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Why Azerbaijan?

Summary

Area: 86,600 km2

Population: 9.9 million

Urban population: 55.3%

Population density: 119.3 people per km2

Population growth rate (change): 1.2%

Capital city: Baku

Official language: Azerbaijani

Currency: Azerbaijani Manat (AZN)

Nominal GDP: US $45.4 billion

Real annual GDP growth: 1.4%

GDP per capita: US $4,569.2

Annual inflation rate: 2.3%

Unemployment rate: 5%

General government gross debt: 19.4% of GDP

Fiscal balance: 4% of GDP

Current account balance: US $5.7 billion/12.6% of GDP

Exports of goods to UK: £94 million

Exports of services to UK: £129 million

Imports of goods from UK: £199 million

Imports of services from UK: £265 million

[Source – FCO Economics Unit, World Bank]

Azerbaijan has grown rapidly in recent years, mainly due to its huge oil revenues. Consequently, poverty in Azerbaijan has reduced from 50% to below 6% in just ten years. However, since the recent collapse of oil prices, the oil-dominated economy and the national currency (Manat) have come under increasing pressure. The Azerbaijan Central Bank devalued the Manat twice in 2015, which hit the banking sector hard. Oil and gas still dominate the economy, but the Azerbaijani Government is trying to diversify, with consolidation of the banking sector now in progress following a recession in 2016.

[Source – FCO Overseas Business Risk, gov.uk]

 

Geography

About the size of Scotland, the Republic of Azerbaijan is located on the southern edge of the Caucasus Mountains in Transcaucasia, and borders Iran to the south, Armenia to the west, Georgia to the northwest, Russia to the north and the Caspian Sea to the east. It also has a small exclave, Nakhichevan, to the southwest bordering Iran, Armenia and Turkey.

The northern border of the country runs along the Greater Caucasus mountain range, reaching a height of 4,406 m. The centre of the country is a relatively flat fertile basin and to the southwest and southeast are the Lesser Caucasus and Talysh mountain ranges, the former reaching a height of almost 4,000 m. The east of the country borders the Caspian Sea with the most densely populated region in the Abșeron Peninsula, including the ancient capital and port of Baku.

Much of the country, including the fertile lowlands of the centre and the highly populated eastern coast, has a dry subtropical climate with mild winters and summer temperatures sometimes reaching over 40ºC. The climate of other regions ranges from humid subtropical with high precipitation in the southeast, to an upland tundra climate above 3,000 m where heavy snowfalls make mountain passes inaccessible for some months each year.

 

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Political situation

Azerbaijan’s political system functions as a republic based upon a dual executive structure. Powers are therefore exercised through the President, who holds the position of head of state, and the Prime Minister as the head of government. Legislative authority is based within the institution of government in the National Assembly.

More information detailing the delegation of powers within Azerbaijan’s political system can be found on the President of the Republic of Azerbaijan site: https://en.president.az/president/power and on the National Assembly website: http://www.meclis.gov.az/?/az/topcontent/2.

İlham Aliyev, the current President of Azerbaijan, has successfully campaigned and won three elections since 2003 – securing more than 75% of the popular vote in each. The ruling party, the New Azerbaijan Party (Yeni Azərbaycan Partiyası) promotes within its Charter the values of secularism, democracy and constitutional legalism (see: http://www.yap.org.az/en/view/pages/8). Alongside these stated values there is a strong commitment to developing the market economy and free ownership within Azerbaijan.

Opposition parties also tend towards supporting free enterprise and liberal economic reform – normally upon a programme of pan-Turkism or pan-Islamism. However, despite the presence of a multiparty system within Azerbaijan, opposition groups often challenge the legitimacy of elections and their access to equal media coverage.

A strong emphasis is placed by the Azerbaijani Government upon maintaining strong regional relations with its neighbours and allies both in Asia and in Europe. This is particularly due to Azerbaijan’s perceived position as the geographical bridge between two continents. Turkey, in particular, is considered to be its closest ally, with the former president, Heydar Aliyev, describing the Turkey-Azerbaijan relationship as 'one nation with two states'.

The government’s commitment to building its regional acumen as a trans-continental economic hub is the infrastructure investment directed towards developing cross-border transport links. Since March 2019, the Gazvin–Rasht railway has been launched as part of a trilateral project between Azerbaijan, Russia and Iran to increase the trade connectivity of countries along the North-South Transport Corridor. See: http://www.mincom.gov.az/en/view/pages/104/ for further information.

The joining up of rail routes between these countries has relied upon connecting potential cargo transport routes through Northern Iran. As a result of this project’s proposed development, the year 2018 saw a 74% increase in bilateral trade with Iran. As the North-South Transport Corridor develops, the government hopes to remain a key sponsor and is committed to progressing towards a joined-up regional plan to create jobs and boost Azerbaijan’s exports in goods.

The war in Nagorno-Karabakh between 1988 and 1994 resulted in around 750,000 internally displaced persons and no control of over 20% of Azerbaijan’s internationally recognised territory. Despite a ceasefire and ongoing peace negotiations led by the OSCE Minsk Group since 1994, there are still regular incidents along the front line, and tensions have increased in recent years.

You should check the FCO foreign travel advice at: https://www.gov.uk/foreign-travel-advice/azerbaijan for the latest travel information.

[Source – FCO Overseas Business Risk, gov.uk, gov.az, president.az, yap.org.az]

 

Economic overview

Azerbaijan’s economy expanded in the first half of 2018 with revived output in the services sector due to improved terms of trade. Due to higher exports to the Russian Federation, agricultural output expanded by 6.5% year-on-year. However, in part due to the completion of works in Azerbaijan’s major gas fields, the construction sector continued to contract during the first half of 2018.  

Following higher oil prices and a stabilisation of oil production, together with strong agricultural exports, the current account surplus increased to an estimated 8% of GDP in the first half of 2018.

Following the recession in 2015-16 and two years of decline with annual inflation at between 13% and 16%, credit growth in the banking system increased by 3% and annual inflation moderated to 2.3% in the first half of 2018.

In addition, the Azerbaijan Central Bank cut the policy rate twice in 2018 from 13% to 10% and the government has adopted a new fiscal rule, a new debt management strategy and new procedures for medium-term budgeting setting spending growth limits. 

Economic growth

In the medium-term, Azerbaijan’s economic performance should strengthen, helped by natural gas exports and a moderate acceleration in domestic demand.

If the oil price is maintained, the current account surplus is projected to average at 10% of the GDP until 2020. Non-oil sector growth is expected to average at 2.7% due to rising market confidence, which will allow improvements in the banking sector and a gradual recovery in investment, with inflation remaining below 3%.

Import growth is expected to accelerate owing to a further real appreciation of the Manat, with fiscal spending rising steadily, although uncertainty in global markets could be a concern. 

Recent debt management legislation should support efforts toward budgetary restraint, and, if oil prices remain stable, the fiscal balance over the medium-term is projected to remain in surplus.

GDP growth will remain largely dependent on developments in the oil and gas sectors, and the country is expected to come out of the recession as the Shah Deniz II gas field comes into operation and a new gas pipeline to transport the gas to Europe is constructed in 2019.

As part of its diversification of non-oil sectors, the government has a new economic strategy, ‘Azerbaijan 2020: Outlook for the Future’, with the objective of diversifying the economy, increasing exports and reducing poverty. See: https://president.az/files/future_en.pdf for further details.

According to its latest World Economic Outlook report, the IMF’s projection for Azerbaijan’s Real GDP is a 3.6% change for 2019. See: https://www.imf.org/en/Countries/AZE.  

[Source – DIT Trade and Investment guide: Azerbaijan, FCO Overseas Business Risk, gov.uk, president.az, World Bank, IMF World Economic Outlook Report]

World rankings

In addition:

  • In Transparency International's latest 2018 Corruption Perceptions Index (announced Jan 2019), Azerbaijan is ranked 152nd out of 180 countries (the UK ranks 11th): https://www.transparency.org/country/AZE  

Contact a DIT Export Adviser at: https://www.great.gov.uk/contact/triage/location/ for a free consultation if you are interested in exporting to Azerbaijan.

Contact UK Export Finance (UKEF) about trade finance and insurance cover for UK companies. You can also check the current UKEF cover position for Azerbaijan. See: https://www.gov.uk/guidance/country-cover-policy-and-indicators#azerbaijan.

[Source – DIT, UKEF, gov.uk]

 

UK and Azerbaijan trade

The UK is the single largest investor in Azerbaijan and UK companies are well placed to increase business.

There are currently more than 450 UK companies doing business in Azerbaijan. In addition to oil and gas, UK companies have been successful in areas such as construction management and design, retail and education.

The total value of UK exports to Azerbaijan in 2017-18 reached nearly £464 million, with the main exports from the UK including services, technology, engineering equipment and oil machinery.

Benefits for UK businesses

Benefits for UK businesses exporting to Azerbaijan include:

  • new diversification strategy

  • high government spending on infrastructure projects

Strengths of the market

Strengths of the Azerbaijan market include:

  • rapidly changing country

  • a strategic location as a gateway between Europe, the Middle East and Asia

[Source – DIT Trade and Investment guide: Azerbaijan, gov.uk]


 

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