were realized from 1995, no any
other waving was observed in the national currency of the country. Because of
the high inflation rate in the neighboring countries, Azerbaijan Manat was valued
against them.
As a result of the policies of the National Bank and signed oil contracts which
support those policies, the increase was observed in the import of the foreign
currencies in 1997-1998. Therefore Azerbaijani Manat was valued against the
United States Dollar. In 1998, the decrease was observed in the export revenues in
line with the inconvenient use of the Manat and Russian economic crisis. However
the value of the Manat has been decreased and its competitiveness has been
increased in the effective monetary markets since 1999. The value of the national
currency increased from 1999, after the strict monetary policies started to be
softened. In 1999, new flactuating exchange rate started to be applied and the
Manat devalued about 7% against the United States Dollar. This gives competitive
advantage to the local product’s export. Consequently, Manat was strengthened
via the financial stability, strict monetary policy and the devaluation in 1999.
The export products were consumed for low prices in the country, and high
prices in the foreign countries because of the devaluation of Manat. Furthermore
the costs of the export products based on the imported raw materials were
increased. In other words, the export revenues went to the countries, whose
currencies’ were valued against Azerbaijan Manat, because of the expensiveness
in the import.
Manat, which was devalued against the foreign currencies in 2000-2003, was
revalued in 2004. The main reasons of the valuation of Manat; the money supply

C. Şərifov, “Azərbaycanda Valyuta Bazarının Müasir Vəziyyəti və Onun Inkişaf Perspektivləri”, Azərbaycan 21. Əsrin Asta-
30

nasında, Azərbaycan Elmlər Akademiyası Nəşriyyatı, Baku, 1998, pp.551-552; Sancak, pp.51-54.

40
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

in circulation increased 31%, and that influenced currencies which are entered to
the country. The increase was happened in line with the production of oil and
gas resources, and the revenues increased as a result of it.
The value of the national currency of Azerbaijan- Manat, is identified in Baku
Interbank Currency Exchange on daily basis.
There is a huge differences between real and nominal currency prices. Currency
Exchanges and banks can buy and sell currencies (+,-) by 5 manat differences.
The currency reserves were $876.86 million dollars according to the statistics of
2004. $62.6 million dollars were spent from the reserves of the National Bank in
order to pay the loans to the International Monetary Fund. The increase in the
currency reserves based on the purchasing form the domestic exhange markets.
Azerbaijan has enough currency reserves. However more than half of the
reserves was spent in order to preserve the value of Manat as a result of the
devaluation accompanied by the decrease in oil prices. It should be noted that,
the reserves of the National Bank were $14 billion dollars before the devaluation.
In 2015, there were $7 billion dollars in the reserves of the National Bank. This
amount is equal to the 3 months’ product and service import. Therefore the
National Bank gave a permission for the next devaluation on 21st of December.
As a result of the 50% devaluation, the equivalent of 1 Dollar became 1.55 Manat.
Generally, if the reserves of the Oil Fund and other reserves will be added to the
reserves of National Bank, the currency reserves of the country will be
approximately $40.000.000.000 USD.
Figure 7. Exchange rate (end of year)

10000
9000
8000
7000
6000
5000
4000
3000
2000
1000
0

Source: http://www.stat.gov.az

41
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

Furthermore, the denomination process has been realized since 1st of January,
2006. The nominal value of the Manat was diminished 5000 times and New
Azerbaijan Manat was created. The New Azerbaijan Manat was released to
circulation and this process continued until 1st of January, 2007. New Azerbaijan
Manat was similar to Euro in in terms of the physical characteristics and value.
Therefore this process blew the dollar hegemony in the country. Because the
most important part of the cash transactions were realized by dollar and this
limited the circulation market of the Manat. However this situation was changed
in line with the severe dropping in the oil prices in 2015. In February, the
equivalent of $1 dollar increased from 0.79 AZN to 1.05 AZN. In December new
devaluation was realized and the equivalent of $1 dollar increased from 1.05 AZN
to 1.55 AZN. The second one planned the fluctuating exchange rate. According
to that, the rate of the Manat will be formed according to the real aspects of
exchange market.
Azerbaijan has enough cash reserves, and this is very significant. However
national resources does not include state property only, but also the property of
the citizens. The existence of the world is not measured by its cash reserves
only. It is measured by the social welfare of the people, who live in it. From this
point of view, Azerbaijan has significant problems. The income level of the
population is very low, there is a severe social stratification and there is no
middle class in the country. The revenues collected in the Oil Fund, as well as
foreign loans should be used relevantly in order to solve this problem.

2.7. FOREIGN TRADE

The liberalization of the foreign trade in order to attain the integration of the
economy without any significant regulations could result in the domestic
production decreased and the internal market could completely depend on the
import. But the government intended to increase domestic production. However
the steps of the government in line with the increase of the domestic production
confronted with the protests of the international companies and organizations
such as International Monetary Fund and the World Bank. The new Customs
Code of Azerbaijan Republic was enacted in April, 2001. The government tried to
increase the custom taxes of the products, which have a potential production
power in Azerbaijan. However it was suuposed that,it would be increased
because of the international contracts. The custom rates of some products were
increased to 15%, and that will not meet the expectations.

42
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

There was a deficit in the foreign trade balance of Azerbaijan during the first years
of the independence (1994-1999). However the increase in the oil exportation
caused the abolishment of the deficit.
As a result of the economic policy, which was started to be implemented after
the attaining of the independence, the total volume of the foreign trade increased.
The total volume of the foreign trade increased 16.4% in 1997, 50% in 2000, and
500% in 2004 respectively in comparison with 1993. The foreign trade increased
37% in 2005 in comparison with 2004 (30% import; 40% export).
The export revenues decreased as a result of the severe valuation of Manat. The
increase of the import, high investments in hydrocarbon sector caused the
increase of the foreign trade deficit to $470.3 million dollars. The deficit in
foreign trade was $106.2 million dollars in 1999. The export numbers have been
increased since 2000, except 2003. The main reason of this was the implemen-
tation of the new phase of the international oil contracts.
The export have been played important role in the GDP since 2000, when oil
exportations were started to increase. Oil plays important role in the export. The
share of the oil and oil products in export was 64.8% in 1998, 84% in 2001, and
95% in 2008 respectively. The most important part of it comes from the export
of crude oil. The price of the oil exported from Azerbaijan increased in accordance
with the increase in world market. On the other hand the volume of exported oil
also increased. However, as a result of all abovementioned, Azerbaijan became
dependent on the oil prices. Food and metal are the other important export
products.
The predominance of oil and oil products in the exported products will cause an
increase as a result of the oil production. This can be a problem such as
dependence on one sector. The oil revenues should be diverted to non-oil sector
in order to solve this problem.
The structure of the export is different from the structure of the import. The
increase has been also observed in the import since 1996. The share of the
private sector in the foreign trade of Azerbaijan; 72.93% import, 49.15% export.
Furthermore, it should be noted that, the decrease will be observed in the import
because of the growth of the domestic production.
The lack of the domestic production as well as the devaluation of Manat against
the United States dollar in 1997-2000, the import became much more attractive.

43
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

Table 6. Foreign Trade of Azerbaijan (Million Manat)

Years Import Import Increase (%) Export Export Increase (%)

1991 1881.2 - 2120.9 -
1992 939.8 -50.04 1483.9 -30.03
1993 628.8 -33.09 724.6 -51.17
1994 777.9 23.71 652.7 -9.92
1995 667.6 -14.17 637.1 -2.39
1996 960.6 43.88 631.2 -0.92
1997 794.3 -17.32 781.3 23.78
1998 1076.4 35.51 606.2 -22.41
1999 1035.8 -3.77 929.6 53.34
2000 1172.0 13.15 1745.2 87.73
2001 1431.1 22.10 2314.2 32.60
2002 1665.5 16.38 2167.4 -6.34
2003 2626.4 57.69 2591.7 19.57
2004 3504.6 33.43 3614.4 39.46
2005 4 211.2 120.1 4 347.2 20.2
2006 5 266.7 125.0 6 372.2 46.5
2007 5 713.5 8.4 6 058.2 -5.2
2008 7 169.5 25.5 47 756 788
2009 6 119.70 -108.5 14 698 -307
2010 6600.61 107 21360.2 145.3
2011 9755.96 147 26570.8 124.3
2012 9652.87 -98.9 23907.9 -89
2013 10712.50 110.9 23975.4 100
2014 9187.69 -85 21828.6 -91
2015 9 221,4 -3,6 11 424,5 - 47
Source: http://www.stat.gov.az

Azerbaijan needs to have a foreign currency and makes it constantly in order to

import products and services. Nevertheless the lack of the structural reforms,
incomplete industrialization, and the deficits in trade were compensated by the
oil revenues. However this situation is not good for the country, even it’s the
illness. The structural changes such as increase in the level of industrialization
decrease in import and increase in the export should be realized in order to get
rid of the illness.

44
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

2.7.1. THE MAIN COUNTRIES IN FOREIGN TRADE

Azerbaijan has business relationship with more than 150 countries. Russia, the
United Kingdom, Kazakhstan, Turkey, Germany, Ukraine, the Netherlands, China,
the United States and Japan provide the 70% of the import. Italy, Israel, Russia,
Georgia, Turkey, Iran, Turkmenistan, Indonesia, Croatia and France provide 87%
of the export. The volume of the foreign trade in recent years: Italy (25%), Russia
(12%), the United Kingdom (6%), Turkey (6%), Turkmenistan (3.6%), Israel
(4.65), Kazakhstan (3.5%), Germany (3.3%), Iran (3%), Georgia (3%), France
(2.6%), China (2.5%), and the Netherlands (2.3%).
Italy is in the first place in terms of export because of the oil transportation via
Trieste port. As a result of the financial crisis in Russian Federation in 1998, and
the devaluation, the Russian goods attained price advancement in Azerbaijan
market. Russia attained one of the first places in terms of the foreign trade of
Azerbaijan.
Figure 8. Main Countries in Export (2015)

24.9
Italy
42.1 Indonesia
Thailand
Germany
11.5 Israel
France
Others
6
5.2 5.6
4.7

Source: http://www.stat.gov.az

In terms of the foreign trade, Azerbaijan prefers to do trade with the western
countries much. Because of the low quality, Iran’s export products are not one of
the favorites for Azerbaijan. Nevertheless Iran plays important role in the foreign
trade of Azerbaijan. Iran was in the first place with 38% share in the foreign trade
of Azerbaijan in terms of the export market. In 2002, the weight of Iran in
Azerbaijan’s import and export were 3.5% and 1.4% respectively. The total trade
turnover between these countries was $900 million dollars in 2015. The share of
Iran in the import of Azerbaijan was 4.25% in 2015.

45
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

Figure 9. Main Countries in Import (2015)

Russia
Turkey
Great Britain
Germany
Ukraine
China
Others

Source: http://www.stat.gov.az

There are also some changes in the country’s foreign trade priority. It is possible
to note that, Azerbaijan makes trade relationships with highly developed and
developing countries.

2.7.2. FOREIGN TRADE RELATIONS WITH CIS COUNTRIES

After the independence, Azerbaijan has been preferred to make trade relations
with the countries out of CIS. However there were some trade relations between
Azerbaijan and former union states. The dependence from Russia in terms of the
economic issues, created some artificial problems for realization of the
independent economic policy and formation of the national economy. The weight
of the CIS countries in the export of Azerbaijan was 27.7% in 1998, and 22.6% in
1999 respectively. In 2000, this indicator was 20.9%.
Theamount of the foreign trade was realized with the CIS countries in 1991-1993.
The volume of the foreign trade with the CIS countries started to decrease
gradually from 1994.
The import from the CIS countries was 80% of the total import in 1991. This
figure was 31.4% in 1999, 32% in 2000 and 23.9% in 2015 relevantly. The
export of Azerbaijan to the CIS countries was 94% of the total export and this
figure was 22.7% in 1999, 13.5% in 2000, and 9.3% in 2015 relevantly.
The decrease in the import with the CIS countries and Russia is slower than the
export. The import from Ukraine decreased much.

46
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

2.8. FOREIGN DEBTS

The amount of foreign debt and the ratio of external debt to GDP have grown by
years on a regular basis. That emerged at the beginning of the transition period
and the lack of an annual direct investment with the purpose of entering into
financial capital is observed. For example the usage of foreign funds to finance state
deficits could be understood from the growth rate of foreign debts against GDP.
Table 7. Azerbaijan's foreign state debt
Information on January 1, 2015 year about the Foreign credits involved in
Azerbaijan and their structure (mln.USD)
On used and considered
public debt loans
I. The total amount of loans 6 380,7
Percentage of GDP 8,5%
Per capital external debt 671,6 USD dol.
II. The structure of loans
1. Credits attracted for economic reforms 325,8 11,2 %
The International Monetary Fund 220,2 5,4 %
World Bank 2 255,7 32,8 %
2. The credits involved for investment projects 3591,0 88,8 %
Electric power Sector 1135,4 38,9 %
Agriculture and Land Reclamation 227,6 7,8 %
Road construction and transport 676,9 23,2 %
The field of chemistry 18,5 0,6 %
Oil and gas sector 169,5 5,8 %
Rehabilitation of territories liberated from occupation 56,1 1,9 %
Socialareas 221,3 7,6 %
Other areas 80,5 2,8 %
Rates 14,6 mln. USD dollar
Including
From budget 19,4 mln. USD dollar
The main return of loan to the International Monetary Fund 8,7 mln. USD dollar
Source: www.finance.gov.az
Despite the decline in foreign investment in 1999, the increase in foreign debt
shows that the annual deficit is financed by foreign borrowing.
Slowly increased export revenues in comparison with the rapidly increased foreign
debts caused the growth in the ratio of foreign debt to export.
Foreign debt/export ratio increased from 7.3% in 1993, to 77.1% in 1999. This rate
was 66% in 2000, 54% in 2001 and 63% in 2002. In this case, the decline in the
rate of increase in exports mustn’t consider the collapse wandered the country's

47
 O.N.ARAS, E.SULEYMANOV,
E K.MAMMADOV

wever a limited maneuver that may cause thhere turn of thee debt
forreign debt, how
ow
wned.
Thhe ratio of exterrnal debt to GDP from was 4% % in 1993. 18.66% increase in 2004
will continue to grow, which shouldbe alarm m. On the otheer hand the laack of
funnding from forreign sources caused increaases in externaal debt. Despitte the
inccrease in debt, increasing inveestments in oil production andd exports not allowed
thee emergence off any problemss with the repayyment of loans borrowed.
Figuure 10. The structture of donors of signed loan agreeements
as of 1 January 2016, mlnn. USD dollar

Soource: http://www..stat.gov.az

In addition to reggulation of foreign financial soources in Azerbbaijan attaches great

im
mportance to thee policy of borrrowing. On Octtober 01, 2015 Azerbaijan's fooreign
puublic debt was 6,730.9 millionn $ (10,934.0 million
m manat), external publicc debt
of the Gross Dom mestic Productt (GDP) ratio is 12.4 percent. Debt statisticss from
thee government'ss direct liabilitiies and contingent liabilities on loans borrrowed
unnder the state guarantee are included.

Thhere is inequalitty in the distribbution of debtss. For example, most of the credits
c
haave been allocaated in the energy sector (33 3%) in 2008. TTransportation sector
s
allocated 9 %, soocial sector 8%, and agriculturre and land recllamation 6%.

488
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

Figure 11. Azerbaijan's foreign debt and its dynamics to GDP ratio

Source: http://www.stat.gov.az

As a result of the development, the budget and foreign currency reserves are
growing from year to year. Azerbaijan's currency reserves reached $40 billion.
Meanwhile the amount of the State Oil Fund is $30 billion. All of these implemented
projects will allow to balance domestic sources. Only one fact should be
emphasized that, Azerbaijan government has allocated $200 million loan to
Georgian government for the construction of the Baku-Tbilisi-Kars railway. This
fact shows that Azerbaijan is a leader in the region. The foreign debt of Azerbaijan
was $3.372 billion Dollar in 2010.
The foreign debt situation of the currency composition of the loans of October,
2015 are as follows: SDR (Special Drawing Rights of the International Monetary
Fund) - 9.4%, currency in US dollars - 66.0%, EUR- 20.3%, Japanese Yen - 2.6%,
Islamic dinar - 0.6%, UAE dirham - 0.5%, Saudi rial - 0.4%, Kuwaiti dinar - 0.2%.
It should be noted that, no any country can be developed without integration to
the world market and foreign debts. Therefore all countries in the world have
foreign debts. The rapid integration to the world economic system created
mutual responsibilities and debts between the countries and the international
organizations. Even the super powers of the world economic system received
long-term loans from international organizations in order to realize big projects.
The increase of the foreign debts can be dangerous for the development, when it
will pass 30% of the GDP. For the comparison it should be noted that the foreign
debts of the developed countries are 40-60% of their GDPs. In Azerbaijan this
number is only 7.3%. Therefore it is not a danger for our country.

49
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

For instance, the foreign debt of Russia is $47.1 billion Dollars, and this is 8% of
the GDP. The foreign debt of other Southern Caucasus republic, Georgia is $1.666
billion Dollars and this should be considered as a huge amount.
The weight of foreign debts in GDP in developed countries is listed as follows:
France-66%, Germany-68%, USA-53%, Great Britain-43% and Norway-36%. It is
possible to mention that the foreign debt of Azerbaijan is less than debts of
before mentioned countries. The great amount of petrol revenues entered to
Azerbaijan. Furthermore the government receives loans from the international
organizations and foreign countries. The incomprehensible situation is that, the
oil revenues and loans are invested to the investment projects. This field is
considered as a suitable area for corruption. The foreign debt of the country is
already $3 billion Dollars.
If the recently signed contract between Azerbaijan and International Monetary
Fund is considered, the foreign debt of Azerbaijan per capita is $300 Dollars.
However that number was only $283.9 Dollars in 2008. The loans are spent to
the investment projects (85%) and the acceleration of the economic reforms
(15%). The loans of International Monetary Fund and World Bank are considered
for the acceleration of the economic reforms. The loans from International
Monetary Fund, World Bank, European Reconstruction and Development Bank and
Japan International Cooperation Agency are allocated for investment projects.
Most of the loans are diverted to the energy sector. There are some doubts in
accordance with the transparently usage of the loans.
Azerbaijan and Turkey come to an agreement on the disputable debt issues.
However, there are some problems between Azerbaijan and Turkmenistan in debt
issues. Only Georgia has debts to Azerbaijan (16 million Dollars). 3% of the budget
is allocated in order to repay the foreign debts. This ratio is less than the indicators
of other CIS countries. At the end of 2008, the foreign debts were 6.4% of the
GDP. If the reserves of the Oil Fund considered the financial resources of the
country are secured. According to the international standards, foreign debts
become dangerous, if only foreign debts are 40% of GDP. If foreign debts passed
200-250% of the export, that would be dangerous for the country also.
Furthermore, the most important part of the foreign debts includes 10 years.
Additionally, foreign countries assist financial aids to Azerbaijan. Japan, Germany,
Switzerland, Turkey, Italy and Finland are the main countries that support the
refuges. The cooperation between Azerbaijan and Japan is high level. Japan
helped to the refugee of Azerbaijan after the Karabakh war. Japan allocated

50
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

$11.470 million Dollars to the refugee of Azerbaijan via the international

organizations. The Japanese government launched 8 projects amounted 480
thousand Dollars through “Grassroots and Human Security” grant program via
their Embassy in Azerbaijan.
Technical partnership with Germany and Azerbaijan began after the independence.
Germany is in third place in terms assistance after the USA and Japan. Relations
between Germany and Azerbaijan are realized in the field of ecology and medicine
in addition to economic cooperation.

2.9. ENVIRONMENT AND ECOLOGY

With an area of 86.600 km2 of Azerbaijani territory agricultural area is 50%, urban
areas are 25%. Azerbaijan has a rich flora also. The number of plants that are
known is more than 1,400. 12% of Azerbaijan's territory is covered by forests.
950 000 hectares of forest is considered to be the country's territory. In general,
the country has reserves of 127 million m3 of wood. The government banned the
cutting of the forest for industrial and other purposes. Such kind of activities
prevent, care and plant tree striving for the development of forests. The country’s
forests are organized out of the shed leaves and pine trees. The flora of southern
region is in serious danger. Thus in the region, the problems that arise due to
lack of natural gas are important for the forest protection.
The illegal cut of trees is going in two directions; 1) heat, and 2) trade. Most of
thetrees were cut downin the Lerik, Guba, Balakan and Khanlar regions. In 2009,
4,600 hectares of new trees were planted as part of reconstruction. These areas
are mostly situated in Gobustan, Gilaziand Garadagh regions. Furthermore some
works are realized in order to plant trees in 500 hectares area. The Ministry of
Ecology and Natural Resources considers that the lack of natural gas resources
is serious threat to the forests. Therefore it is supposed to be that, the deforestation
process will be accelerated in the future.
The most important natural resources of Azerbaijan are oil and natural gas.
However, country has rich mineral resources such as the iron, aluminum, zinc,
copper, arsenic, molybdenum, marble and volcanic sludge. Azerbaijan is a country
with the highest rate of pollution problem in Transcaucasia. As a result of
industrial activities in last 100-150 years created complicated environmental
situation. The country has sufficient water resources, but these reserves are
polluted as well. The proportion of heavy metals is 10-15 higher than proportion

51
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

of normal drinking water. Despite serious water problemin the country, 29% of
wateris lost during distribution.
Despite the decrease in industrial production, air pollution continues to be high.
One of the main reasons of air pollution is transportation vehicles.The harmful
substancesin to the atmosphere, approximately 41% of the total volume of waste
a rising from the road transports. The large part of cars produced in Russia has
higher rates of pollution and do not care about the pollution norms and
standards. According to the information of 2015, the toxic substances violated
the ecological balance of the country. The weight of the toxic wastes among the
industrial cities is listed below; Sumgayit 4 million tons, Baku 340.000 tons, and
other places 37.000 tons. Toxic waste is considered to be very dangerous for
the organism in the production processes.
Usefulness of the soil due topoor irrigationhas been reduced. Economic problems
that emerged in the Caspian Sea are also important. In recent years, there have
beenmore and morecases ofhigh pollution in sea water. Polluted rivers flow into
the Caspian Sea. Seapollution accounts for70-75% from the Volga River.
Additionally lack of central sewer system of the houses caused the pollution
also. Besides oil extraction and waste from other industrial facilities elements
causing pollution in the Caspian Sea.
Another environmental problemis the rise of the level of Caspian Sea. As a result
important fishing zone is jeopardized. From 1977 to 1995 as a result of the rise
of sea level, 50.000 hectares of landwere left under the water. If the sea level
continues to increase the flooded area is projected to reach 100 000 hectares in
2016. The lifting of level of the Caspian Sea, the largest loss of 70-75% of the
industrial potential of Azerbaijan, which isclose to the shore. In the country
problems associated with soil contamination have been increasing since 1970s31.
Serious contamination occurs in the territory of Absheron peninsula. Cleaned
land can be used for agricultural, setting up parks and other useful purposes.

Rəşad Süleymanov, ‘Xəzərin Səviyyəsinin Qalxmasından Ən Çox Ziyan Görən Azərbaycandır’, 525-ci Qəzet, No:56
31

(1913), 26 Mart 2005.

52
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

2.10. POPULATION
At the beginning of 2016, the total population of Azerbaijan was 9.593.000 people.
5.098.000 people or 53.1% of the total population live in cities. 4.495.000 or
46.9% of the total population live in the village. 4.776.000 people (49.8%) of
total population are male, and 4.817.000 people (50.2%) are female. The ratio of
male/female is 1000 men against 1009 women. Azerbaijan is in the 92nd place
among 240 countries in terms of the total amount of population in the world.
22.4% of the total population is 0-14 years old, 71.6% is 15-64 years old and
6% is 65 years and more. The young people between 14-29 years are 28% of
the total population and most of them live in the cities. Each year approximately
172.000 children are born. In average 471 children are born everyday in Azerbaijan
according to the last 5 years’ statistics. According to the information of the
Ministry of Internal Affairs and the State Migration Service 1900 people come to
Azerbaijan for permanent residence. Furthermore 800 people left country in order
to live in foreign countries permanently.
Approximately 40% of the population live in the capital city, Baku. Generally 51.5%
of population live in the cities. The other 48.5% live in the villages. The average
life expectancy is 72.4 years. However the average life expectancy is 75.2 years
for women and 69.6 years for men respectively32.
During the Karabakh War, Azerbaijan lost its 20% territories including Mountainous
Karabakh in the first years of 1990s. Approximately 1 million citizen, 12% of the
population left their motherlands. In 2009 the tent camps, where the refugees
and IDPs live were abolished and they were provided by houses. This process
will apply to the refugees, who settled in the schools currently.

32
Investors’ Handbook, International Conference Investing in Azerbaijan- Gateway to the Newly Insdependent States, Baku,
May 7-9 2003, p.16

53
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

CHAPTER THREE
SECTORIAL ANALYSIS
Azerbaijan economy will be analyzed under the subchapters of industry, agriculture
and services sectors in this chapter.

3.1. INDUSTRY
The industrial sector was the predominant sector in the Azerbaijan economy
before the independence. 42.1% of the national income belonged to the industrial
sector in 1988. Thus there were 1005 industrial organization in Azerbaijan in
1988. There were 529 heavy industry organizations, 206 light industry organiza-
tions and 263 agriculture organizations in Azerbaijan before the independence.
The first years of the independence can be characterized as an adaptation to the
free market economy. More than 3800 organization was closed in 1995. Several
companies continued their operations that time. On the other hand the production
of the industrial products decreased in 1990-95. Even the increase of the industrial
organizations (from 1005 to 2984) could not stop the decrease in the volume of
the production33. The main reasons of the decrease in the production of the
industrial products were the weakening of the state regulation, lack of the relevant
stabilization programs and the low-quality market control. However, it should be
noted that, the same situation was observed in all former Soviet states also. 20%
of the industrial potential of Azerbaijan economy was oil refining equipment
production, machine building and construction sectors. The production of the oil
refining equipment is the oldest and the most important sector for the country.
This sector met the 70% demand of the USSR. However the old equipment and
instruments were triggers of theend of such kind of organizations.
All industrial institutions connected with the other countries of the former USSR.
Therefore the stagnation was observed in the industry after the independence.
On the other hand, lack of the supply injured the sector. The sectors depend on

E.Əhmədov-M.Hacıyev, Azərbaycan Iqtisadiyyatı, Səda Nəşrləri, Baku, 2004, p.31;

33

55
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

the oil and oil products were the strategic sectors according to the government
and these sectors were added to the privatization plan. On the other hand, the
government initiated a program in order to attract foreign investors. However
some limitations were implemented for the international investments. The industry
started to develop after 1995. The ratio of the industry in GDP increased to 29.6%
from 20.8 in 1995. The share of the industry in GDP was 37.6% in 2001, and 45%
in 2015. Consequently from 1996, new industrial organizations were opened as
a result of the establishment of macroeconomic stability. 27% of the population
works in the industry. Despite of the economic reviving, the unemployment problem
has not been resolved yet. Most of the industrial institutions (90%), which were
established in the country, are the small and medium-sized organizations. The
productivity of the previously existed organizations is low. Therefore oil and oil
products of Azerbaijan are exported as a crude material and semifinished goods.
Figure 11. The Share of the Industry in GDP(%)

60

50
48
37.8 45.6
37.6 42.4 43.2
40 39.2
38.1
29.6 28.8 36 34.9 34.6
30 26.2 28.2
27.3 22.9
20 20.8

10

Source: http://www.stat.gov.az/

The oil production technologies, the processing industry, machine building and
construction sectors provide 1/5 of the industry in Azerbaijan. The processing of
energy, electronics, metal working, machine building, shipbuilding and weaving
are also important industries in Azerbaijan. There are several organizations in the
processing sector. However the dependence from the foreign countries in the
industry (especially former USSR countries) stagnated most of the organizations
in the country. The lagging was observed in manufacturing industry until 1999.

56
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

The same situation can be observed in the production of the steel, paper and
other industrial products. The increase has been observed in the manufacturing
since 2000. The wine production is in the first place in the food industry.
The weaving, carpet-weaving, leather products and the furniture production are
the main industry fields within the light industry. There are many small, medium
and large-sized organizations in the weaving sector. Furthermore there are several
cotton manufacturing organizations in this industry.
There was a huge breakthrough in the weaving sector especially. This sector
provided 10-15% of the Azerbaijan industry in the soviet period. There were 50-
60 thousand workers in this sector. In 2007, the weaving was only 3-5% of the
country’s industry. There was a huge decrease in the numbers of employees in
this sector.
Generally intermediate goods and semifinished goods are produced in the heavy
industry. The main part of the heavy industry is provided by oil industry. Sumgayit
is the predominant city in terms of the heavy industry. There are 88 industrial
institutions in Sumgayit. The Azerbaijan government made 25 years’ plan, which
considered the reconstruction of the industrial organizations in the region. The
government needs $30 billion dollars of investment in order to realize this plan.
It is obviously known that, the main reason of the decrease in the industrial
production connected to the collapse of the USSR and disconnection of the
former union states. This shows itself especially in the heavy industry. However
this cannot be said about light industry. In 2000, the industrial production
increased in comparison with the previous year. The organizations in line with
the energy, petrochemical and private sectors played much more important role
in this growth. The increase rate from 2001 to 2004 was less than the figures of
2000. The growth was 8.6% in industrial production in 2007, excluded oil sector.
Despite of the growth in industrial production, the total production for 2008 was
less than the figures of 1990. Energy production industry, electronics and metal
manufacture, machine building and shipbuilding as well as the weaving are the
predominant industry fields. After the independence, the growth is observed in
metal manufacturing and chemical industries. The huge breakthrough was
attained in line with the production of oil equipment and metallurgy. The Customs
Tax and Value-Added Tax came into force since 1st January 1997; protection
measures were enlarged. The role of the private sector in the industry sector has
been increased every year (for instance: 26.4% in 1998, 37.3% in 1999, 43.7%
in 2000, 53.7% in 2002, and 71% in 2015).

57
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

3.1.1. MINING INDUSTRY

Azerbaijan has rich underground resources. The most important resources are;
oil, natural gas, copper, zinc, lead, sulfate, gunpowder, ore, mercury, molybdenum,
cobalt, arsenic, marble, limestone, salt mine and rock-salt. The use of the natural
resources was planned according to the short and long term demands. Several
important mineral deposits were not used conveniently. Azerbaijan has 200-250
million tons iron reserves. The extraction of the iron ore was suspended after the
collapse of the Soviet Union. The reason was the refusal to buy and general
decrease in world market consumption of ore products, which stipulated by
switch of industry to aliminium and plastics. However the German and English
companies are interested in the restoration of the deposits.
The agreement with the “RV Investment”company of the United States was
attained in accordance with the using the gold resources. The agreement was
signed for 25 years. According to the agreement the U.S. Company will invest
$620 million dollars for 6 gold reserves($500 million dollars for operation and
120 million dollars for development).
The gold reserves are located in Gedebey, Dashkesen and Kalbajar, which is
invaded by the Armenian troops. “RV” company is planning to start operations
based on the price of the gold in the world market34.
The mining sector needs urgent modernization. Consequently the mining sector
is confronted with the significant problems. The lack of the modern technology is
the most important problem of this area.

3.1.2. ELECTRICITY
There are 8 thermal power stations and 6 hydroelectric power stations in
Azerbaijan, which utilized for 85% of their capabilities. These electricity power
centers were built during the soviet period, and they have not been used relevantly
after the independence. 82% of the electricity is produced in thermal power
stations, and the other 18% is produced in hydroelectric power stations. The
liberalization of the prices also affected the price of the electricity. The electricity
which is produced in Azerbaijanwas not enough to meet the domestic demands.
The problem displayed itself in the winter months especially. The reason of the
problem was the old technology, which was used in the electricity production.

Azərbaycanın qızıl yataqlarının işlənməsinə başlanacaq”, Üç Nöqtə Qəzeti, No:41(521), 4 Mart 2003; ‘US Company to
34

Develop Azerbaijan's Gold Deposits in 2005’, Azernews, http://www.azernews.net/view.php?d=5692 (19.03.2005).

58
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

On the other hands the production loss increases gradually because of the
inconvenient distribution of the electricity. Azerbaijan imports energy from Russia,
Turkey and Iran. Azerbaijan joined European Union program in order to establish
united energy system with Azerbaijan, Turkey and Georgia.
On the other hand Azerbaijan implements privatization program in order to abolish
the loss in energy sector. In 1996 the president Heydar Aliyev signed decree on
the privatization of the “Azərenerji” for 5 years. Azerbaijan was consisted of 5
regions in 2000, in terms of the energy issues; Baku, Nakhchivan, North (Sumgayit),
South (Shirvan) and West (Ganja). The establishment of the joint-stock companies
was planned in for those regions.
There is a fuel problem in line with the electricity production in Azerbaijan. The
electricity networks of Baku, Sumgayit, Shirvan and Minghachevir were given to
private sector in order to meet the oil and gas demands of the country35. The
distribution of the electricity was given to Turkish company “Barmek Holding”
with the decree of the president in the 1st January, 2002. The electric networks of
Baku and North were managed by “Barmek holding” while other regions were
managed by the “Bayva” company. Then the BayvaCompany rejected the
management of these regions. As a result the authority was given to “Azərenerji”
back.
The electricity systems of Baku have been managed by “Bakı Elektrik Şəbəkə”
and the electricity systems of Sumgayit has been managed by “Sumgayit Elektrik
Şəbəkə” since 2007. The reconstruction of the electricity system of Azerbaijan
was discussed in several projects.Recently PresidentIlham Aliyev signed decree
on the “Establishment of Azerisig Open Joints Stock Company” and this company
took the rights of “Baki Elektrik Shebeke” and partly electricity producer
Azerenerji for Absheron peninsula. The foreign investors are interested in
electricity, but no more than the oil sector. In 2002 the construction of the
Yenikənd Hydroelectric Power Station was completed. The completion of the
reconstruction of the Minghachevir Hydroelectric Power Station increased energy
potential of Azerbaijan. In 2000, the construction of the “North” electricity station
was started near Baku (The value of it was $201 million dollars). The Japanese
companies such as Mitsui and Mitsubishi, the Turkish companies TML Borova
and the Swedish company ABB were the subcontractors in this project in order
to increase the operational capability of the station.

35
Brief Overwiev of Business Practices, New Investment Opportunities and Legal Environment, Azerbaijan Investment
Promotion and Advisory Foundation, Baku, 2005, p.56.

59
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

German KWF allocated 15 million dollars’ loan in order to establish substation. In

this area $2.5 billion dollars are needed in order fully reconstruct Azerbaijan’s
energy sector.
Japan Bank for International Cooperation is one of the other significant financial
supporter to this industry. The Organization allocated $339 million dollars for the
development of the energy sector. Furthermore $100 million dollars were
allocated to the construction of the petrochemical centers of Sumgayit city. Japan
Bank also allocated money for the construction of the gas pipeline from Garadagh
to neighboring areas.
President Aliyev signed 4 important agreement in line with the management of
the electricity system. The president signed a state program on “The Use of the
Alternative Energy Resources” in 2004. The president also signed a state program
on “The Development Fuel-Energetics Complex of Azerbaijan Republic” including
2005-2015. Approximately $1 billion dollar is needed in order to reach the goals
within the state program36. According to the program the electricity production
will be increased 4.5%. As a result the electric energy will be 38 billion kWt in
2015. The power of the energy system will be 6.5 thousand MVt.

3.2. AGRICULTURE AND CATTLE-BREEDING

Agriculture and cattle breeding are the most important sectors among the non-oil
sectors in socio-economic development of Azerbaijan. Azerbaijan’s rich agriculture
areas and regions with different climate zones make possible to grow quality and
wide range products. 9 out of 11 climatic zones of the world are available in
Azerbaijan. This diversity extends from subtropical climate to tundra climate. It is
possible to get a product more than once in a season. The variety of climate
makes possible to grow various sorts of harvest. In short, being favorable for
agriculture Azerbaijan’s main agricultural products are wheat, tobacco, tea, olive
oil, fruit and vegetables. The country has enough potential to produce grain and
satisfy internal demand.
Areas of private property came to an end in the agricultural sector after invasion
of the Soviet Union in 1920 and managed by cooperatives named collective farms
and state farms which were state properties. During this period, the central
government was planning where any product should be manufactured and where
should be sold.

“ Enerji Sektorunun Vəziyyətini Yaxşılaşdırmaq Üçün 1 Milyard Dollar Lazımdır”, 525-ci Qəzet, No:53 ,
36

60
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

Table 8. Agriculture Areas

Areas Soil Resources (ha) %
Total area 8641 100
Area favorable for agriculture 4588 53.1
Area feasible for irrigation 3200 37
Planting area 1622 18.8
Forest 1037 12
Area exposed to erosion 3610 41.8
Source: http://www.stat.gov.az/
Lenkaran region, which is located in the country's southern border next to Iran is
specifically suitable for cultivation of cabbage, tomato and pepper, was called the
Garden of the Union. Moreover, in the collective and state farms of Guba, Khachmaz
and Masalli regions vegetable growing had a special importance. In general,
Azerbaijan, was deliver 500.000-600.000 tons of vegetables to the Union fund.
For Azerbaijan, cotton production has another importance. In 1970-1980, about
1 million tons of cotton was produced annually. However, the problems arising
from the transition period, with the decrease in the price of cotton on the world
market, cotton production resulted in decrease of large quantities.
During Soviet times, grain production showing a large increase in the 1970s and
1980s and was up to 1 million tons per year. In addition, the amount of output
per hectare increased from more than three times between the years of 1913-
1970. Soviet authorities, preferred increase of wine production industry instead
of increasing grain production in Azerbaijan.
Rice production is one of the declining agriculture products in Azerbaijan. For
many years it was grown in some southern regions and in the foothills of the
Caucasus Mountains in the north. During the Soviet Union because of a large
amount of rice production in other countries of Union, rice productionin Azerbaijan
was stopped.
In 1970s the development becomes vital for the Union cultivation in Azerbaijan
especially in grape production. Approximately 70,000 - 80,000 hectares of land
were used for grape production. The goal was to provide an annual production of
3 million tons of grapes since 1990. During the Soviet regime, in the light of the
above-mentioned policy 3 areas of agriculture were developed in Azerbaijan:
cotton, grapes and vegetables.
A small proportion of these products remained in Azerbaijan. For example, the
produced cotton was sent to Russia.

61
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

Moscow, keeping Azerbaijan always dependent from the empire, formed pro-
industrial environment under its own power. Every year, Azerbaijan was getting
about 1,200,000 tons of milk and dairy products and 35.000-40.000 tons of
meat and meat products from the Union Fund. So the production of animal feed
was not allowed by the Soviet authority that was responsible for the development
of animal husbandry. As a result, in comparison with the other Soviet states in
Azerbaijan meat and dairy products consumed less. For example, the average
per capita consumption of meat was 65 kg in the Soviet Union, while the figure
was only about 37 kg in Azerbaijan37.
Along with the collapse of Soviet Union, collective farms and state farms began
to fall apart. With the acquisition of macroeconomic and political stability, the
state accelerated reforms in the agricultural sector. In 1995, along with the
implementation of the Agrarian Reform Law and the legal regulations on land
reform (Land Law, Property Law, the Law on the Establishment of farms,
Entrepreneurship Law, etc.), the number of collective and state farms decreased,
the number of privately owned farms began to grow. After Azerbaijan gained
independence, it has been the only country in the Commonwealth Independent
States where agricultural land was given to the private property in conjunction
with the launch of the privatization. In Kazakhstan, Uzbekistan and other
countries the areas were temporarily assigned for use by renting or leasing.
Transition from state property to private property and collective property was
carried out in large amounts. According to the Ministry of Agriculture, more than
1 million people have been owned plating areas and the number of farms has
reached to 40,000.
After the collapse of the USSR, Azerbaijan lost the majority of CIS markets and
fell into a shortage of production that led to decrease of agricultural production
by 48% between the years 1990-1995. However, later this decrease stopped.
The new public policy revived agriculture sector in accordance with its internal
structure in Azerbaijan. The increase of production of agricultural products was
observed during Soviet regime and the subsequent transition period. After the
land reform carried out in 1996, the production increased in agriculture sector.
As a result of the Privatizations, 99.8% of the country's agricultural products are
produced by the private sector.

37
Azərbaycan-Türkiyə Toxum Istehsalı və Tədqiqatı Işlətməsi Layihə ilə Əlaqədar Görüntülər”,
http;//www.tika.gov.tr/tur/projeler/tarim/main.htm

62
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

Azerbaijan's Ministry of Agriculture’s new public policy plans to revive this

sector. The new reforms within the Ministry had been prepared and implemented
on the basis of recommendations from World Bank, Islamic Development Bank
international organizations and financial institutions such as the EBRD.
During the Soviet regime low production in the country was on the verge of
winning the possibility of production.
Figure 12. the share of agriculture in GDP (%)

35
32.9
30
28.4 27.5
25 27.2
21.6
20 18.4
14.7
15 18.7 13.1 13
16.1 11 10.9
10 14.2
11 12 5.5 5.1 5.3
5
5.8 5.1 5.4
0

Source: http://www.stat.gov.az/

During 2014-2015s, quite impressive processes taking place in Azerbaijan's

economy. Thus more than ninety percent of exports were oil products. The
development of agriculture and diversification of the country's exports increased
its significancedue to significant decrease in oil prices in the world market.
55.1% of the country's territory is arable land. 30.1% of this area is used as
pastures and hayfields. In 2014 the total sown area of agricultural crops was 1,6
million hectares. In the context of the economic division, the distribution of the
arable lands is listed below; 0.2% of Absheron economic region, 12.07% of
Ganja-Gazakh economic region, 11.9% of the Sheki-Zagatala economic region,
7.2% of the Lankaran economic region, 7.8% of the Guba-Khachmaz economic
region, 42.8% of the Aran economic region, 7.4% of the Mountanous Karabakh
economic region, 0.2% of Kalbajar-Lachin economic region, 6.5% of the Shirvan
economic region, 3.93% of the Nakhchivan region.
Since oil and gas in Azerbaijan’s mining industry production takes the essential
place, the share of agriculture in GDP is not so high. In 2014 total agricultural
products were 5.2 billion AZN or 5.3% of the country's GDP. The 53.1% of total

63
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

production establishes cattle-breeding products and 46.9% are plant-raising

products. In terms of economic categories, 92.3% of agricultural products produced
by individual entrepreneurs, family and households, 7.7% of them were produced by
agricultural enterprises and other organizations. Although the share of agriculture
in GDP is little, it plays an important role in ensuring employment in the country.
According to official statistics, 37.1% of the employed population works in the
agricultural sector.
Out of the major factors of production, the small number of officially registered,
specialized individuals and legal entities who can act as a coordinator or direct
executor in export and foreign trade are one of the main obstacles in front of the
growth of international trade of agricultural products. In general, the country's total
exports in 2014 was $ 21.83 billion, and imports - $ 9.19 billion, for the period
from January to June 2015, export outputs were $ 6.23 billion and $4.52 billion,
respectively. The following table shows foreign trade statistics for agricultural
products of the Republic of Azerbaijan for 2014. The main agricultural goods
groups in the country’s export are vegetables, roots and tubers, edible fruits and
nuts, citrus fruits, animal or vegetable fats and oils make $ 481.4 million together
(89.3%). Cereals (52.7%), animal and vegetable fats and oils (13.7%), live cattle
(8.1%) and dairy products, poultry, eggs, natural honey and other food products of
animal origin (10.7%) goods groups have more weight in import.
Table 9. Agricultural trade in 2014
According to the products group Export Import
Live animals 124.3 52367.9
Meat and additional meat food products 172.4 19460.5
Dairy products, bird eggs, natural honey and other food products
2215 69068.0
of animal origin
Other products of animal origin 794.3 187.3
Live trees and other plants, cut flowers 74.4 14163.5
Vegetables, roots and tubers 98919.2 14565.6
Edible fruits and nuts, citrus fruits 192165.3 10614.7
Coffee, tea, mate (Paraguay tea) and spices 31263.4 20137.8
Grains 20.5 339287.4
Oil seeds and fruits, other seeds, pesticides 5363.0 11966.7
The plant blends and extracts 3069.1 353.2
Other herbal products 95.3 392.3
Fats and oils of animal or vegetable origin 190334.7 88110.0
Cotton 14498.8 2861.0
Total 539109.7 643535.9
Source: http://www.stat.gov.az/

64
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

Overall, in 2014, the trade of agricultural products accounted for 2.5% of exports
and 7% of imports.
According to the geographical structure of trade in agricultural products, Russian
Federation, the Commonwealth of Independent States (CIS) countries, Iraq, Iran,
Indonesia, Turkey, European Union countries occupy an important place. In
exports Russian Federation with $ 249.73 million (46.32%), Iraq with $ 94.62
million (17.5%), in import Russian Federation (28.7%) with $ 185 million in the
Kazakhstan $135.8 million (21.1%) are the largest partner countries of Azerbaijan.
During the 2015-2016 periods, the most significant impact on trade in agricultural
products was economic problems in Russia that began with the fall in value of
the ruble. As a major partner in this area, it will have negative effects on exports
in 2015-2016. A bill regulating trade of agricultural products in the country is also
missing. In general, trade is regulated by Customs Code of the Azerbaijan Republic
and by the Law on Customs Tariff. In addition, the laws which consider the
regulation of sales, production and quality control of “tobacco and tobacco
products”, "viticulture and winemaking", "organic agriculture", "livestock breeding",
"cotton", "tea" and "grain" were also enacted.
The agricultural sector in the Republic of Azerbaijan is strongly supported by the
government. Apart from the tax incentives, support covers financial and technical
assistance. The law of providing tax incentives to producers of agricultural
products has been applied since 2001. As a result of the implementation of this
law, legal entities which engaged in the production of agricultural products
(including industrial), according to the Tax Code of Azerbaijan Republic are
exempted from corporate profit taxes, value added taxes, taxes an property and
individual entities are exempted from value added taxes and property taxes.
According to Article 102.1.11 of the Tax Code, individual entities are exempted
from income tax revenues from the production of agricultural products. In 22
November, 2013 implementation of tax incentives in agriculture were extended
for 5 years and has been lauched since January 1, 2014. As a result of tax
incentives in agriculture costs reduced up to 10%. In general, those engaged in
agriculture are exempted from 7 out of 9 types of taxes. According to Tax
administration the amount of taxes granted to the public by concession establishes
25-30% percent of collected taxes. In order to pay an average of 50% of the cost
of fuel and motor oils used in agricultural production regardless of type of harvest
per hectare of not genetically modified crops and the cultivation of perennial
crops producers are provided financial assistance to the amount of 40 AZN.
"Agroleasing" Open Joint-Stock Company and other legal entities and individuals

65
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

in order to ensure the sale of the mineral fertilizers with 70% discount gives for
each hectare of not genetically modified plants a subsidy of up to 80 AZN. In
addition 40 manats are paidper hectar of sown wheat. It is sufficient to recall the
discount of 40% for the purchase of irrigation systems and equipment, and order
to increase the aid from the state budget for purchasing of fuel and engine oil
used by agricultural producers of 25%. In addition, 30-40% of the costs of the
products which are grown in research institutes are paid by the state. Farmers
will purchase fuel with 50% discount, fertilizers with 50-75% discount from
2015. The state also supports seed provision in agricultural production. In
cereals and legumes, for the first seeds reproduction 40% of the sale price, for
the second seeds reproduction 30% of the sale price is paid by state. In addition,
by the resolution 58 of the Cabinet of Ministers of the Republic of Azerbaijan
dated March 31, 2005, agricultural machinery which belongs to "Agroleasing"
Open Joint Stock Company is sold through leasing to legal entities and
individuals. In general the amount of subsidy given to agricultural producers from
state budget in 2014 was 51.83 million for fuel and motor oil, for wheat and rice
sowing 17.05 million manats, 32.5 million manats for mineral fertilizers, for I and
II reproductions of seeds 5.05 million manats. The amount of subsidy for research
organizations for the original, superelite and elite seeds was 908.1 thousand
manats. The total amount of expenses was 107.3 million manats. From 2007 to
2014, thetotal amounts of expenses were 793.6 million manats.
For example, taking into account the high demand for fresh vegetables and fresh
fruit in the CIS, especially in Russia, it is crucial to take comprehensive and
consistent incentive measures for these two product groups, in terms of
increasing non-oil exports potential of Azerbaijan.
A comprehensive view to the exports potential of fresh vegetables and fresh
fruits, significantly may accelerate socio-economic development of the regions,
primarily regions engaged in fruit growing. Agricultural parks established by
initiatives of President will enable to succeed in these fields. As a new field,
sugar beet growing and sugar production, as well as sugar export potential
continues to grow. There are sufficient planting-soil and labor resources, financial
and technical resources. In the recent years, the export potential of vegetable oil
is seen demonstrably. In addition, while the grape-wine exports increased by 2.2
times during the period of 2008-2015, in terms of the raw material base and
exports the current export volume establishes a part of the strong potential of the
field. This means more efficient use of the existing potential in this direction
could be made.

66
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

The World Bank's “Comparative advantages in the implementation of the

agricultural sector" study states that it is a great advantage to have favorable
conditions for high-value agricultural products such as fruits,vegetables and
dairy products.From this point of view planning, procurement, storage, sales
network, export, strengthening in markets of our agricultural products are one of
actual problems should come to the fore. In the near term, in order to improve
the quality of agricultural products and increase the export potential based on
progressive international standards, developing national standards, improvement
of existing standards, expand the use of new technologies in agriculture,taking
into account features,natural and climatic conditions of each region agricultural
production specialization, strengthening control over security while production
an export will increase the competitiveness of products in the industry and export
to international markets.
Accordingly, to coordinate the expansion of exports, several institutions such as
The National Fund for Entrepreneurship Support, Azerbaijan Export and Investment
Promotion Foundation (AZPROMO), "Azerbaijan Investment Company" OJSC. They
support the establishment of logistics centers and transit centers in order to
facilitate the export of perishable food products abroad. For instance, with the
support of AZPROMO and private entrepreneurs the new agro-logistics complexes
were established in port of Aktau in Kazakhstan.
Three transit centers those estimated production of 110 thousand tons of
agriculture products are being built in the Absheron peninsula. The major food
logistics center that called “Fruit” is opened in Garadagh district of Baku. It is
fully specializing in wholesale and export of fruits and vegetables. The first
agropark - ShamkirAgropark producer and intermediary company is built in
November of the 2014. In addition, convenient storage for fruits and vegetables
in all regions were established. They were built by the discounted loans from the
National Fund Support for Entrepreneurship.
However, in order to conquer markets in the near and far abroad, as well as to
export local entrepreneurs to produce a valuable product is extremely important,
and it is urgent to increase brand development, packaging design, and advertising
companies until the end of 2015 in agricultural area. The export of agriculture
products were not considered for subsidization.
April 12, 2001 the Cabinet of Ministers Decision No. 80 of 2003 on the amend-
ments changed by Resolution No. 161 dated December 22, "The rates of import
customs duties on goods imported into the territory of the Republic of Azerbaijan"

67
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

at different times of the year based on what it has been for sowing seed
commissioner of agriculture tariff concessions are applied. In January 2011, the
decision №17 from March 1 to 3 years, a number of government goods were
exempted from import duties and import VAT. Now the government has extended
the period for 3 years. Recall that, breed of cattle, goats andpoultry which is not
heavy than 185 g, soy and bean seeds were released from the import duties and
import VAT. Moreover, sunflower, sugar beet, forage crops in a variety of seeds,
fertilizers, chemicals used in agriculture were released from import duties.
Despite all this support in the organization of marketing and export of agricultural
products has not been achieved serious success. The main reason for this is the
lack of medium and large-sized enterprises in agriculture and the main production
is realized by family farms where productivity is low. The country is still talking
on membership for the World Trade Organization (WTO). The main priority in
bilateral and multilateral negotiations is to protect agricultural producers, stable
or high tariffs on import and gain further concessions on agriculture to achieve
maximum support. Another important factor is associated with the World Trade
Organization. When Azerbaijan became a member of this organization, it will be
difficult for farmers to be exempt from taxes. In general, Azerbaijan is interested
in becoming a member of the World Trade Organization. Despite the fact that
Azerbaijan appealed for membership in 1997, the process of negotiating on the
WTO membership did not allow our country to be its member.
In all cases, the negotiations between the WTO and Azerbaijan are observed to
get its intensity in recent years. However, the bilateral and multilateral talks were
failed. They didn`t reach a fully agreement on before mentioned. One of the
problematic aspects of the WTO negotiations between Azerbaijan and the WTO is
its intention to enter as a developing country. It should be noted that conditions
of accession to the WTO are the same for both the developing and developed
countries.
Naturally, another key issue is related to the amount of subsidies in the agricultural
sector. Subsidies restrictions on the agricultural sector are 10%.
The limit of subsidies restrictions for the World Trade Organization is 5% and it is
very dangerous for the development of the agrarian sector in Azerbaijan.
After joining the World Trade Organization, farmers will be forced to be taxpayers.
Meanwhile, manufacturers of agricultural products are among the countries that
are exempt from tax in Azerbaijan. Currently, it is an important step for the
promotion of agricultural producers.

68
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

Grapes: Once upon a time, one of the most dynamically developing areas of
agriculture has been viticulture. Viticulture and winemaking has had a special
place in the agricultural sector in the Soviet period. In 1990, there were existing
275 thousand hectares of vineyards in the country. About 2 million tons of
grapes were produced every year. During Gorbachev`s period, the fight against
alcoholism has led to the destruction of 150 hectares of vineyards in Azerbaijan.
During this period, vineyards began to be broken. Thus, vineyards have been
turned into wheat fields to increase production of grain.
Grapes and wine sales have not become profitable due to the necessary
decreased interest in viticulture. As a result, the country got a decrease to only
7,700 hectares of vineyards.
Due to the fact of the Armenian occupation of a part of agricultural land, vegetable
production has dropped by half, grape production and wine export decreased
significantly. Vast majority out of 117 grape processing factories stopped
production. A large part of the occupied areas by Armenians are fertile lands. For
example, 100,000 tons of grapes were produced in the Fizuli region. Zangilan
region had 3 big grape plants 3000 hectares of vineyard. Agdam region was
famous for its cotton and Qubadli was popular for its farming. Because of the
Armenian occupation people forced to move from these lands and as a result
nearly 145,000 horned animals left in the area.
Even nowadays viticulture and winemaking have the potential to become one of
the most invested agricultural sectors in Azerbaijan. In recent years, Jalilabad,
Tovuz, Shamkir, Agstafa, Gazakh, Shamakhi, Ganja and other regions have begun
to reduce the vineyards. The development of viticulture takes place in a state
program on development of regions.
Nuts: One of agricultural products that has the opportunity of investment is nuts.
Especially, together with the Zaqatala, it is produced in Baku, Guba and Khachmaz.
65% of shelled hazelnuts are exported to the EU.
Sugar cane: Production of sugar beet is another product that is on the agenda
again. Before the period of the Soviet regime, Azerbaijan was producing significant
quantities of sugar beet. However, when Ukraine started to produce it and meet
all needs of the USSR, there was no need in the sugar beet production in
Azerbaijan.
After independence, Nakhchivan, Beylagan, Sabirabad, Imishli and Salyan regions
began to produce it again. However, the country does not have beet processing

69
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

factories. While sugar beet is planted, due to the lack of sugar factory, sugar
beet is sent from Bilasuvar to the city of Ardabil. Iran is against the country that’s
why there are some innovations in sugar production. Having demand of 360.000
tons of sugar the country needs factories for the production of sugar beet and
sugar mills. Regarding this demand, a sugar factory was built under Azersun
Holding in Imishli. Within the framework of the State Program on socio-economic
development of regions establishment of sugar factories in Nakhchivan, Sheki,
Jalilabad and Bilasuvar regions is planned.

Table 10. Agriculture Production (thousand tons)

Years Grain Cotton tobacco Grape Tea
1990 1413.6 542.9 52.9 1196.4 30.7
1991 1346.4 539.7 57.3 1125.6 26.6
1992 1337.2 336.3 52.3 607.0 22.6
1993 1147.9 284.5 44.9 411.3 24.0
1994 1039.2 283.7 20.8 313.8 19.4
1995 921.4 274.1 11.7 308.7 9.4
1996 1018.3 274.4 11.2 275.0 3.0
1997 1127.1 124.6 15.1 145.3 1.6
1998 950.3 112.9 14.6 144.2 0.9
1999 1098.3 96.8 8.6 112.5 2.7
2000 1540.2 91.5 17.3 76.9 1.1
2001 2016.1 83.6 12.7 68.1 1.4
2002 2195.7 80.4 3.3 62.1 1.4
2003 2057.8 99.6 4.7 65.0 0.9
2004 2158.2 135.7 6.5 54.9 1.1
2005 2254.3 191.2 7.2 79.7 0.7
2006 2564.2 125.9 4.8 94.1 0.7
2007 2725.5 95.5 2.9 103.4 0.5
2008 2848.3 55.4 2.5 115.8 0.3
2009 2988.3 31.9 2.6 129.2 0.5
2010 2000.5 38.2 3.2 129.5 0.5
2011 2458.4 66.4 3.6 137.0 0.5
2012 2802.2 57.0 4.3 151.0 0.6
2013 2955.3 45.2 3.5 148.5 0.6
2014 2383.3 41.0 2.9 147.7 0.5
Source: www.stat.gov.az 2015

70
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

There are produced different kinds of jams and jellies in small packages in the
factories of Guba and Saatli. There is also the tomato production in another
factory of Lankaran. The products of these 3 new factories exported to countries
as Japan, Russia, Belgium and Switzerland.
Tea: The basis of tea production was established in 1930s, in Lankaran-Astara
region, which has favorable conditions for the growth of this plant. Tea production
by the end of the 1960s and early 1970s reached its highest level. The tea
production in 1970 was 34,000 tons; this amount has been reduced down to
1900 tons over the years. This situation is partly due to the lack of a running tea
processing factory.
There is a need in the privatization of the tea processing factories. Tea factories
located in Baku were purchased by Turkish companies and tea farmers started
tea producing again. Tea processed in these factories is mixed with Turkish and
Indian tea and then purchased.
Within the framework of the State Program on Socio-Economic Development of
regions in the southern regions including Lankaran and Astara some measures
and incentives are carried out for the development of tea production. Measures
are being taken to repair tea production areas fallen into disrepair after the
independence of country. According to the plan only in Lankaran region1,000
hectares of tea plantation will be repaired.
It is supposed that Lankaran region will profit 19 billion manats from the
development of tea production. Lankaran and Astara tea factories have been
invested enough for the start of production. "Azersun Holding" has a special role
in the development of tea growing in the southern regions.
Cotton: Azerbaijan has a big experience cotton production. The crude materials
and combine harvesters were brought to Azerbaijan from Uzbekistan and Russia.
However the lack of this import in recent years caused the decrease in cotton
production.
The cotton production potential of the country is 830 thousand tons per year.
70% of the produced cotton is exported as a crude material. Despite of the huge
amount of production, the numbers of the cotton factories are very few. The
most important problem in cotton production are the pests.
Potato: The production of the potato increased in 2014 in comparison with the
previous year. The potato is mainly exported to Russia.

71
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

Table 11. The Production of the Agricultural Products (thousand tons)

Years Sugar beet Potato Vegetable Fruit
1990 - 185.2 856.2 367.4
1991 - 179.9 805.3 498.3
1992 19.8 156.0 555.1 400.9
1993 11.6 152.2 487.8 346.4
1994 17.8 150.3 482.9 323.5
1995 28.1 155.5 424.1 324.4
1996 40.1 214.6 570.0 321.2
1997 33.7 223.4 495.4 330.9
1998 41.4 312.5 502.3 390.6
1999 42.2 394.1 670.8 436.5
2000 46.7 469.0 780.8 477.0
2001 41.3 605.8 916.4 497.5
2002 115.8 694.9 974.6 516.8
2003 84.6 769.0 1046.3 572.1
2004 56.8 930.4 1076.2 424.6
2005 36.6 1083.1 1127.3 625.7
2006 167.2 999.3 1186.4 662.4
2007 141.9 1037.3 1227.3 677.8
2008 190.7 1077.1 1228.3 712.8
2009 188.7 983.0 1178.6 718.2
2010 251.9 953.7 1189.5 729.5
2011 252.9 938.5 1214.8 765.8
2012 173.8 968.5 1216.2 810.0
2013 187.9 992.8 1236.3 853.8
2014 177.3 819.3 1187.7 850.8
Source: SSCAR publications 2015, www.stat.gov.az

3.2.1. STOCK-BREEDING
The animals (99.8% cattle, and 98% small animals) belonged to the state and
after 1996 distributed to the private sector. Other animals are used by government
as a pedigree. One of the most profitable businesses was the cattle-breeding
after the independence. The cattle-breeding met the domestic demand after the
independence. However some decreasing was observed in the cattle-breeding
until 1998.

72
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

On the other hand, the increase was observed in the meat and milk production in
comparison with the previous years. The huge amount of the production was
provided by the farmers. As a result of the privatization policy which realized in
1998, the cattle-breeding increased. Furthermore the quality of the milk products
improved. Azerbaijan companies produced more than 15 types of the products
(sour clotted milk, cheese, milk and etc.,).

Table 12. The Production of Animal products

Years Meat (thousand ton) Milk (thousand ton) Egg (million)
1990 175.5 970.4 985.3
1991 153.5 947.7 958.2
1992 112.7 850.4 812.2
1993 92.5 798.5 584.5
1994 84.4 783.7 494.0
1995 82.0 826.5 455.8
1996 85.7 843.3 477.3
1997 90.5 881.5 492.4
1998 99.9 946.5 509.0
1999 104.6 993.4 526.3
2000 108.7 1031.1 542.6
2001 114.1 1073.7 555.5
2002 124.6 1119.9 561.6
2003 134.4 1167.8 670.6
2004 196.8 1213.7 829.4
2005 198.0 1251.8 874.6
2006 204.7 1299.3 760.9
2007 218.7 1341.0 953.6
2008 228.0 1381.3 1101.2
2009 231.5 1432.8 1209.4
2010 244.9 1535.8 1178.6
2011 254.9 1597.5 1011.0
2012 276.0 1695.6 1226.7
2013 286.9 1796.7 1401.5
2014 291.2 1855.8 1562.7
Source: SSCAR publications 2015 ,www.stat.gov.az

The information about the stock-breeding is displayed in Table 22. The production
in stock-breeding and the number of the animals are increased. Azerbaijan does
not import beef, but imports poultry. 24% of the meat products as well as 35% of

73
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

the eggs are imported. One of the most important points in table is the increase
of the meat production from 1998. The meat production was 291.2 tons in 2014.
The milk production decreased until 1997. From 1997 until 2005 the milk
production increased every year. The production level passed the indicators of
the 1990. From 2006 until 2015 the huge breakthrough was observed in the milk
production and reached 1855.8 thousand tons in 2014. The egg production also
dropped until 1998. However the increased was happened in the egg production
from that date. As a result in 2004, the egg production passed the indicators of
the 1990 also. From 2005 until 2014, the egg production increased sharply and
reached its peak level.

Main Problems in the Sector

Only 53.1% of the lands are suitable for the agriculture in Azerbaijan. According
to the surveys, the arable lands per person are decreased each year in Azerbaijan.
The arable lands per person 0.20 hectares. Arable lands per person are changed
0.04-0.12 hectares per person in some regions such as Lankaran, Astara,
Absheron and Nakhchivan Autonomous Republic.
The irrigation and drainage systems should be established in order to support
improvements in agriculture sector. The modern technologies should applied and
modernizate the processes of area and should be earned in a very close period.
On the other hand the salinity level of the lands increases and the errossion is
happened in these lands. Especially the changes in the level of Caspian Sea
caused salinization. Furthermore the lands between Kur and Araz rivers are
slinized and stayed under the water.
As a result of the rising of the Caspian Sea’s level 47% of the lands that can be
irrigated were damaged. 385 thousand hectares of 1450 thousand hectares
lands that damaged were spoiled as a result of the correction. The level of the
Caspian Sea rose 8 cm only in 2004. This equals to 150 thousand hectares lands.
According to the specialists, the level of the According to the recent data of
2014, Caspian Sea will rise approximately 70 cm, if natural conditions will remain
in the same trend. Furthermore 115.000 hectares soil are salinized.
One of the most important factors which deter the agriculture sector is the
weakining of the material and technical infrastructure. The number of the
techniques such as trucks, combine harvester were decreased in comparison
with the indicators of 1990.
The main problem in line with the stock-breeding is the low feed production and
high cost of it. The country has a suitable climate for the production of the daily

74
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

products. However there are some problems such as old technology, low quality
seeds and misusing of the fertilizers.
The financial resources should be allocated to the farmers in order to get rid of
this situation. The government should help them in production, manufacturing
and sales. Certainly the experience of the developed countries should be imple-
mented in Azerbaijan in order to improve the agriculture and the stock-breeding.

The Reforms in the Sector

The reforms in the agriculture sector; the realization of the land reform, the closing
of the collective-farms and distribution of them to the peasants, the privatization
of the agricultural institutions, easing the product prices and etc. This reforms
triggered the improvement of the agriculture sector.
The share of the agriculture and stock-raising increases in the budget each year.
This growth is one of the most important indicators in line with the development
of the sector.
“The Privatization of Agricultural Institutions in 6 region” project was approved in
1996 and completed in 2003. The value of the project is 28.82 million dollars.
The financial supporters of the project were World Bank and the International
Fund for Agricultural Development. The loans were given to the individuals in 113
villages.
“The Program on the Development of the Agriculture Sector” was enacted in
2002-2006 by the Assosciation of Banks in Azerbaijan. The realization of this
program strengthened the development of the agriculture and stock-breeding in
the future. Azerbaijan government and World Bank signed “Investments in Agrarian
Sector” project in August, 2004. This project supported the households in the
regions.
Some improvements were attained in line with the financial services to the
regions on the agriculture. 78 new bank branches were opened in these regions
with special focus on this area. Meanwhile other organizations also assisted to
these regions. Despite of the positive growth, the current situation of the
production in agricultural sector is under its potential.
The artificial insemination techniques were brought to Azerbaijan from the
Netherlands in order to improve the stock-breeding. The animals were vaccinated
and they were categorized according to the races. This triggered the development
of the stock-breeding in Azerbaijan. Futhermore the government strengthened
observations on the state laboratories and customs checkpoints.

75
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

The main targets of the state program in agriculture sector in 2004-2008 are
listed below:
- The provision of the wholesale of the agricultural products in Baku and Ganja
and the attraction of the foreign investment to it.
- The attraction of the foreign investment to the production of the spare parts
and essential mechanisms.
- The attraction of the foreign investment to the reconstruction of the irrigation
systems and building of 11 institutions.
- The establishment of the organizations which produce agricultural and animal
products.
- The establishment of the organizations which produce plastic and glass for
the manufacturing industry.
- The attraction of the foreign investment to the establishment of the sugar
factory in order to meet the demands of the people.
- The modernization of the agricultural education centers, research institutions
and cattle-breeding organizations.
- The provision of the investment to the socio-economy of the regions and the
reconstruction of the social infrastructure.
- The establsihment of the vineyards and the institution which produces wine.
- The establishment of the veterinary system.
- The establishment of the small agriculture service system.
- The establishment of the organizations which produce potato strach.
- The attraction of the investment to the establishment of the feed mills.
The producers of the agricultural products were exempted from the all taxes in
order to improve the agriculture sector. Various projects were implemented in
order to provide the farmers with the modern technologies. The production and
manufacturing organizations were established in order to increase the level of the
production. In this frame the “Agrolizing” company was established within the
State Program of 2004-2008. The company belons to state. The company was
established in 25th October, 2004. The government allocated 200 million Manat
to the company in order to buy machinery and techniques in 2009. In 2010, 250
million Manat allocated for the same purpose.

76
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

3.2.2. FISHING
One of the sectors enhancing the value of the Caspian Sea in the world market is
fishing. The Caspian Sea is an enclosed inland body of water which is rich in oil
and gas fields as well as high quality fish reserves. The Caspian Sea is the
habitat of sturgeons- the most valuable fish type. The production of sturgeon and
its product caviar in the Caspian Sea have economic values38.

Among the CIS countries, the Caspian basin makes up 55-60% of fish hunting,
40-42% of edible fish products, 50% of canned fish products.
Figure 13. The Fish Production in Azerbaijan (thousand tons)

70
57.6
60
50.1
50
45.1 50.9
40
26.5 28.8
30 22.8 29.1
22 21
18.7 27.4
20 24.5 20.9
9.9 23.3 20.6
10 12.9 19.1
8.2
0

Source: SSCAR publications 2015 ,www.stat.gov.az

Until the beginning of 1980s, the Caspian Sea was very famous for its fish
population. In particular, once the caviar obtained from sturgeon accounted for
90% of Soviet’s caviar production to the west. Although previously 65 thousand
tons of sturgeon was extracted, this figure dropped to 25 thousand tons at the
beginning of 1980s. This number fell to 7 thousand tons in early 1994. In Volga
delta 120.000 fishermen based on this job, however, within a certain time it
dropped to 2000 fishermen. The sturgeon hunting in the Azerbaijani sector of the
Caspian Sea was 550 tons in 1992, in recent years, it has become 90 tons.
Lately, the number of important fish species have declined in the Caspian Sea
where especially small fish are hunted. This amount decreases by 10% every
year. According to the information of the Russian Interior Ministry, even though

Rising Caspian Waters Pose Flood Threat’, Azernews http://www.azernews.net/view.php?d=5705

38

77
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

700 million dollars worth of sturgeon was captured in the Caspian Sea in 2007,
official figures seem to be 60 million dollars. According to some international
sources, 1 billion dollars of illegal caviar is sold to western countries from the
Caspian countries.
In accordance with the researches conducted by the World Bank, 1 million tones
of oil is thrown into the Caspian Sea every year. Considering the fish poisoned
by dioxin, oil waste seems to be the main reason for the Caspian Sea’s pollution.
Starting from 1929-30, the hydro-technical facilities built over the rivers flowing
into the Caspian Sea, expansion of cities and industrial centers by the areas of
construction and industry constructed on the shores of the Sea, have had a
negative effect on the environmental and biological conditions. The irrigation over
Volga and Kur rivers and energy-purpose dams have brought about the reduction
of the water fields for valuable fish breeding. The fish hunting in the Caspian Sea
have declined significantly over the last 60 years due to hydro-technical
complexes, dams, hydroelectric power stations built on the tributaries of Volga in
the postwar years, many industrial complexes, oil and natural gas extracted in
open sea and permanent maritime transport.
Specifically, the days when 90% of black caviar production was obtained from
here, are left behind.
As a result of the decrease in fish species used for caviar production, in early
1952, up to 20 factories of Russia, Kazakhstan, Iran and Azerbaijan were
multiplying these fish species. However, due to the rise of sea level in Caspian
Sea, these factories were submerged which caused a decline in fish production.
This issue even led to the extinction of fish species used to produce caviar.
Between 1959-1985, the fish loss was more than 5 million tons because of the
pollution of Volga river and dams. 750 thousand tons of it was sturgeon which is
famous for its caviar.
In Azerbaijan, fishing is especially done in the Caspian Sea. There are approxi-
mately 120 species of fish in the Azerbaijani sector of the Caspian Sea, 7 of
which are utilized in consumer and pharmaceutical industry. Another important
species of fish is salmon.
The management, production, sale and export right of sturgeon and caviar in
Azerbaijan belonged to a company named “Azerbalig”. After the opening of
“Caspian Fish Co.-Azerbaijan” company in 2000 and closure of a state institution
“Azerbalig” in 2001, fish hunting and import dropped significantly.

78
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

The entire fishing sector has been in the hands of the few company starting from
the same date. Imported fish are formalized on behalf of “Caspian Fish Co.-
Azerbaijan” by consumers. Importers sell 20-30% of fish they brought, to this
company.
Despite the sufficient conditions in the country for the development of fishing,
the provision of the population with fish and fish productsare at a minimum level.
Taking the population growth into consideration , demand for fish and fish
products is 100 thousand tons. However, in real terms, the obtained fish and fish
products per year are 10-20% of this figure.
Statistical figures demonstrate that the level of valuable fish species caught by
years is decreasing.
From 1990 to 1997, fishery and marine products went down 6 times. Between
1997-2009, there was a rise in fish hunting and it reached 50 thousand tons in
2014.
In recent years, fish production and processing potential are tried to be raised
with the projects realized by the support of financial institutions like the World
Bank and foreign entrepreneurs. For example, only in 2008, 15.5 million
sturgeons were released to the Caspian Sea from Neftchala and Ali-Bayramli fish
factories that belong to the Ministry of Ecology and Natural Resources.
In total, 456.3 million different fish species bred in various fish factories were
released to the Caspian Sea, Kur river and inland water bodies in 2008. The
allocation of necessary amount of money for fish and caviar production will have
a significant influence on the economy.

Reasons Reducing Fish Production

The existence of status problem has brought the fish species, whose caviars are
used, to the brink of extinction. Before the collapse of the Sovet Union, Iran and
the USSR strictly controlled illegal fish hunting.
In post-Soviet period, it was observed that the countries were in a serious gap in
terms of fish hunting which brought together illegal hunting. After the collapse of
the Soviet Union, though the countries agreed on defining the yearly amount of
fish hunting , they still failed to impede illegal hunting.
In the same way, depending on the economic power of the states, the volume
and number of fish producing factories fell and they tried to eliminate this rapidly
emerging poaching which made it difficult for the region countries to protect the
determined amount according to their agreement.

79
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

In addition to hydro-carbonate reserves, the Caspian Sea is very important for

the development of Azerbaijan’s economy in terms of its bilological resources.
The Caspian Sea has been the source of more than 90% of the world’s sturgeon
and caviar production along with its oil and natural gas reserves.However, both
pollution and illegal fish hunting have brought about a drop in sturgeon resources
within a short period.
As a result of production activities, the commercially important fish number was
exposed to a huge loss. Starting from the 1950s, the construction of water and
power plants on the rivers flowing into the Caspian Sea caused a grave damage
to the breeding places of sturgeons, while the rise of Caspian Sea’s level even
made those places to remain under water. As a result, sturgeon fishing declined
significantly. Besides, the annual fishing of another valuable species - salmon
went down. Commercially important Caspian Sea, Shamai and Aggoz were
annihilated.
The increase of the Caspian Sea’s biological, especially fish resources will only
be possible with the cooperation of the coastal states.
In addition, it has been inevitable for the regional countries to pay attention to
this problem together due to the emerged food shortage, especially when marine
products on export have such a potential.
In case no necessary measures are taken against pollution, the Caspian Sea will
be deprived of many biological resources. As a result, over the next 15 years
fishing in 50 meters depth of the Sea will lose its importance and 30-thousand-
m2 area will be divested of fishing in Azerbaijan and Turkmenistan shores that
have been exposed to the highest level of pollution. In order to raise fish production,
there is a need to use waste treatment systems in oil and gas extraction industry,
other industrial facilities located in the Caspian basin and shores. Beyond that,
the waste of more than 150 million people living in the Caspian basin or its
coastal cities, floating sea tankers and oil waste of ships carrying oil and natural
gas need to be cleaned.

3.2.3. BEEKEEPING
The most common beekeeping product is honey. However, the production of
pollen, royal jelly, wax is also possible. In the country, bee protection methods
and breeding technology are in low level.
There is a need to increase beekeeping 8 times compared to the current situation
in order to meetthe country’s demand for honey with local production. It can be

80
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

enabled by the country’s climate conditions, rich vegetation and bee species.
Moreover, in comparison with other sectors, repayment of the funds needed for
the development of beekeeping and job opportunities are more fitting39.
The improvement of beekeeping is given special attention in the State Program
on the Socio-Economic Development of Regions. Therefore, the number of the
families engaged in beekeeping is planned to be increased 5 times.

3.3. SERVICE SECTOR

The share of the service sector in GDP was 52.4% in 1998, 48.0% in 1999,
41.7% in 2004, 40.8% in 2006, 36% in 2008 and finally 33% in 2015.Important
sub-sectors of the service sector will be elaborated on below.

3.3.1. EDUCATION
Due to the fall in living standards and war condition, a setback in the education
level started in early 1990s. Thus the economic conditions of the transition
period had a negative impact on the development of the education level. This
downward trend in education went on until the second half of the independence’s
first decade. After this date, the education level began to rise.In Azerbaijan, there
are 1680 preschool education institutions and 4575 secondary schools. In
addition, there are 112 technical vocational schools and high schools, 61 colleges
and 41 universities.
In 1990 and 1991, a large amount of educational institutions were put into
operation. In 1994-2002, very few educational institutions were opened. The
number of the institutions constructed in 1990-2002 was 257.
There are 1 million 322 thousand pupils and 158 thousand 212 students studying
at primary & secondary schools and higher education institutions, respectively.
183 thousand teaching staff are engaged in the teaching and training of students.
160.6 thousand of them work in primary and secondary schools.
In order to establish the integration of Azerbaijan’s education system with that of
the world, more than 3000 Azerbaijani youth study in over 40 developed countries
of the world. In addition, 2000 Azerbaijanis study in up to 50 countries of the
world.

39
“Aqrar Bölmədə Lizinqin Genişləndirilməsi Sahəsində Əlavə Tədbirlər Haqqında Azərbaycan Respublikası Prezidentinin
Sərəncamı”, http://www.azerbaijanleasing.com/azerbaijanleasing/docs/Agro-leasing.doc,

81
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

The role of the private sector in education is going up. In private educational
institutions, teaching is more about the fields needed in market economy. For
instance, 25% of the students at private institutions study economy and 18% of
them were studied in the faculty of law.
In spite of some reforms carried out in the education sector, there are still remain
problems. The education problem of Karabakh refugees has not been settled yet.
The children of Karabakh refugees are educated in 695 schools. Some of them
serve in tent camps and homes. 90 thousand students study at these schools.
Economic problems constantly affect education reducing its quality. The
insufficiency of technical provision in educational institutions is another problem
that needs to be addressed.
The annual rise of the number of students has led to the problem of school
scarcity. These problems are not only confined to remote regions, but they have
emerged in the capital as well. Many schools in the city are forced to take more
students than norms.
1700 million manats were earmarked from the budget of 2015 for education
which is 2.1 times less than a university’s budget in Japan. The funds allocated
for education, health, defense and others only meet 25-30% of the respective
sector’s minimum needs.
The share of funds allocated from public spending for education has been 3-4%
which shows that the portion allocated for education is not only little, but also
prone to decline. The insufficiency of what has been allotted from GDP for
education brings about serious problems in this area.
In 2003-2007, 149 new educational institutions were built. Furthermore, the
construction of 28 and repair of 200 educational institutions have been planned
within “The Poverty Reduction and Economic Development Program”. In addition,
it has been scheduled to build 13 new educational institutions within the State
Oil Fund’s assistance for Karabakh refugees. Thus, within the next 5 years, the
construction, repair of 190 new institutions and provision of education under
normal conditions in 1050 educational institutions have been plotted.
The national average is 1 computer per 1047 students. The computer provision
program of Azerbaijan’s all educational institutions were made in 2005-2007 in
which the average was 1 computer per 33 persons.
Despite the strong scientific potential of the country, it is not benefited properly.
It is observed that the allocated part from the national income for scientific

82
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

research is less than the world average. The share of national income for scientific
researches is 2.2% on average worldwide, while this figure is 0.2% in Azerbaijan
which seems to decrease further over time. This rate was 0.5% in 1990. The
number of those doing scientific researches (2791 per 100 thousand) is higher
than the world average (959 per 100 thousand). This situation signifies that
income level of scholars engaged in scientific researches is low and technical
provision is insufficient. As a result, the level of conducted researches becomes
low. However, educational and scientific researches should be one of the
strategic directions of a country.
Within the second reform program covered the period of from 2003 to the next
10 years, the World Bank will provide 63 million dollars of loan for the education
sector of the country. This program implemented in three phases. The first phase
covered 4 years and the World Bank lent 18 million dollars over this period. The
other 2 phases cover 3 years. In the second phase, the World Bank provide 25-
million-dollar loan.
In the program of development in education prepared by the government covering
2004-2007, the problems of Azerbaijan’s education system and their solutions
have been evaluated40.
In the program, some problems have been reflected such as the low level of
education in primary and secondary schools, weak material and technical
infrastructure, lack of teachers in villages, lack of classrooms and teaching
materials, incompatibility of teaching programs with the requirements of market
economy, weak development of education system and labor market, low-level
technical and vocational education of youth.
Specific measures for resolving the problems are taken into consideration in the
program. For the realization of the targets, within 4 years, up to 123 million
dollars of financial resources have been directed to the education sector. More
than half of these funds are thought to be spent for reinforcing material and
technical infrastructure of education.
Based on the decree signed by President Ilham Aliyev for the approval of “The
State Program of Azerbaijani youth abroad in years 2007-2015”, the education
of 5 thousand Azerbaijani youth for 8 years’ period in foreign countries were
planned and in accordance with the program thousands of students have already
studied and returned to the country. As end of 2015, 3185 students sent to 542

40
Misir Mərdanov ,”Heydər Əliyev və Azərbaycan Təhsili”, Azərbaycan Müəlimi Qəzeti, 7-13 Mart 2003, s.3

83
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

universities around 33 countries to get education under State Program of SOFAZ

scholarship, whereas 794 of them successfully graduated already. For increasing
number of ICT devices, 6000 computers, 3000 notebooks, 700 projectors, and
1377 smart boards has been boughtfor schools in 2014. As a result, the ratio of
students per computer reached to 18 in secondary education level. So, overall
schools joined Azerbaijan Education Network (through intranet and internet) has
reached to 1765, which equals to 40% of education system41.
Furthermore, it was envisaged in the program to raise the social status of those
who work in the education sector and increase pensions.

3.3.2. HEALTH
As a way to evaluate the success of the Soviet Union system, Azerbaijan has
inherited a health care system improved in conditions of those days. However,
as necessary amount is not allocated from the budget and income level of the
people has fallen, the health services are not at a satisfied level. Healthcare
enterprises operating in Azerbaijan don’t meet modern requirements and
unsuitable in terms of old, useless buildings and supplies.
The share of the health spending in national income have been 1% which shows
that this amount allocated for health costs is not enough.
In Azerbaijan, per 10 thousand people, the number of doctors is 34.6, amount of
health workers is 59.3, and number of hospital beds is approximately 49. If
calculated only for Baku, this figure seems to be over the average. In Baku, there
are 85 doctors, 110 health workers, 115 hospital beds per 10 thousand people.
This situation indicates that there are fewer health care services outside Baku.
Lack of healthcare services leads to an increase in the number of some diseases
every year. The most commonly seen diseases recorded are upper respiratory
tract, nervous system, ear-nose-throat disorders.
Some reasons like the transition of hospitals to formal or informal paid service,
lack of medicines, technical equipment and funds, high prices of services and
medicines have lessened the people’s use of health care services.
The newly opened private health centers play an essential role in raising the
quality of health services.

41
http://edu.gov.az/upload/file/HESABAT/2014/hesabat-xulase-2014.pdf

84
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

Table 13. Information on the Health

Health Care
Years Hospital Polyclinic Doctor
Workers
1995 768 1779 29217 67000
1996 759 1694 28873 63200
1997 746 1630 28477 60700
1998 739 1611 28485 60600
1999 735 1614 29033 60000
2000 735 1618 29084 59900
2001 738 1603 29090 59100
2004 734 1591 29700 59500
2005 732 1594 30100 59700
2006 729 1595 30600 60800
2007 726 1589 30800 61600
2008 748 1692 32400 62200
2009 752 1695 32500 62500
2010 756 1692 32800 62900
2011 516 1688 33100 60100
2012 523 1690 31400 57800
2013 539 1725 32300 57500
2014 553 1744 32400 56900
2015 566 1746 32800 56100
Source: SSCAR Publications.2015

Despite a lot of problems in the health sector, it seems that these problems are
declining with the economic growth and rise of income level.
In the State Program on Socio-Economic Development of Regions, new health
care facilities were already opened.

3.3.3. TOURISM
For the tourism sector, there is natural, historical and cultural resources, namely,
climate, natural beauty, historical and archeological potential available in the
country. 9 out of 11 climate zones exist in Azerbaijan, as well as the coasts of
the Caspian Sea, wooded area in Khachmaz-Lankaran-Astara regions and springs
for treatment purposes attract attention.All-union and international tourist routes
functioned in Azerbaijan were cancelled since 1st quarter of 1990. The war and
instable situation on borders led to occurrence of other problems in the system
of tourism. For example, 2 of 10 tourism centers in the system of the trade unions
left in the occupied territories and other places were accommodated with internally
displaced persons. In September 1991 the department on foreign tourism was

85
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

liquated and Foreign Tourism Council was established in its place under the
auspices of the Cabinet of Ministers of the Republic of Azerbaijan.Only at the end
of the 90-es the trends of tourism development were reflected in the legislative
acts of the country.
Already at the beginning of the XXI century in Baku, Ganja, Nakhchivan and other
regions of the country modern hotels that can accommodate foreign guests
operated. More than 500 tourism companies covering all regions of the republic
are engaged in accommodation of foreign tourists and servicing local population
with tourist services, and 540 hotels have been officially registered. The total
amount of beds in those hotels is more than 50000. Private treatment and resort
centers with modern level were given for use in the regions suitable for tourism
and recreation. The number of foreign tourists visited the republic passed the 2,5
million people.
Owing to the favorable climatic conditions, significant number of tourists was
attracted to the country during the Soviet Union. Hotels and beaches back at
those years indicated that42.
The areas forming the tourism sector in Azerbaijan can be focused on under the
following subheadings;
Holiday Tourism: The most appropriate regions to rest, especially, during summer
months are Zagatala, Sheki, Guba, Ganja, Gazakh and Lankaran.
Plateau and Mountain tourism: The suitable areas in Azerbaijan for plateau and
mountain tourism are Zagatala forests, Shaki Gelersen Gorersen tower, Basdasagil,
Guba,Ismayilli, Lahij, Gabala, Agdas forests, Ganja, Hajikend, Goygol.
Bath and Health Tourism: Azerbaijan is rich in drinkable and treatment-purpose
mineral water resources.There are nearly 2000 mineral water sources providing
200 million liters of water.
In addition, the muddy water with mixture of oil in “Naftalan” is good for nervous
system, skin, and gynecologicaland other diseases. Many of the specific
therapeutic sanatoriums are located in the Absheron peninsula.
Beach Tourism: Azerbaijan surrounded by the Caspian Sea, is favorable in terms
of beach tourism. Bilgah and its surrounding have beaches stretching kilometers.
Hunting Tourism: There are 97 species of mammals, 346 species of birds and
95 species of fish in Azerbaijan. In the country, different regions of which have

Z. N. Eminov, Azərbaycan Fiziki və Iqtisadi Coğrafiyası, Azərbaycan Coğrafiya Institutu Nəşriyyatı, Baku, 2000, pp. 153-156
42

86
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

favorable conditions for hunting tourism, permission should be given to use

shotgun. At the same time, membership of every gun owner is mandatory in the
society of hunters.
Cultural Tourism: Azerbaijan owns very rich cultural and historical treasure.
Various organizations have been set up to protect and restore ancient monuments,
graves, tombs, building and other historical works.
Owing to natural wealth, the development of tourism in Guba-Khachmaz, Astara-
Lankaran, Shaki-Zagatala, Ganja-Khanlar, Shamkir-Ismayilli, and Siyazan-Khizi is
more appropriate.
Considering the number of tourists entering the country, it is observed that very
few of them come from developed countries. Tourists from the CIS countries are
prevalent.
Figure 14. Number of tourists coming to the country (thousand)

3000
2484 2508
2500 2239 2297

1962
2000 1830
1560
1460 1490
1500 1350 1425
1066.29
1000 793.345
766.992
680.909
602.047
483.163
500

0
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Source: SSCAR Publications.

In fact, the number of tourists entering the country is much higher than the figures
reflected in statistics. According to the explanations, due to the problem in the
registration system, the information doesn’t reflect the truth. Government tries to
resolve this issue with new measures and decisions43.

43
Əbülfəz Qarayev, “Azərbaycan Bu Gün Beynəlxalq Olimpiyada Oyunlarına Müvəffə-qiyyətli Imza Atan Dövlətlər Sırasındadır”,
Dialoq Azərbaycan Iş Dünyası Dergisi, TÜSIAB Cemiyeti, Mart-2003, p.16.

87
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

The low level of income in terms of domestic tourism, insufficiency of promoting

the country abroad in terms of foreign tourism, assessment of the country as a
dangerous region due to the conflict with Armenia are negative factors that affect
tourism of Azerbaijan.
The absence of a single state policy and program related to the tourism sector
for a long period had a negative influence on the sector.
One of the important losses in terms of the tourism sector is the occupation of
Karabakh which is one of the most favorable regions of Azerbaijan. After the
occupation, the ecological balance of the region was disrupted seriously by the
Armenian side in a way to affect the tourism in Karabagh.
Although the share allocated from the budget for the development of the sector is
higher in each passing year, it is still not enough for the sector to reach the
desired progress trend.
Other reasons hindering the improvement of the tourism sector are as follows:
- Lack of necessary conditions for recreation facilities,
- Unfavorable roads to touristic areas,
- Untoward health conditions at hotels where tourists may stay,
- The effect of the war with Armenia on the country for more than 25 years.
Since 1994, Azerbaijan has signed many alliance agreements with various
countries in tourism field. After September 27, 2001 when Azerbaijan Youth,
Sports and Tourism Ministry became the member of the International Tourism
Organization, a special investment program was made in order to develop the
tourism sector, encourage financial support of international organizations and
inspire tourism companies functioning in other countries to invest on Azerbaijan.
The documents have been prepared both to promote the country’s development
of the tourism sector and encourage making investments on the sector. For the
purpose of training necessary staff, some activities are being done at the level of
high education. Furthermore, to ensure the professional development of those
working in the sector, they are provided to take vocational education courses in
touristic regions of some countries including Turkey.
To have newly created Guba-Khachmaz, Sheki-Zagatala, Lankaran-Astara and
Tovuz-Gazakh tourism roads meeting modern standards, projects worth between
100 thousand-50 million dollars have been submitted to international tourism
companies by the Azerbaijan Ministry of Tourism.

88
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

Moreover, “The State Program on the Development of Tourism for the years of
2002-2005” was approved with the decree numbered 1029 which was signed
on August 27, 2002. With the decree signed by the President Haydar Aliyev, the
term of license for companies involved in tourism activities was extended from 2
to 5 years. State duty was reduced from 8 million manats to 2 million 750
thousand manats (manat before denomination) which increased the number of
companies in the tourism sector to 200.
There are more than 500 hotels in the country. Much work is being done to
improve the quality of service in hotels. In addition, some touristic hotels are
building and tourist information centers are being established in regions.
Entry visa fee for tourists has been decreased from 40 to 20 dollars. In airports
and border gates, the citizens of the Republic of Turkey can receive a monthly
entry and visa to settle by paying 10 dollars.
The development of the tourism sector is observed year by year. For example,
the income obtained from the activity of hotels and motels only in 2003 was 208
billion 214 million 400 thousand manats. In 2003, 74 companies were licensed
and the state budget attained 203 million 500 thousand manats from this.
In 2008, the growth of the sector was 37%. The number of tourists coming to
the country goes up 20-30% every year. In 2002-2015, 250 new tourism facilities
were put into use.
The tourism sector was within the main targets included in the development
program of regions covering 2004-2008, 2009-2013, 2014-2018, so projects
and business plans prepared in relation to the improvement of eco-tourism were
submitted to foreign investors interested in this field.
The Ministry of Culture and Tourism of the Republic of Azerbaijan is responsible
for an ambitious tourism development programme. it would be noteworthy to
mention about some of the successful projects held in recent years. The creation
of the Shahdag Mountain Resort in Kusar district is one project in this programme,
offering all year winter tourism activities in world-class quality and service.
Similar project of Tufandaq in Qabala district is also major tourist complex.
Azerbaijan will be a development perspective of tourism with such various
projects, cultural measures and will possess a wide tourism potential with the
regulation of the infrastructure. All the regions with its cultural and art centers will
have an irreplaceable position in the developing tourism sector.
Besides, in recent years there have been two major organization great supports
to the promotion of Azerbaijan.

89
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

The Eurovision Song Contest of 2012 took place in May, 2012 in capital Baku,
Azerbaijan, following Ell & Nikki's victory at the 2011 contest marking the first
time that the country had won the contest.
The 2015 European Games, also known as "Baku 2015 European Games", were
the inaugural edition of the European Games, an international multi-sport event
for athletes representing the National Olympic Committees (NOCs) of Europe. It
took place in Baku, Azerbaijan, from 12 to 28 June 2015, and featured almost
6,000 athletes from 50 countries competing in 20 sports.

3.3.4. FINANCE
The following financial sector will review under the banking, insurance and
securities exchange sub-headings.
3.3.4.1. Bank
The activities of the ongoing transition to a new system, is continuing a
newstructure of the financial system, at the same time including a bank.In the
country operates National Central Bank, shares in state-owned banks, private
investment local banks and foreign-owned banks.
Central Bank, the legal person which is all part of the capital is the state-owned,
has a lot tougher controls on financial markets. The process can be divided into
three stages in the development of the banking system. In the first stage, was
between the 1990-92 years the National Banking system was formed. In 1992-
94 years in hyper-inflation conditions the banking system has evolved in an
environment of instability. In 1994 and after that, Central Bank tried to develop a
re-drafting of the banking system stable macroeconomic environment.
Legal principles of the banking system in Azerbaijan have been taken with Article
14 named "The banking system and the money supply of "Fundamentals of
Economic Independence" Constitutional Law dated 25 May 1991. With this article
in Azerbaijan determined the legal foundations of an independent banking system,
the national currency unit, the status and powers of the National Bank. National
Bank was established on February 11, 1992.
"Law on Banks and Bank Activities" entered into force with sequence "Law on
the National Bank" on August 7, 1992,in relation to the regulations on Bank and
National Bank. In December 1992, the charter of the National Bank of Azerbaijan
was adopted. In the country targeted banking system establishment consisting
of the National Bank and other banks: In money and banking sector identification

90
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

of policies, monitoring and control authority refers to the National Bank. Bank law
covers all banking activities in the modern meaning, however, those targets can
not be carried out by reason of the lack of a free market economy system with
literally intact and there is no banking system modern meaning.
In the early years of the transition to a free market economy in Azerbaijan there
was a strong control over banks due to the establishing of a banking system.
Commercial banks, which benefiting from the legal loopholes developed rapidly.
Established banks concentrated mainly in speculative activities.
Law on "The National Bank of the Republic of Azerbaijan" was adopted June 10,
1996. In connection withthe related laws some changes and amendments have
been made in 1997, 1998, 2001, 2002, 2004 and finallyin 2015 years.
"The Law on Banks in the Republic of Azerbaijan" was approved by the head of
state on January 16, 2004, with the final version.
In Azerbaijan the financial market instruments and banking services has not been
developed. However, locally-owned banks trying to increase the diversity and
quality of service in order to compete with the subsidaries of foreign bank’s
subsidaries.
At the beginning of 2001 the number of bank and non-bank credit organizations
which were 158 dropped to 116 in 2002. As of the beginning of 2005, 114
licensed credit organizations operated. By collecting funds from the publicin
2009, 42, to performthe activities carried out by the bank with the foreign
exchange unit 43, safeguards and to guarantee 41, to operate with plastic cards
30 credit organizations has licensed.
In Azerbaijan trend of an increase in the number of bank continued until 1995.
Since 1996, the number of banks has started to decline.
Especially in the first years of independence, there was an increase in the number
of banks due to the keeping low of the capital structure of banks. Then after the
happened banker disaster was a gradual decrease in the number of banks while
entering the trend of gradual increase in the amount of investment in the
establishment of the National Bank. With the new regulations on October 1, 1997
the adequacy of the authorized capital for the newly opened banks increased to
$1,250,000, for the operating banks to $800,000. After the regulation began to
stop the activities of small banks.
On 01.01.2000 datein accordance withthe policy ofimproving of thebanking
system the minimumcapitals ofbanks increased to $ 2 million and for the 2016

91
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

established banks to$ 50 million. The number of banks, which is higher than
before decreased as a result of the merge of some of the commercial banks the
activities of some banks to putting an end because of the inability to raise capital
building to $ 2.5 million. In 2016, unable to raise the authorized capital of $50
million 8 bank's license has been cancelled44.
As a result of the decision to direction of increasing the capital structure of the
banking sector in the country, 50 banks have been disqualified since 2001. The
number of the banks decreased to 59 at the beginning of 2001, to 53 at the
beginning of 2002, and to 43 at the beginning of 2005 while operating 240 bank
credit organizations in the beginning of 1990. Two of the banks arestate-
owned banks, 38 private banks. 15 banks have foreign capital or foreign capital
participation.
At the endof 1995, 4 state-owned bank Agrobank, Industrial Bank, Deposits Bank
and the International Bank had 80% of bank assets, 85% of unpaid back credits,
75% of deposits, 65% of branches and 70% of employees in the banking sector.
There were 2 state-owned banks (International Bank of Azerbaijan and Kapital
Bank) as of the beginning of 2005.
Evenin Soviet times, in 1988, United Universal Bank was establishedas a joint-
stock company joining of Agroprombank, Promstroibank and Sberbank (Agrar
Industry, Industrial Investmentand Deposits Bank) of opened specialty banks in
Azerbaijan in 2000. In 2004, the bank's name was changed to Kapital Bank.
Kapital Bank was privatized at the end of 2000’s and became the biggest privately
owned bank in Azerbaijan. The International Bank of Azerbaijan is another state
bank which was founded in 1992 on the basis of Soviet’s Vnesheconombank’s
department.
Most of the state-controlled banking sector, in particularly was under the
influence of the International Bank of Azerbaijan. Assets of International Bank of
Azerbaijan was compatible with 54% of the total assets of the banking sector. 7
points increase is remarkable of this ratio over the previous year.
While the number of operating banks branches were 191 in the beginning of
2002, this number increased to 226 at the beginning of 2003, to 350 at the
beginning of 2005. The number of non-resident banks' branches is just 3.
Department of credit institutions, representation and so on activities are poor
aboard. This enterprises functions in the form of 1 department, 1 representation
and 1 closed bank in aboard.
44
www.cbar.az

92
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

According to a review of the number of branches of banks operating in the

country, the numbers of branches of private banks seem to be more than the
number of department of state banks.
There are also some subbranches of foreign banks in addition to Turkish banks
established in Azerbaijan. Foreign-owned bank in Azerbaijan can be established
both 100% of the foreign investment, as well as the joint. The share of foreign
capital in banks limited to 30%.
The share of foreign banks in the sector when compared with many countries,
this ratio is high. Lack of investment by local banks caused being weak competition
with foreign banks.
Furthermore domestic and foreign banks carry out financial transactions with
many countries via the established "correspondent" banking relations.
By the end of 2008 the total amounts of the charter capital of banks were 3051.0
million Manats an increasing of 41.3% over the previous year. As of January
2009 the total share capital of state banks are accounted for 340 million manat,
1411 million manat of private banks. The fund which was established with parti-
cipation of foreign capital in banks' charter was 352.8 million manat was equal
to 32.6% of the total share of the fund. Surely implemented tighter monetary
policies hada big impact in the reduction of number of banks. In 2015 National
Bank’s President Mr. Elman Rustamov was re-elected to his post, country’s
biggest state bank changes its management and national currency devaluation
occurred. The bank renamed as Central Bank of Azerbaijan. Recent devaluation
forced Central Bank to renew bank system, tighten the control. As a result
approximately 10 banks lost their licenses and numbers of the banks reduced up
to 30’s at the beginning of 2016.

Credit and Loan Interest Rates

The advantage of the banking sector in the economy has increased steadily and
with the increase of confidence in the banks have increased deposit and loan
volume. The share of the private sector began to increase with each passing
year seen in given loans. While given by private banks 35% of the total loans in
2002, in 2014 this ratio realized as 76%. The advantage of state-owned banks
seems to be 45% between the years of 2002-2015.
The share of bank loans in foreign credit institutions while was 15% in 2002,
backs liding in 8% in 2008. In 2002-2008 years 47% of credits were given as a
manat, 53% as a foreign currency. Significant increases were in the amount of

93
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

directed credit to the private sector. These important developments such as the
introduction of the monetary and credit policy allowed more success.
While directing 70 % of the more short – term total loans to the private sector in
2002, it was directed 75.6% in 2008. While being 30% of all loans of the volume
of credits directed to the public sector in 2002, it was directed 24.4% in 2008. In
addition, trade-service and transport-communication sectors have been given
more loans.
Interest rates are determined by the market, tried to get the development of the
financial sector while deliveries the treasure operation passing through a market
activity.
Table 14. Credits (million manat)
Years Short-term Short-term (%) Long – term Long-term (%)
1995 1264.8 87.3 184.2 12.7
1997 1901.1 93.1 140.9 6.9
1998 2087.7 97.8 45.9 2.2
1999 2160.5 97.5 55.0 2.5
2002 1672.0 72.0 649.8 28.0
2004 1769.9 72.8 661.4 27.2
2006 1871.2 71.9 1129.6 28.1
2007 1649.5 35.2 3032.3 64.8
2008 2295.9 31.9 4895.4 68.1
2009 2359.9 28.1 6047.5 71.9
2010 2567.1 28.0 6596.3 72.0
2011 3051.2 30.7 6899.1 69.3
2012 3885.1 30.5 8835.4 69.5
2013 2297,4 20.8 8779,3 79.2
2014 2494,2 18.4 11011,5 81.6
2015 1777,3 16.2 9235,7 83.8
Source: The Central Bank of the Republic of Azerbaijan, www.cbar.az

Short-term loan interest rate was 19.53% at the beginning of 2001,19.74% at the
beginning of 2002, and 18.17% at the beginning of 2003. Long-term loan
interestrate was 21.60% at the beginning of 2001, 20.70% at the beginning of
2002, and 18.86% at the beginning of 2003. The three-monthloan interestrate in
the interbank market was 20.3% at the beginning of 2001, 19.75% at the
beginning of 2002, and 19.67% at the beginning of 2003. In 2008, the average
nominal interest rate for loans increased. At the end of 2007, 15.91% of the loan
interest rate with manat was 15.55% by the end of 2015. However, considering

94
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

the last 12 months, the inflation rate was 10.4%. It can be expressed 9.76%
decrease in real interest rate. The situation has significantly changed in 2015-
2016 and still volatile.
Deposit and the Deposit Interest rates
It is seen a large portion of deposits placed as aforeign currency. In 2002, 5%
increment compared to 2001, in a large part of 85% of deposits, in 2004, 80%
was realized in foreign currencies. The rate of manat deposits was 15% in 2002,
20% in 2004. In addition, a large part of deposits collected in state banks. In
recent years, the volume of deposits increased, especially to state banks by the
people. This condition as the first time may be considered as an increasing
confidence to the banks.
In 2008, the volume of deposits was 5126.3 million manats increased by 77.9%
in banks. 1029.1 billion of deposits was in manats, 4097.2 million manat was in
foreign currency. 2015.6 million manat deposits in banks that have been provided
by private individuals, this amountis more than 60% over the previous year.
3110.7 million manat deposits in banks that have been provided by legal entities,
this amountis more than 73.5% over the previous year. 47.6% of deposits
belonging to private banks. Increasing 53.5% of private short-term deposits,
66.5% of long-term deposits can be considered of starting to increasing public
confidence in the banking system. On the other hand, while increasing 63.8% of
the volume of deposits by foreign currency, 86.6% increasing of the volume of
deposits in manats can be considered to beginning of a growth in confidence as
the local currency which was eliminated in 2015.

Figure 15. The volume of loans (million manat)

14000
12000
10000
8000
6000
4000
2000
0

Source: SSCAR Publications.

95
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

In 2009, deposit interest rates remained stable. While increasing the average
interest rate on deposits in manat from 6.5% to 6.73% compared to the previous
year at the end of 2015, the average interest rate for foreign currency deposits
fell from 80.08%.

Foreign Loan Institutions

While the number of foreign credit institutions was 99 at the beginning of 2001,
it had fallen to 63 at the beginning of 2002, to 45 at the beginning of 2009. The
number of bank foreign credit organization has risen to 70 at the beginning of
2009. 25 branches of foreign banking organizations operate.
Some problems existed in connection with the development of foreign banking
credit organizations. First of them is the absence of adequate institutional
arrangements. In addition, giving small loans has not yet fully comprehended in
Azerbaijan. 100-1000 dollars given loans of these organizations, has been accepted
as a temporary situation in connection with the transition process, regarded as
humanitarian aid. In fact, giving the small loans, in the absence of an effective
banking sector and due to the low level of life, makes sense for the development
of small-scale entrepreneurship in Azerbaijan. Another problem is that, these
short-term loans provided by institutions do not mean anything on the evaluation
form in economic development.
A variety of international credit organizations as "ACDI/VOCA", "ADRA", "FINCA",
"NNE", "NRC", "MC", "OXFAM", "IOM", "SCF" and "WVI " operated in Azerbaijan.
In order to give the micro-loan 15 non-bank credit organizations operate in the
country. Azerbaijan Micro-Finance Association (AMFA) was founded by micro-
finance institutions on December, 2001.
By the end of 2004 there were several credit institutions created by international
organization: Azerbaijan Micro-Finance Bank, German-Azerbaijan Fund and other
non-bank credit organizations officially registered under the Azerbaijan Micro-
Finance Association.
Micro-finance institutions operating in the country due to finance some of the
projects gave small micro-loans in 54 different regions, 47 thousand small and
medium-sized entrepreneurs (40% women). The amount of each given loan
varies from $100 to $125,000 Dollars. These organizations gave the small loans
to the businessmen total amount more than $117million, 787 thousand by the
end of 2004. At the end of 2005, this figure is calculated to exceed $ 200
million$.

96
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

Micro-finance is seen as one of the ways most appropriate for the reduction of
poverty in the country. In Azerbaijan there area wide range of potential and great
opportunities for the provision of micro-loans.
One of the micro-loan organizations is Azerbaijan Micro-Finance Bank. Azerbaijan
Micro-Finance Bank (the new name Access Bank) founded by (EBRD, IFC, Black
Sea Trade and Development Bank, the LSF Financial Systems) (AMFB International
Finance Corporation, the European Bank for Reconstruction and Development,
Black Sea Trade and Development Bank, "Kredit tanstalt fur Wiesderaufbau
(KfW)" and "LFS Financial Systems") international anonymous group of
companies. AMFB is supported by the EU technical assistance program and
German government.
AMFB started to participate in the retail market with its micro and small loans in
September 2003. The total amount of more than $1 million 170 thousand Dollar
loan was given by AMFB. The bank was able to increase its loan portfolio during
2003. Bank gave more than 3,500 loans in the amount of $7.3 million Dollars in
2003.
Micro-Finance Bank gave about 10 thousand micro-loans cost of $23 million
since its inception until April 2005. The annual interest rate son loans between
$100-125000 varies between 18-36%.
On the other hand, the National Entrepreneurship Support Fund gave loans through
19 representative banks and 5 other credit institutions. The loan limit given by
fund was raised from $500,000 Dollars to million Dollars with final regulation. On
the other hand the term of the 7% loan interest rate increased from 5 to 8 years.
63 million Manat loan was given to the sources of the fund's via different banks.
As in 2014, in 2015, it was pointed out in the budget, 900 million of dollar
budget source lending to entrepreneurs.

Problems in the banking sector

In Azerbaijan’s financial sector the structure is still not very strong. People are
more inclined to trade in Azerbaijan. However, it does not have the necessary
financial resources. There is no public confidence in the banks because of the
"Tragedies of banker" that happened in country previously. Therefore, those who
have the financial reserves realized it without banks. Some people take respon-
sibility on the task of making the loan. Income problem seems at the beginning
of the problems that arise in the banking sector.
There are too many commercial banks in the sector and basically, structural
feature with a single branch banks, have limited capital resources.

97
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

There form of the financial sector is progressing very slowly.

Specifically, the great advantage of the local state-owned banks in the economy
taken part in the privatization and privatization continues. Creation on the
progress of its banking system in Azerbaijan, also work has been done on the
reshaped in state banks.
In 2016 Central Bank canceled several banks licenses due to not compelling with
the requirement of a minimum amount of capital 50 million. After two devaluation
in 2015, failed to fulfill its obligations to creditors, for failing to manage current
activities in a safe and prudent manner. For example, the "Caucasus Development
Bank" JSC, "Atrabank", OJSC "United Credit Bank", "Ganja Bank", "Bank of
Azerbaijan" has already suspended operations. Also, "AGBank" and "Bank" JSC
was signed between the initial consolidation.
As of January 01, 2016 overall assets realized 34906,0 mln. AZN, loans 21152,0
(mln. AZN) and households savings 9473,9mln. AZN.
Growth varies throughout the world, although economic growth prospects are
higher for 2015 and upcoming years (3.5% in 2015 and 3.8% in 2016). Economic
growth in DDCs is expected to prevail over that of 2014, while it will be weak in
DGCs.The Management Board of the CBA decided to set the exchange rate of US
dollar against AZN at AZN 1.05 as of 21 February 2015 in light of the situation on
the FX market. The decision was taken to create additional impetus for the
diversification of the economy, further enhance its international competitiveness
and export capacity, and ensure strategic sustainability of the balance of
payments and country’s international solvency45.
The loan portfolio of the banking sector rose 21.2% in 2014 and reached AZN 17
175 million as of the endperiod Credit growth sourced primarily from systemically
important banks. Thus, systemically important banks made 8.3 p.p. contributions
to the growth of the credit portfolio in 2014. The credit portfolio rose 11.3% in
nominal terms and equaled 20.6 billion AZN in Quarter 1, 2015. If not taking into
account the difference in the real exchange rate, the real size of the portfolio
remained unchanged over the quarter. Net profit of the banking sector constituted
AZN 370.5 million as of the end of 2014, roughly 38% higher relative to the
previous year. The number of profitable banks and their share in the banking
system increased regularly over the years 2011-2014. Thus, the number of
profitable banks rose from 30 to 35, with their share in the banking system

45
http://www.cbar.az/assets/3753/illik_hesabat_az2014-_web.pdf

98
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

increasing from 47% to 96%. Aggregate loss of banks operating with loss
declined to a considerable extent and totaled only AZN 4.79 million (AZN 322.5
million in 2011). Non-satisfactory and doubtful loans made up 5.9% (AZN 1 174
million) of the credit portfolio of the banking sector as of 31.03.2015. According
to CBA requirements, respectively 30% and 60% reserves should be established
on such loans. Establishment of a 100% reserve as a sign of default on non-
satisfactory and doubtful loans was simulated in order to assess the impact of
possible shocks on the quality of bank loans. Assessment results suggest that
the banking sector, overall, is resistant to this shock: the capital adequacy ratio
of the sector may decrease down to 14.7% from 17.3%. As of 31 March 2015,
the foreign debt balance of the Azerbaijani banking sector was AZN 6.4 million,
22% of the total liabilities. The refinancing ratio (rollover ratio) of the banking
sector was 89% in March, 2015. The refinancing ratio of the banking sector
constituted 150% in the medium term (2009-2014), which reflects high potential
of banks to attract funds from foreign markets46.

Reforms in Banking Sector

Thereforms carried outon statebanks; thedevelopment of the management, new
servicesand markets, organizationbankscarried out SAC program according to
the World Bank. AZIPS system established by National Bank on February 16, in
2001, ensures quickly procession of the payments led by banks and provision
online information system. This systemis based on SWIFT respond to interna-
tional standards.
In order to eliminate deficits in banking sector, the government prepared reform
programs under the supervision of the World Bank and the International Monetary
Fund in 1999. The main objectives ofthe strategy was reorganization and
privatization government banks, the combination of private banks, improvement
the quality of regulatory, supervisory body of National Bank of Azerbaijan and the
ability to create robust, effective and competitive technology, development of
infrastructure including periodical audits.
In 2002, banking reform has continued to increase financial assistance on small
and medium-sized enterprises in order to strengthen the national banking system.
Important works has been done in area of lending to private sector from the state
banks. In order to increase competition the process of promoting foreign
investment in the banking sector eased further. The banking sector has been

46
http://www.cbar.az/assets/3753/illik_hesabat_az2014-_web.pdf

99
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

accelerating its activities in the field of infrastructure. Preparation the new laws,
norms and acts for the banks is started.
In order to create favorable conditions for the development of the banking
system, obtain a good work experience and techniques in the sector speeding up
the investments planned to sell 20% of the initial capital of the International Bank
of Azerbaijan to the European Development Bank.
The process of transition to non-cash payments in Azerbaijan's banking market
accelerates. Experience of the world of the transition of non-cash payments; with
drawal of the nation's financial resources to the banks improved economic
situation in the country in terms of quality and it also raise the social life
standards of the people.
Implementation of "Internet Banking" and "Mobile Banking" payment systems in
Azerbaijan started January 2005. These activities have been implemented
according to the recommendations of the World Bank (WB) and International
Monetary Fund (IMF).
Today the opportunities are expanded in order to serve customers in the banking
market of Azerbaijan and world-class services are provided in maximum extent
compatible with their requirements.
The development of the banking sectorin the country and so to restore public
confidence in the banks, establish a deposit insurance fund and the law on
deposit insurance should be considered. For problems that may arise due to the
revision of the deposit insurance fund the banks must follow the policy of
National Bank to show true financial accounts.
Some works has been done within the framework of reforms to insure the
deposits. Deposit Insurance Fund regulations on the establishment and activities
regulated by a separate law in 2011.
Infrastructure works, payment systems, accounting systems, such as banking
supervision and legal infrastructure works will continue in banking sector. In
terms of private sector development in the banking sector, in particular, will allow
easier access to credit opportunities.

3.3.4.2. Insurance
After the collapse of the Soviet Union one of the works in the first period was
reorganization of the Azerbaijan State Insurance Company which was available in
the previous system as State Insurance Agency of Azerbaijan.

100
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

On September 20, 1991 a decree on the establishment of "The Azerbaijani

Republic State Insurance Commercial Company" was approved. According to
the decree, State Insurance Commercial Company is an independent, released
by control of the Ministry of Finance, can work on their own terms, as a self-
financing company began operating by approving the charter on November 22,
1991. On January 24, 1994 the company's charter has been changed by the
Cabinet of Ministers and came into force. From 2000 to 2008, the efforts were
realized due to create legal infrastructure of the insurance sector for working
conditions47.
State Insurance Commercial Company in reinsurance field cooperated with
"SEDJWICK", "WILLS FABER & DUMAS" insurance broker teams of "LLOYD"
(England) group of insurance companies, "Munich Re" (Germany) Reinsurance
Company, "Asia" (Iran) Company and "Lukoil" (Russia) Inc. insurance.
The second step was to put an end a monopoly, in order to develop the country's
insurance sector. For this purpose, after a short time companies operating
effectively as opponent to State Insurance Company, insurance companies
started to prove themselves in the sector.
Insurance companies were established along with foreign allies from 1992, and
totally based on localcapital from 1995.
There were 28 insurance companies in the country as of the beginning of 2009.
22 of them were national and 7 of them were the foreign-owned joint insurance
companies (England, Turkey, Russia, Iran, the US, Italy).
Foreign insurance companies are more interested in the insurance sector,with
each passing day in Azerbaijan. However, in order to avoid the monopoly of
foreign investors in the insurance sector has some limitations. For example,
foreign investors can have only maximum 49% of the insurance sector. Therefore,
foreign investors prefer to have their shares instead of buying insurance companies
operating in the country. Currently insurance market is dominated by giants such
as AXA Insurance. However due to the loopholes in legislation, this area is not
developing as it would be.
As of the beginning of 2009 the total amount of authorized capital of the
insurance companies operating in the country increased 46.7% over the previous
year. In this context, while increasing 39.7% the authorized capital of 22 local

Əlövsət Qocayev, “Azərbaycan Iqtisadiyyatında Sığortanın Rolu”, Dialoq Azərbaycan Iş Dünyası Dergisi, Sayı:15, TÜSIAB
47

Cemiyeti, Baku, 2004, 55.40-41.

101
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

insurance companies, the authorized capital of the 7 joint foreign-owned

insurance company increased 26%. 82% of the authorized capital accounts for
the local insurance companies, 18% accounts for joint foreign-owned insurance
companies. A large part of the total investment in the insurance sector companies
concern to International Insurance Company founded on February 5,2002 and
got licensee on April 1,2002.
"Insurance Law of the Republic of Azerbaijan" No. 436 entered into force on
January 5, 1993. Later in order to adapt to the requirements of the law the new
"Insurance Law" was passed by parliamenton June 25,1999 and entered into
force signed by the President on August 19, 1999.
The signing of oil contracts since the beginning of 1994 has led to the entrance
of large amounts of capital in Azerbaijan. As a result, large part of the insurance
companies was directed in the oil sector. Foreign citizens living in Azerbaijan,
stateless people and foreign legal entities have the insurance right along with
citizens of the country and companies.
Within the insurance sector reforms, investment structure of insurance companies
operating in Azerbaijan gradually increased. The decision of the Cabinet of
Ministers, signed a decree by President of Azerbaijanon insurance on May 4,
2000 as for the insurance companies agreed to a phased capital structure is as
follows; until 01.01.2002 500 million Manat, until 01.07.2002 750 million
Manat, until 01.01.2003 1 million Manat, until 01.07.2003 1.5 million Manat, until
01.01.2004 2 million Manat ($ 404.000). Since January 2005, each insurance
company's authorized capital is decided to be to a minimum of 2.5 million Manat
($ 510,000).
According to the decision taken by the Cabinet of Ministers of Azerbaijan in
2004, the minimum investment amount of the authorized insurance companies
operating in the country should raise until 2010, 5 gradually billion manat (about
$1,000,000), in reinsurance companies should raise 10 million Manat. Starting
in 2004, insurance companies should increase their investments 500 million
manat each year. Reinsurance companies must add 1 million manat annually to
their investments. According to the decision of Cabinet of Ministers "The minimum
amount of insurance and the determination of the authorized capital" companies
operating in the insurance market should increase the authorized capital 3 billion
manat in 2006, 3.5 million Manat in 2007, 4 million Manat in 2008, 4.5 million
Manat in 2009, 5 million in 2010. As a result at the beginning of 2010 the
authorized capital of the insurance companies at least should be $ 5 million
Manat, reinsurance companies should be 10 million Manat.

102
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

The authorized capital of newly established insurance companies should be

minimum $5 million Dollar, and re-insurance companies should be 10 million
Manat. Considering investments most of the insurance companies seem to be
small and medium-sized companies. While performing 90% of the volume of
insurance activities 10 insurance company in the country, part of the remaining
10% was the share of other insurance companies.
Foreign insurance companies have more impact on the insurance sector. Foreign
companies operating in Azerbaijan basically have insurance in their own countries
insurance companies. Besides because of weakness of the ability of local
insurance companies’ payment re-insurance the large-scale insurance contracts
outside the country.

Insurance Services
Insurance companies take guaranteed many risks by offering variety of insurance
services to domestic and foreign companies and businessmen. There are 35
different types of insurance in the insurance sector. 9 are compulsory from this
types of insurance, 26 are voluntary insurances. The most common types of
insurance are accident, fire, medical, personal accident, cargo, automotive,
financial risk, life, engineering, agriculture and live stock insurance.
Insurance companies are uniting much more in small-scale enterprises. However,
after passing the free market system the number of insurance services grows
with each passing year with the development of the insurance sector. Having
more type so voluntary insurance from compulsory insurance is an indication of
the development of the insurance market in Azerbaijan.
Land slides, floods and water disasters such as the flooding takes place in
Azerbaijan in recent years. While insured entities operating in Azerbaijan and
people property, they have the ability to prevent the loss of a large volume will be
revealed as a result of any natural disaster or the personal intervention.

Insurance Rights
Insurance premiums collected by insurance companies increases every year.
The amount of fees in 2004, an increase of 14.5% compared to 2003 was 287.3
million manat. 92.5% of the collected insurance premiums are the types of
voluntary insurance. The insurance premiums accounted for 91.9% of the local
insurance companies. 70.7 million manat paid for the insurance events
correspond to 21.6% of total insurance premiums.

103
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

The insurance sector is still under development and the benefit to the economy
is very few compared to their financial institutions. The turn over of the country's
insurance market Gross Domestic Product (GDP) is less than 1%.
Basic Problems in the Insurance Industry
In the slow development of the insurance sector, among the causes of relatively
little benefit from insurance services of local people and businesses is paramount
importance the low level of income and the inability of the people for seen the
benefits of insurance.
One ofthe main reasons forthe lack of interest and confidence of people's in
insurance sector in Azerbaijan awareness and promotional activities ofthe
companies which are notsufficient.
The development ofthe insurance sector and trust to the sector which is the
basic elements of the dynamic development, is one of the factors that will
increase the flow of foreign investment into the country.

3.3.4.3. Securities Exchange

In connection with the formation of the stock market regulations started with the
adoption of the law "on the Securities and Market". The stock market has
become even more with the start of the development phase of privatization in
Azerbaijan. December 30,1998 signed a decree by the President of Azerbaijan
on "Establishment of the State Commission on Securities under the President of
the Republic of Azerbaijan". The most important information about the Securities
Market reflected in chapter 2 of Article 3 of the Law on "Financial Markets"
National Depository System. Providing information about the state regulation in
the relevant article of the Law in connection with the Securities Market is given
information about participations to be carried out how and by whom. Special
attention is paid to the establishment of the securities market since 1998.
Securities market principles of operation determined according to the law on the
State Short-Term Bonds Issuance".
The Securities Market established by 18 companies, actually established on
February 15, 2000 and the official opening took place in 2004. Stock trading hall
which has 30 employees is suitable for all kinds of securities to commercial
activities, in terms of technical procurement. Stock partners are The European
Securities Market, Istanbul Securities Market, Fessaloniki Securities Market,
INISIT, Interfax, and National Bank of Azerbaijan, International Bank of Azerbaijan
and Azerbaijan Investment Promotionand Advisory Foundation.

104
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

In exchange in the first years not with standing the fact that the prices of
securities issued by the government, in later years securities of companies
began to see the co-operative and anonymous.
The securities market is not formed yet all means to achieve a certain amount of
activity is too early to say that. Especially, limited financial actions, distrust of the
problems in the economy and financial markets, lack of information, significantly
hinders the development of the stock market. In the future, foreign companies
investing in the oil sector is projected to produce to the market price of its
securities that, important legal arrangements have been carried out on them. For
the development of securities market, a little bit of the volume, repo and reverse-
repo operations take an important step.
Corporate documents markets not been formed yet. As well as in local firms,
International bond markets of Azerbaijani government did not witness any activity
yet. With the acceleration of the privatization, the bond market is projected to
develop.
Another problem of the securities market in Azerbaijan is a limit of market for
foreign companies. One of the main reasons for this is much less values used in
the portable market. Foreign investors do not want to invest in the securities
market. Because the foreign investors can not be profitable in order to receive
interest income in the rate of 4-5% with the national currency in financial market
of developing countries. Expectations of foreign investors are higher than these
rates, especially for developing countries.
The new relations with investors are established, in order to increase the
Authorized Capital of the Securities Market. As a result, the authorized capital
stock reaches a volume of 5.4 million Manat.
Since the beginning of the activities of the organization until 2005, the structure
of the securities market in the country is trying to be formalized. This structure
covers Securities Market, loan institutions and broker age firms.
In recent years, increase in the volume of cargo turnover prices and the
development of new securities values is observed. In 2003, the main securities
were government bonds and shares of stock companies. Stock prices become
one of the most organized sectors of company bonds as a result of privatization.
At the beginning of 2004, the first bank bonds were in offered. One of the new
financial documents was short-term notes of National Bank. The above mentioned
securities have been introduced to financial markets on September 2004. Referred

105
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

to as "Not" these securities will take responsibility for any kind of request for
money. Notes circulation in the country is explained by the increase in the
demand for money. National Bank prefers these type of securities, referring to in
addition to the removal of the money supply in circulation will lead to inflation.
They would prefer to use notes, while consumers demand increases for money.
Such practices are common in many countries around the world. The purpose is
to pay for the need for new financial bank note was in circulationin the act, as
well as the process to prevent inflation. The new notes put into operation via
licensed 38 commercial banks in the country.
The first phase of development of the securities market is the creation of stocks
in Azerbaijan. In the process mainly investors should be focused trade portfolio
equity. For this the privatization of large enterprises seems to be one of the most
important steps. Thus investors do not pay serious attention to the small-sized
enterprises. Secondly it is necessary to achieve transparency in the market.

3.3.5. TRANSPORT AND COMMUNICATIONS

Transport and communication sector has a share of over 7% of GDP. In 2014,
the volume of transport services declined 1.6% compared with a previous,
communication services increased 4.4%. A portion of the oil transported from
Turkmenistan and Kazakhstan through Iran and Russia, has a negative impact
on the volume of cargo transit through Azerbaijan.

Figure 16. Location of Transport and Communication Sector in GDP (%)

20
18 18.7
16
14 12.5 12
11.4
12 12.5
10.1 10 9.1 9.2
10 11.3 8.7
8.3 10.7 7.1
8 9.8 9.5 8.9 9.3 6.8
8 7
6 7.1
4
2
0
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014

Source: SSCAR Publications.

106
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

In 2008, 56.5% of the cargo carried as transported by road. 15.4% of cargos are
transported by pipelines, 17.8% by rail, and 11.2% by sea. 57.8% of cargo, 84.7%
of passengers was carried out by privately owned vehicles. 57.9% of cargo was
transported by road in 2015. 27.7% of the cargo transported pipeline, 9.8% by
railway and 4.5% by sea. The private sector share in the area of communication
services has grown annually. Finally, the share of private sector in 2009 was
71.3%. 74.2% of communication services were carried out by the private sector.
In the coming years, the share of the private sector will continue to rise in the
area of communication services.
The limited access to open seas and roads do not meet the demands of
international standards are the most important problems. Communication sector
is growing as a result of integration with the world. Sea, air, road, railway pipeline
transport and communication will be examined separately in the chapters below.

3.3.5.1. Sea transport

Azerbaijan, in terms of sea transport in the region has significant potential as a
transit country. Being one of the largest in the country there are 15 ports,
although there are hundreds of kilometers of coastline on the Caspian Sea. Baku
International Sea Trade Port is the largest port in the country.
When there is no railway in Azerbaijan transport has played a major role by sea.
Sea travels were carried out directly and regularly between the Azerbaijan and
the Caspian littoral states. Trade relationship has been established with Iran,
Turkmenistan, Dagestan, Kazakhstan and Russia through the Caspian Sea.
Baku International Sea Trade Port, in addition to appearing as part of the strategic
logistic infrastructure, also transportation of mineral products and other raw
materials from Central Asia to western markets as a logistics corridor in
geostrategic point. Baku port is not only deep, also does not freeze in winter. The
port is not very favorable for passenger transport.
The nature of the world that is not conducive to the integration of infrastructure in
Azerbaijan, sea transport is old and uncomfortable. Overall, the main reason for
the decline in the transport sector has emerged sector's ties with the countries of
the former Soviet Union.
The total number of passengers using the transport sector declines gradually in
marine transportation. In 1990, 500,000 passengers used marine transport, in
1991 400,000, in 1992 and 1993 100,000, in 1994 60,000, in 1996, 39,000
and in 1997 43,000. Stagnated until 2002, passenger increased by 27.3% over
the previous year. In 2003, decline in the number of passenger transport

107
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

continued, however in 2004, 46.3% a significant increase was observed. In

2015 25% increase was observed in comparison with the indicators of 2014.
Development of freight transport: in 1960, 9.163, in 1970, 13.138, in 1980,
11.354, in 1990 3.870, and in 1997, 5.008 million tons of cargo was carried out
by sea. According to 1970 to 2005, the volume of cargo transported by sea is
reduced until the mid-90s. With the exception of 1999, since 1998 the volume of
marine cargo transportation displayed an increase in the trend. According to
2014 data there was 6.7% decline in cargo transportation compared to 2013. At
the end of 2015 because of the Turkey-Russia crisis Central Asian Turkish trucks
passing through Azerbaijan being the Caspian Sea as an alternative direction will
increase sea freight transportation. Another reason for the increase is start of
operations in the the international sea port in Alat settlement. According to the
President Ilham Aliyev’s Decree on October 18 2007, construction of the Alat the
project of new Baku International Sea Trade Port Complex program was prepared
by the winner of the international bid in the Netherlands, "Royal Haskoning"
company. The first stage is provided 10 million tons of cargo, TEU containers up
to 40 thousand, the second stage 17 million tons of cargo, and TEU containers
up to 150 thousand, the third stage 25 million tons of cargo, TEU containers up
to 1 million.
First stage of the project building process is continued 3 years and 6 months.
At this stage, it is planned area of 104 hectares was built. The number of bridges
are 9 (including ferry-2, dry cargo-4, Ro-Ro-1, the service fleet-1). 100 ha area
of 400 hectares for the port complex (being 50 ha in the first stage) has been
designed the construction of the international transport logistics center. In the
framework of the TRACECA, location at the crossroads of port complex at the
East-West and North-South corridors was considered for international transport
and logistics center constructioncarrying out "The international transport and
logistic centers" project by experts of the European Commissioner for Transport.
As the 2nd stage of the development of the port, it is intended to build building 1
ferry and 4 bridges for dry cargo. This, in its turn, will add to the port's cargo
transportation capacity 7 000 000 tons and thus as a result of the port's cargo
capacity will increase to 17 000 000 tons, the volume of cargo transportation
will increase to 150 000 TEU containers.
At the 3rd stage, along with the construction of a new ferry terminal, it is planned
commissioning the container terminal in length 650 m.This will allow the ability
of the port's cargo transshipment for 25 million tons per year and 1 million TEU
containers loading and discharge.

108
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

In 2015, the volume of cargo transported by sea was more than ten million tons.
A large proportion of cargos transported by sea were oil and oil products. This
volume was 72.7% in 2014. Among the different geographical areas in which it
operates marine transportation the Caspian Basin is considered to be one of the
most important means for transportation in region due to the new infrastructures.
In the mid-1990s until 2015, the development of the transport sector played an
important role in the transportation to the Black Sea of the Kazakh oil through the
Caspian Sea.
Table 15. Sea Transport
Years Freight Freight Passenger Passenger
(thousand tons) Growth Ratio (%) transportation transportation
(thousands person) Growth Ratio (%)
1995 5713 -13 60 -7.7
1998 8178 9.0 20 -53.5
1999 7382 -9.7 14 -30.5
2000 8779 18.9 12 -15.1
2001 10247 16.7 11 -8.3
2002 11381 11.1 14 27.3
2003 13272 16.6 13 -7.1
2004 13208 -0.48 19 46.3
2005 13726 3.9 21 10.5
2006 13890 1.1 23 9.5
2007 14586 5.0 25 8.6
2008 15654 7.3 27 8.0
2009 13190 -6.1 10.4 -19
2010 11714 -22.1 12 40
2011 12499 13.9 17.3 29
2012 12371 -7.7 17.1 -42
2013 11509 -6 13.7 -16
2014 9934 -6.7 14.7 25
Source: SSCAR Publications.
One of the representatives of maritime transport fleet, ship named "Heydar
Aliyev", which became operational in 2004, was developed "Krasnoye Sormova"
shipyard in Nizhny Novgorod. The ship's value is estimated at $ 13.5 million. The
ship is equipped with the most modern technology. The ship will estimated to
bring Kazakh oil to world markets via the Baku port.
Baku Port can play affordable "transit" role for Middle East, Europe and South
East Asian countries. As well Baku port needs $ 2 billion. Feasibility and design

109
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

studies of project have been considered and project could be implemented in a

very short period.
In addition to Baku port, construction of a new port at Lankaran city will be
useful in terms of production and trade development of east of Mugan plain.
Material and technical infrastructure, which has special importance on maritime
transport, needs rehabilitation and development. For this transport sector, which
is important in Azerbaijan, there is a need to the ships used to transport heavy
cargo, the liquid cargo especially oil and chemical tankers and frigorific ships,
ferries rail cars used to transport cargo, liquid cargo, cargo floor and casting to
be used as a new type of ship cargo ships.

3.3.5.2. Road transport

The length of Azerbaijan roads is 25,000 km. Most of these roads are asphalted
roads. At the road transport passenger transportation are carried out more by
buses and mini buses. 80-85% of passenger transport takes place by means of
buses with roads. Transport number of cars is increasing every year. There are 3
highways to reach the open seas. These are the routes through Georgia to the
Black Sea, via Russia to the Black Sea and to the Persian Gulf through Iran.
Table 16. Car Road Vehicles
1990

1995

1999

2000

2001

2006

2007

2008

2009

2010

2011

2012

2013

2014
Years

Number of
cars 399 392 409 441 452 612 690 773 926 982 1037 1136 1232 1291
(thousand)
The number
of cars per
55 51 52 55 56 59 69 77 92 98 100 113 123 129
1,000
person
Transportati
on cars
260 278 307 332 343 480 549 616 759 815 871 958 1048 1100
(thousand
units)
The number
of cars per
36 36 39 41 42 45 52 58 75 81 87 95 104 110
1,000
passenger
Individual
small cars
per 100 16 19 19 19 19 26 29 32 38 40 42 46 50 52
families

Source: SSCAR Publications

110
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

The location on the crossroads of the historic Silk Road creates strategic position
to carry out a number of road projects. As a part of the TRACECA project,
Azerbaijan-Georgia highway was rebuilt according to the international standards.
Only by 2009, Azerbaijan has spent as much as $ 200 million in road projects.
For the purpose of the construction and repair of roads EBRD and the World
Bank, Asian Development Bank and The Islamic Development Bank provide
financial assistance. Azerbaijan needs more than $ 800 million funds for the repair
of roads and reconstruction. A comprehensive action plan has been prepared the
construction and renovation of roads in terms of the program on "Social and
Economic Development of Regions". With the aim of repair and reconstruction of
roads throughout the country in order to fund these projects in connection with
the allocation of credits has been addressed to the some international financial
institutions by the government.
Table 17a. Length of contact roads (2000-2007)
2000-2007 2000 2002 2003 2004 2005 2006 2007
General use railways, km 2116 2122 2122 2122 2122 2122 2099
Tram tracks
35.9 27 22 - - - -
(with a double-line account), km
Trolleybus routes
165.3 119.4 53.7 48.2 48.2 - -
(with a double-line acount), km
Metropolitan ways
28.5 28.5 29.9 29.9 29.9 29.9 29.9
(with a double-line account), km
Main pipelines, thousand km 4.4 4.2 4.2 4.5 4.1 4.6 5.3
Main oil pipelines 1.4 1.4 1.4 1.4 1.4 1.9 1.9
Main gas pipelines 3.0 2.8 2.9 3.1 2.7 2.7 3.4
Source: SSCAR Publications
Table 17b. Length of contact roads (2008-2014)
2008-2014 2008 2009 2010 2011 2012 2013 2014
General use of the railways, km 2099 2079 2079 2079 2068 2068 2068
Tram tracks
- - - - - - -
(with a double-line account), km
Trolleybus routes
- - - - - - -
(with a double-line acount), km
Metropolitan ways
31.5 31.5 31.5 29.9 34.6 34.6 34.6
(with a double-line account), km
Main pipelines, thousand km 5.8 6.3 6.4 6.5 6.1 5.7 5.4
Main oil pipelines 1.7 1.7 1.7 1.7 1.6 1.5 1.5
Main gas pipelines 4.1 4.7 3.8 4.8 4.6 4.1 3.8
Source: SSCAR Publications

111
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

Table 18a. Cargo in transportation sector, 2000-2007 (thousand ton)

2000-2007 2000 2002 2003 2004 2005 2006 2007
Total 80180 98445 110001 117314 128328 145596 167264
including:
railway 15876 17464 20345 20671 26522 30205 28007
sea 8779 11381 13272 13209 13680 13506 10174
aviation 37 31 52 75 74 75 52
pipeline 15054 15831 17262 18145 18534 27426 47408
oil pipeline 11774 9977 11283 11589 11692 19947 39999
gas pipeline 3280 5854 5979 6556 6842 7479 7409
automobile 40434 53738 59070 65214 69518 74384 81623
Source: SSCAR Publications

Table 18b. Cargo in transportation sector, 2008-2014 (thousand ton)

2008-2014 2008 2009 2010 2011 2012 2013 2014
Total 183093 190372 196452 203586 210862 217926 221991
including:
railway 27432 20799 22349 22203 23116 23127 21795
sea 11898 13190 11714 12499 12371 11510 9934
aviation 43 32 40 51 82 126 125
pipeline 55731 62115 62458 59053 57170 57941 61534
oil pipeline 44383 50480 49982 45602 43316 43549 45784
gas pipeline 11348 11635 12476 13451 13854 14392 15750
automobile 87989 94236 99891 109780 118123 125222 128603
Source: SSCAR Publications

The international transportation will be rebuilt until 2015. 1225 kilometers inter
urban road, on 1807 kilometers local roads were renovated and reconstructed in
the period of 2004-2015. In this context, the activities are successfully completed
for the following projects:
1. At the Baku-Alat (47km) section 508km highway, along the border of Baku-
Alat - Gazakh - Georgian reconstruction activities launched and completed
by the end of 2005;
2. The length of 132 km of Ganja-Gazakh-Georgian border road project costs
$60 million were completed in 2009;
3. Gazimammad-Kurdamir highway construction completed at the end of 2006
and costed $41 million, 85 km length of project financed by the European
Bank for reconstruction and development ;
4. Along the Kurdamir-Ujar-Yevlakh-Ganja road, the length of 188 km, and
costed 102 million dollars;

112
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

5. The reconstruction of the road 132km length in Ganja-Gazakh-Georgian

border costed $60 million were completed in 2009;
6. 208 km of Baku-Guba-Russian borderthe, project cost 280 million dollars
construction of the road in the first degree completed in 2009;
7. The 21km length project, which costed $30 million, Baku circle road has
been completed at the end of 2010.
8. In addition, 243km of Alat-Astara road, which costed about $300 million
completed in 2010.
9. 19.5 km length road at Bilasuvar-Iran border completed in 2009 and costed
$30 million Dollars.
10. 162 km long Baku-Shamakhi-Ismayilli road costed 270 million Manat
reconstructed in 2006-2010.
11. 71 kilometers long road, of Shamkir-Gazakh highway, the World Bank has
provided a loan of $ 40 million.
In the framework of the projects in Baku Georgian border, from the part the road
Alat-Gazimammad and 23-kilometer part of Ganja-Shamkir of Ganja-Gazakh road
asphalt cover renovated which respond to the international standards.
Rapid economic development in Azerbaijan is increased the number of vehicles.
The number of cars is increasing annually. Just in 2005, nearly 40 000 cars
have been imported to the country. This figure was 104 thousand 385 in 2013,
63 thousand 368 was in 2014. In recent years, traffic jam problems are observed
in Baku. To overcome this problem of conflict of interests on the roads of the
city in 2008-2012, overpasses, bridges and multi-storey roads have been built.

3.3.5.3. Railway Transport

The railway transportation has an important place on domestic and international
cargo transportation. Capacity is an important part of the railway transport.
Approximately 70% of cargo and 30% of passengers’transportation are performed
by railways. 2068 km of railways are is in use. Oil and oil products are shipped
by railways. Subway lines started to operate in 1967. The current length of it is
34.6 kilometers. Under the terms of cleanliness and service of the Baku metro
are chosen "the cleanest metro" in the world by the International Transport.
Metro is mainly used in the transportation of passengers, while railways used to
carry cargo more.
As a result of the transportation of Kazakh oil through the territory of Azerbaijan
within the framework of agreements related to oil cargo transportation volume

113
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

increased by 20% in 2004. In 2003, oil shipments were 2.8 million tons.
Azerbaijan's state oil transportation by rail is expected to be 8 million tons
annually. Freight transport by rail to the main location, with 74.5% of oil and oil
products are a part. 74.5% of railway transportation is accounted for oil and aoil
products. However, railway modernization is essential for country transportation.
Table 19a. Cargo turnover in transportation sector, 2000-2007 (million tons/km)
2000-2007 2000 2002 2003 2004 2005 2006 2007
Total 15948 20277 22291 23283 26534 43294 77943
including:
railway 5770 6980 7719 7536 9628 11059 10287
Sea 5192 6077 6555 6771 7521 8043 6013
Aviation 102 84 204 315 310 291 203
Pipeline 1371 1602 1572 1696 1539 15679 52305
oil pipeline 646 648 649 655 624 14690 50892
gas pipeline 725 954 923 1041 914 989 1413
Automobile 3513 5534 6241 6965 7536 8222 9135

Table 19b. Cargo turnover in transportation sector, 2008-2014 (million tons/km)

2008-2014 2008 2009 2010 2011 2012 2013 2014
Total 88607 97704 97504 91461 90110 90887 93531
including:
railway 10021 7592 8250 7845 8212 7958 7371
sea 6076 6173 4859 5186 5062 4632 4124
aviation 129 110 139 224 357 443 481
pipeline 62434 73195 72931 65850 63172 63734 67039
oil pipeline 58759 68575 68804 61960 59171 59274 62030
gas pipeline 3675 4620 4127 3890 4001 4460 5009
automobile 9947 10634 11325 12356 13307 14120 14516

Table 20a. Passenger transportation in transport sector, 2000-2007 (thousand passengers)

2000-2007 2000 2002 2003 2004 2005 2006 2007
Total 871484 893225 920988 954079 1000278 1063347 1148403
including:
railway 4250 4442 4736 5241 5492 5824 6661
sea 12 14 13 20 17 17 14
aviation 701 732 867 1094 1211 1332 1537
pipeline 2427 1135 453 - - - -
oil pipeline 3431 3104 2301 1102 696 105 -
gas pipeline 117364 115639 127052 136898 146952 161096 175689
automobile 743301 768159 785566 809725 845910 894973 964502
bus 720881 746633 763608 786515 821122 867926 933889
taxi 22420 21526 21958 23210 24788 27047 30613

114
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

Table 20b. Passenger transportation in transport sector, 2008-2014 (thousand passengers)

2008-2014 2008 2009 2010 2011 2012 2013 2014
Total 1242161 1328073 1387308 1491905 1617339 1746106 1828324
including:
railway 6598 6394 6389 4803 3451 2668 2517
sea 14 10 12 17 17 14 15
aviation 1396 941 1017 1394 1599 1664 1788
pipeline - - - - - - -
oil pipeline - - - - - - -
gas pipeline 200412 206140 181146 182602 195642 206673 215472
automobile 964501 103945 114593 1200330 1304441 1535247 1608532
bus 1000194 1076509 1158324 1257940 1366123 1478828 154833
taxi 33751 38084 42006 46501 51290 56419 60199
Source: SSCAR Publications.

As a result of political events and changes in government that occurred in Georgia,

the inability to use the port of Batumi and increasing control of the Azerbaijani-
Georgian border.

3.3.5.4. Airport Road Transport

In 1924, with the launch of the Baku-Tbilisi air transport flights, air transport has
started in Azerbaijan.
There are 27 airports in Azerbaijan. However, only 5 of them are able to receive
the normal passenger airplanes. Baku, Nakhchivan, Lankaran, and Ganja airport
reconstructed to meet international standards and Azerbaijan was the only
country in the Caucasus region,which obtained international status for all of its
airports.
The country’s fleet is quite old. In recent years,12 new aircrafts were included
into the fleet after the independence. The new aircraft purchased in 2005-2006,
increased the quality of "Azal" aircraft.
Azerbaijan flights to more than 60 countries on a regular basis. The airline
transport develops after the country's independence in line with the increase in
international political and economic cooperation.
Since 2002, the increase in passenger transportation by air, while there has been
a decline in cargo transportation. However, in 2004, significant increase in the
amount of cargo transportation was 42.9%. In 2015, 1 million 788 thousand
passengers were transported by the airlineswhich the remarkable high number
for this area. Cargo decreased compared with 2014, but the total notice increased

115
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

in recent years. In 2009, 32 thousand tons of cargo was transported by airlines

and 2015 this figures reached to 126 thousand tons.
Construction of the new airport in 1999 with the purchase of new aircraft provides
better service and increase the number of the customers.

Table 21. Airline Transport Passenger and Cargo Transportation

2002-2008 2002 2003 2004 2005 2006 2007 2008
Passenger transportation 732 867 1094 1211 1332 1537 1624
(thousand person)
Cargo transportation 31 52 75 74 75 52 64
(thousand ton)
2009-2014 2009 2010 2011 2012 2013 2014
Passenger transportation 941 1017 1394 1599 1664 1788
(thousand person)
Cargo transportation 32 40 51 82 126 125
(thousand ton)
Source: SSCAR Publications.

Nakhchivan International Airport was renovatedstarted to operate from 2004. In

Ganja airport the renovation work was completed in 2006, in order to meet the
international standards. Lankaran airport renovated within the framework of the
Regional Socio-Economic Development on the State Programwhich covers
2004-2008. Located in the city of Gabala, Gabala International Airport opened in
2011 and the first international flight was carried out in November 2012.
Airports in Yevlakh, Naftalan, Shaki, Zagatala and other cities were reconstructed.
Thus, each region obtained airline transportation in Azerbaijan.

3.3.5.5. The pipeline transport

After the initial construction of pipeline in Azerbaijan, transportation pipelines
started to have a special significance in transport sector. The transportation of oil
and natural gas by pipelines become more important and actual.
Distribution of goods transported by pipelines is given in the 34th table.
In transportation sector, freight transportation pipelines were 9.5% in 1990 and
increased to 31.5% in 1995.
The role in the transport sector, started to increase oil production, pipelines,
along with the launch of the Baku-Tbilisi-Ceyhan oil pipeline being the main
export pipeline, in connection with the export of natural gas has become even

116
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

more important with the construction of the Baku-Tbilisi-Erzurum natural gas

pipeline. Information about pipelines, the economic importance of the Caspian
energy resources will be introduced in the chapter.

3.3.5.6. Communication
One of the advanced sectors in Azerbaijan is the communications industry. A
large part of the country, almost equipped with digital telephone.Since December
1996, Azerbaijan communication system connected to the GSM operator.
Wireless communication is the most active sector in telecommunications industry
in Azerbaijan.
In 2004 the number of cellphone service increased by 47.9% compared to 2003.
The number of mobile phones used in in the country reached 9.7 million in 2015.
The number of mobile phones per 1000 person was 1046 in 2015.
The ratio of mobile phone usage varies from region to region. This ratio was
around 50% in big cities. However it did not exceed 10-15% in some small towns.
In many cases, mobile phone service is outdated and ineffective alternative to
cable telephone connections.
"Azercell", "Bakcell" and "Nar Mobile" are three mobile operators in Azerbaijan
market. In mobile communications market, 55% is share of "Azercell", 36% is the
share of "Bakcell". Other 9% is for "Nar Mobile" in mobile operator market. 93%
of Azerbaijani territory is under coverage of mobile communication. Azerbaijan's
occupied territories are just not within the scope of mobile communication.
Since the first months of 2006, number of subscribers and coverage of "Bakcell"
have been increased. As a logical result of this, "Bakcell" is operating throughout
the country in 2015.
Additionally, the funds have a significant state budget while"Azercell" sold shares
of the state. At the same time $15 million investment was put in the postal system
and at the end of 2006, all post offices are connected to a common information
network.
Nearly half of the country’s population settled in capital city, Baku. Therefore the
development of the telecommunication system is mainly observed in Baku. The
number of the internet subscribers increased 90% recently.
The Ministry of Communications and Technology have lots of problems in terms
of qualified personnel and technology. The Ministry has problems due to meet
the demands of population because of the high economic growth and rapidly
increased internet market.

117
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

Language is one of the other important breakthroughs in telecommunication

sector. According to the decree of former President Heydar Aliyev in August 1st
2001, the print media and internet service have to be realized in Latin alphabet,
not in Russian. That decree speeded up the integration of Azerbaijan with world
countries.
A large internet and information market formed in Azerbaijan. This market is
considered to be beneficial area for a number of investments both across the
country, as well as at the international level. However, taking into account this
investment and the establishment of enterprises, the economic potential of the
country, the legal framework will be effective in the presence of modern
technology and skilled personnel patronage and supervision of the Ministry of
Communications and Information Technology.
In addition to being satisfactory the field of telecommunications infrastructure in
Azerbaijan, internet access has not yet been laid for the necessary investments,
in connection with the economic situation, due to financial difficulties. In
addition, the transfer of information via the Internet for getting superiority in fiber-
optic infrastructure is available. This infrastructure can be used for a long-distance
communication and as a result, more widely spread of the Internet.
All of the satellites are combined with Russia. This is a continuation of the
dominance of the current situation in Russia and the Russian language, also
reveals as the future of e-commerce economic activities, Moscow-based
management will be implemented. Turkey plays an important role in the internet
access of Turkey, Azerbaijan and other Turkic republics.
In 1969, the US military discovered the Internet. Azerbaijan has started to use
internet since 1994. Turkey's Middle East Technical University,Turkey's Scientific
Research Center carried out a joint project with Azerbaijan National Academy of
Sciences in order to use the Internet for the first time in 1994 over Middle East
Technical University. This project was funded by TICA.
78% of the country's population is Internet users in 2016. Organizations and
educational institutions contain a large portion of members of the Internet. The
number of Internet users in Azerbaijan is under the world average.
Internet service may be provided under the license issued from the Ministry of
Communications and Information Technology. Internet service is a kind of
enterprises of the Ministry of Communications and Information Technologies
operates as a partner.

118
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

Azerbaijan's first satellite "Azerspace-1" satellite was released into orbit in French
Guiana, on February 7, 2013 (South America, the French administered island)
from the Kourou spaceport in Guiana Space Center, at local time, 18:36 (Baku
time on February 8, 2013 at 01:36). Produced by US "Orbital Sciences
Corporation" and French "Arianespace" company, “Azerspace-1” is distinguished
by its high reliability. "Ariane-5" rocket had been launched with "Azerspace-1"
satellite separated from the rocket body after about 35 minutes the rocket taking
off from cosmodrome. Azerspace-1" satellite is based on the accumulated
"STAR-2" satellite platform developed by "Orbital Sciences Corporation"
successfully. Currently there are 22 active satellites. Constantly negotiating with
television channels in many countries around the world in order to be involved in
watch over "Azerspace-1" satellite by "Azerkosmos" OJSC. According to the
information on July 1, 2014, 100 television and 20 radio channels were
broadcasted over the satellite. For the purpose of the development of national
space industry, several countries’ satellite launching is intended to prepare in the
coming years. Thus, in the country space observed by the community in the
creation and development of geo-information services to create the first low-orbit
satellite observations of Earth from space in order to conduct intensive
negotiations with companies in the world specializing in this field. In addition,
Azerbaijan's second telecommunications satellite "Azerspace-2" is going to work
on the project. According to forecasts, that will be released into orbit of both
satellites respectively in 2016 and 2017. Azerbaijan's "Azerspace-1" satellite in
orbit means the success of the satellite operator in the market. A truck equipped
with 36 active transponders and weighing approximately 3.2 tons, "Azerspace-1"
satellite will be located at 46 degrees East geostationary orbit and will cover in
Europe, Africa, Central Asia, the Caucasus and the Middle East. That will have at
least 15 years of service life in orbit. "Azerspace-1" satellite broadcasting and
telecommunications services, corporate and government clients as well as
meeting the requirements intended to ensure quality and reliable communications
platforms (http://www.mincom.gov.az/).
In recent years, information and communication technology (ICT) is developing.
The basis for the development of ICT and the state programs are prepared. ICT's
investment is needed in large quantities for further development. This is possible
to attract funding through the private sector simply. In the near future, the
privatization of the telecommunications offices and formation of favorable market
conditions are planned. E-government, e-mail systems development and the
implementation of regional television and radio broadcasts can be displayed
among the major projects.

119
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

3.3.5.7. New Silk Road Project

Silk industry, has an important place in the lives of many people since ancient
times; the transportation of silk and spices from Far East to the western world
has played an important role in international relations. Besides, silk played a of
role recognition of eastern culture in western world. Transporting of east spices
and silk by caravans to west, established trade routes from China to Europe. In
medievals, trade caravans, starting from the city of Xian of China, came to the
province of Kashgar of Uzbekistan; the first of the two routes from the Caspian
Sea to Afghanistan hamlets with other way surpassing Karakum mountains went
Iran through Anatolia. Heading to Europe from Anatolia by sea or from the land of
Thrace. The trade movements from east to west, used in previous centuries were
used for a road network. The thousands of kilometers long caravan routes
allowing the exchange of culture between the two continents, in addition to
transporting intensively silk, porcelain, paper, spices and valuables in time, has
been called ''Silk Road''. Silk Way, at the end of the medievals, after the discovery
of new continents and trade routes lost its importance. Next periods under the
rule of the Soviet Union of Central Asia East (Iran, Afghanistan and Pakistan)
closed the doors to the west from the Caucasus. The fate of the people of the
region has changed suddenly in the 90s. The region will be one of the most
important regions from the states of Central Asia gained independence in Turkish
in 21stcentury. Thus, the region's groundwater resources is important for the
whole world appeared to have a chance to get rid of the monopoly of the Soviet
Union. However, due to the closure of the region to the outside world through
Russia and the Soviet Union, products manufactured, produced and owned crude
oil and natural gas transporting are another important trade routes to world
markets.
The region's relationship with the outside world, a geographical surveillance can
be realized through Russia. These roads;
- First extends to Far Eastern countries and into the ocean from China's territory
(distances from the road because it is currently impossible to finance
projects because it is not possible to remain in the background)
- Secondly, through Pakistan and Iran (in transit through Afghanistan) in the
Indian Ocean,
- Thirdly, the Caucasus and the Caspian Sea to Europe via Turkey and the
Black Sea.

120
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

The richness of the East to the West during the past two thousand years,
caravans were passed along with five of the Turkish Republic, Tajikistan, Georgia
and Armenia, covering the history of the Black Sea, Silk Road to China in the
twenty-first century in communication, transport and energy corridor for the
transportation of the TRACECA (Transport Corridor Europe-Caucasus-Asia /
Europe-Caucasus-Asia Transport Corridor) project.On September 7-8, 1998 at
the Gulistan Palace century's most extensive communication and transport
agreement signed at the summit, with a ring in a new chain of global economic
relations have been added. Linking the two continents and three offshore basin
restoration project on the basis of the Silk Road in Central Asia and the Caucasus
in 1993, five countries met with the participation of the Ministry of Transport and
Commerce put forward at a conference in Brussels
This project is intended to open transport corridors which were landlocked in the
republics of the Caucasus and Central Asia. That will be an important stage in
the integration of international markets with significant economic growth in the
region. In this context, as well as being a help, it will further strengthen the
political and economic independence has great importance in terms of being a
serious catalyst.
Silk Road is a trade route, linking Asia and Europe, as well as the fact that, since
2000, the regional cultures, religions, races, and the traces of a great historical
and cultural wealth gives transports. After gaining independence of Turkic
republics of Central Asia, the Silk Road, was built along the roadboth trade route,
as well as a wealth of historical and cultural revitalization of the day-profile, and
the protection and restoration of the buildings.
In ancient times, the wealth of the east-west transport caravans is operated as a
Eurasian corridor, which will bring peace the Caucasus and Central Asia, and the
development of dialogue among civilizations will be achieved.
Globalization of the world's in these days economic, political and technical
conditions of the TRACECA project will play an important role in achieving of
regional peace and stability.
In this sense, an important place on the historical Silk Road, which for the
centuries, but more importantly, in the light of events in the post-cold war, the
economic, social and political point of view as well as the geography of the
twenty-first century will organize the dynamic force of gravity as a candidate
standing in the center of Eurasia. Turkey stays out of such an important project,
it is impossible to think. TRACECA is an important ideal to support Turkey in this
issue important.

121
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

Reconstruction of the Silk Road in Azerbaijan since independence, is one of the

most important and positive steps.
Azerbaijan played an important role between Central Asia and Europe. The road
to Europe through Central Asia, the Caspian Sea, Azerbaijan, Georgia and the
Black Sea is the most convenient transportation route. Acting in this way, means
to revive the old Silk Road. In this way the outskirts of Europe, Central Asia and
Europe to Central Asia, cheerful and reliable transportation will be the most
favorable both Europe and Central Asia, as well as cargo transported from
Europe to Central Asia. Small cargo ships that belong to Azerbaijan in Caspian
Sea are transported.
Since 1996, the steps were taken for the construction of this road. It can compete
with the regional transport corridors.The development of the country's economy
is one of the important factors that influence the formation of ground
transportation. In 2001 compared to 1998, the cargo transportation of the Silk
Road increased 1.5 times, transit cargo transportation by 1.9 times, the income
1.6 times.
In addition, the oil company Chevron Tengiz oil field in Kazakhstan's Tengiz oil
from the Caspian Sea to world markets is reflected in the use of a route. The
direction of the Euro-Asian transportation of Kazakh oil via TRACECA from
Azerbaijan to the Georgian Black Sea port of transportation is continuing since
1996. Crude oil tankers from Aktau to Baku, where it is transported by rail to the
port of Batumi.
New Silk Road on the way to the Turkey-Georgia-Azerbaijan line increases
regional trade and investment opportunities; social and cultural rapprochement
between these countries will increase further. The launch of the necessary studies
for this railway project was launched in 2005. Carrying out the above mentioned
project Azerbaijan's transport sector will give an impetus to the development
dynamically.
Gars-Akhalkalaki-Tbilisi-Baku railway is a line, links Azerbaijan to Europe directly.
The project costs about 700 million dollars. The project is scheduled for completion
in 2016. The launch of the first line of the project is completed, the volume of
freight transport will be between 2-3 million tons. Later, this figure will reach 5-8
million tons.
BTC pipeline pumping oil from Azerbaijan in connection with the May 25 ceremony
in 2005 regulated the Gars-Akhalkalaki-Tbilisi-Baku railway project, also signed
an agreement on the interstate.

122
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

At the end of 2016 Gars-Akhalkalaki-Tbilisi-Baku railway will be completed by

the start of the line from Iran to India, carrying cargo from Europe and the CIS
countries, "North-East" in combination with the transport corridor, rail freight
transport volume will reach 15-20 million tons. As a result, the Silk Road, at least
until the oil pipeline will have strategic importance.

3.3.5.8. North-South transport corridor

At the beginning of 2005 "North-South" transport corridor project was signed in
Baku between Iran, Russia and Azerbaijan.
Under the project of "North-South" transport corridor signed a memorandum on
the establishment of a joint company betweeen Russia, Azerbaijan, Iran Qazvin-
Rasht railway’s design, construction and use, at the same time on the design of
the railway of Astara (Azerbaijan) and Astara (Iran). Protocol aims to establish a
joint-stock company (joint stock Company) and attract investors to project with
the aim of railway project construction.
The length of the North-South transport corridor is 505 km. The project in the
Caspian Sea ports, waterways and railways of Russia, Iran, the Gulf and East
Asia to Europe by means of cargo transportation has to be the goal.
Implementation of the project will become a center for the transit of goods to be
transported to the north and east. When fully operational start of international
transport corridor will allow access to the Persian Gulf and India the European
countries, Russia, Central Asia and the Caucasus, will increase trade relations
littoral states of the Caspian Sea with the Black Sea ports.
The same hallway will allow increasing revenues for transit cargo transportation
of Azerbaijan.

3.3.6. CONSTRUCTION
In 1990-2015 there is a close relationship between economic and social
development and the development of the construction sector. During these years
many new buildings and complexes have been built in the country.
Besides, some acting buildings have been expanded and restorated. The
construction sector's share in GDP was 8.1% in 1991 and 10.9% in 1999. The
ratiodid not change much in 2000-2001, and again increased in 2002. The
increase reached 13% in 2004. The construction sector’s share in GDP declined
to 8.1% again in 2010, and increased by 12.5% in 2015. According to the

123
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

assessment conducted by the IMF, the industry's impact on the economy is

greater than the official statistics seen. Construction activitiesare very important
part ofthe economy. The flow of foreign investment in the oil sector since the
beginning of 1995 displayed a significant increase in construction activities.
Investment in the construction sector has driven part of the fluctuation between
the years of 1990-2004, with the exception of 1990. The share of investments in
the construction sector was less than 1%. Every year, part of a larger investment
is directed to the areas of production purposes.
In 2002, the volume of investments in the construction sector to orient 82.2%
over the previous year, an increase was 10.3 trillion manats. Of this amount, 7.8
trillion manats (1.6 billion dollars), the amount of investment accounted for
75.5% of the foreign investments.
In 2004, the volume of investments referred to the construction sector compared
to 2003 growth 39.8% was 24.2 trillion manats (before denomination). That
referred to investments in the construction sector accounted for 73.7% of the
foreign investment. This interest in the development of construction sector in
Azerbaijan is further enhanced by the effect of foreign businessmen.
Construction sector growth, has led to the establishment of the first phase of the
new production. In 2004 thousands of jobs played a key role in opening new
businesses.
Construction companies of specialized firms like Azersenayetikinti, Azersutikinti,
Azərenerjitikinti and SOCAR (the State Oil Company of the Azerbaijan Republic),
Caspian Maritime Administration, the State Railway departments are the largest
construction companies.
Turkish companies dominate in the sector in large extent. Turkish companies
operating in Azerbaijan under construction companies, approximately with 20.1%
has a very important role.The agenda of oil pipelines, the construction of housing
and housing repair, again of war-damaged buildings and a number of border
areas, infrastructural renewal, restoration and construction of industrial facilities,
recreation of entertainment venues, such as hotels and construction projects of
Turkish companies to enter the market are allowed.
Housing and business center of the Turkish companies involved in the
construction, the market is very active.
However, Turkish construction companies in the construction sector are
competitive with a strong construction companies in the US and Europe.

124
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

Every last day Baku is changing with the establishment of new buildings.
However, modern construction designs and construction materials, at the same
time as a result of geological and geodetic surveys the construction of the 15-
storey high building is not allowed. At the same time the newly built multi-storey
buildings and unplanned construction of Baku, contrary to the image of the
amphitheater alarm ringing. Also, some of these structures are a number of
problems in terms of parking and courtyard areas. Construction of pipelines,
construction of modern industrial facilities, reconstruction and restoration
projects, especially for tourism and entertainment sector, hotels, restaurants,
and a variety of other objects, significant investment opportunities in the
construction sector.
New construction projects, increases demand for high-quality construction
products. Quality and quantity meets the needs of the domestic production does
not amount. Construction materials and raw materials industry are plentiful and
cheap, and because of the inability to meet the needs and requirements of the
proposal in terms of the construction sector for foreign investors, strengthens its
position as an industry that attracted attention.
In addition to the oil sector, the construction sector is rapidly developing pararell
to the oil sector. In parallel with the increase in the income level taking into
account trends in the construction of new residential areas and shopping
centers. Construction sector to grows several times faster than the rate of
population growth. At the same time the price of goods is rising rapidly. The lack
of housing is one of the factors influencing the increase in divorces. At the same
time causes people to marry late. In this regard, housing construction in oil
revenues could be directed in the right way. Taking into account the housing
needs of the population since 2005 government "Mortgage Fund" formed and
since 2006, long-term mortgage loans started.
Azerbaijan Mortgage Fund (AMF) created under the Central Bank of Azerbaijan in
accordance with decree by the President of the Republic of Azerbaijan "On the
establishment of the system of mortgage loans in the Republic of Azerbaijan,"
No. 299 dated September 16, 2005. The main objective of the AMF is create
mechanisms to ensure the long-term mortgage lending to the population of the
Republic of Azerbaijan, helps to attract domestic and foreign financial resources
to mortgage lending.
Azerbaijan Mortgage Fund's primary functions include:
1. Commissioner refinances mortgage loans issued by credit institutions;

125
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

2. Identifies again requirements on mortgage loans;

3. In order to attract the financial resources is provided by mortgage securities
issued;
4. His mission is to manage financial risks in order to ensure stability and
liquidity;
5. Mortgage lending in the provision of liquidity and financial resources in the
Fund is taking measures within its power to attract.
As of 2016, the maximum credit limit of 8% of the normal loans and it is planned
to 4% of the preferential categories.
This is possible to say a significant positive impact on the development process
continuingin construction sector. However, cannot be say this process has yet
to be implemented successfully. Because of the low level of income, but also the
complexity of credit conditions still do not allow the use of the broad masses of
the fund's resources. In the near future the use of the fund for the provision of
social groups is planned to be implemented a number of projects.

126
 CHAPTER FOUR
REGIONAL ANALYSIS
Azerbaijan economically could be analyzed in 10 different regions. This division,
have been developed in the context of the state programs on socio-economic
development of regions of Azerbaijan, covering the period of 2004-2008, later
2009-2013 and 2014-2018 and first program out of this package have been
approved by the President Ilham Aliyev 11 February 2004. State programs were
implemented in order to ensure continue diversification of the economy, non-oil
sector and enhance regional development, further improve infrastructure and
social services. As a result of implementation of state programs, over the last 10
years since implementation, gross domestic product of Azerbaijan increased in
3.2 times, non-oil sector in 2.6 times, industry in 2.7 times, agriculture in 1.5
times, investments in 6.5 times, income of the population in 6.5 times and
average of monthly salary in 5.5 times.
Thus specific activities carried out in Azerbaijan, enable to establish 900 thousand
permanent jobs out of more than 1.2 million new jobs, 55.6 thousand enterprises,
decline unemployment to 5 percent and reduce the poverty rate to 5.3 percent.
These important works conducted in terms of the before-mentioned programs
created a solid foundation for the development of the regions in the next years.
The division and classification of economic regions have done on the basis of
structural, economic and geographical position, natural wealth and resources,
density of the active population, regional area and soil structure, and on region's
history respectively. According to the significance country's economic regions
are as follows:
Before characterization of the regions,
a- Because of the suitable climatic conditions of the country large and small
horned cattle, poultry production is possible almost in every region,
b- Further diversification of investments in agriculture is possible in almost every
region of Azerbaijan because of the suitable agriculture, wide variety of arable
areas and climate,

127
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

c- Big potential of the tourism sector lays in undiscovered regions of the country
in terms of natural beauty of regions,
d- Inevitable role of food industries development should be considered in terms
of the regions socio-economic development.

4.1. ECONOMIC REGIONS

In economic terms country is consists of the ten regions which are Absheron,
Ganja, Nakhchivan, Sheki-Zagatala, Lankaran, Guba-Khachmaz, Aran, Upper
Karabakh, Kalbajar-Lachin and Shirvan48.

4.1.1. ABSHERON ECONOMIC REGION

Region currently serves as a representative of the country's economy. The region
accounts for the largest share of production. In comparison to other regions of
the country, it has a developed infrastructure. The most important highways, air,
water and train hubs passes through Absheron. Being surrounded by the Caspian
Sea enables region to have an easy access to foreign countries.
Absheron economic region is one of the country's most important cultural centers.
In the region operates Scientific Research Institutes, high schools, big sports
facilities, health centers and other social security funds.
Baku
Economic development program of the regions prepared by the government,
does not cover Baku because of its high level of development. Therefore, in the
information below provided about the Absheron economic region, Baku is not
considereded. Baku will be shortly and separately evaluated in contect of this
chapter.
The country's capital Baku, clearly distinguished itself from other cities of the
country with the level of economic development.
Baku along with the highest population density of 3 million people, during the last
25 years was the most concentrated destination of foreign investments in
Azerbaijan. Since 2003, Baku, with its multi-storey buildings becomes a
megapolis that combines both the opportunities and the dangers on the way of
urbanization.

48
http://senaye.gov.az/az/normative_programs/region_development

128
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

Baku by being kept aside from the regional economic development program may
be attractive for the following areas of investment: complementary industires for
oil and gas sectors, electricity, electronics, laboratories for the petroleum
products, iron and non-iron metals, automatization and auto-industry complexes,
building materials, manufacturing facilities, textile sector, maritime transport and
shipping, land, air, sea, subway and rail businesses for the ground and
underground, alcohol and alcoholic beverages, health, education, tourism
complexes, environmental protection facilities, land reclamation and irrigation
facilities.
a. Geography
Region consists of Absheron and Khizi administrative regions, including one of
the main cities of country - Sumgait. In particular, the Sumgait city has a very
favorable economic and geographical position.
b. Area
Absheron economic region is (excluding Baku) 3.34 thousand km2. It covers
3.9% of the country's territory.
c. Population and Density
Region with its 551,800 people population encounters 4.8% of the population of
the country. The density in the region is 148 people per square kilometer. The
active population is 163 thousand people.
Suitable geo-economic position of the region plays an important role in the
settlement. Most of the population lives in cities.
d. Climate
The climate in the economic region is dry-subtropical.
e. Natural Resources
Absheron is one of the rich economic regions in terms of natural resources. Saw
stone, cement raw material, quartz and construction sand are among the
region's natural resources.
There are rich bath treatment and hot water sources in Absheron Peninsula.
During the summer months bath treatment facilities allows the beach tourism
along the Caspian coast. Despite this it is the only region with non-drinking water
in its territory. Region meets drinking water needs from the other regions -
Samur and Kur rivers, through water pipelines.

129
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

f. Industrial Areas
Industrial areas of the region are oil, natural gas, electricity, organic and inorganic
chemical products, medications, metallurgy, energy, iron and steel, other metal
companies, oil and gas related industries, textiles, light and food industry.
Transportation and services sectors play a vital role for the region's industry.
This economic region has a powerful source of fuel energy. A large part oil,
natural gas and electricity produced in the country accounts for this region.
Chemical and petrochemical industries are leading industries of the region. Iron
and non-metals production, also, has an important place in the industry.
Polymeric materials, glass and others products such as, industrial products, are
produced in the region.
g. Agriculture
Dry subtropical fruit cultivation, vegetable, floriculture, viticulture, dairy, poultry-
breeding and big and small horn livestock are main agricultural areas of the
region.
Favorable climatic conditions of the region allow production of products such as
olive, saffron and peanuts.
h. Developing Areas
Construction, telecommunications and other service industries are the growing
areas of the region.

4.1.2. GANJA-GAZAKH ECONOMIC REGION

Connecting Azerbaijan with Georgia and the Black Sea and located in the western
part of the country Ganja-Gazakh economic region’s characteristics are unique in
nature and will be elobarated in the futher paraghraphs.
The region's social infrastructure has an important role on socio-economic
development of the north-western part of the country and meets region's socio-
cultural needs. Scientific Research Centers, institutions of high education,
professional training in the field of agriculture, public libraries, museums, theaters,
hospitals and other social infrastructure facilities are available in the region.
a. Geography
This region, which has significant economic and geographic position covers
Agstafa, Dashkasan, Gadabay, Goranboy, Khanlar, Gazakh, Samukh, Shamkir,
Tovuz administrative regions, as well cities of Ganja and Naftalan.

130
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

b. Area
1249 thousand km2 area in the region makes 14.4% of the country's territory.
c. Population and Density
1,240,800 people of the region are 13.6% countrys’ total population. Region’s
density is 101 inhabitants for each km2. Region’s population more and more
concentrates into the centre. 47% population lives in the cities, whereas 53% live
on the rural areas. The active population is 633 thousand people.
d. Climate
As the nature of the topography, region, divided into four areas. This division
varies in line with the climatic conditions of the region.
e. Natural Resources
Ganja-Gazakh economic region is one of the regions with rich natural resources.
Iron ore, aluminum, copper, saw stone, marble, zeolite, gypsum and cement raw
material main resources of the region. Kur River is passing through the region
and creates a huge potential for hydro-power sources.
There are lots of natural recreation areas in the region. The favorable natural
conditions, clean air and climate, forests and mountain scenery in the mineral
waters allows the creation at the international level resorts and sanatoriums.
Goygol and Hajikend recreation areas located at an altitude of 1566 meters
above sea level are part of the region. Region’s Naftalan sanatorium already has
an international reputation.
f. Industrial Areas
Ganja-Gazakh with its economic potential is the second most important region of
the country. It is considered as the second industrial region of the country, due
to its benefit at approximately on 12-13% to the industrial production of Azerbaijan.
The main industrial areas of Ganja-Gazakh economic region are electric tools,
telecom equipment, agricultural machinery, metallurgy, automobiles, cotton, yarn,
textiles, carpets, cement, ceramics, glass production; various supplies, heavy
industry and food industry.
The main companies in the construction industry are embroidery house-building
companies, metal - concrete, brick –ceramica and marble factories.
g. Agriculture
Sugar, potatoes, wheat, grapes, wine, candy, canned food, meat and dairy products,
large and small horn animal are important agricultural areas of the region.

131
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

13-14% of agricultural products of the country's accounts for this region, which
are mainly forms from potatoes, grapes and wheat. About 80% of the country's
potato production, 28% of the grapes comes from this region. Cotton is produced
only in Goranboy administrative region in Ganja-Gazakh area. Vegetable and fruit
growing are well developed in the region. 15% of animal products of the country
are obtained from this region.
h. Developing sectors
One of the developing of the region is tourism industry. 6.2% of the railway and
6.1% of roads of the country are accounted for this economic region. Highway,
rail, pipeline and air routes which are passing through economical region have
significant impact on development of the economic relations on domestic and
international levels. Ganja, Gazakh and Agstafa are main transport networks.
Europe-Caucasus-Asia corridor which correspondence to this region is required
construction of modern roads, which should corresponds to the international
standards. Within the framework of the State Program on socio-economic
development of regions various roads and bridges construction and rehabilitation
activities continue.
The historical "Silk Road" which passes through this territory of the region has
increased the demand for railway. At the same time, the second railway bridge
over the Kur River is included into the state program.
Baku-Tbilisi-Ceyhan pipeline, passing through the region Ganja, Khanlar, Shamkir,
Tovuz, Agstafa, Gazakh regions, has caused significant changes in the socio-
economic development of region. Region has several state protected areas which
are: Korchay, Garayazi-Agstafa and Garayazi State Reserve.
Ganja airport which is inside of thus economical region has flights within the
country and to the Commonwealth of Independent States. At the same time
Naftalan and Agstafa airports operates in this region.
In summary, transport sector is one of the important sectors on socio-economic
development of Ganja-Gazakh economic region.

4.1.3. SHEKI-ZAGATALA ECONOMICAL REGION

Located in the northwest of the country, Shaki-Zagatala is one of the richest
regions of Azerbaijan.
Major roads in the region of the developed transport network are Yevlakh-
Balaken road and rail way.

132
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

Social infrastructure of the region, are the educational institutions, cultural and
health centers, museums and theaters.
a. Geography
Region covers Balaken, Gakh, Gabala, Oguz, Zagatala and Sheki administrative
regions.
b. Area
The total area of region is 8.96 million km2 which is 10.3% of the country area.
Since region is covered by mountains and mountainous areas, land resources
are limited in Sheki-Zagatala. This situation is caused by the region's natural
diversity.
c. Population and density
The region has a population of 599,900 people. This is 6.5% of the country's
population. Active population is 632 thousand people in the region. The region
accounted for 68 persons per 1 square kilometer. 27% of the people live in the
cities, 73% live in mountainous areas, a large part of the population living on the
rural areas.
d. Climate
Despite the fact that different climates exist in the region, it has more temperate
climate.
e. Natural Resources
Economical region is rich in terms of natural resources. Among the region's
natural resources, copper, sulfur, lead, zinc, sand and other building products,
drinking water, can show an example. 90% sulfur, 97% lead, 99% zinc are
produced from the mines of this region. Copper is extracted from this region
entirely. Gravel, sand and other construction materials are located in mountainous
and hilly areas.
In addition, the region has lots of forests. 27% of the region, an important part of
the territory of Balakan and Zagatala are covered with forests.
Due to natural beauty the region is one of the country's tourist resorts. Tourism
facilities in Gabala, Balakan, Gakh, Shaki and Zagatala regions of Sheki-Zagatala
economic region are not enough to accommodate tourist traffic of the region.
Highway which connects country with the Georgia passes through this region.
At the same time the region has important water resources.

133
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

f. Industrial areas
Region has a weak industry which is made of the light and food industry only
and considered as the most developed area in Sheki-Zagatala. These areas
account for 95% of industrial production in the region. Just a little over 3% of the
country's industrial production fell to a part of the region. 27% of region's territory
and 30% of the population lived in Sheki, where half of industrial production of
the region comes from.
Light industry is mostly comprised of silk production. Different numbers of textile
enterprises are operating in region’s center.
g. Agriculture
The region's main economy comes from its agriculture. In agriculture tobacco,
silkworm breeding, fruits, grain products, viticulture, meat and milk, cotton and
small cattle and livestock are main developed areas of the region. In this context,
the economic region is favorable the development of industry based on
agriculture, silk worm, crushing nuts, tobacco, wine, water supply facilities,
wood and wood materials.
75% of tobacco, 17% of wheat, 35% of mulberry, more than 2% of green tea
produced in the country accounts for this region. Production of livestock products
of the farm country of more than 10% is produced in Sheki-Zagatala economic
region.
h. Developing Sectors
In Sheki-Zagatala region special attentions is paid to silk and tourism sector as
potential areas.
Part of the economical structure of the region, Gakh administrative district is
located in the north-west of Azerbaijan. It has very favorable conditions in terms
of geography. It is one of regions for tourism of Azerbaijan. With the implemen-
tation of development program migration from the region to Baku has stopped
and existing plants and factories began to function again.

4.1.4. MOUNTAINOUS SHIRVAN ECONOMICAL REGION

Located in the center of Azerbaijan and being a part of the ancient settlements,
Shirvan economic region has a large transport hub to utilize all types of
production.
Socio-economic infrastructure of the region includes high and secondary
education institutions, cultural and health centers, theaters and museums.

134
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

a. Geography
Mountainous Shirvan economic region covers Agsu, Ismayilli, Shamakhi, and
Gobustan administrative regions.
b. Area
The total area is 6.06 million km2, the region holds 7% of the country's territory.
c. Population and density
Consisting of 304,000 people, region inhabits 3.2% of the country's population.
Active population is 141 thousand people. Population density is less than in
other regions; for 1 sq kilometer accounts 50 people.
d. Climate
In terms of topography mountainous and lowland areas separating region into
two climates. Due to topographical charachteristics moist, warm and cold or hot
and dry climatic conditions dominated in the region.
e. Natural Resources
In terms of natural resources it is not a rich region. Region has stone, sand, lime,
gravel and other construction materials resources. Mountainous areas are rich in
healing mineral waters. Sulfur and hydrocarbon-rich springs are used for
drinking water and treatment.
f. Industrial Areas
Weakness of the industrial sector in the region is obvious after intial review of
economic data of the region. The main industries of regional of agricultural
production are food and light industry. Light industry areas are: fruit juice, textiles
and carpet-weaving. The main field of food industry is the production of wine
grapes of the region. Besides there are forestry and wood processing enterprises,
building materials, agricultural machinery repair factories.
Shirvan region is the center of the history of handicrafts and textiles. Lahij is
famous for the copper production and Shamakhi is famous for the production of
silk shawl.
g. Agriculture
The main areas of agriculture are: wheat, grape growing, winemaking, large and
small horn cattle breeding. Grain is very important in production of wheat. Other
grain products meet the regional consumption only.

135
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

h. Advanced Sectors
In the region among the emerging sectors silk and tourism sector are the leading
areas.

4.1.5. ARAN ECONOMICAL REGION

Located in the center of the country, the region is located on important transport
routes. These transport routes concludes Baku in the main economic regions of
the country. At the same time, by this ways transport arrives to Georgia, Iran and
Turkey. The importance of these roads has increased along with the increasing
importance of international transport of the region. On the other hand, air transport
between Baku and Yevlakh is available as well.
70% of energy resources produced in Azerbaijan is obtained from Aran economic
region.
a. Geography
Aran Economical region covers Agjabedi, Beylagan, Barda, Bilasuvar, Goychay,
Hacıgabul, Imishli, Kurdamir, Neftchala, Saatli, Sabirabad, Salyan, Ujar, Zardab
administrative regions along with, Shirvan, Mingachevir, Yevlakh cities.
b. Area
Region has an area of 21.43 million km2, it covers 24.7% of the country's territory.
An important part of region (more than half) consists of the plain areas below the
sea level.
c. Population and density
The favorable economic climate and geographical location has the main role in
the allocation of the population. Region population is 1,936,000 people, thus,
equivalent to 20.5% of the population of the country. The active population is
918 thousand people. Region’s population density is 82 people / km2.
d. Climate
Aran economic region has a subtropical dry climate.
e. Natural Resources
Among the natural resources there are underground and surface energy resources
and mineral water mines. These resources are mainly located in the center of the
region and the south-east.
Rich solar energy, Kur and Araz rivers' water resources, land suitable for farming
and other natural resources are the main resources of the region.

136
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

f. Industrial areas
The industry of Aran economic region is well developed. The main industrial
areas are the oil, natural gas, iodine, bromine, chemicals, knitting, leather
processing, building materials, light and food industry. Industrial areas are
concentrated in south-west in Shirvan, Salyan, Neftchala cities and Mingachevir,
Yevlakh cities in the north-west.
g. Agriculture
Fruits and vegetables, fishing, meat, milk, large and small horned cattle, cotton,
sugar beet, wheat, potato and grapes are the main agricultural areas of the region.
This region accounted for 90% of the country's cotton production.

4.1.6. NAKHCHIVAN ECONOMICAL REGION

As a result of Armenia’s occupation, this economic region is blockaded and
currently, surrounded by Turkey, Iran and as well as Armenia. For this reason,
being in disadvantages situation in economic and geographical areas, this region
maintains his relationship with the other regions of Azerbaijan by airlines. Railway
transport is still completely inappropriate. Road transport is only possible
through Iran.
Nakhchivan as one of the cultural centers of the region has a wide range of
social and cultural infrastructure. High, technical and secondary education
institutions, cultural and health centers, museums and historical monuments
form the social base of the region.
a. Geography
Nakhchivan Autonomous Republic forms the economic region of Nakhchivan.
Region covers Babak, Julfa, Ordubad, Sadarak, Shahbuz, Sharur administrative
regions and Nakhchivan city.
Sadarak, despite of being the smalles region of Nakchivan in terms of demography
and population has special geographical significance. Azerbaijan’s 11 kilometer
border with the Republic of Turkey is located in the area along Araz River.
In the 1990s, Sadarak resembled a war front. Armenian continually attacks. On
the initiative of Heydar Aliyev bridge construction of Sadarak-Diluju, referred to
as "Umid Bridge", established relations between Nakhchivan Autonomous Republic
which is an integral part of Azerbaijan with the nearby regions of the Republic of
Turkey and has strengthened Sadarak stability.

137
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

b. Area
The territory of the Nakhchivan Autonomous Republic is 5.5 thousand km2, covers
6.3% of the country's territory.
c. Population and density
439,800 people of the region are made 4.5% of the country's population that live
in the region. 198 thousand people are active in the region. For 1 square kilometer
are 80 people.
d. Climate
There are different climate types in Nakhchivan.
e. Natural Resources
The region is rich in natural resources. Regions natural resources are molybdenum,
polymetallic ore, rock salt, dolomite, marble, construction materials, reinforced
concrete, sand, gravel, mineral water. There are more than two hundred mineral
water reserves in the region.
All of molybdenum and dolomite reserves produced in the country, 60% of
mineral water reserves are achieved from Nakhchivan economic region. Only
0.5% of the region is covered by forests.
f. Industrial Areas
Energy, electronic products, cement, sugar, food, aluminum plates, furniture
production, silk, carpets and tissue-knitted are major industrial areas of the
region.
The region's industrial production accounted for approximately 2.6% of the
country. Nakhchivan city is accounted for half of industrial production and 35%
of labor force of the region.
Energy, aluminum factories, furniture, car repair enterprises are leading areas of
the industry. Reinforced concrete, wall cladding, sand and gravel production
enterprises are considered to deliver construction materials of the industry.
Light and food industries have particular importance for the region. Light industry
consist of silk processing, carpet weaving, knitting enterprises whereas, food
industry is represented as canning, tobacco processing, mineral water bottling,
meat processing and fish products producing enterprises.

138
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

g. Agriculture
Tobacco, grapes, fruits, vegetables, wheat, henna, sugar beet, meat, milk and
wool production, beekeeping and fishing are agriculture sectors of the region.
Agriculture products accounts for 3.6% of the country's production.
Favorable climatic conditions contributed to the specialization of different areas
in the agricultural sector. Nakhchivan is the country's second major economic
region in tobacco production.
The agricultural reforms started in Nakhchivan in 1992, and accelerated since
1996.
These reforms provide necessary assistance to farmers to increase agricultural
production. Irrigation problems are major problems which is tried to be eliminated
with reconstruction and repairs. As a result, there is an annual increase in the
production of agricultural products.
Livestock of the region started to increase from 1996.

4.1.7. LANKARAN ECONOMIC REGION

Located in the southeast region of Azerbaijan, has economically developed
transport system and plays a special role in the development of economic
relations between Azerbaijan and Iran. There is also the air transport between
Baku and Lankaran.
Social infrastructures in the region are: high and secondary education institutions,
hospitals, theaters, regional museums and other social facilities.
Country’s almost all tea production comes from the Lankaran economic region.
a. Geography
Region covers Astara, Jalilabad, Lerik, Masalli, Yardimli administrative regions.
This region borders with Caspian Sea to the east, Iran to the west and south.
b. Area
Total area of 6.08 million km2 represents 7% of the country's territory. Division
by Lankaran lowland and Talysh Mountains creates a different topographical
character for the region.
c. Population and density
The regions population is 893,000 people, which is 9.3% of the country's
population. Favorable economic - geographical position has a special role on

139
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

population density. The number of active population in the region is 366 thousand
people. The economic region density is 147 people per square kilometer. In
Lenkoran lowland, the population density is 170 people per sq km.
d. Climate
Region differs from other economic regions of the country in terms of natural
conditions. In Lankaran economic region there are 7 climate zones of 11
different climate zones of the world. Basically, it has a humid subtropical climate.
e. Natural Resources
There are very few natural resources in the region. Plaster, river stone and
construction sand can be considered as the main natural resources of the region.
Region is rich in thermal water. The beautiful natural areas, hot and cold mineral
water, favorable climatic conditions and developed transport hub of the region
creates the necessary conditions for the development of health tourism.
Lankaran tourist center in Istisu operates as the treatment center.
26% of the territory is covered with forests.
f. Industrial Areas
Regional economy is based on agricultural complexes. Sector is made up from
the food industry and fishery products production. Forest products industry with
its importance could be a good sample of the light industry of the region.
90% of industrial production accounts for the food industry. In food industry,
fish, tea, fruits and vegetables cans, wine production, tobacco are major
produced goods.
g. Agriculture
Fruit and vegetables, tea, grapes, grain products and potatoes are the main
agricultural areas in the region. Humid subtropical climate, great lands, water
and labor resources stipulates the development of agriculture in the region. The
region's most important production is citrus fruits.
There are fishing in coastal areas. Also, poultry developed in the region.
99% of the tea, 27% vegetables, wheat 15%, potatoes 24%, 13% of the grapes
and 10% of the fruit production of the country are accounts for this region.
h. Developing Sectors
Tea-growing sectors are important for the region, since in tea production in the
USSR it was in the second place after Georgia.

140
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

In the frame of development programs tea plantations and enterprises were

privatized.
To develop the country's tea production loans and other assistance are given to
Lankaran-Astara region farmers. The purpose of the development programs is to
make the country a tea exporter.

4.1.8. GUBA-KHACHMAZ ECONOMIC REGION

Because of the regions border countries, Guba-Khachmaz economic region has
strategic importance. Located in the northeast of the country, region has a long
coastline with the Caspian Sea.
Region has favorable geographical and transportation position. Highways, railway,
oil, natural gas and water pipelines, telecommunications lines passing through
the region play an important role in the development of the regional economy.
Azerbaijan and Russia are connected to each other with communications lines
via this region.
Social infrastructures are paramount importance in development of the region
which meets socio-economic current requirements. Public libraries, theaters,
hospitals and other social infrastructure facilities functions in the region.
a. Geography
Guba-Khachmaz Economic Region, have been organized from Devechi,
Khachmaz, Guba, Siyazan administrative regions.
b. Area
The total area is 7.66 million km2 and region covers 8.8% of the country's
territory.
c. Population and density
Population of the region is 525,700 people, where 5.6% is the population of the
country. 257 thousand people are active population. There are 76 people per
square kilometer. Due to the topographic structure the population of the region
lives more on the coast of the Caspian Sea. 32% of the population lives in the
city, 68% in rural areas.
d. Climate
Regions specific topography character divided it into the four distinct zones.
Therefore has a different climate types like: hot, cold-moist and cold.

141
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

e. Natural Resources
Oil, natural gas, combustible shale, sand, gravel and water take place among the
region's natural resources. Forests cover 10-11% of the region area. Region is
rich with the natural recreational resources. The most important health centers
are located in this region. Galaalti mineral water resources, located in Siyazan,
function as the country's major sanatorium center.
f. Industrial Areas
Regionsl industry depends on oil and natural gas. Oil and natural resources of
the region concentrated in Siyazan region (Keshchay, Siayazan – Nardaran,
Amirjan, Zoghlu – Zeyva, Tangi, Saadan, Vayimdagh – Toghchay and etc. ).
Light and food industries developed as a result of wide spread agriculture in the
regions economy. Fruits and vegetables canning, carpet weaving and fish
products have an important place in agriculture industry area.
g. Agriculture
Agriculture has an economic advantage in the region.
Agriculture is concentrated on fruit and vegetable production. Along with these,
grape, potatoes and wheat are produced in Guba-Khachmaz. To increase milk
and meat production big and small horn animals has been developed in the plain
areas of the region. Poultry developed in the Siyazan and Davachi regions.
h. Developing Sectors
Tourism is leading among the most developed sectors of the region.
Yalama-Khudat seashore, Galaalti for kidney disease treatment center, Gusar,
Guba, Khachmaz and Devechi in terms of hunting and fishing are places of
importance to the region's tourism.
In addition to tourism, region’s canning, alcoholic and non-alcoholic drinks,
flour, meat and dairy products, packing, construction materials and carpet
weaving can be considered more favorable areas in terms of investment.
In addition to oil industry of Siyazan region, as in other regions canning,
poultry, soft drinks, flour, meat and dairy products manufacture are also among
the leading areas of investments.

142
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

4.1.9. UPPER KARABAKH ECONOMIC REGION

A large part of the region has been occupied by Armenians. After the independence
of the occupied territories of the region according to the government declaration
it will prepare and implement special program on the regions’ development.
The region is rich in natural resources and therefore is a destination which
attracts tourists.
a. Geography
Upper Karabakh which is consist of Agdam, Tartar, Khojavand, Khojaly, Shusha,
Jabrail, Fizuli administrative regions lost its of Khankendi city, Khojavand, Khojali,
Shusha, Jabrail administrative regions, all of the Khankendi city, part of the
Agdam and Fizuli regions as a result of Armenian occupation.
b. Area
With parts of Agdam, Fizuli regions that are not occupied and with the total area
of Tartar, region is 1482 km2.
c. Population and density
211,800 people living in the areas that are not under occupation. Density in this
area is 143 people are per square kilometer.
d. Industrial Areas
Industry of the region is mostly depends on the agricultural products.
e. Agriculture
The region's main agricultural products are grapes, wheat, fruits, tobacco and
cattle-breeding. Region draws attention to the production of grape. Population in
high mountain areas is engaged in big horn animal breeding to produce meat,
milk and wool. At the same time in the economic region have developed
beekeeping and production of mulberry.

4.1.10. KALBAJAR-LACHIN ECONOMIC REGION

The entire of region has been occupied by Armenians. After the independence of
the occupied territories of the region according to the government declaration it
will prepare and implement special program on the regions’ development.
a. Geography
The economic region covers Kalbajar, Lachin, Zangilan and Lachin regions.

143
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

b. Area
The area of the region is 6,500 km2 and by this it makes 7.5% of the country's
territory.
c. Natural Resources
Gold, mercury, marble, cobalt, perlite, packing building blocks are among the
region's natural resources.
d. Industrial Areas
The main part of the industry is consists of food and a small proportion of the
light industry.
e. Agriculture
Region’s key areas of economy are agriculture and cattle-breeding. In particular,
it is important to mention that the region suitable for cattle breeding and
beekeeping.

4.2. IMPORTANCE OF REGIONAL

DEVELOPMENT PROGRAMS
Azerbaijan, which gained independence in the late twentieth century, has faced
many challenges. Despite the fact that socio-economic issues were in the focus
of the Soviet state on a regular basis, Azerbaijan was not successful in achieving
results in this sphere. In 1996, as a result of the implemented economic reforms
decline in the country's socio-economic life stopped and as a result, GDP per
capita has increased, important and positive steps have been taken and stability
of the foreign exchange currency obtained, budget deficit reduced to a minimum
level.
In summary, with the last 20 years of implemented economic regulations macro-
economic stability has been achieved in the country, which pushes the dynamic
development of the economy and significantly improved people's living standards.
However, during the last period, in terms of economic changes and rebirth of
Azerbaijan, which was still at the beginning of the road, the country was not in
the condition to start the division of the regions, develop policies in this direction.
Circumstances required providing more attention to the oil and natural gas
production and export before the division of the region and the sectors to attract
foreign investment into the country.

144
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

Since 2004, in terms of socio-economic development Azerbaijan has stepped

into a new era and started to concentrate on the solution of one of the most
important issues - development of private enterprise in the regions by effective
usage of increasing labor force, natural and economic potential to achieve
sustainable development, increase the use of the labor force, and by thus,
reduce the poverty in the country. Implementation of the programs in this direction
will eliminate differences in the economic development level of the regions and
result in regional balance of the country.
According to international as a result of interregional development higher
economic results are be possible to be achieved. In this regard, the full meaning
of Azerbaijan development depends on increasing the economic level of the each
region. One of the most important problems of different regions’ economy’s
development is that it should be based on the principles of free market economy.
Baku and Sumgait’s economy is growing fast. However, two of the country's
socio-economic level of the city simply can not be determined by economic
power. In absolute terms in order to ensure economic development in other
regions, particular importance is given to economic development and need to
take certain measures. In comparison with the neighboring countries - Armenia
and Georgia, Azerbaijan has favorable economic and geographical conditions
that allow the formation of an effective regional structure of the economy. One of
the main indicators of regional development is to attract foreign investment that
corresponds to the desired goal.
The current state of the state budget allows the socio-economic development of
the regions. Thus, the private business environment in the regions where foreign
investment is necessary is developing.
Energy, human, and natural resources of the region have a potential to stipulate
regions development in case if government will create necessary conditions to
utilize these resources on the maximum level. Country has rich cotton, grape,
tobacco, fruits and vegetables and underground water resources. The amount of
raw materials in the regions allows the development of the industrial sector in the
regions, especially, of the manufacturing industry.
Farmer facing many challenges alone despite the fact that they get assistance
and subsidies from the government. The farmers do not have enough financial
opportunity, to benefit from available loans opportunities. In some regions, even
small problems related with this issue could not be solved without serious
interaption. The lack of natural gas, electricity and the need for agricultural

145
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

supplies and technical information are other main problems. In such environment
the importance government support to the entrepreneurs in the agricultural
sector is inevitable.
Tourism regions abondended and ruined as a result of indifference and lack of
attention. City of Naftalan, which attracted tourists not only from the country but
also from other Soviet countries were left alone and lost all its attraction and
almost all facilities due to lack of maintenance and support from the side of
government. However it is possible to attract investors regions for revive
agriculture and tourism and to improve the socio-economic conditions. USA,
Germany, France, Japan and other developed countries had gained social rebirth
in their countries as result of a comprehensive approach to the economic
development and increasing attention to the development of their regions.
80% of the capital invested into the country flows to the capital. Industrial sector
in other regions of the country is negligibly weak, existing businesses do not
work at full capacity. The main part of the industrial potential of the country is
located in Baku and the surrounding area increased flow of people from the
regions. For this, population of other cities after independence moves to the
capital city. Those who could not find jobs that come from the regions to Baku
as a result of the increased population density in the capital has led to the
emergence of many problems. Both in Baku and in other regions of the country,
people left the country because of chronic unemployment.
Influx caused by the people of the regions who are trying to find work in different
cities of the Russian created very serious problems.
According to the State Statistics Committee 67 city are dependent on the income
from the capital. In country-wide, dependence on the central regions closes to
60%. While the ratio contanes 46.4% compared to the development of the
industry in the city of Sumgait, in Ganja 51.8%, in Mingachevir 66.8%, the
industry is very weak or at non-existent level dependence on the capital of
Gabala is 90.7%, Dashkesen 90.2%, Yardimli 93.5% and Khachmaz 80.6%. The
dependency ratio will be reduced only as a result of the complex steps for the
regional growth.

146
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

4.3. REGIONAL DEVELOPMENT PROGRAM

(2004-2008)
After the "Contract of the Century" economic development process started in
Azerbaijan economy. However, investments, infrastructure improvements and
reconstruction works carried more in Baku. On the other hand, other regions of
the country remained outside the attention of government. This created the
crucial difference in the socio-economic level of the capital and other cities. This,
in turn, meant a dangerous situation for the country. The weight, amount allocated
from the state budget to the regions was about 10-12% of the total state budget.
Amount of investment to the regions hardly reached to 15-17% of total
investments to the country. Unemployment in the regions, as stated above,
increased flow of the work force to Baku. There were serious problems in
explotation of the electricity, water and natural gas services.
To use the regions resources efficiently, increase production of non-oil and
agricultural products, to develop service and tourism sectors, decrease
unemployment and increase life standards of the population a separate program
on regions development was inevitable.
In this context, on 24 November of 2003, the decree on acceleration of the socio
- economic development and determination of the main directions of the
country's socio-economic development was signed. Almost at the same time,
preparation of special state program on regions development was initiated.
On 11 February, 2004, President Ilham Aliyev signed a decree on "State program
on socio-economic development of regions of Azerbaijan in 2004-2008".
Approved state program, was an important document which determines the
balanced and sequential development of the state economy. This program
includes issues related to infrastructure, agriculture, industrial and social spheres
development of the regions.
More than 15 state programs have been implemented in Azerbaijan. Each of these
programs is to re-formation of the national economy to a free market economy
and aims to acceleration of international economic integration, improvement of
the welfare of the people, reduction of poverty and unemployment. State Program
signed on 11 February, 2004 was in a time to solve social problems of the
regions, reduce unemployment, in short, and improve the welfare of the people.
However, program on regional development is of great importance than the other
programs.

147
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

The state program approved by the head of state can be considered as the care
of the state to regions and the most important step taken for the solution of
regional problems. For this reason, the state program is one of the most
important steps taken in order to revive and develop the non-oil sector, particularly
agricultural sector with the efficient use of the economic potential of the
Azerbaijan regions and natural resources, by increasing the level of employment,
people income and standard of living in the country.
To effectively use natural and human potential every country should have modern
infrastructure which could be used for this purpose. In this respect, the program
had great importance.
Determination of activities carried inside of the program increased the efficiency
of the program.
Main activities to accelerate regions economy and policies were defined in the
state program of the regional development. The program consists of three parts.
In the first half, the information is provided on general structure of economy of
the regions of Azerbaijan, in the second part, main targets for socio-economic
development for 2004-2008 are listed, and in the third part, activities and time
frame of these activities are elaborated in details.
Dedication of the problems to a certain organizations that will be responsible for
the solution of the regions problem is one of the characteristics that
differentiated this program from the previous ones.
In the frame of the State Program financing sources of activities to be implemented
defined as: state budget, National Entrepreneurship Support Fund, other funds,
commercial banks and non-bank credit organizations loans, financial resources
of international organizations and foreign states, foreign investment, other sources
not prohibited by law. Program also utilized the resources of the State Oil Fund.
For the implementation of the program, local financial sources determined in the
amount of 5-6 million manat.

4.3.1. GENERAL OBJECTIVES OF THE PROGRAM

The State Program on Socio-Economic Development included;
- The continuation of macroeconomic stability,
- The continuation of small inflation rate,
- The optimal state regulation directed to areas which have strategic importance,
- Carry out second reforms in the agricultural sector,

148
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

- The development of private enterprise in the regions due to speed up

privatization,
- The implementation of structural policies in order increase export potential
and non-oil sector,
- Improve the investment climate for private business,
- Improve the quality of social services, which have been identified as key
areas.
The purpose of the program is identified in order to develop regions in terms of
economy via using current potential. Furthermore the continuation of the
activities of the production companies is also one of the main goals of the state
program. To do so, the program expects the improvement of the income level,
the development of the entrepreneurship, the reduction of the unemployment.
The reconstruction of the traditional production institutions in the regions, the
establishment of new production areas, the increase of the productivity via using
local resources, the establishment of the necessary infrastructure, the promotion
of the opening of the new jobs are the other objectives of the State Program.
The State Program on Socio-Economic Development of Regions 30 various
projects will be realized in 10 various geographical regions of the country. Most
of them are connected to the construction and tourism areas. The program
includes education, health, agriculture and other socio-economic reforms.
The private sector's share in GDP is planned to be 85% as a result of the
realization of the State Program. According to the program the volume of the
investment reached 16.8 billion US Dollars and 60% of it directed to the regions.
The program was implemented within 5 years and 600.000 jobs were created.
The average monthly salaries increased by 3.1 times.
The program continued until 2008. The second phase of the program was
realized from 2008 to 2012. The second phase of the program included; the
taken of the steps in order to achieve balanced growth, the establishment of the
necessary infrastructure, the continuation of the work on the privatization of the
enterprises, the strengthen of the investment allocation in the regions. Additionally
the program planned the development of agriculture, the establishment of
manufacturing facilities, the improvement social services in the regions.

149
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

4.3.2. REGIONAL TARGETS OF PROGRAM

The State Program identified regional targets. The water problem of Shaki-
Zagatala, Guba-Khachmaz, Ganja-Gazakh and Lankaran regions is less than the
others’. Karabakh, Mil, Mugan and Absheron regions have water problems and it
continues almost throughout the year. Regional economic program identified
targets in order to solve the water problems important steps have been taken
within the defined targets.
There is great potential for the development of agriculture and tourism in the
southern region of the country- Lankaran, Astara, Masalli, Jalilabad, Bilasuvar,
Lerik and Yardimli. Meanwhile there is great opportunity for the development of
the tea, grain, livestock, and manufacturing industry in the region.
The strengthening of the agricultural and manufacturing facilities, the development
of tourism is taken into account in Absheron. Lankaran, Mountainous Shirvan,
Guba-Khachmaz economic regions attract attention in line the development of
agriculture and manufacturing facilities.
Ganja-Gazakh Region: Another important point is the development of
production and processing industries in Ganja-Gazakh economic region. In Ganja
city 3.5 million Manat was allocated for 64 projects. In Shamkir city 1.2 million
Manat was allocated for 22 projects. Most of them are medium and large-sized
projects. 565 million Manat will be allocated other projects in the future. The
loans will include 200 micro-loans. Effective use of these million manat loan will
be created more than 550 new jobs. 950 people will have the opportunity to
work as a result of the use of loans.
Shaki-Zagatala Region: The most important areas are agriculture and
manufacturing sectors in Sheki-Zagatala region. Great amount of money will be
allocated to the development of agriculture and manufacturing industries. In
Zagatala city 2,312 million Manat loan will be allocated to 5 projects. As a result
of this about 300 new jobs will be created in the city. The total amount of 1,063
million Manat loan has been decided for Shaki city for 4 projects. In Gabala city
1 project has been decided in the total amount of the 490 thousand manat. In
Balakan city 490 thousand Manat allocated for the projects.
Lankaran, Shirvan, Guba-Khachmaz and Ganja-Gazakh economic regions are
convenient for the development of ecotourism.
In Absheron economic region the new recreation centers will be built until
2010. With the opening of the tourist complex in Gizilgazma village of the region

150
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

is planned to increase the flow of tourists to the Khizi region. The construction of
tourist facilities is supposed in"Gulistan" area of Goranboy administrative region
in Ganja-Gazakh economic region.
Guba, Devechi, Khachmaz regions on Guba-Khachmaz economic regions are
popular as recreation centers. Nabran settlement has become an international
tourist center. In order to develop this process the modernization is planned in
Nabran in terms of tourism center, Olympic sports lyceum, sports and health
infrastructure.
Implementation of road and railway projects between Azerbaijan and Iran will
significantly contribute the development of the tourism sector in Lankaran
economic region. The region with the new complexes will be established and
modernized will create a wide range of opportunities in terms of tourism
infrastructure.
The development of tourism sector in Shirvan economic region, especially
infrastructure activities will be carried out in Ismayilli city and Shamakhi region.
In Nakhchivan economic region, the development of the tourism sector is
available in terms of historical sites and Batabat and Ganligol areas in Shahbuz
region.

4.3.3. DEVELOPMENT AFTER THE PROGRAM

In line with the implementation of “State Program on Socio-Economic Develop-
ment of Regions” some organizations have begun to take certain steps. Under
the regional development program, foreign, and local businessmen, who will
invest regions will be assisted.
The companies on producing, manufacturing, tourism, trade, service and other
areas were established in order to take the advantage of local resources.
The loans were given to farmers in order to operate this program successfully.
The program was launched in separate stages. For example, in accordance with
the decision made by the Cabinet of Ministers, 25% of insurance reserves of
grain fields are intended to be financed by the state budget. In this step, the
insurance of arable lands have been taken at the request of its traditional
appearance. The Cabinet of Ministers took into the consideration the international
experience proposals which have been prepared for the service on the
agricultural sector in the regions.

151
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

One of the most important steps is the attracting of the foreign organizations to
the regions. Economic forums were held in eight cities of Azerbaijan. The forums
included several projects.
Increased purchasing power of people in the regions is a positive indicator.
Education and health care facilities in many regions have been renovated and
built. The implementation of activities supported by private enterprise.
Between October 1, 2003-January 1, 2005 more than 177 thousand new jobs
were created in Azerbaijan. 53.1% of the new jobs are permanent jobs. Just in
2004, 167 thousand jobs were created. 83.7 thousand of them were permanent.
87% of them are in private sector and 13% are in the public sector. Distribution
of new jobs in the sector are as follows; construction 13.6%, wholesale, retail
sales and auto services 10.8%, processing industry 14.2%, agriculture 8.1%,
real estate 3.9%, state management and compulsory social insurance is 3.2%.
In 2004, 84% of new jobs were created in the regions and 12 % in Baku. The
advantage of detection of non-oil sector refers to the private sector. This
information created investment opportunities in the region was an indication for
the private sector.
The distribution of newly created jobs in terms of economic regions is as follows;
Aran region 61000, Absheron Region 11360, Ganja-Gazakh Region 17350,
Guba-Khachmaz Region 11300, Shaki-Zagatala Region 10600, Lankaran Region
10000, Nakhchivan region 7300, Upper Karabakh region 3700, Shirvan region
900.
The newly created jobs, which were established in large companies is distributed
as follows in terms of the economic regions; 59.3% in Baku, 6.5% in Absheron,
6.3 in Ganja-Gazakh, 5.4 in Nakhchivan and 4.1% in Lankaran.
In this framework, “Oka” brand automobile manufacturing started in Ganja.
Furthermore “Azbentonit” factory opened in Absheron, while Nakhcivan
International airport was established in Nakhchivan. Additioanlly, the establish-
ment of beer and tomato plants in Lankaran, macaroni factory in Khachmaz,
mills in Shaki, Sadarak, and Ordubad, swimming pools in Baku, Sumgait, Ganja,
Tovuz, Gabala, Dashkesen, Khachmaz, Baku, Absheron, Gobustan, Guba and
power generation facilities in Imishli and Julfa regions were realized in 2004.
Only in 2004, nearly 4.000 jobs have been created in Guba-Khachmaz economic
region. In addition, nearly 2,000 are direct jobs, more than 100 jobs have been
rebuilt, and the rest is a temporary job. Including economic region Khachmaz,

152
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

agricultural sector is more developed. More than 100 people are employed here
with the start of the service the flour and feed mills, horned animal farms,
greenhouse and some commercial enterprises. In previous years reconstruction
of "Khachmaz-Carpet" OJSC and provison of different services in the public Air
conditioner factory in Khachmaz has played an important role in the exploitation
of labor.
In Gusar significant improvements were attained in line with the execution of the
program. The production of carpets is the most important industry in the city.
The new school buildings, recreational and commercial facilities have been built.
More than 100 jobs have been created as a result of the taken measures.
Besides, in Guba carpets venture and Food Products Factory which produces
marmalat and jam were renovated.
On the other hand, small and medium-sized enterprises for the development of
mountain regions surrounding Guba, Gadabay, Gabala, Lerik and Shakhbuz
"Development Program on Mountain and Highland Areas" $ 350 million Dollars
were allocated within a few years to entrepreneurs. As a result of the measures
mentioned more than two thousand new jobs have been created in the regions.
In addition to these 2 million 650 thousand dollars will be allocated regions in the
future.
In Lerik a non-governmental organization "IFAD" (About the International Fund for
Agricultural Revival) began operations in 2004 under the program on
"Development of Mountain and Highland Areas" and increased activities
development in agricultural sector, poverty reduction and infrastructure
improvement. 30 groups were created in region in terms of agricultural
production, sale and trafficking. In 2004 IFAD spent 300 million Manats for the
improvement of infrastructure in the area, the construction and renovation of
social facilities.
In Nakhchivan Autonomous Republic, socio-economic point of view important
progress has been achieved in 2008. It is progress in social and economic
infrastructure and economic indicators. Decree on Nakhchivan Autonomous
Republic on 15th March 2000 on "Sadarak Region Socio-Economic Development"
has become effective. As a result of this program, the border region in Sederek
has been achieved to the development on education, health and cultural fields,
the strengthening of stability in the economy. In region center and villages,
renovation in different areas and reconstruction activities, the building of road
and bridges were realized.

153
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

Sadarak, the only gateway between Turkey and Azerbaijan was able to offer 24-
hour service trying to build new construction and technical infrastructure. In
2004-2008 important actions were realized in Sadarak which covers the "Socio-
Economic Development of Regions of Azerbaijan Republic on the State Program"
in Nakhchivan. With the establishment of new enterprises in the region increased
the volume of employment.
In order to revive the activities of the National Endowment for Private Enterprise
increased fund resources in 2009. Provision of resources for entrepreneurs
selected banks and increased their numbers. In order to improve water and
sanitation services organizational steps have been taken.
In 2004 different legal arrangements carried out. In the country the provisions of
the law on the establishment of economic regions, the expansion of investment,
and other economic relations of monopoly regulation have been prepared to
promote regional development. The transformation activities to joint-stock
company of medium and large businesses has continued. Accelerated
privatization of the enterprises of small and rental. According to the investment
made by the state activities are carried out on reconstruction of production
facilities. The improvement of regional infrastructure and public services, in order
to divert the construction of social facilities in connection with the financial
resources necessary for the period 2005-2006. Activities started in accordance
with the withdrawal of optimal tax rates.
In short, covering five years time started since the adoption of the package on
"Socio-Economic Development of Regions of Azerbaijan State Program (2004-
2008)", there was a great revival in all regions of the country.

4.3.5. EXPECTATIONS FROM APPLICATION

The development of the oil industry is the country's foremost concern. However,
there was need to develop of non-oil sectors. Because of this, the competitiveness
and increasing of the national economy, modernization of production, application
of many protective technologies, increasing industrial production in the regions
are among the main objectives of development policy.
If State Programme on "Socio-Economic Development of Regions in Azerbaijan"
well executed, the oil sector will be developed in conjunction with the non-oil
sector. To do so the effective use of the economic potential of the regions will
reduce the poverty rate, create new jobs, increase the living standards of the

154
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

people. Besides, through the program the rapid growth of private enterprise will
be possible in the regions. The expansion of local production and the
manufacturing facilities, reconstruction of economic, social and cultural
infrastructure facilities and development was realized.
In accordance with the State Program, the establishment of workshops is
considered for people of the rural regions of the country, with Export Promotion
Fund and also public investment enthusiasm. However, 62.5% of such measures
will allow an increase in agricultural production.
On the other hand, 600 thousand new jobs will be possible to improve the
business and investment sector. There is a need for $ 10 thousand Dollars in
order to establish a place of business. If necessary for job modern technology
and infrastructure, then such a case, millions of dollars are needed. In this regard
Azerbaijan needs the creation of jobs on competition, which has the power to
make goods exported from work on paper. However, in Azerbaijan lags behind
the pace of GDP growth increasing speed of the production sectors, industry and
agricultural production. Foreign trade increase rate is low. It is also important to
establish balance in the Azerbaijan economic structure.
The elimination of bureaucratic obstacles, control over and improving relations
with law enforcement authorities in regions will emerge favorable business and
investment climate for private business in terms of legal, economic as well as
technical aspects.
Regional development can be realized via investment to the regions, the opening
of new work places and the start of production again available in the workplace
of private ownership. For this reason, to achieve regional development more
depends on continuation will be given the opportunity and incentives to increase
private enterprise.
Continuations of the policy of regional development via achieving a healthy
foundation to monitor the effects of these policies are essential. Therefore, after
the first regional development evaluation, basic economic indicator will be
carried out especially with per capita GDP of the country's various regional
developments. With a different evaluation criteria encourage and support system
will become richer. The regional geography, structural and regional issues listed
for the importance of regional support system and incentives should be
established.
Regional development policy may have its own structural problems in each
region. In development, the region should rank even given the importance of the

155
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

city level. Thus, the differences in growth and development in the regions outside
of Baku in Azerbaijan is taking into consideration the situation of the beginning of
the incentives. This will be implemented in phases. Cities in terms of GDP per
capita, the national average of determination, incentives can be increased in
stages.

4.4. THE PROGRAM OF SOCIO-ECONOMIC

DEVELOPMENT OFAZERBAIJAN REPUBLIC
REGIONS IN 2009-2013
In Azerbaijan significant achievements have been attained on sustainable
development of non-oil sector, creation of new businesses and job, in regions,
as well as, in the country capital increasing the volume and quality of utilities and
social infrastructure provision, further improvement of the business environment,
increasing the employment rate of the population, poverty reduction. Therefore,
within "The State Program on socio-economic development of Azerbaijan Republic
regions the Azerbaijan Republic (2004-2008-years)", as well as "A program of
measures to accelerate socio-economic development Baku suburbs for 2006-
2007" prepared "Azerbaijan's socio-economic development of regions in 2009-
2013" State Program in order to continue the work started. The Action Plan of
the State Program has been compiled by the following sections:
1. Events of national importance.
2. The measures in the districts and suburbs of Baku city.
3. Measures on economic regions of the country:
3.1. Absheron economic region (Absheron and Khizi regions, Sumgait city);
3.2. Aran economic region (Agjabadi, Beylagan, Barda, Bilasuvar, Goychay,
Hajigabul, Imishli, Kurdamir, Neftchala, Saatli, Sabirabad, Salyan, Ujar,
Zardab regions, Shirvan, Mingachevir, Yevlakh cities);
3.3. Mountainous Shirvan economic region (Agsu, Ismayilli, Gobustan,
Shamakhi regions);
3.4. Ganja-Gazakh economic region (Aghstafa, Dashkasan, Gadabay,
Goranboy, Goygol, Gazakh, Samukh, Shamkir, Tovuz regions, Ganca and
Naftalan cities);
3.5. Guba-Khachmaz economic region (Davachi, Khachmaz, Guba, Gusar,
Siyazan regions);

156
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

3.6. Lankaran economic region (Astara, Jəlilabad, Lerik, Masalli, Yardimli,

Lankaran regions);
3.7. Nakhchivan economic region (Nakhchivan city, Babak, Julfa, Ordubad,
Sadarak, Shahbuz, Kangarli, Sharur regions);
3.8. Kalbajar-Lachin economic region (Kalbajar, Lachin, Zangilan, Gubadlı
regions);
3.9. Shaki-Zagatala economic region (Balakan, Gakh, Gabala, Oghuz,
Zagatala, Shaki regions);
3.10. Yuxarı Qarabağ economic region (1) (Aghdam, Tartar, Khojavənd,
Khojali, Shusha, Jabrayil, Fuzuli regions, Khankandi city).

4.4.1. THE GOAL OF OF THE STATE PROGRAM,

OBJECTIVES AND PRIORITIES OF REGIONAL
DEVELOPMENT
The main objectives of the "Regions of the Republic of Azerbaijan in 2009-2013
State Programs on Socio-Economic Development" are to achieve the development
of non-oil sector in the country, economic diversification, balanced regional and
sustainable socio-economic development, the improvement of people's life
standards.
As defined by the state program is intended to achieve the following tasks:
• To ensure the rapid development of non-oil sector make effective use of
natural and labor resources of the country;
• The continuation of measures aimed at improving infrastructure;
• Implementation of the measures to improve the business environment and the
accelerated development of entrepreneurship;
• To continue attracting investment for development of the economy;
• To stimulate production of export-oriented;
• The creation of modern infrastructure facilities and existing facilities in
international standards;
• Improve the provision of public utilities;
• The continuation of measures aimed at improving employment;
• Poverty reduction.

157
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

Achieving the goals set in the State Program, as well as for the implementation
of these tasks is important to maintain macroeconomic stability. Successful
implementation of the oil strategy of Azerbaijan's integration into the international
economic system, as a result of efficient use of oil and gas revenues, which led
to the maintenance of macroeconomic stability, and created favorable conditions
for the implementation of the measures in this sphere.
Given the macroeconomic stability of the economy as a whole in the coming
years, including in the regions, which is one of the preconditions for the
development of separate areas, the average annual inflation rate and the exchange
rate of the national currency, maintaining a reasonable level of tax rates to
determine the optimal level, the extension of the concessions applied to
agricultural producers, new promoting job creation, maintaining the optimal level
of customs rates, external debt management policy will be effective. Increasing
foreign currency earnings, reducing the risk of inflation, strengthen the
coordination of monetary and fiscal policy, government spending and other
measures to control expense growth, the macroeconomic situation, as well as
the prevention of adverse effects on the development of non-oil sector, the main
issues are considered to be the economic policy in the coming years.
In order to speed up the integration of the national economy to the world
economic system accelerated the process of adapting legislation, standards to
international requirements, including World Trade Organization (WTO) for the
expansion of cooperation with Azerbaijan authoritative international organizations,
economic communities in the future. Foreign economic policy will be directed for
the creation of favorable conditions export of manufactured products, at the
same time, protection from unfair competition of the internal market. One of the
main objectives of fiscal policy is to achieve sustainable development of non-oil
sector, the maintenance of a stable macro-economic situation of the country,
effective regulation of the economy and stimulate its dynamic growth. In this
regard in the future it is necessary to achieve expansion of production in the
country, the creation of competitive economy, infrastructure, a favorable
investment climate and increasing the share of the country's internal resources
attracted investment to the economy. At the same time, state support for
agriculture and increase direct subsidies to this sector, attracting investments for
the establishment processing enterprises, to ensure non-oil, non-raw material
sectors of the economy, the development of tourism are considered as priority
directions for 2009-2013.

158
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

In order to improve the tax system in coming years it is designed to implement

the following measures:
• optimize of tax rates;
• tax and customs policy aimed at promoting entrepreneurship;
• The extension of tax benefits to the producers of agricultural products;
• improving and expanding the scope of tax services provided to entrepreneurs
for the creation of computer terminals and private tax advice.
In coming years, in monetary policy special attention will be paid to implemen-
tation of exchange rate policy that ensure favorable competitive level of Manat
and optimization of money supply channels. Monetary policy will be directed to
macroeconomic strengthening stability, including, stimulating employment and
production in the non-oil sector, in the regions, on this basis, its fast and intensive
development, an increase in investment activity in the real sector, economic
diversification, poverty reduction and the continuously increasing of life standards.
In the Republic of Azerbaijan monetary and loan policy for the development of
financial services, including the regions of the single state policy will consist the
following purposes:
- Increasing the country's foreign exchange reserves;
- To improve and streamline monetary policy and monetary regulation
instruments and mechanisms;
- To ensure the stability and the internal convertibility of manat;
- To preserve financial stability in the banking system, expanding regional bank
branch network;
- Taking incentive measures for speeding Installation of cashless payment
instruments (POS terminals, ATMs, info-kiosks);
- Expanding the scope of insurance and leasing services;
- New economic application of methods based on international experience in
order to stimulate and develop agriculture insurance.
To ensure long-term economic and social development of the country's investment
policy is one of the most important tools. In this area the main task will consist
of the creation of an atmosphere of free competition and improvement of the
existing legal framework for all investors in order to expand investment
opportunities in all sectors of the economy and provide a more favorable
investment climate.

159
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

In the coming years, transparent and effective implementation of the privatization

process of enterprises open for privatization will continue. In the non-oil sector
the work will be carried out purposefully for supporting investment activities of
enterprises, will be encouraged the import of modern production equipment.
State investment policy directed to the implementation of priorities as the
creation of new jobs, to ensure reliable operation of infrastructure facilities, the
development of human capital and to strengthen social protection of citizens in
the regions. One of the most important areas of employment policy is elimination
of the factors limiting the creation of new jobs and to create conditions to
stimulate an increase in the level of employment. In this regard it is particular
importance measures aimed at the development of entrepreneurship, especially,
small and medium-sized enterprises. In coming years, the main purpose of
employment policy will consist of ensuring the effective employment of the
population through the better use of labor resources. To achieve this goal, it is
planned to carry out the following tasks:
• To create favorable conditions for the development of enterprises, especially
small and medium-sized enterprises;
• To ensure the efficient development of employment support investment
activity;
• Implementation of measures on strengthen social protection of the jobseekers
and unemployed, legalization of informal labor relations;
• Improve infrastructure aimed at strengthening of dynamic between supply
and demand in the labor market;
• Adapting to the demands of a rapidly growing labor market on personnel
training system, including vocational training and performance of networks.
While the country's economy develops, the number of foreigners in the domestic
labor market is increasing. The favorable geopolitical location of Republic of
Azerbaijan has caused an increase in labor migration flows the implementing of
economic reforms in the country, development of entrepreneurship, international
communication projects and so on. The main directions of migration policy in
coming years will be as follows:
- Migration processes for the effective use of the country's development;
- The implementation of migration programs, taking into account the interests
of the state and society;

160
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

- Creating conditions that enhance adaptation of migrants to the current socio-

economic situation;
- The protection of migrants' rights;
- The prevention of illegal migration.
Enterprise Development will lead to one of the directions carrying out state policy
in terms of diversification in the economy. This policy will be directed raising the
level of regulatory,organizational and financial support for business activity in all
sectors of the economy, especially in the priority development areas. In terms of
sustainable economic development in the field of entrepreneurship will be
implemented the following measures:
• to speed up the integration of the small and medium-sized enterprises (SMEs)
to the world economy, increasing export potential and to strengthen the role
of SMEs in the solution of social problems of society;
• optimization of the entrepreneurial activity area, regional and technological
efficiency structure;
• across the mutually beneficial cooperation of small, medium and large
enterprises, including the expansion of production and cooperation relations;
• the creation of modern organizational models for entrepreneurship support,
including continuation of the establishment in advice for entrepreneurs,
information provision, marketing services and other structures;
• Creating of trade fairs;
• orientation of the local economy, taking into account the improvement of
vocational training centers for unemployed in the regions;
• prevent interference in business activities.
In Azerbaijan comprehensively implementation of events to the development of
non-oil sector will be possible to accelerate the production of exportable
products based on the implementation of economic mechanisms. In order to the
development of the export potential of the country, delivered to foreign markets
Azerbaijan goods and services, creating favorable conditions for it, ensure the
effective integration of the world economy of the country. Implementation of
measures will be a priority in coming years.
The effective implementation of the country's export potential, the formation of
healthy competition in the domestic market, ensuring the protection of consumer
rights, standardization and metrology sectors following measures will be
implemented in order to adapt to international requirements:

161
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

• to stimulate exports in the private sector and increase the range of export
goods;
• strengthening the position of national producers in foreign markets, the
implementation of relevant measures on strengthening the protection of
interests;
• to improve the level of trade, catering and domestic sectors service and
implementation of measures to protect the domestic market under the
principles of the WTO;
• involvement of entrepreneurs and consumers on strengthening the fight
against unfair competition and implementation of measures on development
of competition;
• strengthening control over the quality and safety of consumer goods.
One of the main objectives in the industry will consist of restoration of existing
industrial enterprises in the regions and reconstruction, the creation of new
businesses. Here will be paid special attention on restoration of agricultural
products processing enterprises and increasing export potential. Industrial sector
is envisaged to implement following measures to achieve the goal:
• Identification of areas of non-oil sector for development of industry;
• Support for competitive industrial production and promote creation of export-
oriented production;
• rehabilitation and privatization of controlling stock of state-owned or state-
owned industrial enterprises;
• support the activities of the enterprises after privatization;
• the reconstruction of production;
• prepare skilled personal.
During the past period the successful completion of an institutional point of view,
land and agrarian reforms and the creation of new opportunities for agricultural
producers, based on free market relations in coming years and are capable of
self-development of the entire economic system - characterized by the process
of forming an independent national economy will take place. Various economic
forms of agricultural production, including the development of a form of
collective economic cooperation in the region and expansion of the labor force
led to the formation of the public will be more productive. In coming years,
which is the traditional areas of agriculture, grain, grape, fruit, cotton, tobacco,
tea, silk and other areas will continue to be a priority. Continuing reforms in the

162
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

agricultural sector, special attention will be paid to the development of mountain

regions. The development of agriculture sector consists of the following areas:
• improvements of agrarian sector legal and regulatory framework, scientific
and methodological support and personnel training system;
• raw material production in agriculture sector and the development of
processing areas, stimulation to increase competitive production;
• increase financial support to the agricultural sector;
• strengthening the material-technical base of the agricultural sector;
• serve agrarian sector and operate on market principles to support new
structures;
• in agriculture sector improvement of irrigation and reclamation;
• ensuring the efficient use of land and water resources.
The development of tourism in Azerbaijan Republic, expansion of international
cooperation in this field is priority in the coming years. Turn tourism to a high-
income economy, create efficient and competitive modern tourist complexes to
respond to social and environmental requirements, and to ensure the creation of
new jobs are important tasks standing in front of the development of non-oil
sector. Tourism industry consists of the following areas of development:
• creating competitive tourism infrastructure and tourism industry;
• existing tourism facilities in international standards;
• the development and application of advanced methods and standards for
tourism services;
• determination of the legal status of the country's tourism-recreation zones,
identification of tourism zones and routes in the country;
• countries, which have rich experience in the field of tourism expansion of
international cooperation in the field of personnel training.
Efficient use of energy has a paramount importance in ensuring the economic
security of the Republic of Azerbaijan. Ensuring long-term investment in the
energy sector of the international oil companies by signing "Contract of the
Century" leading role of Azerbaijan in the world energy sector. The main task of
the country's fuel and energy complex is to provide more comprehensive
satisfaction of the economy and the population's energy needs. The main
directions of the state policy in this area for 2009-2013 will include:

163
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

• reconstruction and modernization of oil and gas production, transportation

and processing infrastructure;
• accelerate the exploration of new deposits and ambitious structures and
prepare them for exploitation;
• to ensure gas supply for settlements of natural gas provision;
• regional development, taking into account the growth rate of demand for
electricity and the creation of new power as a result of expanding the use of
alternative and renewable energy sources to improve the country's energy
security;
• to support business activity in the energy sector;
• construction of modern power plants, to continue implementation of
reconstruction and development projects;
• renewal of power transmission lines and substations, and to be completely
replaced.
Last years, as a result of the favorable environment for investment in the country's
economy the number of newly-built buildings and public facilities increased
significantly. This, according to the urban legislation is indispensable on the
reconstruction of public infrastructure and the organization of services in
accordance with the requirements of the market economy. Based on purposeful
reforms to be implemented in the area of housing and communal services
designed to international standards in the areas of quality of services provided to
consumers:
• In the event of an accident reconstruction-reinforcement works in buildings
and structures;
• Acceleration of restructuring measures in the field of public utilities;
• Rehabilitation of existing heating systems, modernization and reconstruction;
• Household waste collection, transportation, disposal and processing of new
ventures, involving the private sector in this area;
• Continuation of restructuring measures in the water sector in line with
international standards and ensuring a reliable water supply;
• The country's cities, regional centers, rehabilitation of water and sanitation
systems, especially in rural areas, and the new lines, the construction of
facilities to attract the private sector and municipalities.
The integration of the world economy and the expansion of foreign trade of
Azerbaijan Republic is required reconstruction of transport infrastructure, use of

164
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

the existing opportunities as a transit country, increase competitiveness of local

cargo carriers and development of export of transport services. In coming years,
it is designed the establishment of effective development of the transport system
in the country, the new modern roads and road facilities, bridges, underground
and surface passages and parking areas, improving the regulatory framework
governing the operation of public transport and the development of other
necessary measures in this direction. In 2009-2013, to achieve comprehensive
development of the industry and to further improve transport services planned to
implement measures in the following areas:
• harmonious development of the way in which different transport-
communication complex;
• balanced development of the international and transit corridors and roads
throughout the country, as well as regional, road infrastructure in cities and
districts;
• speedy integration of the transport and communication system in the world of
transport-communication traffic passing through the country and the main
vehicle accordance with international standards on the basis of the
modernization;
• to continue implementation of roads, communication lines and other infra-
structure facilities construction, the reconstruction and development projects;
• economy that realizes the exchange of goods and freight transport and
passenger transport to ensure the balanced development of the social needs.
In recent years, communication and information technologies fields in the
Republic of Azerbaijan are developing rapidly. in XXI century passages to the
information society in the country, formation of e-government and the
development of intellectual capacity became one of the important issues to
improve the socio-economic development. At the same time, with the development
of information and communication technologies in the country, to achieve all-
round progress of the country, especially to implement the National Strategy on
information and communication technologies (ICT) for development, operate and
ensure the implementation of planned projects in accordance with the objectives
set are the priority directions of development in coming years. By using the existing
potential various events are planned aimed its development, modernization in
terms of organizational, legal, technical, personnel of communication and
information technologies fields, formation of ICT industry, attracting new
investments in this area and as a result of the expansion of business to ensure
the country's transition to an information society.

165
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

To achieve the set of goals in this area will be taken on the following areas:
• creation of advanced information and communication infrastructure, the
formation of a unified national information space;
• creation of electronic government for the efficient, transparent and controllable
state administration and realization of local self-government;
• efficient use of world information resources in education, the acceleration of
the use of interactive educational opportunities;
• the provision of universal communication services(telecommunications, IT
and mail) in the regions;
• expanding access to internet in all areas.
In the country should be done a number of important measures for prevention of
factors that have a negative impact on the environment and to improve the
environmental situation, as well as, in the coastal strip of the Caspian Sea, in
Absheron peninsula and in other regions of the country waste water must be
cleaned, should be remediation of contaminated soils, the settlement, forests
and vegetation in wide range fields, to carry out improvement works and other
necessary measures should be implemented to restore the natural quality of
water basins, air, land. The rapid development of the national economy,
environmental protection and rational use of natural resources in solving problems
in the coming years will require the implementation of following measures:
• To improve the hydrological monitoring system on Kura, Araz and other
rivers;
• Expanding the greening of cities and towns, streets and avenues;
• to continue reforestation and afforestation measures in the regions;
• Identify recreational forests and service infrastructure for the development of
eco-tourism;
• The continuation of the measures to prevent pollution of water resources,
waste water, including cross-border pollution ;
• implementation of measures on the prevention of air pollution from industries
and vehicles;
• measures against soil erosion and salinization;
• strengthening of environmental awareness raising activities, the allocation of
a wider range to environmental education in educational institutions.
As in previous years, the main aim of social policy in the next five years in the
country will provide further improvement of the living conditions of population, as

166
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

well as, the citizens living in the regions. One of the priority directions in the field
of social protection of population will consist of the increase social benefits for
the low-income population groups, improve the social status, living conditions of
persons in need of social protection and reduction of poverty in the country. In
order to ensure social protection and decent living standards of citizens intended
continuation of the measures for improving pension provision and to increase its
effectiveness.
In social security one of the most important areas of public policy will consist of
ensuring targeting of social benefits, paying special attention to the disabled, war
veterans, young families, vulnerable sections of the population. Strengthening
social protection of the population will be implemented following measures:
• to continue appropriate measures for providing social assistance to low-
income families;
• improve mortgage loans in order to better meet needs housing of population,
especially young families;
• To improve the living conditions of the Karabakh war veterans and martyrs'
families;
• strengthening of social protection and safety of mothers and children;
• creation of child and family centers, including, special leisure facilities and
specialized services institutions for children;
• the improvement of population health (improving the quality of food products,
infectious and sexually transmitted disease prevention, etc.);
• the improvement of reproductive health and the development of family
planning services.
In coming years, the work will be done in the field of education will target its
structure and content updating. For all population groups in the country the
provision of education services, which can provide up to modern standards,
creating the conditions of material-technical and methodical and in this basis
achieving the highest socio-economic efficiency of the education system takes
essential place in the state's social policy. At the same time, in terms of the
formation of competitive economic system in region and sustainable development
will be a priority need payment to meeting modern requirements workers, creation of
necessary conditions to enroll in a higher education based on universal values of
young people, to ensure expansion and efficiency of the process discipline access
to education in the leading countries of the world. To achieve these objectives,
the following measures will be implemented in the coming years:

167
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

• Modernization of the content of education and improve its quality;

• construction of new schools, the improvement of technical and human
resources in schools;
• improvement of material and technical base of educational institutions on
information and communication, improve the provision of computer equipment
and other necessary digital equipment;
• Providing pupils with free textbooks and improving the performance of school
libraries;
• ensure equal access to education for all sections of the population;
• the improvement the education of children with special needs (disabled);
• to speed up reforms in the field of school education, optimization of such
education facilities, strengthening the material-technical base and establish-
ment of the new pre-school in modern level needed in the towns, villages and
towns;
• strengthening of vocational and higher education reforms, including adjusting
the staff training to labor market One of the most important tasks in the field
of science occurs the practical significance of the research, ensuring the
establishment of closer ties between economic subjects in scientific research
and design institutes. In the coming years, the following measures will be
implemented in the field of science:
• To protect and develop the scientific and technical capacity;
• To increase the research capacity of the country and its social protection;
• Increase the state's information resources and accelerate the innovation
process;
• By further strengthening the case on linking and directing the scientific
institutions of higher education and scientific research activities;
• Making effective use of scientific potential on the protection of population
health and ensuring environmental safety;
• Preparing highly qualified personnel by study abroad and through internships.
Measures to be implemented in the health sector for 2009-2013 must guarantee
the protection of public health, improve the quality of medical services, the
establishment of a modern healthcare system in Azerbaijan Republic. The ultimate
goal of the state policy in the field of health occurs improvement of population
health, prolongation of life expectancy, to provide quality medical care to all

168
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

segments of the population. To achieve the goals of the main directions of the
state policy in the field of health are as follows:
• As part of the state's financial resources to expand and improve the quality of
health care services for free;
• Development and implementation of measures to provide medical assistance
to underprivileged layer of population;
• Malnutrition among mothers and children, and the improvement provision of
micro-nutrients;
• Improve the scope and quality of medical preventive measures;
• Preparation of medical staff in the planning and preparation of family doctors
in accordance with the requirements of the health sector;
• Creation and operation of the medical industry enterprises supported by the
state in order to improve the provision of medicines and equipment to health
care facilities;
• Construction of new health care facilities in the regions;
• Creation of the geographical information system in the field of health all over
the country.
In order to ensure a healthy lifestyle of the population in Azerbaijan Republic, the
work will continue to engage in physical education and sport of every citizen. In
order to ensure comprehensive development of the population,especially,
growing younger generation will consist of the implementation of the measures
improving the health of the population in physical education and sport, to nurture
high moral values, the country's defense preparedness. To this end, in the
coming years will focus on the following works:
• Continuing the development of the material-technical base of physical culture
and sport, strengthening and compliance with international standards in cities
and regions of the country;
• Building on scientific grounds the development of physical culture and sport;
• To ensure medical control and services those engaged in physical education
and sports.
The strategic objectives of the state policy in the field of culture occurs protecting
and development of cultural potential of the country, riches and traditions and
improvement of the education system. To this end, following measures will be
implemented:

169
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

• strengthening inter-regional cultural relations, the integration of the world

cultural process of national culture;
• ensure the protection of cultural heritage of Azerbaijan Republic, including
increasing the number of the movable cultural heritage and museum;
• protecting the country's historical and cultural heritage and cultural potential
and for this purpose, to carry out comprehensive reforms in the museum;
• creation of modern sorting mechanism in library funds, the provision of
information libraries and creation and development of library-information
computer network in the country;
• the creation of collaboration and cooperation between cultural facilities and
other area organizations.
In recent years, there was active participation of the municipalities in the
implementation of infrastructure projects implemented and a number of
important measures to improve the social situation of the population, their
presence were necessary in the effective use of local natural and human
resources. In the coming years local self-government bodies will actively
participate in the resolution of social problems and the realization of works in the
development of the regions, as well as the formation of new economic relations,
development of entrepreneurship, the establishment of quality and mutual relations.
Implementation of the measures envisaged in the State Program directions play
an important role in economic development of the country being important stage
in socio-economic development of the Republic of Azerbaijan and achieving the
objectives set within the " State Program on Poverty Reduction and Sustainable
Development in Azerbaijan Republic in 2008-2015" as well as improving the
welfare of the country's population.

4.4.2. SOURCES OF FUNDING MEASURES ENVISAGED

IN THE STATE PROGRAM
Within the "State Program on the Socio-Economic Development for 2009-2013
of regions of the Republic of Azerbaijan"49 measures will be implemented is
expected to be financed from the following sources:
• Azerbaijan Republic state budget;
• extra-budgetary funds;
49
http://senaye.gov.az/az/normative_programs/region_development

170
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

• manage, enterprise and organizations funds regardless of ownership;

• Funds of National Entrepreneurship Support Fund of Azerbaijan and "Azerbaijan
Investment Company" OJSC;
• funds of local and foreign entrepreneurs;
• Financial resources of international organizations and foreign countries;
• other sources not prohibited by the legislation.

4.5. SOCIO-ECONOMIC DEVELOPMENT PROGRAM

OF REGIONS OF AZERBAIJAN REPUBLIC FOR
2014-2018
Adopting the implementation of state programs on socio-economic development
is great importance in the last decade on the rise of a new stage of development
of regions. All-round development of the regions as a continuation of the policies
instituted since 2004 developed "State Program on socio-economic development
of regions of Azerbaijan Republic for 2014-2018"50. Execution of "Socio-economic
development state program of regions of Azerbaijan Republic in 2014-2018" will
play a crucial role in ensuring macroeconomic stability, the expansion of
business activity in the region, the creation of new businesses and jobs, the
implementation of large-scale infrastructure projects, the improvement of public
services, resulting in further improvement of people's welfare and reducing
poverty by playing an important role in the development of the national economy.
The Action Plan of the State Program consists of the following sections:
• Country significant events,
• measures for the economic regions of the country:
• Nakhchivan economic region (Nakhchivan, Babak, Julfa, Ordubad, Sadarak,
Shahbuz, Kangarli, Sharur regions);
• Absheron economic region (Absheron , Khizi regions, Sumgayit city);
• Aran economic region (Agjabadi, Agdash, Beylagan, Barda, Bilasuvar, Goychay,
Hajigabul, Imishli, Kurdamir, Neftchala, Saatli, Sabirabad, Salyan, Ujar, Zardab
regions, Shirvan, Mingachevir, Yevlakh cities);
• Mountainous Shirvan economic region (Agsu, Ismayilli, Gobustan, Shamakhi
regions);

50
http://senaye.gov.az/az/normative_programs/region_development

171
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

• Ganja-Gazakh economic region (Agstafa, Dashkasan, Gadabay, Goranboy,

Goygol, Gazakh, Samukh, Shamkir, Tovuz regions, Ganja and Naftalan cities);
• Guba-Khachmaz economic region (Shabran, Khachmaz, Guba, Gusar, Siyazan
regions);
• Lankaran economic region (Astara, Jalilabad, Lerik, Masalli, Yardimli,
Lankaran regions);
• Kalbajar-Lachin economic region (Kalbajar, Lachin, Zangilan, Gubadli regions);
• Sheki-Zagatala economic region (Balakan, Gakh, Gabala, Oguz, Zagatala, Sheki
regions);
• Upper Karabakh economic region 1 (Agdam, Tartar, Khojavand, Khojaly,
Shusha, Jabrail, Fizuli, Khankendi city).
The State Program implementers are relevant central and local executive bodies.
Coordination of program implementation is carried out by the Ministry of
Economy and Industry of the Republic of Azerbaijan. The implementation of
measures envisaged in the State Program for the years will be provided when
preparing for the annual Public Investment Program.
In this regard, the main objective of "The State Program socio-economic
development of regions of the Azerbaijan Republic (2004-2008-years)" decree
approved by President of Azerbaijan Republic on February 11, 2004, No. 24 was
composed on sustainable development of non-oil sector, to ensure balanced
development of regions of the country, improve the provision of public utilities
and social infrastructure in the regions, as a result of the creation of new jobs
and businesses, increasing the level of employment and improving quality of life.
In order to achieve the development of non-oil sector, economic diversification,
balanced regional and sustainable socio-economic development, further
improvement of the living standards in the country for the continuation of the
measures launched since 2004 approved decree on "The State Program on
socio-economic development of regions of Azerbaijan Republic for 2009-2013 "
by President of Azerbaijan Republic on April 14, 2009, No. 80. As a result of
successful implementation of "The State Program on socio-economic develop-
ment of regions of Azerbaijan Republic for 2009-2013" was achieved macro-
economic indicators of the country's high growth rate played an important role
on further improvement of the living standards in the implementation of
measures envisaged in the sphere of socio-economic development.

172
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

Overall, over the past 10 years implementations in the field of socio-economic

development policy caused the rapid improvement of the country's macroeco-
nomic indicators, increased Gross Domestic Product (GDP) 3.2 times, GDP per
capita 2.8 times, the non-oil sector by 2.6 times and the average annual
economic growth organized 12.9%. The last 10 years, strategic currency reserves
increased 31 times, the foreign trade turnover 6.6 times, export by 9.3 times,
import by 4.1 times, non-oil exports by 4.7 times.
In 2004-2013 years, domestic investment increased by 14.6 times, the non-oil
sector 12.9 times, 50.7 billion manat were allocated to the regions from all
sources. Over the past 10 years as a result carried out measures opened more
than 1.2 million new, as well as, 900 thousand permanent jobs, 55.6 thousand
new businesses have been created. 80 percent of new jobs accounted for the
regions.
Expanded Direct transport links with world countries, especially, the countries of
the European Union, BakuTbilisi-Jeyhan (BTC) oil pipeline and Baku-Tbilisi-
Erzurum gas pipeline made a significant contribution ensuring world energy
security. Ensuring energy security of the region and Europe exceptional importance
projects of TANAP and TAP, also the signing of the final investment decision of
"Shah Deniz-2" project is paramount importance with the development of
economy, social welfare and improvement of socio-economic development. In
addition, actions towards the realization of the country's transit potential, as well
as Europe-Caucasus-Asia transport corridor activities, construction projects on
Baku-Tbilisi-Gars railway, International Sea Trade Port in Alat, North-South, East-
West transport corridor, highways continued successfully.
The last 10 years in the development of education infrastructure 2708 school
was built in or were renovated, aimed at improving the quality of medical
services rendered to the population were built more than 500 health facilities. In
order to improving the welfare of citizens, strengthen the social protection of the
poor people, every year beginning since 2007, increased the basic part of labor
pensions according to age and social benefits, the minimum amount of pension
has been reached from 20 manat to 100 manats. The last 10 years all tent camps
were abolished, 77 modern settlements established for refugees and internally
displaced persons, 37 thousand families - 166 thousand internally displaced
persons have been provided with housing. At the same time, continued
strengthening of social protection of the disabled and families of martyrs, have
been built 2788, as well as, 2041 apartment buildings in the region and more
than 450 houses.

173
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

The aim, objectives and priorities of regional development of the State Program,
the main objective of the " State Program on socio-economic development
regions of Azerbaijan Republic for 2014-2018" is the non-oil sector development,
economic diversification, continuation of the measures on the rapid development
of the regions, will consist of especially, on the development of rural infrastructure
and further improvement of social services. To achieve the set goals of state
Program it is planned to carry out important tasks as a continuation of the
measures such as infrastructure provision in the regions, as well as, further
improvement of the provision of public utilities, accelerate business development
in the production of export-oriented and competitive products, increasing
employment of the population, especially, rural population and to reduce poverty.
Achievement of the objectives as well as for the implementation of the above-
mentioned tasks it is important to preserve macroeconomic stability set in the
State Program. Taking into account the macro-economic stability the modernization
of the state's budget policy priority sectors of the economy and the creation of
conditions in order to ensure its effectiveness, long-term sustainability further
improvement of the investment climate will be a priority. As the main source of
economic growth, employment, budget and foreign exchange revenues will
continue to serve as a strategic factor achieving balanced and sustainable
economic growth in the non-oil sector and formation of high-income economy.
In this direction, such as the main terms of the whole economy, including the
development of the individual sectors in the regions for 2014-2018:
• Maintaining an acceptable level of the average annual inflation rate and the
exchange rate of the national currency;
• Determination of the extent of tax and customs tariffs;
• To continue measures to the stimulation of agricultural producers;
• Increasing grain production and strengthening of competitiveness;
• Stimulation of the activity of export-oriented manufacturers;
• The stimulation of creation of new jobs;
• Increasing of non-oil budget revenues special weight in Gross Domestic
Product;
• Will be continued development of the agricultural sector in order to ensure
food safety.
The investment climate in the state, affecting the development of employment
policies, employment creation, tax, customs, education and other relevant fields
of politics, further improvement of the new jobs will be to implement measures

174
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

to stimulate the development of the institutional environment. Following measures

will be implemented in the area of employment in the coming years:
• Expansion of regional economic cooperation;
• Establishment and development of a fair competitive environment, ensuring
control over compliance with labor legislation;
• Directing the development of human capital in a part of the revenues from oil
exports and the application of advanced technologies and innovations on the
development of scientific fields;
• Create conditions that ensure a balance between the number of jobs available
of the proposed workforce;
• Through the development of social and communal infrastructure reduce
migration of the population in rural areas;
• Increase the level of employment of women and young people. In the coming
years, the main directions of of the Azerbaijan Republic tax policy shall be as
follows:
• Expansion of partnership relations between taxpayers and tax authorities;
• Expansion and improvement of e-services through the use of modern
information and communications;
• The stimulation of investment in regional economy and innovation activity;
• The creation of a more favorable tax environment for business activity in the
regions.
Azerbaijan's economy in the global economic integration, the role of customs
policy in protecting the economic security of the country and the domestic
market is growing significantly and as one of the main tools in ensuring socio-
economic development of the country the development of a system based on
transparency, strengthening the protection of the rights of employers and
individuals, modernization of customs infrastructure and continuing to strengthen
the material-technical base will be the main priorities of customs policy for
2014-2018. Financial intermediary role in the economy in order to support the
liquidity of the banking system will continue to keep an adequate level and at the
expense of the sustainable development of non-oil sector, the role of the banking
system on ensuring the diversification of the economy, accelerating regional
development, expanding business initiative and on this basis the reduction of
poverty is significantly increased. A healthy competitive environment in the banking
system will be formed in the coming years, the regions will be provided with high
quality and wide range of banking services, banks will increase credit and

175
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

investment opportunities, equal competitive environment in the banking services

market will be achieved for the organization. The necessary measures will be
continued which provides an efficient and stable functioning of a market economy,
protecting the business activity from the potential risks, creating a cost-effective
sources of long-term investment for the development of the economy associated
with the formation of the national insurance system. In order to ensure long-term
economic and social development of the country's economy will play a special
role in attracting investments, the investments in order to ensure the required
quantity and quality of the major challenges facing the improvement of the
investment climate. For this purpose the main directions of the state's investment
policy will be the following priorities for the period of 2014- 2018:
• directing the investments on the non-oil sector and regional development;
• prioritization of regional investment policy in accordance with modern
tendencies of development;
• strengthen the social dimension of investment activity in the country, provision
of priority in the human capital and infrastructure investments;
• prioritizing investment in public investment in the field of nanotechnology and
low-carbon production;
• Speed stimulating measures to the priority areas of the economy, as well as
in order to attract local and foreign investments to the specific weight of
export-oriented and high added value sectors;
• be established in industrial parks to attract local and foreign investment.
To improve the business environment for the development of entrepreneurship in
the country as a result of constantly high quality and competitive products for
export and the production of the main priorities of the state's economic
development strategy. The activities carried out in the environment for
entrepreneurship and improving public policy, state support will be directed to an
improvement in relations between the state and entrepreneurs improvement. A
number of measures will be implemented in the coming years in the
development of entrepreneurship:
• Continuing further improvements of the legal framework regulating
entrepreneurial activity;
• other institutional mechanisms for improvement of relations between the state
and entrepreneurs;
• in the regions to further improve entrepreneurs financial security;
• improvement of entrepreneurship production, market and social infrastructure

176
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

including, mechanisms for the acceleration of development of modern market

infrastructure(as a financial, banking and insurance system, stock market,
audit, mortgage, leasing, franchising service);
• In regions supporting efforts to strengthen and expansion of mutually beneficial
cooperation between small, medium and large enterprises, including production
- cooperation.
In accordance with the policy of industrialization, measures undertaken for the
establishment of a qualitatively new level of industrial enterprises activities based
on local raw materials, and creation of new businesses, industrial districts, will be
stimulated the introduction of innovative technologies, the work will be continued
towards the creation of specialized and general-purpose industrial parks.
Establishment of industrial parks will have a significant impact the country's
economic development, modernization, competitive industrial production of high-
tech and further expansion of the country's export capacity, as well as an
increase in the level of employment. The following measures will be implemented
as part of the industrialization policy:
• In the region promotion of the establishment of competitive and export-
oriented industrial production sectors on the basis of innovative and high-
tech;
• The development of non-oil sector in traditional production areas (Chemical
industry, metallurgy, mechanical engineering, electrical engineering,
electronics, light industry, food industry, etc.);
• The successful implementation production organizational models in the world
for the support of entrepreneurship, including the continuation of the creation
of industrial parks and business incubators;
• implementation more transparent and effective privatization process on
privatization of industrial enterprises started, support the post-privatization
activities of enterprises;
• Reconstruction of the existing industrial enterprises in terms of production
and preparing with qualified staff the mechanisms of ensuring.
In the region the main priority is the development of non-oil sector in the area of
the successive reforms aimed at the development of agriculture and attraction of
new technologies. The combination of farmers in agriculture and creation of
cooperatives will give an impetus to increase competitiveness of incomes in the
agricultural sector and agricultural products and compliance with international
standards. The development of the agricultural sector and ensuring food security

177
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

of the population is considered as one of the main directions of the State

Program. The development of the agrarian sector consists of the following areas:
• associated development of production of raw materials and processing areas
of agrarian sector and stimulation of increase of competitive and export-
oriented production, primary the continuation of the measures related to food
self-sufficiency;
• Increase financial support to the agricultural sector and the continuation of
measures to promote the development of traditional agricultural areas;
• application of environmentally clear technologies in plant growing and animal
husbandry and stimulating the activity of economic entities in this area;
• creation of large grain or seeding, saplings, vine, intensive gardening farms;
• Continuation of the establishment of hothouse, refrigerators and grain storage
complexes (logistics centers) in regions with the aim of agricultural production,
deliveries, keeping and sales;
• taking into account the nature of each region, naturally and the climatic
conditions implementation of appropriate measures by specialization in
agricultural production;
• formation of ecologically clean agricultural and food markets;
• strengthening the material-technical base of agrarian sector and the new
structures will operate on market principles;
• The continuation measures to improve the supply of agriculture, irrigation and
land reclamation, efficient use of land and water resources;
• Undertaking relevant measures towards the lands electronic technical
registration and creation of an electronic registration system for farmers.
In order to ensure the effective integration of the national economy into the world
economy the expansion of foreign trade policy are priority directions of export of
non-oil products. In this connection, the following actions in 2014-2018 will be
important tasks:
• implementation of appropriate measures on research and to increase the
access to target markets of agriculture and processing products which have a
major role in regional development;
• continuation of regular activities on expansion of export opportunities for
entrepreneurs in the regions;
• implementation of appropriate measures on strengthen the protection of the
interests of strengthening the position of national producers in foreign markets;

178
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

• implementation of appropriate measures to improve the infrastructure for the

development of foreign trade;
• Stimulation of exporting enterprises to participate in international exhibitions
and fairs in order to increase their access to world markets of products
originating in Azerbaijan;
• Undertaking relevant measures explore and to develop the possibilities for
exports to the widespread use of e-commerce services;
• To improve the quality standards of the products are exported and export
potential and encourage businesses that produce products of international
standards in this regard and support for the creation of national brands.
For 2014-2018, information and communication technology (ICT) infrastructure
will be developed, further expanded the capabilities of modern electronic
services to the population, including the village residential areas, in the country
broadband, low-cost and high-quality Internet access will be provided. To achieve
the set goals in this area will be carried out on the following areas:
• Raising the level of knowledge and training of personnel in the ICT sector of
the population in the regions;
• Enhancing the quality of television broadcasting in the regions.
In the development of non-oil sector the development of tourism in the region
will remain a priority in the coming years, continued the expansion of tourism
resources, tourists visit, to meet the needs of tourism services which is
necessary and expand the range of other cultural events and modern standards,
the implementation of projects related to the construction of tourism facilities.
Tourism industry consists of the following areas of development:
• The implementation of targeted projects aimed at the establishment of the
highest international standards of tourism infrastructure in regions;
• Promotion of tourism activities in all regions of the country and the expansion
of promoting in order to attract investments in this sector by means of
modern information and communication technologies;
• The creation of appropriate infrastructure in tourism and recreation zones in
the regions, development different types of tourism , the creation of new
tourism routes;
• Implementation of appropriate measures to improve the quality of tourism
services in the regions through the increasing the level training of personnel
working in the tourism sector;

179
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

• Support for the creation of new hotels of different categories, and other
placement means, tourist service facilities in regions.
Work to be done in the sphere of fuel and energy complex of of the country in
the coming years will consist of to provide more comprehensive satisfaction of
the economy and the population's energy needs, the development of the energy
industry, including to increase its effectiveness. The main directions of the state
policy in this area in 2014-2018 will include as follows:
• continuation of the country's energy system and the creation of new powers,
construction and reconstruction of new power plants and transmission
systems;
• expand the use of alternative and renewable energy sources;
• construction new thermal and hydroelectric power station in the region,
continuation of the modernization of the existing power units;
• To continue to improve the region's gas supply;
• The continuation of modern heating systems, rehabilitation of existing heating
systems, modernization and reconstruction in regions.
The development of human capital and effectively continuation of the work done
in the field of social protection system and expansion was identified as a key
priority, for this purpose the country's population, in particular, to improve the
housing conditions of socially vulnerable sections of the population and the
development of this sector are set out as one of the key issues. In order to
housing and community economic development, exploitation of housing stock
and increasing the level of maintenance are the main priorities of housing policy
for 2014-2018:
• Continuation of the housing and communal sector reform in regions,
supporting the development of the real estate market;
• The continuation of the measures in order to provide living space for low-
income citizens regions in need of housing, including young families;
• In regions the continuation of the measures for water supply and reconstruction
of sewer system and to improve;
• In regions continue measures on landscaping and planting of greenery;
• In the regions will take appropriate measures on waste management area.
Make effective use of the country's strategic geographical position the develop-
ment of transit and transport services, domestic and international transportation
management mechanism, improving the quality of public transport services will

180
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

be the main tasks For 2014-2018 years. In this connection, the following
measures will be implemented:
• In regions the development a sustainable transport system, improving the
competitive environment the transport sector, including transport services
market;
• The development of road transport infrastructure of interregional, city and
intraregional of the country;
• In regions the continuation of the measures on the overhaul on construction
and reconstruction of highways, in particular, construction of rural roads.
For 2014-2018 years one of the main goals are to achieve ecological balance.
The necessary measures will be continued in the coming years on biodiversity
protection, neutralize the negative environmental impact of the fuel and energy
complex, the elimination of pollution of the sea and its waters and protection,
restore green areas and the effective protection of the resources available. The
main objective of environmental policy will be to ensure sustainable development
for the sake of present and future generations, with protection of ecological
systems and the efficient use of natural resources. The main events will be
carried out in this area consist of the following:
• In regions implementation of appropriate measures by activity based on the
principle "green economy" of industrial enterprises;
• The discovery of new deposits of raw materials for the supply of raw material
base for economic development:
• In regions to continue reforestation and afforestation, increasing green areas;
• In regions the development of specially protected natural territories and to
ensure the sustainability of biodiversity;
• In regions management the resulting solid and industrial waste;
• Expanding the use of alternative and renewable energy sources. The main
priorities of the state policy in the field of social protection of population for
2014-2018:
• By the development of effective social protection system the continuation of
the work on area of reducing the risk of social on the elderly population, low-
income families and in particular, socially vulnerable groups in the regions;
• In regions strengthening of the material-technical base of state-owned
enterprises providing social services, expanding their types and the network;
• The continuation of the work to improve the housing conditions of Karabakh
veterans and families of martyrs;

181
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

• In regions will be continuation of the measures in order to develop the skills

and abilities of people with disabilities, to increase employment opportunities
for them.
In the coming years, the work will be done in the field of education in accordance
with "National Strategy for the Development of Education in the Republic of
Azerbaijan " provides for large-scale events among countries in the world Quality
Results and holding leading positions in the coverage, based on cutting-edge
technology infrastructure for the creation of the education system. The education
system in accordance with economically sustainable and the standards of the
world's leading education systems allowing the training of personnel in the
country, education management system and advanced international experience in
education infrastructure and reconstruction of Azerbaijan concept of development,
will ensure sustainable development knowledge-based economy in the country.
To achieve these objectives, the following measures will be implemented in the
coming years:
• construction of educational institutions in the regions and continuation of the
capital repair works:
• implementation of appropriate measures carrying out measures for
rationalization of the education network, for equalize the quality of education
between regions;
• systematic study of the regions of the labor market system;
• creation for distance education, gifted and special education for children with
special needs and development, adult education, vocational and educational
issues, regional universal advice centers.
For 2014-2018 years the main objectives in the field of health strengthening
primary health care services in the regions, will improve the quality of medical
services provided to the population. In the regions in order to strengthen the
material-technical base of public health continued, construction of medical
facilities, repair and reconstruction, work to equip them with modern medical
equipment. To achieve the set goals the main directions of the state policy in the
field of health are as follows:
• In regions the continuation of appropriate measures to the protection of public
health, to improve the quality of medical services, knowledge experts and the
ever-increasing skills;
• In regions medical assistance to underprivileged social groups, to improve
the scope and quality of medical preventive measures;

182
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

• In order to improve the supply of medicines and equipment of health facilities

supports for the creation of medical industry enterprises;
• In the regions continue construction and refurbishment of new health care
facilities;
• The continuation of the establishment of resort in the regions, reconstruction
and improving infrastructure provision work on their area.
Will be continued the work carried out in 2014-2018 in order to support youth,
as well as the development of physical culture and sport. Events will be
continued information for young people living in remote rural areas will be
expanded network of advisory services, strengthening the health of young people,
to increase the role of physical culture and sports in accordance with the
relevant conditions in the field of leisure:
• Further improvement of conditions for the development of young people in the
regions;
• Further increasing youth employment and entrepreneurship development
among young people;
• To encourage young professionals to work in regions;
• Promoting physical education and sport among the children, adolescents and
youth in regions;
• strengthening the material-technical base of sports facilities in in regions, and
continue to develop.
In the coming years, continued appropriate measures on protection of cultural
heritage in the region, further development of cultural diversity in the context of
globalization, the restoration and preservation of historical and cultural
monuments, improve the functioning and development of the historical and
cultural reserves, repair and construction of cultural facilities in the regions.
Mentioned directions of the State Program implementation of the measures
envisaged being an important stage on socio-economic development of the
Republic of Azerbaijan play an important role sustainable development of the
country's regions and under the achieving the intended objectives on "Azerbaijan
2020: Vision of the Future" concept, as well as, improving the welfare of the
country's populatio.

183
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

4.5.1. SOURCES OF FUNDING MEASURES ENVISAGED

IN THE STATE PROGRAM
Within the measures to be implemented "Regions of the Republic of Azerbaijan in
2014-2018 State Program on socio-economic development" is intended financing
from the following sources:
• the state budget of Azerbaijan Republic ;
• extra-budgetary state funds;
• regardless of ownership, management, funds of enterprises and organizations;
• National Entrepreneurship Support Fund of Azerbaijan Republic and "Azerbaijan
Investment Company" JSC funds;
• funds from local and foreign entrepreneurs;
• Financial resources of international organizations and foreign countries;
• other sources not prohibited by the legislation.

184
 CHAPTER FIVE
CASPIAN ENERGY RESOURCES AND
ECONOMIC IMPORTANCE
Oil is the most precious wealth of Azerbaijan. Since the start of production over
the last 150 years, oil playing an important role in economy currently, is considered
to be the country's main source of income and the main source of export goods.
Medium and long term prospects for the country's development directly dependent
on the oil sector strengthening. Proceeds from the sale of oil plays a key role in
addressing some of the social and economic problems.
In terms of the contracts signed by the discovery and development of Azerbaijan
energy resources, a historic opportunity both politically and in terms of economic
independence, has had an excellent opportunity. The signed oil contracts speed
up the entry of foreign capital into the country, in parallel, increased foreign aid
and loans from international financial organizations.

5.1. POTENTIAL OF OIL AND NATURAL GAS

The Caspian region (Azerbaijan, Turkmenistan, Kazakhstan, Russia and Iran) has
proven oil reserves of 10 billion barrels. Estimated oil reserves are 233 billion
barrels. Proven natural gas reserves of the Caspian region is an estimated 170
Tcf (trillion cobic feet). Estimated natural gas reserves in the region, including
Uzbekistan is 293 Tcf.
It should be noted that; with hydrocarbon resources of the Caspian region, as a
result, with respect to oil and natural gas potential of Azerbaijan it is very
different from the estimates.
According to the Ministry of Energy, signed contracts covering the regions of
Azerbaijan have 6-8 billion barrels (1 billion tons) of oil reserves. Just Azeri-

185
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

Chirag-Guneshli oil reserves are 730 million tons. The information provided
above is based on 0.7% of the world's oil reserves, we can say that it has.
According to Mondros Armistice Agreement, the Turkish troops had to retreat
from Baku and the Allied troops had to enter the city.The Allies troop under the
command of General Thompson entered Baku on November 17th of 1918 and
founded an organization called “British Petroleum Management” and exported
114 million rubles worth of oil from Azerbaijan through Batumi.
After the war, the economic and strategical importance of oil became more vivid.
Countries started to feel the need for huge amount of oil in order to increase their
national power and realize economic development.
In the spring of 1919 after the Allied troops left Baku, Azerbaijani authorities tried
to rebuild the gravely damaged oil industry.
Owing to the balance of the political situation in Azerbaijan in 1919 and the return
of the oil industry to its former owners, certain increase happened in the oil
production. Over the next 2 years, the oil industry showed a further decrease due
to the nationalization of the oil industry. Thus the oil production in 1921 was 70
% of what was produced in 1919.
On the other side, the Genoa and Hague conferences took place in 1922. Although
the announced reasons of the conferences were political,in fact the real target
was only petrol and most importantly Baku’s oil. The aim of those conferences
were not about recognising the independence of Azerbaijan, but rather dividing
its oil resources among the countries hiding big oil terrorists behind.The only
thing spoken in the conferences was oil. As a result of the Genoa and Hague
conferences Azerbaijan’s fate was determined; Azerbaijanians lost their young
independence for the sake of oil and one Turkic country was cleaned out for
petrol.
The fundamental reason for the dramatic decline in oil drilling in Azerbaijan can
be explained by the political changes in Russia and Azerbaijan.
During the period of the Sovet Union, Azerbaijan was deprived of the benefit of
its own oil and met a significant portion of oil needs of the Union. In comparison
with the unbalanced growth of investments made in the oil industry to boost oil
production and export, capitals in other industrial sectors dwindled.
The years between 1920-45 during the reign of the Sovet Union are considered
as the second phase of oil. Over this period, while the oil and gas industry
improving significantly, the material and technical infrastructures advanced

186
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

considerably. The period between 1945-90 is regarded as the third phase of

Azerbaijan’s oil production.
In 1918, in accordance with the decision taken by the Bolshevik government in
Moscow, 165 independent oil companies were nationalised. In the same year
when Independent Azerbaijan Democratic Republic was proclaimed (1918-1920),
the government decided to cancel the nationalisation of the oil industry giving
those businesses back to the owners.Unfortunately, Azerbaijan Democratic
Republic was invaded by the Russian Army on April 28,1920 preventing the
elimination of oil crisis. After the occupation of Azerbaijan by Russia’s Red
Army, the Azerbaijan oil industry was renationalized. Starting from April 30, 1920
Baku oil was transported to Russia.
After the invasion, oil production kept shrinking. As in 1921 , only 2,411 million
tons of oil was produced.
The nationalisation of oil industry and political change played an important role in
that period. The already increasing oil production reached 11.6 million tons in
1928.
During this period, there was a great competition between America’s Standart Oil
and the UK’s Shell companies. Taking benefit from this competition, Azerbaijan
was selling oil to foreign countries through Turkey and buying goods for the Sovet
Union in return. Although Lenin gave some freedom to Azerbaijan in foreign trade
and it caused complaints of some circles, he supported the continuation of
foreign trade provided that information would be given about every action. Slowly
growing Baku oil exports reached 1 million 650 thousand tons in 1925, this
figure became 50 times more than the export in 1921.
After the First World War, in spite of the big efforts made for the development of
Azerbaijan oil production and processing industry, while great success was
achieved in petro-chemical, oil industry and mechanical engineering, but large
declines occured in the oil production. Despite this fact, in 1930, 57% of oil
production in USSR was provided by Azerbaijan. This figure rose to 71% in
1940.
Azerbaijan’s oil in the Second World War - During the Second World War Hitler,
who read, spoke and knew a lot about the history of major oil fields around the
world, tried to capture the oil fields in the Caucasus, particularly in Baku according
to a plan named “Edelweiss”. Because he regarded the oil in the Caucasus as
the fundamental element in the way of self-sufficient and thus invincible German
Empire.

187
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

Baku oil fields were the focal point of England, France and the USA. The mentioned
states had plans of bombing Baku to prevent Germany’s access to Baku’s oil
fields and weaken the Sovet Union.However after Hitler’s invasion of Holland,
France and Belgium on June 22, 1940, Baku oil fields stopped being the main
target.Though Hitler struggled hard to take over Baku’s oil, he failed to achieve
his aim. The Sovet Union won the Second World War by defeating Germany
thanks to Azerbaijan’s oil.
Azerbaijan oil played a significant role in the development of the Sovet Union and
during the Second World War 20 million tons of oil was sent to the front.That is
why, Azerbaijan oil had a huge impact in winning the War. Over the Second
World War oil production in Azerbaijan was realized like this: 25.4 in 1941, 15.8
in 1942, 12.6 in 1943, 11.8 in 1944 and 10.4 million tons in 1945. The steadily
rising oil production since 1923 reached the record level in 1941.
During this period, the oil drilled in Baku and the surrounding area accounted for
75% of the oil produced in the Sovet Union. Given the fact that during the War
remarkable part of the USSR’s oil needs were met by Azerbaijan, the geo-strategic
importance of Azerbaijan becomes much clearer.
The period of the Second World War caused a grave harm to the development
process of Azerbaijan’s oil. Because oil wells were damaged in the transportation
of oil.
On November 7, 1949 the first oil production from the discovery well in Caspian
Sea “Oil Rocks” started.
Furthermore, Baku oil and industry had an important contribution in discovering
and producing oil fields in Tatarstan, Bashkiria and Kazakhstan. That is why new
oil fields discovered in the Sovet Union were named “Second Baku”, “Third Baku”,
“Fourth Baku”. The start of oil production , in particular, in Siberian fields as well
as along the Volga, Tatarstan, Bashkiria, Western Siberia, Kazakhstan led to a
significant reduction in Baku oil production after 1950s.
Azerbaijan’s part in Sovet oil production decreased from 39.1% in 1950 to
12.9% in 1960 and to 6% in 1970, 3% in 1975, 2.40% in 1980, 1.7% in 1990.
The reduction during that time can be explained by following factors.
First of all, the continued production in the offshore fields caused the reserves to
dwindle, even newly discovered fields could not prevent this process At the
same time, oil production in defined areas were expensive.
Secondly, as mentioned above, very large oil fields were discovered in western
Siberia, western Kazakhstan and other places.

188
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

In 1985, the share of offshore oil made up 66% of total production in Azerbaijan.
In 1970s and at the beginning of 1980s, "Kaspmorneftegaz” organisation’s
technical capabilities were insufficient for the exploration of oil and natural gas
deposits at more than 60 metres depth in Azerbaijani sector of the Caspian Sea.
With the help of Gipromorneftegaz, “Gunesli” with large reserves was discovered
and it brought about further research in other fields.
Like the other republics of the Sovet Union, Azerbaijan was controlled and directed
with the central planning, thus depending on the central government it was unable
to utilize its own aboveground and belowground resources to meet its needs.
The amount of the money paid to Azerbaijan for the oil was 3-4 times lower than
the price of mineral water. At first, 35 rubles, then 65 rubles and in 1991, 120
rubles were paid, the cost of one ton oil was 131 rubles.In addition, during the last
years of the Sovet era, 85% of the investments made by the central government
was allocated to the oil in western Siberia,the Urals and the Volga.
Towards the end of 19th century, a great competition began among the regional
powers, world powers and oil companies. Russia was afraid of losing its
influence in the oil market and it boycotted a contract signed in 1895 among
American Standart Oil, the Rotshilds and the Nobels. The competition in the
region,the ethnic conflicts were inflamed increasingly by bureaucracy and
relatively less developed legal and commercial performances.
In 19th century, the improvement of the technology made it possible to use oil
reserves in higher level and thisincreasedcontrol in the region as well. The
competition was mainly centralised around the Caucasus and Caspian Sea. The
crude oil extracted from the region played an essential role in both world wars in
20th century.The protection of the oil fields of the Caucasus became the main
job of the allies51.
On the eve of the Second World War, the oil in Caucasus was the primary target
of Hitler’s scouts. After Germany-Russia Pact in 1939, the Sovet oil drilled in the
Caucasus comprised one third of Germany’s oil import. In 1942, Germany
organised regular attacks to seize power in natural resources of the region.
It is clearthat Azerbaijan was unable to use its own natural resources much and
met the large proportion of needs of the region.To increase oil production and
exports, the investments made in the oil industry went up, while the capitals put
in other industrial sectors declined steadily.
51
Aras, Osman Nuri. Azerbaycan'ın hazar ekonomisi ve stratejisi.Istanbul. Der, 2007.

189
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

After the collapse of the USSR, almost all the world’s attention turned to the
Turkic countries that gained independence. Although these countries possessed
rich oil and natural gas reserves, they did not have the financial and technical
capacity to use the oil and natural gas reserves alone.
Azerbaijan’s oil production and development in the Caspian Sea were gathered in
4 fields including Gunesli, Chiraq, Azeri and Kepez. However, due to the usage of
the simple technology, decreases occured not only in the production, but also in
the potential reserves that could be produced. If the oil production was 14.7
million tons in 1980, this number declined gradually and dropped to 12.5 million
tons in 1990, 9.2 million tons in 1995, 9.1 million in 1996. This reduction in oil
production stemmed from the decrease of productivity as a result of the use of
old technology and faults in the renovation of oil drilling equipment.In order to
utilise rich oil reserves of Azerbaijan, in September,1992 the State Oil Company
of Azerbaijan Republic was established by combining Azerineft and Azneftkimya.
Increase oil production and improvement of available resources might only be
possible by making use of modern technology and conducting new projects.
Azerbaijan’s economic strength and technology were insufficient for the use and
development of available resources.Those problems made Azerbaijan’s alliance
with big companies indispensable.
The oil is extracted both onshore and offshore in the country.The onshore oil is
exported in Absheron Peninsula. Azerbaijan’s oil agreements have mainly focused
on offshore reserves. By the agreements signed with big oil companies, Azerbaijan
has targeted to use its oil resources for the country’s economy. Towards this
goal,including onshore fields since September 20,1994, 23 international oil
agreements have been signed in Azerbaijan with the participation of 33 companies
from 19 different countries. Production Sharing Contracts covers a period of 25-
30 years.The total volume of the investments is more than 60 billion dollars.
In total, 400 companies including 72 local ones take part in the implementation
of oil projects.The activities of the companies range from construction to
environmental services.The alliance between local and foreign companies allows
the utilisation of modern technologies, materials and management techniques
which plays an important role in the transition from central management type to
market economy.
There are 75 thousand people working in the oil sector in Azerbaijan. People who
work in the oil sector get higher salaries than the ones working in other sectors.
In general, the economic benefits of partnership with foreign oil companies are
as follows:

190
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

- It has given Azerbaijan the opportunity to renovate the assests of oil production
by modern research, oil extraction, use and entry of the transport technologies
to the country as well as to set up businesses to help the development of the
oil and gas industry.
- As a result of the contracts signed, growing oil production has led to a
significant increase in the budget revenues.
- Azerbaijan has afforded global work force and access to the international raw
materials market, as well as get the possibility to take advantage of its
privilege in raw materials field as a source of income for the improvement of
the country’s economy.
- As the rising oil and natural gas production promotes the employment,
Azerbaijan will implement new infrastructure projects. The oil and natural gas
contracts have been signed in a way to guarantee the employmentfor local
labor force.It has helped reduce unemployment by opening new workplaces.
- With the signed contracts, in particular with “Contract of the Century”
Azerbaijan has proven to the world that it is possible for the investors to
operate and make partnership equally.
In addition to the above mentioned, concerns are frequently voiced about the oil
contracts which include some conditions against the national interests of
Azerbaijan. It is not only oil production mentioned in the contracts, but also
providing large volume orders for the goods and services of local manufacturers,
opening many new workplaces are reflected, thus necessary supplies and
services for the existing contracts are mainly brought from abroad, in terms of
orders, the volume of goods and services of local manufacturers remain far
behind in comparison with foreign orders.
Among the contracts about the production of energy resources, “The Contract of
the Century: Azeri-Chirag-Gunesli fields agreement”which is an important one in
terms of the country’s oil reserves and “Shah Deniz” which plays an essential
role in terms of natural gas reserves, will be discussed below. Other contracts
will also be mentioned comprehensively later on.

5.2.1. THE CONTRACT OF THE CENTURY:

“AZERI-CHIRAG-GUNESLI” FIELDS AGREEMENT
“The Contract of the Century”, which is the most important one among the
others, has given a new breath to the sector that lag behind during the Sovet era
and carries great economic importance for Azerbaijan.

191
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

The contract that covers ACG fields is the most significant historical event that
roots from Azerbijan’s independence and the efforts to change its position.The
negotiations made in very difficult situation began between Azerbaijan and
western companies during the Sovet Union.
The period of liberalisation that weakened the Sovet economy attracted western
companies because of the discovery of rich mineral resources in Azeri-Chirag-
Gunesli offshore area and well-developed oil industry of Azerbaijan.
Azerbaijani government decided to accept western capital to the country for the
implementation of the projects due to the faults in necessary equipment to
explore, develop and consume reserves. In January, 1991 the country’s projects
were opened to tender. BP, Statoil, Amoco, Unocal and other companies
participated in this tender.
In 1991, several foreign companies including Amoco,BP,McDermott, Pennzoil,
Ramco, Unocal, Turkish Petroleum Corporation (TPIC) and Statoil started the work
with Azerbaijan that would last 3 years in the direction of improving research in
Chirag and Guneshli fields located in the Azerbaijani sector of the Caspian Sea.
In 1992, the companies wishing to operate in Caspian Sea oil fields built a
consortium and signed contracts. On condition that SOCAR would buy 30% of
the project , Azerbaijan International Oil Consortium-AIOC led by Abulfaz Elchibey
signed an agreement for the development of oil sector.
According to the agreement, the discussions had to continue in London in June,
1993. However, owing to the change of power in Azerbaijan discussions did not
yield result. Abulfaz Elchibey was removed from power by Suret Huseynov
without concluding the discussions.At the same year, the new president of
Azerbaijan, Heydar Aliyev cancelled this contract. Meanwhile, the immediate
overthrow of Elchibey brought the companies around the table for discussions
with Heydar Aliyev. On February 4, the discussions resumed. In April,1994 SOCAR
officially declared it to consortium partners that Russian company Lukoil would
buy 10% share. The firms in the consortium took into account the effects that
could be made by Russia in the future. Because of the control in the Volga river,
Russia might pose obstacles to the pass of heavy cargo ships from the internal
waters of the Caspian Sea in the future. As a result of these discussions continued
in Baku, Istanbul and Houston, Russia was also incorporated into the consortium
and the contract was reviewed again, SOCAR’s 10% share was given to Russia.
On September 20, 1994 after the discussions that lasted about 3 years, the
Contract of the Century namely “The joint use and sharing of oil in Azeri, Chirag,

192
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

Guneshli located in the Azerbaijani sector of the Caspian Sea” was signed
between SOCAR and the consortium in Gulustan Palace giving the right to explore
and extract the oil in those regions to AIOC.
As a result,despite many impacts the contract was signed and a vital step was
taken in favor of Azerbaijan.
Under the terms of the contract, Azerbaijan protects the right of ownership in the
three oil fields.
The contract came into force on December 12, 1994 after being discussed by
Milli Majlis of Azerbaijan on December 2, 1994.
This project which is also known as mega-project has the total investment volume
of up to 11 billion dollars and it is estimated that total producible oil reserves may
be 5.4 billion barrels (730 million tons) and natural gas reserves may be 96
billion m3. Besides, the fields own 6 million tons of condensate reserves. The
approximate numbers above changes frequently. The contract covers a period of
30 years.
Guneshli field is 82 km, Chirag field is 94 km and Azeri field is located 113 km
away from the coast.
In December 1994, the consortium set up Azerbaijan International Operating
Company (AIOC). Building Azerbaijan’s oil industry infrustructure according to
westernd standarts and by taking these measures into consideration is the key
part of the program of AIOC, whose main task is to follow the work on a daily
basis.
The problems faced during the discussion of the contract covered the topics
explaining that companies could cancel the contract under certain conditions.
They are these: The start of the war in Nagorno-Karabakh,the rapid deterioration
of the economic and political relations between Russia and Azerbajan,the internal
instability in Azerbaijan, the failure of Azerbaijani government to have a stable
export line and any misunderstanding occured in the regime to define the status
of the Caspian Sea.
In the early years, Japan was not in the consortium, but it joined later. The
Japanese “Itochu” company, that had not taken part in the contract earlier, later
bought 2.45 % share from “McDermott International” selling all its shares and
joined “ACG” consortium. The Japanese company later purchased 1.5% out of 5
% share sold by AMOCO, so its share reached 3.9%.
EXXON bought 3% of AMOCO’s shares, while UNOCAL purchased 0.5%. Earlier
SOCAR’s share was decided to be 30% which delivered 10% of it to Russian

193
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

Lukoil before the contract and in April of 1995, after the contract was signed it
gave 5% to EXXON company and 5% to TPIC on the same date. Although it
wanted to give a share of 5% to Iran, this plan failed to be realised due to the
pressure from the West.
“The Contract About the Agreement on Carrying Out the Operations Together”
was signed among the members of the consortium and Azerbaijan International
Operating Company was created as a result of this contract. This company, that
was established with the participation of 11 companies from other countries
beyond SOCAR, serves the use of the fields52.
The final version of the existing distribution in the Contract of the Century is as
follows:
BP (operator) 34.13%
Unocal 10.3%
SOCAR 10%
INPEX 10%
Statoil 8.56%
ExxonMobil 8%
TPAO 6.75%
Devon 5.62%
Itochu 3.72%
AmeradaHess 2.72%
“The Contract of the Century” is something like “Production Sharing Agreement”
and if we look at the distribution of the shares, it is obvious that the USA has the
largest share. The total share of American companies is 40%.The USA produces
approximately 340 million tons and imports 600 million tons of oil in a year. So
the USA needs new energy reserves to import.In this respect, the Caspian Sea is
among the regions in the USA’s economic interests. The total share of English
companies is 19%. The biggest share in the consortium after American and
English companies belong to Russian and Azerbaijani companies.
The role of “The Contract of The Century” for the Republic of Azerbaijan has to
be the fulfilment of the 90% of the investments, that are important for the use of
the fields, by the consortium. Azerbaijan keeps the management and the right to
control over oil and natural gas fields. Without any doubt, large amount of
investments should be made on the offshore oil reserves in a quick and beneficial
way, also new technologies should be bought, as well as the most experienced

52
Aras, Osman Nuri. "Azerbaycan Ekonomisi ve Yatırım Imkanları." Bakü: TÜSIAB Yayın 2005-001 (2005).

194
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

oil companies from foreign countries should be attracted to the fields and allied
with. Because, with the aim of the use of the fields, there is a need to make huge
amounts of investments in drilling and manufacturing platforms and building
provision systems of the pipelines in the land.
With “the Contract of the Century” on energy resources which is not only an
important factor in the national economy, but also an essential key in foreign
market, Azerbaijan took the first step in the direction of actively integrating into
the world economy.
All the envisaged activities were carried out in Azeri-Chirag-Gunesli fields which
was the first oil project, the areas were provided with the latest technology for oil
production, the foundation of the oil industry modernized very much. The
construction of “Chirag 1” offshore platform finished and the first oil well was
drilled, the underwater pipelines were laid from the platform to the coastal
terminal in Sangachal and compressor station in the oil rocks.A costal terminal
was built in Sangachal, the maintenance activities were implemented in Baku-
Novorossiski oil pipeline and this pipeline started operating on November 12,
1997.
After the production in Chirag-1, the oil-production related activities in the fields
whose names are shown in “The Contract of The Century” consist of 3 phases.
The first phase started in August of 2001 in Central Azeri field. The second phase
began with the activities in West and East Azeri fields in July of 2002. The
contract on the start of the third phase was signed on October 20, 2004.In the
contract the production in Guneshli field was meant to start. The first production
of the oil in the third phase was planned in 2011. The oil production was
400.000 barrels in a day in 2011 .After several years, within “The Contract of
The Century” the oil production will rise to 1 million barrels daily.

5.2.2. “SHAHDENIZ” FIELD CONTRACT

The contract of Shahdeniz field was signed on July 4, 1996 and approved on the
4th of October,1997, came into force on October 17,1997. The contract signed
in the form of “Production Sharing Agreement” has 30 years’ term.According to
this contract the responsibility was given to the Shahdeniz consortium. BP
Exploration Ltd. was assigned to utilise the area. Shahdeniz field located in the
south-east of the Azerbaijani sector of the Caspian Sea is 70 km away from Baku.
The field covers an area of 800 km2.

195
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

BP Exploration began operating at the end of October, 1996. The project

investment is estimated to be 4.1 billion dollars.
There are nearly one trillion m3 gas resources in Shahdeniz field.400 billion m3 of
natural gas has been approved. It is assumed that 60 billion m3 gas will be
extracted per year. Thus, Shahdeniz field has increased the natural gas potential
of Azerbaijan roughly 1 trillion m3.
The requirements of joining the consortium of the project, the main indicators of
which are mentioned above, turned the contract into a zone of political war.After
the contract of Karabakh field, “Liberation” newspaper gave information that a
new agreement would be signed within six months and French oil company “Elf
Acquitanie” would join it. Aliyev’s official working visit to France in December of
1993 had a big influence in the joining of France to the new oil contract.
Moreover, it was confirmed that Lukoil and another Russian company Yukos
would join the consortium as partners.However, problems over the participation
of Iran occured. In Ashgabad meeting of the economic alliance organisation held
in May of 1996, a contract was signed between Aliyev and Rovshengani on giving
10% of Azerbaijan’s 20% share in Shahdeniz to Iran. Therefore, Iran’s some
negative impacts on Caspean Sea oil issues was eliminated.On the other hand,
Vashington did not allow the participation of USA companies in the contract in
case of Iran’s attendance, though earlier they were permitted to join the contract
in the consortium. Consequently, when an Iranian company, OIEC took part in
the consortium, no other American company participated there.
The distribution in Shahdeniz among the companies is as follows:
England BP 25.5%
Norvay Statoil Alliance 25.5%
Azərbaijan SOCAR 10%
Russia Lukoil 10%
France TotalFinaElf 10%
Iran OIEC 10%
Turkey TPIC 9%
Shahdeniz field enabled Azerbaijan to be among the countries of natural gas
producers and exporters. That’s why before Baku-Tbilisi-Ceyhan pipeline was
decided, the discussions on pipeline to export natural gas started to be made.
In connection with the sale of the gas from Shahdeniz, 4 contracts were signed in
2004. The first contract was signed with “Botas” for selling 6.3 billion m3 of gas.

196
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

One contract with Azerbaijan and 2 with Georgia were signed. According to them,
per year 1.5 billion m3 of natural gas would be sold to Azerbaijan and 800 million
m3 to Georgia.
During Ilham Aliyev’s official visit to England in December of 2004, loan agreement
was signed with European Bank for Reconstruction and Development (EBRD) in
connection with the 10% share that needed to be sponsored by Azerbaijan.
According to the loan agreement, EBRD, that was to fund Azerbaijan’s share in
Shahdeniz project, gave one hundred and seventy million dollars of loan to
SOCAR.
So, the funding by foreign financial institutions to transport Shahdeniz gas to the
world has been an essential step forward in the realisation of the project53.
Within Shahdeniz project, 100 million dollars are spent each month. Shahdeniz is
one the world’s biggest 10 oil-gas projects. Natural gas started to be exported
from the field at the end of 2006.

5.2.3. OTHER CONTRACTS

5.2.3.1. The contracts on offshore fields
1. “Lenkeran-Deniz ”–“Talısh-Deniz” Fields Contracts
Date of the contract: January 13,1997
Date of approval: June 13,1997
The companies involved: TotalFinalElf (35%, operator)
Wintershall (30%)
SOCAR (25%)
OIEC (Iran) (10%)
Estimated resources: 700 million barrels of oil
Investment volume: 2 billion dollars
Status: the first well checked in 2001
2. Yalama-D222 Field Contracts
Date of the contract: July 4,1997
Date of approval: November 4, 1997
The companies involved: Lukoil (80%, operator)
SOCAR (20%)

53
Aras, Osman Nuri. "Azerbaycan Ekonomisi ve Yatırım Imkanları." Bakü: TÜSIAB Yayın 2005-001

197
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

Estimated resources: 750 million barrels of oil

Investment volume: 4 billion dollars
Status: 2-D və 3-D seismic studies conducted
3. Absheron Field Contract
Date of the contract: August 1,1997
Date of approval: November 11,1997
The companies involved: SOCAR (50%)
Chevron (30%, operator)
TotalFinalElf(20%)
Estimated resources: 13 billion barrels of oil,100 tcf of natural gas
Investment volume: 3.5 billion dollars
Status: The drilling of the first well in 2001 did not yield a positive
result.The second well was drilled in 2004.70 barrels of oil
are estimated per day.
4. Oghuz Field Contract
Date of the contract: August 1, 1997
Date of approval: November 5,1997
The companies involved: ExonnMobil (50%, operator)
SOCAR (50%)
Estimated resources: 290 million barrels of oil and və 685 tcf
(trilyon kub feet) of natural gas
Investment volume: 2 billion dollars
Status: The well was digged in April of 2001. ExxonMobil left the
project in April of 2002.
5. Nakhchivan Field Contract
Date of the contract: August 1, 1997
Date of approval: November 14, 1997
The companies involved: ExxonMobil (50%, operator),
SOCAR (50%)
Estimated resources: 750million barrel of oil
Investment volume: 2 billion dollars
Status: ExxonMobil drilled a well successfully. Activities will go on.

198
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

6. Kurdashı–Arazdashı–Kirgan Offshore Fields Contract

Date of the contract: June 2,1998
Date of approval: July 7,1998
The companies involved: SOCAR (50%)
Agip(25%, operator)
Mitsui(15%)
TPIC (5%)
Repsol (5%)
Estimated resources: 730 million barrels of oil
Investment volume: 2.5 billion dollars
Status: 2 wells were drilled.None succeeded.
7. Inam Field Contract
Date of the contract: July 21,1998
Date of approval: December 1,1998
The companies involved: SOCAR (50%)
BP (25%, operator)
RoyalDutch/Shell (25%)
Estimated resources: 2.2 billion barrels of oil
Investment volume: 2 billion dollars
Status: In the first evaluation of BP, the drilling was cut short. New
drilling was planned until 2005.
8. Araz-Alov-Shark Fields Contract
Date of the contract: July 21,1998
Date of approval: December 18, 1998
The companies involved: SOCAR (40%)
BP (15%, operator)
Statoil (15%)
ExxonMobil (15%)
TPIC (10%)
Alberta Energy(5%)
Estimated resources: 4 billion barrels of oil
Investment volume: 10 billion dollars
Status: In December, 2001 the contract was suspended due to the
lack of compatibility in Iran and Azerbaijan Caspian Sea
borders.

199
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

9. Yanan Tava – Ateshgah – Mugan Offshore Field Contract

Date of the contract: December 25, 1998
Date of approval: June 11,1999
The companies involved: SOCAR (50%)
JAOC consortium (50%)
Shares of JAOC internal companies are like
this: Japex (22.5% operator), Inpex (12.5%),
Telikoku (7.5%), Itochu (7.5%)
Estimated resources: 600 million barrels of oil
Investment volume: 2.3 billion dollars
Status: Seismic work is being conducted
10. Lerik-Cenab-Savalan-Dalga Fields Contract
Date of the contract: April 27, 1999
The companies involved: SOCAR (50%)
ExonnMobil (30% operator)
Not assigned (20%)
Estimated resources: 1 billion barrels of oil
Investment volume: 3 billion dollars
Status: Searches are carried out in the blocks of
D-43, D-44 və D-73 .
11. Zafar–Mashal Fields Contract
Date of the contract: April 27, 1999
Date of approval: April 21, 2000
The companies involved: SOCAR (50%)
ExonnMobil(30%, operator)
Conoco (20%)
Estimated resources: 1-2 billion barrels of oil, 1.8 tcf of natural
gas
Investment volume: 3 billion dollars
Status: Searches were carried out in the blocks
D-9, D-38. Recent drilling operation was
conducted in September, 2004.

200
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

5.2.3.2. Contracts on Onshore Fields

1. Kemaleddin–Mishovdag Fields Contract
Date of the contract: It was signed as Joint Venture in 1992 and
became PSA in 2000.
The companies involved: National Energy (85%), SOCAR (15%)
Estimated resources: 200 million barrels of oil
Investment volume: 50 million dollars
Status: In 2004, production capacity was scheduled to increase
from 2700 bpd to 3200 bpd.
2. Anshad Oil Contract
Date of the contract: It was signed as Joint Venture in 1993
and became PSA in 2000
The companies involved: SOCAR (51%)
Atilla Dogan (31.5%)
Land and General Berhard(17.5%)
Estimated resources: 219 million barrels of oil (Neftchala, Killi,
Babazanan Fields)
Status: 4 wells were drilled in 1998-1999. The oil production
volume was about 77000 bpd. The average natural gas
production volume was 1.1 mcf per day in 2004.
3. AzGeroil Contract
Date of the contract: It was signed as Joint Venture in 1993
and became PSA in 2000
The companies involved: SOCAR (51%), Grunewald (49%)
Estimated resources: 140 million barrels of oil (Rehmani,
Balakhanı, Sabunchu Fields )
Status: The average production volume is 1000 bbl/d since 1999.
4. South-West Gobustan Field Contract
Date of the contract: 2 June 1998
Date of approval: November 1998
The companies involved: SOCAR (20%)
CNPC of China (62.83%)
Arawak Energy of Canada (37.17%)
Estimated resources: 180-200 million barrels of oil
Investment volume: 900 million dollars
Status: 2-D seismic searches continue.

201
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

5. Zıgh-Hovsan Fields Contract

Date of the contract: June 5,2000
Date of approval: June, 2001
The companies involved: SOCAR (20%)
Lukoil(50%)
Estimated resources: 66-150 million barrels of oil
Investment volume: 250 million dollars
Status: The fields have been rehabilitated. Due to ecological reasons,
the start date of the contract was postponed.
6. Kursengi–Karabaghlı Fields Contract
Date of the contract: December 15,1998
Date of approval: April 16, 1999
The companies involved: SOCAR (50%)
CNPC(30%)
Amerada Delta-Hess (20%)
Estimated resources: 730 million barrels of oil
Investment volume: 1 billion dollars
Status: In order to increase the production, 10 new wells were
drilled. The oil production is 6600 bbl/d since 2004.
7. Muradkhanlı-Jafarlii-Zardab Fields Contract
Date of the contract: July 21, 1998
Date of approval: November 20,1998
The companies involved: SOCAR (50%), Ramco (50%, operator)
Estimated resources: 730 million barrels of oil
Investment volume: 1 billion dollars
Status: The first oil in Muradkhanlı was drilled in April,2001.
8. Padar-Harami Fields Contract
Date of the contract: April 27,1998
Date of approval: June 9, 2000
The companies involved: Nations Energy (85%, operator)
SOCAR (15%)
Estimated resources: 580-750 million barrels of oil
Investment volume: 140 million dollars
Status: Seismic searches continue.

202
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

9. Shirvan–Kurovdagh Fields Contract

Date of the contract: It was signed as JV in 1997and became
PSA in 2000.
The companies involved: SOCAR (49%)
Caspian Energy Group (UK) (51%)
Estimated resources: 650 million barrels of oil (Kurovdagh
Field)
Status: The rehabilitation of the wells continues since 1997. In
2004 the average oil production volume was 57000 bpd,
natural gas production volume became 1.5 mcf/d.
10. Western Absheron (Karadagh-Kepzz-Umbakı) Fields Contract
Date of the contract: August 10, 1994
The companies involved: BMB (100%)
Estimated resources: 200 million barrels
Investment volume: 700 million dollars
Status: With the request of suspending BMB’s activities, SOCAR
took over the right of privilege of the fields in December
1999.
11. Pirsaat Fields Contract
Date of the contract: June 5, 2003
The companies involved: SOCAR (25%)
Sheng Lee Oil (50%)
Middle East (25%)
Estimated resources: 7 million tons
Investment volume: 147 million dollars
Status: Reproduction was planned in the field with the drilling of 7
new wells and reconstruction of 27 wells.
12. Qarachukur Field Contract
Date of the contract: June 18,2004
The companies involved: SOCAR (25%)
Investment volume: 2.3 billion dollars
Status: Seismic studies are conducted.

203
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

13. Lerik-Cenab-Savalan-Dalga Fields Contract

Date of the contract: April 27, 1999
The companies involved: SOCAR (50%)
ExonnMobil (30% operator)
Not assigned (20%)
Estimated resources: 1 billion barrels of oil
Investment volume: 3 billion dollars
Status: Searches are carried out in the blocks of
D-43, D-44 və D-73.
14. Zafar–Meshel Fields Contract
Date of the contract: April 27, 1999
Date of approval: April 21,2000
The companies involved: SOCAR (50%)
ExonnMobil (30%, operator)
Conoco (20%)
Estimated resources: 1-2 billion barrels of oil, 1.8 tcf of natural gas
Investment volume: 3 billion dollars
Status: Searches are conducted in the blocks of D-9, D-38. The
last drilling operation was done in September of 2004.

5.3. OIL AND NATURAL GAS PRODUCTION

It is calculated that in Azerbaijan- the most experienced country in the Caspian
Sea - 1.4 billion tons of oil and 445 billion m3 natural gas have been extracted in
the past 100 years. Since the start of the production until 2005, the highest oil
production in Azerbaijan was recorded in 1941 with 23.4 million tons54.
Although oil production declined in Azerbaijan with the start of the transition
period, the signed contracts became the turning point in the production and it
began to rise again after the activities. In November,1997 with the beginning of
the oil extraction from the first well in Chirag field, the declining oil production till
1997 started to grow from 1998. However natural gas extraction showed a
decline except for 1999.

54
Aras, Osman Nuri. Azerbaycan'ın hazar ekonomisi ve stratejisi. Der, 2007.

204
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

The Caspian Sea portion of the total oil production was 82.3%, but this ratio
inclined to 89% in 1999 and between 2000-2004.Thus, the Caspian Sea portion
of the oil production is rising over years. Since 2005, this ratio is higher than
90%.
By comparing the oil production level in 2002 with 1990, we can observe that it
was 2.5 million tons more. This production scale is equal to the level of oil
extracted in 1979 in Azerbaijan. Consequently, the ongoing instability in oil
production since the late 1960s ended and rose again. Oil production was
resulted in 15.3% in 2003 and became 15.5 million tons with 1.3% increase in
2004.
In 2010, 50 million 838 thousand tons of oil was produced.There was a
decrease in the oil production level in 2014 in comparison with 2010. Because it
declined to 42 million tons.
Figure 17. Oil Production (million tons)

60

50

40

30

20

10

Source: SSCAR Publications

As can be seen from the chart above, the highest oil production was recorded in
2009 and 2010 with 50.4 and 50.8 million tons, respectively.
Natural gas production in Azerbaijan commenced in 1902. Since the start date of
the production the highest natural gas production in the country was carried out
in 1981 with 17 billion m3. In 1980s natural gas output reached 14 billion m3 on
an annual basis. However, as a result of a significant decline in the production
since 1990, it fell to the volume of the output in 1960s.

205
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

There are 2 big pipelines in Azerbaijan. They are Baku and Novo-Baku lines. The
daily volume of Baku line is 230 thousand barrels and Novo-Baku is 200
thousand barrels.There is a need for nearly 700 million dollars to restore and
repair both lines which have very low production and old technology.US Trade
and Development Agency has provided financial support of 500 thousand and
400 thousand dollars alternately for feasibility studies of modernizing Baku line
and Sumgait petrochemical plants.
96% of natural gas output is achieved from the Caspian Sea.
In 1995-2001, the volume of natural gas production decreased 16.3%.In 2002, it
showed 7.4% fall becoming 5.150 billion m3. With the ongoing decline of the
natural gas production in 2003-2004 it became 5 billion m3 in 2004 with 3.1%
decrease in comparison with the previous year.
The produced natural gas met only 40% of the domestic demand of the country.
It meant natural gas output failed to address the domestic demand. For that
reason, natural gas import became a necessity.Since 2006, natural gas
production in Azerbaijan reached the level of 20 billion m3 increasing year after
year which enabled Azerbaijan not only to pay the demand of its own domestic
market, but also to export natural gas to Turkey,Georgia and Russia.
Figure 18. Natural Gas Production (billion cubic meters)

35
30
25
20
15
10
5
0
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014

Source: SSCAR Publications

As can be seen from the chart above, in recent years natural gas production has
grown significantly.That is, if only 5 billion m3 of natural gas was produced in
2005, it reached 29.5 billion m3 in 2014. The primary reason of the rise in natural
gas output can be explained by the renewal of technical equipment as well as the
start of production in new gas wells.

206
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

As a result of the fall of natural gas production to 5-6 billion m3, though Azerbaijan
exported gas to Armenia and Georgia earlier, it began to import gas from
Turkmenistan and Iran from 1990.But natural gas import stopped in 1995. A
contract was signed in 2000 to import gas from Russia and in November of the
same year natural gas was started to be supplied for the trial.
Natural gas sales do not play an important role in trade volume between
Azerbaijan and Russia.Azerbaijan imported 5.5 billion m3 of gas from Russia in
2005. For the imported gas ,Azerbaijan paid 256 million 412 thousand dollars.
The amount paid for the same volume of gas meant to be purchased in 2005
was 330 million dollars. Since 2006, Azerbaijan has stopped its gas import from
abroad and turned into a gas exporter. Especially Turkey,Georgia and Russia
have become the main customer of Azerbaijan’s gas.
It is projected that the annual volume of natural gas production between 2010-
2020 in Azerbaijan will be 60 billion m3, 15-20 billion m3of it will meet the
domestic demand. For the export of the rest of the gas, a number of alternative
projects including Nabucco are available.

5.4. FOREIGN INVESTMENTS IN OIL AND

NATURAL GAS SECTOR
Azerbaijan’s energy resources and foreign capital entering the country in connection
with that have had an important role in the improvement of Azerbaijan’s economy
since mid- 1990s
Figure 19. Foreign Investment made in Oil Sector (million $)
8000
7000
6000
5000
4000
3000
2000
1000
0
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014

Source: SSCAR Publications

207
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

3.34 million dollars of investment was made in oil industry between 1994-
2000.Since 2001 there has been a significant increase in foreign investments in
oil sector. As a result, it is obseved that the capital put in oil sector reached 80
billion dollars at the end of 2015.
The total volume of the investment concluded by 23 contracts on the energy
resources production is approximately 80 billion dollars.

5.5. OIL EXPORT LEVEL AND INCOMES

Oil and oil products take the main place with a rate of 85-90% in Azerbaijan’s
export. Towards the end of 2005, with the launch of BTC, the amount of oil in
export grew even further.
Until 2004, the export volume of Azerbaijan exporting oil through Baku-
Novorossoysk and Baku-Supsa became 25 million tons right after BTC pipeline
started functioning in October, 2005. in 2014, Azerbaijan’s oil export was 35
million tons which is less in comparison with 2009. As in 2009 Azerbaijan’s total
oil export was 44 million tons.
in 2010, Azerbaijan’s crude oil export was 1 billion barrels/day which is projected
to reach 20 billion barrels/day in 20 years’ period.
Azerbaijan imported 579 million m3 in 1995, 274 million m3 in 2000, 3337
million m3 in 2001, 3935.3 million m3 in 2002 (216 million dollars), 5.5 billion
m3of natural gas in 2004. With the commence of the production in Shahdeniz
field in 2006, natural gas export started as well.
Since the export products were mainly oil and oil produce, Azerbaijan’s economy
became dependent on oil prices.In 1997, the indirect taxes associated with oil
accounted for 57% of the total taxes. Oil related taxes making up the main
increasing part of the budget revenues constituted roughly 50% of the total
revenue in 1996-1997. In 1997-1998 when oil prices dropped, it affected the
state revenues and overall economic power negatively.
Although Azerbaijan got three fourths of the revenues from oil and oil products in
1997, due to the fall in oil prices the country faced large amount of income
losses. The decrease in the taxes taken from the oil which is an essential part of
export and tax incomes increased the budget deficit. In 1999, as a result of the
rise in oil prices in the middle of the year and beginning of the production in new
fields, the revenues grew again. In the second half of 1999, due to the the oil

208
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

price increase, there was a growth in oil production too. This escalation had
positive effect on the oil income and state budget.
In 2000, on one hand, owing to the rise of oil price in the world market,the price
of each ton of the exported crude oil went up 90 dollars in comparison with
1999, on the other hand, the volume of exported crude oil became 850 thousand
tons more. In 2000, the crude oil of 1097.4 million dollars was exported which
was 6061.1 million dollars more than in 1999.Consequently, the escalation of oil
prices had a plus effect on the budget revenues. Because oil related income
constitutes more than half of the budget revenues.
In 2002, Azerbaijan’s export of oil and oil products was 1.927.4 million dollars.
The crude oil export was 8.793.6 tons (1.159.5 million dollars). In return, the
import of mineral fuel, oil and oil products became 292.6 million dollars (17.5%
of total import).
In 2002 the possibility of US invasion of Iraq increased and the price of a barrel
of oil went up to 32 dollars which caused the rise of Azerbaijan’s oil income. In
the budget of 2002, the price of a barrel of oil was calculated to be 19 dollars. If
we take into consideration the fact that a dollar increase in the price of barrel
brought 18-20 million dollars of revenue to Azerbaijan,as a result of the escalation
of oil prices Azerbaijan gained more than 100 million dollars. In the state budget
of 2003, the price of a barrel of oil was defined as 19.5 dollars.
In 2008, the sale price of oil in the world market hit the peak after 1994, however
as a result of the crisis that started in the USA and spread across the world, in
the first quarter of 2009, a barrel of oil was sold for 35-45 USA dollars in the
global markets and it made the Government of Azerbaijan give up large-scale
projects.
The reasons of the increase in those years: Many experts explains the reason for
the rapid increase of the prices with rising demand for oil.The volume of oil
declined in some countries like Mexico, the North Sea. At the same time, oil
export in many countries was stopped.Very few production could only meet
domestic demand. Britain, that was known as an oil exporter in previous years,
was importing oil. With the economic development of the USA and China, their
needs for oil escalated too. The world market had to fulfill the oil needs of large
countries like China and India. In addition, the decline in the oil and natural gas
resources of the USA multiplied the demand for oil. As a result of all these
reasons, oil price went up in the world market.
The events happened in the Middle East have also affected the rise of the world
oil prices.The war period and all the conflicts in Iraq, the weakness of the oil-

209
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

producing companies there and terrorist attacks that might happen at any moment
bring about oil scarcity which causes a rise of oil price in accordance with the
rules of market economy.
The creation of a monopoly in oil sector by OPEC is another thing that leads to
the increase in the prices.
The impact of the price increase on the budget:In parallel with the price increase
in the international market, the escalation of the price of Azerbaijan’s oil
influences the country’s export in a positive way.
Azerbaijan’s budget revenues are not only about customs and taxes. The rise in
the income of Azerbaijan’s oil, which is sold in the world markets, also affects
the growth of the budget revenues.Although in the budgets of 2003-2004, the
sale of oil in the world markets per barrel was calculated to be 20 dollars, the
cost of oil was much higher than this figure in the international markets. The cost
of a barrel of oil exported by Azerbaijan surpassed 38 dollars.
In such case, the allocated part of oil revenues to the budget seemed to be
less.Since the oil incomes are one of the main sources in the formation of the
state budget, the government might need to change the price of a barrel of oil by
taking budget calculations into account again. When the budget of 2008 was
prepared, the cost of oil in the world market was high enough and it was expected
to rise further. But again the oil price in the budget project of 2009 was defined
to be 60-70 dollars. In reference to the world experience, on the basis of the
estimates made by international companies, it will be more correct to consider
the real oil cost in the preparation of a budget. Azerbaijan makes 1 million 400
thousand dollars of additional profit thanks to a dollar’s increase in a barrel cost
of oil.Even though the additional income gained as a result of the price change
goes into the oil fund, its spending should still be monitored.
Although Azerbaijan made more than about 120 billion dollars of profit after the
process, 70-75 billion dollars of it were spent in the form of transfer to the oil
fund and budget. In the background of a serious oil price fall in the world markets,
Azerbaijan’s economy faced a loss of 20-25 billion dollars which was a quite
rigorous circumstance.In the past 2 years, the Central Bank’s reserves fell twice
to 7 billion dollars and even 30% devaluation of manat at the beginning of 2015
could not inhibit this process.Considering this condition, for the first time in the
last 5 years the government of Azerbaijan reduced the transfer from the Oil Fund
from 10 billion to 6 billion dollars.
Managing oil revenues: The use of the wealth achieved from oil is essential. In
this regard, the main problem in Azerbajan’s experience is the emergence of

210
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

“Crony Capitalism” as well as the existence of high-level bribery and corruption.

The flow of oil-money to the country overburdens the realization of proper reforms.
The ease of getting oil revenues leads to the weakening of state expenditure policy,
the immediate change in oil prices can cause the increase of long-term foreign
debt and interest payments affecting the state budget.
Thus, it is an inevitable necessity for the government,which directs the country’s
economy, to pay attention to the division with a mechanism of resources
division that will be able to continue oil revenues in a way to form a growth (in
betwen oil & non-oil trade sectors and the sectors that are not included in foreign
trade). Diverting the revenues and benefits coming from oil to productive areas is
one of the major problems in an economy where financial institutions and markets
are not formed fully. The solution to this problem reveals the need for the
planning role of the state in the economy.
The foreign exchange that Azerbaijan will gain from oil export should be directed
to other areas, especially to the development of export fields and the ones that
substitute import. If currently Azerbaijan is obliged to export only energy and raw
materials to the world market, it should not confine itself to these in the future.
Beyond this, conclusions should be drawn from “bitter” experiences of oil
exporting countries by learning them deeply.With the incomes from oil, more
investments should be made. Investment-oriented policy is more important.
However, the government should carry out social tasks as well.
The long-term strategy of managing Azerbaijan’s oil and natural gas revenues
was identified in 2008. For the development of energy sector and infrustructure,
this strategy reflects government plans,which emerged in a time when high
amount of oil and gas revenues were obtained, on providing the transformation
of the economy without loss. The strategic program approved by the country’s
president involves the management of oil and natural gas revenues to be obtained
in 2005-2020. 25% of the attained revenues will not be spent but rather protected.
It is calculated that Azerbaijan will gain 240-265 billion dollars’ revenue from oil
and natural gas over 30 years. The revenues coming from Azeri,Chirag and
Guneshli fields will reach its peak in 2008-2015. Over this period, yearly around
5-6 billion dollars and as a result 35-42 billion dollars will enter the country. After
the use of Shahdeniz field, revenues that might be obtained will become more
than 7 billion dollars.
According to the calculations made by the State Oil Fund, oil and natural gas
revenues reached the highest level in 2009-2014. Over the course of the next 20

211
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

years, the country’s revenues from oil and natural gas will vary between 15-35
billion dollars.
According to the researches conducted by the State Oil Company of Azerbaijan,
in case a barrel of oil price becomes 35 dollars, the country’s oil revenues will
be 104 billion dollars till 2024.

5.6. THE PIPELINES

The pipelines assume economic importance. One of the main issues in the usage
of the energy resources is the creation of necessary transportation line in order
to transfer the resources to the world market. Owning transportation lines outside
Russia will be the main step taken economically .
Until 1880, Azerbaijani oil was being transported to foreign countries such as
Dagestan, Georgia, Iran in the form of freight through ships. Then, Baku oil
started to be carried to Russia, Georgia and other countries through the 720 km-
long pipelines from Grozny. They were Baku-Novorossiysk and Baku-Supsa
lines. The discovery of the Caspian oil and after the independence of Azerbaijan
Baku-Tbilisi-Ceyhan became attractive.
Over the days when Azerbaijan’s oil became a subject of discussion worldwide,
though 7-8 pipelines appeared on the agenda ,the number of the pipelines was
reduced to 3 namely, Baku-Novorossiysk, Baku-Supsa and Baku-Tbilisi-Ceyhan
in the report of Azerbaijan International Oil Consortium created in order to transfer
Azerbaijan’s oil.

5.6.1. BAKU-NOVOROSSIYSK OIL PIPELINE

During the times, while the issue of transporting first oil through which pipelines
was under discussion, Russia suggested that there was already a pipeline
between Baku-Novorossiysk port which might be the only cheap and fast way.
Even Russia came to an agreement with Chechnya since the pipeline would go
through there. Then a contract was signed among Azerbaijan, Russia and
Chechnya in relation to the pipeline of Baku-Grozny-Tikhorotesk-Novorossiysk.
With the signed contract on January 16, 1996 between AIOC and Russia’s Trans
Oil company, the initial oil export was decided via Baku-Grozny-Novorossiysk.
Since November,1997 the oil is being exported through this line. The first of the
tankers carrying the oil, which was delivered to Russia’s Novorossiysk port from
Baku via the pipeline, went through Istanbul Strait on December 12,1997.

212
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

Via Baku-Novorossiysk oil pipeline, 2.5 million tons of Azerbaijani oil are exported
per year. SOCAR pays 15.67 dollars to Russia per ton. It is higher than than the
amount paid for every ton of oil through Baku-Supsa pipeline.

5.6.2. BAKU-SUPSA OIL PIPELINE

Along with Baku-Novorossiysk pipeline, the other terminal agreed on October 9,
1995 to sell the produced Baku oil in the international markets is the Western
pipeline ranging from Baku to the Supsa port of Georgia. Wıth the participation of
Aliyev and Shevernadze, On March 8,1996 the contract determining the trans-
portation of the initial oil from Azerbaijan to Georgia was signed among AIOC,
Georgian government and SOCAR. In the contract the oil extracted from Azeri,
Chirag and Guneshli fields was planned to be transported to the international
markets
As the Chechnya problem put Baku-Novorossiysk pipeline at risk, Baku-Supsa
line was built. As planned, this line started operating in 1999.
From the pipeline that was used to export oil right after its inception, 10 million
tons of oil have been exported since 2004.

5.6.3. BAKU-TBILISI-CEYHAN OIL PIPELINE

In case of an increase in the oil production, operating Baku-Novorossiysk and
Baku-Supsa would not suffice, so many alternatives emerged on the subject of
the main pipeline to export to Western markets. Baku-Tbilisi-Ceyhan was chosen
among the these alternatives.
1768 km-long Baku-Tbilisi-Ceyhan pipeline passes from the Sangachal port near
Baku via overland pass to the Georgian capital, Tbilisi and enters Anatolia after
going between 42 degrees 49 minutes north of Turkish borders and 43 degrees
18 minutes east coordinates. 443 km of the line passes through Azerbaijan, 249
km from Georgia, 1076 km from Turkey. The line joins the terminal constructed
in Ceyhan after going alongside the borders of Ardahan, Kars, Erzurum, Erzincan,
Sivas, Kayseri, Kahraman Maras, Osmaniye and Adana cities.
Along with Azerbaijan,the transportation of Kazakhstan oil and Turkmenistan
natural gas through the same line is thought over for a long while. That’s why the
Transcaucasus line which is thought to be laid under the Caspian Sea will be
used to transfer Kazakh oil and Turkmen natural gas to Baku, then from here to
Turkey through Baku-Tbilisi-Ceyhan pipeline.

213
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

On September 18,2002 with the participation of the presidents of Azerbaijan,

Turkey and Georgia, the foundation ceremony of Baku-Tbilisi-Ceyhan pipeline
was held.
An export and import bank of the USA, “Exim Bank” decided to allocate 160
million dollars of long-term credit for the export of American equipment and
services in order to constuct Baku-Tbilisi-Ceyhan oil pipeline.After the information
on the project was presented to the Congress, this decision was made. Eventually,
on February 3,2004 an important step was taken in the realization of Baku-Tbilisi
- Ceyhan pipeline. On that very date, the financial package of the project was
completed together with the world’s famous and essential financial institutions.
With the decree of March 10, 2004 -“To perpetuate the memory of the national
leader, Heydar Aliyev Alirza” signed by Ilham Aliyev, Baku-Tbilisi-Ceyhan main
export pipeline was decided to be named after Heydar Aliyev.
Together with the costs of filling the pipeline with oil, 3.6 billion dollars were
spent on BTC oil pipeline.
The benefit of BTC oil pipeline on Azerbaijan’s economy in a positive way has
started to show itself since its inception in 2006.
In the first year when the BTC pipeline started operating 25 million tons of oil
were transported, since 2007, 45-50 million tons of oil per year are transported
to Ceyhan port.
Ceyhan crude oil export terminal has the volume of 120 million tons/year and by
considering approximately 71 million tons’ volume of Iraq-Turkey crude oil
pipeline, 49 million tons/year volume is sufficient to meet BTC’s capacity to be
transported.
As a result of the implementation of BTC pipeline and the transportation of
Kazakhstan’s oil through this line to the world markets together with the oil that
will be produced in Azerbaijan, the effect of the oil on economic development
and independence will be observed more clearly. The discussions on the trans-
portation of Kazakhstan’s oil through this pipeline is on the agenda regularly.All
the documents have been prepared for the transportation of oil with Kazakhstan
side. “Chevron Texaco” company is thinking of transporting 12 millon tons of
Kazakhstan’s oil through Baku-Tbilisi-Ceyhan. “Total” (France), “ENI” (Italy),
“Inpex” (Japan) və “ConocoPHILIPS” (USA) companies want to export the oil
from “Kashagan” field in the Kazakh section of the Caspian Sea to the world
market through BTC.

214
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

5.6.4. BAKU-TBILISI-ERZURUM NATURAL GAS PIPELINE

After the discovery of rich gas fields in Shahdeniz located in the Azerbaijani
sector of the Caspian Sea 100km away from the coast, the discussions on how
to export the natural gas began. In the phone talks between Aliyev and
Turkmenbashi, in return for the agreement on Azerbaijan’s 5 billion m3of natural
gas export through Transcaspian line, the extension of the contract term by the
company to take part in Transcaspian project put the realization of the line in
danger. Beyond that, the yearly sale of 50 billion m3of natural gas by
Turkmenistan to Russia was another reason making Turkmenistan lose interest
in Transcaspian pipeline. All of these caused Azerbaijan to look for new ways to
sell its natural gas.
During Aliyev’s visit to Turkey in March of 2001, a contract was signed between
Turkey and Azerbaijan in Ankara on the export of natural gas. According to it, it
was planned to export 23.2 billion m3 of natural gas over a 5-year period
including 2 billion m3 in 2004, 3 billion m3 in 2005, 5 billion m3 in 2006, 6.6
billion m3 in 2007-2008, however due to some price dispute and technical
problems in later years brought about certain delays Although under the contract
it was decided to start the export in 2004, in course of the events, the construction
of Baku-Tbilisi-Erzurum natural gas pipeline with the aim of transporting
Shahdeniz natural gas to Turkey later on commenced in 2004. The very pipeline
was thought to be parallel to BTC oil pipeline. The 12 metres’ calculation of the
distance between 2 pipelines will allow to save time and reduce financial costs in
the realization of the project.
In 2004, BP launched the construction of South Caucasus natural gas pipeline in
connection with the gas export of “Shahdeniz” field. The construction was
completed in the 4th quarter of 2005 and the produced natural gas export began
in the winter of 2006.
With a signed agreement, for the first year 1 billion of natural gas will be exported
to Greece and Europe.The export level will be raised to 14.3 billion m3. Within
this framework, the construction of the pipeline between Greece and Turkey has
started. The joining of Greece to the project by purchasing natural gas will
contribute to the deepening of the relations between Greece and its strategic ally
in “Shahdeniz” project, Turkey.The participation of Greece in the project will
create a balance in its policy towards Azerbaijan and Armenia.
In case of activating Transcaspian natural gas pipeline, the effect of energy
resources on the economic development will be seen more clearly.

215
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

Unlike Iran and Iraq, oil and natural gas fields in Azerbaijan are limited.However,
these resources will serve the integration of Azerbaijan to Europe and implemen-
tation of the European Union’s neighborhood strategy. Certainly, the realization of
oil and natural gas projects will give an impetus to the economic development of
other countries in the region.

5.6.5. TANAP PROJECT AND ITS PERSPECTIVE

Following the succesful implementation of the oil strategy, Azerbaijan began to
define strategic objectives in relation to gas export policy. Currently, Azerbaijan is
the only country in the region exporting gas to the international markets (Turkey,
Russia, Georgia). For this reason, it is seen as “the provider and participant” of
Southern Gas Corridor by EU. In this direction, Azerbaijan aims to be the country
of an important and strategic natural gas exporter. From Shahdeniz field to the
end European user, it targets to take part in the every ring of the value chain55.
Gas is a strategical product and if it is used effectively, Azerbaijan can reach a
substantial geostrategic and financial position with SOCAR. Managing possible
future relations assumes great importance day after day. With the growth of
South Caucasus Pipeline Project, Azerbaijan will be able to maintain its interests
by controlling the gas volume from its source to the end user. However, this
arrangement will not provide a country aiming to popularize gas export. Such a
step taken by SOCAR can be explained by 2 reasons. The first one is the
transportation of Shahdeniz gas after 2017, the second one is to increase
Azerbaijan’s oil production to 50 billion cubic meters per year together with the
gas that will be produced by new discoveries after 202556. In case of the
implemantation of these projects, in order for SOCAR to maintain its interest in
the lower rows of the value chain in Turkish territory, the development of the
above mentioned strategy has become a necessity. Trans Anatolian Pipeline
(TANAP) “suddenly came up” for the first time in October, 2011 during Turkey
Azerbaijan transit discussions and was guaranteed by “an additional item” of
Intergovernmental Agreement (IGA)on October 25, 2011. Later on, Memorandum
of Understanding (MOU) on December 24, 2011 and a special IGA on June 26,
2012 were signed for TANAP. As accepted by both parties, adding the condition

55
Süleymanov, Elçin, and Ruslan Huseynov. "The Importance of Azerbaijan's Energy Revenues in its
Exports Volume and the Effects on the National Economy." International Journal of Business and Social
Science 4.6 (2013).
56
TANAP Projesinin Ekonomik Ve Stratejik Sonucları (Economic and Strategic Expectations of Trans-
Anatolian Natural Gas Pipeline Project) ON Aras, E Suleymanov, H Fakhri - International Conference on
Eurasian Economies, 2013

216
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

of 6 billion cubic metres of gas export to the Turkish market via TANAP to the text
was significant for SOCAR. Without 6 billion cubic metres of gas, it is not possible
to conduct TANAP, because the pipeline in the capacity of 56 inches and 31
billion cubic metres can be economically effective with only the start volume of
10 billion cubic metres.That’s why, IGA’s part of “transit” title approved by the
Turkish Parliament on October 25, 2011 and Gas Transit Agreement (GTA) signed
between SOCAR and BOTAS on the same date has the authority of “application”
for TANAP project in an informal sense.TANAP is being supported by the
governments of Azerbaijan and Turkey. TANAP is also seconded by England, the
USA, the EU and even Nabucco with Trans Adriatic Pipeline (TAP). BP backs up
both TANAP and BOTAS for different approaches. There are 4 stages in the period
of decision-making on TANAP and the start of its construction. These 4 stages
will be discussed separately below57.
The Agreement, which was signed in Izmir between Turkey and Azerbaijan on
October 25, 2011 , envisages both the transit transportation of natural gas to be
obtained from Azerbaijani sector of the Caspian Sea-Shahdeniz field over Turkey
to the world markets and its purchase by Turkey.
About the transit transportation of natural gas to Europe,2 different alternatives
were taken into consideration in the contract signed after the meeting held with
the participation of Turkey’s Prime Minister Erdogan and Azerbaijan’s President
Aliyev in Izmir-Aliaga. The first one of the mentioned alternatives was about
Turkey’s transmission system of national natural gas, the second alternative was
the construction of an exceptional pipeline. The contract between the governments
laid the foundations of the way to TANAP.
Trans-Anatolian Natural Gas Pipeline was first announced as a project by SOCAR
(State Oil Company of Azerbaijan Republic) in the Third Black Sea Energy and
Economic Forum organised in Istanbul, on November 17, 2011. In the statement
made by the president of SOCAR, he expressed that the operation on Trans-
Anatolian Pipeline Project extending from the eastern borders of Turkey to the
western borders had started in order to transport Azerbaijan’s natural gas
potential to the long-term promising markets of Turkey and Europe.
Nearly 2 months after the pre-agreement, the memorandum of agreement on the
“Trans-Anatolian Natural Gas Pipeline” was signed between the Ministry of

57
TANAP Projesinin Ekonomik Ve Stratejik Sonucları (Economic and Strategic Expectations of Trans-
Anatolian Natural Gas Pipeline Project) ON Aras, E Suleymanov, H Fakhri - International Conference on
Eurasian Economies, 2013

217
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

Energy and Natural Resources of the Republic of Turkey and Azerbaijan’s Ministry
of Industry and Energy in Ankara, on December 26, 2011.
The consensus on the urgent start of the work towards the exceptional pipeline
named Trans-Anatolian and the establishment of a joint consortium of the
companies appointed by the 2 countries was reached.
In the consortium that will be organised for the construction of the pipeline,
SOCAR, BOTAS and TPIC were decided to take part as the first partners. It was
also considered that other international oil and natural gas companies might join
the consortium within the period of the agreement.
Thus, with the memorandum of agreement, the contract signed on October 26,
2011 was made more definite.
In order to construct the new exceptional pipeline under the name of Trans-
Anatolian for transporting Azerbaijan’s Shahdeniz-2 gas to Turkey and Europe,
the historical cooperation between Azerbaijan and Turkey started with the 3
agreements made in Istanbul on June 27, 2012. They consist of the inter-
governmental deal on the project,the agreement of the host country and pipeline.
The recent TANAP Intergovernmental Agreement was signed on June 27, 2012
in Istanbul and it envisages to convey the natural gas to be obtained from
Shahdeniz-2 field, which is one of the world’s most important gas fields in terms
of the reserve amount, to Europe via Turkey.
TANAP pipeline that passes through Georgia aims to sell and transport
Azerbaijan’s natural gas via Turkey. The entry point of the line is Turkgozu of
Turkish border, the exit points will be Eskishehir and Trakya areas.The borders of
Greece and Bulgaria will become the entry point to Europe from Turkey. This part
of the new line has not been decided fully, also the one side of it is thought to
reach Greece, while the other to Bulgaria.
The investment made on the Trans Anatolian Natural Gas Pipeline Project is
presumed to be 7 billion dollars. The first stage of the project, annual capacity of
which is planned to reach 31 billion cubic metres, is meant to be completed in 6
years.
In the consortium created for TANAP, SOCAR from Azerbaijan, BOTAS and TPIC
from Turkey take part as the first partners.In the consortium BOTAS of Turkey
owns 20% share, while SOCAR of Azerbaijan has 80% share. In 2015, Azerbaijan
sold 12% of its share to BP making the environment more multinational and
adding the world’s energy giant to this project. Currently the shares of Azerbaijan,
TPIC and BP in the project are 68%, 20%, 12% respectively.

218
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

The project is planned to be implemented in 4 stages.

1. The operation stage of the pipeline
The first of the 4 stages meant for the project will be conducted in 2018 with the
flow of the first natural gas. In the first stage, Shahdeniz gas is planned to be
sold to Turkey after passing through Georgia. It means in the first stage of the
operation of the pipeline in 2018, Turkey will buy 6 billion cubic metres of natural
gas per year.
2. The stage of the first increase in the pipeline’s capacity
In the second stage that is in 2020, the capacity of the line is considered to
reach 16 billion cubic metres annually. In this stage, 6 billion cubic metres’ part
of yearly 16 billion cubic metres of natural gas to be extracted by Shahdeniz-2
consortium will be sold to Turkey, while the portion of 10 billion cubic metres
will be exported to Europe.
3. The stage of the second increase in the pipeline’s capacity
In the third stage, the yearly capacity of the line is planned to reach 23 billion
cubic metres in 2023.
4. The final stage
Eventually, in the final stage the annual capacity of the pipeline is scheduled to
be 31 billion cubic metres.
In the following stages, the natural gas export of the TANAP project is aimed to
reach 50 billion cubic metres due to the changes in the resources and need for
the natural gas.
The economic results of TANAP
4 different alternative projects on the transportation of Shahdeniz-2 oil to
European markets were set on the agenda. They were “Great Nabucco”, “Trans-
Adriatic”, ITGI (Turkey-Greece-Italy) and SEEP (South East Europe) projects. The
project supported by the European Union and USA was Great Nabucco.However
the financial problems related to the project, some uncertainties, the objection of
several countries due to the strategic effects it might have, as well as the situation
of some countries failing to expess opinions on whether they supported the
project or not, prevented the realization of it. Even the leading source supplier
country - Azerbaijan’s position was indefinite because of economic and strategic
reasons. After the latest agrement between Turkey and Azerbaijan on TANAP, the
Nabucco consortium was forced to revise Great Nabucco as the Nabucco West

219
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

Project. As a result of the conversion of Great Nabucco’s Turkish section, that

was meant as 3440 kilometres, to TANAP, the Nabucco West Project became
shortened. The intended length of the Nabucco West Natural Gas Pipeline is
1300 kilometres. The positive approach of the Nabucco consortium to TANAP
and proposed Nabucco West Project as an addition to TANAP in order to export
Shahdeniz-2 natural gas to the European markets, were accepted by Azerbaijan.
In terms of Azerbaijan, this project brings huge economic gains in the export of
the available natural gas resources to new markets. According to the latest
circumstance in TANAP, 68% of which belongs to Azerbaijan, it will be like
Azerbaijan will be transporting its own gas via Turkey’s territory. Because
Azerbaijan wanted to get the revenue of the export of the natural gas to the
European markets itself. Thus, one more economic obstacle in the way of
Azerbaijan’s long-term negative approach to Great Nabucco was eliminated. That
is, Azerbaijan will get revenue both from the sale and transportation of Shahdeniz
-2 gas to the European markets.
The work on the implementation of this project assumes great importance in
terms of new employment opportunities in Turkey. With cooperation, Azerbaijan
and Turkey laid the foundation of a big refinery project in Petkim. Given the 2
major projects, the amount of the investment made by Azerbaijan’s SOCAR in
Turkey will reach 17 billion dollars. It means the biggest country investing in
Turkey’s industry will be Azerbaijan and the biggest company will be SOCAR.
After Baku-Tbilisi-Ceyhan and Baku-Tbilisi-Erzurum pipelines, with the agreements
on TANAP and refinery project in Petkim, Azerbaijan will be an important
strategic and economic partner in the direction of Turkey’s being both an energy
corridor and and main energy supplier.
In case this project of various economic importance is carried out, a part of the
natural gas (6-10 billion cubic metres) of this line will be sold in Turkish market,
while a significant portion (10-25 billion cubic metres) to European countries.
Considering the exit points in Turkey, the Trans Anatolian line will feed Turkey’s
National Transmission line and this line is seen as an important one in
strengthening energy supply in western region.
Besides the economic reasons of splitting Great Nabucco project into TANAP
and Nabucco West, its some strategic results are point in question. TANAP is
assumes great strategic importance for both the region countries including
Turkey and Azerbaijan as well as European countries.
Azerbaijan’s natural gas potential in the Shahdeniz field is 1.2 trillion cubic metres
and in other sources it is more than roughly 2.6 trillion cubic metres. Given the

220
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

potential in the other natural gas fields beyond Shahdeniz, Azerbaijan’s gas
production is projected to reach 50 billion cubic metres in between 2020-2025.
These assumptions bring Azerbaijan to the position of a remarkable natural gas
supplier for the export of large amount of gas to the European markets through
Nabucco West.
The implementation of the project with financial and technical capabilities of
Azerbaijan and Turkey has made it a project to be realized between Turkey-
Azerbaijan. TANAP means Turkey and Azerbaijan will emerge together in the
European market for energy transportation.
Along with Baku-Tbilisi-Ceyhan and Baku-Tbilisi-Erzurum, TANAP has reinforced
Turkey’s position as a necessary energy corridor in delivering the energy
resources of the Caspian Sea to the Western markets.

221
 CHAPTER SIX
“DUTCH DISEASE” IN ECONOMY AND
THE MEASURES AGAINST IT
Putting Azerbaijan’s investments in oil sector mostly and the major role of the oil
revenues in GDP’s formation are dangerous. Directing all the attention to energy
resources simply means a risk for the economy. This creates a possibility that
the economy may be exposed to some financial fluctuations. Price changes in
the world market due to the one-sided development of the oil sector brings about
fluctuations in GDP,the budget and foreign trade.

6.1. DUTCH DISEASE

In general, “Dutch Disease” can be expressed as the rapid development of a
sector in a country’s economy in contrast with setback and collapse of other
sectors.
In a narrow sense, it is the prevention of economic structure created by growth
of oil industry based on natural resources in the healthy development of other
industries. In scientific literature, this situation known as Dutch syndrome58 or
disease refers to the disproportionate economic growth of a country it exists.
Dutch disease affects59 the destruction of macro-economic stability from 3
different sides. First of all, during the time of an increase in demand for the
58
Dutch Disease means making an economy nonindustrial as a result of the discovery of a natural resource or
its excessive use. It is called like this since it emerged in the Netherlands after the discovery of natural gas
fields in North Sea in 1960s. Dutch syndrome was experienced by England, Norway,Mexico,Nigeria due to
oil production,Colombia in relation to coffee output, Ivory Coast because of coffee,cocoa and timber
production, Zambia and Zaire for iron ore output.Look at: Y. Hesenli, “Efficiency Issues Of The Impact Of The
Oil Revenues On Azerbaijan’s Economy” – Currency Crisis: ‘Devastating Growth’, ‘Dutch Disease’ and ‘Asia
Financial Virus”, The Materials of the International Conference Of the Caucasus and Central Asia In
Globalisation Process, Baku, 2003, p.217; V. A. Huseynov,The Rise Of Manat and Economic Development:
The Study of the Content And Symptoms of “Dutch Disease”, Sada Press, Baku 2005, p.7-8.
59
C. B. Rosenberg and T. O. Saavalainen, “Dealing with Azerbaijan's Oil Boom”, Finance and Development,
Vol.35, No.3, September-1998, p.35-36; Osman Nuri Aras, “ ‘Dutch Syndrome’ Experienced in Azerbaijan In

223
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

domestic currency in conjunction with “oil boom”, central bank can turn a blind
eye to the extreme upsurge of real exchange rate (the value of the national
currency against foreign currencies) acting involuntarily in sterilization policies
in order to keep inflation under control. Secondly, the uncertainties in the amount
of oil revenues and its collection can lead to the risk in the sustainability of
balance of payment, the signing of external debts contracts having no special
importance and the rise of external debts burden. Thirdly, unintended revenue
flow can bring about “ratchet effect” on government spendings and improvement
of the country’s financial policy. The availability of oil revenues can weaken the
country’s spending policy. For instance, in parallel with additional oil revenues ,
the increase of government spending rate will affect state budget negatively as a
result of a fall in oil prices, also long-term budget deficits will cause the escalation
of external debts and interest payments60.
The classic Dutch Disease argument focuses on the disproportionate growth
between oil & non-oil sectors and other sectors not related to foreign trade.
According to Dutch Disease, the minus effect of heavy usage of natural resources
on economy’s other foreign-trade related areas shows itself in 2 ways. The first
one is the effect of costs increase: if the revenue attained from energy resources
is not kept abroad and spent on goods having no direct or indirect relation with
foreign trade, the price of these goods will go up in comparison with the ones
associated with foreign trade and the real impact will emerge as a rise of
exchange rate. This will damage traditional areas related to foreign trade. As a
result, the external balance of payment will be disrupted. In spite of the price rise
in the next round of energy resources export, the expectation for the revenue
increase of energy reserves will maximize domestic import and export and
decrease the export volume of non-oil sectors.
Looking at the example of Azerbaijan, more rapid development of GDP shares of
the sectors not related to foreign trade (retail trade, restaurants and hotels, etc)
can be observed in comparison with transitional and non-oil producing countries.
The second effect will be with the distribution of labour, which is one of the most
important factors, among sectors. Due to the rise of salaries in an emerging
sector, it will attract experienced staff to itself from other sectors of economy.
The reduction in the level of experienced staff in other sectors will result in the
decline of the production.

Transition Period and ‘Its Solutions’”, The Materials of Scientific Conference Dedicated To the 800th
Anniversary of Nasreddin Tusi, Baku, 2-3 April 2001, p.130-133.
60
Aras, O.N., 2005. Azerbaycan Ekonomisi ve Yatırım Imkanları. Bakü: TÜSIAB Yayın, (2005-001).

224
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

The flow of skilled workforce and equipment into energy sector will have a
negative impact on the development potential of other sectors. The escalation of
the emerged break-up between oil and non-oil sectors impedes the functioning
of free market mechanism in the mentioned sectors61.
The dependence of economy only on energy sector can create some negative
results in socio-economic sphere.
Spending oil revenues to purchase imported goods, in particular importing
consumer goods instead of investment commodity will create cuts in the country’s
trade balance.
In order to prevent the economy from falling into Dutch Syndrome, the production
level in non-oil sector should be raised and necessary environment for the
opening of new workplaces should be established.
Because of the unstable oil prices, the government should raise the usage of
resources when the prices rise by pursuing a more cautious policy and should
determine it according to the demand when the prices fall. The creation of the
reserve fund will act as depreciation.
In a nutshell, “Dutch Syndrome” expresses the negative effects when energy
resources increase is pursued by an unfit policy. As a result of paying less
attention to other sectors besides oil sector, a disproportionate growth will appear.
The rise of real exchange rate will influence the ability of sectors with the potential of
foreign trade to compete. The imbalance between wage and price in connection
with the growth of the oil sector can grow compared to non-oil sector and the
balance between labor market and prices can be disrupted. For example, the rise
of real exchange rate in Azerbajan since 1994 has been higher than the other
countries of Commonwealth of Independent States (CIS).

6.2. DUTCH SYNDROME IN AZERBAIJAN

AND ITS COMPLICATIONS
As can be seen in a study conducted, 7 main indicators of Dutch Disease are
observed in Azerbaijan. Among them are the excessive value gain of national
currency against foreign currencies in some years, a reduction in the
competitiveness of export goods, the one-sided development of oil industry thus
the economy, the dependence of demand on import and budget on oil revenues.
61
Aras, O.N., 2005. Azerbaycan Ekonomisi ve Yatırım Imkanları. Bakü: TÜSIAB Yayın, (2005-001).

225
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

Although the growth in the export of other sectors are observed, given the
country’s economic setback in the transition period and its new progress process,
it can be concluded falsely if it owns an advantage of competiteveness truly in
export products.
It can be expressed that Azerbaijan can not benefit enough from the investments
made on non-oil sectors62.
While deciding about the transparency, prudence and rational distribution of
resources, it should be taken into consideration to make maximum use of rapid
development of oil sector during the transition to free market mechanism. The
increase of foreign investment on Azerbaijan’s economy and realisation of all the
conditions to protect it should be priority in the economuc policy of the country.
It should always be in the center of the country’s attention as an important point.
Concisely, it is wrong to cite only the oil sector in Azerbaijan’s integration into
the world economy and attracting foreign investment to the country. Oil and oil
products make up 90% of the country’s annual export; if the products much of
which consist of production technology within the oil contracts are not taken into
account , agricultural products account for almost half of the imports. In fact,
Azerbaijan’s natural climate and soil condition allow the growth of the production
of agricultural outputs, meeting domestic demand as well as producing for
export. That’s why it is important to fulfil necessary conditions for attracting
foreign investment to non-oil sectors.
In the country’s economy Dutch Syndrome, its first indicators and measures to
be taken, have gained more and more importance especially since the end of
2005 when oil export began.
Along with the danger of Dutch Disease, almost all of the investments are
assembled in Absheron region and even in Baku, so the investment level in other
regions is almost none which is a serious threat for Azerbaijan’s economy.
However a lot of regions in the country have many favorable conditions for foreign
investment activity, creation of strong production and scientific-technical
potential, having qualified staff and their organisation, supply products related to
production and consumption that own a wide market, suitable geo-political
condition, benefits in transportation and geographical position and reconstruction
of the Silk Way.
Baku accounts for approximately 90% of the taxes collected. The rest of the
taxes that is nearly 10% is collected from cities other than Baku including

62
Nuri, Aras Osman, and Elçin Süleymanov. "Azerbaycan Ekonomisi." Şark-Garb Matbaası, Bakü (2010).

226
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

Nakhchivan, Ganja, Mingechevir and Sumgait. If these indicators are evaluated

differently, the regions other than Baku seem to be in hard economic situation.
In fact, Azerbaijan’s economy possesses enough potential in terms of domestic
market. It paves the way for the production increase in different sectors.
Beyond this, the full recognition of Azerbaijan’s rich resources in the world in
accordance with the necessary requirements of economic development especially
in European countries, will be considered as acceptable at the international level
for a long term. Moreover, as a result of economic recession happening in some
countries , the use of the investment has been limited which will let it to be
directed to Azerbaijan’s economy.

6.3. THE MEASURES TAKEN AGAINST

DUTCH DISEASE
Different measures are being and tried to be taken in the country against Dutch
Disease in political, theoretical, macroeconomic, sectoral and regional levels.
The regional socio-economic development program, activities on the progress of
non-oil sectors and other regions beyond Baku are mentioned in the regional
analysis chapter. Below, of other measures , the State Oil Fund and Free Zones
which is still in a draft form will be talked about.

6.3.1. THE STATE OIL FUND

As a result of the rise in oil revenues, the desired positive changes in the life of
the people are not observed. For this reason, the Azerbaijan’s government and
International Monetary Fund (IMF) have exchanged views at different times on
the effective use of oil revenues63.
Considering the influence of oil revenues on a country’s socio-economic
development and people’s quality of life, the situation of the countries specialized
in oil industry is not heartwarming. In the countries where oil revenues are not
used effectively, the country’s standart of living has dropped rapidly. In 1971-89,
the economic development in the world’s 97 countries and comparative analysis
conducted among natural resources were at odds. Among 18 relatively high
developing countries, the number of the countries rich in natural resources is
only 2. These countries are Malaysia and Mauritius. According to the statistics of

63
Nuri, Aras Osman, and Elçin Süleymanov. "Azerbaycan Ekonomisi." Şark-Garb Matbaası, Bakü (2010).

227
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

the World Bank, the annual rate of decline of per capita GDP from 1965 to 1998
was 1% in Iran and Venezuela, 3% in Kuwait and Iraq. However in Qatar, it was
6% between 1970-1995. In OPEC member countries, the level of per capita GDP
has not gone up in the last 30 years, but rather it has decreased by 1.3%. This
condition is not only observed in OPEC countries. In the past 20 years, the
investment volume, that main capital was directed to, reached 25% of GDP in 4
out of 65 countries rich in natural resources.
The annual per capita GDP growth rate of these countries is carried out with the
condition of not less than 4%. They are Indonesia, Malaysia and Thailand. Among
these countries, only Indonesia possesses relatively rich oil reserves.The places
like Hong Kong, Singapore,South Korea and Taiwan in which there are limited
natural resources have shown a higher growth. The inverse proportion observed
by the volume of natural resources is explained by different reasons. One of the
main causes of it is “Dutch Syndrome”.
Although some features of Dutch Disease are observed in Azerbaijan, it shows
some difference due to the experienced transition period as well as the country’s
transition to the free-market economy. The advance of one sector in Azerbaijan
attracts the financial source of others. According to the statistical figures , 90%
of Azerbaijan’s export is constituted by oil and oil products. The economic
problems emerged after the fall of the country’s oil revenues as a result of the
drop in oil prices from 140-150 dollars and 40-50 dollars since 2014, proved it
once again. The decline in oil revenues impacted negatively, particularly, financial-
bank sector, as well as construction, service and others.
Another mechanism of the inverse proporotion between the rich natural resources
and economic development is the minus effect of manufacturing sector criteria
on people’s education level and human capital. The large proportion of income
gained from the consumption of these resources is not associated with empolment
profit and production areas are not accepted as productive. The demand for highly
specialized workforce is less here. The education of the people qualified in this
field is not at a desired level, also their labor can not be used in non-oil sector.
However it does not mean that rich natural resources are obstacles in the way of
economic stability and progress.The existence of natural resources is simply a
risk, so governments have to determine their economic policies carefully. Some
countries are trying to solve this issue by organising stability funds. Such funds
are formed as the ones that enable the gain of additional income in certain
periods. Among these funds, the experience of the State Fund of Norway and
Venesuela’s Macro-Economic Stability Fund assumes importance for Azerbaijan.

228
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

The experience of the Norway Oil Fund deserve attention for the function of long-
term stability as well as collection, while Venesuela’s Macro-Economic Stability
Fund’s example is important in terms of its feature of insurance against oil price
change. The control of councils on these funds are also essential.
Within the contracts signed with foreign companies, in Azerbaijan the oil
revenues from the produced oil are assembled in the State Oil Fund (SOFAZ).
The fund was established by the decree of the late President Heydar Aliyev on
December 29. 1999. The management guidelines of the fund were developed in
cooperation with IMF. The SOFAZ is a fund set up to collect the revenues
Azerbaijan will get from the fulfilment of the contracts signed between SOCAR
and foreign oil companies on oil and natural gas search, their extraction and
production sharing, as well as from the realisation of the agreements on searching
oil and natural gas reserves in Azerbaijan, particularly in the Azerbaijani sector of
the Caspian Sea. That’s why the collected money by the State Oil Fund is planned
to be used in Azerbaijna’s industry, agriculture and social investment areas.
Since its inception in January of 2001, the State Oil Fund provides information on
income and expenses every three months. The income of the Oil Fund was
1614.3 billion manats in 2004 and its expenses were 871.2 billion manats (before
the denomination). Thus, at the beginning of 2016, more than 120 billion manats
are collected in Azerbaijan’s State Oil Fund. Sınce its foundation, about 85 billion
manats have been spent from the Fund, 80 billion manats of which have been
transfers to the state budget.
Transfers to the state budge. In 2004, the transfer to the state budget accounted
for the major part (92%) of the State Oil Fund’s budget spendings. In 2014, the
amount of 9337.0 billion manats were transferred to the state budget from the
Oil Fund. The total amount of the transfers made to the state budget from the Oil
Fund have been over eighty billion manats during 2003-2016. In general, the
volume of this transfer have been more than half the budget until 2016. In the
budget of 2016, the level of this transfer has been 6 billion manats decreasing by
40% compared to previous years because of the fall of oil prices64.
Financing the measures to improve the social welfare of refugees and
internally displaced persons. The allocation of the funds from th Oil Fund with
the aim of improving the social welfare of the refugees and internally displaced
persons has started since 2001 and will continue in 2017. In the towns created
for the settlement of the refugee and IDP families, 1757.8 billion manats were

64
www.oilfund.az

229
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

allocated in 2001-2015 in order to build private houses, high-rise buildings, socio-

cultural, infrustructural and other facilities. During this period, 25403 internally
displaced families are accommodated in private houses built in 62 towns.
Financing the reconstruction project of Samur-Absheron irrigation system.
The main objective of the project was to create durable water source for Baku
and Sumgait’s water supply systems, to overcome the existing energy consump-
tion and in return, to finance “The reconstruction project of Samur-Absheron
irrigation system” which had the capacity of producing 25 MW energy. Financing
of the project started in 2006 and it was continued in 2014. During 2006-2014,
1149.6 billion manats were allocated for the project. The project was ordered by
Azerbaijan Irrigation and Water Management Joint Stock Company and the Oil
Fund earmarked 0.5 million manats for “the construction of approach roads”,
21.48 million manats for “the joint construction of Takhtakorpu and Hydroelectric
Power Station”, 3.27 million manats for “building Takhtakorpu-Jeyranbatan canal”,
2.59 million manats for “building Valvalachay-Takhtakorpu canal”, 2.7 million
manats for “constructing water-taking facilities and transmitting canals in northern
rivers”, 0.68 million manats for the maintenance of the project’s working group.
The total volume of the earmarked fund was 80.2 million manats in 2014. By the
act in 2014, Takhtakorpu hydroelectric station along with its construction facility,
the construction of approach roads to Takhtakorpu water reservoir, Valvalachay-
Takhtakorpu, Takhtakorpu-Jeyranbatan canals were taken into operation.
Funding Azerbaijan’s share in the construction project of “STAR” oil refinery
complex in the Republic of Turkey. In 2013, the Oil Fund alloted some amount
of money in order to sponsor the projects in previous years as well as provide
the implementation of new projects. The construction project of “STAR” oil refinery
complex is among the new projects started in 2013. 40% of the shares of the
project (760 million US dollars), the authorized capital of which accounts for 1.9
billion US dollars, is funded by the Oil Fund. In 2004, 223.5 million manats or
284.71 million US dollars were directed to finance the share of the Republic of
Azerbaijan in the project of “SOCAR Turkey Aegean” Oil Refinery.
Funding human capital development -“The State Program on the education of
Azerbaijan youth abroad in the years 2007-2015”
Within “The State Program on the education of Azerbaijan youth abroad in the
years 2007-2015”, the education of young people in world’s leading universities.
Under this program, tuition fees, accommodation, food, travel, insurance and
other costs of the students studying abroad are sponsored. During 2008-2015,

230
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

at the expense of the Oil Fund, 2867 students were sent to foreign countries to
study at universities.
An important part of the resources of the State Oil Fund were spent on funding
SOCAR’s share in the construction of “Baku-Tbilisi-Ceyhan” (298 million manats)
and improving the social living conditions of internally displaced persons (647
million manats). Initial costs set aside from the Oil Fund were oriented to the
resolution of the social problems of internally displaced persons living in the
most difficult and challenging situation. IDPs’ problems are the most important
issue for Azerbaijan. The people who became away from the lands they were born
and raised are always in the public administrators’ focus of attention. New
settlements, hospitals, schools and other institutions for refugees and IDPs are
financed by the reserves of the Oil Fund65.
In the new model accepted for the effective use of oil revenues, it is thought that
a certain part of the State Oil Fund’s reserves should be kept as bank deposit,
while some part can be given to agriculture and manufacturing sector in the form
of low-interest loans. The division of the Oil Fund into reserve and consumer
funds are also meant here.
Of course, in ideal conditions, the oil fund reserves should be directed to
investements rather than current expenditures in order for the income attained
from the investment to be regulatory in case of oil prices fall. Foreign influences
also make it important to manage the rapid advance of the oil sector carefully.
Considering the effect on the state budget, some portion of oil fund can be
directed to unexpected costs that are likely to appear as a result of the rapid
increase of oil production.
It should be decided that chanelling the fund reserves to expand the investments
should be more frequent. Although it is said that the Oil Fund works better
through private sector,considering the whole territory of the country, in order to
gain more benefit, state investements should be preferred.
As a result of the adjustments, the income collected in the fund is kept as deposit
in highly rated credit institutions for investment. In Azerbaijan, the oil revenues
are kept in foreign financial institutions and are not spent on the goods not
related to foreign trade through direct and indirect financial channels.Thus, the
minus effect that may arise for other sectors associated with foreign trade is
tried is tried to be prevented from emerging.

65
www.oilfund.az

231
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

Along the the importance of using the revenues in the State Oil Fund for the
development of agricultural sector, the allocation of subsidies from the fund will
not suffice for the country to shake off “Dutch Syndrome”. Surviving these
problems can only be possible by conducting projects inclined to the advance of
industrial areas having export potential. In the policy to be conducted, it is
essential to encourage the investments on necessary fields.
Since the end of 2005, the amount of the income attained from oil has risen
remarkably. The government has planned the rapid development of non-oil
sectors with these incomes. According to the calculations made by the State Oil
Fund along with local and foreign experts, after 2015 Azerbaijan’s revenue to be
obtained from oil will decrease substantially. These estimates of the experts
make Azerbaijan to take serious measures.In this sense, attaining the social-
economic progress of the regions is very important. Since 2005, the government
of Azerbaijan has started to prefer a strategy based on saving the economy’s
dependence on oil. In order to gain a long-term benefit from the allocation of oil
revenues, the economic development of the regions are given special attention in
the accepted strategy. As part of this strategy, 20-25% of the State Oil Fund
reserves will be spent on the progress of small and medium-sized enterprises.
The advance of production and manufacturing industries are among the ones
preferred by the government. On the other hand, it is planned to increase the
spendings on science and research to enhance human capital.

6.3.1.2. The Independence or Privatization of the State Oil

Company
Ideas on the privatization of the State Oil Company of Azerbaijan are expressed
frequently. Doing this is thought to be an important step for the company’s
transparency and independent trade activity. SOCAR’s independent trade
operation might make the state’s control on oil policy more transparent beyond
its being an essential milestone in the usage of oil revenues. Of course, the
privatization is as necessary as how it will be realized.
However, in the country where the economic development in non-oil sectors and
regions is still in its inception, the privatization of big institutions is not completed,
and there is a need for the state’s superiority in the economy, it is not possible to
set the agenda on the privatization of SOCAR which assumes great importance
in terms of the country’s economy. It will be more interesting if the independence
instead of privatization is the subject of controversy and the proposals are made
on the effective use of the funds collected in the Oil Fund.

232
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

6.3.2. THE ACTIVITIES ON THE ESTABLISHMENT OF

FREE ECONOMIC ZONES
One of the factors that will contribute to the economic development and deter
Dutch Syndrome in Azerbaijan is the establishment of free economic zones.
Particularly, free economic zones will play a necessary role in the improvement
of non-oil sectors.
Today, the targets of creating many free economic zones in the world are to
increase foreign trade level, to ease export and import, to multiply foreign
exchange revenues and employment level,to give impetus to the progress of
industry, to bring modern technology to countries. Free economic zones have
acted as a contributing factor in industry growth of many countries.
For instance, in Turkey there are over 20 free economic zones. They help keep
the balance among the regions in Turkey in terms of economy.
One of the most productive sources of regional economic development is the
establishment of free economic zones. The limited financial opportunities of the
local investors make it a necessity to create free economic zones in some regions
of Azerbaijan. In the past few years, this problem has brought about various ideas
and disputes at the governmental level. Although it has been emphasized that
there is enough favorable conditions for establishing free economic zones in the
regions like Baku, Sheki-Zagatala, Guba-Khachmaz, Lankaran-Astara, Nakhchivan,
the steps taken and work done in this direction is considerably weak.
It is possible to form free economic zones in Sumgait, Lankaran and Nakhchivan.
The available railway lines in these cities, the egress of Sumgait and Lankaran to
the sea, the existence of Lankaran and Nakhchivan airports and at the same time
the borders of Nakhchivan with several countries are other factors making them
favorable in terms of creation of free economic zones.
The main essence of free economic zones is building trade, service and export-
production fields in places located on internationally important ways, as a result
that zone become exempt from customs duties, taxes are lowered, loans are
given with low-interest. It will give a rise to the revival of the economy in
economically weak regions, the removal of differences between regions in terms
of economic development. However, as the regions in Azerbaijan are not provided
with energy and other resources, it makes the creation of free economic zones
difficult.

233
 CHAPTER SEVEN
THE ECONOMIC POLICY OF
AZERBAIJAN
In every country, during the different periods of economic crisis and social
change, the government intervention into economic trend has been compulsory.
In transitional countries, government’s role in economy turns into necessary
regulation, planning and control instead of being efficient over production in
order for economic situation to be favorable. In parallel with the increase in the
number of private enterprises, the regulatory and supervisory role of government
rises too.
Preserving macro-economic stability, keeping on reforms, persisting succesful
economic policies, “State Program on Poverty Reduction and Economic
Development”, “State Program on Socio-economic Development of Regions”
will provide enhance of competitive circumstance in Azerbaijan.

7.1. MONETARY POLICY

In the early years of the transition period in all post-Soviet countries, high inflation
was observed. Taking steps towards liberalization in prices, foreign trade activities
and financial sector has naturally brought increases in the general level of costs.
In such a condition, the only way out is to balance the amount of money in
circulation through monetary policy and thus, to cease the rise seen in general
price level. However the most important things are to provide high-level
development of money amount beyond the general level of prices following the
example of balanced, stably growing, developing countries and use it efficiently
to eliminate unemployment.
Since 1995, in order to avoid existing hyper-inflation in the country, the Central
Bank introduced tough monetary policy. The power of the Central Bank on
monetary policy is implicit. The Bank applies tight monetary policy.The emission
level of manat in 1994 fell from 500% to 175% in 1995, increased by 28% in 1997.

235
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

The amount of the money in circulation at the beginning of 1998 decreased as a

result of rigid monetary policies. However, after the second half of 1999 , the
volume of the money in circulation began to rise. In 2000, the cash in circulation
(M0) increased by 19.9% and money supply (M2) 18.3%.The main reason for the
rise in money amount was the increase in demand for mandatory reserves due
to the growth of foreign currency and deposits. In 2000, the cash in circulation
(M0) went up by 11.5% and money supply (M2) by 15.7%.
Figure 20. Emission level (million Manats)

2000
1800
1600
1400
1200
1000
800
600
400
200
0
1995 1997 1999 2000 2004 2006 2007 2008 2009 2010 2011

Source: The Publications of the Central Bank of Azerbaijan. 2015

Starting from mid-1990s, obviously the difference between the rate of real GDP
growth, which is one of the main macroeconomic indicators, and rate of money
supply increase seem to be against the money amount.
Table 22. Money Supply (Million Manats)
Il M0 M1 M2 M3
2006 1311,4 1839,6 2135,5 3435,0
2007 2713,5 3621,71 4401,6 5897,3
2008 4145,9 5105,19 6081,24 8494,5
2009 4175,0 5231,46 6169,41 8469,4
2010 5455,9 6838,46 8297,57 10527,6
2011 7158,4 8796,28 10997,43 13903,5
2012 9256,8 11122,31 13806,58 16775,5
2013 10458,7 12736,9 16434,8 19289,4
2014 10152,5 12830,4 17435,8 21566,4
2015 5176,9 6980,3 9050,0 17444,5
Source: www.cbar.az 2016

236
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

In 1996-2000, in other words, during a total of 6 years, the growth of GDP in the
country was 36%, while M2 money supply was a little more than in 1996. In
2004, the money supply growth rate attracts attention since it was higher
compared to previous years.
The difference between GDP growth rate and money supply increase is eliminated
in 2 ways. Firstly, the use of another currency in economy, that is, to replace
money. The second one is payment problems that lead to big problems in
economy. Taking this situation into consideration, it can be said that national
money can reduce the impact of reforms conducted due to its weak role in
economy.
The tough monetary policy which was applied in mid-1990s and yielded
successful results to prevent inflation, unfortunately led to the decrease of
money amount in circulation in terms of the formation of demand necessary for
investment volume and offer front (production) in economy. While the conducted
rough monetary policy kept hiper-inflation under control in 1995-96, after 1997,
it gave a rise to some negative effects.The emergence of the deflation after the
implementation of the tight monetary policy affected real sector negatively.
Importers taking benefit from the stability of US dollar were able to fill the
country’s markets with imported goods without encountering any limit. Thereby,
the consumer goods market in Azerbaijan almost consist of imported commodity.
It goes without saying that the prices in consumer sector are connected to US
dollar. Consequently, the change in dollar’s rate does not make sense alone, but
as all the imported goods are estimated with dollars, the costs of them change in
connection with the variation in the rate of dollar.
On the other hand, preventing the loans directed to demand is in parallel with
tough monetary policy. However this policy should not deter lending medium-
term loans for the increase of production. Due to the lack of necessary resources,
if the Central Bank does not consent to give such credits and demanded collateral
is not given by the state, it impedes the foreign banks to give such loans.
Under the influence of the deflation in 1998-99, rediscount interest rate went up
and in March this rate rose to 28%. In March of 2000, it fell to 8%. The short-
term lending interest rates of commercial banks levelled off at 20% at the
beginning of 1999, in 2000 it became 22.2%. This brought about estimations
about the likelihood of manat’s losing value and movement in the rate of inflation.
The variation in the short and long-term loans between manat and dollar started
to decline with cheapening manat, but the big difference was not eliminated.

237
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

Dollar was chosen as the major currency among bank deposits. Between the
years 2006-2008, the inclination to dollar fell to some extent, while the rate of
currency accounts continued at a high level.
At the end of a time period of over 23 years,it can be observed that as a national
currency, manat fails to fulfil the basic function of money wholly. Although the
prices exist as manat, the costs of goods are considered with dollar. This has
confined the function of manat as a technical feature.
Replacing the scarcity of money amount with foreign currency is certainly a very
big threat to economy. As substitute currency can not be kept under control
either by the Central Bank or other government organisations. The substitution of
money which can not be controlled reduce the impact of monetary policy. In
order to limit the movement of dollar in circulation, the Central Bank chose to
restrict the money amount in circulation as the sole method of control. It even
magnified the problem, as a result the Central Bank had to struggle aginst the
result instead of the reason.
In summary, this condition shows that the power of control over monetary policy
in Azerbaijan may disappear over certain time. As a way of solution, taking the
growth rate of GD into account, it was taken a step back in tight monetary policy.
Money substitution is the foothold of foreign currency amount, as a result
available illegal money in the country. That is why, currency substitution plays
special role in the development of shadow economy.
An estimated 80% M0, 20% M2composition of money amount indicates the
existence of more cash in circulation. This leads to major obstacles in terms of
bank sector and management. The dominance of cash over general money
supply paves the way for avoiding supervision, circuitously tax control66.
The main objectives of the implemented monetary policy in 2015 were obtaining
stability in prices and rate of exchange, protecting currency reserves, improving
bank system and eliminating the lack of money in the economy. The Central
Bank utilized the means in its own control to attain the pre-planned goals related
to monetary policy. In 2002, some efforts were made in order for open market
operations to be means of monetary policy, the purchase and sale of securities
went up significantly. The Central Bank obtained the stability in manat rate by
intervening in the market and regulating the volume of manat. Furthermore, thanks
to the President’s decision on the development of private sector, the percentage

66
“http://www.cbar.az/assets/3574/Bulleten-2015_noyabr_1_.pdf (01.02.2016).

238
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

of loans given to this sector was lowered from 10% to 7%. The loan interest rate
in Azerbaijan is the lowest among the CIS countries.
By applying the monetary policy, the Central Bank reached its objectives of having
the reasonable level of inflation, preserving the stability of national currency’s
level, keeping proper foreign currency reserves, reinforcing the bank system
further, providing the monetarisation in the economy. The changes occured in
currency rate have become stable. The economic growth rate has been 11%.
Thanks to the implemented economic reforms, the private sector has developed
and its share in GDP has surpassed 70%. The export level has risen and reached
5-6 billion dollars. Half of these investments originated from direct investments.
Over this period, in order to provide the flow of foreign investments to non-oil
sector, some work has been done and as a result, the flow to this sector has
grown 90.4 % and become 9 billion manats. In general, from 1995 to 2015, 130
billion manats of investments were made on the country’s economy, half of which
were invested in non-oil sector. The drop of oil prices in 2015 resulted in the
decline of exchange reserves which became 7 billion dollars. The Central Bank
took this into account and realized 2 devaluations, the first one in February, the
second at the end of December, as a result US dollar has risen twice against
manat.In 2016, it is intended to continue the monetary policy applied in 2015.
The Central Bank also put the monetary policy into practise in 2015, this policy
is thought to help the rapid growth in the economy, preserve macro-economic
stability and management. In particular,the implementation of the inflation rate of
3-4% in 2015 was in the top of the goals and it was achieved. Some necessary
measures were taken to minimize the negative effect of the money to enter the
country through oil and foreign investment on exchange rate67.
To attain the goals mentioned above, the Central Bank made succesful use of
means of monetary policy such as credit policy, interest rate policy, legal response
rate, free market operations and intervention in foreign exchange market.
In 2015, the monetary policy, which was directed to support the rapid economic
growth, the prices –one of the main indicators of macro-economic stability, form
the competitiveness of non-oil sector, provide financial need of the economy,
was applied and the defined objectives were achieved.
In 2014, the decline in oil prices, as a result the decrease of foreign currency
revenues led to the reduction of Azerbaijan’s volume of money in money market.

67
“http://www.cbar.az/assets/3574/Bulleten-2015_noyabr_1_.pdf (01.02.2016).

239
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

Since one of the primary reasons of inflation is the increase in the volume of
money, the Central Bank will do its best in this direction. The growth of the
volume of money may cause the decline of interest rates in credit and bank
markets. It will enable the significant escalation of the loan amount necessary for
the acceleration of economic growth. The rise of banks’ loan opportunities is
expected in credit market.
The targeted macro-economic situation will cause the national currency to
strengthen. It is possible to say that this factor will contribute to reinforce the
country’s international competiteveness. How is this affordable? The Central
Bank is thinking of offering securities and other exchange tools to the market in
accordance with the objectives of the monetary policy. To advance the financial
markets, the Bank is planning to cooperate with the Ministry of Finance for long-
term securities proposals. Taking such a step may inhibit the existing proposal in
the financial market, as well as the growth of inflation rate.
For the Central Bank, 2016 is the year of comprehensive measures in accordance
with the reliable and efficient development strategy of banking system. These
measures include to increase the role of banks in the economy, enhance the
financial services for the progress of activity, small and medium enterprises,
regions in credit planning. The Bank takes drastic action on the banks that are
not in compliance with the norms in order to shape a strong competitive
environment. That is, since January of 2015, the commercial banks that will not
increase their authorized capital to 50 billion dollars and private banks that will
not apply international management mechanisms to create reliable banking
system, will be in the focus of the Bank’s attention. In order to improve the
reliability of people on the banks, the foundation of “Deposit Insurance Fund” was
one of the major goals taken into account in 2005.
The amendments in connection with mortgage lending were completed and the
“Law on Mortgage” was adopted on April 15,2005. With this law, it became
possible to lend mortgage loans. Within the law, credits started to be given by
making legal, administrative and practical arrangements.
To sum up, the Central Bank began to put into practise the monetary policy
supporting the realization of the comprehensive action program directed to speed
up social-economic development in the country.
In addition, a decree on “Changing the value size and nominal value of the currency
of Azerbaijan” was signed by the President. According to the decree, starting
from January 1, 2006, the country’s currency was changed to new manat in the

240
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

form of one new manat equal to 5000 old manat. The alteration of “1 new manat
= 5000 old manat” is different from the one made in Turkey by only removing
zeros in terms of the goal and content.
In the early years of the country’s independence, the value of the currency in
circulation had fallen rapidly againt other countries’ currencies within a short
period with the effect of military, political, social and economic crisis appeared at
that time and as a result, the country went through hiper-inflation. In spite of the
progress period in the country since 1996 originating from the social-economic
stability, low nominal exchange rate of manat due to high inflation obstructed the
processes in accounting system, statistics, institutions and banks.
Most importantly, the distrust of the country’s currency, running away from it
initiated the process of dollarization.The local currency became the exchange
tool mainly in small-scale trade. The positive movement in the economy created
favorable condition for the country’s currency to gain a close value to the
commonly accepted currencies.
Over the period from the independence to 2005, altering the national currency
with the courage taken from the favorable situation following the change emerged
in the value of the country’s currency had 3 main objectives:
1. Economic Objective: To alter the negative view of manat stemming from the
devaluation and change of exchange rates against manat
2. Technical Objective: To prevent the cause to work more labor force in
accounting and occured errors
3. Aesthetic Objective: To prepare more modern and resistant currency against
wear and tear
As the impact of money-related elements among inflation indicators is
approximately 30%, it is expected that changes in the movement of money will
cause low-level inflation and a big increase in the prices of goods and services
less than 5000 manats. Given this, it has been planned to carry out a monetary
policy that will prevent denomination from leading to inflation.
With the denomination it is targeted to bring closer the value of the local
currency to Euro and Dollar. This will lead to have a national currency owning a
purchasing power equal to that of dollar. It is the goal of fighting against
dollarization. However, it is not a correct to think that such a step is the indexation
of the country’s currency to dollar.

241
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

No matter how suprising it is, but the major problem with the monetary policy
decisions is that manat is too strong. So it is becoming attractive for import and
export in a way against domestic production.
According to the information by the State Statistics Committee, the average
annual inflation was 3.7% in 2015 which is 3.8 percentage points lower than the
changes of the average annual consumer price index of the last 10 years.
The decrease of foreign currency proposal and increase of the demand in the
background, the Central Bank’s exchange rate policy in 2015 was conducted
under the objectives of strengthening the country’s international competiteveness
and and macro-economic stability. Since the end of 2014, the plummeting
prices in the world oil market and devaluation waves in the main trade partners
resulted in the growing demand for foreign currency, especially US dollar in the
internal currency market. The total volume of foreign exchange market in 2015
increased by 1.8 times compared to the respective period of the previous year.
91% of transactions in the currency market were done in US dollar, while the
remaining 9% were in other currencies. In comparison with the same period of
2014, the volume of transactions in US dollar extended by 1.8 times and that of
Euro by 2.1 times. The net cash provided in US dollar to the people by banks
went up by 61.7% compared to the same period of last year. The growth of
demand for foreign currency cash occured mostly in the first quarter. Since, in 9
months, 63% of the net US dollar and 38% of Euro were sold in the first quarter.
During 2015 when the monetary policy decisions were being accepted, the
condition of realizing that policy and succeeding the inflation goals were taken
into account. Over that period, the monetary policy was conducted considering
the trends in economic cycle and dynamics of money supply as well as price
and financial stability targets. In order to fortify the financial support for the
economic growth in non-oil sector, stimulate investments by accelerating the
drop of interest rates, create monetary basis for funding small and medium-sized
businesses and optimizing the cost of mortgage lending of people, the Central
Bank’s discount rate was reduced from 3.5% to 3% starting from July 13, 2015.
Given the latest trends in money supply change, the reserve requirement set by
the Central Bank was cut down from 2% to 0.5% with the aim of seconding the
economic growth by creating the reduction of interest rates.
The money supply was formed under the impact of the ongoing processes in
currency market owing to the dynamics of manat and monetary supply in 2015.
The monetary base of 2015 with manat declined 38.9% and became 7050.4
million manats by the end of the period. The dollarization had a reducing and

242
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

other factors (the Central Bank’s market operations, etc) had an increasing
influence on the alteration of monetary base.Significant changes did not occur in
the level of money multiplier which expresses the ability of the banking system.
During this period, broad money supply (M2) fell 46.3% becoming 9369 million
manats at the end of the period. In a broad sense, the money supply with manat
decreased on account of the money supply in cash. Broad money supply (M3)
decreased by 18% and it was 17684 million manats from 01.10.2015. Compared
to the respective period of 2014, M3 monetary aggregate dropped by 16.3%.
The decline in M3 monetary aggregate in 2015 happened in connection with the
reduction of net foreign assets. The share of net foreign assets in broad money
supply reduction was 59.5%. The share of deposits and savings in M3 money
supply, in foreign currency had been 47% towards the end of the period.

7.2. FINANCIAL POLICY

One of the main targets of macroeconomic policy is fiscal policy. It is a
government’s regulatory policy of budget spendings and tax system which
ultimately affects the structure and redistribution of national income and
expenditure. As the content of fiscal policy, government’s intended or implemeted
reforms both in social and economic spheres in connection with budget,
economic laws, actions can be mentioned. Fiscal policy can be used as a tool to
reach the goals like excess of budget income and expenditure, balance, non-
balance, deficit financing. Fiscal policy is an integral part of the financial policy of
a government which covers its financial actions on the creation and usage of
budget funds and plays the role of powerful regulatory tool. For the first time,
fiscal policy was put forward by J.M.Keynes as a means of avoiding global
financial crisis happened in the world economy during 1930s. According to
Keynes and his followers, aggregate demand can be stimulated and economic
processes can be activated by making relevant changes in tax rates and budget
spendings. Keynesian theory says, the change made by government in fiscal
policy will impact aggregate demand and indirectly aggregate supply. Hence,
fiscal policy along with aggregate demand has the ability to influence the level of
employment and people’s income.
The basic tools of fiscal policy
The fundamental tools of fiscal policy are taxes and government spendings.
Government spendings are expenses of government to carry out its functions. In
order to remove public needs, government should benefit from some goods and

243
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

services which makes the very government to spend certain funds. Along with
the fulfillment of public services, the economic obligations undertaken by
government emerge in the form of expenses. It is a reality that the goals such as
arrangement of fair income distribution, realisation of full employment, formation
of condition for economic development direct government to the purchase of
goods and services. At the same time, sometimes these objectives channel the
government to aid the private sector gratuitously. In a narrow sense, the costs of
central state organisations and local institutions are meant as public spendings.
In a broad sense, it refers to tax expenditures as well. Tax expenses are the
amount refused by government, who has to take it as tax, for various reasons.
Government renounces some portion or all of the tax amount to be taken with
names like tax exemptions, tax cuts. Thus, we can evaluate public spending as a
reduction in government’s net financial worth.
According to the Tax Code of the Republic of Azerbaijan, tax is the mandatory,
individual and non-refundable payment made in the form of alienation of funds
owned by taxpayers with the aim of supporting the state and municipal activities
financially68.
Stances of fiscal policy
There are 3 main stances of fiscal policy: neutral, expansionary and contractionary.
Neutral fiscal policy is usually applicable when there is prevailing balance in
economy. By this, government spending is fully funded by state revenues and it
has a neutral effect on economy.
Expansionary fiscal policy involves government spending exceeding revenues.
This policy is utilised to annihilate periodic crisis by decreasing taxes and
increasing budget expenses. This policy may have both positive and negative
effects on economy.As a result of implemeting this policy, we can evaluate the
annihilation of cyclical crisis as positive,however budget deficit and inflation as
negative. The growth in government spending during carrying out expansionary
fiscal policy leads to the increase in aggregate demand and the country’s gross
domestic product.
Contractionary fiscal policy occurs when only a part of state revenues is directed
to expenditures. The main objective of this policy is restricting economy’s periodic
growth by budget sequestration and increase of taxes. This policy might also
affect economy positively and negatively. As a result of the implementation of

68
www.finance.gov.az

244
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

this policy, we can evaluate the decline of the budget deficit and inflation as
positive, the rise of unemployment in a short term and creation of stagflation in a
long term as negative.
Types of fiscal policy
The role of fiscal policy in economy is associated with its charater and types,
namely, the type of adopted fiscal policy determines the mechanisms of its
implementation. There are 2 basic types of fiscal policy which are discretionary
and automatic:
Discretionary fiscal policy is also called active fiscal policy. While the active
fiscal policy is conducted, state intervene in economic processes by manipulating
taxes and budget expenses deliberately. In other words, by realising discretionary
fiscal policy, state tries to find effective ways out of the situation by maneuvering
between taxes and government spending for the increase & decrease of gross
domestic production volume, optimization of employment level, change of prices
and regulation of inflation. During the implementation of discretionary fiscal policy,
government regulates taxation and budget expenditures purposefully to improve
the economic situation of country. The level of this regulation is diverse in the
different phases of economic cycle. As state increases its expenses and reduces
the level of taxes during economic crisis, all of which lead to the expansion of
purchasing needs. When the rise in production is accompanied by inflation, state
prevents business activity by reducing its own expenditures and raising the level
of taxes. During economic setback, in order to stimulate aggregate demand,
through discretionary fiscal policy, government creates budget deficit purposefully
by escalating its volume of expenses or mitigating the level of taxes. In order for
government spendings to show stimulating effect, they shouldn’t be financed at
the expense of tax revenues69. The expansion of tax rates reduces the incentive
for business activity which brings about a decline in the volume of production.
Therefore, the escalation of government spending is usually followed by budget
deficit. Thus, government eases economic crisis and achieves the rise of domestic
production volume by increasing its expenditure during the setback of production
and decreasing its expenses during the period of economic growth accompanied
by inflation.
While carrying out automatic or passive fiscal policy, tha changes related to
taxes and budget expenses are regulated automatically. Automatic fiscal policy
envisages the automatic increase of the volume of net tax revenues to state

69
www.taxes.gov.az

245
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

budget during the period of economic growth and the automatic decrease of the
volume of net tax revenues to state budget during economic setback. These
alterations happen with the effect of «installed self-regulators». Installed self-
regulator is a mechanism which allows to reduce the fluctuations in the level of
production and employment without making any change in the economic policy
of state. Such automatic regulators are as follows:
- the progressive tax system preventing aggregate demand during economic
growth. As the income of people grow, they are taxed at a hihger rate which
impedes aggregate demand. When revenues decrease following economic
downturn, lowering tax rate causes the increase of revenue obtained. It results in
the stimulation of aggregate demand.
- as a result of the rising number of the unemployed during economic downturn,
the size of unemployment benefits and other welfare payments grow. During
economic boom, the level of unemployment falls which automatically leads to
the decline in the volume of those payments.
The main advantage of automatic fiscal policy is that, as a result of a little change
in economic conditionsç installed self-regulators are set to work immediately.
The disadvantage of this policy is that, it only smoothes out periodic fluctuations
and can not eliminate them completely. Hence, fiscal policy is the regulatory
system of national economy as a whole or its various strategic areas and regions
by making changes related to taxes, their types and rates, as well as budget
spendings by government actively or passively.
The fiscal policy of the Republic of Azerbaijan for 2016
Azerbaijan’s fiscal policy for 2016 is aimed at maintaining economic stability, the
modernization and diversification of its leading areas, continuation of the
measures on social security of the population observing social priority, as well
as providing people’s living standarts, social security of refugees and IDPs.
The primary targets for 2016 involve stimulating non-oil sector further, fulfilling
complete and timely tax obligations for increasing revenues more, as a whole
reinforcing tax and customs discipline.
Given the expected decline in the world market price of crude oil to 40-60
dollars, optimistic(if it becomes 60 dollars), base( if it becomes 50 dollars),
pessimistic (if it becomes 40 dollars) scenarios are prepared in accordance with
the main directions and priorities of the state and consolidated budget for 2016-
2019.

246
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

Table 23. Structure of Taxes (2005-2014)

Indicator 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Value-added tax 600 737,8 1179 1911 2013 2083 2223 2367 2710 3120

Excise tax 141 187,4 402,9 486,9 485,1 514,9 480,2 531,5 593,3 797,3

Income taxi 355 1361 2458 2862 1329 1430 2134 2252 2375 2303

Source: www.taxes.gov.az

Within the “Law on the Budget System” that was adopted in December,1992, the
budget system consists of the budgets of the Republic of Azerbaijan and
Nakhchivan Autonomous Republic, as well as local budgets.
Budget revenues comprise income tax, VAT, customs duties, land tax and excises
(taxes on smoking, drinking, imported cars and mines). Social security costs,
defense expenses and allocated costs on state institutions have a special place
in budget expenditure.
With the declaration of ceasefire in connection with Karabagh War and political
stability, procedures on creating economic stability started to be applied. Within
this framework, a reform of tax was conducted.
Between 1991-1994, the war with Armenia had a negative impact on the state
budget.During this period, the ratio of government spendings to GDP rose to
55%, while the ratio of the state budget deficit to GDP increased to be 15%. On
one hand, oil and privatization incomes were continued to be used for financing
the state budget deficit, on the other hand, the measures to raise government
revenues and reduce spendings were tried to be carried out. In 1999, although
the ratio of the state budget deficit to GDP went up by 5.4%, with the actions
taken it was targeted to keep it at a lower level.
Within the framework of the policies backed by the IMF, it is aimed to reduce
government spendings and thus to control the budget deficit. According to the
tight monetary policy, the target is the continuation of low inflation and to be
affected the least by the crisis in neighboring countries. For this purpose, with
the application of rigid administrative control, it was tried to gain the trust on
manat again. Thus, it was targeted to reduce the real and nominal interest rates.
Despite the changes in government spendings after the IMF backed financial
policies, the fall of the state revenues led to the growing usage of outsourcing in
the elimination of the state budget deficit. Along with that, the income obtained

247
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

from privatization and other similar internal sources were utilized in funding
budget deficit. In 2000, VAT incomes made up the most important source of
income in state revenues.
As part of the conducted reforms, the actions were started to be taken to raise
tax revenues and strengthen the areas of tax. The recent rise of government
spending stems from the increase observed in salary, social transfers and
investements. The decline has been made in the units allocated for the different
areas among government spendings. The government is trying to improve the
situation in the state budget balance in this way.
The tax system in Azerbaijan is defined with the country’s constitution and other
legal regulations. The tax is determined and received in accordance with these
legal regulations. In particular, forming a large portion of the budget incomes
with taxes increases the essence of this issue. In this regard, the importance of
the tax-related organisations rises day by day. The most essential of these
organisations is the Ministry of Taxes which was established in 1990 as a part of
the Ministry of Finance, in 1991 it became independent tax inspectorate and
finally in 2000, with the decision of the head of the state it was turned into a
Ministry. Afterwards, other departments of this ministry were founded. In
addition, the departments were opned in various regions. Tax policy and its
collection is conducted by the Ministry of Taxes.
In general, there are three types of taxes in the country. They are state taxes, the
Autonomous Republic taxes and local taxes. Tax collection is done in 2 ways.
The first is taken directly from the source, while the other is carried out on the
basis of the declaration. There are 9 types of state taxes, 8 types of the
Autonomous Republic taxes (relates to Nakhichevan Autonomous Republic), 4
local (municipal) tax types. Some people are either completely exempt from taxes
or have obtained some concessions. At the same time, the tax system is
constantly being developed as a part of a plan to set up a system in accordance
with that of developed countries.
While renewing the Tax Laws, some efforts were made to strengthen tax officials.
In 2000, it was tried to raise the level of state revenues by making concessions
in the payments cut from entrepreneurs in VAT, the Legal Person Tax, Social
Protection Fund. Within the agreement signed with the IMF, government spendings
were tried to be controlled.
Though many new adjustments were made in order to strengthen the
organisational structure of the public sector, it is still not possible to say that the
public sector works efficiently.

248
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

Furthermore, in many ministries including the Cabinet of Ministers, a structural

reform that needs to reshape the public sector completely and actions to
increase the judicial power and independence are continued.
One of the main objectives of the policy applied is to provide the development of
non-oil sector that will revive the market.Poverty reduction and revival of the real
economy are among these aims. The acceleration of the financial policy will
have a positive impact on the economic conditions of small and medium-sized
enterprises.
Some steps directed to the simplification of the tax system, reduction of VAT rate
and tax burden, need to be taken. Such steps will enable the progress of non-oil
sectors and affect price stability positively. International experience shows that
the development of an economy where the rate of VAT is between 5-10% can be
expected. If this rate is higher, some serious problems like in the South American
countries can arise.
Until the beginning of 2016, more than 200 changes have been made in the Tax
Code. They were made in order to achieve the aims like increasing the benefits in
tax control, protecting the rights of taxpayers, preventing tax evasion70.
With those changes, certain time limit was set in some tax procedures. Some
alterations were also made in the Tax Code for those who want to hire their
properties. In addition, customs system was simplified. Agricultural production
was decided not to pay tax except for land tax. As a part of new regulations, the
application area of simplified tax system was extended.
The main directions of the fiscal policy
In accordance with the country’s medium-term economic and social prediction,
in order for the implementation of the financial policy, the realization of the
following measures in 2016 are envisaged in the fiscal policy71:
On revenues:
 To increase the share of non-oil revenues in the budget revenues;
 To reduce the transfers from the State Oil Fund of the Republic of Azerbaijan
to the state budget gradually;
 To improve the simplified tax system by making amendments to the existing
legislation and grant the right to choose to taxpayers operating in some areas
of the economy according to the rules on tax payment;

70
www.taxes.gov.az
71
www.taxes.gov.az

249
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

 To review the tax exemptions on tax and customs payments implemented in

various areas of the economy, their restriction or repeal;
 To obtain dividends to the state from the enterprises that has state share in
charter fund or stocks according to those shares;
 To raise the receipt percentage of tax revenues to the state budget;
 To continue the work in the course of raising receipt percentages of the
estimated mandatory state social insurance;
 To continue the activities directed to reduce subsidies thanks to the tax
payers with tax registration, in order to balance local revenues and spendings
in the country’s cities and regions;
 To continue the work to provide the transition of customs tariffs system to
less-tier system;
 To multiply the access rate of the revenues obtained from leasing state lands
to the budget;
 To take effective measures in the course of increasing the revenues from
privatization of state property to the state budget.
On expenses:
 To maintain the fiscal policy in non-favorable external environment, as well as
in the background of the reduction of state and consolidated budget revenue
and spendings, to amplify the efficiency of spendings in public sector, to
improve the management of the current and capital expenditures;
 To generate financial support for all the social obligations of the state budget,
the main state programs, as well as education, health, social, cultural, sports
and physical infructructure projects by keeping up the social policy;
 To intensify the financial stability for pension provision, to strengthen
principals of insurance, to establish financial provision in connection with the
implementation of the Concept of the Reform of Pension Provision System in
Azerbaijan approved for the application of the balancing mechanism between
the attained pension rights and compulsory state pension rights;
 To create financial support in order to ensure the country’s defense capability
and safety;
 To continue state care to agricultural sector for the solution of self-sufficiency
of the population with basic food products, government support for farmers,
development of leading areas of agriculture and giving subsidies to these
areas;

250
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

 To form financial support by using the budget revenues in the development of

non-oil sector, also direct funding of production projects with large financial
capacity;
 To raise the efficiency further in managing public debts, to bolster the state
control over the financial activities of the institutions taking loans with state
guarantee, to keep on the realization of loan service costs by the funds of the
same institutions.
 To provide the consistency of the state program and measures with budget
expenditures, the funding of new state programs and measures intended to
be carried out by the state budget;
 To maintain the reforms in the systems of education, health, social insurance
and social assistance, alongside sports and cultural areas, to increase the
focus on their priority directions of development;
 To continue the joint financing with international financial institutions for the
implementation of infrastructure projects;
 To carry on the activities for further intensification of attracting private
investments by restricting the participation of public finance in many areas of
the country’s economy gradually.
On budget deficit:
To succeed keeping the budget deficit in a manageable level.

7.3. EXCHANGE RATE POLICY

There is a close relationship between the exchange rate policy applied in Azerbaijan
and the balance of foreign trade and payments. In the conducted researchesç it
was observed that exchange rate plays a role in foreign trade indicator, real
sector opportunities and regulations against inflation. To maintain the value of
foreign debts at the request of the IMF, fixed exchange rates will affect both
domestic production and export negatively. This situation has impacted the
difference between imports and exports to be in favor of imports.
With the effect of rising inflation rate, Azerbaijan’s manat depreciated sharply from
1992 when it was first distributed into circulation, to 1994 when it was adopted
as the single currency and especially, in 1994, excessive fluctuations occured.
With the capital revenues obtained as a result of the macroeconomic stability
policies put into practice since 1995 and the policy of floating exchange rate,
money supply was kept under control to prevent further rise of prices, however

251
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

the nominal value of manat against dollar began to ascend. The Central Bank did
not change its exchange rate policy from this year and until 1998, manat’s
nominal and real value gaining was observed. Along with attaining price stability,
foreign capital into oil industry also has big impact on this. The crisis in 1998
and decline in export level resulted in the transition to floating exchange rate
mode from the middle of 1999, then it was tried to gain competitive advantage in
export products by reducing the value of national currency against dollar. After
the transition to floating exchange rate in 1999, manat started to lose value
against dollar which influenced export.
The depriciation of manat against dollar continued in 1999 and 2000. Traditionally,
Azerbaijan is a country that is significantly dependent on foreign trade.
Competitiveness in foreign trade refers to price advantages. In particular, applied
exchange rate policies become important at this point. On the other hand, oil and
oil products that are main export areas show a remarkable growth with the launch
of new oil fields of the consortiums.
In spite of the spending of exchange reserves owing to the implementation of
Baku-Tbilisi-Ceyhan project and foreign debt payments, the Central Bank aimed
to maintain the same level of exchange reserves.
As a part of this policy, during 2003-2009, there was not a big change in the
value of manat.
After a rapid decline of oil prices and exchange revenues in the world market, in
2009, currency demand was higher than its supply in currency market of the
country. The Central Bank inhibited the fluctuations in exchange rate by its currency
policy. Manat strengthened by the applied policy reduced the effect of the price
increase in imported goods to some extent due to its being more functional.
Inflation in the countries like Turkey, Russia, Ukraine and Iran, with whom
Azerbaijan is in a close relationship in terms of trade among countries, was between
8-14%. The average rate of manat against the currencies of these countries
decreased by 2.8%. Therefore, the real effective rate of manat went up by 1.6%
and international competitiveness of the country’s products grew.
The implementation of the monetary policy
Inflation. In 2015, prices in the country remained stable, inflation was provided
in the low single-digit level. According to the latest report of the World Economic
Forum, Azerbaijan is one of the countries with the lowest inflation level. The
average annual inflation in 2015 accounted for 3.5% falling by 0.8% compared to

252
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

the same period of last year. This figure is substantially less than the average
inflation in trading partner countries. Over the year, the Central Bank kept the
factors affecting inflation under control. Targeted monetary regulation, the
expansion of the supply compared to domestic demand, cheapening prices of
food in the world markets had a downward effect on inflation. The opportunistic
surveys conducted by the Central Bank betwwen real sector enterprises and
households, indicates the decline in inflation expectations. During the period, the
growth in the income of the people exceeded the inflation pace.
Exchange Rate Policy. In 2014, the Central Bank carried out a purposeful
exchange rate policy on the basis of favorable foreign economic position and
conserved the stability of national currency-manat. The Bank provided the balance
in currency market reacting rapidly to the processes in here. Exchange rate policy
was implemented by taking into account aims to protect macro-economic and
financial stability, as well as competitiveness of non-oil sector.The realization
mechanism of the exchange rate policy was kept unchanged, US dollar/manat
bilateral exchange rate was the operation target of this policy. Despite the
substantial devaluation of national currencies in many foreign trading partner
countries, in 2014 the exchange rate of manat against dollar remained almost
unchanged. Lower level of the domestic inflation in comparison with that of the
partner countries had a downward impact on the real effective exchange rate.
The psychological factors associated with currency demand, motives and
sources to buy foreign currency in cash and non-cash markets, supply sources,
impairment of currencies of some partner countries were closely followed by the
Central Bank. Relevant regulatory measures were taken on this basis, as a result
the stability in currency market was preserved and fluctuations in manat exchange
rate did not happen. The stability of manat exchange rate in the condition of
available features of Azerbaijan’s economy once again confirms its macro-
economic importance. Fixed exchange rate is an essential factor in the manage-
ment of inflation and its expectations, the protection of the people’s and real
sector’s assets, financial stability of banking sector. At the same time, structural
policies and economic policy coordination aimed at fortifying macro-economic
durability play an important role in the stability of the exchange rate.
Given the situation in the currency market, on February 21, 2015 the Central
Bank’s Board of Directors reached a decision on defining the exchange rate of
US dollar against manat in the level of 1.05 manat. The main purpose of the
decision was to create incentives to diversify the national economy, to further

253
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

strengthen its international competitiveness and export potential, to ensure the

strategical stability of the balance of payments and the country’s international
solvency on this basis. During the CBA reporting period, the Central Bank adopted
a decision on improving the operational framework of exchange rate policy. As the
exchange rate policy started to be conducted based on two-currency basket
mechanism including US dollar and Euro. Quantitative parameters (basket
structure, value, etc.) of the new operation framework that began to be applied in
the first quarter were optimized in the second quarter (more details about the
essence of this mechanism are reflected in the Monetary policy review for the
first quarter). The operations of the Central Bank were implemented within inter-
vention corridor (range between selling and buying rates). In 2015, Azerbaijani
manat depriciated against the currencies of all partner countries except for
Russian rubles, Kazakhstan tenge, Ukraine hryvnia and Belarusian ruble. The
dynamics of manat’s nominal bilateral exchange rates led to the change of real
bilateral exchange rate, thus real effective exchange rate. During the reporting
period, real effective exchange rate (non-oil trade weighted) dropped by 15%. This
mainly happened thanks to 12.1% depreciation of nominal effective exchange
rate.
On December 21, 2015, the Central Bank announced the transition to floating
exchange rate and dollar rose again becoming 1.55 manats which was the
second official devaluation by 50%. The Central Bank announced that this step
was taken due to the plunge in oil prices and increased interest by US Federal
Reserve.
Interest Policy and Money Supply. In 2015, under the condition of low inflation
the Central Bank took the advantage of the monetary policy’s promotional oppor-
tunities. Taking into consideration the internal and external factors of economic
growth, in general tendencies in economic cycle, The Central Bank loosened the
monetary policy. In 2014 The Central Bank made 2 changes in the parameters of
interest rate corridor in order to create condition for a further rise of investment
activity in non-oil sector and reduction of interest rates. As a result, discount rate
was lowered from 4.75% to 3.5%. At the same time, the obligatory reserve
norms for banks’ foreign and domestic liabilities were reduced from 3% to 2%.
These actions had a downward impact on interest rates for deposits and loans.
In the 11 months of 2015, money supply with manat went up by 6.6% in
accordance with the demand for money, the improvement of its structure went
on. The increase in non-cash money supply exceeded the growth of cash money
supply by 22 percentage points.

254
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

Preserving financial stability-macroprudential framework

The increased stability of banking system against internal and external shocks,
preservation of financial stability, efficient mobilization and allocation of financial
resources have been provided. Necessary measures have been taken to hinder
the accumulation of risks in banking system. The capitalization of banks has
been continued and prudential control framework focusing on the regulation of
major risks has been applied. The risks of systematic importance have been
restricted in a preventive manner based on the the diagnosis of main trends in
banking sector. “Countercyclical” management and early warning systems have
been strengthened. With the aim of protecting the sector’s asset quality and
regulating credit risks, multi-vector destimulation measures have been taken in
the course of rebalancing the portfolio structure, macro-prudential supervision
framework has been tightened. The capitalization of banks have been maintained,
an intensive supervisory regime on banks with a low capitalization potential has
been applied. During the period after the adoption of the decision on capitalization
(August, 2012), the total capital of banks has reashed 4.2 billion manats
increasing by 95% or 2 billion manats. The capital volume of the banks owning
99% of the sector’s assets has been higher than 50 billion manats. The risk-
based new methodological framework of banking supervision has been developed.
In order to define the standarts for banking behavior and eliminate undesirable
business practise, new methodological framework on “responsible” lending,
which envisages to increase social responsibility of credit institutions, has been
set. Within the measures to build confidence on banks, forming protection
mechanisms of consumers of financial services, efficient settlement of disputes,
institutionalization of consumer rights protection in banks have been continued.
The series of actions together with banks, international organisations and
government agencies have been maintained in 5 financial literacy areas. Educative
events in more than 40 educational institutions have been held. The establishment of
“Financial Education Portal” with various intellectual resources has been completed
to improve financial literacy.
Financial Stability. All the measures have resulted in the impovement of major
stability indicators in banking sytem, as well as the reinforcement of the system’s
financial resources against possible risks. Currently, the primary indicator of the
stability of banking sector – capital adequacy is 18.7% against 12% norm. The
total capital of banking system rose by 21.3% over 11 months of this year. The
liquidity in banking sector is high, the implementation of commitments and
payments ar performed continuously. The instant liquidity ration exceeds the

255
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

minimum requirement twice. Bank assets’ quality indicators are satisfactory. The
portfolio share of real sector and people’s overdue loans to banking system
accounts for 5.5% which is covered fully by the banks’ reserves. The share of
foreign dept liabilities in bank resources is only 22% and this is a safe level in
terms of stability. This year, the profit of banks has increased by 23% compared
to last year. The profitability of the system’s assets has been 2%, while that of
capital has become 13.8%.
I. Financial mediation and development of the banking and financial
infrastructures
Financial Mediation. In 2015, the banking sector’s role in economic developmet
was observed to rise further. In accordance with the strategic development
objectives of the country, the Central Bank has performed relevant actions on
expanding business lending. Necessary measures have been taken to reduce the
cost of banks’ funding sources, optimize the cost of business loans. The financial
depth of the banking sector possessing 90% of the country’s financial system
assets has kept growing. The sector’s assets went up by 21.2% reaching 78% of
non-oil GDP. For the time being, the financial depth of Azerbaijan’s banking
sector is in line with countries having moderately developed banking system.
Bank loans increased by 18%, long term loans went up by 19.2%. At present,
more than 81% of loan portfolio is made up by long-term loans. Over 11 months
of this year, business loans increased by 18%, including 36.3% in industry and
production, 14.1% in agriculture and manufacturing. The share of business loans
has been 73% in total loan portfolio. Credit investments in the regions has risen
by 39.4%. Given the current trend and potential risks in consumer loans, a series
of regulatory measure have been taken in the current year. As a result, the growth
rate of consumer loans fell by 1.9 times to 19% compared to last 6 years and
with the exception of mortgage loans it declined to 11%, the volume of car loans
decreased by 31%. In Azerbaijan, the share of consumer loans in the loan
portfolio is less than the average figure of the countries of the European Bank for
Reconstruction and Development. In developed countries the share of consumer
loans in the portfolio is 50% or higher. In the past period of 2014, mortgage loans
in the amount of 92 million manats were given. As a result, the loan portfolio of
the Mortgage Fund reached 628 million manats, the numer of people taking
mortgage loans exceeded 157000. The implementation of “electronic mortgage”
among authorised banks, insurance companies, appraisers and the Mortgage
Fund started. The total volume of mortgage loans increased by 25% going over 1
billion manats (3% of non-oil GDP).

256
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

Access to financial services. During the reporting year, expanding the access
opportunities of economic entities to financial services continued, the level of
using financial infrastructure rose. The number of bank service points per every
100 thousand reached 10. Considering the affiliates of “Azərpoçt” providing
financial services to the population, this figure is 20. In 2014, 47 new bank
branches were opened, 34 of which are in regions. More than half of bank
branches are in regions. To revive the sources of alternative lending, the Central
Bank has supported the non-bank credit organisations in the current year. The
number of non-bank credit organisation is 157, while their branches are 222.
From the beginning of the year, the assets of non-bank credit institutions and
volume of loans have increased by 13.3% and 12.3% respectively. The actions
have been taken for the development of electronic banking services playing an
important role in the expansion of the people’s access opportunities to financial
services. At present, 23 banks function on internet banking and 15 banks on
mobile banking. In order to improve the service, 2 departments by the Central
Credit Register (CCR) started operating in “Asan service” centers. The number of
the requests into the registry by credit institutions exceeded 2.8 million.
Sources of resources. In 2014, the confidence in banks increased further which
resulted in the enhancement of resource base of banking sector and reinforcement
of the stability of the sources. Over the past period of 2014, corporate deposits
reached 8.2 billion manats rising by 35.3%, while people’s deposits became 7.1
billion manats increasing by 10.8%. People’s manat deposits grew by 15%
during 11 months. Deposits in regions multiplied 12.4%. Currently, 473 of every
1000 people are depositors. The amount of deposit per capita is 745 manats,
the number of individuals’ bank accounts is 6.4 million. Population is the net
creditor with respect to banking sector. The volume of people’s deposits exceeds
their credits 2.3 billion manats. During the past period of the current year,
interest income of people on deposits became 450 million manats.
Interest Rates. The interest rates have continued to decline, additional measures
by the Central Bank have been taken to speed up this process. Since the
beginning of the year, the average interest rate on deposits has decreased by 0.4
percentage points to be 9.4%. In addition to the discount rate of the Central
Bank, since May the maximum interest rate on the deposits insured by the
Council of Trustees of the Deposit Insurance Fund has been reduced from 10%
to 9% which has had a downward effect on interest rates. Interest rates on loans
also tend to fall. This trend has strengthened over the last 5 years, currently the
average interest rates on credits is 14.3%, including 10.8% on consumer loans.

257
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

The average interest rates on consumer loans varies depending on the type and
guarante degree of credits. Generally, the interest rates on consumer loanss are
close to that of many countries.
PAYMENT SYSTEMS. Maintaining the stability in payment systems, extending
the application scope of modern infrastructure established in this field and
promoting innovations were among the main activity areas of the Central Bank in
2014. The amount of payments made through the National Payment System in
2014 was 2 times of GDP. The enhancement of “Government Payment Portal”
founded within the framework of “E-government” continued. As a result, 19
institutions providing mass service were integrated into the portal. The payments
are performed on more than 285 types of services of these institutions. For the
time being, the work is about to be completed on receiving payment on the
services of government agencies in “ASAN service” centers through portals, as
well as the integration of “ASAN payment” system to the infrastructure. In 2014,
the progress of card infrastructure was kept on. The number of payment cards
issued in the country has reached 5.9 million, while the amount of ATMs to 2586
and POS terminals to 68676. The number of payment cards has increased by
5% , that of ATMs has gone up 6.8%, while the amount of POS terminals has
doubled.
II. The monetary policy, financial stability and banking sector in 2015.
The monetary and exchange rate policy of 2015 will be implemented taking into
account global economic risks, strategic development challenges of the national
economy. Keeping inflation at a low single-digit level will be the main target of
the monetary policy.The stability of manat exchange rate will be one of the top
priorities in the coming year. Depending on the economic situation , the flexibility
of the monetary policy will be increased to provide efficient support for the
economic growth. For ensuring financial stability in banking sector, prudential
supervision will be strengthened, counter-cyclical regulation will be maintained.
Expanding access to business loans, stimulating real sector lending, improving
banking and financial infrastructure will be main priorities. The actions on
reducing interest rates will be continued.
The Objectives of the Monetary Policy. In 2015, the main goal of the Central
Bank’s monetary policy is to ensure price stability under its authority. Given the
recent global and domestic economic trends, inflation is expected to remain at a
low level in the medium term. Inflation level is targeted to be 2-3% for the next
year. The flexible reaction of the monetary policy both to inflation and deflation

258
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

will be provided. The character and scale of this reaction will change depending
on the demand and supply factors affecting inflation. Next year, the Central Bank
will pay special attention to the analysis of various price indexes and overall
assessment of the risks of deviation of inflation forecast. The dynamics of the
base inflation will be watched constantly in order to differentiate the temporary
and long-term factors of inflation (deflation) pressures. The Central Bank will
consider the results of the economic cycle model in the formation of an
adequate reaction of the monetary policy.
EXCHANGE RATE POLICY. While conducting the exchange rate policy in 2015,
the Central Bank will focus on the targets to ensure macro-economic stability,
financial stability and protect competitiveness of non-oil economy. A stable
exchange rate of manat plays an essential role in attaining a low single-digit
inflation, preserving social welfare and investment activity. Taking this into
account, the stability of manat exchange rate in 2015 is an important priority.
Exchange rate regime will be kept unchanged, targetting US dollar/manat exchange
rate will be the operational framework of the exchange rate policy for the next
year. The following year, besides the bilateral exchange rate, manat’s nominal
and real effective exchange rates will be monitored.
Monetary Policy Tools. In order to achieve a reasonable growth of money supply,
in 2015, the Central Bank will utilize the tools of providing liquidity in money
market and sterilization. Macro-economic forecasts show that the tendency of
the stability of demand for money will continue in 2016.
Depending on the situation in money market, the regulation of liquidity, also the
use of injection operation will be focus of attention. Along with the objectives of
the monetary policy, market operations will serve the protection of stability in
banking sector, stimulation of financial mediation and implementation of timely
payments. In addition to the classic tools, the usage of unconventional monetary
policy will be provided in necessary cases, also the instruments of crediting
business through banks will be improved. Interest rates on liquidity instruments
will be determined according to “interest rate corridor concept”. In 2015, the
parameters of the interest rate corridor will be adjusted to economic environment
in a flexible way. While identifying interest rates on its operations, the Central
Bank will take into account the priority of reducing interest rates on loans. The
transmission characteristics of the monetary policy to the economy will considered
too while determining quantitative parameters of the monetary policy instruments.
The measures on impoving the tools of the monetary policy and strengthening
their impact on the economy will continue. In particular, reinforcing the activity of

259
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

interbank money market will remain in focus, the integration of the interest rates
here into the interest rate corridor will be considered.
Monetary Policy Framework. The Central Bank will continue to improve the
strategic framework of the monetary policy in 2015.
This improvement will be conducted in the directions of both realizing conditions
of transition to direct inflation targeting regime and expanding the regulatory
arsenal of the Central Bank. According to international practise, targeting inflation
directly is the most effective framwork of providing price stability. This policy
framework ,that envisages high-impact opportunities to aggregate demand,
economic growth and inflation through the interest rates of the Bank, stabilizes
inflation expectations and allows to neutralize the effects of macro-economic
shocks quickly. As an appropriate condition is formed for this (diversification of
sources of foreign currency,deepening of financial and capital markets, increase
of financial depth of banking sector, etc.). the opportunities to use interest rate
as an immediate target affecting aggregate demand will emerge.While improving
the monetary policy framework, changes happening in the design of monetary
policy recently will be considered as well. The recent global crisis indicated that,
central banks should not be satisfied only with supporting price stability for
sustainable economic development. Currently, the matter of expanding target
perimeter (along with price stability, economic growth and financial stability) and
arsenal of tools of central banks are topical in the world. Given the possibility that
risky increase in financial sector may cause macro-economic imbalance,
monetary policy will be closely coordinated with macro-prudential policy. The
macro-economic stability provided by monetary policy tools will be strengthened
with the application of counter-cyclical macro-prudential instruments which
prevent overheating in financial sector.
Financial stability policy. In 2015, the Central Bank will continue its activities
focused on improving the stability of banking sector against potenrial risks,
restricting risks in preventive regime. In 2015, the improvement of banking
supervision framework will be maintained by considering Basel III principles, as
well as the local environment of banking activities. Activities of building a policy
model which allows the implementation of a risk-based and countercyclical
prudential regulation, the prudential requirements scope of each type of risk. In
order to protect the quality of the sector’s assets, banks’ restrained lending activity
and rebalancing the structure of loan portfolio will be ensured. The regulation of
growth on consumer loans will be kept on to provide the compatibility of
dynamics of investments with economic development strategy. The implementation

260
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

of “responsible lending” philosophy in banks will be improved, new initiatives on

deposits’ realization mechanism will be taken. To inhibit a risky growth in banking
sector, possibilities of introducing new instruments of prudential supervision will
be explored. In 2015, it is planned to establish regulatory framework on
operational risks and consider capital adequacy in the calculation of these risks.
Consolidation process will be continued in the banking system. Electing a
supervisory framework in line with the risk profile of banks will be kept in focus,
restructuring measures will be taken if necessary. In order to develop the internal
potential on management of risks in banks, complex application of corporate
governance standarts, the activities on raising the demand for governance
quality, management competencies, technology and human resources will be
kept on.
Within the events directed to build confidence of people and corporate sector on
banking system, reinforcing the sytem of protecting consumers’ interests of
financial services will be one of the major priorities . The activities on raising the
level of people’s financial literacy will be bolstered. Financial Education Portal is
expected to play a special role in this regard. Joint mass events in the field of
financial literacy will go on. The development of new educational tools and
products towards this will be ensured.
Financial Depth and Access to Credit. In 2015, the Central Bank will keep acting
towards raising the role of banking and financial sector in diversification of the
economy. The formation of a financial system focusing on the diversification of
financial resources, providing effective support for economic growth leading to
more efficient distribution of incomes and improvement of social welfare, will be
promoted. Possibilities of creating new financing mechanisms to multiply
chances of long-term business loans will be explored, offering new products and
services to real sector by banks will be encouraged. Introduction of effective
business projects by real sector in the expansion of business lending will be an
essential factor. Making financial reporting of real sector institutions relevant to
international standarts, strengthening the mechanism of protecting creditor rights
are significant factors increasing possibilities of access to business loans. The
actions of reducing interest rates will be maintained. Stimulation of attracting
long-term savings of people, corporate sector, institutional investors to banking
sector will be focused on with the aim of increasing the resource base of banking
sector in this direction. Moreover, the activities towards stimulating non-cash
payments and expanding sources of resource will be fortified.The possibilities of
extending the scope of deposits and depositors protected within the framework

261
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

of improving deposit insurance mechanism, will be considered. The continuation

of restructuring in banking sector, development of interbank market, reinforcing
internal potential in banks and raising operational efficiency of banking services,
as well as introduction of electronic and distant banking services will be the
factors having a downward impact on interest rates. The development of regional
banking will be focus of attention, in 2015 as well and enhancement of regional
network of credit institutions will be promoted. The development of the physical
branch network along with remote banking mechanisms, as well as banking
instruments will become important priorities. Given the role of microfinance in
rising social welfare in regions, non-bank credit institutions will be paid attention
to. Through microfinance institutions including the regional service network of
“Azərpoçt” LLC, additional actions will be taken to increase the access to banking
services. The activities of developing mortgage lending system will be kept on in
2015. Based on the world experience, the opportunities of taking new initiatives
together with the government will be considered. An important priority is to
expand the scope of social mortgage. In order to simplify the process if mortgage
lending, “electronic mortgage” system will be benefited from. Citizens will have
the opportunity to apply for mortgage lending electronically. For the expansion of
mortgage lending, the actions on the attraction of additional market sources,
creation of new mortgage products, formation of guarantee mechanism of
mortgage lending, will be taken.
Payment Infrastructure. Expanding the scale of non-cash payments in the
coming year will be one of the priorities, sustainable development of the key
components of the National Payment System will be provided. The integration of
state institutions into the portal will be maintained towards expanding the use of
the Government Payment Portal infrastructure. Receiving the payments through
the portal on the services of government agencies in “ASAN service” centers will
be provided. The integration of “ASAN payment” system into the establihed
infrastructure will be concluded. The improvement of relevant regulatory and legal
framework is intended for managing risks to enhance the usage of electronic
banking services in banks, equating customers, regulating the relationship between
customer and bank.

262
 CHAPTER EIGHT
THE PROCESS OF AZERBAIJAN’S
INTEGRATION TO THE WORLD
ECONOMY
One of the main goals of the government of Azerbaijan, which regained
independence at the end of twentieth century, in economic field was to ensure
the integration of the country’s economy into the world economy.
International economic integration is performed by foreign trade, international
circulation of investment and employment, membership at international economic
organisations, participation at regional unions.
Foreign economic relations are one of the factors defining the position and
reputation of every country among world countries.The establishment and
expansion of these relations on a solid foundation is of great are of great
importance for the countries gaining independence newly.
Foreign economic relations in Azerbaijan, which was surrounded by “iron
curtains” during the period of Sovet Union, existed as an independent area of the
economy. The country, that was unable to build relations with the outside world
without the permission of the center, tried to found a new system after the
independence.
The structure of Azerbaijan’s economy inherited from the former Union did not
only meet the national economic requirements of an independent country, but
also failed to allow the appropriate way of integrating into the world economy
and to ensure economic independence of the country.
In particular, after the late President Heydar Aliyev became the leader of the
country, within the framework of delicate equilibrium policies, Azerbaijan was
seemed to form its international relations and start to integrate into the world
economy.

263
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

Despite the favorable condition in Azerbaijan in terms of its geographical location,

large energy facilities, oil and petroleum equipment industry, chemical electronic
and wine industry, transport infrastructure and rich raw materials, the main
factors shaping foreign economic relations were weakness of technological
potential, lack of production, cheap labor force.

8.1. THE LEVEL OF INTEGRATION

The relations, that were close only with CIS countries over the first years of the
independence, involved other foreign countries later on and currently it has turned
into a developing system together with trade agreements, foreign investment and
credits from international financial institutions. This system is being realized by
state institutions such as the Ministry of Foreign Economic Relations changed to
the Ministry of Commerce, the State Customs Committee, the Foreign Investment
Department under the Ministry of Economic Development and the Agency of
Foreign Credit and Welfare under the Cabinet of Ministers.
After passing to liberal economic model, the process of the country’s being part
of the world markets continues rapidly with important charter changes to liberalize
foreign trade.
In the process of integration into the world economy, recently Azerbaijan has
established trade relations with 154 countries which is an essential indicator of
the countries progress in this process. Since the enterprises fail to produce at
a level to compete in the world markets, it confines Azerbaijan’s integration
opportunities by exporting the finished product.

8.2. THE TIES WITH INTERNATIONAL

ECONOMIC ORGANISATIONS
One of the new cases of in Azerbaijan’s foreign economic relations is the
membership at some economic organisations and loans taken from them.
Azerbaijan’s foreign trage regime constitutes the basis of the system of foreign
economic relations.
Azerbaijan is a member of the following organisations:
The International Bank for Reconstruction and Development (IBRD), the
International Monetary Fund (IMF), the Organisation of Black Sea Economic

264
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

Cooperation (BSEC), CCC (Commodity Credit Corporation), The Council of Europe

(CE-observer), Citizenship and Immigration Services (CIS), Euro Atlantic
Partnership Council (EAPC), the European Bank for Reconstruction and
Development (EBRD), the Economic Commission for Europe (ECE), the
Economic Cooperation Organisation (ECO), the Economic and Social
Commission for Asia and the Pacific (ESCAP), the United Nations Food and
Agriculture Organisation (FAO), the International Civil Aviation Organisation
(ICAO), ICRM, the International Development Association (IDA), the Islamic
Development Bank (IDB), the International Fund for Agricultural Development
(IFAD), the International Finance Corporation (IFC), the International Labour
Organisation (ILO), Intelsat, Interpol, Non-Aligned Movement (NAM-observer),
the United Nations (UN), UN Conference on Trade and Development (UNCTAD),
the United Nations Educational, Scientific and Cultural Organsiation (UNESCO),
Indystrial Development Organisation (UNIDO), the World Health Organisation
(WHO), the World Trade Organisation (WTO-observer).
Due to the lack of domestic financial resources within the country, Azerbaijan
allied with these organisations in order to benefit maximally from extensive
financial resources of international financial organisations in reconstructing the
country’s production and social structure. The major organisations giving loans
to Azerbaijan are the European Union (TACIS,TRACECA,INOGATE), the IMF, the
International Bank for Reconstruction and Development (IBRD), the US Export
and Import Bank, the International Development Association, the European Bank
for Reconstruction and Development (EBRD), the Turkish Eximbank, the Islamic
Development Bank (IDB), Japan Bank for International Cooperation (JBIC), Black
Sea Trade and Development Bank (BSTDB), IFC, Kreditanstalt fur Wiesderaufbau
(KfW-Germany). In order to decrease investment risk in terms of warranty, the
Multilateral Investment Guarantee Agency (MIGA) is operating in Azerbaijan.
Loans offered by these organisations are project loans to facilitate the transition
to a market economy. Along with foreign loans, the amount of international aid to
Azerbaijan by international organisations has increased significantly. Among
them, the aids by the European Union has a special place. Azerbaijan, who has
ties with a lot of international economic organisations, is the member of
necessary organisations in terms of regional economic and trade relations. In
addition, there is a close collaboration with the European Union.
In spite of the loans given by the European Bank for Reconstruction and
Development, the Japan International Economic Alliance Fund, it is worth noting
that preference in foreign loans was given to the IMF and the World Bank.

265
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

The first major decision taken by Haydar Aliyev after he came to power was the
acceptance of Manat as a national currency unit and the only means of payment.
The second step was choosing the strategy of benefiting from the energy
resources. After this, the relationship with the IMF and the World Bank began to
be built in order to step towards the integration into the world economy. In
September of 1992, Azerbaijan became a member of the IMF, the World Bank
and International Development Association. Although the membership to the
World Bank and IMF was accepted in 1992, loan agreement with these
organisations was signed in 1995.
In order to adapt developing countries to the world market structure and make
them a part of it, the IMF and World Bank recommends these countries stability
and structural compatibility programs to guarantee this process in using foreign
debt and charge mechanisms
Azerbaijan’s relations with international economic organisations will be dealt with
separately below.

8.2.1. RELATIONS WITH THE IMF

The IMF, that took the role of managing the transition of these countries to market
economy after the collapse of the Sovet Union, had the chance of applying its
policy in many of them.
Azerbaijan’s transition to a market economy and efforts to attain economic
stability is supported by international organisations. Within this framework, aid
contracts were signed between Azerbaija and the IMF to support macro-economic
stability and development, as well as prepare the country for oil revenues.
Azerbaijan took a positive approach to foreign aid in order to get out of the
economic crisis and became a member of the IMF with 117 million SDR on
September 18, 1992, then the country took its first loan on April 19,1995. The
volume of this loan was 46 million dollars.
The IMF supported the economic reform program introduced in 1995-1996 with
132 million dollars of loan in November,1995. This economic reform program
covered the structural reforms such as reducing inflation with proper monetary
and financial policies, as well as reconstruction of the financial sector, rationalizing
the price structure and achieving a rapid development in privatization.
To second the program of 1998, in December, 1997 the IMF confirmed 2 new
loan tranches, a total amount of which was 64 million dollars. These loans
targeted macro-economic stability by reducing inflation and resuming the growth.

266
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

The loan of 112 million dollars which was approved in January, 1999, was
aimed at supporting the financial and economic program of 1999 and eliminating
the negative effects of the decline in world oil prices in 1998 on export. Thus, with
this loan the IMF kept supporting structural reforms towards the reconstruction of
the public sector72.
The government of Azerbaijan was given a 100-million-dollar loan in July, 2001
under the name of “Poverty Reduction and Growth Facility” in order for the
government to continue supporting economic reforms. The primary aim of this
loan was to regain macro-economic stability, encourage the growth of non-oil
sectors of the economy.
In mid-2002, Azerbaijan recieved 16.1 million SDRs in 2 slices. However because
of the misunderstanding between the parties, the program was frozen for a year.
In May, 2003 the IMF decided to allocate the third slice of 12.8 million SDRs.
Azerbaijan gets credit from the IMF within the framework of the “State Program
on Poverty Reduction and Economic Development”. The IMF has allocated 80.45
million SDRs to Azerbaijan within the program of Poverty Reduction and Growth
Facility (PRGF). As a part of the program that started in July, 2001, the loan was
given for 10 years, at an annual interest rate of 0.5%, to be paid back after 5.5
years.
The Loan Mechanism on Poverty Reduction and Ensuring Economic Development
is a low-interest credit mechanism that the IMF has designed for low-income
countries. The programs performed through PRGF, are based on the strategy of
poverty reduction which impacts the strategy document that belongs to the
country of origin, made and confirmed with the wide participation of its citizens
and prepared to reduce poverty. The aim is to ensure that each program conducted
through PRGF is in connection with the macro-economic structure and social
policy of that country and this mechanism serves to reduce poverty and
contributes to development. Currently, Azerbaijan receives only technicl aid from
the fund without the loan resources of the IMF. The International Monetary Fund
has an exceptional place among other international organisations Azerbaijan is a
member of. Azerbaijan is the member of the IMF since September 18, 1992.
Back at that time, the first quota eas 168.000 $, in January, 1999 this quota was
reviewed and increased to 220.000$. It should be noted that, after being the
member of the IMF, the Republic of Azerbaijan attracted a total of 577,3 million $
for the implementation of 6 different programs, that were directed to the

72
http://www.imf.org/external/country/AZE/

267
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

realisation of economic reforms, with the help of the organisation. Azerbaijan has
paid back 552 million $ of the received loans from the International Monetary
Fund, only 15.3 million $ of debt has been left to January 1, 201673.

8.2.2. RELATIONS WITH THE WORLD BANK

The World Bank supports Azerbaijan with various programs and projects to resolve
the problems encountered in the period of transition to a new economic system
and protect from economic crisis. These projects can be splitted into 2 as the
ones directly related to economic reforms and others indirectly helping the
economic development. The World Bank does not only help Azerbaijan by giving
recommendations on economic development policy, but also on the coordination
of foreign aid for the investments and state budget finances74.
Azerbaijan has been cooperating extensively with the World Bank and its branches.
It should be noted that Azerbaijan became a member of the World Bank in 1992
and started to take credits from 1995, as a result, until the first quarter of 2015 the
credit total amount of which was over 3 billion US dollars was allocated to 75
projects. Forty of these projects have already been completed and others are
currently active. Thus, in Europe and Central Asia regions, Azerbaijan has become
the third country owning the largest loan portfolio after Turkey and Kazakhstan.
Through the strategical policy and provision of investments, providing necesary
aid to the country during the time of transition by funding the government’s budget
and regulating aids is the basis of the World Bank’s activities on Azerbaijan. The
main objective of the World Bank’s aid program to Azerbaijan is to organise
technical aid in order to strengthen the structural opportunity of the government for
managing oil funds and define main laws to speed up reforms.
The World Bank operates together with the government of Azerbaijan in order to
bolster organisational opportunities in managing oil resources, form the major
policy of changes, accelerate reforms.
The World Bank focuses on privatization and making investment environment
favorable, improvement of water, natural gas and electricity systems, progress of
health and education sectors, preparation of poverty reduction strategy.
Firstly, the World Bank allocated funds for reconstruction, assisting refugees and
IDPs and it has also conducted a number of big projects. For example, reforms on

73
http://www.imf.org/external/country/AZE/
74
http://www.worldbank.org/en/country/azerbaijan

268
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

budget activities and social sphere are performed thanks to the allocated credits,as
well as necessary steps are taken in the fields of health and water supply. From
now on, the World Bank will pay attention mainly to 3 directions. Firstly, to develop
non-oil sectors and open new workplaces in these sectors, make public
administration transparent and work more with the principle of responsibility, serve
the improvement of social services, education and health indicators. Making
amendments to the laws related to fighting against corruption and developing the
accounting system is also the focus area of the World Bank. The discounted and
unpaid loans of the World Bank will be given until the per capita volume of GDP is
at a desired level.
The first loan of the World Bank to Azerbaijan was directed to the oil sector.
Considering the weight and place of oil in Azerbaijan’s economy, the importance of
that credit for the economy becomes vivid. The loans allocated by the World Bank
positively contibutes to the economy just like foreign investments.
Another feature of bank loans is that they are long-term and with very little interest.
The World Bank gives Azerbaijan 35-year and interest-free loans, the government
pays a service charge of 0.75% to the Bank every year.
However, in order to get the expected effects of the loans, they should be spent for
intended reasons and necessary expenses should be avoided. If the economic
funds and increases earned after the use of the loans don’t meet the interest on
those loans, they will be a financial burden for future generations.
A project of “Development and Crediting of Agriculture” was signed with the World
Bank in May, 2000. The volume of that projects is 33,7 million dollars. Under the
project, 9.4 million manats of loans were given to the 329 common group of
deptors joining more than 6 thousand members by CIA (Credit Implementing
Agency) that was founded by “G&G Consulting” consortium (Turkey-Australia).
Additionally, within the project, 20 credit unions (6 in both Beylagan and Nakchivan,
5 in Sheki and 3 in Masalli region) were established by 566 people.
As a part of the project, the registration system of real estate in regions was
improved and the development strategy of agricultural sector was prepared.
The World Bank has planned to carry out 19 projects in Azerbaijan between 2003-
2016. The amount of the financial assistance for the projects is estimated at 1
billion dollars75. Those projects and their financial volume are as follows:

75
http://www.worldbank.org/en/country/azerbaijan

269
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

- 12 million dollars in order to realize an additional project for the reconstruction

of water supply system,
- 18 million dollars for the project meant for the development of the education
system,
- 30 million dollars for the project on renewing the irrigation system,
- 17 million dollars in 2003 as a part of “State Program on Poverty Reduction
and Economic Development,
- 22 million dollars for the progress of villages,
- 10 million dollars to reconstruct the pension system,
- 40 million dollars for the electricity distribution system,
- 8 million dollars for the reconstruction of “Shahdagh” national park,
- 20 million dollars to conduct “PRSC-2”(Poverty Reduction Support Credit 2).
At the same time, the World Bank allocated 300 million dollars for “Baku-Tbilisi-
Ceyhan” oil pipeline construction project.
In this context, the World Bank gave low-interest 1.2 million dollars of loans to
about 3000 farmers of Ganja-Gazakh region, in 2003-2004 to support private
enterprise in the country’s western regions. The Bank has allocated 10.3 million
dollars for Greater Baku Water Supply Project II, 13.9 million dollars for the
Rehabilitation of gas system Project, 10.2 million dollars for the privatization of
the agricultural sector.
As stated above, the total amount of the project of the World Bank on pension
and social security is 10 million dollars. The aim of this fund is to reconstruct the
pension system and provide transparency in there, as well as to form necessary
conditions for delivering social aids directly to those in need. This one is the 16th
project funded by the World Bank for Azerbaijan.
The World Bank’s project related to the development of the regions which has
the volume of 22 million dollars will be conducted during a period of 4 years.
Since 2005, Azerbaijan has started to pay down the credits taken from the World
Bank for various projects. The first loan project between Azerbijan and the World
Bank was signed in 1995 and it expired in 2005. In principle, payment of all the
credits back to the World Bank by Azerbaijan starts after the first 10 year.
Recently, the Bank attaches great importance to the advance of the country’s
agricultural sector.
The World Bank’s loans and projects are based on the Bank’s activity principle
and they focus on necessary fields such as health, education, human development

270
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

and reconstruction. A part of these projectswas in the context of structural

reforms which showed that the relationship between Azerbaijan and the World
Bank develops steadily.
Table 24. Share and quota of Post-socialist countries in the World Bank
Number of Weight Weight
shares in the according to according to
Situations Country
authorized number of Quota number of
in IBRD name
capital of the common shares common votes
Bank with % with %
7 Russia 44795 2.99 45045 2.92
27 Ukraine 10900 0.73 10158 0.72
60 Belarus 3323 0.22 3570 0.23
61 Kazakhstan 2905 0.20 3235 0.21
69 Uzbekistan 2493 0.17 2743 0.18
81 Azerbaijan 1646 0.11 1896 0.12
82 Georgia 1584 0.11 1834 0.12
88 Lithuania 1507 0.10 1757 0.11
92 Latvia 1304 0.09 1630 0.11
93 Moldova 1368 0.09 1618 0.11
102 Armenia 1130 0.08 1380 0.09
103 Kyrgyzstan 1107 0.07 1357 0.09
111 Tajikistan 1060 0.07 1310 0.09
121 Turkmenistan 937 0.06 1187 0.08
124 Estonia 923 0.06 1173 0.08
Source: Prepared by the author according to the website http://www.worldbank.org/en/country

8.2.2.1. Cooperation with the Multilateral Investment

Guarantee Agency (MIGA)
As a member of the World Bank, the Multilateral Investment Guarantee Agency
was established in 1988 in order to reduce non-trade political risk factor in
developing countries and help foreign investors to be guaranteed. The total
capital of MIGA, which has 154 members, is roughly 1.2 billion dollars.
MIGA has given guarantee at the amount of 77.1 million dollars to foreign
companies functioning in Azerbaijan 6 times. The first one was given Efes
company of Turkey that invested 18.3 million dollars on Coca-Cola company in
Baku.The second guarantee was for the investment at the amount of 2.7 million
dollars of Koc Bank from Turkey. The third guarantee was provided to Germany’s
Bank Kreis, Turkey’s Pamukbank and Azertel companies for their investments on
Azercell and Azerbaijan’s digital contact sector.

271
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

In February, 2003 MIGA guaranteed Fatoglu Food Industry and Trade Company
from Turkey with 529.920 dollars in order to expand and modernize mills. These
investments have been insured against political risks considering restriction of
property rights, confiscation of private property, war and conflicts.

8.2.2.2. Cooperation with the International Finance

Corporation (IFC)
The International Finance Corporation (IFC) was founded within the World Bank
Group in 1956 to give project loans to the private sectors of developing countries.
It has 2.4 billion dollars of capital and 175 members.
IFC does not only give loans to different projects of private sectors in a member
country, but also takes part in syndications. IFC’s participation in investment
partnership is also possible.
IFC’s strategy in Azerbaijan is applied towards strengthening financial sector,
multiplying small-scale enterprises, increasing aid to the country’s industrial and
agricultural sectors, directing financial assistance to areas other than oil sector
and helping investments for energy sector.

8.2.3. RELATIONS WITH THE EUROPEAN BANK FOR

RECONSTRUCTION AND DEVELOPMENT (EBRD)
One of the economic institutions Azerbaijan is in an all-round cooperation is the
European Bank for Reconstruction and Development. EBRD was set up in 1991
in order to give financial assistance in transition to free market economy and
democracy to the countries declared independence after the collapse of socialist
system in former Sovet region along with Central and Eastern Europe. Azerbaijan
became the member of this organisation on September 25, 1992.
EBRD actively provides support to the progress of oil, transportation and banking
sectors which promotes the development of non-oil sectors in Azerbaijan. To
shape the investment environment in the country, in particular, EBRD helps small
and medium-sized enterprises, private sector. Besides, the Bank maintains its
aid for oil and natural gas sector.
Azerbaijan has also been included into EBRD’s initiative of “The countries with
initial transitional economy”. Starting from April, 2004, the purpose of this initiative
is to raise the level of the investments earmarked for 7 underdeveloped countries.

272
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

It was formed by international effort to reduce poverty in CIS countries. Within

this initiative, EBRD has focused its attention to improve business in private
sector, conduct economic reforms in this field, finance small projects, etc.
It should be noted that, the Bank’s activities in Azerbaijan are performed in this
way – 50% in energy sector, 25% in financial sector, 6% in microfinance, 3% in
non-banking organisations and 5% in cooperation sector. EBRD provides financial
and technical assistance to increase the institutional development and
competitiveness of a number of banks.By the way, the Bank gives credit lines,
syndicated and subordinated loans to existing and new partner banks in order to
improve bigger, more diversified and sustainable banks. Beyond this, EBRD
supports non-bank microfinance institutions, as well as leasing and insurance
companies. In general, over the period of EBRD’s cooperation with Azerbaijan,
1.6 billion dollars have been allotted for 110 projects, 70 of which have been
performed in financial sector. Generally, 44% of the funds on the projects carried
out by the financial assistance of EBRD has been directed to energy sector.
Until 2016, EBRD has signed different contracts with Azerbaijan related to 24
projects. Within this framework, 1500 million dollars of loan was given to
Azerbaijan which was mainly earmarked for oil sector. 200 million dollars of the
loans were spent on the progress of oil and gas sector. In 2010, EBRD planned
to give credits with the aim of improving small-scale institutions including
electric power, mining industry and non-oil sectors in regions. EBRD shows
interest for bank construction sector, as well. Due to the increase in demand for
construction materials in construction industry, it wants to help the companies
producing this kind of materials and assist them to raise their capitals. At the
same time, EBRD is interested in the development of alternative energy resources.

8.2.4. RELATIONS WITH THE JAPAN BANK FOR

INTERNATIONAL COOPERATION (JBIC)
The cooperation with JBIC seems to be concentrated mainly in energy sector.
Japan Bank for International Cooperation has been one of the most essential
financial donors in the realization of reconstruction in energy sector. Until 2010,
the Bank gave 100 million dollars of loan to construct blocks for petrochemical
industry beyond 339 million dollars allocated for another sector. The organisation
has also carried out the construction of gas pipeline for electric station in
Garadagh region (south of Baku).

273
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

8.2.5. TIES WITH THE ASIAN DEVELOPMENT BANK

The Asian Development Banks started operating in Azerbaijan in 2001, is functioning
to meet the people’s need for goods and services, build infrastructure and
workplaces for the development of private sector.
In 2004, the Asian Development Bank performed a 2.5-million-dollar aid project
for the improvement of living conditions of IDPs residing in Mingachevir. 850
000 dollars were earmarked for the project of nutirion of small children and lack
of iodine together with the Ministry of Health. The Bank has helped the State
Program on Poverty Reduction. One of the Bank’s projects is about the assistance
to the victims of floods. The opening of the Asian Development Bank’s permanent
agency is measured as an increase in its interest for Azerbaijan.
The total amount of the loans allotted by the Bank in 2001-2009 and directed to
reduce poverty, improve private sector, became 190 million dollars. Until the
beginning of 2009, the Bank allocated 20.5 million dollars of grant to the country
within the framework of 28 technical assistance projects.
Between the years of 2009-2018, the Asian Development Bank has planned to
earmark 27 credits to Azerbaijan. In 2011, the Bank provided Azerbaijan with a
loan of approximately 300 million dollars. The funds to be allocated by the Asian
Development Bank will be given as small loans.
In 2015, the Asian Development Bank earmarked 120 million dollars to Access
Bank, Finca Azerbaijan and Demirbank to develop agriculture and support
medium-sized enterprises.

8.2.6. TIES WITH THE ISLAMIC DEVELOPMENT BANK (IDB)

Futhermore, Azerbaijan is a member of the Islamic Development Bank since 1992.
In 2004, contract was signed with IDB on the allocation of a loan worth of 22
million dollars for the construction of Ujar-Yevlakh highway. With this loan, it
was intended to reconstruct the way with a length of 55 kilometers. This project
was realized in 2006.
Moreover, a memorandem was signed with IDB on the construction of Khachmaz
power production center, joining it to the power line transceiver of Yashma-
Derbent, evaluating the construction projects of Valcalachay-Takhtakorpu part of
Samur-Absheron canal. IDB will allot about 10 million dollars for the construction
of Valcalachay-Takhtakorpu part of Samur-Absheron canal which has the volume

274
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

of 42,5 million dollars. In addition, IDB will allocate 13.5 million dollars to build
Khachmaz power production center and joining it to the power line of Yashma-
Derbent.
At the end of 2004, IDB gave Azerbaijan a credit at the amount of 152 million
dollars. The allotted credits were directed to realize the projects related to energy
sector, reconstruct roads, improve water and sewage systems. Besides, IDB is
interested in the cooperation with Azerbaijan’s institutions including small and
medium-sized ones to credit export-import activities.
IDB set aside 58 million dollars of loan in 2005 in order to realize communication
and energy projects and help the development of private sector. At the same
time it is intended by the Bank to allot 1.5 million dollars of grant to improve
IDPs’ living conditions.
Azerbaijan’s being a newly independent muslim country encouraged IDB to
designate investments for the country. The primary target of the Bank is to assist
the social and economic advance of member and muslim countries, as well as
to achieve social economic progress.IDB has made different credit, grant and
technical assistances to the country in order to fund a number of economic
projects. For instance:projects such as the constructions of “Mil-Mugan collector
canal”, “Khanarkhi canal”, “Alat-Gazmammad” and the restoration of “Mingachevir
HPP”, etc. can be shown.
In 1992, IDB gave Azerbaijan a total of 1 billion 200 million dollars of debt.

8.2.7. RELATIONS WITH THE GERMAN

DEVELOPMENT BANK
German-Azerbaijan Fund (GAF) was founded by German Development Bank and
the Ministry of Finance (Azerbaijan) in 1999.This Fund is functioning to earmark
funds in order to meet credit needs of small and medium-sized enterprises.
In 2003, the banks in cooperation with GAF gave 751 loans at the amount of
5.96 million euros. At the end of 2003, a contract between the governments of
Azerbaijan and Germany was signed to increase the funds of GAF from 3.6
million to 8.7 million euros.
The budget of GAF in Azerbaijan is 3.3 million euros on 666 credits.Since the
launch of the Fund in 2001, 927 loans worts of 9 million euros have been given
to small and medium-sized enterprises. The main objective of GAF in 2004 was

275
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

to speed up regional crediting and help increase the function of the banks which
it cooperated with.
The loans of German Development Bank (KfW) allocated for financial sector is
used to support private sector and for the project of “deposits insurance fund”.
Thanks to the loan from Germany’s KfW Bank. Ganja and Shaki water supply and
sewage systems were reconstructed.

8.2.8. RELATIONS WITH THE BLACK SEA TRADE AND

DEVELOPMENT BANK (BSTDB)
Azerbaijan became a member of BSTDB in 1997. In general, the organisation is
specialized in giving financial assistance to the projects in non-oil sectors,
reconstruction and development of private enterprises. BSTDB has intended to
finance the projects related to the sectors of telecommunication, transportation,
production, agriculture.
In 2013, BSTDB allotted a total amount of 34-million-dollar loan for 4 financial
organisations.

8.3. STRUCTURE OF FOREIGN DEBT ON

RESOURCES
Japan is in the first place in terms of loans designated for global sectors like
energy, water and others. According to the structure of the total loan, the share
of Japan Bank for International Cooperation makes up 27%, the World Bank’s
share is 26%, the IMF has a share of 17%, EBRD, Turkish Eximbank and others
have a share of 5.1%, 5% and 14% respectively.

8.4. TIES WITH THE EUROPEAN UNION

By the increase in the aids of European companies to Azerbaijan, the relationship
of these countries with Azerbaijan has developed.
With the TRACECA, INOGATE projects and TACIS program, the relations between
the EU and Azerbaijan has improved.
Since 1996, the EU carries out “Food Security” program to support the state
budget. As a part of the program named “Excertional Assistance”, in 1997-98,

276
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

30 million euros were set aside for Azerbaijan. This fund was for the reconstruction
of hydroelectric power plants, canals and other infrastructures.
“Rehabilitation” program is about reconstructing the areas released form Armenian
occupation, while “Demining” program intends to clear these areas from mines.
Since 1992, the EU has provided Azerbaijan with an assistance at the amount of
400 million euros.
TRACECA project assuming great importance in the ties of Azerbaijan with the
EU will be reviewed below under the subheadings of INOGATE project and TACIS
program.

8.4.1. TRACECA
In April, 1996, the EU and Azerbaijan signed the Alliance and Cooperation
Agreement which came into force in 1999. Among the countries of the EU,
England prefers to strengthen its diplomatic ties with Azerbaijan due to the oil
companies operating in the country.
Azerbaijan is the largest country in the Caucasus in terms of the commercial
relationship the EU has. The most basic products of this relationship are oil,
natural gas and cotton. Since 1993, there has been a rise in the level of trade
between Azerbaijan and the EU.
Much work is being performed to reconstruct the Silk Road which will have a
positive effect on the economic development of the countries taking part in its
reconstruction along with its geo-political importance. The Silk Road will be a
bridge between East and West and impact the expansion of the market of
Azerbaijani goods, protection of the internal market and growth of income level.
In the reconstruction of this road, “TRACECA” project realized with the help of
the EU will play an exceptional role.
TRACECA aims to build a road with 2 movement directions that will cost less
and be completed quickly from Europe to the Black Sea and via the Caucasus to
the Central Asia. For the refunctioning of the Silk Road, the first step was taken in
1991 with TACIS program of the EU76.
The biggest communication and transportation contract of the century, which
was first dealt with in May of 1993, in Brussel with the participation of Ministers
of Economy and Transport from Azerbaijan, Armenia, Georgia, Kazakhstan,

76
http://www.traceca-org.org/tr/countries/azerbaijan/

277
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

Kyrgyzstan, Tajikistan, Turkmenistan and Uzbekistan, was signed in 1998, in

Baku.
In the conference where besides Azerbaijan, Turkey, Georgia, Uzbekistan,
Moldova, Kyrgyzstan, Ukraine, Romania and Bulgaria presidents took part, a
number of agreements were signed towards the development of international
transport in Europe-Caucasus-Asia Corridor.
With the decision of the EU in 1991, representatives of 32 countries including the
ones from Europe and Asia attended the summit supported within the framework
of Technical Aid to the Commonwealth of Independent States (TACIS).
Besides 32 countries, 150 representatives from 12 international organisation
participated in TRACECA (Transport Corridor Europe Caucasus Asia) conference
as a result of which a contract was signed to officially commence the new
transport corridor from England to Japan.
At the end of the conference, a document named “Baku Declaration” was signed
by the parties. In the document which drew attention to the essence of developing
good relations among participating countries, it was emphasized that the transport
line to be constructed among Europe-Black Sea-Caucasus-Caspian Sea-Asia
would be within the framework of the agreement made on May7, 1993, in
Brussel77. These articles were included in the document:
“All the countries taking part in the summet declare that they will comply with
all the grounds in Brussel Declaration. The European Union’s activities to
conduct TRACECA shoul be applauded. The implementation of TRACECA gives
hope to bring tranquility and stability to the region. The parties will use the
Black Sea and Caspian ports more easily with the realization of the Silk Road.
The environmental balance in the region will be controlled, the parties will
provide necessary support in cargo and passenger transportation in order not
to harm the ecological balance of the region. Hoping this program will bear
large partnerships, the development of more large-scale cooperation with the
UN and other organisations was decided. Concerned countries will perform all
legal regulations as soon as possible for the full implementation of the project.
It will be achieved to build am intergovernmental commission and a general
secretariat to carry out its activities.
The coordination will be much easier with both any EU countries and others
Within TRACECA, the construction of new highways and railways will be
accomplished”.

77
http://www.traceca-org.org/tr/countries/azerbaijan/

278
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

The phase of globalisation and development of economic relations make it a

necessity to reconsider transport sector. According to the evaluations and
estimates on the advance of the world economy, economic relations will gather
in Europe-Asia. It brings about the necessity of utter usage of the geographic
location of the Silk Road which will realize a favorable transit in this region.
The virtues of this road are international organisations’ support of TRACECA
program, the number of the countries involved in the project, rich natural
resources in the region where the transport corridor goes through, the shortest
and potentially quick features of the TRACECA road’s length between the ports of
Central Asia and the world markets compared to other roads.

8.4.2. TACIS
In the EU’s summit meeting in Rome (December,1990), TACIS technical assistance
program was decide to support post-soviet states on economic reforms. The
most significant feature of the program is that the EU became a mediator in
economic partnership with the CIS countries and took the responsibility of the
function to help ally and cooperation agreements78.
In 1992-93, the EU began to implement the TACIS program. The project
envisages the technical aid to realize legal, structural and economic reforms.
Through TACIS program, the EU encourages the establishment of free market
economy and democratic society in Azerbaijan by funding the projects that bring
new technologies from Europe to Azerbaijan. The European Commission,
Azerbaijani government and other organisations act together in order to investigate
the sectors in need of finance within TACIS program. TACIS, which plays a major
role in the reconstruction of bridges and roads, helps reconstruct the transport
and communication infrastructure. TACIS performs educational programs for the
development of small and medium-sized enterprises, as well as it helps to
identify alternative ways related to the transportation of energy resources from
the Caspian region and Central Asia to the European markets by expressing view
on the resolution of ecological pollution and general enviroenmental problems
resulting from the production in the energy field79.

78
http://www.azerweb.com/en/program.php?id=136
79
http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=URISERV%3Ar17003

279
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

8.4.3. INOGATE
Interstate Oil and Gas Transport to Europe (INOGATE) is being carried out as a
primary regional program within the framework of the technical aid intended by
the EU for the former Sovet Union. The fundamental objectives of the project are
the reconstruction and development of the systems of regional gas, oil and oil
products transportation and finding alternative ways to transport energy
resources to the European markets.
Azerbaijan, Kazakhstan and Turkmenistan’s energy resources have a pivotal role in
the project of INOGATE. In this context, both legislative and technical issues have
been helped with. In December, 1998, the meeting of the countries involved in
INOGATE program took place in Brussel where supportive decisions were made
about both Baku-Supsa and Baku-Tbilisi-Ceyhan oil pipelines80.

8.5. REGIONAL ECONOMIC RELATIONS

Azerbaijan is also a member of some regional organisations and the most
important ones are the Black Sea Economic Cooperation Organisation, the
Commonwealth of Independent States, the Organisation of Economic
Cooperation and GU(U)AM (Georgia, Ukraine, Uzbekistan, Azerbaijan, Moldova).

8.5.1. THE COMMONWEALTH OF INDEPENDENT STATES

The three Slavic countries of the Soviet Union – the Russian Federation, Belarus
and Ukrain’s leaders gathered on December 8, 1991 announcing that the USSR
officially was dissolved and replaced by a new union called “The Commonwealth
of Independent States (CIS)”. Shortly after this announcement, on December 21,
1991, the foundational declaration of the CIS which is know as “Alma-ata
Declaration” was signed in Alma-ata city of Kazakhstan. Thus, the official status
of the USSR came to an end.
The CIS was established with the agreement signed among the Russian Federation,
Belarus and Ukraine in Minsk, on December 8, 1991. According to the Protocol
adopted as an addition to the agreement on the creation of the CIS, on December
21, 1991, 8 more countries were included in the CIS: Azerbaijan, Armenia,
Kazakhstan, Kyrgyzstan, Moldova, Tajikistan, Turkmenistan and Uzbekistan. In
December, 1993, Georgia also joined the CIS and currently, 12 countries are
members of this organisation.
80
http://www.inogate.org/?lang=en

280
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

In the first phase (1992 and the beginning of 1993), “civilized divorce” of former
soviet republics was ensured, as well as some activities were done towards
creating the base of relationship among them which started to assume interstate
importance81.
Starting from 1993, the legal basis of the existing relations within the CIS began
to be established:
 On January 22, 1993 the Charter of the CIS was adopted by the Heads of
States Council of the CIS and thus, its functional and organisational bases
were defined;
 In September of 1993, atreaty on creating the Economic Union was signed
which accompanied by signing of other documents improving the treaty ( an
agreement on the establishment of free trade zone; an agreement on the
foundation and development of production, commercial, credit and finance,
insurance and mixed transnational unions; a contract about the realization of
negotiated anti-monopoly policy; a treaty on the cooperation in the field of
investment activity and so on);
 On December 1994, the Interstate Economic Committee was established to
strengthen the coordination of economic cooperation among the CIS countries;
 In October, 1994, an agreement was signed to create the Monetary Union.
The common directions of the economic policy agreed in the section of the CIS’s
Charter dedicated to the cooperation in economic, social and legal, areas are as
follows:
 the formation of a common economic space on the basis of market relations
and free movement of goods, services, capital and workforce;
 the preperation of social programs and events to reduce social tensions
stemmed from the implementation of the social policy coordination and
economic reforms;
 the advance of transportation, communication and energy systems;
 the coordination of credit and financial policy;
 assisting the development of trade and economic relations among the
member states;
 the promotion and mutual protection of investments;
 helping the standardization and certification of industrial products and goods;

81
https://tr.wikipedia.org/wiki/Ba%C4%9F%C4%B1ms%C4%B1z_Devletler_Toplulu%C4%9Fu

281
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

 the legal protection of intellectial property;

 helping the progress of a common information space;
 providing mutual assistance in implementation of joint environmental events,
elimination of the consequences of economic accidents and other emergency
situations;
 the realization of joint projects and programs in science and technology,
education, health, cultura and sports fields.
The structure of the CIS was formed in a short period of time: the Council of CIS
Heads of States, Council of CIS Heads of Governments, CIS Interparliamentary
Assembly. Since 1993, the Executive Secretariat has been functioning in Minsk
which serves as the headquarter of the CIS. A number of organisations have
been created like the Council of CIS Foreign Ministers, the Council of Defense
Ministers, as well as some sectoral ones. The Council of CIS Heads of Foreign
Economic Organisation, the Intergovernmental Council on Oil and Gas, etc. Are
schematically shown in Chart 20.1.
One of the essential moments in the development of the mutual relations among
the CIS states was an agreement on the establishment of the Economic Union
signed in 1993. With this agreement, the gradual movement of the CIS countries
towards economic integration and long-term goals were identified: the creation
of common goods, service, capital and labor markets in stages, formation of free
trade zone, customs union and later on, currency union. A collective body named
the Interstate Economic Committee was founded to carry out these tasks.
Over several years, hundreds of multilateral and bilateral agreements determining
the principles and directions of mutual cooperation of the CIS countries in
economic, social, defence and other spheres, were made and signed .
Azerbaijan was accepted to the CIS in September, 1993.
The CIS which was set up with the participation of 12 out of 15 countries of
former Soviet Union, had the aim of “development of professional unity among
independent states that are independent in many fields beyond economic areas.
All the republics will be independent on the subjects of mother tongue, national
currency, cultural values, however, they will follow the targets of this “union” on
other subjects.
During the past period, considering the relations between the CIS countries, it is
possible to make such an assessment: When the Soviet Union model collapsed
which was maintained by force in all Eurosian countries during Cold War years,

282
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

the Russian Federation focused on the development of a new model to control

these countries under the CIS, but failed to accomplich this goal. Because, a
number of factors such as democratic revolutions in Ukraine, Georgia and
Kyrgyzystan, Azerbaijan-Armenia conflict were undermining the strength of this
community.
Georgia left the CIS, after the Russian Army entered the country in 2008. Ukraine
left the CIS for the same reason in 2014.
The CIS has more advantageous conditions to move fast in “the way of
integration” compared to other economic groups. It stems from the comprehensive
relations of national economy complexes arisen in the period of interbranch and
domestic division of labor. Since, in 1989 10 out of 15 republics of the USSR
met from 19.8% to 24.4% of their domestic needs thanks to the goods coming
from other republics. The goods and services coming from outside the USSR
made up 3-6% of common need. 9 republics were exporting 19.7-25.4% of the
produced commodities and services to other republics, while they exported only
2-3% of the products and services abroad.
Despite such advantages, processes completely against the integration are being
observed in the economic space of the CIS: quantitative restrictions are applied
in mutual trade, additional customs and border posts are identified, etc.
It should be noted that about 1500 contracts and agreements, which can give
impetus to the economic integration, have been signed in the CIS. However, up
to 300 of these documents are being implemented.
Even though a concept on economic integration has been made in order to
coordinate the forms and methods of integration, this document has not provided
the common position in the countries integration.
The integration process in CIS is obstracted by unequal economic development
of member countries. Such an inequality can be explained by following reasons:
- the negative impact of former soviet economic space on the national
economies of the independent countries has not been the same;
- the inequality in the adaptation of participating countries’ national economies
to the world market has been observed;
- economic reforms have not been implemented at the same speed by the
member states;
- initially, turning economy to an uncontrollable course, lack of efficient
regulation mechanisms for foreign relations, socio-economic instability have
created an uneven start condition for the integration with new basis;

283
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

- the economic potential of the participating countries sharply differ from each
other.
Along with trade and customs barriers, the differentiation of economic legislation
in the CIS countries has an effect on the economic integration. In many cases,
the harmonization of the legislation in the fields of trade, taxation, and customs is
not carried out.
The existence of such conflicts resulted in the establishment of sub-regional
integration within the CIS. Although the CIS itself is a regional community, there
are different associations in its composition, too. They are the following:
The Customs Union: Belarus, Kazakhstan, Kyrgyzstan, Russia, Tajikistan;
The Economic Community of Central Asia: Kazakhstan, Kyrgyzstan, Tajikistan,
Uzbekistan
UGUAM: Uzbekistan, Georgia, Ukraine, Azerbaijan, Moldova;
The Union State: Belarus and Russia;
The single economic space: Russia, Kazakhstan, Ukraine, Belarus.
The first real stage in the direction of forming a single economic space has been
the agreement on the creation of the Customs Union. It was signed among Belarus,
Kazakhstan and Russia in January, 1995 and it envisages the establishment of a
single customs territory. Kyrgyzstan and Tajikistan joined this agreement in March,
1996 and February, 1999, respectively.
Numerous documents were adopted during the existence of the Customs Union
including the agreement on deepening the integration in economic and
humanitarian spheres signed on March 29, 1996 and its logical development the
agreement on the Customs Union and Common Economic Space signed on
February 26, 1999. The main directions of the cooperation (the formation of free
trade zone, mutual relations of the Customs Union with third countries, forming
a single customs territory, common service and labor market, a common
agricultural market, a single scientific-technical and information space) were
determined with these documents.
During the formation of the Customs Union, although certain success was
achieved, a number of serious problems and difficulties which questioned the
realization of the goals set, appeared.
The real results have not been attained in economic activity without solving the
major principal issues of the formation of Customs Union. The slow process of
the integration among the participants of the Customs Union is explained by

284
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

several important factors (differences in the level of social-economic development,

differing sectoral structure of economy, features of the countries geographical
location, slow advance of infrastructure, significant differences in national
transport tariffs).
The formation of a common customs tariff is still carried out on a tripartite basis
(Russia, Belarus Kazakhstan).
In 2000, the Eurasian Economic Committee was founded on the basis of the
Customs Union which includes Russia, Belarus, Kazakhstan, Kyrgyzstan and
Tajikistan. The relevant agreement on this was signed in Astana on October 10,
2000. The objective of the new organization is to shape a single economic space
in the territories of the 5 countries. The primary duties in near future are identified
as follows: agreeing on structural reforms to be conducted in the economies of
the member countries, the creation of a single transport structure and market,
applying a single custums tariff, the harmonization of national legislations, the
use of common rate in relations with international organisations.
On April 30, 1994, an agreement on the establishment of a single economic
space was signed among Kazakhstan, Kyrgyzstan and Uzbekistan. On March 30,
1998, Tajikistan joined this agreement. Since July of 1998, this regional union is
called the Economic Community of Central Asia.
According to Article 3 and 4 of the agreement, the major goals in the formation
of a single economic space consists of the below-mentioned factors:
- creating necessary legal, economic and organizational conditions for the free
movement of capital and labor force;
- performing the agreed policy in the field of transport and communication
development which will provide an efficient transportation of goods and
passengers;
- forming an appropriate condition for fair competition including the mechanism
of anti-monopoly regulation;
- avoiding unilateral actions related to the limitation of applying free (agreed)
prices in mutual trade and access of goods (services) to local markets by
taking the integration of domestic markets into account;
- establishing favorable condition to provide the development of direct economic
ties among the subjects having economic relations and strengthen industrial
cooperation;
- introducing the network of joint ventures, production units, commercial and
financial-credit institutions and organisations;

285
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

- ensuring equal economic circumstances for mutual investments and

coordinating the investment policy, attracting foreign investments and credits
to the areas of mutual interest, creating a real mechanism for the protection of
investors’ rights and interests;
- eliminating customs duties and removing taxes, fees, other restrictions
consecutively;
- simplifying customs procedures;
- harmonizing customs legislation;
- gradually bringing closer the tariffs applied in the transportation of cargo and
passengers to one another by keeping the principle of transit freedom and so
on.
On October 10, 1997, during the meeting of Georgia, Ukraine, Azerbaijan and
Moldova presidents in Strasbourg, the idea of founding an intergovernmental
organization was approved and the relevant agreement was signed. On April 24,
1999 Uzbekistan officially declared to join this organization. Currently, it is called
UGUAM (Uzbekistan, Georgia, Ukraine, Azerbaijan, Moldova) based on the initials
of its member countries.
The fundamental objective of establishing this organization is reflected in both
political and economic aspects of the member countries’ cooperation; political
issues, fight against intolerance, separatism, religios extremism and terrorism,
peacekeeping activities, the Europe-Caucasus-Asia transport corridor development,
integration into European structures and cooperation with NATO within the
program of “Partnership for Peace”.
On April 2, 1996, as the treaty signed between Russia and Belarus on establishing
the Union between these 2 countries targeted a higher level of integration, right
after a year, an agreement on Russia and Belarus Union was signed. This Union
has a special place in the integration process taking place in the CIS. During the
formation of Russia and Belarus Union as a big regional unity, from the very
beginning the intention of developing a comprehensive integration and eventually,
the target of joining the 2 countries in one Union state were declared.
On January 26, 2000 “The treaty on the establishment of the Russian Federation
and Belarus Republic union state” came into force. According to Article 2 of the
agreement, the objectives of the Union state are as follows:
- providing peace and democratic progress of the participating states, fraternal
peoples, reinforcing the friendship, improving the level of welfare and the
quality of life;

286
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

- building a single economic space by combining financial and intellectual

potentials and utilizing market mechanisms of economy for providing socio-
economic progress;
- observing fundamental rights and freedoms of people and citizens all the time
in accordance with universally accepted principles and norms of international
law;
- carring out the coordinated foreign and defence policies;
- shaping a unified legal system of a democratic state;
- conducting the agreed social policy focusing on creating the conditions that
provide a decent life and development of a human;
- ensuring security and mutually beneficial cooperation in Europe and the world
and the development of the CIS.
With the aim of establishing a common economic space, the participating states
have identified the fundamental principles that will be taken as a basis during the
formation of the Union state:
- functioning of a unified and later on a single legislation in the field of economic
activity, including the regulation of civil and tax relations (Article 20);
- bringing the main social and macroeconomic indicators closer stage by stage
and adopting agreed measures for realizing a unified structure policy (Article
21);
- gradual application of a single currency with the creation of a single emission
center (Article 22);
- performing common principles in taxation (Article 27);
- conducting a single policy in pricing sphere including the regulation of prices
and tariffs (Article 23);
- forming a single securities market (Article 24);
- introducing a unified refinancing rates and mandatory reserve norms (Article
25);
- establishing the rules of conducting a single legal framework,foreign debt and
investments in the spehere of external and domestic debt service and payment
(Article 26);
- carrying out a common trade policy in relation with third countries, international
economic organiations and economic association, implementing a unified
customs duties, customs regimes, customs clearance and control, unifying
the legislation on the protection of economic interests of participating countries

287
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

during the state regulation of foreign trade activity and implementation of

foreign trade (Article 28);
- functioning of common customs area in union states: non-tariff regulation
measures considering the application of quantative restrictions; common
rules for the mutual recognition of licenses, certificates, permits (Article 29);
- functioning of combined energy, transport, telecommunication and communi-
cation systems within the borders of the Union state (Article 30);
- performing a unified labor law and legislation in the field of people’s social
protection and pension provision (Article 31).
The Union of Russia and Belarus addresses the interests of these 2 states.In this
case, production and economic relations will be restored and a single economic
space will be created. Both Russia and Belarus understand that, bringing
macroeconomic and social indicators closer, implementing a common structural
policy, transition to a single currency and solution of numerous other issues are
complicated and labor-intensive.
The last regional union was qualified to perform by signing “the contract on the
creation of the Single Economic Space” in Yalta summit of Russia, Kazakhstan
and Belarus presidents on September 18, 2002.
If an efficient economic integration was ensured in the CIS, the initiatives would
not be taken to establish a common economic space or other regional
organizations. Within the CIS, the alternative integration form is preferred by the
countries whose political, economic and strategical interests overlap.
The existence of this integration form is not a coincidence. The inefficiency of
the integration within the CIS has given an impetus to this.
Giving priority to the subregional cooperation doesn’s characterize its superiority
or efficiency compared to the integration in the CIS. Experience shows that, a
subregional integration precess built in a new level has its own inefficiency and
declarative nature.
Deepening the integration process within the CIS can be implemented in various
organisational and legal forms. This integration can be based on multilateral and
bilateral agreements. For example, the agreement on the establishment of the
Economic Union involves the principle of multilateralism. In fact, such an
integration form is based on the EU model.
Although the agreement on the Economic Union is based on the principle of
multilateralism, many of the CIS members prefer bilateral treaties. Experience

288
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

shows that, bilateral cooperation agreements are more effective and their
implementations doesn’t cause a problem. Such a cooperation form shouldn’t be
regarded as a negative case that brings about disintegration. The main issues is
deepening the integration in various forms. The economic integration in the CIS
should take the demands of the new era into consideration
In general, th economic integration in the CIS can succeed by considering the
sovereignty of the independent states which means each participating country
respect political independence and sovereignty of each other. The priority for
each of the CIS members in building and regulating economic relations is
national and state interests. Putting these interests in shade can not allow to
deepen the economic integration. In this regard, the expansion of the integration
framework can be conducted on the basis of mutual agreement and compromise
stage by stage. In addition, it is absurd to talk about economic cooperation and
large-scale integrtion perspectives in a union where separatist tendencies are
observed and inviolability of territories is violated.
On the other hand, integration should be on a voluntary basis and an objective
condition should form for that. Another condition is about taking existing realities
of market economy into consideration. It shouldn’t be forgotten that economic
integration is only based on economic interests.
Economic integration also demands macro-economic indicators to be close to
each other.However observations indicate that the macro-economic indicators of
the CIS members including budget deficit, inflation, investment, economic
growth rate and regulation mechanisms differ from one another. Under such
conditions, identifying a single set of rules in economic field for the member
countries is impossible.
The efficient results of the economic integration will depend on market subjects
rather than that of the CIS. Because market subjects, namely entrepreneurs,
companies will build horizontal relationship with each other which will lead to
deepening integration. In this regard, not only macro, but also micro-level
condition should be generated. As there is no political framework for a specific
company and entrepreneur, they build their mutual relations with the partners
based on the principle of purpose and mutual benefit. We think that the CIS
countries can contribute to the horizontal development of the economic
integration by stimulating the establishment of transnational companies and
supporting their activities.
Sometimes the integration process in the CIS is regarded as the restoration of
former economic ties which is not a trues approach to this issue. Actually, the

289
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

integration process within the CIS should ensure the rationalization of economic
relations and pave the way for new contacts to create a condition for scientific-
technological, institutional and social progress. Such a system of economic ties
should result in the increased investment activity, improvement of inductrial
structure and quality of manufactured product and provision of its competitiveness.
Otherwise, it will not be possible to turn the CIS into a regional cooperation built
on a solid foundation.
Among the duties to ensure the joining of the CIS as an interrated group and its
long-term functioning, the following can also be shown:
- determining the place of the CIS Economic Union in world economic relations,
as well as in mutual relations with other integrated groups, collectively
eliminating discrimination, unfair competition, legal & economic restrictions
and other threats against it by third countries and other interstate unions;
- realizing a coordinated restruction of production structure that will enable to
minimize the loss during implementing production and extending economic
potential of member countries as a whole or separately;
- providing the progress of technical and technological basis in goods and
services’ production, increasing collective scientific-technical and educational
potential, conducting complex scientific-technical projects;
- developing and implementing large-scale ecological programs.
Summarizing the above mentioned statements, we can note that, a new integration
should not be build on ideological and political dogmas, but rather it should be
based on the principles of market economy and mutual benefit. Moreover, there
must be a balance between the interests of small and large states. The integration
within the CIS can be based neither on the experience during the USSR nor the
mechanical application of international & regional communities’ experience.
There should be a completely different mechanism for the economic integration
of the CIS countries.
Currently, the economic integration in the CIS is based more on bilateral relations
and regulation of economy is exposed to restriction by various types of market
mechanisms, different currency-finance, price, tax legislation and so on. The CIS
countries need a real integration mechanism enabling to turn statement
documents into real achievements.

290
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

8.5.2. ORGANIZATION OF THE BLACK SEA ECONOMIC

COOPERATION
Organization of the Black Sea Economic Cooperation (BSEC) was established as
a result of political and economic restructuring period encircled political and
economic field within the course of worldwide globalization and international
integration on the regional level. BSEC is the outcome of the process of the
transition to democracy in the political terms and changeover to a free-market
economics in Eastern Europe that took place in the late 1980s. It represents
regional economic cooperation initiative82.
Organization of the Black Sea Economic Cooperation (BSEC) was founded in the
summit with the participation of heads of 11 states and governments on 25th of
June 1992, in Istanbul under the leadership of Turkey. Along with Azerbaijan
these countries are the members of the organization: Albania Bulgaria, Armenia,
Georgia, Moldova, Romania, Russian Federation, Turkey, Ukraine and Greece.
These countries are different one from another but theirs aim is to make world
economy stronger by determining prosperity, peace and stability in the region.
Theoretically and basically BSEC interconnects three sub-political geography
(Caucasus, the Middle East, the Balkans) and three seas (Black Sea, Aegean Sea
and Caspian Sea). In the current situation, when there is no any free trade area,
neither customs union, BSEC region is in the spotlight when it comes to future of
building of global economy.
Azerbaijan attaches great importance to expansion of relations with Organization
of the Black Sea Economic Cooperation. Also, Azerbaijan plays active role in the
implementation of economic projects within the organization. To improve the
efficiency of the organization new financial Mechanisms should be established.
The member countries of Black Sea Economic Cooperation Organization are
spread through the wide geography and they have great economic potential83.
In order to make BSEC one of the major regional initiative in the international
platform, it needs settlement of the regulations that will ensure a transition to a
further levels of globalization within the goals of the future perspectives. It all can
be achieved by overpassing of the member countries to a free-market economics
in short terms, resolving fundamental issues among the member countries and
accession of the countries to other attempts to economic unions or overcoming
the obstacles to implementation of commitments coming out from such unions.

82
http://www.bsec-organization.org/Pages/homepage.aspx
83
http://www.bsec-organization.org/Pages/homepage.aspx

291
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

8.5.3. ECONOMIC COOPERATION ORGANIZATION

Regional Cooperation for Development, established in 1964 for strengthening
and improve economic cooperation among Turkey Iran and Pakistan, after
alterations in structure and essence in 1985 became to Economic Cooperation
Organization (ECO). Economic Cooperation Organization used the radical historical
changes in Eurasia took place in the beginning of 1990s: for enlargement. In
1992 Afghanistan, Azerbaijan, Kazakhstan, Kyrgyzstan, Uzbekistan, Tajikistan and
Turkmenistan joined the Economic Cooperation Organization. As a result of this
ECO became to a ten-member organization with abundant natural resources and
300 million populations, spread over the area 7 million km84.
Due to the cooperation among member countries ECO adopted strategy that
gives priority to trade, transportation, communication and energy sectors. In the
frames of importance given to transportation and communication fields, Economic
Cooperation Organization implies to improve infrastructure in the region,
especially by providing the opportunity to those member countries that have not
got access to international ports and markets, and therefore meeting theirs needs,
also close the gaps, expand and develop communication networks, so they will
meet the modern standards. On the other hand, the correct exploitation of rich
energy resources and delivery of them to international markets has particular
importance. We can see that the Organization took some steps in the direction of
the chosen objectives.
We can say that, nowadays when influence of globalization can be easily felt
among developing countries, Economic Cooperation Organization can help to
reduce the negative impacts of globalization.

8.5.4. GU(U)AM
Azerbaijan was against to the strengthening predominant course of Russia on
the member countries of Commonwealth of Independent States and therefore
Azerbaijan attempted an initiative of establishing an alternative regional institute
known as GU(U)AM (Georgia - Ukraine - Uzbekistan - Azerbaijan - Moldova). The
Organization, aimed to establish political, economic and strategic cooperation
among the member-countries and to exacerbate principles of independence and
territorial integrity within the frames of collaboration was founded in 1997. P
These are the objectives of the organization of GU(U)AM:

84
http://www.ecosecretariat.org/

292
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

1. After the collapse of Soviet Union socialist bloc states faced different
uncertainties. Due to the political gap the region began to attract the attention
of other powerful countries. Soon the post-Soviet space, especially in the
case of the Black Sea and Caspian Sea countries became to the point of
intersection of interests of those countries who were professing to be centres
of world power. This situation instigated countries to come together in order
to protect their independence.
2. The other issue that brought the Region to the agenda was the "Contract of
the Century" – the project on the production of energy resources in the Region
and also debates and concerns about the way of exportation of those
resources. The fact that pipelines were under the control of Russia was a
source of suspicion. In this case, the organization of regional union was
necessary for the establishment of economic and political relations between
countries in the region and therefore, the selection of reliable exportation
route.
In 1999 Uzbekistan also joined this new organization build to develop economic
cooperation capability among Azerbaijan, Georgia, Ukraine and Moldova. However,
in 2002 Uzbekistan declared about freezing it’s membership of GU(U)AM and
substantiated it with non-comprehensive functioning of the organization. Turkey
and Latvia are observer states.
Delivery of Azerbaijan oil by pipelines across Georgia and shipping of it by tankers
from to Black Sea port to Ukraine and Moldova is an important factor for this
alliance.
In course of time member states held discussions regarding structural changes
in GUAM. Such countries like Turkey, Bulgaria and Romania were candidates for
membership of organization. Unfortunately these processes were driven out
especially after political development and changes in Georgia and Ukraine. US
support, bodes a bright future of this organization.

8.6. NEW GOALS OF INTEGRATION

Following, we will touch on the topic new target of Azerbaijan’s relations with
international organizations within the frames of international economic integration
of Azerbaijan, in other words, in joining to World Trade Organization, and from
regional economic relations’ perspective, and subheadings «Turkish Economic
Union " or "Eurasian Economic Union".

293
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

8.6.1. MEMBERSHIP IN WORLD TRADE ORGANIZATION

One of the main targets of Azerbaijan in point of international economic integration
is become a member of World Trade Organization.
Since the 1947 decisions adopted by GATT in assemblies was directed to the
elimination of impediments that restrict the freedom of the global trade. During
the 8th assembly, held in Uruguay in 1986, it was decided to create World Trade
Organization the main objective of which was to regulate international trade
relations. The WTO officially commenced on 1 January 1995. More than 145
countries are the members of this organization. Nowadays WTO regulates 95%
of global trade.
The World Trade Organization along with, the International Monetary Fund (IMF)
and the World Bank for the foreseeable future will be one of the most important
organizations for the development of international economic relations.
WTO membership has great importance for developing countries, even since the
very beginning of organization’s history: thus, Venezuela and Brasilia complaints
against USA, regarding violation of rules of trade in petroleum products. On 29th
of January 1996 WTO made decision justifying the complaint.
On July 19th 1996 US announced that they will obey this decision. On 14th of
March 1996, India claimed that preservation measures took by the USA
regarding the knitwear goods contradicts knitwear products and knitwear
clothing trade rules and requested WTO to open a discussion. The complaint
was adopted on April 17th 1996 and on 24th of April India took it back, after US
cancelled controversial measures.
Considering both situations it can be concluded that, membership in WTO is not
salvation for developing countries, yet it’s not lethal too.
Approximately 90% of Azerbaijan’s export consists of oil and oil products. WTO
doesn’t regulate market and prices for such products. Therefore, membership in
this organization doesn’t affect the increase in the volume and variety of exports.
However, in accordance with WTO rules opening up a wide range of domestic
market for foreign products might lead to a drop in the situation even worse for
Azerbaijan’s hardly existing industry and agriculture and livestock sectors which
are still not able to compete foreign manufacturers. In this point of view, the
period and terms of membership in WTO should be determined accurately in
order to get maximum of advantage for country’s economy253.

294
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

The first phase of industrialization based on import substitution results in the

development of the consumer goods industry.
Now after there are two models for states to improve their industrialization
policy. First, open to external market. The countries with small domestic market
such as South Korea, Tavian and East Asia countries could develop after they
chose this policy, because it’s impossible for those states to reach a high level
of development by fulfilling domestic market’s needs only. The other model is
targeting increase the production of raw materials and capital goods industriali-
zation policy. Turkey and the other countries with large market developed by this
way. Russia the owner of quite large domestic market is also trying second way
of industrialization policy in order to save its market.
What about Azerbaijan, likewise lots of other Eastern Asia countries with small
domestic market, it should run industrialization policy through first model, in
other words, giving superiority to export. Therefore, adopting in time to a new
world trade system, organized by WTO and use the advantages, presented by
this system, can play significant role for economic development of Azerbaijan85.
An adequate building of relationship with an international organization is one of
the basic conditions of integration. As it was expressed above, Azerbaijan entered
IMF and IBRD in 1992 and holds observer status in GATT since 1993 and now
Azerbaijan is planning to become member of World Trade Organization.
At the same time, membership in WTO creates more serious discussion in
comparison with membership in IMF and IBRD as membership in WTO is
considering as voluntarily limiting the economic independence.
Azerbaijan started its relations with WTO in 1993 as a observer. In 1997
Azerbaijan commenced discussions and in 2002 launched first committee
assembly on membership in WTO.
In accordance with decision, made in Geneva in December 2002 and after the
lengthy negotiations made in 2003 Armenia was admitted as a full member of
WTO. Before Armenia, Georgia and Moldova also accepted as a member of this
organization.
Along with Azerbaijan the other members of CIS as Russia, Ukraine, Belarus,
Kazakhstan, Kirgizstan and Uzbekistan also have applied to become a member of
WTO.

85
https://www.wto.org/english/thewto_e/acc_e/a1_azerbaidjan_e.htm

295
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

Among the reasons that delays Azerbaijan's membership in WTO, we can

especially highlight problems that arise in relation to customs duties. WTO
requires the removal or reduction of the applicable taxes. The other condition set
forth for WTO membership is the suspension of aid for agricultural sector.
It is essential for Azerbaijan to focus on three main global organizations IMF,
IDRD and WTO. Azerbaijan will have to build its international economic relations
within the frames of rules, regulated by these organizations.
The instructing position that international organizations adhere in global integration
process can damage country's national interests. The decision should be made
after comparing profits and loss of country that were generated from membership
in different international organizations and according to national interests.
One of conditions, accelerating integration of Azerbaijan to the world is its
membership in significant international organizations. In this perspective, we can
evaluate admission of Azerbaijan to World Trade Organization as its economic
integration to the world. As it was mentioned above, despite Azerbaijan
Government applied for membership in this organization earlier, it still haven’t
been accepted to WTO.
Membership in WTO means production diversity in domestic market, attraction
of developed technologies to country in one hand and importance of reduction in
customs duties, refusal of state aid in other. In this term, Azerbaijan should
accurately discuss its benefits and loss in this situation. At the same time,
Azerbaijan should make decisions that consider its profit on different types of
products86.
Membership in WTO doesn’t guarantee a great speed of economic development
of country. Because country industry doesn’t have enough power to produce a
product able to compete with agriculture. In this regard, the fact that country has
a product that may be brought to world market might not be enough encouraging
for exporters. In addition, membership in the WTO will be an important step for
the future economic development of the country. Being a member of WTO
enables domestic manufacturers to get access to the big platform of information.
They will receive guaranteed access to international markets and secured terms
and conditions of carriage of transit cargo. Membership in this organization can
also bring some problems to local manufacturers. Along with the issue of mixed
domestic producers, the membership in WTO will made country to open liberal

86
https://www.wto.org/english/thewto_e/acc_e/a1_azerbaidjan_e.htm

296
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

limits wider. It means reduction of customs duties, dispense of allowance in

customs points, which will led to increase the flow of qualitative world products
into domestic market. Respectively, it can cause to collapse of domestic market,
which is unable to compete with foreign products. Delay of measures, required
for industrial improvement will cause to lots of problems after acceptance to a
membership in WTO. For this reason, there is a need for a certain time.

8.6.2. “TURKISH ECONOMIC UNION” OR IDEA OF

“EURASIAN ECONOMIC UNION”
After the collapse of the USSR Turkish republics started to use their energy
export potential, thus was a great chance for Turkey, which was heavily depended
on foreign countries, to release from energy reserves dependence. With the
influence of development of relations in economic, political and cultural spheres
among Turkish republics, by the convey of oil and natural gas through Turkey to
western markets Turkish republics would enforce their economic independence
and improvement and respectively it will help to develop their political
independence and also to earn crucial energy resources. The transportation of
energy resources through Turkey, undoubtedly will increase the importance of
Turkey's geo-political futures.
But denomination of economic relations between Turkey and new Turkish
republics “Turkish Economic Union”, “Common Turkish Market” or emotionally
“Turkish Union” will be incorrect. These kind of targets are assuming as main
reason for different obstructions in process of development of economic relations
between Turkey and new Turkish republics and identification of routes for
transportation of energy resources to western markets and etc.
Turkey can evaluate opportunities and become a transit country for export lines
for energy resources and thereby achieve the economic improvement and also
develop relations with new Turkish republics only if this process will coincide
with understanding profit which western countries rely on, as well as won’t
reveal the intentions to find alternatives to the West. Especially to eliminate the
obstacles for the faster development of economic relations with new Turkish
republics and suspicions regarding realization of energy resources transit lines
project exactly across its are Turkey should firstly estimate the chance to be
country of common culture and take more active role in cultural dialog initiatives
started by volunteer organizations and assimilated by official organizations.

297
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

In addition to this, they should pay attention to “partnerships” that will be able to
achieve improvement of economic relations by avoiding such expressions as
“Union” and “Common market” among Turkey and new Turkish republics. It also
requires attention to ensure that this relations will also cover other countries in
the region. In this point of view creation of organization with a large probability of
participants as “Eurasian Economic Union” makes sense in future perspectives.

298
 CHAPTER NINE
FOREIGN INVESTMENTS IN
AZERBAIJAN AND INVESTMENT
POTENTIAL
In this chapter we will review in Azerbaijan, the investment environment, formed
in as a result of external investment processes implemented in Azerbaijan and
changes made in the country for attraction of those, also fields that may be
profitable for foreign proprietaries in perspectives of investment potential.

9.1. FOREIGN INVESTMENTS

After the restoration of independence Azerbaijan acquire a chance open not only
oil, but also non-oil sectors for western investments. For this occasion, it was
decided to firstly establish legal base of transition to free market economy. First
important step after the adoption of Constitutional Article on State Independence
of the Republic of Azerbaijan on October 18, 1991 was made in 1992. In 1992
some measures were taken for preservation of foreign investments. Likewise, on
15th of January 1992 government of Azerbaijan adopted a bill on "Foreign
investment protection", which identified legal and economic basis of foreign
investments and this was guaranteed by state. By the time some changes was
made in this law and Azerbaijan state vouched for nationalization, inventory,
compensation, payment of damages, a state security issues such as the transfer
of profit87.
Azerbaijan who decided to transmit its economy to free market system and
opened itself to foreign investments after the restoration of independence in short
period of time started to attract external capital. However, it can be seen that in
general, in 1991-1993 the country couldn’t execute the flow of foreign investments.
The bill on "Investment Activities" was adopted and implemented in 1995 and in

87
http://www.worldbank.org/en/country/azerbaijan/overview

299
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

2005 Azerbaijan Parliament approved this bill again after some modifications.
This bill encompassed attraction of external capital to the country, development
international economic relations and independence and guarantee for all foreign
investments.
Since 1994 the flow of external capital into the country started to grow. As a
result of administrative and legislative changes, made in 1994-97 to ensure the
flow of foreign capital into the country Azerbaijan could extend the amount of
foreign investments. At first they were companies with externa capital and mainly
interested in exploitation of rich oil and natural gas resources. Soon country
could attract companies specialized in other sectors.
State policy realized in Azerbaijan in 1996-997 and aimed to encourage real
economy could achieve economic stability but due to lack of governmental
support and rejection of the cancellation of taxes implemented for attraction of
external capital and lack of sensitivity by state authorities in 1997 country didn’t
receive any investments.
In 1998 flow of the foreign investments reached its maximum level and amounted
to 1472 US dollars. However, in a result of Tight Monetary Policy, applied by
government, the economic recession, delay in privatization and the expected
implementation of economic reforms country economy the pressure of deflation
besides, there has been a decline in the economy of Azerbaijan since 1998,
especially in sphere of foreign investment. This situation was also incited by
crisis with Russia in 1998 and bureaucracy, corruption and illegal monopolies in
certain spheres. It all led to significant reduction in the number of foreign firms
and descending of general amount of foreign investments. The abolition of tax
privileges to foreign capital impressed the negative trend in non-oil sectors even
more.In 1994-2016 approximately 180 billion US dollars were invested in
Azerbaijan. 77.2% of them were sourced directly, other 22.8% by credits. 73% of
direct capital was invested in oil industry. Azerbaijan holds leading position
among CIS for the volume of direct foreign investment per person. Big part of
GDP in Azerbaijan economy consists of foreign investments. In 1996-2000 the
ratio of volume of the external capital to GDP rose from 30% to 35-40%. In 1999
and 2000 flow of investments declined in comparison with 1998, but in the end
of 2000 this indicator stared to rise again. Some amendments in legislation,
partial reduction of customs and tax rates, and protection of foreign investment
and the steps taken by the government in this way contributed to an increase in
foreign investment. Attain stability in macroeconomic structure, changes made
to strengthening the private sector and further development of oil sector creates
new opportunities for the realization of the flow of large amounts of capital from

300
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

the world's financial centers to Azerbaijan. In 2001, 70% of investments in

Azerbaijan's economy was external capital and 30% the domestic capital. In
2002, 80.9% of the foreign investment sourced from external and 19.1% were
carried out by local entrepreneurs. The distribution of capital investments per
sector were as follows: 77% for the industry, in this context, 68.5% of the oil and
natural gas, 11.3% in construction, 9.4% in building construction, 38% in
transport, 2.4% of the telecommunication, trade and services accounted for
1.8%, 0.8% in agriculture, 2.9% were in other areas88.

Table 25. Amount of investments to Azerbaijan (Billion $)

2000 2003 2004 2005 2006 2007 2008
All sources of investments (taking into account external capitals):
Million manat 1289.8 4249.2 5820.4 6733.4 7415.6 10353.9 12481.8
Million US dollar 1441.4 4326.4 5922.7 7118.5 8300.4 12066.1 15192.1
Foreign investments:
Million manat 829.5 3310.9 4496.4 4628.5 4514.2 5727.2 5625.8
Million US dollar 927 3371 4575.5 4893.2 5052.8 6674.3 6847.4
Local investments:
Million manat 460.3 938.3 1324 2104.9 2901.4 4626.7 6856
Million US dollar 514.4 955.4 1347.2 2225.3 3247.6 5391.8 8344.7
*
initial data
2009 2010 2011 2012 2013 2014
All sources of investments (taking into account external capitals):
Million manat 10475.0 14118.9 17048.8 20251.1 21448.2 21890.6
Million US dollar 13033.5 17591.4 21558.9 25777.8 27340.0 27907.5
Foreign investments
Million manat 4395.1 6619.7 6849.8 8102.7 8269.3 9175.7
Million US dollar 5468.6 8247.8 8673.9 10314.0 10540.9 11697.7
Local investments
Million manat 6079.9 7499.2 10199.0 12148.4 13178.9 12715.0
Million US dollar 7564.9 9343.6 12915.0 15463.8 16799.1 16209.8

In 2003, 80.5% of investments made in Azerbaijan's economy, were carried out

by foreign investors and 19.5% by the domestic investors. The share of
investment industrial sector reached 79.7%. 76.2% of investments were made to
the oil and gas production, 1.6% of the electricity and water consumption, while

88
http://www.worldbank.org/en/country/azerbaijan/overview

301
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

to the manufacturing sector there were dropped only 1.9%. Also, allocation of
investments to other areas was as following: 1% share of the agricultural sector,
0.2% - the construction sector, 0.8% share of trade and services, 8.7% to
transport, share, 1.4% share of the telecommunications, house building - 5.5%,
and other areas of interest shared only 2.7%.
In 2004, in total 24.2 billion pounds (4.9 billion US dollars) has been invested in
Azerbaijan.This ratio is 36.1% more in comparison with 2003. The 73.7% of the
investment, in other words, 17.8 trillion manat (3.6 billion US dollars) accounted
from foreign investment, the 26.3% of investment which are 6.4 trillion manat
(1.3 miles-yard US dollars) sourced from local capital. The 86.4% of total
investments which consists of foreign and local firms and businesses-relevant
investments ascended to 28.4%, while investments in the state budget increased
by 10.5% over the previous year and reached 537 billion manat.
Table 26. Foreign investments (million USD)
Total foreign investments 2000 2003 2004 2005 2006 2007 2008
including: 927 3371 4575.5 4893.2 5052.8 6674.3 6847.4
Financial credits
Oil industry 262.9 238.3 293 698.4 983.5 1576.6 2357.9
Oil bonus 546.1 2972.4 4088.1 3799.9 3422.3 4003.3 3350.7
Joint ventures and foreign-
- 58.6 21.6 1 17 68.2 3.5
invested enterprises
from: 118 45.4 104.2 230.5 368.4 439.1 494.1
Turkey
US 31.6 17.1 80.1 96.2 136.6 109.2 145.2
Iran 11.2 4.9 8.4 24.8 70 78 87.9
Germany 2.9 - - 1.2 17.5 4.6 -
Russia 1.7 - 2.1 21.5 17.4 22.9 48.2
Great Britain - 1.2 1.8 5.1 4.6 10.7 5.8
United Arab Emirates 6.8 9 4.2 39.5 39.1 80 89.9
Switzerland 2.8 4.4 4.4 5.7 18.3 12.3 38.5
France - - - 0.5 2.7 3.5 3.7
Cyprus 39.3 2.2 2.2 2.6 11.1 4.4 -
Chinese - - - 0.2 5.4 13.2 2.2
Italia - - - 0.2 1.3 1.2 8.1
Pakistan - - - 4.6 2.8 14 2
Japan - - - - 3.1 - -
Other countries 16.4 - - - - - 0.4
Other investments 5.3 6.6 1 28.4 38.5 85.1 62.2
Total foreign investments 56.3 68.6 163.4 261.6 587.1 641.2

302
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

Total foreign investments 2009 2010 2011 2012 2013 2014

including: 5468.6 8247.8 8673.9 10314.0 10540.9 11697.7
Financial credits
Oil industry 1 438.3 3 405.9 3,692.5 3,135.5 2,655.8 1,880.6
Oil bonus 2 412.7 2 955.3 3,407.8 4,287.8 4,935.2 6,730.7
Joint ventures and foreign-
1 2 19.9 2 2.4 17.0
invested enterprises
from: 624.4 659.6 886.0 1094.5 1041.0 1318.5
Turkey
US 76.8 147.5 89.1 185.9 401.3 481.4
Iran 117.6 40.0 73.8 92.5 24.4 89.3
Germany 6.8 3.2 11.2 - - 40.5
Russia 38.8 17.0 32.5 45.6 15.1 51.0
Great Britain 50.3 11.7 35.0 21.8 36.1 13.6
United Arab Emirates 160 144 148.8 149.3 136.0 153.5
Switzerland 43.2 30.3 75.3 92.4 109.3 90.2
France 16 11.7 26.7 79.4 18.2 18.9
Cyprus 4.5 6.2 14.3 14.4 6.1 7.2
Chinese - 1.6 - 6.6 5.4 0.2
Italia 25.9 33.5 - 6.7 5.7 9.7
Pakistan 9.8 10.3 - 22.1 21.3 21.2
Japan - - - - 3.1 -
Other countries 2.8 1.4 2.5 5.4 3.0 2.9
Other investments 28 163.5 173.3 186.4 141.6 103.8
Total foreign investments 43.9 37.7 203.5 186.0 117.5 235.1
including: 992.2 1225.0 667.7 1794.2 1906.5 1750.9
Sourse: www.azstat.gov.az

Firsthand foreign investments played main role in exhilaration of Azerbaijan

economy. Economic development was supported by extremely huge capital,
invested in oil sector.
In the beginning of 2015, the capacity of external capital, invested in Azerbaijan
economy succeeded 80 billion US dollars, thus Azerbaijan get the leading position
among Eastern Europe and CIS states. Nowadays, Azerbaijan took important
steps to expand international economic relations in order to ensure the socio-
economic development, reducing unemployment and improving the welfare of the
population259.
Among the states made investments in Azerbaijan between 1993-2016, the
United States and Great Britain holds first places with 25% shares of total sum of
investments. Turkey ranks to third place with 15% of shares. Iranian investors

303
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

entrusted 166 million US dollars to Azerbaijan economy and 110 million of them
was made in oil sector.
The most part of external capital, coming in Azerbaijan accounts for loans from
international financial organizations, direct investments, oil rates, and other credit
investments. A big amount of them are the loans and in future they’ll have to be
returned with additional rates. The same case in investments in oil sector – they
are also loans and in time the interest rates will be paid by the expense of oil.
The extending investments made outside of Azerbaijan during last three years,
may be interpreted as a result of mentioned above facts.
In one hand Azerbaijan returns capital given by international financial organizations,
in the other hand it pays membership fee to international organizations. Besides,
lately Azerbaijan started repayment to stakeholders of “Contract of Century”.
According to calculations made by The World Bank and the "Oxford Analytical"
company of UK, Azerbaijan ranks fifth place among Middle and East Europe and
26 ex-socialist countries of Middle Asia for amount of foreign investments and
exceed capital invested into such countries as Poland, Russia, Hungary and the
Czech Republic.
There is an increment in investments into energy sector and petrochemical
sphere. However, investments in other areas, especially the food and the silk
industry didn’t reach the desired level. Thought this may seems to some investors
as negative case, from perspective of market share and access to the market,
this can be seen as a positive development. Azerbaijan invites foreign investor
and guarantees them all kinds of comfort and all in all, external capital is
encouraged in the country.
In a result of substantial investment in oil sector Azerbaijan became the most
economically developed post-Soviet country. The growth of Azerbaijan economy
sources mainly from oil sector and related to this construction activities,
transport sector and little from agriculture sector.
We can observe stillness in other fields of economy. In order to eliminate this
stillness and increase investments into oil sector 3 social-economic programs
were created for 2004-2018.
Prepared by the Ministry of Economic Development and Industry “Azerbaijan
Investment Map” is aimed to help foreign investors by giving them information
regarding the region sphere and amount of the capital they can invest in country.
According to the estimations move that 60 billion US dollars have been invested
for the yield of Caspian energy resources until 2012. In accordance with the

304
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

results of research made by English company in Baku “MAI Consulting”, by 2030

total sum of investments made into country will reach 200 billion US dollars.
The development of existing reserves of Azerbaijan, renovation of the technological
structure of economy, increase the range of industrial structures, the need for
the creation of new communications and transportation networks requires the
increase of the external capital supply.
There are reasonable concerns regarding the fact that very big part of investments
is made into oil sector and in this occasion the most share of GDP comes from
oil sector. Due to the unilateral development of the oil sector changes on the
world market’s prices cause the fluctuations in the GDP. It can be easily seen in
the case of the Russian crisis in 1998.
Shortly, in economic terms Azerbaijan is facing the risky case called “Dutch
disease” which is the apparent causal relationship between the increase in the
economic development of a specific sector and a decline in other sectors. In
addition, we can observe that Azerbaijan is in the edge of not only the dependence
on one sector, but also dependence on specific region.
Besides the Dutch disease, here are the main problems for Azerbaijan, sourced
from foreign investments:
- The growth of country’s foreign depth,
- Direction of external capital and the activities of joint ventures mostly into
easily profitable industry of raw production and services,
- The minor share of investments in country’s many sectors of the manufacturing
industry,
- As a result of gathering all the investments in Absheron district, other district
literally suffers from lack of the foreign investments,
- Against the macroeconomic stability promised by credits and counsels took
from international financial structures the increase the level of production and
productivity in real sector can provide the prominent strengthening of social
safety of population and other social-economic problems.

9.2. INVESTMENT ENVIRONMENT

Cheap labor and opulent subsurface resources are the main factors, attracting
investors to non-oil sector. The other positive parameter for drawing especially
external capital is affordable investment environment. This makes necessary the
analysis of investment environment from different aspects.

305
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

Below we will review the negative cases in country’s investment environment

firstly, then we will look through the legal and administrative measures, taken for
elimination of those.

9.2.1. NEGATIVE CASES IN INVESTMENT ENVIRONMENT

The high rates of taxes, impacts which are contrary to free market environment,
lack of required legal structure and etc. negative factors are the main risks for
affordable environment.
The high rates of taxes cause to informal activity of private sector. Most of private
institutions pay big part of employees’ salary informally. The shadow market
mainly operates in production and trade of weapons, drugs and pornographic
commodities. In contrary, in Azerbaijan informal activities occupies the most
ordinary production, trade and service spheres. According to some estimations,
capacity of shadow market is much bigger than official market activities. Some
international organizations elucidates different numbers regarding level of
shadow market in the country. According to specialist of World Bank, the extent
of the shadow market exceeds GDP 60% which means more than 15 billion US
dollars. Other specialists claims this indicator reach even 80%. In accordance
with estimations made by Azerbaijani State Statistics Committee, the shadow
economy occupies only 18-20% of GDP. The other problem for the private sector,
compelled to choose the shadow economy is bribe.
During the last period of Soviet Union’s existence exploitation and the distribution
of state property and national wealth for personal purposes became to a normal
case. In this point of view, corruption and bribery is the social disease inherited
from Soviet system. Recent survey, done by one of the international organizations
(“Transparency International”), shows that Azerbaijan ranks leading positions for
corruption and bribery266. According to this survey, in 2013, Azerbaijan with 28
balls ranked 127th place among 177 countries.
According to “Transparency International”, anticorruption measures, held in
Azerbaijan isn’t sufficient enough.
"Anti-Corruption Law" which came into force in January 2005, has a definite
impact on reducing the level of corruption in the country. These kind of changes
may result in democratization, economic liberalization and ensuring greater
transparency of governmental bodies. In war against bribery and corruption firstly
needed to prevent the expansion and deepening of this problem in governmental
enterprises and social-economic system.

306
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

Competition is one of the basic elements of policy in countries that is getting

through transition period. Domination of one or the same conditions in the
economy hinders businessmen actions and delays economic development.
Azerbaijan government is taking some actions to overcome the inequality in
economy and the adoption of "Anti-Corruption Law" is example for this.
Azerbaijan's credit rating (loan return confidence) is very low in comparison with
Russia and Kazakhstan. Therefore, now the country's private sector doesn’t
government guarantees it seems risky to crediting the private sector. Azerbaijan
is a country with the least crediting with state guarantee. If Azerbaijan will equal
its rates with Kazakhstan and Russia, in can get additional 300-500 million US
dollar with very low loan interest rates each year.
In previous years the load rating of Azerbaijan was made by international
organization called “Fitch” Azerbaijani government tries to get the rating process
be done by such companies as Standart&Poors" and "Moodys".

9.2.2. LEGAL REGULATIONS

In all countries who is going through a transition period, business suffers from
lack of legal regulations, which primarily affects investment environment.
Taking this into consideration, Azerbaijan took reasonable measures in terms of
legal regulations, especially since 1995. A lot of reformations have been done by
adoption of laws on customs, tax, labor, land, and public service and anti-monopoly.
In a result of new laws, adopted with consideration of specific conditions of
Azerbaijan economy during 1995-2010, the new legal infrastructure was created
for shaping country’s economy for transition into free market economy, in other
words, market get environment profitable for both internal and external terms.
The European Bank for Reconstruction and Development (EBRD) revealed that
rules controlling trade relations in Azerbaijan are acceptable enough.
With no doubt, there are lots of aspects that need to be examined and steps that
need to be taken. In this perspective the decrees, adopted by Azerbaijani
president have got significant importance. Verdict adopted by president in 2002
predetermined the open gates principles on foreign investments and convenient
environment has been created.
Counting exceptions as national defense, the foreign proprietors have almost the
same rights with locals. Enterprises set by foreign investors in Azerbaijan are
considered as state ones. The local and foreign holders are affected by the same
principles. The only exceptions are departments and representatives.

307
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

Amendments made in taxes law and procedure for taxes improved assuredness
of employers regarding the transparency of taxes system.
According to these changes, since 2004 the mechanism of implementation of
fines was simplified. By this means, fines, applied for repeating violations of the
law, will be eliminated. The aim of this change is help to overcome obstacles
that hinder development of small and middle entrepreneurs.
Foreign physical and legal individuals have no right to privatize the land but they
have right to rent it by signing a contract. Besides this, foreigners were given lots
of new privileges.
Since 2005, it was planned to implement new projects within the frames of State
Investment Program together with The social-economic development of regions
program. In addition to that, government adopted the new bill “On investment
rules”, which came instead of those, adopted in 1992 and 1995. This bill aimed
to improve the transparency of investment environment for extending the external
capital flow into country. In the beginning of 2005 about 24 billion US dollars
invested in Azerbaijan. Now government tries to direct businessmen to invest
capital in tourism food industry and etc. new law doesn’t imply any restrictions
for investors’ income.
One of the advantages of the law “On Investment Activities” consists of is
exemption from taxation those foreign businessmen who bring provision for
production and/or service and agricultural equipment. It’s essential for creation
of complex production and service field. It’s also expecting that foreign investors
and holders will get the advantages in creation of free trade zones and industrial
cities. All in all, the implementation of this law will enable flow of foreign capital
to the regions of Azerbaijan.
The codex of anti-monopoly will help to prepare the free competition environment.

9.2.3. LEGAL ENTERPRISES REGISTRATION PERIOD

For building in Azerbaijan, both local and foreign-owned enterprises first should
register at the Ministry of Justice. Presentation of any documents and/or references
is mandatory for registration process. In average this process can take for 10 up
to 30 days. After the Ministry of Justice individual should register in tax authorities
of the, the State Statistics Committee, the Social Insurance Institution. In September
2002, after the declaration of new presidential decree lot of simplifications were
made in company's registration process.

308
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

The number of documents required for issuance of a license required de pending

on the characteristics of the operations minimized, the amount of state fees to be
paid for the issuance of licenses in large quantities reduced and the extended
term of the license or a license in one state-formation of the procedure is provided.
The transactions necessary for companies have been reduced, the number of
licenses reduced from 240 to 30 and their validity period extended from 2 to 5
years in duration.
Foreign investor can start his business inn Azerbaijan with 100% external capital
or as a “joint-venture”. It is impossible for foreigners to have any specific legal
equity ratio or limit in company or investment. The licensing process takes
approximately 40 days.
Legally, businesses are divided into four different categories: unlimited liability
partnership (general partnership), a limited partnership, a limited liability company
(LLC) and the open joint stock company (JSC). Especially two last categories
are the most popular among legal entities.
When building an enterprise foreign investors must take the opinion of experts on
the protection of nature in cases and situations, appointed in accordance with
the laws of Azerbaijan Republic. Taking the opinion is obligatory even during
the functioning or closing of complexes, established on external capital.
Commissioning of natural resources, a large building or reconstruction of facilities
requires additional mandatory expert opinion presence related business plan.

9.2.4. PROPERTY RIGHTS PROTECTION AND

RESPECT FOR CONTRACTS
One of the conditions perplexing investors in countries in transition period, is
protection of property rights and respect of contracts. According to research,
made by EBRD, Azerbaijan is one of the countries with most positive indicators
in these terms. The protection of property rights is considering by the Constitution
of Azerbaijan Republic. The Civil Code which entered into force in 2001 also
covers structural conditions of contracts, trade relations, property rights and
securities. In the other hand, in accordance with presidential decree, issued by
deceased president Haydar Aliyev in September 2002, the actions will be taken
in order to overcome to illegal obstacles in property rights, guaranteed by
government and illegal pressures on property owners.

309
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

9.2.5. PROTECTION OF INTELLECTUAL PROPERTY RIGHTS

Copyright, trademark and patent are governed by the law. Since the middle of
1990’s, Azerbaijan has developed its own national system for registration and
protection of intellectual property. Copyright, trademark and patent shall be
governed by the laws in force. Of the mid-1990s, in connection with the
registration of intellectual property rights protection and has developed its own
national system. This system includes copyright law (the Law on Copyright and
Related Rights, 1996), (Patent-related law1997), and law on the protection of
the trade mark (Trade Marks and Geographical Sciences Law on Earth-1998). In
addition, Azerbaijan joined international treaties such as the Treaty of Paris on
the Protection of Industrial Property; the Convention for the Protection of Literary
and Art Works.

9.2.6. STATE FINANCIAL AID TO PRIVATE SECTOR

Azerbaijani government established the "The Business Support Fund". In 2003-
2005, 250 billion US dollars were intended to provide financial assistance to
private entrepreneurs by the fund. In this regard, the loans were granted also in
2003 and 2004. In 2015, the "Entrepreneurship Support Fund» contributed
financial support in the field of agriculture and other fields of the economy.

9.2.7. TRANSPARENCY OF REGULATORY SYSTEM,

GENERAL STANDARDS MANAGEMENT AND
COMBATING CORRUPTION
International organizations reinforcing investors and economy evaluates regulations
in legal field by government positively and accept the laws and regulations in
business as appropriate and useful. Despite some gaps in legislation on these
issues, the improvements are remarkable for the country that makes first steps
in market economy.
In 2000, late president Haydar Aliyev signed a statue regarding the fight against
corruption. In 2001, the decree on public service was adopted. The decree
determined the Code of conduct for state officials and reflected the guidelines of
appointment of officials, their promotion, and payment of wages. This law
considers the improvement of public service and decrease of factors sourcing
for corruption.

310
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

The government, also started reforms on development of effectiveness and

independence of the judiciary and judicial bodies. New regulations brought to
Civil and criminal proceedings contributed to the emergence of new methods in
assignment of new judges. In September 2002, in accordance with the decision
of the head of state, the number of documents and special permits reduced from
240 to 30.It eliminated the needless bureaucratic obstacles facing entrepreneurs
and reduce additional payments in order to accelerate the process of getting a
permit.

9.2.8. NATIONAL REGULATIONS

The Law on the protection of foreign investment implies at least the creation of
environment for equal business terms for local and foreign entrepreneurs. The
only exceptions in the law, foreign investors will have privileges only if the
importance of foreign entrepreneurs to invest in the areas will not adversely
affect the income of local entrepreneurs.

9.2.9. NATIONALIZATION
Law on Protection of Foreign Investment nationalizes foreign investors’
properties and protects the from expropriation. Only in cases if it will condtradict
the country's national interests or the possibility of damage occurs to the local
people or in case of natural disasters and other necessary situations invesments
can be nationalized fastly and with compensation on true value of the investment.
Desicions on nationalization can only be given by the Parliament of Azerbaijan
Republic (Milli Majlis). The decree o exportation can be made by the Cabinet of
Ministers.
In recent years, there hasn’t been any nationalization of the country.
The compensation of losses, occured due to illegal actions of State power also
guaraneed by governent.

9.2.10. THE TRANSFER AND REPLACEMENT OF

THE INCOME
Additionaly, there is a guarantee for investors of transfer of income to their own
country. Foreign investrst can transfer their income, other cash income and
legitimate investment earnings to foreign banks only after payment of related
taxes.

311
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

Foreign investors may reinvest the income obtained in Azerbaijan into the
country, or keep them in the banks and also can buy surrencyaccording to the
course and the rules set by the National Bank of Azerbaijan.

9.2.11. RESOLUTION OF CONFLICTS

Althought there are some gaps in udicial resolution of disputes, recent years
significant reforms have been made in Azerbaijan in these field. The International
Arbitration Law came into force in 2000. Accorddig to the law, parties can apply
to any court according they want to. Foreign court decision will be carried out
only if it does not disrupt the political stability in the country. Milli Majlis approved
The New York Convention of 1958 on the Convention on the Recognition and
Enforcement of Foreign Arbitral Award, which is rsponsible for direct transition
of any problem, arose between foreign investor and Azerbaijani government, to
International Court of Arbitration. Also, some agreements between Azerbaijani
government and third parties allow foreign investors an opportunity to address to
International Centre for Settlement of Investment Disputes (ICSID). Azerbaijan
joined to International Agreement on the Settlement of Investment Disputes
between States and Nationals of Other States.

9.2.12. BILATERAL INVESTMENT TREATIES

Azerbaijan, China, France, Georgia, Germany, Great Britain, Iran, Italy, Khazakhistan,
Kyrgyzstan, Pakistan, Poland, Turkey, Ukraine, United States and Uzbekistan
signed a bilateral agreement on investment protection.
Since they relate to the life in Azerbaijan, Bilateral Investment Treaties, can provide a
positive environment for confidence of some investors in the country.

9.2.13. CAPITAL PARTICIPATIONS AND SUPPORT

In the frames of presidential decree issued in September 2003 to support the
development of entrepreneurs, the Business Alliance has been established.
Alliance will be engaged on a regular basis in activities to solve detection and
analysis of the existing problems. It also will be dealing with foreign investors’
problems and contribute to their solution.

9.2.14. TAXES AND TAX RATES

Taxation system of Azerbaijan Republic were formed after the rebuilding of
independence in 1991-1992. This process can be divided into 3 periods:

312
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

During the first period, which surrounds 1991-1992 years, some essential
decrees on incomes and expenses were adopted. In December 1991, the laws
on "Value Added Tax" and "Excise", on June 1992, legal entities "to separate the
types of profits and income taxes" and "income tax for individuals," laws were
passed. Since the middle of 1992, began to take shape the independent of the
tax authority of the country.
During the second period, which lasted from 1993 till 1996, there were adoption
and formation legal base of some statues regarding new forms of taxes that
entered country’s system due to transition to market economy. In these terms
some of essential laws were adopted: in February 1993, "Land Tax", in March
1995, "Property Tax" and "Mining Tax", in December 1996, "the State Road Fund
tax", tax laws related to the use of guides, regulations have been developed.
Third period continued from the end of 1996 to 2000 and covered measures
took for improvement of the laws adopted in the previous stage due to qualitative
changes in society and the economy and in January 1999 president signed a
statue on "Improve the system of state control and the removal of artificial
barriers to the development of entrepreneurship" that was directly related to tax
authorities. As a result of this phase, we can mention "Tax Code" which was
accepted in July 2000.
Nowadays taxation system of Azerbaijan Republic provides functioning of
country’s production mechanism, financing immediate needs of the country,
prevents the growth of budget deficit and in general it responses to all demands
of the transition to market economy system. State tax system of Azerbaijan
Republic consists of a single centralized system, which includes Ministry of Taxes
and the State Tax Service. Ministry of Taxes of Nakhchivan Autonomous Republic
the Ministry Training Center, Department for work with large taxpayers and
enterprises with special tax regime, the Department of preliminary investigation
of tax crimes, the General Department of Taxation of Baku, Regional Tax Offices,
taxes offices departments in cities and regions of the republic are also the
integral parts of this system.
The Ministry of Taxes is included to Public administration bodies system and is
subject to the President and Government of Azerbaijan Republic. The establishment
of a centralized system, such as the tax on the entire territory of the country allows
the implementation of fiscal policy. The ministry and all of its subordinate tax
authorities are the juridical persons, they have independent estimate of
expenditures, the current account at the bank, treasury account in warning body,
consonant seals with the emblem of the state seal and stamps and TIN. Minister

313
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

personally responsible for the fulfillment of the requirements for tax bodies and
Ministry. Minister is appointed to the post of President of the Republic of
Azerbaijan. State tax authorities operate on the principle of vertical subordination.
Vertical command accelerates the exchange of information and guidance on the
distribution of legislation materials stipulates to the tax authorities. The tax
amounts are as follows: directly from the source (tax collection before obtaining
income or profit); by declaration (tax collection after obtaining income or profit);
notification of the (object value and the area of taxation, calculated based on the
amount of the tax authority or municipality on the basis of payment notice,
issued for the payment of the tax by the taxpayer).
The state taxes include:
1) the income tax;
2) the income tax (municipal-owned enterprises and other organizations);
3) value-added tax;
4) excise tax;
5) the property tax;
6) the land tax;
7) road tax;
8) mining tax;
9) simplified tax.
The property brought to Azerbaijan to invest into enterprises or enterprises
established with the participation of foreign capital investment can be imported
free from the customs duty and VAT exemption. Further investments with some
exceptions will be subject to a 5% customs duties. They are exempt from VAT.
There are two types of tax regime. Oil companies, operating mostly in oil and
natural gas sector in the frames of Production Sharing Agreements (PSA), are
bound to the oil consortium tax regime. The official tax regime is acceptable to
all the other legal entities.
The income tax for local and foreign entrepreneurs is 20% of the company's
profits. Revenue of social support organizations, grants, membership fees and
donations from non-trade organizations have taxes besides income tax.
The income tax is fluctuating between 14%-25%. The incomes of foreigners,
working in Azerbaijan for less that 182 days and salaries of council employees
are exceptional.

314
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

The VAT rate is 18%. Consumption tax is unstable. Taxes for resources (machines,
buildings, etc.) is taken according to the type of property. However, of foreigners,
working in Azerbaijan for less that 182, property of diplomats and consular
officers are free from tax.
Tax for areas are determined according to its type and location. The mining tax is
between 3-26%.
Tax for Cars belonging to foreign citizens who have entered the territory of
Azerbaijan, is determined according to the type and size and length. In addition,
entrepreneurs and individuals, which operates under the name of the simplified
tax system, have to pay VAT 4% in Baku 2% rate for the sale of goods and services
are not related to sales activities. Property and income shall be exempt from
paying taxes.

9.3. INVESTMENT POTENTIAL

Considering only market potential of country’s economy in planning of investment
process in Azerbaijan won’t be right. Taking into consideration the geographical
position of Azerbaijan, it’s clear that country along with regional neighbors have
significant market potential. Azerbaijan is “economic windpipe” for Caucasus
and Middle Asia. Such importance will get more obvious when Baku-Tbilisi-
Ceyhan oil pipeline and the Baku-Tbilisi-Erzurum gas pipeline will start their
functioning. It will also extend its value and importance after the export of
Kazakhstan oil and Turkmenistan gas through the pipeline across Caspian Sea to
the world market. In the other hand, this potential will grow every day by vitality
of the Silk Road. When making an investment in Azerbaijan, main attention should
be paid to region’s potential and future of the region.
When taking into account the market potential of the region, it is possible to
make investments into quite big amount of spheres but with the condition that it
will be made in amount and way that will be able to compete the world market’s
production. Climatic conditions and fertile soil of the agricultural industry makes
investments possible. The impact of investments in the oil sector, banking and
financial services sector and other investments in the sector will become more
attractive.
In a result of discussions held by the late national leader Heydar Aliyev with local
and foreign businessmen in 2002 and the new decisions taken after these
discussions, entrepreneurs were encouraged to open and prevention, legal and

315
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

institutional structures necessary for the transition to a free market economy,

combined with the positive developments in the demand for employment rapid
growth, investment and economic relations with Azerbaijan to carry out the
investment climate and the market has become more favorable.
Modern world, which doesn’t recognize the borders for financing along with the
globalization, when investors, came from such the far regions as Germany,
France, England, Japan are interested in privatizing of large-scale enterprises that
are going to be realized in Azerbaijan, Turkish investors have to get out into
foreign markets due to economic problems in their country and Turkish
government supported them in that. They got interested in privatizing in Azerbaijan
and made investments in different sectors of Azerbaijan economy and this was
useful for both, the investors and the country economy.

9.4. INVESTMENT AND TRADE SPHERES

Below we have mentioned different sectors that are leading in attraction of
investments and trade spheres.

9.4.1. AGRICULTURE AND FOOD

- Agriculture Engineering Production Complex,
- Milk and Milk Products Production and Processing,
- Children's food products,
- Vegetable oils (corn and sunflower oil) production,
- Food Concentrate Production,
- Olive and Olive Oil Production,
- Chocolate and Confectionery Product Manufacturing,
- Cookies Production,
- Pomegranate Juice Pomegranate juice concentrates and Production,
- Tomato Production,
- Rose oil production,
- Flour and flour products,
- Livestock and Poultry Feed Production,
- Canned Goods Production,
- Canning factory modernization,
- Storage and packing of agricultural products,
- Construction of modern greenhouses,
- Construction refrigerator warehouses,

316
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

- Construction of sugar factories,

- Wine factories construction,
- Beekeeping,
- Caviar and fishing enterprises,
- Floriculture,
- Poultry,
- Meat Products Production facilities, etc.

9.4.2. CHEMICAL INDUSTRY

- Powdered detergent, soap, shampoo VS Consumer Goods Production,
- Ethylene-propylene factory modernization,
- Fertilizer Production,
- Bromine Iodine and Processing,
- Polyethylene Processing,
- Made of polypropylene,
- Paint Production,
- Soda and Chlorine Production facilities,
- Glass Production.

9.4.3. LIGHT PROCESSING INDUSTRY

- Air Conditioner Processing,
- Compression Processing,
- Electric and Electronic Processing Tools,
- Repair of transformers and Processing,
- Home Appliances Processing,
- Farm Products Processing,
- Paper and Paper napkin Processing,
- Pipe and Plastic Products Processing,
- Processing the refrigerator and freezer,
- Soap modernization of production facilities,
- Rubber Processing,
- Cable Processing,
- Production of pieces of natural and synthetic,
- Phosphate production facilities modernization,
- Silk Production,
- Restructuring of the textile factory,
- Cotton and Wool Spinning Construction of factories,

317
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

- Refinery gas meters smart card type,

- Natural gas consumption in connection with the production of goods
- Children glands Production,
- Clothing and Footwear Leather Processing,
- Carpet weaving.

9.4.4. CONSTRUCTION AND TOURISM

- Construction Materials Production,
- Production of iron ore,
- Mountain Sports, Tourism and Entertainment Center, Construction,
- Construction of hotels,
- Tourism Complex Building,
- Construction of Therapeutic Recreation Center,
- Construction and reconstruction,
- Construction of industrial zones,
- Mosaic and Marble Works
- Production Medical Complex and ceramic materials.

9.4.5. TRANSPORT
- Restructuring of the locomotive depot,
- Construction of Freight Wagons repair factory by the Wagon depot,
- Construction 3rd North Area of the Baku Metro,
- Public Transport Services in auto and motor ways.

318
 CHAPTER TEN
SWOT ANALYSIS OF COUNTRY’S
ECONOMY
SWOT analysis method is a structured planning method used to evaluate the
strengths, weaknesses, opportunities and threats, which may also source from
external environment, of a country, sector, structure, method and process.
The goal of SWOT analysis is to develop plans and strategies, that will focused
on strong and profitable spheres and consider risks and weak sides of them and
at the same time evaluate internal and external influences on those in order to get
maximum advantage.
SWOT analysis is used on the stage of strategic development of a plan or to
define and resolution of a problem.
SWOT analysis is necessary for government, local and foreign investors and
those who want to have a general information about country’s economy.
This method has strategic importance for government that determines development
policy programs for achievement of economic improvement of Azerbaijan and
transition to market economy using economically potential resources of country
and improvement of strategies by making systematic analysis.
For domestic and foreign investors the non-empirical analysis of economy,
excepting macro and sectorial economy, is needed as a first step for making
investments in non-oil sectors.
In this chapter we will make the SWOT analysis of economy of Azerbaijan. As
method of analysis the strengths and weaknesses of the country's economy will
be analyzed separated from macro economy, sectorial-regional economy, risks
and opportunities will be analyzed as economy and non-economy.
The strengths and weaknesses, the risks and opportunities of SWOT analysis
will be given as a paragraphs. In these terms, this analysis will create a general
picture of macroeconomic, regional and sectorial analysis and level of integration
into a world economy.

319
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

10.1. THE STRENGHTS

10.1.1. THE STRENGTHS FROM MACROECONOMIC
PERSPECTIVES
- The existence of stable macroeconomic environment leaded by stability in
prices:
Due to political and economic instability in the early years of country’s indepen-
dence, which was incited also by Nagorno-Karabakh war between Azerbaijan
and Armenia in 1995, there has been instability in the macroeconomic indicators.
However, after the establishment of political stability and implementation of
economic policy, the economic stability were brought in since 1996. In this
regard, the macroeconomic indicators are stable for more than 20 years.
- The external debts aren’t high in relation to GDP:
The amount of Azerbaijan’s foreign debt as of the beginning of 2005, is 1,588
billion US dollars. This amount is equal to 18.6% of GDP. The amount of foreign
debt per capita, in comparison to CIS countries Azerbaijan is ranked in the
middle positions.
In the middle of 2016, the amount of Azerbaijan’s foreign depts. reached 6 billion
778 million 200 thousand US dollars. It equals to 12.6% of GDP.
- The stability of monetary course
In 1992 Azerbaijan left the “Ruble Region” and started the circulation of national
currency – the manat. In the beginning it circulated with ruble, but since 1994,
manat became the only official currency in country. With the implementation of
imports and exports in rubles in an important part of the countries, particularly in
Russia, in line with the liberalization of prices rise, the mana began to lose value
against the ruble in 1993. At the same time, the crisis in the bank sector in
1993-94 and negative projections related to the value of the manat caused to the
depreciation of manat in comparison to other currencies.
After the restoration of political and economic stability in the country the currency
exchange rate also became more stable.
- The cheap labor
Due to the high rate of unemployment, the level of wages in the country is low.
The minimum wage in the country is 105 manat. As a factor of production labor
payments is making advantage in terms of the total sum of cost. As a result the
cheap labor becomes to one of the factors that encourage investments.

320
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

10.1.2. THE STRENGTHS FROM SECTORIAL AND

REGIONAL PERSPECTIVES
- Agricultural and livestock sector to have a favorable climate and terrain
conditions:
Azerbaijan is located on a strip which is ranging from tundra climate to subtropical
climate and has 9 of 11 existing climate types. The diversity allows to product
the harvest more than one time in a year to produce different types of products.
53% of the country is suitable for agriculture.
The climate type and landscape also enables the engagement in animal
husbandry.
- Suitable conditions for production of agriculture and livestock products,
which is an important raw material for food industry:
The fact that country has climate and landscape conditions favorable for
agriculture means that the most suitable conditions will be given for raw materials
and respectively for investments in food industry.
- Azerbaijan has ecological, natural, historical and cultural resources profitable
for development of tourism:
Azerbaijan has climate, natural beauty, historical and archaeological monuments
necessary for the development of the tourism sector. Favorable climatic
conditions at the Caspian Sea coast, forest areas and different regions treatment
benefit show organized-known water source capacity is remarkable.
- Existence of powerful oil and natural gas resources:
After the discovery of oil and natural gas reserves in the Caspian Sea, country
become attractive with its potential to export the oil and natural gas. A part of
investments made in 2005 was spent to production of energy sources. The total
sum of capital which is going to be invested in this sector is about 65-70 billion
US US dollars.
With the start exportation of oil in 2005, and natural gas exportation in 2006
country began to earn big amount of income.
- A sufficient level of raw material and information collection in the country,
necessary for development of petrochemical industry.
Due to the oil industry focused economy, chemical, petrochemical, equipment
and the manufacturing sectors create the basis of industrial sector. After

321
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

independence, agreements signed on oil and natural gas production we can

observe that, more investments made into industrial sector, are beginning to
dominate the field of petrochemicals. Since 2005, a significant amount of oil and
natural gas production in the country, the situation in this area allow the
development of investment making in this sector of industry.
- Development potential of transport and communication sectors:
Due to rebuilding of transport and communications sector during the transition
period, these sectors now have the potential, allowing the investments.
- The existence of the State promoting policy:
The existence of promoting State policy, regional development programs and
governmental programs necessary for development of different regions (not only
Baku) and non-oil sectors in 2004-2018 years, tax free and governmental support.
- Development potential of financial sector:
Together with the receipt of income from oil, the financial sector will earn fast
developing potential. The country is close to be one of the most important financial
center in the region.
- Development potential of construction sector and production of construction
materials:
The revival process gives chance also for significant development potential of
construction sector. During last 2 years, this sector has got essential improvement
especially in Baku. And it has serious development potential not only in Baku, but
also in other regions. In regard the construction materials production sector is
remarkable for investments.
- Fishing and caviar production in the Caspian Sea:
Along with the essential oil and gas resources, Caspian Sea has also qualitative
and rich fish resources. Caspian is considered as the homeland of the most
valuable fish species myrtle (Sturgeon) fish.
Sturgeon also has very valuable caviar. The production of sturgeon and its caviar
appears as significant economical income. Taking into consideration, that 80-
90% of black caviar is producing in Caspian Sea, we can assume, that fishing
also has profitable and strong developing potential.

322
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

10.1.3. NON-ECONOMIC STRENGTHS

- Education level of population
Notwithstanding the setback in economic situation and difficult conditions,
Azerbaijani population are still interested in education. 98% percent of the
population in the country can read and write, approximately 60% of them has
lyceum or high school level of education.
Educated population allows to solve in short time practical and specialization
tasks among the staff that investor can face in new opened enterprise.
- Existence of political stability and the will
Economic development in any country mainly requires political stability and
leaders that have the will of continuing this stability. Political stability guarantees
market the implementation of economic programs without mistakes.
After Heydar Aliyev became president of Azerbaijan political stability was
established in Azerbaijan and after Ilham Aliyev was selected as a next president,
all uncertainties were eliminated.

10.2. THE WEAKNESSES

10.2.1. THE WEAKNESSES IN MACROECONOMIC
PERSPECTIVES
- Unemployment problem:
According to official statistics made by state bodies, the rate of unemployment in
the country is approximately 1.5%. However, the results of researches and
statistic made by different international organizations showed that this indicator
fluctuates between 16-25%, which is indeed quite high.
One of the reasons of such a high rate of unemployment is occupation of
Karabakh by Armenian aggressors, after which nearly 1 million people remained
displaced. On the other hand, after the close of the work places, which weren’t
able to compete with the army of modern industry of the transition period the
percentage of those who lost their jobs has significantly rose.
- The migration of skilled personnel to foreign countries:
Due to the lack of sufficient job opportunities, educated and skilled people had to
leave the country. Most of them moved to Russia, Turkey. Iran and other neighbor

323
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

countries. A very big part of these emigrants are young and middle-aged people.
The process which can b expressed as "Brain drain", has significantly increased
in recent years.
- Slow privatization of large enterprises:
In the frames of second privatization program, started in country in 2000, the
privatization of medium and large-sized enterprises such as, communications,
transportation, chemical and energy sector are planned. But we can observe
slowdown in privatization of large institutions.
- Corruption and the level of bribery:
According to numbers, revealed in “Corruption Perceptions Index”, prepared by
Transparency International and including results from 133 countries, Azerbaijan
ranked to 124. This survey shows, that in almost each sphere, especially trade
and investments sectors the level of corruption is high. In the other hands,
Transparency International endorses the measures to combat corruption in
country.
- Dependence of export and the state budget on oil revenues:
The share of oil and oil revenues in exports is about 90%. On the other hand,
50% of the budget revenues are derived from petroleum and petroleum-related
industries. Thereby dependence of the budget from oil revenues, dependence of
thus on the world markets indicators brought Azerbaijan face to face with danger
of "Dutch Disease".
- Customs problems:
Problems and difficulties emerging in customs impedes the healthy implementation
of a foreign trade.
- Low level of income, uneven distribution income:
Despite per capita income level is increasing each passing year, it is still remains
in the middle-level. This means that the purchasing capacity of people is quite
average.
At the same time there is an uneven in distribution of income. Especially, when
those who work in oil and oil related sectors can called prosperous, the swages
of employees in all remained sectors is quite low. This leads population to luxury
consumption. There is not the Middle class in the country yet.
- Monopoly and unfair environment for competition:

324
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

One of the main problem faced by entrepreneurs is monopoly and unfair

environment for competition. The existence of monopoly in certain sectors
creates a hindrance for development of private ownership and efficient use of
resources. It also leads to frequent chaotic increase f costs.
- Distrust of the national currency because of probability of fluctuations in
currency policy:
Inflation and devaluation emerged in a result of political and economic crisis
during the first years of independence caused to distrust of the national currency
among the population.
- The Shadow economy
The Shadow economy in the country is higher than GDP. Among the CIS
countries, Azerbaijan is at the forefront in terms of the shadow economy as well
as the comparison with the level of corruption.
According to official data, the share of shadow economy is compatible with the
18-20% of GDP. However, some evaluations show that the shadow economy is
estimated to be greater than the registered economic activities. In accordance
with World Bank’s specialists, the he size of the shadow economy exceeds 60%
of GDP, which equal to 5 billion US US dollars. Some experts claim that this ratio
is 80%. Although the difference in numbers, we can assume that shadow
economy activities re very high in the country.

10.2.2. WEAKNESSES IN SECTORIAL AND

REGIONAL PERSPECTIVES
- Lack of infrastructure and obsolete technologies:
Agriculture and livestock suffers from lack of infrastructure as irrigation, etc.
Technologies that are used in this sectors are also obsolete and there are few of
them. The same can be told regarding road, transport and hotel complex
infrastructure, required for tourism sector.
The infrastructure in the industrial sector seems to be less and technologies are
also outdated. does not allow us to produce a product that is able to compete
with high-quality and modern and more cheaper production in the world market.
- Due to reliance of economic structure on oil and gas production, the other
sectors are left neglected:
After the restoration of independence, due to the oil and natural gas production
energy sector was in the spotlight of foreign and local investors. And the

325
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

specialized employees tried to find job especially in this sphere. In a result of

concertation of investments and specialized staff only in one sector, others
couldn’t developed as well as that one.
- Insufficient development of financial sector:
After the bank crisis, happened in the beginning of independence period, bank
sector settled in the center of financial sector. Though, it couldn’t develop yet.
One of the reasons that has essential influence on securities market is delay of
privatization of large enterprises.
The low level of income hindered the development of insurance sector.
- The Dutch Syndrome threat:
The focusing of investments and export on oil and natural production,
predominance of oil and natural gas in export sector, dependence of state budget
on again oil and natural gas resulted in reliance of sectoral economy on these
resources. After the increase of export of oil and natural gas this reliance will
grow even more.
- Existence of sectorial monopoly:
Existence of monopoly in number of sectors has a negative influence on quality
of producing goods and their costs and hinders the efficient use of producing
resources.
- Inequality in regional development:
In a result of gathering economic enterprises mostly in Baku and nearby areas
and centralized flow of tax incomes also from there, country regionally has an
economic structure which depends on Baku and nearby areas.

10.2.3. NON-ECONOMIC WEAKNESSES

- Transportation obstacles between regions:
In a result of Armenian aggression, the 130-km-long railway, allowing link between
Nakhchivan and other regions of the country has been occupied. Due to
occupation of Nagorno-Karabakh areas by Armenians, road and rail transport
among Nakhchivan Autonomous Republic of Azerbaijan and other regions of the
country is not available.
Today, the only possible way of transportation of passengers and cargo to
Nakhchivan is available through territory of Iran. This problem coupes to 2.5

326
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

million US US dollars to state budget each year. The additional burden bringing
to state budget by transfer costs of Baku-Nakhchivan airline traffic, which was
arranged in order to sole the transportation problem, equals to approximately 10
million US dollars.
- Changing ideas:
The change of thoughts during the transition to market economy and democracy
hasn’t finished yet. The problems are still being estimated and solved from the
point of view identical to Soviet regime. This delays the establishment of market
economy in the country. Surely, the change of ideas is process requiring a time.

10.3. THREATS
10.3.1. ECONOMIC THREATS
- Fluctuations in oil prices:
Fluctuation in oil prices is the main threat in economic terms. Thought for the last
decade there was some increase in oil prices, there is a danger for economy,
related to decrease of oil expenses since 2014. Unexpected drop of costs for oil
may cause to essential problems for country income.
As the matter of fact, high prices can turn to economic weakness and lead to
neglecting with attention demanded for development of non-oil sectors.

10.3.2. NON-ECONOMIC THREATS

- The ongoing Nagorno-Karabakh conflict:
The Nagorno-Karabakh is still under the occupation of Armenia and it causes to
periodic conflicts nearby this region. In case if conflict won’t be resolved through
dialog, country is determined to switch to use more severe measures, which
puts the country in the face of a possible war. This prevents the flow of external
capital, especially in non-oil sectors.
The 70% of 150-160 billion US US dollars investment, flew into country was
made by foreign investors. Only 27% of them direct foreign investments were
made in non-oil sectors. Local investors also aren’t willing to made investments
in this sector. Starting with 2007, we can observe that domestic investments
exceed the external ones.

327
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

- Situation in neighbor countries:

Among the neighbor countries; political and social problems occurring in Georgia
at certain times, the processes related to problem between Chechnya and
Dagestan Autonomous Republic of Russia and weak relations among Iran and
world countries because of political structure of first one and etc. processes has
the negative effect on local and foreign investors. Investment in Azerbaijan,
especially in large-scale investments, won’t be realized based only on the
domestic market potential. Investors will want to invest in the region, taking into
account other countries. The processes taking place in the neighbor countries at
certain times causes problems, negatively affecting foreign trade. Or sensitive
relationship between countries has negative impact on foreign trade and again it
will negatively affect the foreign investor.
- Caspian Sea's status problem:
Problems, sourcing out from the unsuccessful attempts to determine the Caspian
Sea’s status is also case that negatively affects the economic development of
country. Due to the disputable position of some oil deposits, oil companies
avoiding the oil production there.
Also, because of this situation, countries cannot exploit the essential fish and
caviar resources of Caspian Sea’s. In the other hand, the pollution of Caspian
Sea one of the negative cases in the development of economy of the region.
- Absence of access to the sea and the ocean:
The absence of access to the sea and oceans doesn’t allow the country to
benefit the sea transport opportunities among continents.

10.4. OPPORTUNITIES
10.4.1. ECONOMIC OPPORTUNITIES
- Level of integration into global economy:
It is easily seen that Azerbaijan is much faster adapting to globalization process
and it achieved bigger results in integration into global economy, by attraction of
external capital, relations with the global economic organizations and membership
in regional alliances in comparison with the countries in the same region.
Country's favorable geographical location, large energy facilities, oil and petroleum
equipment industry, chemical, electronic and wine sector, transport infrastructure

328
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

and positivity rich reserves of raw materials, lack of production, factors such as
cheap labor has been a major factors influencing foreign economic relations of
the country.
Azerbaijan has cooperative economic relations with more than 150 countries and
it’s a member of numerous international and regional organizations.
There is also confidence environment due to signed oil contracts, which are
being supported by the countries and invested by the oil companies.
- The level of transition to free market economy is higher than other regional
countries:
In comparison with other new republics in the region, that got independence
recently, the legislation and infrastructural realization of transition to free market
economy is very high in Azerbaijan.
- Azerbaijan is leading among the countries restored the indecency in
attraction of investments:
It’s observed that the biggest share of extremal capital invested in region came to
part of Azerbaijan. This will turn into positive indicator for the investment making
in other sectors after the start of oil exportation process.
- Having its place among the oil natural gas exporting countries:
In a result of all that work that have been done after the discovery and exploitation
of oil resources and natural gas exportation since the 2005 and 2006, Azerbaijan
have got its place among the oil and natural gas exporting countries. These are
the essential opportunities for attraction of foreign investments and integration
into global economy.

10.4.2. NON-ECONOMIC OPPORTUNITIES

- Location at trade and historical transition roads:
The geographical position of Azerbaijan, linking the two continents and three
offshore basin and it’s located also on a very important date as the New Silk
Road trade route.
With the agreement related to renovation of Great Silk Road, signed in 1998,
Azerbaijan became to a brand new ring in worldwide economic chain.
- Strategical position:
Due to strategical location nearby Russia and Iran also makes Azerbaijan very
interesting for USA and European countries.

329
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

10.5. PROPOSALS
In the frames of SWOT analysis of Azerbaijan economy we looked through the
strengths and weaknesses of country’s economic capabilities in internal terms
and opportunities and risks that may occur from outside world.
The strategically primary measures that should be taken to provide continuing
flow of local and foreign investments is to accurately estimate the strengths and
weaknesses of country’s economic capabilities in internal terms and opportunities
and risks that may occur from global environment. It will be right to plan the
making of investments in spheres where strengths match the opportunities only
after this investors can make some right and profitable decisions regarding the
potential of sector, product and region. Afterwards, detailed attention should be
given to legislative and diplomatic support and individual relations.
The strengths and weaknesses, revealed in the analysis below, has necessary
importance regarding decisions that should be made, programs and projects,
that should be held and realized for integration in global world in terms of
strengths and weaknesses of internal economy and risks and opportunities for
external economy.
The country government have to determinate and implement decisions that will
help to use the opportunities of strong spheres of economy. In the other hand,
strategic decisions and policies should be adopted in order to transform risks
and threats of economy into opportunity for its development.
The more realistic, stable and confidence steps should be taken by the
government for creation of the investment climate in the country, to promote
political and social policies within the framework of the policies defined by the
determination which adversely affect the investment climate weaknesses and
relieving elements that threaten the economics of country.

330
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

Evaluation Schedule Related to SWOT Analysis

POSITIVE NEGATIVE
STRENGTHS WEAKNESSES
Macro economic Macro economic
Stable costs in the country and general stability
Unemployment problem
in macro economic environment
The mass migration of skilled and qualitative
Few share of external debts in GDP (14%)
personnel to foreign countries
Stability in the foreign monetary courses Slow privatization of large enterprises
The cheap labor Corruption and the level of bribery
Dependence of export and the state budget on
Sectorial and Regional
oil revenues
Agricultural and livestock sector to have a
Customs problems
favorable climate and terrain conditions
Ecological, natural, historical and cultural Low level of income, uneven distribution
resources profitable for development of tourism income
Suitable conditions for production of agriculture
Distrust of the national currency because of
and livestock products, which is an important
probability of fluctuations in currency policy
raw material for food industry
Existence of powerful oil and natural gas
The Shadow economy
resources
A sufficient level of raw material and
Monopoly and unfair environment for
information collection in the country, necessary
competition:
for development of petrochemical industry
The existence of the State promoting policy Sectorial and Regional
Development potential of transport and Lack of infrastructure and obsolete
communication sectors technologies
Due to reliance of economic structure on oil
Development potential of financial sector and gas production, the other sectors are left
neglected
Development potential of construction sector
Insufficient development of financial sector
and production of construction materials
Fishing and caviar production in the Caspian
Existence of sectorial monopoly
Sea
Non-economic The Dutch Syndrome threat
Educational level of population Inequality in regional development
Existence of political stability and the will Non-economic
Transportation obstacles between regions
Changing ideas

331
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

OPPORTUNITIES THREATS
Economic Economic
Level of transition to free market economy is
Fluctuations in oil prices
higher than other regional countries
Azerbaijan is leading among the countries
restored the indecency in attraction of Non-economic
investments
Level of integration into global economy The ongoing Nagorno-Karabakh conflict
Having its place among the oil natural gas
Situation in neighbor countries
exporting countries
Non-economic Caspian Sea's status problem
Location at trade and historical transition roads Absence of access to the sea and the ocean
Strategical position
POSITIVE NEGATIVE

332
 CHAPTER ELEVEN
ECONOMIC RELATIONS BETWEEN
AZERBAIJAN AND TURKEY
On October 18, 1991, when Azerbaijan declared its independence, Turkey was
the first to recognize the country's independence, admitted that the only way for
Azerbaijan to really strengthen its independency is through getting true economic
independence and achieve economic development and therefore, Turkey launched
share of its economic experience and capabilities through state and private
ownership. Since 14.01.1992 Turkish consulate and since 25.05. Turkish embassy
began functioning in Azerbaijan. Thus, the practical cooperation between
Azerbaijan and Turkey driven to an alliance in many sectors such as transport,
communications, construction, oil, education89.
Below the economic and trade relations between Azerbaijan and Turkey, the
perspectives of their development and capital movements between the two
countries have been captured.

11.1. LEGAL BASICS OF ECONOMIC RELATIONS

After the restoration of independency in Azerbaijan two countries which have
always shared historical, geographical and cultural values, there have been signed
more than 150 different contracts, protocols and agreements on cooperation in
lots of various spheres, such as economic and trade relations.
The economic and trade relations between Azerbaijan and Turkey are running in
the frames of “Agreement on Trade and Economic Cooperation” by 01.11.1992.
On the other hand, countries have adopted agreement that have essential
importance for investors such as, "Double Tax Avoidance Agreement between
Azerbaijan and Turkey," by 09.02.1994, "Reciprocal Investment Promotion and
Protection Agreement" by 09.02.1995.
89
Doç. Dr. Osman Nuri ARAS, Elçin SÜLEYMANOV `Azərbaycan Iqtisadiyyatı`Baku 2010, p 316

333
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

One of the essential tool of development of trade and economic relations, Joint
Economic Commission (JEC) has adopted the First Period Assembly Protocol on
20.02.1997. The Second Period Joint Economic Commission Assembly Protocol
was signed on 30.01.2002. This protocol has importance in the perspectives of
realization of measures, took in the direction of cooperation of such organizations
as KOSGEB, OSTIM and MKE.

11.1.1. COOPERATION IN THE AGRICULTURE FIELD

The alliance between two countries established on the “Protocol on Scientific,
Technical and Economic union in the field of Agriculture", which was signed on
09.02.1994. During the Second Assembly of Executive Committee in Agrarian
sector on 17-21 July 2001 in Baku there has been signed a protocol.
Turkey's Agriculture Ministry and the United Nations Food and Agriculture
Organization (FAO) have developed a project for the acquisition of the food safety
in Azerbaijan.
The Ministry of Agriculture of Turkey Republic and the General Directorate of
Agricultural Enterprises sent 25 tons of wheat seeds and provided consulting
services during the transplant for Akhiska Turks living in Azerbaijan. The costs
were covered by the Turkish ally and Development Agency Department (TIKA).
In Khachmaz region of Azerbaijan the Azerbaijan-Turkey joint seed venture was
established. Until 2005, company was producing the seeds of barley and wheat.
Since 2005, it was planned to launch the production of corn, sunflower, olive
and other plants’ seeds.
Within the frames of "Eurasian country seminars Agriculture Research and
Development Project" which is being continued by alliance of Azerbaijani
government, The Ministry of Agriculture of Turkey Republic and TIKA, the project
on reconstruction and modernization Plant protection and quarantine laboratories
was launched.

11.1.2. COOPERATION IN THE INDUSTRIAL FIELD

On 12 November 1998, Azerbaijan, Georgia, Kazakhstan, Kirgizstan, Mongolia and
Tajikistan signed the protocol of intent for establishment and development of
cooperation between Patent organizations of Turk Republics in the frames of
Industrial Ownership Rights, which are the part of duties of Turk Patent Institute
by the Ministry of Industry and trade of Turkey Republic.

334
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

The educational program on education in economic, trade and technical spheres

for the development of technical cooperation among Turk Republics was signed
in 22-28 May 2000 with the participation of Turk Republics, also Azerbaijan.

11.1.3. COOPERATION IN THE FIELD OF STANDARDS

The first partnership protocol between Azerbaijani State Committee on Standardi-
zation and Meteorological Center (AZS Standardization Institute) and the Turkish
Standards Institute (TSE), signed in December 1990. This protocol and other
protocols that are subject to agreement between the parties recognize international
organization, brands and documents that control quality of goods and services,
that are the subject of trade.
The essential improvement on this way is the execution protocol, which were
signed 13 June 1996. Thus, two countries agreed that the goods, coming from
these two countries and/or from third one and have documents of related
organization of both countries won’t be incurred to the control by Standard
Organizations.
In accordance with Azerbaijani legislation, all goods, imported in country should
have documents. When the goods with TSI documents is entering in Azerbaijan
from CIS and Turkey Azerbaijan State Agency of Standardization, Meteorology
and Patent takes the certificate of TSI and gives the certificate of AZS. These
goods won’t pass the laboratory testing, which makes them more desirable for
domestic market.
TSI has its representative in Azerbaijan since 1997. In Azerbaijan it gives ISO
certificates for all sorts of goods. Besides, Azerbaijan is the member of Regional
Union of Standardization (BASN).

11.1.4. COOPERATION IN ENERGY SECTOR

Energy sector has main place in strategic cooperation relations between Azerbaijan
and Turkey. Baku-Tbilisi-Ceyhan Oil Pipeline project and Baku-Tbilisi-Erzurum
Natural Gas Pipeline project are the strategically and economically most
important projects in energy sector.
The other example of collaboration relations between two countries: Turkey rented
underground warehouses in 50 km distance from Baku for period until Turkey
which is the member of Pipeline Petroleum Transport Joint Stock Company

335
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

(BOTAŞ), will finish the construction of underground warehouses on its own

territory90.
11.1.4.1. Baku-Tbilisi-Ceyhan Oil Pipeline Project
Baku-Tbilisi-Ceyhan Oil Pipeline project was realized in a result of “The Inter-
governmental Contract”, signed among governments of Azerbaijan, Turkey and
Georgia during OSCE Summit on 18 November 1999.
On 3 October 2000, Azerbaijan founded “Sponsor Group”, aimed to support the
project. This group got the official status after the adoption of “Sponsor Group
Finance and Cooperation Agreement” on 17 October 2000. All of the AIOC
members, except ExxonMobil, Lukoil and Devon were participants of this group.
11.1.4.2. Baku-Tbilisi-Erzurum Natural Gas Pipeline Project
The first step on the way to Baku-Tbilisi-Erzurum Natural Gas Pipeline project was
taken during OSCE Summit on 18 November 1999, during the meeting of
ministers of Energy of Azerbaijan, Turkey and Georgia and as a result of this
meeting the primary agreement protocol was signed.
In the frames of agreement, Azerbaijan and Turkey governments signed “The
Intergovernmental Contract” on 12 March 200, regarding transportation of natural
gas from Azerbaijan to Turkey and cooperation between BOTAŞ and SOCAR on
natural gas trade for a period of 15 years.

11.1.5. COOPERATION IN TOURISM SECTOR

Azerbaijan and Turkey signed an Agreement on Cooperation in Tourism in 1992.
Azeri personnel, who work in tourism sector have an opportunity to get an
education in Turkey. Besides, in the frames of signed contracts, mutual touristic
tours have been organized by private touristic companies of these countries.

11.1.6. COOPERATION IN MINING SECTOR

In 1994-1995 Turkey Mineral Research and Search Institute management
organized “The Conference on the Earth Sciences and Mining in Turkish-speaking
countries”. The potential of natural resources and mining activities in all the
countries discussed in connection with the media. In addition, the 1/500,000 scale
map of mineral deposits, "Azerbaijan State Reserves Committee" was published
by Turkey Mineral Research and Search Institute management.

90
Doç. Dr. Osman Nuri ARAS, Elçin SÜLEYMANOV `Azərbaycan Iqtisadiyyatı`Baku 2010, p 316

336
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

11.1.7. COOPERATION IN EDUCATION SECTOR

Within the framework of Great Student Project likewise the other Turk Republics,
Azerbaijani students have an opportunity to get bachelors, masters and doctoral
education in Turkey.11% of Turk Republics’ students, coming to Turkey to get an
education are from Azerbaijan.
In 1993-2001, Turkey has sent financial assistance in the amount of 102.570 US
dollars for reconstruction of schools in Azerbaijan, inventarization and providing of
textbooks and school supplies. Moreover, Turkey Religious Foundation has opened
the Theology faculty in Baku State University. Besides, this Foundation has also
opened in Baku the Baku Turkish Lyceum for Azeri and Turkish students, living in
capital of Azerbaijan.
Educational institutions, founded by Çağ Educational Company has important
place in education sector. In addition to that, Turk World Research Foundation
organized the opening of Faculty of Business Administration in Azerbaijan
Economic University.

11.1.8. COOPERATION IN TRANSPORT SECTOR

On 1 November 1992, Azerbaijan and Turkey signed the comprehensive Agreement
on Automobile Transport. Unfortunately it only connects Nakhchivan with Turkey.
The other roadway from Azerbaijan to Turkey is possible from Georgia and Iran.

11.1.9. CUSTOMS PARTNERSHIP

On 09.02.1994, two countries signed Administrative Assistance Contract. In this
framework, Azerbaijani government representatives took a part in the numerous
seminars, held by Turkey's Customs Laws and Proceedings in 1992, 1995 and
2000.

11.1.10. COLLABORATION IN SOCIAL SECURITY SPHERE

The agreement on collaboration between Turkey Republic Ministry of Labour and
Social Protection and Ministry of Labour and Social Protection of Azerbaijan
Republic was signed in 1993. In 1995, the governments of two states adopted
cooperation protocol in social security field and in 1997 the Partnership Contract
was signed. On 17 July 1998 the Agreement on Social Defence was signed. This
agreement was aimed to guarantee the social security of nations of these two
countries and it came into force on 9 August 2001. The Administrative Agreement,

337
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

which was concluding the above mentioned one was signed on 6 May 2004.
Thus, two states got the reciprocal guarantee of social security for their citizens.

11.1.11. EXIMBANK LOANS

In the framework of agreement protocol made on November 1992 between two
states, Turkish Eximbank opened a loan in amount of 250 million US dollar for
Azerbaijan state International Bank, which is the state bank. But there were some
problems with payment of the loan. In this occasion, July 7 1995 and June 14
1996 two protocols was signed regarding the prolongation of period of returning
of loan. Azerbaijan and Turkey governments became to an agreement about debt
problem in 2004-2005.

11.1.12. TURKISH COOPERATION AND DEVELOPMENT

AGENCY (TIKA) CONTRIBUTIONS
As a result of appreciation given by Turkey to Turk Republics, in 1992 Turkish
Cooperation and Development Agency was founded by Ministry of Foreign Affairs.
Since 1999 this organization is directly subjected to the Ministry.
During the first years of its operations TIKA was mainly focused on providing of
humanitarian and financial aids, but in further, it extends activities to technical aid
and cooperation projects. Themes of these projects were energy, environment,
industry, agriculture, urbanization, tourism, education, health, culture, art and etc.
TIKA has organized in Azerbaijan different projects in following spheres:
- Programs on Development of Organizational and Administrating Structures
- Programs on Research and Development of Agricultural Systems in Eurasian
Countries
- Programs on Research and Development of Ownership, Small and Middle
Industry in Eurasian Countries
- Programs on Development of Tourism and Service Sector
- Social Partnership Programs
- Educational and Cultural Collaboration Programs.
TIKA has organized especially important projects in agricultural sector of Azerbaijan:
- In Khachmaz region of Azerbaijan the Azerbaijan-Turkey joint seed venture
was established. Until 2005, company was producing the seeds of barley and
wheat. Since 2005, it was planned to launch the production of corn, sunflower,
olive and other plants’ seeds.

338
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

- The enterprise for identification and destruction of harmful plants was

established in Samukh and Astara regions. The 120 thousand US dollars were
invested to this project.
- The construction of new institute for examining the composition of the soil in
Gandja and Quba has been planned.
Within the context of social assistance activities TIKA has undertook the renovation
of various buildings for disabled children in Shaki and unprivileged children in
Gandja.
TIKA also financed the first project about usage of internet in Azerbaijan. In 2004
there were held educational courses on tourism, insurance and tax.

11.2. TRADE RELATIONS

Azerbaijani and Turkish economics from the perspective of structure and
geographical positions are in the complementary characteristics. While Turkish
economy shows a picture of the export-oriented and manufacturing advantageous
structure, Azerbaijani economy is more advantageous with a raw material.
On the stage of the integration to the world economy Turkey takes enormous
place in the volume of the foreign trade in 2016 of Azerbaijan that has the
economic cooperation with 154 countries proving the fact that it has the important
positions.
According to the official statistics, the annual volume of trade in 2009 between
Azerbaijan and Turkey was about 700 millions of dollars. However, taking into
account the unformal trade activities led by the small size trade, the volume of
foreign trade between these two countries was much more higher than the
official figures.
According to the unofficial calculations, this number is higher than 1 billion of
dollars. If taking into account that the trading volume of Azerbaijan is about 5
billions of dollars, the volume of trade relations between Azerbaijan and Turkey
can be considered as quite high. It means that approximately 20 % of Azerbaijani
trade volume is taken by Turkey. Of course, the trade volume between two
brotherhood countries can still be increased. It is planned to reach the point of 5
billions of dollars of trade volume between two countries. It is predicted that the
trade volume between two countries can reach 5-7 billions of dollars after
resolving some problems between the countries.

339
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

The first rows of the product groups imported from Turkey into Azerbaijan are
taken by the food products. These are the main products imported from Turkey:
butter, fresh and frozen chicken, sugar, chocolate and confectionery, fruit juices,
milk and milky products, eggs, pasta, potato, other food products, stationery,
salt, sulfur, plaster, cement, electricity, paint, paint additives, washing powder,
various chemical products, paper, cardboard and cardboard products, wallpaper,
iron and steel items, knitting machines, cars and trucks, automotive spare parts,
furniture, leather products, knitwear products, bath and kitchen equipment,
wheel, plastic goods, electronic and household equipment, telecommunications
equipment and etc.
Following there are the main products exported to Turkey from Azerbaijan: oil
and oil products, cotton and cotton products, polyethylene, sugar beet, raw
leather, wool, spirits, licorice, apple juice, silk, carpets and other textile products,
copper, aluminum, titanium, fire extinguishers and so on.
Since 1991, in line with the evolving political and economic relations with
Azerbaijan, as a result of high interest of Turkish businessmen and opening of
the branches of Turkish companies in the Azerbaijani market and import from
Turkey the trade between two countries shows a preference in favor of Turkey.
In the early years of independence, the advantages in the economic and trade
relations between Turkey and Azerbaijan started to decline due to the reason of
entry of other countries’ to the market and development of the domestic
enterprises.
One of the main reasons of the decline in export from Turkey to Azerbaijan is that
the Turkish construction companies completed the construction works and they
are not involved in new projects yet.
The absence of a direct highway connection between Azerbaijan and Turkey
causes the hardships of the relations, especially economic and trade relations
between the two countries and brings Turkey to non-profitable situation due to
other countries (Russia and Iran). Thus, this situation in the Turkish-Azerbaijani
relations brings up on a regular basis the impact of the third countries on
economic and political relations. The high taxes implemented by Georgia towards
the highway connection and the car tonnage restrictions by Iran, at the same
time the membership of Azerbaijan in the CIS and the customs agreements with
the CIS countries caused some difficulties in the economic and trade relations
between Azerbaijan and Turkey. The high taxes applicate to the Turkish tracks,
customs problems, the high level of the bureaucracy, the legislative base

340
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

deficiency, the unfair competition brought by "shadow economy" , secret mono-

polization, the pressure abilities of some state officials in their own interests in
the private sector, and some laws and regulations that do not comply with the
logic of market economy makes the ability of Turkish businessmen to compete
more difficult and reduces the interest towards the country.

11.3. THE ADVANTAGE OF TURKISH

INVESTMENTS IN AZERBAIJAN
Since the early years of independence, Turkish businesspersons investing in
Azerbaijan, contribute to the economic development of both countries.
The help of Turkish capital is very essential for Azerbaijan, which is in transition
period and in need of investments. Turkish businessmen draw attention with the
investments mostly made into the non-oil sector. Turkish investments in Azerbaijan
are in the first place among the investments in non-oil sector in the country. A
large part of Turkish companies operating in Azerbaijan is engaged in trade or
prefers small and medium-scale investments. These companies are operating in
the following fields; oil, telecommunications, banking and insurance sector, food
production, education, publishing, textile and clothing industry, transport, automation
industry, lumber, iron and steel, other metals, construction, construction materials
and services and housing construction services.
Turkish businesspersons established more than a thousand of 2,500 foreign
companies operating in Azerbaijan. 380 of them are completely in the Turkish
capital, 370 - the Azerbaijani-Turkish alliance, and 60 - the representations. More
than 300 Turkish companies operating in the country are very active.
Turkish businessmen were the first who helped Azerbaijan to gain modern
hotels, banks, insurance companies and educational institutions. The companies
based on Turkish capital which make 7% of the Gross Domestic Product of
Azerbaijan, bring essential help for Azerbaijani economy in opening of new job
places from the perspective of employment.
Turkish capital has a part of 6% of Azerbaijan's state budget.
There are 40-45 thousands of Azerbaijani citizens and 5 thousands of Turkish
citizens working at the facilities opened by the Turkish investors.
Established in partnership with the Ziraat Bank "Azer-Turk Bank" is the first
example of cooperation in the banking sector. Koch Bank and Cibank based on

341
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

the Turkish capital, Gunay Anadolu Insurance and Bashak-Inam Insurance are
the enterprises serving the financial system.
At the same time, Turkish companies play an essential role in the reconstruction
of the road from Baku up to the Georgian board.
However, in recent years, while the decline in the volume of trade between
Azerbaijan and Turkey has occured, the reduction in the volume of Turkish
investments and the reduction in the number of companies based on the Turkish
capital also becomes visible. For example, in 1997, Turkey's share of 14% in
investments in Azerbaijan's economy, although in 2007 the figure was 7.1%.
In short, the Turkish capital, complying with the expression of "one nation, two
states" as a friendly and brotherly investment rather than foreign investment
gives a positive impetus to the development of Azerbaijani economy and its
integration to the world economy.

11.3.1. THE SECTORAL DISTRIBUTION OF

TURKISH INVESTMENTS
The Turkish Petroleum Corporation (TPAO) participates in the four international
consortia established in the oil and gas sector opened to the foreign investments.
TPAO has got a share of the country's oil and natural gas reserves of 6.5% of the
(Azeri, Chirag and Guneshli) project with the total cost of 11 billion dollars, 9% in
the Shah Deniz project with the cost of $ 4.1 billion, 5% from Kurdahsy project
with the cost of $ 2.5 billion and 10% of Araz-Alov-Sharg project which costs $
10 billion. The volume of Turkish investments in the frame of above-mentioned
projects by the end of 2007 was more than $ 2 billion. At the same time, two
private Turkish companies - Pet Holding and Atilla Dogan are producing oil
onshore (Mishovdag and Khilli Babazanan areas) by the companies (Joint
Venture) established together with the State Oil Company of Azerbaijan (SOCAR).
The volume of investments in the non-oil sectors of Turkish businessmen
predicted to take the important place in the development of Azerbaijani economy
has become 4 billions of dollars with the beginning of the operation of Baku-
Ceyhan oil pipeline supporting the signed oil contracts and delivering oil to the
World markets.
Turkish businesspersons with their investments are foreign investors who invest
more in non-oil sectors. Turkey's share in investments in non-oil sector amounted
to 40%. A large part of the Turkish investments is directed to construction,
communications and transport and food industry.

342
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

The distribution of the Turkish investments outside of the oil and natural gas
production in Azerbaijan is as following:
1. Industry Sector:
The ratio of the Turkish investments in the manufacturing and assembly
operations of different areas in the industry sector in Azerbaijan including paint,
aluminum, steel, cable, rechargeable battery, and etc. acoording to the number
of companies is 19%.The volume of investments is about 410 million dollars.
The number of workers in companies is in the amount of 10,000 people.
2. Trade Sector:
Turkish investments in this sector are specialized more in the sale of food,
textile, furniture and household goods. Trade sector due to the number of
companies has a share of 30%. The number of workers in companies with the
volume of investments of approximately $ 370 is close to 16,000.
3 .Service Sector:
The share of Turkish investments in service sector due to the number of
companies is 26%. The volume of investments into the health, education, hotels,
restaurants, banking and insurance services’ companies in the service sector is
about 310 million dollars. The number of workers employed in the service sector
is close to 10,000 people.
4. Transport and Communications Sector:
The volume of Turkish investments in the transport and communication sector
according to the number of the companies has a share of 10%. The volume of
investments of companies operating with the Turkish capital in the spheres of
telecommunications, automation, transportation, and publishing is about 470
million dollars. The number of workers employed is up to 6,000.
5. Construction Sector:
The volume of Turkish investments in the housing construction, construction and
decoration materials sector according to the number of the companies has a
share of 11%. The volume of investments is around $ 360 million, approximately
6,000 people work at the Turkish-owned enterprises.
6. Agriculture and Livestock Sector:
The volume of this sector according to the number of companies operating is
4%. Turkish capital in agriculture and livestock sectors is a about of 70 million
dollars. The number of workers in the sector is approximately 3,000 people.

343
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

11.3.2. AZERBAIJAN INTERNATIONAL SOCIETY OF

TURKISH INDUSTRIALISTS AND BUSINESSMEN
(TUSIAB)
In 1994, the Turkish business executives have became more organized and
established the Azerbaijan International Society of Turkish Industrialists and
Businessmen (TUSIAB).
TUSIAB created by Turkish businessmen in the framework of relations between
Azerbaijan and Turkey in the light of reality of "one nation, two states" and in the
light of the reality of "globalization" aimed to help to encourage the investments,
increase the cooperation and to develop economic and trade relations between
the two countries.
The society that is operating in a period of more than 20 years for the reason of
staging, has become a very good model for Turkish businessmen organizations
of the development of economic relations and the elimination of obstacles to the
development of relations as well as the example of the formation of market
economy and business activities in Azerbaijan.
Generally, despite the economic crises that are going on around the world and
especially in Azerbaijan and Turkey, Turkish businessmen are setting up long-
term plans in the different sector of developing economy of Azerbaijan and
continuing to operate successfully.

11.4. AZERBAIJAN INVESTMENTS IN TURKEY

There are more than 100 companies registered officially and investing the
Turkish economy from Azerbaijan. Most of these companies are operating in the
service sector. The percentage of Azerbaijani share of these companies with the
total amount of investments of 7 billion of dollars is about 86 %. The purchase of
the half of the biggest petrochemical complex PETKIM by the SOCAR in 2009 is
a second essential step after the Baku-Jeyhan pipeline towards the investments
into Turkey. Turkey to build the oil terminal and the refinery complexes in the future.
If to rank the Azerbaijani businesspersons operating in Turkey according to the
number of companies and the volume of investments, they are the investors with
the biggest part of investments among the Caucasus and Central Asian countries.
In the framework of the CIS, the volume of investments of Azerbaijan is on the
second place after Russia.

344
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

11.5. THE NEW ERA

Starting from 2015 Azerbaijani Ministry of Agriculture is planning to put the
limitations to the import of food products from abroad. The biggest part of the
products exported from Turkey to Azerbaijan are food products. It shows that the
volume of foreign trade between two countries will decrease after the certain
period. Therefore, it’s very important to pay attention to the development of
cooperation in industry sector, as well as the construction, tourism, textile and
processing industries in order not to decrease the volume of trade between two
countries.
However, despite the fact that the problems of the transition period, the
bureaucracy and corruption have a slightly negative impact on the investment
climate, the President Ilham Aliyev's political will and commitment to improve the
investment climate formulates every day a a little more favorable investment
climate for the Turkish businessmen and other foreign countries.
In general, it’s forecasted that the rule of Turkish businessmen in Azerbaijan's
economy in future periods will increase in forms of small, medium and big-sized
investments.
At the same time, with the start of operation of the "Baku-Tbilisi-Ceyhan" oil and
"Baku-Tbilisi-Erzurum" natural gas pipelines, as well as the development of
Azerbaijan's economy, the economic relations between Azerbaijan and Turkey
will be intensified.
It was planned that The Baku-Ceyhan oil pipeline should be commissioned in
June 2006, and the Baku-Erzurum gas pipeline - in mid-2007. At the same time,
it’s forecasted that Turkey's stability in political life together with the observed
development phase in the economy, will make a positive impact on trade relations
between Azerbaijan and Turkey and the flow of Turkish capital to Azerbaijan.
Indeed, Erdogan's government gives its support on the regular basis to the
development and increase of any kind of cooperation both on political and
economic level.
The first step in this direction has been taken in the end of 2002 within the
framework of the summit of ECO when national leader Heydar Aliyev had met
with Turkish businessmen and Turkish businessmen came to Azerbaijan
afterwards. The second and more important step had been taken in the beginning
of 2003, when Rajap Tayyip Erdogan together with large group of business
persons visited Azerbaijan. Taking into consideration that during both of the

345
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

visits businessmen from Turkey were acquainted with the very important
projects, the increase in the flow of capital in the future is certain. At the same
time, it’s very important to emphasize the important steps by the young Azerbaijani
leader Ilham Aliyev in this direction in particular. The business forum in Istanbul
held in April 2006, is a clear proof of this.
Europe-Caucasus-Asia transport corridor will play a significant role in the
development of economic relations between the two countries. It is planned that
in the coming years, the Azerbaijani railway will be connected with Turkish. The
construction of the Kars-Akhalkalaki railway will help to achieve this goal. Both
countries are interested in the realization of this project. The estimation of this
project started in 2005 and expected to be completed in the coming years.
Turkish businessmen have very important responsibilities particularly in the
agricultural sector, tourism, industry, financial sector, transport, communications,
construction and the development of various sectors in Azerbaijan. If to take into
account that Azerbaijan also plays a role of the bridge for other Central Asian
countries, Azerbaijan becomes more important from Turkish perspectives.
Developing political and economic cooperation between Azerbaijan and Turkey,
"Shahdaniz-2", TAP and TANAP projects carried out successful cooperation
between the two countries. At present, about 2,500 Turkish companies operate
in agriculture, services, industry, trade, construction, transport and others sectors.
36% of foreign companies in Azerbaijan are Turkish companies. In Turkey, nearly
1,100 Azerbaijan companies successfully operates.
In 2013, a new project - 'STAR' an oil refinery factory construction has been
started in Turkey. he project has been laid the foundation by the President of
Azerbaijan Republic Ilham Aliyev and The Prime Minister of The Republic of
Turkey Rajab Tayyip Ardogan in October 25, 2011. "STAR" oil refinery will be
directed to supply the demand of the interior market in Izmir and Istanbul
territories by constructing in Aliaga port zone near Izmir city , in the west of
Turkey which is considered powerful enough economically. The construction of
the factory near the huge petrochemical complex Petkim will cause high-
efficiency by creating vertical integration. The total capacity of the oil refinery will
be 10 million tons and The State Oil Company of the Azerbaijan Republic will
perform as the main supplier of raw materials of the factory. The factory will
produce approximately 1.6 million tons of naphtha will reduce its dependence on
raw materials from foreign countries in the petrochemical industry in Turkey, will
help to decrease the current account deficit of diesel and aviation fuel and play
the role of raw materials for petrochemical industry products. The total cost of

346
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

the project is 5.6 billion USD, in 2014 to finance the construction project of
"STAR" oil refinery complex has been taken into account to allocate in the
amount of 224 million manat by Fund. Until the date 30.09.2014 generally 596.1
million manat, including 223.5-million manat allowance for 9 months of the year
2014 has been directed to finance this project by Oil Fund.
In accordance with the project of "STAR" oil refinery complex has been allocated
596.1 million manat allowance in general by Oil Fund and financing of the project
has finished. According to The President of The Republic of Azerbaijan's Decree
No.1974 of February 21, 2007 The State Oil Fund of Azerbaijan Republic fulfill
the financing of the project "Baku-Tbilisi-Kars new railway". With this Decree,
"International Bank of Azerbaijan" Open Joint Stock Company has been assigned
the agent bank for the implementation of credit and banking services on behalf of
the Government of the Azerbaijan Republic. According to The President of The
Republic of Azerbaijan's Order No.2222 of June 13, 2007, The Ministry of
Transport of Azerbaijan Republic has been determined the competent authority in
the bilateral agreement by the Government of the Azerbaijan Republic. Since the
beginning of financing of projects, until the date 01.10.2015 generally 559.3
million USD, including 22.5 million USD allowance for the first nine months of
the year 2015 has been allocated to The Ministry of Transport with treasury by
the State Oil Fund. This allowance, in accordance with the bilateral agreement
signed between the governments of Azerbaijan and Georgia with The
International Bank of Azerbaijan, has been transferred to the account of the
Limited Liability Company "Marabda-Kartsakhi Railway" which has been created
for projecting, constructing, rehabilitation-reconstruction and exploitation of the
railway area and appropriate infrastructure institution up to the border of the
Republic of Turkey.
At the auction held on 30th of May, 2008 the 51% of "Petkim Petrokimya Holding"
company’s shares have been acquired by the SOCAR&Turcas Energy Inc.for the
price of 2 billlion and 40 million dollars. At present, there are some factories on
low-density polyethylene, high-density polyethylene, polypropylene, polyvinyl
chloride, acrylonitrile, ethylene glycol, purified acid, aromatic hydrocarbons,
ethylene-propylene, chlorine, vinyl chloride monomer, plastic works and phthalic
anhydride operating under the "Petkim". The petrochemical products produced
by the "Petkim" that supplies the Turkish industry with the raw materials ar widely
used in the in the construction, agriculture, electricity, electronics, textile
industries, as well as in the production of pharmaceutical, paint, cleaning
products, cosmetics and other areas. In 2010, "Petkim Petrochemical Holding"
Inc. set a record in production, export and production capacity percentages for

347
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

the 46-year history. "Petkim " took the 12th place in the" Top 500 largest
industrial entities" of " Istanbul Chamber of Industry ", the 20th place among the
"1000 Most exporting companies" of "Turkish Exporters Assembly" and 3rd place
in the ranking released by the "Aegean Region Chamber of Industry" among the
"100 largest industrial structures of the Aegean "and "The most exporting
companies".
Bilateral economic co-operation between Azerbaijan and Turkey, as well as their
great contribution to the investment are the main factors for the development of
our countries. The turnover for the trade between Azerbaijan and Turkey is more
than 5 billion dollar. The volume of the investments allocated to the economy of
Turkey will have reached 20 billion dollar by 2020, whereas 15 billion of this will
go to the State Oil Company. The significant projects, such as Baku-Tbilisi-Ceyhan
pipeline, Baku-Tbilisi-Erzurum pipeline, Baku-Tbilisi-Kars railway have the great
importance in the future co-operation between two countries.
After the projects mentioned above, Trans-Anatolian Natural Gas Pipeline Project
(TANAP), which was signed on, 26 June 2012 by the President Ilham Aliyev and
Prime Minister Recep Tayyip Erdogan, has increased the influence of our countries
in a global world and region. Thus, TANAP project will be implemented within 5
years. Azerbaijan will be not only a vital gas supplier for Turkey, but also
Azerbaijani gas will be transported to Europe via Turkey at the same time.
Today, Azerbaijan plays a critical role in a global energy market, as well as
ensuring energy security of region and Europe. The share of Azerbaijan just
increased to nearly 40 percent in some of the gas market of European countries.
Furthermore, an agreement reached as a result of the activities of political
leaders of both countries for the construction of Trans-Anatolian Gas Pipeline in
2012. The role of Azerbaijan will be widened in European gas market after the
implementation of TANAP in 2017. This project will be a strong instrument for
ensuring our long-term development, as well as economic and other interests in
a decade. Current gas reserves of Azerbaijan will let meet the republic and other
countries need for gas in 100 years. Moreover, choosing the TAP project-Trans-
Adriatic pipeline as an export route in 2013 has been a historic page.
On 17 March, 2015 a solemn ceremony was held in Selim, the Turkish province
of Kars, on the occasion of the groundbreaking of the Trans-Anatolian Natural
Gas Pipeline with the participation of the President of the Republic of Azerbaijan
Ilham Aliyev, President of the Republic of Turkey Recep Tayyip Erdogan and
President of Georgia Giorgi Margvelashvili.

348
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

It was noted in this historic event that the project will link the expanded South
Caucasus Pipeline, which starts in Azerbaijan, with several pipelines in the
European Union. The project that intended to impalement within 5 years will be
carried out in several stages, with the first ending in 2018.
The planned capacity of the pipeline will be 16 billion cubic meters of natural gas
per year by 2020, and will be increased to around 23 billion cubic meters by
2023 and 31 billion cubic meters by 2026. Ten billion cubic meters of the initial
16 billion cubic meters volume will be transported to Europe, while 6 billion
cubic meters to Turkey. The intended gas for the Europe will go from Turkey-
Bulgaria and Turkey-Greece border. This historic event could be evaluated as the
new and dynamic development stage of the strategic cooperation of Azerbaijan-
Turkey.
Turkey pays attention to the following points in the Caucasus and Central Asia
policy, including Azerbaijan:
1. To give a priority to the strategy of the common cooperation and development
of the countries in the region,
2. To the establishment of the insurance union of the region,
3. To the establishment of the international arbitration system to operate in the
region,
4. To the acceptance of the properties of investors in the region as the
mortgages while giving the Eximbank credits,
5. To the completion of Kars-Tbilisi railway in the nearest future,
6. To the volume of trade between Azerbaijan and Turkey as well as to increase
of the information and technology flow,
7. To support the development of commercial law, tax law, execution-
bankruptcy law, competition law and the infrastructure of the capital market
legislation,
8. To accelerate the cooperation for the establishment of the economic system
that can be able to compete in the regional market,
9. To mediate the cooperation between this region and Europe at the stage of
acceptance of Turkey into the EU,
10. To work towards the softening of the fright traffic and customs checkpoints
conditions and establishment of the comfortable movement between Azerbaijan
and Central Asian states as between the European countries,

349
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

11. To mediate in the work towards the establishment of Turkish Economic

Union between the Turkic states as the alternative of the European Union. As
the CIS doesn’t give the expected effect, to formulate a strong region in the
fast developing world market with more effective and strong economic
systems.

350
 CHAPTER TWELVE
THE IMPACT OF GLOBAL FINANCIAL
CRISIS ON AZERBAIJAN’S ECONOMY
12.1. THE GLOBAL FINANCIAL CRISIS AND
ITS REASONS
Financial problems that started with chaos and swelling in mortgage credit
system continue to deepen in the USA. After taking Freddie Mac and Fannie Mae,
which were organized to improve the market in housing loans, to state control
the big investment bank Lehman Brothers went bankrupt, Merrill Lynch was sold
at a very low price to the Bank of America and AIG, the giant insurance
company, was forced to use a large amount of credit from Fed (Central bank of
the USA) in order to be able to operate. When the crisis was noticed and won
global size in UK, Europe and other developed countries the US congress
confirmed about 700 billion dollars as bailout bills.
In 2008 in the world economy development and growth of previous years began
to decline. None of the countries that play main role in world economics (USA,
Japan, China, UK, India, Germany, France, Italy and Russia) could escape the
impact of crisis. These countries form about 80 % of world GDP. Nearly the half
of world’s population belong to these countries. The world’s annual average
growth after decreasing by 2 times went down to 2.5 % from 5 % in 2007.
From the early months of 2008, banks put up for sale the houses under the
mortgage. Houses that cost over 1 trillion US dollars were offered to customers
in market in June already. As a result of decreasing prices in real estate market
was registered that the US house market lost 4 trillion US dollars. Contrary to
predictions, in most countries the economic development decreased even more.
According to experts, financial crisis followed up by the lack of benefits subsides
and more severe industrial crisis replaces it. In another word, crisis proceeded
from financial sector to industrial. This stage of crisis causes more problems.

351
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

Lately, in the most world countries bankruptcy of car, electrical, light industrial
enterprises and standstill in realty market have been the factors that led to
unemployment. In a fact, crisis affects able-bodied fields the most and it brings
to massive unemployment. It decreases consumption the world wide even more.
Nowadays, banks as in the capacity of weakest points of global crisis, could not
deal with yearly increasing deposits from different countries. In the recent past,
they directed money for a short time to the trade and service sector in a high
percent. Widely has been distributed borrowing money in relatively favorable
terms to repay old debts. Recently the flow of loans were directed to big cities
such as Shanghai, New –York, London, Frankfurt for sale of under mortgage
houses. Even conservative bank systems of England and Switzerland were caught in
financial pyramid trap – they forwarded to mortgage more than 10 billion dollars
without finding out the reliability of customers. In these conditions, investors
directed their funds to real estate –to houses, and to other types of realty.
Financial surplus was making realty prices go up. Formerly, when buying house
under the mortgage you were not paid more than 70% of house worth. Customer
was paying the rest 30%. Afterwards, you could get 80% for the first payment,
later 90%, and in a little while- 100%.It achieved 105-110%. It was a method to
attract customers, extra 5-6 % were planned to provide the house with furniture.
During the mortgage boom, wages and income were also high. But no one did
take into account that in the major states, especially in the US and the UK, the
cost of budgetary expenses coming over the revenues and import’s exceed over
the export on a continuous basis will lead to the stop of the development one
day. After the crisis in the US and Europe more than 1000 leading banking and
financial institutions has declared bankruptcy or partially self-insured with the
help of the states.

12.2. THE IMPACT OF FINANCIAL CRISIS ON THE

ECONOMY OF AZERBAIJAN
12.2.1. THE IMPACT ON ECONOMIC DEVELOPMENT
Considering the state economics we can notice the increase of GDP, decrease of
inflation rate, lessening of unemployment and expansion of other positive econo-
mical development. As known, in Azerbaijan increase of GDP mostly depends on
oil and rising oil prices. Before global financial crisis, according to increase rate

352
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

of GDP, in 2005- 26,4%, in 2006-34,5%, and in 2007 despite the fact that the
economic increase was coincided to 25%, in 2008 in Azerbaijan was noted
10,8% of increase. As International Currency Fund notices, there was no
increase rate of GDP in Azerbaijan in 2009 for the first time, it regressed in a
range of -11,5%. If analyzing economic growth after 2005, although the public
produces the previous extent of oil against the background of decreasing oil
prices there have been lessening in the production of goods and servicing. It
proves that profits of Azerbaijan directly depend on oil and oil profits on world’s
price conjuncture. In order to increase the growth of GDP the dependence of
economic development on oil profits needed to be lowered to the minimum. In
2009 in a contrast with previous years, the GDP decreased for the first time. It
mainly occurred because of reduction of oil prices and decline in the
construction sector91.

12.2.2. THE IMPACT ON OIL AND NON-OIL SECTOR

As reproducing country, Azerbaijan has suffered injury due to the decline in oil
prices. Before the crisis barrel of oil that cost 150 dollars after the crisis fell
down to 30-40 dollars. This cheapness affected in the negative way oil profits of
Azerbaijan. Generally, cheapness of oil prices, oil sector that forms 75% of state
budget, oil and oil products that make up 90% of export bring many problems
within development of state economy. The decrease on energy carrier prices can
reveal not only in economical, but also in social way negative results.
After global financial crisis, Azerbaijan government had to delay realization of
many large projects for several years. Especially, projects for construction of
new metro, for the bridge in the Caspian Sea and construction of certain facilities
were postponed until the subsidence of crisis results.

12.2.3. THE IMPACT ON AGRICULTURAL SECTOR

The role of agriculture in the reducing the impact of the global financial crisis and
particularly in maintaining food security in the country is indispensable. The
effective functioning of Azerbaijan's agricultural sector, especially in rural economy
at the expense of their own financial resources is almost impossible. Even in
some developed countries in recent decades, the targeted impact on the agrarian
sector mainly has been directed to emerge from crises, but now in these countries

91
Süleymanov, Elçin, Elvin Alirzayev, and Ayaz Zeynalov. "2008 Küresel Mali Krizinin Azerbaycan Ekonomik
Kalkinmasina Etkisinin Analizi." Journal of Qafqaz University 1.1 (2013): 114-123.

353
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

the impact is directed to ensure sustainable development of the agricultural

sector to a large extent.
The payment of the agricultural product demand through domestic production is
very essential not only in terms of the country’s agricultural safety, but also
important in terms of reducing dependence on imports. Rationale The financing
of agriculture from state’s budget depends on the level of investment policy in
the field of agriculture, its implementation and the promotion of innovations. In
2008, the mineral products exports accounted for 97% of the foreign trade
turnover of commodity groups, but the agriculture doesn’t exceed 1.1%. It is
essential to increase their ability to export agricultural enterprises.
The need for financial resources involved in agriculture, especially in rural
economy is compared to the solvent depends on the costs and revenues. In the
process of the determining of this ratio, the level of development of the modern
sector is still in the process of emerging problem of incomplete initial
information. The fact that the available statistics (exception for the sample survey
of households) is not enough to calculate with precision the financial results of
enterprises and households. Therefore, it should be satisfied with the data
coming from the individual agricultural businesses and agricultural enterprises in
determining the costs of production, income and profitability indicators.
Thus, the share of GDP of the sector employed 40% of total employment, has
decreased since 2000 and reached 5.7% in 2008. The financial crisis has shown
once again that Azerbaijan's crude oil, natural gas production is not enough for
the sustainable development of the industrial sector, and there is aneed to pay
more attention to the development of agriculture92.

12.2.4. THE IMPACT ON TRADE SECTOR

In 2008, the volume of trade operations conducted by the residents and non-
residents with 141 countries was $ 54.9 billion. During this period the country
exported 2127 kinds of goods with worth of 47.8 billion dollars and imported
5893 kinds of goods with worth of 7.2 billion dollars and the positive balance on
export-import operations amounted to $ 40.6 billion. In the trade sector of
Azerbaijan during 10 months of 2009 import-export operations conducted with
136 countries amounted to $ 16.5 billion. In January-October, 2009 foreign trade
turnover consisted of $ 11.5 billion of exports and $ 5 billion of imports. The
positive surplus in foreign trade sector was $ 6.5 billion.

92
Süleymanov, Elçin, Elvin Alirzayev, and Ayaz Zeynalov. "2008 Küresel Mali Krizinin Azerbaycan Ekonomik
Kalkinmasina Etkisinin Analizi." Journal of Qafqaz University 1.1 (2013): 114-123.

354
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

12.2.5. THE IMPACT OF AZERBAIJAN ON FOREIGN

STATE DEBT
The amount of foreign debt of Azerbaijan has increased 22.9 percent, in other
words 3 billion dollars according to reports till 1st January of 2009 during crisis
in 2008. The ratio of foreign debt to GDP has decreased from 8.2 to 6.4. However,
the foreign debt per person has raised from 283.8 to 344.9 dollars. The main
part of the credits received by governmental and state organizations has been
spent on investment projects.
To the date of 1st of October of 2015 the foreign debt of Azerbaijan has been
6.730,9 million US dollars, and the ratio of foreign debt to GDP has been 12.4
percent. The amount of credits received for economic reforms has been 644.9
million dollars. The credits taken mainly from World Bank, Asia Development
Bank, Islam Development Bank, European Reconstruction and Development Bank,
Japanese International Cooperation Agency and other organizations has been
spent to support to economic reforms peojects, restoration and reconstruction of
infrastructure, and also road construction, improvement of water supply of
regions and also improvement of rail way services, industry and etc.
286.3 million dollars has been spent to the payments of foreign debts. The
amount of payment has increased 67.9 percent and one of fourth has been
spent to the payment of the debt percentages. We have to note that 117.9 million
dollars has been paid with the help of state budget. The World Bank assumes the
ratio of current account balance to GDP will raise to 41.6 percent according to
the summary of 2008 and will be 30.7 percent in 2009.
Note that for this indicator among the countries of the Eastern Europe and Central
Asia Azerbaijan is in the first place. At the same time, Azerbaijan maintained its
leading position in the years of 2009 and 2010. In general, the majority of
countries in the mentioned region have had a negative current account balance
and the percentage of GDP was also negative.
Even if the share of foreign public debt to GDP is not at a dangerous level, the
trend of rapid growth of external debt is still under concern. In addition, such a
dramatic increase rate coincides to the period when Azerbaijani financial viability
is in the phase of contraction compared to previous years. The repayment of the
highest amount loans taken and being used recently will take place in the period
of the reduction of oil revenues - after 15-20 years.

355
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

12.2.6. THE IMPACT ON CONSTRUCTION SECTOR

The volume of construction work carried out by construction enterprises in 2009
was about 3 158,9 millions of manats and decreased by 12.2% in comparison to
the amount of work in 2008. Thus, 2,163 billion of manats of the work done in
the reporting year (68.5% of total volume) have been spent on new construction,
reconstruction and expansion works, 610 millions of manats (19.3% respectively)
on overhaul, 132.4 millions of manats (4.2%) on maintenance and 253.5 millions
of manats (8%) on other construction works. The non-government-owned
construction companies have spent 2 363,6 million AZN and state construction
companies - 795.3 million AZN on construction works. Besides that, during
eleven months of 2009, the average monthly wage of 62.1 thousand people
worked in the construction sector amounted to AZN 449.8, and increased up to
10.7% in comparison with the same period of the previous year. The average
monthly salary of large and medium-sized construction workers was AZN 500.4.
The average monthly nominal wage of employees owned by construction
companies amounted to AZN 365.9. The amount of salary in the construction
area increased up to 43%, and up to 11.4% in the area of construction of buildings,
and in the area of installation of engineering equipment of buildings and covers
and decoration works field have increased and become AZN 443.6 and 264.9,
respectively in comparison with the previous year's level.
Despite of all of these indicators, in real terms the global financial crisis has
made the most significant impact on the construction sector. The construction
sector flourishing in the previous years, due to the customer and capital shortage
has become a sector that has been tangible in the level that it was easy to notice.

12.2.7. THE IMPACT OF DIRECT INVESTMENT

One of the most significant impact channels of the global crisis on the developing
countries is decrise of the flow of direct foreign investments. Under the
framework of the program of public investment in infrastructure projects with the
increase in domestic investment, the foreign direct investment into the country’s
economy slightly decreased in 2008. The volume of foreign investments directed
to the main capital from foreign sources in 2008 was about 2.2 billion manats
(2.75 billion dollars), making up 16.3% less than the same period of the previous
year. If in the previous years (the trend has been observed since 2006) the
reason of decline has been associated with the transition phase of repatriation of
more investment in oil and gas projects, in 2008 the effects of the global
economic crisis should also be added.

356
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

Table 27. Investments in economy

2000 2003 2004 2005 2006 2007 2008
Investments
Millions of manats 1289.8 4249.2 5820.4 6733.4 7415.6 10353.9 12481.8
Millions of dollars 1441.4 4326.4 5922.7 7118.5 8300.4 12066.1 15192.1
Foreign investments:
Millions of manats 829.5 3310.9 4496.4 4628.5 4514.2 5727.2 5625.8
Millions of dollars 927 3371 4575.5 4893.2 5052.8 6674.3 6847.4
Domestic investments:
Millions of manats 460.3 938.3 1324 2104.9 2901.4 4626.7 6856
Millions of dollars 514.4 955.4 1347.2 2225.3 3247.6 5391.8 8344.7
*initial information
Source: State Statistics Committee of the Republic of Azerbaijan
2009 2010 2011 2012 2013 2014
Investments
Millions of manats 10475.0 14118.9 17048.8 20251.1 21448.2 21890.6
Millions of dollars 13033.5 17591.4 21558.9 25777.8 27340.0 27907.5
Foreign investments:
Millions of manats 4395.1 6619.7 6849.8 8102.7 8269.3 9175.7
Millions of dollars 5468.6 8247.8 8673.9 10314.0 10540.9 11697.7
Domestic investments:
Millions of manats 6079.9 7499.2 10199.0 12148.4 13178.9 12715.0
Millions of dollars 7564.9 9343.6 12915.0 15463.8 16799.1 16209.8
Source: State Statistics Committee of the Republic of Azerbaijan
In 2008, the UK had the biggest share in the investment made from foreign
countries and international organizations. The volume of investments directed to
the main capital by the British residents was about 1.27 billion dollars, or the
equivalent of nearly 1 billion manat. Compared to the same period of the previous
year, the capital investment of the British investors declined for 202 millions of
manats or 16.5%. Along with the UK the first five of the main foreign investors in
Azerbaijani economy consists from the US, Japan, Turkey and Norway residents.
The total sum of the capital investment of the investors representing these four
countries is 941.3 millions of manats, while their share is equal to 42.3%. It
should be noted that the total amount of investments from all of the financial
sources into the development of economic and social spheres in Azerbaijan in
2008 was 9 billions of manats, or 34.3% more investments than in 2007. There
is also a decrease in sales of various imported goods in the country. For
example, the volume of sales of some car brands in 2008 decreased by 40%.

357
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

Table 28a. Foreign investments, 2000-2008 (Millions of dollars)

2000 2003 2004 2005 2006 2007 2008
Total foreign investments 927 3371 4575.5 4893.2 5052.8 6674.3 6847.4
including:
Financial credits 262.9 238.3 293 698.4 983.5 1576.6 2357.9
In oil industry 546.1 2972.4 4088.1 3799.9 3422.3 4003.3 3350.7
Oil bonus - 58.6 21.6 1 17 68.2 3.5
Joint ventures and
118 45.4 104.2 230.5 368.4 439.1 494.1
foreign-invested enterprises
Table 28b. Foreign investments, 2009-2014 (Millions of dollars)
2009 2010 2011 2012 2013 2014
Total foreign investments 5468.6 8247.8 8673.9 10314.0 10540.9 11697.7
including:
Financial credits 1 438.3 3 405.9 3,692.5 3,135.5 2,655.8 1,880.6
In oil industry 2 412.7 2 955.3 3,407.8 4,287.8 4,935.2 6,730.7
Oil bonus 1 2 19.9 2 2.4 17.0
Joint ventures and
624.4 659.6 886.0 1094.5 1041.0 1318.5
foreign-invested enterprises
Source: State Statistics Committee of the Republic of Azerbaijan

12.2.8. THE IMPACT ON STATE BUDGET

The expenses of state budget of Azerbaijan Republic for 2009 were expected to
be 12 billions and 177 millions manats and the revenues were expected in the
amount of 12 billions and 355 millions manats. In comparison with 2008, the
state budget's dependence on oil also slightly increased. In 2008, the share of
the oil revenues of the state budget revenues were expected to reach 62.4%,
however, in 2009 this figure reached 65.4%. The direct investments from oil
sector in 2009 was 7595 millions of manats, including the direct tax payments
from oil sector - 2680 mln. of manats and SOCAR transfers of 4915 millions of
manats (40.4% of budget revenues).
The 74% (1264.5 mln. AZN) of growth of budget revenues in 2009 (1693 mln. AZN)
stemmed from the increase in the oil sector payments. At the same time, the
budget's dependence on oil revenues had an effect of the increase in non-oil
budget deficit. If the ratio to GDP formulated in the non-oil budget deficit in the
non-oil sector of state budget in 2007 was 32%, in 2009 this figure increased up
to 42.5%.
In connection with the economic crisis in 2008, the annual amplitude of the price
of oil was higher as well. Thus, the price of Brent crude oil has changed over the

358
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

year from US $ 144.9 to US $ 38.1. The decline of the price of each barrel of oil
for 10 dollars means a loss of $ 2.2 billion for Azerbaijan.
But even if the price per barrel of crude oil decreases to $ 40, no problems with
the implementation of the state budget are expected. It should be noted that
three-quarters of the oil revenues in the budget consist of the State Oil Fund's
transfers. Even if the price limit used as a calculation base rate by the government
while forecasting the budget revenues for the year 2016 mentioned in the
speeches of representatives of the competent state bodies throughout the budget
estimate was taken as $ 50 per barrel of crude oil, the State Oil Fund’s transfers
for the first time in the past five years have been reduced for more than 40% and
was about 6 billion manats. In this case, the projected budget allocations from
the Fund for the current year will make a total of 90% of the Fund's income. As
noted above, in case of the worst price scenario (for example, 40 USD per each
barrel) the reduction in the Fund's projected revenues will be available.
As you can see, even in the context of such a sharp decline, the State’s Oil Fund
will be able to implement not only Fund’s obligations on the state budget, but
also the obligations of the Fund’s own expenses. In this case, 50-70% of the
Fund's total income can be transferred to the state budget.

12.2.9. THE IMPACTS ON MACROECONOMICS

The major aspect that can cause a serious problem is that crisis affects the State
Oil Company of Azerbaijan Republic’s (SOCAR) income. The fall in “Azeri Light”
brand oil prices in last 3 years reached the most critical psychological threshold
– less than 50 US dollars. Taking into consideration, that in 2009, the price of oil
was lower than projected in the budget (in the budget it was estimated as 70$
for a barrel), the assumption that world economic crisis will affect the Azerbaijan’s
trade turnover was very realistic. According to official statistics, crude oil has a
special weight as most of the country's exported item (93,80 percent). At the
same time, crisis leads to postponement of investments in the country's economy,
which caused a delay in economic development and will lead to lower economic
growth expected for the end of the year.
- A reduction in oil revenues that form the basis of our economy;
- Has been postponed a number of major socio-economic investment projects;
- Economic growth will be lower than expected for the end of the year;
- A decrease in demand will result in the weakening of activity of economic
subjects.

359
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

12.2.10. THE IMPACTS ON MICROECONOMIC SYSTEM

At the end of 2008 and by the beginning of 2009, the Central Bank softened
monetry policy as a preventive monetary measure. With a resolution of the CB
Board of Directors on February 2, 2009, 5% discount rate has been reduced to
3% and reached 5%. The upper limit of the interest rate corridor was reduced
from 13% to 10%. Manat and foreign currency reserve requirement was reduced
from 6% to 3%. In conditions of the deepening of the global economy crisis, 2009,
in accordance with the direction of the monetary policy of the National Bank of
macroeconomic stability, financial stability and supporting economic activity in
the country continues to maintain its mitigation.
As one of the anti-crisis measures is the abolishment of tax for insurance
companies directing for increasing of capitalization of income for 3 years, as a
evidence of state financial support. For decreasing of impact of crisis on insurance
companies during this period all unnecessary expenses should be reduced,
increase the number of clients and create new products for market. Government,
on its turn, has made an essential step by exemption of income tax for insurance
companies and banks in 2008.
The most weak in terms of this crisis, sector of Azerbaijan economy is bank
sector. National Bank of Azerbaijan urged to reduce interest rates by 2 times and
run accurate policy by estimating all elements of situation reigning in the market.
For now, private banks reduced the issuing of loans. Azerbaijan banks have
attracted 2 million US dollars investment from foreign finance resources. At the
moment the process of alluring of independent finances has stopped, due to the
decrease of margin loans in global market and sharp increase of interest rates. It
all resulted in lack of foreign credits that Azerbaijan commercial banks alluring
and respectively, these banks aren’t able to give consumer and corporate loans
to population and entrepreneurs.
Financial and banking sector problems will spread to the real sector. Because the
entrepreneurs who cannot get loans from banks will reduce their operations and
the volume of turnover in the majority construction and production facilities will
descend and service and sales areas will begin to decline. All of these will result
in thousands of people will become unemployed. On the other hand, the
conservative characteristics of Azerbaijan bank to the world market were in our
favor. Very serious reductions have started in private structures and companies
in the country. Some experts deny the impact of the financial crisis, but the
country's economy, in the largest 12 companies of Azerbaijan in total 3400
people were diminuend.

360
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

The large surplus in the country's currency balance of payments increased by 2

times (9.7 bln. $). The volume of exports increased significantly in comparison
to previous years and is more than imports by 5 times.
The strategic reserves are enough to finance continuous import of non-oil sector
for 28 months. In international practice the norm for this is 3 month. As we
mentioned, the amount of external debt of the banking sector is 2 billion US
dollars. It contains total of 18% of the liabilities.
The National Bank controls monetary market of the country and this is the reason
why the currency is relatively stable. In this term, the efficiency of economy is
considerably extending.
Among the CIS countries Azerbaijan was the one who has had the less impact of
Global Financial Crisis and considering of the following proposes can help to
maximum reduce the impact.
- To increase agricultural investment and allocation of loans;
Taking into consideration, that 46% of the Azerbaijani population lives in villages,
and their economy is mainly based on agriculture and agricultural products are
the raw material for industries, ultimately it will give impetus to the development
of the industry.
- Reduce dependence on oil revenues and prepare economic fields to the
development of non-oil sector of the economy by high growth rates of
producing;
- In order to reduce the deficit of the state budget the implementation of the
budget should be overestimated and some of the expense items have to be
reduced;
- Increase state control and public scrutiny on funds, allocated for social and
development construction projects at the expense of Oil fund in order to avoid
the embezzlement of these funds;
- Replace the short-term investments with the long-term investments;
- Strengthen state control measures to fight the artificial price increases,
monopoly and unfair competition;
- Grant a share of the exchange reserves held abroad in foreign banks to the
use of local banks with preferential terms, in general, the promotion of soft
loans among the banks and the population oriented loans;

361
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

- Increase state aid for farmers and other stakeholders (especially those who
decrease the sale or turnover), and implementation of regional and sectoral
tax incentives;
- Promotion of exports in non-oil sectors;
- Revision of the priorities of the investment program, strengthening financial
discipline and efficient use of state budget funds;
- Implementation of state guarantee for some problematic debts that was
carefully elected, for and the registration of non-formal economy;
- Sponsoring of the projects that provides secondary professional training for
unemployed population, number of which is continuously increasing the
benefits and vocations provided to them;
- Organization of campaigns to encourage savings in households and institutions
of all kinds, regardless of their property facilities;
- Promote economic way of development corporate debt securities sector in
the securities market; avoid the preference of Montero or fiscal measures
separately as a anti-inflation instruments and give a preference only to their
combined work.
Thus, we can conclude that such an analysis of the recent global economic
crisis is distinguished by its uniqueness and the serious impact on all the major
financial and trade channels of Azerbaijan. Thought the full official diagnosis of
the impact isn’t systematic, some of the steps taken convincing us that the
government and the business sector is aware of the possible risks

362
 THE RESULTS AND PROPOSES
Azerbaijan, which has rich natural resources, natural beauty and strategic
geographical position and growth prospects in among South Caucasus counties,
during the early years of independence, due to the impact of the occupation of
Karabakh by Armenia's and political, economic and social problems, which
occurred because of this occupation has had not very bright position in the
international arena. However, regarding the promising economic resources it
was known as a country that has been the focus of the world's leading media in
the country.
By the coming to force of the National Leader Heydar Aliyev, country gained the
political stability. Azerbaijan could manage the economically hard situation and
developed as a country exporting oil in global scale.
With the policy, running by Heydar Aliyev, the stability in economic and political
environment were achieved and as a result of tighter monetary and credit policy
the 1760% rated inflation has been decreasing since 1995 and the stability in
common consumer costs was provided.
After the international oil companies signed "Contract of the Century" in 1994,
dedicated to the receipts of energy resources in the Caspian Sea, foreign
investment in the country especially in the energy sector continues to be
successful. Oil and natural gas reserves are the backbone and engine of the
economy. With the delivery of energy resources to Western markets Azerbaijan
will become to the richest country in the region with the most important position
in the future.
In the other hand, Azerbaijan is one of the most invested countries, especially by
Western companies, who prefer to make big scale investments in energy sector
and it somehow gives an international guarantee for the future investments in
other sectors also.
The 85-90% of the share of exported products comes from oil and oil industry
production. This rate increased after launch of oil export through the Baku-Tbilisi-
Ceyhan oil pipeline in 2005 and start of transportation of natural gas through
Baku-Tbilisi-Erzurum pipeline in 2006. However, it means that economy is

363
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

indexed on oil and fluctuations in oil prices. Thus, the balance of payments deficits
is removed in line with the increase in oil prices and revenues from the oil.
The first period of privatization, which covered mostly small-scale enterprises
finished in 1997. The second period of privatization was launched in 2001 and in
was manly focused on privatization of several middle and large scale institutions,
which had strategic importance.
The economic crisis in Russia in 1998 and decline in oil prices have made
negative impact on country’s economy, but after the increase in oil prices in
2000, the economy become more stable.
Azerbaijan is trying to organize foreign trade policy in terms of the market
economy. There are no any restrictions, especially in the food sector, except
customs duties on certain strategic products.
The turmoil, happened in bank and financial sector in the early years of
independence, was removed and this sector has been moved under the strict
control of the National Bank. Thought legislative regulations haven’t been
accomplished yet, there are main laws that provides general balance of
economy. However in Azerbaijan, state has serious intervention in the financial
system. This doesn’t allow for the liberalization of the financial system. Along
with the rapid development of the financial sector, the sector is still very weak
and vulnerable.
As a result of permission to have a private property and launch of privatization in
agriculture, industry and service sectors, private sector's share in GDP was 13%
in 1990, and increased to 62% in 1999, then rose to 74% at the beginning of
2005. In 2014, the private sector share in the GDP was even 83.2%.
Surely, there are a lot of steps and actions that should be held in economic
development process. These problems, which Azerbaijan is facing with, aren’t
sourced from free market. They are transition period problems. It needs to be
outlined, that the legislative and administrational base for the implementation of
further measures has been established. The macroeconomic, regional and
sectorial goals have been determined and some actions were held towards them.
There has been a significant revival in the economy of Azerbaijan, in general,
after the launch of the Baku-Tbilisi-Ceyhan oil pipeline, there. The project-based
programs are observed to be carried out.
It’s observed that, along the economic, also strategic profits have been taken
into consideration when Azerbaijan chose the way of production of Caspian

364
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

energy resources and their exportation to global market. This case has a
significant role for Azerbaijan which has had to continue its political independence
and develop the economic freedom against Russia, which tried to save its
impact on region as it was during the Soviet regime.
Despite this all, the existence of rich natural resources, the big personnel potential,
the level of economy in the period of beginning of the transition, location right on
the intersection of essential transport roads creates a positive opinion regarding
the future of Azerbaijan economy.
The resolution of main political problem – the occupation of Nagorno-Karabakh
by Armenia, will have a significant impact on the economic development and
stability.
For the solution of some problems and further development of economy Azerbaijan
government should evaluate and take into consideration some proposes and
made implement some amendments:
- The actions, required for re-establishment of economy should be taken as
soon as possible and it also has to provide the bigger and wider in scale flow
of investments in the country.
- Along with measures, that will provide the flow of investments in Azerbaijan
and guarantee their safety, one of the main targets for economy should be to
get rid of the “Dutch Disease”. The focusing of external trade only on natural
resources is resulting in the exhausting of those resources and contravention
of social justice, which in this term means the enrichment of small part of
population. This also can lead to loss of independence in internal and external
relations. Therefore, the income from oil and energy sector should be directed
to other sectors and human resources.
- The implementation of state subsidies is essential for the development of
some important sectors and exports. In particular, in order to avoid the threat
in the future in perspective of sectorial dependence, the non-oil sectors are
often more sensitive and should be supported. The key sectors requires the
support are the agriculture, livestock, food and industrial sectors. Be the first
to attract foreign investment in this sector, in addition to these sectors,
increasing productivity and quality. While simplifying the use of its lending to
the sector, the manufacturing sector to exports, the decline in unemployment
will lead to an increase in employment and the hidden.
The resolution of environmental problems in national level, regulations regarding
chemical pollution, re-organization of sewage cleaning system, biological diversity

365
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

works to protect the Caspian Sea, the prevention of soil pollution, improve the
management of the forest, with tree-planting projects, expansion of agriculture,
animal husbandry and food industries will achieve significant progress.
- The social disease, inherited from Soviet system – the bribe and corruption
haven’t been defeated yet and it can cause to the widening and deepening of
the problem. Also, it’s very important to increase the minimum standard of
living and the average monthly income of employees in the public sector.
- Nowadays, globalization dominates in the formulation of economy. New
economic term expresses the world where ides and innovations come over to
equipment and technics.
The new economy is the new type of economy, which “stands on the
knowledge”, as it was pointed out in “Third wave” by Alvin Toffler. During the
first wave the agricultural society, owned such factors of production at the
economic development and prosperity as the land and farming techniques, while
during the second wave of the industrial society these factors have been
transformed into the mining, energy resources elements. In the third wave or for
so-called the knowledge society, economic development and prosperity elements
weren’t associated with the land neither energy resources. For Knowledge
societies, development and prosperity will be determined by way of intellectual
production and the transformation of science to investment.
Thus, the struggle for the economic development has earned different perspectives
and now infrastructure for economy is not the physical goods, they are now
more information based. In a result of ongoing grown of position of information
in production, we can even say that industrial goods have lost their leading
position. If we will compare the prices for car, mobile phone, satellite and genetic
vaccine, we can easily see that nowadays knowledge has become to very
important and valuable. Most of the added value of the new economy are
produced by the brain.
In this context, in order to reduce the gap of information; the acquisition of more
knowledge, understanding and have spread.
in this case, for earing of real economic independence for Azerbaijan, economic
independence, development and integration the science and scientist are needed.
It’s impossible to guarantee everlasting economic independence based only on
oil and natural gas resources. Azerbaijan has essential personnel potential. And
now it has to for an educational structure that will develop this potential in
accordance with conditions of new economic world.

366
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

The decision to direct the revenue from energy resources, for getting access to
information, and more importantly, to the sources of revealing the information
and development of educational institutions to train people to be the right
decision. In this regard, the example of India will be most appropriate due to the
use of works and the need to support the work done.
Due to the global process of globalization of the World, investments also has
been got the global characteristics and therefore, it became to the main object of
fluctuations in economic conditions. This fluctuations have appeared, especially
starting from 1980s’, in the shape of financial crisis and transformed into
common economic crisis.
In order to minimalize the impacts of these kind of crises, the international
investments should be directed to productive spheres inside the country, and
this should give the benefits of direct investments.
The developing countries, which are in the transition period, generally run the
policy of increasing the production capacity of the economy. Known as a
Proposal Economy, this policy assumes the importance of tax concession. This
policy was theoretically formed in 1970s’ and it’s mainly focused on the necessity
of promotion of proposals of production factors and therefore defenses the
importance of tax reductions. For the developing or transitioning economics,
which has lack of proposals more that lack of demand, this theory should activate
the production factors by reduction of taxes, which will lead to increase of
production.
In this occasion, there is a keen demand for supporting policy that will rescue
Azerbaijan, which was shaken by the Financial crisis in Russia in 1998, from the
“Dutch Disease”, and therefore prevent the outbreak of the country's income and
foreign investment from the country and launch the new wave of huge
investments, especially, direct big amounted investments in country instead of
portfolio investments. These policies, based on the development of investment
environment, necessary for improvement of level of production and employment
not related to the oil and natural gas sectors. In its turn, good investment
environment required political and macroeconomic stability in the country, for
achievement of which, the elimination of non-trade risks, the existence of tax
rates, tax system and culture and legislative and administrative regulations for
protection of foreign capital is needed. Aldo the optimization systems should be
carried out in connection with the customs regulations. To increase the volume
of foreign trade, we need to liberalize and modernize the customs department. In
addition, in order to increase the export potential of the country, we have to
create the free regions.

367
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

- The foreign investment attracting organizations should be coordinating more

actively by state. The power of promotion and commercials can be used in
this term. There is a requirement for more strong cooperation between
international financial organizations and investments.
- The measures for renovation of transport infrastructure and telecommunication
system should be fastened and have more primary position.
- The regulations, necessary for bringing the bank and financial sectors to the
standard, should be implemented as soon as possible. The more accurate
registration of economy with the help of new legislative and administrative
regulations along with the extending of capital resources, will strengthen the
development of financial system and priority of private sector in this market.
- There is a requirement to overcome the grown of foreign debt amount and
reduction of budget deficits.
- There is a sharp need for a foreign capital for the realization of number of big
projects. The external capital sources demand the state guarantee for
investments and project loans. For the state guarantee there should be
legislative regulations, which in its turn requires applicable tax and customs,
re-estimation of VAT, tax regulations for trade enterprises and etc.
- The forming of investment insurance system as a new step in investments
policy. We have to achieve the attraction of portfolio investments by the
fastening of establishment of investments funds and securities markets.
- Bureaucracy should be decreased to minimum and artificial obstacles should
be eliminated. It requires the forming of mechanism that will secure the local
enterprises by independent competitive and ownership. In these terms ASAN
Xidmət is an admirable project. At the same time, the progressive projects
such as “electronic government” and “System of One Window” should be
increased. The monopoly should be defeated and restricted by legislative
measures.
The optimum device of production factors is one of the essential conditions of
reaching the maximum level of production. For this reason, the use of factors of
production in each of the areas and sectors supposed to be equal to the marginal
productivity of each other. The situation, called «Alternative theory of equality of
marginal productivity" can be carried out only in the country with a fully competitive
conditions. One of the features to prevent monopolies in the developing countries
be obtained by taking the competitive environment necessary for economic
development is one of the main conditions. Considering that the scarce
resources, the optimum use of resources becomes more important. Of course,

368
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

regional and sectoral factors of production flexibility necessary to create the

conditions essential for the acquisition.
Creation of a competitive environment in the economy will be beneficial for
attraction of foreign and local capital in country, equal distribution of production
factors across sectors and for the overall level of prices that would be acceptable
for everybody.
- The policies, which will be applied, should be complex and therefore,
investments that low in country should be kept here and used inside the
country.
- The uncertainty of Caspian’s status has negative influences on foreign
investors. The neighbor countries have to come to a positive decision in the
nearest future in order to attract foreign capital to the region.
- Government have to reduce state impact on privatization as soon as possible.
Diminishing state role in economy and privatization of state property should
be estimated as a tool of creation of new economic relations.
The fastening of establishment of property relations, based on free market principles
makes necessary measures for fighting the "Hidden economy" and the "criminal
economy" and tax avoidance and illegal capital flow cases.
For achievement of civilian character of property relations, firstly exploitation
mechanism and transparency of financial and monetary policies must be
obtained, bureaucratic barriers must be eliminated.
- The directing role of government in the development of economy should be
increased. The share of social investments in state budget should be
promoted.
- The integration of country’s economy in global economy should get deeper,
faster and wider. Nowadays the global economic integration is getting more
and bigger in scale, which increase the importance of foreign trade. Economic
operations require implementation of modern rules of world market, strengthen
of cooperation with international financial and economic organizations.
The competition among the countries to have the place of its own is getting more
and more keen shape. Any delay in this process may have a negative impact for
each of countries. Therefore, Azerbaijan should determine its potential to integrate
to global economy and must get maximum use of it. The geopolitical, geographical
location of the country, rich natural resources, great science-technological and
personnel potential and high working abilities of nation should be taken into

369
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

consideration and these capabilities must be mobilized for effective and useful
integration into the global economy.
Even the biggest countries wouldn’t be able to develop their economies aside
from the global integration process. The global integration can be strengthened
by regional integration, which enables to build more tight relations with neighbors
and open to new markets, third countries and superiority in these relations. At
the same time, global integration can have negative impacts such as total
dependence of economy on export. So these details should also be taken into
consideration.
- Government should support local production. The dynamic improvement of
leading industrial fields, and main sectors, which exploit the local raw
materials and produce the goods with strong competitive standards must be
provided by implementation of high technologies The experience of the newly
industrialized countries of Asia shows that strict measures should be taken in
the direction of defense of internal market and protection of local production
in its time in order to development and strengthen of domestic production.
The same measures were taken by Developed Countries also. In Azerbaijan
there is a requirement to develop competitive capability of local production
and provide acceptable conditions for them.
- Oil-chemical industry is on the top of essential sectors, which can prevent
Azerbaijan from the “Dutch Disease”.
- The other important sector is Metallurgical industry, which has rich raw
material resources and production with high liquidity in global market.
- When prioritizing the production fields with high demand potential in global
market, it needs to give priority to those, which profitable in perspectives of
natural resources, which exist in country.
- While waiting for final decision regarding the status of Caspian Sea, that will
create regulations on exploitation of oil and natural gas resources and also
fish and caviar production, Azerbaijan should take the complex measures
about water pollution and fish poaching.
- The strict attention should be drawn to regional development programs. For
successful and balanced development of all regions enterprises must exploit
local natural resources.
- GDP growth should exceed 10% in a year. In this case the ongoing economic
development and efficient work of government and political mechanisms are
possible.

370
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

- Along with the increase of the level of income, the justice divide of income
and strengthening of middle class is needed.
- One of the sectors, which also requires the improvement is social defense
system. It should been established in line with modern standards and the
improvement of the welfare of the people must be achieved. In this perspectives,
the priority should be given to social aspects of economic development and
state budget. In Azerbaijan we are observing the continuing decrease of
middle class. For preventing this decrease to reach dangerous limit,
economic decisions should be made with the mandatory of social interests.
- Due to active oil and natural gas production, utilization of metallurgic, energetic,
chemical and water resources and occupation of 20% of territory by Armenia,
Azerbaijan have become to one of the most ecologically dangerous regions in
the world. Government should focus on the re-establishment of social-
economic system, where ecological safety will be provided.
- In order to protect the purchasing power of national currency (manat) the real
income pf the population and poverty must be increased.
- The economic policies, implemented by the government need to be adapted
in line with requirements of the time. For the normal functioning of real
economy we have to try to adapt the transparency of monetary policy and
harmonization with the economic conditions.
- For 2016 Azerbaijan has got more than 40 billion US dollars currency
reserves in Oil Fund and Central Bank. However, it doesn’t hinder the active
cooperation Azerbaijan with international financial organizations. The
increasing of financial abilities of Azerbaijan requires new projects, especially
for management of oil incomes. A part of this income Azerbaijan invests in
realization of different projects abroad. In case of any misunderstanding, The
World Bank's International Centre for Settlement of Investment or MIGA help
to regulate this process.
- According to the International Financial Organizations, Azerbaijan has achieved
very positive results in some areas. In 2005 the indicator of per capita annual
income was 1.270 US dollars, in 2015 it has raised to 7.850 USD (calculated
with the Atlas method). In a result of investment of oil income in Oil Fund (by
government), Azerbaijan was the first country which complied the Extractive
Industries Transparency Initiative in 2009. Besides, significant progress in
building of business has been achieved. Thus, in 2007, the period of
registration of business was 51 day, but in 2015, this indicator fell to 8 days
(Report on Business Building).

371
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

As a result of taking essential steps in field of renewable resources and

understanding the importance of exploitation of foreign investments in non-oil
sectors, Azerbaijan stated to improve the investment environment and now quite
big investments are being made in non-oil sectors.
Taking into consideration the tree Programs on Social-economic development of
Regions (2004-2018) and opening of Baku-Tbilisi-Ceyhan oil pipeline in 2005
and Baku-Tbilisi-Erzurum natural gas pipeline in 2006, we can say that Turk
businessmen should maximum use the chance of taking part in investments and
entrepreneurs activities in Azerbaijan. At the same time, investment of big amount
of oil income of Azerbaijan in Turkey makes relations between two countries
stronger. New age of these relations should consider also common exploitation
of alternative energy resources. In this perspective Turkey needs Azerbaijan’s
energy resources, while Azerbaijan needs rich market economy experience and
technology of Turkey.

372
 LIST OF REFERENCES
1. A. V. Veliyev, “AzŠrbaycanın Istehlak Bazarının Formalaşmasında MDB ÖlkŠlŠri ilŠ Iqtisadi
ÄlaqŠlŠrin Rolu”, AzŠrbaycanda Iqtisadi Islahatların HŠyata KeçirilmŠsi XüsusiyyŠtlŠri vŠ
ProblemlŠr, Iqtisadi Inkişaf Nazirliyi Iqtisadi Islahatlar MŠrkŠzi, Baku, 2001, p. 185-186.
2. A. A. Salmanov, “AzŠrbaycan NŠqliyyat Tranzit Potensialı-Iqtisadi ÄlaqŠlŠri Stimullaşdıran
Amil Kimi”, AzŠrbaycan Iqtisadi Islahatlarının HŠyata KeçirilmŠsi XüsusiyyŠtlŠri vŠ
ProblemlŠri, AzŠrbaycan Respublikası Iqtisadi Inkişaf Nazirliyi Iqtisadi Islahatlar MŠrkŠzi,
Bakı, 2001, p. 54.
3. A. Nadirov – Page Muradov – v.d., AzŠrbaycan Iqtisadiyyatı, Science Publishing, Baku,
2003.
4. Ahmet Ünal Çeviköz, “Türkiye Azerbaycan Ekonomik Ilişkileri - Işbirliğinde Yeni Ufuklar”,
Diyalog Azerbaycan Dünyası Dergisi, TÜSIAB Society, Bakü, Mart-2003, p. 6-7.
5. Agajan Ahmedov, “Regions Develop Dynamically”, (Interview), Media News, March 31 –
April 08, 2005, p. 4.
6. Akif Musayev, “AzŠrbaycan Respublikasının Iqtisadi Inkişaf Strategiyası vŠ Vergi
SiyasŠti”, Iqtisadiyyat vŠ Audit Magazine, No: 10, Oktyabr-2001, p. 12.
7. Alkan Soyak–Zenfira Nesirova, “Küreselleşme Sürecinde IMF Politikalarının Sonuçları:
Azerbaycan Deneyimi”, Articles of The International Conference On A Theme Caucasus
and Central Asia in The Globalization Process, Baku, 2003, p. 14-20.
8. Altan Turker, “Tükenmiş Bir Çevresel Miras Orta Asyada Sınır Ötesi Çevre Sorunları ve
Doğal Kaynakların Tahribi”, Avrasya Etüdleri, C.1, PAGE1, Ilkbahar 1995, p. 42.
9. Ariel Cohen, “Caspian Basin Confronts Boom and Bust Energy Cecle”,
http://www.sibnet.tm/article.php?sid=7334&mode=thread&order=0&thold=0
(04.04.2005).
10. Asaf Nadirov, “Iqtisadiyyatın Yeni Inkişaf MŠrhŠlŠsi”, Azerbaijan, 15 September 2001, p. 2.
11. Atila Artam, Türk Cumhuriyetlerinin Sosyo Ekonomik Analizleri ve Türkiye Ilişkileri, Sabri
Artam Vakfı Yayınları, Istanbul, 1993.
12. Avrasya Dosyası, TIKA bulletins, Different issues.
13. Ayhan Erdal, “Dünya Ticaret Örgütü ve Azerbaycanın Üyelik Süreci”, Materials from
International Conferences after Independency of Azerbaijan, Baku, 3-4 Mach 2003, p.
110-112.
14. Ayhan Karaca, “Azerbaycanda Ekonomik Dönüşüm Süreci ve Reformların 10 Yılı”,
http://www.foreigntrade.gov.tr/ead/DTDERGI/ocakozel2002/ayhan.htm. (13.03.2003)
15. Azad M. Cavadov, “Banking System and Real Business”, Conference Report, 1st
International Conference Banking Development in Azerbaijan 12-14 November 2004,
Baku, 2004, p. 368-369.
16. Azer Amiraslanov, “DövlŠt MüstŠqilliyi vŠ Milli Iqtisadiyyatın Formalaşması ProblemlŠri”,
Advisory Bulletin, No:7(43), October 2001, p. 50-57.

373
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

17. Azer Mehdiyev, “AzŠrbaycanın Dünya Iqtisadiyyatına Inteqrasiyasının Reallıqları”, Ekspert

Econmic Magazine, No.7-8, 2001, p. 26.
18. Azerbaijan International Magazine, Different issues.
19. Azerbaijan, IMF Economic Review, Washington DC, May-2015.
20. Azerbaycan Cumhuriyeti, http://www.yesevi.org/tdbm/azerbaycan.html. 13.03.2003.
21. AzŠrbaycan RŠqŠmlŠrdŠ, ARDSK Publications, Baku, 2014.
22. AzŠrbaycan Respublikası Bank Sistemi Haqqında MŠlumat MŠcmusu, Azerbaijan
Assosiation of Banks, Baku, 2015.
23. Azerbaijan Republic State Statistics Committee , 2015, www.azstat.org. (8.4.2015).
24. AzŠrbaycan Respublikasının Konstitusiyası, AzŠrbaycan NŠşriyyatı, Baku, 1996.
25. Azerbaycan Ülke Raporu, DPT Müsteşarlığı Dış Ekonomik Ilişkiler Genel Müdürlüğü,
Ankara, Mayıs-2002.
26. AzŠrbaycanın Iqtisadi Icmalı, Rüblük Bülleten, TASIS European Expertize Service, Baku,
April-June 2000.
27. AzŠrbaycanın Iqtisadi Icmalı, Rüblük Bülleten, TASIS European Expertize Service, Baku,
June-December 1999.
28. Azim Abbasov, AzŠrbaycanda MaliyyŠ Bazarının Formalaşması vŠ bazar Iqtisadiyyatında
MaliyyŠ-Kredit Sisteminin ProblemlŠri, polygraph Press, Baku, 2003.
29. BP Statistical Review of World Energy 2004, http://www.bp.com/centres/energy
(07.04.2015).
30. Bahri Ozdemir, “Azerbaycan Ekonomisi ve Azerbaycan-Türkiye Ticari Ilişki-leri”, Diyalog
Azerbaycan Iş Dünyası Dergisi, TÜSIAB Society, Macrh-2003, p. 24-25.
31. Brief Overwiev of Business Practices, New Investment Opportunities and Legal
Environment, Azerbaijan Investment Promotion and Advisory Foundation, Baku, 2005.
32. Budaq Budaqov–Yaqub Qarbli, AzŠrbaycan Respublikasının Fiziki Coğrafiyası, Öyretmen
Press, Baku, 1996.
33. C. B. Rosenberg-T. O. Saavalainen, “Dealing with Azerbaijan's Oil Boom”, Finance and
Development, Vol.35, No.3, September-1998, p. 35-38.
34. C. Sharifov, “AzŠrbaycanda Valyuta Bazarının Müasir VŠziyyŠti ve Onun Inkişaf Perspek-
tivlŠri”, AzŠrbaycan XXI Äsrin Astanasında, AzŠrbaycan ElmlŠr Akademiyası Publication,
Baku, 1998, p. 551-552.
35. Charles PAGE Fairbanks, “Moskova Darbesinden Sonra”, (Çev: Levent Köker), Demok-
rasinin Küresel Yükselişi, (Der: Larry Diamond – Marc F. Plattner), Yetkin Yayınları, Ankara,
1995, p. 333-341.
36. Cihan Bulut, “Non-Oil Sectors in Azerbaijan”, Journal of Caucasian Studies, Number:1,
Fall-2004, p. 20-25.
37. Cihan Bulut, Bilgi Toplumunda Yeni Ekonomi Anlayışı ve Bu Çerçevede Azerbaycan
Değer-lendirmesi, Diyalog Azerbaycan Iş Dünyası Dergisi, TÜSIAB Cemiyeti, Sayı:15,
Baku, Şubat-2004, p. 38-39.
38. Cihan Bulut, “Azerbaijan Valuation in The Light of Model of Indian Information
Technologies”, Articles of The International Conference On A Theme Caucasus and
Central Asia in The Globalization Process, Baku, 2003, p. 58-63.
39. Chingiz Abbasov, AzŠrbaycanın Dünya Iqtisadiyyatına Inteqrasiya Yolları, Science press,
Baku, 2005.

374
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

40. D. A. Mamedov, O. A. Aliyev, “Kontrakt Veka i Ago Vliyaniye Na Ekonomiçeckoye Raz-

vitiye Azerbaicanskoy Respublika” (Äsrin MüqavilŠsi vŠ AzŠrbaycanın Iktisadi Inkiçafına
TŠsiri), AzŠrbaycan XXI Äsrin Astanasında, (Ziyad Samadzada), AzŠrbaycan ElmlŠr
Akademiyası NŠşri, Baku, 1998, p. 87.
41. Daniel Yergin–Thane Gustafson, Rusya 2011 ve Dünyadaki Yeri, (Çev: Özden Arıkan),
Sabah Yayınları, Istanbul, 1994.
42. Dilara Elma, “Azerbaycan Bank Sektörunda Elektronik Ödeme Uygulamaları”, Journal of
Caucasian Studies, Number:1, Fall-2004, p. 29-33.
43. Diyalog Azerbaycan Iş Dünyası Dergisi, TÜSIAB Society, Sayı:10, Baku, Ekim-2001.
44. Diyalog Azerbaycan Iş Dünyası Dergisi, TÜSIAB Society, Baku, March-2003.
45. Doing Business in Azerbaijan, Baker&McKenzie, May-2000.
46. “DövlŠt Statistika KomitŠsi MŠlumatları”, AzŠrbaycan Zaman Newsaper, 13-14 February
2003, p. 6.
47. E. Ahmadov - M. Hacıyev, AzŠrbaycan Iqtisadiyyatı, SŠda Press, Baku, 2004.
48. E. O. Huseynov, “Reformatika vŠ Onun Hiper dövrŠ Uyğunlaşdırmağın ZŠruriliyi”, AzŠr-
baycanda Iqtisadi Islahatların HŠyata KeçirilmŠsi XüsusiyyŠtlŠri vŠ ProblemlŠr, Iqtisadi
Inkişaf Nazirliyi Iqtisadi Islahatlar MŠrkŠzi, Baku, 2001, p. 92-99.
49. E.Samadzada, “Ekoloji TŠhlükŠsizlik – Menecement vŠ Audit Obyekti Kimi”, AzŠrbaycan
Iqtisadi Islahatlarının HŠyata KeçirilmŠsi XüsusiyyŠtlŠri vŠ ProblemlŠri, AzŠrbaycan
Respublikası Iqtisadi Inkişaf Nazirliyi Iqtisadi Islahatlar MŠrkŠzi, Baku, 2001, p. 164-165.
50. E. Imanov - E. M. Babashov - R. H. Dayıyev, “Iqtisadi Islahatlar ŞŠraitindŠ Ähalinin Sosial
MüdafiŠsinin TŠşkili MŠsŠlŠlŠri”, AzŠrbaycanda Iqtisadi Islahatların HŠyata KeçirilmŠsi
XüsusiyyŠtlŠri vŠ ProblemlŠr, Iqtisadi Inkişaf Nazirliyi Iqtisadi Islahatlar MŠrkŠzi, Baku-
2001, p. 102.
51. E. V. Aliyev, “AzŠrbaycanın Vergi SiyasŠti vŠ Onun GUÖAM TŠşkilatı ÇŠrçivŠsindŠki
Iqtisadi ÄmŠkdaşlığa TŠsiri”, Iqtisadiyyat vŠ HŠyat Magazine, No: 3-4, March-April-2004,
p. 87-91.
52. Abulfaz Kharayev, “AzŠrbaycan Bu Gün BeynŠlxalq Olimpiada Oyunlarına MüvŠffŠqiyyŠtli
Imza Atan DövlŠtlŠr Sırasındadır”, Diyalog AzŠrbaycan Iş Dünyası Jurnalı, TÜSIAB
Society, Baku, March-2003, p. 16.
53. Akbar Eldaroghlu, “AzŠrbaycan HökumŠti Yoxsulluq Problemini HŠll EtmŠyŠ Çalışır”,
AzŠrbaycan Milli Demokratiya Fondu “AzŠrbaycan” Bulletin, No:32 (152), 09 August
2001.
54. Akbar Eldaroghlu, “Dünya TicarŠt TŠşkilatı vŠ AzŠrbaycan”, AzŠrbaycan Milli Demokra-
tiya Fondu “AzŠrbaycan” Bulletin, No:22 (142), 31 May 2001.
55. Akbar Eldaroghlu, “Neft Fondunun VŠsaitlŠri Hansı IstiqamŠtŠ IstiqamŠtlŠndirilmŠlidir?”,
AzŠrbaycan Milli Demokratiya Fondu “AzŠrbaycan” Bulletin, No:25 (145), 21 June 2001.
56. Akbar Eldaroghlu, “Qeyri-Neft Sektorunun Inkişafında Azad Iqtisadi Zonalar Mühüm Rol
Oynaya BilŠrdi”, AzŠrbaycan Milli Demokratiya Fondu “AzŠrbaycan” Bulletin, No: 30
(150),26 July 2001.
57. Elchin Suleymanov, “AzŠrbaycan vŠ Avropa YenidŠnb Qurma vŠ Inkişaf Bankı Münasi-
bŠtlŠri”, Materials from International Conferences after Independency of Azerbaijan,
Baku, 3-4 March 2003, p. 101-102.

375
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

58. Elchin Suleymanov, “MüstŠqillik Sonrası AzŠrbaycan vŠ Dünya Bankı MünasibŠtlŠri”,

Materials from International Conferences after Independency of Azerbaijan, Baku, 3-4
March 2003, p. 102-103.
59. Eldar Shahbazov, “XXI Äsrin ÄvvŠllŠrindŠ AzŠrbaycan Respublikasının Neft vŠ Qaz
SŠnayesi”, DirçŠliş - XXI Äsr Magazine, No 5 (63), May-2003, p. 104-109.
60. Elman Nasirov, “AzŠrbaycan Neftinin DünŠni Bugünü ve Sabahı”, AzŠrbaycan Neftinin
DünŠni Bugünü ve Sabahı, (Ed. M MŠrdanov v.d.), Baku, 1997, p. 141.
61. Elman Rustamov, “Development Strategies in the Banking Sector of Azerbaıjan”,
Conference Report, 1st International Conference Banking Development in Azerbaijan 12-
14 November 2004, Baku, 2004, p. 270-288.
62. Elmar Daigov, “Banking Development in Azerbaijan”, Conference Report, 1st International
Conference Banking Development in Azerbaijan 12-14 November 2004, Baku, 2004, p.
226-237.
63. Elnur Mustafayev, “Banking Development in Azerbaijan Republic”, Conference Report,
1st International Conference Banking Development in Azerbaijan 12-14 November 2004,
Baku, 2004, p. 270-288.
64. Elovsat Qocayev, “Azerbaycan Iqtisadiyyatında Siğortanın Rolu”, Diyalog Azerbaycan Iş
Dünyası Dergisi, Sayı:15, TÜSIAB Cemiyeti, Baka, February-2004, p. 40-41.
65. Elshan Memmedov, “Asrın Müqavilesi Azerbaycan Neft Saneyisinin Inkişafında Mühüm
Merheledir”, Azerbaycan Neftinin Düneni Bugünü ve Sabahı, (Ed. M Merdanov v.d.),
Baku, 1997, p. 48-50.
66. Ercan Sancak, Azerbaycan Iqtisadiyyatı, Qafqaz Üniversitesi Yayınları, Baku, 1999.
67. Ersan Bocutoğlu, Orta Asya ve Kafkasyadaki Durum ve Avrupa Güvenliği, Karadeniz
Teknik Üniversitesi Matbaası, Trabzon, 1998.
68. Ätraf Mühitin MühafizŠsi ÜzrŠ Milli FŠaliyyŠt Planı, The State Committee on Control of
Ecology and Natural Resources Baku, 1998.
69. Eyup Zengin-Nesimi Kamalov, Azerbaycan Ekonomisinin Gelişimi Içerisinde KOBIler,
Hasan Selçuk (Ed.), Yeni Yüzyılda Azerbaycanın Sosyo-Ekonomik Yapısı, Tasam Yayın-
ları, Istanbul, 2004, p. 99-120.
70. F. K. Hashimov, “Milli Iqtisadiyyatın KreditlŠşmŠsindŠ Ähalinin MaliyyŠ Potensialının
Rolu”, Iqtisadiyyat vŠ HŠyat Magazine, No:7-8, July-August-2004, p. 89-91.
71. F. S. Aliyev, AzŠrbaycan Respulikasının Yeraltı Suları vŠ Ehtiyatlarından IstifadŠ vŠ Geo-
koloji ProblemlŠri, Çaşıoğlu Press, Baku, 2000.
72. F.V. Quliyev, “Ärzaq Bazarının Qorunmasında MaliyyŠ-Kredit Mexanizminin Rolu”,
Iqtisadiyyat vŠ HŠyat Magazine , No:7-8, July-August-2004, p. 92-95.
73. F. Y. Bayramov-S. E. NŠcŠfov, “DövlŠt BüdcŠsinin KŠsiri vŠ Inflasiya”, AzŠrbaycanda
Iqtisadi Islahatların HŠyata KeçirilmŠsi XüsusiyyŠtlŠri vŠ ProblemlŠr, Center for Economic
Reforms Ministry of Economic Development, Baku, 2001, p. 148.
74. Faruk Arslan, “Azerbaycan Ekonomisinde Geçiş Dönemi”, Hazar Bilim Sanat ve Kültür
Dergisi, PAGE1, Bahar-2000, p. 17.
75. Fazil Memmedov, “Azerbaycanda Vergi Oranları”, Diyalog Azerbaycan Iş Dünyası Dergisi,
Sayı:10, Ekim-2001, p. 12.
76. Fazıl Mammadov, “Vergi SistemindŠ Islahatlar Älverişli Vergi Mühitinin Yaradılmasına
YönŠlib”, Diyalog Azerbaycan Iş Dünyası Dergisi, Sayı:16, August-2004, p. 10-11.

376
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

77. Ferhan Erkmenoğlu, “Ekonomik Işbirliği Teşkilatı (EIT) Devlet veya Hükumet Başkanları
Yedinci Doruk Toplantısı (Istanbul; Ekim 2002)”
78. http://www.mfa.gov.tr/turkce/grupe/ues-8/ECO.htm, (09.04.2003).
79. Fikret Aliyev, “Kontrakt Veka: 5 Let Spustya”, Consulting & Business, PAGE9, 1999, p.
40-41.
80. Fikret Sucayev, “AzŠrbaycanda Qaz Hasilatı vŠ Ona Olan TŠlŠbatın ÖdŠnilmŠsinin
Başlıca IstiqamŠtlŠri”, Materials from International Conferences after Independency of
Azerbaijan, Baku, 3-4 March 2003, p. 36-37.
81. Fuad Aliyev, The International Monetary Fund and Reforms in Azerbaijan, Budapest,
Hungary, February-2002.
82. Fuad Huseynov, “Azerbaycanın Jeopolitik Konumu, Enerji Kaynakları ve Dış Ekonomik
Ilişkiler Sistemi”
83. http://www.foreigntrade.gov.tr/ead/DTDERGI/OCAK2001/azerbaycan.htm, (9.2.2015).
84. Gahir Mikailov-Eyüp Zengin, Azerbaycanda Azgelişmişlik Sorunu, Hasan Selçuk (Ed.),
Yeni Yüzyılda Azerbaycanın Sosyo-Ekonomik Yapısı, Tasam Yayınları, Istanbul, 2004, p.
71-98.
85. http://www.geocitiep. com/ganigonullu/kafkasyaortaasya.html, 7.4.2015.
86. Qubad Ibadoghlu, “AzŠrbaycanın Inkişaf Strategiyasında Neftin Rolu: Ortodoks Bakuş
Açısıyla”, 2023 Dergisi, PAGE18, 15 Ekim-2002, p. 72-75.
87. Gulgaz Aliyeva, “AzŠrbaycan Respublikasının Avropa Ittifaqı IlŠ MünasibŠtlŠri”, Advisory
Bulletin, No:11(47), February-2002, p. 20.
88. Güner Gücük, “Azerbaycanın Ekonomik Gelişimi ve Girişimcilik”, Diyalog Azerbaycan Iş
Dünyası Dergisi, Sayı:16, Ağustos-2004, p. 44.
89. H. Mammadov - R. Axundov, “QŠdim IpŠk Yolunun NŠqliyyat Marşutları”, IpŠk Yolu II.
Respublika Elmi-Praktiki Konfransının Materialları, Baku, 2001, p. 11-14.
90. Hasan Selçuk, “Azerbaycan Bankacılığı”, Hasan Selçuk (Ed.), Yeni Yüzyılda Azerbayca-
nın Sosyo-Ekonomik Yapısı, Tasam Yayınları, Istanbul, 2004, p. 43-70.
91. Haydar Aliyev, Dünya Siyasetinde Azerbaycan Petrolü, (Der. Ilham Aliyev - Akif Murad-
verdiyev, Çev. Abdullah Çiftçi - Ergun Kocabıyık), Sabah Kitapları No.77, Istanbul, 1988,
p. 101-102.
92. HeydŠr Äliyev, “AzŠrbaycan Respublikasının DövlŠt MüstŠqilliyinin Onuncu Ildönümü
Haqqında”, AzŠrbaycan Respulikası Prezidentinin 20 March 2001 Tarixli FŠrmanı, Baku,
20 March 200.
93. Huseyn Mamedov, “Banking Legislation and Improvment Aspects”, Conference Report,
1st International Conference Banking Development in Azerbaijan 12-14 November 2004,
Baku, 2004, p. 292-295.
94. Ibrahim Kuluöztürk, “Türkiye-Azerbaycan Sosyal Güvenlik Sözlşemesi”, Diyalog Azer-
baycan Iş Dünyası Dergisi, Sayı:16, Ağustos-2004, p. 24-26.
95. Investors Handbook, International Conference Investing in Azerbaijan-Gateway to the
Newly Insdependent States, Baku, May 7-9 2003.
96. Investment Guide to Azerbaijan 1998, USACC, Washington, 1998, p. 70.
97. Ilhan Uludağ - Salih Mehmedov, Sovyetler Birliği Sonrası Bağımsız Türk Cumhuriyetleri ve
Türk Gruplarının Sosyo-Ekonomik Analizi Türkiye Ilişkileri, TOBB Yayınları, Istanbul, 1992.

377
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

98. Ilkin Sabiroghlu, “Neft Böhranları vŠ Holland Sindromu'', AzŠrbaycan Milli Demokratiya
Fondu AzŠrbaycan Bulletin, No: 19 (139),10 May 2001.
99. Imran Cafarzada, “Äsaslı Inkişaf IllŠri”, Iqtisadiyyat, 18 October-1 November 2001, p. 3.
100. Inqilab AhmŠdov, “Iqtisadi Islahatlarda Pul-Kredit SiyasŠtinin Rolu”, Advisory Bulletin,
No:7(43), October 2001, p. 43-48.
101. Irfan Kalaycı, “karadeniz Ekonomik Işbirliği: Dünya Ekonomisi Açısından Geleceği”,
Articles of The International Conference On A Theme Caucasus and Central Asia in The
Globalization Process, Baku, 2003, p. 52-57.
102. Irşad Aliyev, “Aqrar SahŠyŠ Investisiya Imkanları”, Diyalog Azerbaycan Iş Dünyası
Dergisi, Sayı: 16, Ağustos-2004, p. 12-13.
103. Ismail Özsoy, Dağıstanın Sosyo-Ekonomik Tarihi, Kaynak Yayınları, Izmir, 1997.
104. Ismet Ergün, “Kollektivist Bir Sistemde Piyasa Ekonomisine Geçiş Sorunları”, Türkiye
Modeli ve Türk Kökenli Cumhuriyetlerle Eski Sovyet Halkları, Yeni Forum Yayınları,
Ankara, 1992, p. 109-113.
105. I. T.Akbarov, “The Role and Economic Importance of Caspian Sea Region”, Materials of
The International Conference on a Theme Caucasus and Central Asia During
Globalization, Baku, 2003, p. 66-67
106. Javid Ahmadi, “Development Perspectives of Azerbaijan Agriculture”, Ekspert Iqtisad
Magazine, No.7-8, 2001, p. 8-9.
107. Karim Mammadov, "The main factors of production in the firms: Manager and
Management." (in Azerbaijani - Menecer ve Menecment - şirkŠtlŠrdŠ Šsas istehsal
faktorları), Research Paper for www.gundelik.cjb.net, First Virtual Azeri Academic
Newspaper, 2001.
108. Karim Mammadov “Conflict, not corruption, is the greatest inhibitor of economic growth
in the Caucasus”. Paper presented at the “First Annual Caucasus Debate Forum”, CEP
(Civic Education Project), 15-18 March,2001, Tbilisi, Georgia.
109. Karim Mammadov “Traditionalism or Modernism.” (in Russian – Традиционализм или же
Модернизм), Paper presented at the "IDEA (International Debate Education Associations
Parliamentary Trainings", April-May, 2001, in Baku, Azerbaijan.
110. Karim Mammadov and Yavuz Kahraman: Strategic Management and Application
(Azersun Holding) (in Turkish – Stratejik Yönetim ve Uygulama (Azersun holdıng), Baku,
2003, Adiloglu publications, 132 p.
111. Karim Mammadov “International Experience: Public sectors market orientation. US
Public sector case.” (in Azerbaijani – BeynŠlxalq tŠcrübŠ: DövlŠt sektorunun müasir
bazaar istiqamŠtlŠnmŠsi), Azerbaijani Quality Associations technique-economical journal
- Quality & Management, Issue 1, CBS publication, June 2007.
112. Karim Mammadov“Behavioral Effects - National Culture and Knowledge Management in
SME's”, 4th Global Islamic Marketing Conference, May, 2013, Istanbul, Turkey
113. Karim Mammadov “Behavior and Innovation on sample of local company reorganization”,
Economic Forum, April, 2014, Baku, Azerbaijan
114. Karin Dalva, “Global payment Cards in Azerbaijan”, Conference Report, 1st International
Conference Banking Development in Azerbaijan 12-14 November 2004, Baku, 2004, p.
212-225.
115. Ken Jowitt, “Yeni Dünya Düzensizliği”, (Çev: Levent Köker), Demokrasinin Küresel
Yükselişi, (Der: Larry Diamond – Marc F. Plattner), Yetkin Yayınları, Ankara, 1995, p.
303-313.

378
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

116. Kenan Çelik – Cemalettin Kalaycı, “Azeri Petrolünün Dünü ve Bugünü”, Journal of
Qafqaz University, V.2, No.2, 1999, p. 63.
117. M. F. Gadcizade, “Nekatorıye Vaprosı Organı Akrujayuşey Sredı na Ploşadyah
Ekspulutatsiyi Neftegazovıh Mestarajdeniy Mejdunarodhıh Kampaniy”, Azerbaycan 21.
Esrin Astanasında, Azerbaycan Ilmler Akademiyası Neşriyyatı, Baku, 1998, p. 235.
118. M. V. Aliyev, “QaradŠniz Regionunun Iqtisadi Inteqrasiya Prosesi vŠ Bu ProsesdŠ AzŠr-
baycan Amili”, Iqtisadiyyat vŠ HŠyat Magazine, No.3-4, March-April-2004, p. 99-102.
119. Marc F Plattner, “Demokrasi Anı”, (Çev: Ergun Özbudun), Demokrasinin Küresel Yükse-
lişi, (Der: Larry Diamond – Marc F. Plattner), Yetkin Yayınları, Ankara, 1995, p. 53-65.
120. Marchin Czurda, “Raising Finance for Azerbaijani Borrowers from the International
Markets”, Conference Report, 1st International Conference Banking Development in
Azerbaijan 12-14 November 2004, Baku, 2004, p. 298-313.
121. Mahammadhasan Valili, AzŠrbaycan, Azerbaijan State Press, Baku, 1993.
122. http://www.turkiye.net/mbinay/news/analiz1.htm, 7.4.2003.
123. Mehmet Dikkaya, “Türk Cumhuriyetleri Enerji Kaynakları: Yeni Büyük Oyunun Temel
Dinamikleri”, Akademik Araştırmalar Dergisi, Y.1, PAGE3, Kasım-Aralık 1999 Ocak 2000,
p. 33-64.
124. Mazaddin Ayyubov, “Bazar Iqtisadiyyatına Keçid vŠ SŠnaye Kompleksi” Advisory Bulletin,
No:7(43), October 2001, p. 66-67.
125. Michael Gerlic, “Role of Banks in the Development of Leasing in Azerbaijan”, Conference
Report, 1st International Conference Banking Development in Azerbaijan 12-14
November 2004, Baku, 2004, p. 338-347.
126. Mikhail Gorbachev, Perestroika: New Thinking for Our Country and the World, New
York, 1987.
127. Misir Mardanov, “HeydŠer Äliyev vŠ AzŠrbaycan TŠhsili”, AzŠrbaycan MüŠllimi
Newspaper, 7-13 March 2003, p. 2-3.
128. Murad Iskender, “Azerbaycanda Ekonomik Sistemin Dönüşümü”, Hasan Selçuk (Ed.),
Yeni Yüzyılda Azerbaycanın Sosyo-Ekonomik Yapısı, Tasam Yayınları, Istanbul, 2004,
p. 15-42.
129. Murad Iskender-Halkan Kitapçı, Değişim, Dönüşüm ve Dünya Ekonomisine Entegrasyon
Süre-cinde Azerbaycan Ekonomisi, Türk Dünyası Işletme Fakültesi Yayınları, No:001,
Baku, 2003.
130. Mustafa Özel, Değişim ve Kriz, Iz Yayıncılık, Istanbul, 1994. p. 120.
131. Mübariz Baghırov, Banklar vŠ Bank ÄmŠliyatları, Nurlan Press, Baku, 2003.
132. Müsteqil AzŠrbaycan, State Statistics Committee of Azerbaijan Republic, Baku, 2001.
133. N. Aliyev, E. Shahbazov, HeydŠr Äliyev vŠ AzŠrbaycan Neft SŠnayesinin Inkişafı,
AzŠrbaycan International Publishing, Baku, 1998.
134. N. E. Cavadov, “AzŠrbaycanın Aqrar Iqtisadiyyatı MüstŠqillik DövründŠ”, Materials from
International Conferences after Independency of Azerbaijan, Baku, 3-4 March 2003, p.
58-60.
135. N. E. Farruxov, “Äsrın MüqavilŠsi - XX Äsrin Šn ÄhŠmiyyŠtli HadisŠsi”, AzŠrbaycan 21.
Äsrin Astanasında, (Redaktor. Ziyad SŠmŠdzadŠ), AzŠrbaycan Elmler Akademiyası
Press, Baku, 1998, PAGE196.
136. N. Ibrahimov - I. Şükürov, Geydar Aliev Otkrıvaet Miru Azerbaydjan, Baku, 1994, p. 32.

379
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

137. N. O. Hacıyev, “Sahibkarlıq Sektorunun Inkişafının SürŠtlŠndirilmŠsi ilŠ Bağlı Problem-

lŠr”, AzŠrbaycanda Iqtisadi Islahatların HŠyata KeçirilmŠsi XüsusiyyŠtlŠri vŠ ProblemlŠr,
Center for Economic Reforms Ministry of Economic Development, Baku, 2001, p. 117.
138. Nail Fataliyev-Aygul Shamchıyeva, “Qara DŠniz Iqtisadi ÄmŠkdaşlığı”, Advisory Bulletin,
No:12 (48), March-2002, p. 19-38.
139. Nail Fataliyev - Aygul Shamchıyeva -Ruqiyyet Mammadova, “Dünya Bankı vŠ Onun
AzŠrbaycandakı FŠaliyyŠti”, Advisory Bulletin, No:3(39), p. 20-34.
140. Nail Fataliyev -Rafiq Ahmadov, “BeynŠlxalq MaliyyŠ-Kredit TŠşkilatları vŠ Onların AzŠr-
baycan Respublikası IlŠ ÄlaqŠlŠri Haqqında”, Advisory Bulletin, No:10(46), January-
2002, p. 24-43.
141. Narodnoye Hozyaistvo Azerbaicanskoi SSR V 1983 Godı Stat. Ejegodnik, Baku, 1983.
142. Nasser Sagheb-Masoud Cavadi, “Azerbijans 'Contract of the Century' Finnally Signed
With Western Oil Consortium”, Azerbaijan International Magazine, Winter 1994, p. 27.
143. Natık Aliyev, “Petrol Azerbaycanın Milli Serveti (Eyvaz Gasanovun Röportajı)”, Diyalog
Avrasya Dergisi, Şubat-2001, p. 82.
144. Natig Aliyev, The Azerbaijan Oil and Gas Industry in the 1949-1999 Period,
http://www.caspenergy.com/no3rus21.html. 04.04.2005.
145. Natiq Alasgarov, “Tarixi IpŠk Yolu vŠ AzŠrbaycan Neft SŠnayesi Müasir MŠrhŠlŠdŠ”,
Böyük IpŠk Yolu vŠ AzŠrbaycan Nefti, Mars-Print, Baku, 1999, p. 32-33.
146. Nazim Imanov, “Ilk On Ilin Yekunları: Iqtisadiyyat”, Advisory Bulletin, No:7 (43), October
2001, p. 32.
147. Nabi Nabiyev, Iqtisadiyyat CŠmiyyŠt vŠ Ekoloji Muhiti, Ağrıdağ Press, Baku, 2000.
148. Nesimi Kamalov, “1990-2000 Yılları Arasında Azerbaycanda Enflasyon”, Journal of
Qafqaz University, Number 6, Fall-2000, p. 65-74.
149. Nesimi Kamalov, Arz Yönlü Iktisat Teorisi ve Azerbaycanda Uygulanabilirliği, Hasan
Selçuk (Ed.), Yeni Yüzyılda Azerbaycanın Sosyo-Ekonomik Yapısı, Tasam Yayınları,
Istanbul, 2004, p. 143-158.
150. Niko Hobdari, “Impact of Banking Sector and Structural Reforms in Financial
Intermadiation”, Conference Report, 1st International Conference Banking Development
in Azerbaijan 12-14 November 2004, Baku, 2004, p. 60-63.
151. Nizami Suleymanov, AzŠrbaycanın Iqtisadi Tarixi, Baku, 2001.
152. Nuray Altuğ, Istikrar Politikaları ve Ülke Örnekleri, Türkmen Kitabevi, Istanbul, 2001.
153. Osman Nuri Aras, “Azerbaycan Iqtisadiyyatında SerMaye Strategiyasının Nezeri Infra-
strukturu”, Azerbaycan Iqtisadiyyatında Strateji Problemleri Konfrans Materialları, Baku,
14-15 March 2002, p. 209-212.
154. Osman Nuri Aras, “Geçiş Sürecinde Azerbaycanda Yaşanan “Hollanda Sendro-mu” ve
Çözüm Önerileri”, Nesreddin Tusinin 800 Illik Yubileyine Hesr Edilmiş Republika Elmi
Konferansda Sunulan Tebliğler, Baku, 2-3 Nisan 2001, p. 130-133.
155. Osman Nuri Aras, “Azerbaycan Iqtisadıyyatında Ehtimal Olunan Problem: Pul Evezi”,
Azerbaycan Iqtisadiyyatında Strateji Problemleri adlı Konfrans Materialları, Baku, 14-15
March 2002, p. 315-318.
156. Osman Nuri Aras, Azerbaycanın Hazar Ekonomisi ve Stratejisi, Der Yayınları, Istanbul,
2001.
157. Osman Nuri Aras, Para Talebi Para Ikamesi ve Finansal Gelişme, Qafqaz Üniversitesi
Yayınları, Bakü, 2000.

380
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

158. Osman Nuri Aras, Rusyada Tıkanan Sosyo-Ekonomik Değişim Dalgası, Qafqaz
Üniversitesi Yayınları, Baku 2000.
159. Osman Nuri Aras, “Türkiye-Azerbaycan Ilişkileri”, Hasan Selçuk (Ed.), Yeni Yüzyılda Azer-
baycanın Sosyo-Ekonomik Yapısı, Tasam Yayınları, Istanbul, 2004, p. 173-203.
160. Osman Nuri Aras, Elçin Süleymanov "AzŠrbaycan iqtisadiyyatı` ŞŠrq QŠrb`nŠşriyyatı,
Baku 2010, p 316
161. Poverty Reduction Strategy Paper (Interim Report), Baku, May-2001
162. P. Mammadov, “XŠzŠrin Ekoloji ProblemlŠrinin HŠllindŠ ÖlkŠlŠrarası ÄmŠkdaşlığın
ÄhŠmiyyŠti”, AzŠrbaycan XXI. Äsrin Astanasında, (Ed. Ziyad SŠmŠdzadŠ), C.II,
AzŠrbaycan ElmlŠr Akademiyası Press, Baku, 1998,, Baku, 1998, p. 208.
163. R. Abbasov, “AzŠrbaycan Turizm Üçün ÄhŠmiyyŠtli BölgŠdir”, HŠrbi And Newspaper,
1-15 April, 2003, p. 2.
164. R. T. HŠsŠnov, “AzŠrbaycan Iqtisadiyyatının Inkişaf Strategiyasının PerspektivlŠri”, AzŠr-
baycan Iqtisadi Islahatlarının HŠyata KeçirilmŠsi XüsusiyyŠtlŠri vŠ ProblemlŠri,
AzŠrbaycan Respublikası Iqtisadi Inkişaf Nazirliyi Iqtisadi Islahatlar MŠrkŠzi, Baku,
2001, p. 10-11.
165. R. X. SHaulov, “MütŠqillik ŞŠraitindŠ Regional Inkişafın Strategiyası”, AzŠrbaycan Iqtisadi
Isla-hatlarının HŠyata KeçirilmŠsi XüsusiyyŠtlŠri vŠ ProblemlŠri, Center of Economic
Reforms of The Ministry of Economic Development , Baku, 2001, p. 84-86.
166. Rasim Hasanov, “AzŠrbaycanın Iqtisadi Inkişaf Paradigması vŠ Iqtisadi TŠhlükŠsizlik
Konsepsiyasının Seçimi”, Advisory Bulletin, No:7(43), Baku, October-2001, p. 6-8.
167. Rasim Musabeyov, “Qloballaşma vŠ AzŠrbaycan”, Advisory Bulletin, No:11 (47),
February-2002, p. 31-45.
168. Raif Kutluk, “Azerbaycan Tarım Sektörüne Genel Bakuş”, Diyalog Azerbaycan Iş
Dünyası Dergisi, Sayı:16, Ağustos-2004, p. 28-34.
169. Rauf Husseynov, “CIPCO Clinging to Life Support”, Baku Sun Newspaper, 17 December
1998, p. 21.
170. RŠhimŠ NurŠliyeva, “AzŠrbaycan Iqtisadiyyatında Böyük IpŠk Yolunun Rolu vŠ ÄhŠ-
miyŠti”, Böyük IpŠk Yolu vŠ AzŠrbaycan Nefti, Mars-Print, Baku, 1999, p. 50.
171. Rashad Suleymanov, “XŠzŠrin SŠviyyŠsinin Qalxmasından Än Çox Ziyan GörŠn AzŠr-
baycandır”, 525 Newspaper, No:56 (1913), 26 March 2005.
172. Rashad Suleymanov, “AzŠrbaycan Mikro MaliyyŠ Assosiasiyası Daşınmaz Ämlakın TŠ-
mirinŠ dŠ Kredit Verir”, 525 Newspaper, No:43 (1900), 5 March 2005.
173. Rovshan Ibrahimov, “Böyük IpŠk Yolu Proqramı vŠ GözlŠnilŠn NŠticŠlŠri”, IpŠk Yolu II.
Respublika Elmi-Praktiki Konfransının Materialları, Baku, 2001, p. 22-24.
174. Rovşen Ibrahimov, “GUÖAM Örgütünün Kurulma Sebeplerinin Uluslararası Ilişkiler Karar
Verme Süreci Teorisi Açısından Değerlendirilmesi”, Azerbaycan Müsteqillikden Sonra
Beynelhalq Konfransın Materialları, Baku, 3-4 March 2003, p. 55-58.
175. Rovshan Guliyev, “Aqrar Bazarların TŠnzimlŠnmŠsi ÜzrŠ Dünya TŠcrübŠsi”, Advisory
Bulletin, No:12(48), March-2002, p. 39-56.
176. Sevil Yıldırım, Dünyada ve Türkiyede Petrol, T.C. Başbakanlık Dış Ticaret Müsteşarlığı
Ekonomik Araştırmalar ve Değerlendirme Genel Müdürlüğü, Ankara, Ağustos- 2003.
177. S. Bölükbaşı, “Ankara's Bakü-Netred Transcaucassa Policy”, The Middle East Journal,
winter 1999, p. 87.

381
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

178. S. Eyyuboghlu, “Qeyri-Bank Kredit TŠşkilatları Bazarda Hökümranlıq Edir”, 525

Newspaper, 04.01.2003.
179. S. Eyyuboghlu, “TürkiyŠ AzŠrbaycanla Iqtisadi ÄlaqŠlŠrini Inkişaf EtdirmŠk NiyyŠtin-
dŠdir”, 525 Newspaper, 11.01.2003.
180. PAGE Eyyuboğlu, “XŠzŠr BölgŠsi Neft QiymŠtlŠrinŠ On IldŠn Sonra TŠsir EdŠ bilŠ-
cŠkdir”, 525 Newspaper, 08.01.2003.
181. Sahila Allahverdiyeva, “Baku DŠniz Limanının Böyük IpŠk Yolunun BŠrpasında ÄhŠ-
miyyŠti”, Böyük IpŠk Yolu vŠ AzŠrbaycan Nefti, Mars-Print, Baku, 1999, p. 10-12.
182. Sakit Huseynov, Davamlı Insan Inkişafının Stratejik IstiqamŠtlŠri, Adiloğlu NŠşriyyat,
Baku, 2003.
183. Saleh Mammadov, Inflyasiya vŠ MaliyyŠ Bazarı, Baku, 1998.
184. Samir Veliyev, “Main Objectives and Nature of State Policy in Privatization Program”,
Conference Report, 1st International Conference Banking Development in Azerbaijan
12-14 November 2004, Baku, 2004, p. 100-102.
185. Sattar Safarov, “ÄvŠzsiz Milli SŠrvŠtimiz: MüstŠqillik”, Iqtisadiyyat vŠ Audit Magazine,
No: 10, October-2001, p. 5-6.
186. Sevil Yıldırım, Dünyada ve Türkiyede Petrol, T.C. Başbakanlık Dış Ticaret Müsteşarlığı
Ekonomik Araştırmalar ve Değerlendirme Genel Müdürlüğü, Ankara, Ağustos-2003.
187. Sinan Oğan, “Bağımsızlığının Onuncu Yılında Azerbaycan Ekonomisi ve Türkiye Ile
Ekonomik Ilişkileri”, www.ceterisparibup. net/arsiv/s_ogan.pdf. 12.03.2003
188. Sinan Oğan, Türkiye-Azerbaycan Ekonomik Ilişkilerinin Geliştirilmesi Konferansı, IAV-
TIKA, Bakü, 1996.
189. Stanislav Zhukov, “The Macroeconomic Situation in Azerbaijan: At the End of the First
Post-Soviet Decade”, Ekspert Iqtisad Magazine, No.7-8, 2001, p. 6-7.
190. Statisticeskiye Pokazateli Azerbaicana V 1997 Godı Stat. Ejegodnik, Baku, 1998.
191. State Programme on Poverty Reduction and Economic Development 2003-2005, Baku,
2003.
192. Sh. E. Yaqubov – A. M. MahmudzadŠ, “AzŠrbaycan Respublikasında Aparılan Aqrar
Islahatların QiymŠtlŠndirilmŠsi“, AzŠrbaycanda Iqtisadi Islahatların HŠyata KŠçirilmŠsi
XüsusiyyŠtlŠri vŠ ProblemlŠr, Center of Economic Reforms of The Ministry of Economic
Development, Baku, 2001, p. 60-63.
193. Shafa Aliyev, “Kimya vŠ Neft-Kimya Kompleksinin Inkişaf MŠrhŠlŠlŠri, Mövcud Prob-
lemlŠri vŠ PerspektvlŠri”, Iqtisadiyyat vŠ HŠyat Magazine, No:7-8, July-August-2004, p.
61-70.
194. T. A. Abbasov, “Aqrar Bazarın Inkişafında TŠlŠbatın TŠkmilleşdirilmŠsi ProblemlŠri”,
Iqtisadiyyat vŠ HŠyat Magazine, No:7-8, July-August-2004, p. 110-115.
195. Tarık Aydın, “Azerbaycan ve Dünya Bankası”, Mutasyon.Net,
196. http://www.mutasyon.net/makaleler/taydin/default.asp, 15.9.2002
197. Tabriz Vafalı, “Qarabağın Iqtisadıyyatımıda Izi”, HŠrbi And QŠzeti, 1-15 April 2003, p. 3.
198. Diyalog Azerbaycan Iş Düntası Dergisi, TÜSIAB Society Bulletin, No:03/91, 4 Şubat 2003,
p. 2.
199. V. A. Huseynov, v.d., Manatın Bahalaşması vŠ Iqtisadi Inkişaf: Hollandiya XŠstŠlyinin
MŠzmunu vŠ ÄlamŠtlŠrinin TŠdqiqi, SŠda Press, Baku, 2005.

382
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

200. V. E. Rustamov, “AzŠrbaycan Iqtisadiyyatının Struktur YenidŠn qurulmasında Xarici

Kapitalın Rolu“, AzŠrbaycan Iqtisadi Islahatlarının HŠyata KeçirilmŠsi XüsusiyyŠtlŠri vŠ
ProblemlŠri, Azerbaijan Republic Center of Economic Reforms of The Ministry of
Economic Development, Baku, 2001, p. 27-28.
201. Vugar Dargahov, “Neft SiyasŠti vŠ IpŠk Yolunun Xarici Turizmin Inkişafında Rolu”, Böyük
IpŠk Yolu vŠ AzŠrbaycan Nefti, Mars-Print, Baku, 1999, p. 21-24.
202. Yasin Aslan, Hazar Petrolleri, Kafkas Kördüğümü ve Türkiye, Ankara, 1997, p. 75-76.
203. Yavuz Selim Çelebi, “Türk Standartları Enstitüsü ve Azerbaycan”, Diyalog Azerbaycan Iş
Dünyası Dergisi, Sayı:16, Ağustos-2004, p. 22.
204. Yavuz Kahraman, Globalleşme Sürecinde Ulus Ötesi Işletmeler, Tüketici Davranışları ve
Azerbaycan, Articles of The International Conference On A Theme Caucasus and
Central Asia in The Globalization Process, Baku, 2003, p. 80-84.
205. Yavuz Kahraman, Yabancı Girişimci Açısından Azerbaycan Ekonomisinin SWOT Analizi,
Diyalog Azerbaycan Iş Dünyası Dergisi, Sayı:16, Ağustos-2004, p. 48.
206. Yusif Vazir Chamanzaminli, Tarixi Coğrafi vŠ Iqtisadi AzŠrbaycan, Baku Universiteti
Neşriyyatı, Baku, 1993.
207. Z. N. Eminov, AzŠrbaycan Fiziki vŠ Iqtisadi Coğrafiyası, AzŠrbaycan Coğrafiya Institutu
Press, Baku, 2000, p. 153-156.
208. Zahid Mammadov, AzŠrbaycan Respublikasının Xarici Iqtisadi ÄlaqŠlŠri, Kooperasiya
Press, Baku, 2004.
209. Zakir Nuriyev, “Azerbaıjan Banking Sistem in 2002-2003 Years”, Conference Report, 1st
International Conference Banking Development in Azerbaijan 12-14 November 2004,
Baku, 2004, p. 64-69.
210. Zenfira Nesirova, Sovyetler Birliği Dağıldıktan Sonra Azerbaycanda Ekonomik Gelişme,
Yayımlanmamış Yüksek Lisans Tezi, M.Ü, Sosyal Bilimler Enstitüsü, Istanbul, 2002.
211. Zarifa Musayeva, “Böyük IpŠk Yolu vŠ Azerbaycan Nefti”, Böyük IpŠk Yolu vŠ AzŠr-
baycan Nefti, Mars-Print, Baku, 1999, p. 34-46.
212. Y. Hasanli, Neft GŠlirlerinin AzŠrbaycanın Iqtisadiyyatına TŠsirinin SŠmŠrŠlilik ProblemlŠri
– Valyuta Böhranı: “Dağıdıcı Artım”, “Holland XŠstŠliyi”, vŠ Asiya MaliyyŠ Virusu”,
Materials from the International Conference on Globalization in the Caucasus and
Central Asia,Baku, 2003, p. 217-219.
213. “Azerbaijan”, Eurasian File, TICA, PAGE103, July 1998/2, p. 2.
214. “Azerbaycan”, Avrasya Dosyası, TIKA Bulletin, PAGE128, March 2000, p. 2.
215. “Azerbaycan'ın Petrol Anlaşmaları”, Avrasya Dosyası, PAGE85, Ekim-97/2, p. 4-5.
216. “Yaponskie Kompanii v Azerbaydjane - Tam Gde Net Riska, Net i Bolşoy Pribıli”, Capital
Magazine, April-May 1997, p. 48-49.
217. http://www.exprep.com.az/second.asp?id=2909. (09.04.2003).
218. “Azerbaijan,: Financial Position in the Fund”,
219. http://www.imf.org/external/np/tre/tad/exfin2.cfm?memberKey1=51, (04.04.2005).
220. “AzŠrbaycan Respublikası Milli Bankının 2003-cü Il Üçün Pul-Kredit SiyasŠtinin Başlıca
IstiqamŠtlŠri BarŠdŠ BŠyanatı”,
221. http://www.nba.az/az/analitic/bayanat2003-10.shtml, (18.04.2003).
222. “AzŠrbaycan Respublikasının Sosial-Iqtisadi VŠziyyŠti”, Milli Bank Illik Hesabat-2000,
AzŠr-baycan Respublikası Milli Bankı, Baku, 2001, p. 6.

383
 O.N.ARAS, E.SULEYMANOV, K.MAMMADOV

223. “AzŠrbaycan TŠhsil Nazirliyinin BŠyanatı”, AzŠrbaycan Zaman Newspaper, 15-17 March
2003, p. 2.
224. “AzŠrbaycanın Qızıl Yataqlarının Çıxarılmasına Başlanılacaq”, Üç NöqtŠ Newspaper,
No:41(521), 4 March 2003.
225. “Azerbaycan-Türkiye Tohum Üretim ve Araştırma Işletmesi Projesi ile Ilgili Görüntüler”,
http://www.tika.gov.tr/tur/projeler/tarim/main.htm. 12.03.2003.
226. “Baku-Tblisi-Ceyhan Pipeline”, Energy Ecology Economy Popular – Science Magazine,
13/2003, p. 2-15.
227. “Banki i Biznes”, Zerkalo Newspaper, 28 February, 2001.
228. “Caspian Staging a Comeback”, Offshore Engineer, June-2000, p. 38.
229. Consultation With the Azerbaijan Republic, Public Information Notice (PIN), No.05/6,
January 21 2005, http://www.imf.org/external/np/sec/pn/2005/pn0506.htm (10.04.2005).
230. “Country Assistance Strategy For The Azerbaijan Republic”, The World Bank Report,
No:19892-AZ, 29 November 1999. p. 11.
231. “Dünya Bankı 2003-2005-ci IllŠrdŠ AzŠrbaycanda 9 LayihŠ HŠyata KeçirdŠcŠk”, 525
Newspaper, 17.04.2003.
232. “Dünya Bankı TŠhsilin Inkişafına 63 Milyon Dollar Kredit Ayıracaq”, 525 Newspaper,
18.03.2003.
233. “Doğu ile Batı Arasında Ipek Köprü”,Zaman Gazetesi, 9 Eylül 1998.
234. EBRD and Azerbaijan, http://www.ebrd.org/country/azer/index.htm. (10.04.2005).
235. Enerji Sektorunun VŠziyyŠtini Yaxşılaşdırmaq Üçün 1 Milyard Dollar Lazımdır, 525
Newspaper, No:53 (1910), 23 March 2005.
236. EU-Relations with Azerbaijan,
http://europa.eu.int/comm/external_relations/azerbaidjan/intro/ (04.05.2005).
237. Gov't Says New Program Will Halve Poverty Level, Azernews, No:10(400), March 8–
March 15, 2005, p. 3.
238. “Investment Possibilities of Azerbaijan”, Ekspert Iqtisad Magazine, No.7-8, 2001.
239. www.byegm.gov.tr/yayinlarimiz/anadolununsesı/147/AND11.html, (7.4.2009).
240. “Iqtisadiyyatımız DirçŠlir”, AzŠrbaycan Zaman Newspaper, 12-14 November 2002, p. 2.
241. www.foreigntrade.gov.tr/ead/ekonomi/sayi10/kei.htm 5 Haziran 1999. (09.06.2009).
242. “Kommersiya Banklarının Sayı Azalıb”, 525 Newspaper, 14.01.2003.
243. MikromaliyyŠlŠşdirmŠ Bankı On Mininci Kreditini Verdi, 525 Newspaper, No: 57 (1914),
29 March 2005.
244. “Milli Bank HiMayŠdarlıq SiyasŠti Yeridir”, Azadlıq Newspaper, No:2(2665), 5 January
2005.
245. “Minfin Podvodit Itogi Strahovogo Goda”, Zerkalo,No. 15(108), Baku, 2002, p. 16-18.
246. “Neft Fondunun VŠsaiti 727 Milyon Dollara Çatıb”, 525 Newspaper, 17.04.2003.
247. Oil and Gas Investment Projects: Azerbaijan and Georgia, Bisnis Home Page,
http://www.worldbank.org/ogmc/ifcoginvestmentsprojectsazerbaijan.htm. (12.04.205).
248. “Orta Asya Türk Cumhuriyetleri Telekominikasyon ve Internet Altyapısı Ile Ilgili Olarak
Hazırlanan Teknik Rapor”,
http://www.foreigntrade.gov.tr/turkcumhuriyetleri/teknik_rapor.htm. (19.04.2015).

384
 ECONOMY OF AZERBAIJAN 25 YEARS OF INDEPENDENCE

249. Process of Privatization, www.msp. gov.az/html/eng/xod.html, (18.04.2015).

250. Sektörel Bazda Azerbaycandaki Türk Yatırımları, TÜSIAB 10. Yıl Tanıtım Kataloğu, Aralık-
2004, p. 110-112.
251. Sektörel Bazda Azerbaycandaki Türk Yatırımları, TÜSIAB Ekonomi ve Haber Bulletin,
No:19/136, 29 Haziran 2004. p. 1.
252. “Sığortacıların NizamnamŠ Kapitalı Artırılır”, Ekspert Iqtisad Magazine, No:5-6 (17-18),
2001, p. 4.
253. “Son Beş IldŠ KŠnd TŠsŠrrüfatına 300 Milyon Dollar Xarici SŠrMayŠ Qoyulub”, 525
Newspaper, 20.03.2003.
254. State Program on Social-Economic Development of Regions of Azerbaijan Republic for
the Years of 2004-2008,
255. http://unpan1.un.org/intradoc/groups/public/documents/UNTC/UNPAN016803.pdf,
(05.04.2009)
256. “TürkiyŠ AzŠrbaycanla Iqtisadi ÄlaqŠlŠrini Inkişaf EtdirmŠk NiyyŠtindŠdir”, 525-ci QŠzet,
11.01.2003.
257. “World Bank Lending to Azerbaijan”, http://lnweb18.worldbank.org/ECA/Azerbaijan.nsf/
ECADocbyUnid/EB90853C3B704B85C4256C3A001980A7?Opendocument,
(01.04.2015).
258. http://www.eia.doe.gov/emeu/cabs/azerproj.html, (04.04.2015).
259. http://www.invest-in-azerbaijan.com/docs/facts_azerbaijan.shtml, (21.05.2009).
260. AzŠrbaycan Respublikasının MaliyyŠ Nazirliyi, AzŠrbaycan Respublikasının 2016-ci il
üçün dövlŠt vŠ icmal büdcŠ layihŠlŠrinin tŠqdimatı, Baku, 2015
261. www.cbar.az
262. www.finance.gov.az

385
 By Sponsor ...
With more than a decade and a half of experience in commercial cleaning services, BG Cleaning
Systems is now bringing its expertise to Azerbaijan.
Due to our commitment to excellence and high quality standards, BGCS has grown significantly
in the past few years. We currently provide a diverse range of janitorial and maintenance services
that cater to all types of facilities, in both the private and public sectors.
Our ongoing business relationships with clients in every sector have allowed us to create an
extensive selection of services designed to accommodate the needs of every facility.
We offer a variety of solutions ranging from standard janitorial maintenance to specialised
services, which include but are not limited to: floor care/maintenance, carpet cleaning/
maintenance, window washing, pantry services, messenger services, and industrial cleaning.
Through years of commendable service, we’ve earned a reputation for being courteous, honest,
and fair. All of our employees are taught the importance of good character and are urged to
portray the utmost in integrity, professionalism, dignity, and reliability.
About BG Cleaning Systems Azerbaijan
BGCS just recently opened its first franchise in Baku Azerbaijan.
Through the able leadership and management of the Master Franchisee of BG Cleaning Systems
Azerbaijan, we’ve been able to bring our services to Baku and its surrounding regions. At BG
Cleaning Systems, we use only the best equipment and we require our professional staff to
uphold high operating standards while completing jobs in a timely and efficient manner.
We take pride in the fact that our team members are trained to provide fully satisfactory service
on a consistent basis, exercising effective cleaning protocol and maintaining complete
confidentiality while performing their duties.
Our goal is to continually improve our portfolio of services and be the best cleaning company in
the industry.

To find out more about the cleaning services

we offer in Pune, feel free to contact us today:
BG Cleaning Systems Azerbaijan (TIS AZERBAIJAN LLC)

Samad Vurgun / Suleyman Rahimov str. 309 rossroad

“World Business Centre” 16th Floor No: 3
AZ1009, Nasimi district, Baku/Azerbaijan
Tel: +994 (12) 555 66 54
azerbaijan@bgcleaning.com
www.bgcleaning.com

View publication stats