CORRECTED COPY: AZERBAIJAN: INVESTMENT CLIMATE

UNCLAS SECTION 01 OF 10 BAKU 000123

SIPDIS

SIPDIS

STATE FOR EUR/CACEN AND EB/IFD/OIA;
STATE PLEASE PASS TO OPIC AND USTR
ANKARA FOR FCS
DEPT PASS TO TDA FOR STEIN, EXIM FOR GLAZER
COMMERCE FOR 4231 ITA/MAC/ORUE FOR DSTARKS
COMMERCE FOR 3004 ITA/FCS/ ADVOCACY FOR ACHAMS-EDDINE

E.O. 12958: N/A
TAGS: KTDB ECON EFIN EINV ELAB ETRD OPIC PGOV AJ
SUBJECT: CORRECTED COPY: AZERBAIJAN: INVESTMENT CLIMATE
STATEMENT 2008

REF: STATE 158802


1. This cable contains post's Investment Climate Statement
for 2008. The Statement includes the following sections:

Introduction
A.1. Openness to Foreign Investment
A.2. Conversion and Transfer Policies
A.3. Expropriation and Compensation
A.4. Dispute Settlement
A.5. Performance Requirements and Incentives
A.6. Right to Private Ownership and Establishment
A.7. Protection of Property Rights
A.8. Transparency of the Regulatory System
A.9. Efficient Capital Markets and Portfolio Investments
A.10. Political Violence
A.11.a. Corruption
A.11.b. Bilateral Investment Agreements
A.11.c. OPIC and Other Investment Insurance
A.11.d. Labor
A.11.e. Foreign Trade Zones/Free Ports
A.11.f. Foreign Direct Investment Statistics

--------------
INTRODUCTION
--------------


2. Azerbaijan's continued efforts to modernize and reform its
economy into a market economy presents both significant
prospects and challenges. Many outdated laws have been
replaced with modern legislation to encourage foreign
investment, to protect intellectual property, to permit
bankruptcies, and to rationalize the Government's revenue
collection policies. Since the mid-1990s, Azerbaijan has
successfully executed a strategy to develop its oil and gas
resources and has begun to receive energy revenue inflows.
Much work remains to be done, however, to produce prosperity
for the country's population of eight and a half million.
This includes improving governance and curbing corruption,
diversifying the economy through domestic and foreign
investment, and creating jobs. A long running and unresolved
conflict with Armenia over Nagorno-Karabakh has left
Azerbaijan with approximately 800,000 refugees and internally
displaced persons (IDPs) for more than a decade and
constitutes an enormous burden on economic and democratic
development. The World Bank estimated in 2005 that 24
percent of the population lived in poverty, with slightly
more than nine percent in extreme poverty. Poverty remains
particularly acute in Azerbaijan's regions, and developing an
environment in which private investors can help create
employment opportunities in the regions remains an imperative
for Azerbaijani policymakers.


3. Cooperation with the international financial institutions
has been a key element in Azerbaijan's reforms efforts.
Azerbaijan is a member of the International Bank for
Reconstruction and Development (IBRD),the European Bank for
Reconstruction and Development, the International Monetary
Fund (IMF) and the Asian Development Bank. Azerbaijan is not
yet a member of the World Trade Organization, but USAID is
providing assistance in preparing Azerbaijan's bid for
accession. Azerbaijan's macroeconomic situation continued to
improve in 2007. According to the National Bank of
Azerbaijan, compared to the first 11 months of 2006, GDP
increased 25.4 percent and reached USD 24.6 billion.
Developments in the oil and gas sector continued to be the
primary force behind this growth. Oil and gas production
increased 30 and 61 percent respectively. Inflationary
pressures increased in 2007 with estimates ranging from 18 to
27 percent through November 2007.


4. The national currency, the manat, appreciated
approximately 3.1 percent in real terms against the U.S.
dollar in 2007. The nominal exchange rate was approximately
1 USD = 0.845 AZN as of January 1, 2008. The National Bank's
currency reserves grew 75.6 percent and reached USD 3.5
billion in December 2007. The State Oil Fund continued to
play a critical role in promoting macroeconomic stability and
in sterilizing massive energy revenues. As of September 30,
2007, the Oil Fund had more than USD 2 billion in assets. In
2008, the Government of Azerbaijan is expected to receive

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approximately USD 5 billion in additional energy revenues.
Over the next 15 years, Azerbaijan is expected to receive
more than USD 200 billion in energy revenues.


5. With completion of the Baku-Tbilisi-Ceyhan oil pipeline
and the South Caucasus gas pipelines in 2006, the nature of
business activity within the energy sector is shifting from
infrastructure construction to services provision. In 2007
the BTC pipeline transported approximately 750,000 barrels of
oil a day from Azerbaijan's offshore Azeri-Chirag-Gunashli
(ACG) field. In addition, the South Caucasus Pipeline (SCP)
transported natural gas from Azerbaijan's offshore Shah Deniz
field to Turkey and Georgia. Azerbaijan has taken
significant steps to implement the Extractive Industries
Transparency Initiative (EITI),which promotes oil revenue
transparency. Azerbaijan remains an active participant in
the Extractive Industries Transparency Initiative (EITI). In
June 2007, the United Nations awarded Azerbaijan and its
State Oil Fund a public service award for its work to improve
transparency, accountability and responsiveness in public
service.


6. Corruption is a significant deterrent to investment in
Azerbaijan, especially in the non-energy sector. Laws and
regulations that exist to combat corruption are not
effectively enforced, with corruption in the regulatory, tax,
and dispute settlement systems most pervasive. Problems in
the quality, reliability, and transparency of governance, as
well as abuse of the regulatory system and poor contract
enforcement, significantly impede the ability of many
companies to do business in Azerbaijan. These problems have
driven many companies, including some major Western firms,
from the market. In the summer of 2007, the government took
several positive steps aimed at tackling the problem of
corruption by adopting a new National Strategy on Increasing
Transparency and Combating Corruption and an ethics code for
civil servants.


7. The New Anti-Corruption National Strategy, set to run from
2007 to 2011, replaces and expands upon Azerbaijan's previous
State Program on Combating Corruption. The new National
Strategy commits the GOAJ to undertake a number of important
reforms in a wide range or areas, including adopting a
comprehensive anti-money laundering/counter terrorist
financing law, increasing accountability in government
purchasing, improvement in the operations of the
anti-corruption commission, streamlining government licensing
and regulation, and increasing transparency throughout
government operations. Shortcomings in its intellectual
property rights laws and enforcement of such laws resulted in
Azerbaijan being placed on the U.S. Special 301 Watch List
from 2000 to 2005; however, Azerbaijan was removed from the
Watch List in 2006 due to steps taken to enforce intellectual
property rights enforcement. Azerbaijan remained off the
Watch List in 2007.

--------------
A.1. OPENNESS TO FOREIGN INVESTMENT
--------------


8. The Government of Azerbaijan officially welcomes foreign
direct investment, recognizing that it plays a vital role in
development of the country's economy. Since 1994, Azerbaijan
has attracted significant amounts of foreign investment to
develop further its energy sector. However, government
bureaucracy, weak legal institutions and predatory behavior
by politically connected monopoly interests have severely
hindered investment outside of the energy sector. The 2008
World Bank/IFC "Doing Business" report ranks Azerbaijan at 96
(out of 178),an improvement of five positions compared to
the previous ranking when taking into account that two
countries were added to the ranking in 2008. Azerbaijan's
improvement is primarily due to the creation of a
one-stop-shop for business registration at the Ministry of
Taxation.


9. The Law on Protection of Foreign Investments permits
foreign direct investment (FDI) in any activity open to a
national investor unless prohibited by law. Prohibited areas
include those relating to national security and defense. The
government carefully controls other key sectors, such as

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energy and communications. In the past, the process of
investment in the oil and gas sector has been to conclude a
Production Sharing Agreement (PSA) with the State Oil Company
of Azerbaijan (SOCAR),which is subsequently ratified by
parliament. The establishment of a Ministry of Fuel and
Energy, renamed the Ministry of Energy and Industry (MEI) in
2004, has not meaningfully changed this procedure, although
the MEI has been given nominal responsibility for conclusion
of PSAs. A limitation on FDI in the banking sector was
reduced when the National Bank of Azerbaijan (NBA) increased
the limit on participation of banks with foreign ownership
from 30 to 50 percent of the commercial banking market.


10. Azerbaijan is not yet a member of the World Trade
Organization, but the Government, with U.S. and international
technical assistance, has been working to draft new
legislation. The Ministry of Economic Development has been
tasked to lead the WTO accession process. The Government has
recently accelerated its WTO accession efforts, hoped to have
a WTO Working Party meeting in Geneva by early spring, and
wants to complete the accession process by late 2009.
Creating a stable and predictable business environment is
especially crucial for attracting investment to the
non-energy sector. At present, however, Azerbaijan remains a
challenging market in which to do business. Following
international recommendations, the Government of Azerbaijan
established a new business registration mechanism on
principles of a one-stop-shop at the Ministry of Taxation.
The time to register new businesses has dropped from several
weeks to three days.


11. Under Azerbaijani law, foreign investors may participate
in the Azerbaijani market through joint ventures with local
companies, establishment of subsidiaries wholly owned by
foreign investors, and representative offices and branches of
foreign legal entities. The Law on Protection of Foreign
Investments provides that the Azerbaijani government will
treat foreign investors in a manner "not less favored" than
the treatment accorded to local investors. This law provides
for repatriation of profits, revenues, and other
investment-related funds so long as applicable Azerbaijani
taxes have been paid. The law also provides a 10-year
grandfather clause in the event new legislation less
favorable to the foreign investor is adopted. However, this
provision does not apply to changes in tax legislation.


12. While the Azerbaijani government employs no formal
screening mechanisms for general foreign investment, the
process of registering an enterprise with the Ministry of
Justice serves as a de facto screening process. Although by
law required only to determine that documents of enterprises
seeking registration are in order, the Ministry operates in a
non-transparent and arbitrary manner. Credible reports
indicate that ministry officials make extra-legal
determinations of whether individual foreign investments are
of an appropriate nature before making decisions about
registration. Some investors have alleged that they have
received demands for bribes when attemptingQ register their
enterprises.


13. In September 2005, a presidential decree transferred
control of privatization from the Ministry of Economic
Development to an autonomous State Agency for Privatization.
Implementation of a second stage privatization program, which
began in 2001 and could include some of Azerbaijan's largest
state-owned enterprises, has been slow. Foreign investors
may participate, though it is not clear what role vouchers
and options purchased previously by foreigners will play in
these and other privatizations. Several attempted
privatizations or placements of large state enterprises under
private management failed for lack of qualified bidders. In
general, participation in the privatization program continues
to be hindered by a lack of resources to properly prepare
assets for privatization, as well as insufficient information
about the assets of enterprises to be privatized. The
Government of Azerbaijan announced at the end of 2007 that
the validity of privatization vouchers had been extended
until 2010.


14. The Ministry of Economic Development maintains a web site
with information about investment opportunities available in

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English, Azerbaijani and Russian (www.economy.gov.az). The
Azerbaijani Export & Investment Promotion Foundation
(AZPROMO) (http://www.azpromo.az/) is a joint Public Private
Initiative established by the Government of Azerbaijan in

2003. AZPROMO is empowered to play a key role in
public-private dialogue serving as a bridge between
investors, local producers and the Government. AZPROMO is an
independent organization with the key objective to contribute
to achieving balanced development of the economy of the
country and to implement measures necessary for the
attraction and promotion of inflow of investments for
creation of new jobs, particularly in its rural regions
within the poverty reduction strategy framework. In August
2005, AZPROMO was also empowered with the mandate to promote
export of local non-energy sector products.


15. The Azerbaijan Investment Company (AIC) is a state-owned
joint-stock company, established by presidential decree in
2006, in order to promote investment in the non-oil sector.
Key priorities of AIC are to participate in joint-venture
projects (especially export-Qented and import substitute)
of Azerbaijani enterprises and to promote local and foreign
investments in the non-oil sector. AIC's investment
decisions are based on the analysis of business plans,
description of effectiveness of organization's commercial
activity, experience and achievements of shareholders of
potential partners. AIC invests in both existing and
newly-established joint-ventures.

--------------
A.2. CONVERSION AND TRANSFER POLICIES
--------------


16. Azerbaijan has a liberal exchange system, and, in
general, there are no restrictions on converting or
transferring funds associated with an investment into freely
usable currency and at a legal, market-clearing rate.
Conversion is carried out through the Baku Interbank Currency
Exchange Market and the Organized Interbank Currency Market.
The Baku Electronic Currency Exchange System (BEST) was
launched in July 2002. Cash exchange is carried out at
numerous currency exchange points and no difficulties exist
in obtaining foreign exchange.


17. Since 2001, the NBA has required that cash transactions
be conducted in Azerbaijani manats. In 2006, the NBA
completed the denomination of the national currency, and
starting from January 2007 new Azerbaijani manats (1 AZN
equals 5000 old Azerbaijani manats are the only legal cash
tender. The average delay for remitting investment returns
is two to three business days. Additional requirements
relating to the disclosure of the source of currency
transfers have been imposed in an attempt to reduce illicit
transactions. The Parliament amended legislation in 2007 to
eliminate custom duties for cash currency exports, a move
that is in-line with a WTO requirement and is believed to
help ease inflationary pressures. The Tax Ministry has
occasionally frozen bank accounts of companies that it
believes have failed to meet their tax obligations.

--------------
A.3. EXPROPRIATION AND COMPENSATION
--------------


18. The Law on Protection of Foreign Investments protects
foreign investors against nationalization and requisition
except under certain specified circumstances.
Nationalization of property to prevent harm to the population
or damage to state interests of Azerbaijan is possible by
parliamentary resolution. Requisition by a decision of the
Cabinet of Ministers is possible in the event of natural
disaster, epidemic, or other extraordinary situation. In the
event of nationalization or requisition, foreign investors
are entitled by law to prompt, effective, and adequate
compensation. There have been no cases of nationalization or
requisition against foreign firms in Azerbaijan.

--------------
A.4. DISPUTE SETTLEMENT
--------------


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19. Dispute settlement mechanisms are improving in
Azerbaijan, but effective means of protecting and enforcing
property and contractual rights are by no means assured.
While the Azerbaijani government does not officially
interfere in the court system, in practice courts are weak,
judges often inexperienced, and progressive new tax and other
economic legislation poorly understood. The Economic Court,
which has jurisdiction over commercial disputes, is weak,
widely regarded as corruptible, and its decisions are often
inconsistent. The Civil Procedure Code of September 2000
sets forth basic civil legislation.


20. Since 2000, the Law On International Arbitration provides
for the possibility of local arbitration in international
commercial matters. However, in practice arbitration is
seldom used to resolve disputes. A Bilateral Investment
Treaty between the U.S. and Azerbaijan, which came into
effect in 2001, provides U.S. investors with recourse to the
International Center for the Settlement of Investment
Disputes. Azerbaijan is a party to the World Bank Convention
on the Settlement of Investment Disputes between States and
Nationals of Other States and is also a member of the
Multilateral Investment Guarantee Agency (MIGA). Azerbaijan
is also a party to the 1958 New York Convention on the
Recognition and Enforcement of Foreign Arbitral Awards, which
provides for binding international arbitration of investment
disputes between foreign investors and the state. The Civil
Procedure Code provides that foreign arbitral awards may be
enforced in Azerbaijan so long as they do not contravene
legislation or public policy, and if reciprocity exists.
Azerbaijan's bankruptcy law does not function effectively and
is rarely used.

--------------
A.5. PERFORMANCE REQUIREMENTS AND INCENTIVES
--------------


21. Azerbaijan has not yet developed effective incentives to
attract foreign investment, other than the incentives
provided by Production Sharing Agreements in the oil and gas
sector. Performance requirements are not imposed on new
investment, but investors who participate in the
privatization process of enterprises often assume specific
obligations regarding future investment and employment.
Foreign investors are not required to purchase from local
sources or export a certain percentage of output. Except for
those state monopolies identified above, there is no
requirement that nationals own shares in enterprises.
Investors in PSAs assume obligations and requirements as
provided within the PSA.


22. There are no legal requirements for employment of host
country nationals. Employers wishing to hire foreign workers
in Azerbaijan must obtain a license from the Ministry of
Labor. Foreigners who wish to work in Azerbaijan must
register with local authorities at their place of residence
and obtain work permits from the Ministry of Labor. Foreign
workers in Azerbaijan are subject to income taxes and Social
Protection Fund contributions. Heads of representative
offices and branches of foreign legal entities and their
deputies do not require work permits. In 2008, the Government
expects to introduce a work visa for all immigrant employees.

-------------- --------------
A.6. RIGHT TO PRIVATE OWNERSHIP AND ESTABLISHMENT
-------------- --------------


23. Under Azerbaijani law, foreign investors may engage in
investment activities not prohibited by law. Private
entities may freely establish, acquire, and dispose of
interests in business enterprises. In practice, access to
markets, credit and other business operations is often
impeded by licensing and other regulatory requirements and by
politically connected business interests that can mobilize
the powers of the state to their advantage. In sectors of
interest to certain senior government and political figures,
competition is not tolerated.


24. Legislation regulating real property rights include the
Law on Mortgage (2005),Land Code of the Republic of
Azerbaijan (1999),the Law on Land Reform (1996),the Law on

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Land Leasing (1999),and the Law on Land Market (1999).
Azerbaijani citizens and Azerbaijani legal entities,
including enterprises with foreign investment, can legally
own, buy, sell, and trade property. Foreign citizens and
enterprises may lease, but cannot own, land.

--------------
A.7. PROTECTION OF PROPERTY RIGHTS
--------------


25. Secured interests in property, both movable and real, are
technically recognized. While the Government, together with
World Bank, has been working to improve the property
registration system, the system is filled with bureaucratic
requirements and is generally seen as corrupt and
inefficient. In 2006, the Government centralized processing
of residential real estate transactions through a network of
notary offices under the Ministry of Justice.


26. In the mid-1990s, Azerbaijan began implementing a
national system for registering and protecting intellectual
property rights with the assistance of the World Intellectual
Property Organization (WIPO),of which it is a member.
Azerbaijan enacted modern copyright legislation (Law on
Copyright and Related Rights) in 1996, patent legislation
(Law on Patents) in 1997, and trademark protection
legislation (Law on Trademarks and Geographic Names) in 1998.
Azerbaijan is a party to the Convention Establishing the
World Intellectual Property Organization, the Paris
Convention for Protection of Industrial Property, and the
Berne Convention for the Protection of Literary and Artistic
Works. Azerbaijan is also a party to the Geneva Phonograms
Convention, and acceded to the two WIPO Internet treaties in

2005.


27. The State Copyright Agency has formed an anti-piracy
commission, with representatives from various ministries.
While the Agency has made some progress by conducting raids
and initiating civil court proceedings for violation of
copyrights, in practice, there is limited enforcement of
intellectual property rights. Pirated software and movies,
as well as knock-off clothing and luxury items, are widely
available in Azerbaijan. Shortcomings in its intellectual
property rights laws and enforcement of such laws resulted in
Azerbaijan being placed on the U.S. Special 301 Watch List
every year from 2000 to 2005. Improvements in IPR
enforcement, however, resulted in Azerbaijan's removal from
the Watch List in 2006. Azerbaijan remained off the Watch
List in 2007. Azerbaijan became a member of the World
Intellectual Property Organization (WIPO) Performances and
Phonograms Treaties (WPPT) and Copyright Treaty (WCT) in
April 2006.

--------------
A.8. TRANSPARENCY OF THE REGULATORY SYSTEM
--------------


28. Although the Azerbaijani government has improved its
regulatory system in the past several years, lack of
transparency and allegations of corruption remain key
problems in this area. The lack of transparent policies and
effective laws to establish clear rules and foster
competition are particularly serious impediments to
investment. Informal bureaucratic control mechanisms often
impede with application of laws and regulations and hinder
competition.


29. While laws and decrees are usually published in one of
the country's official newspapers, implementation is often
delayed while regulations are developed. Those regulations
in many cases are not published or distributed. Despite some
improvement in recent years, many persons doing business in
Azerbaijan continue to complain that bureaucratic procedures
contribute Qlong delays in gaining necessary permits and
licenses.


30. Azerbaijan has announced plans to adopt 29 national
accounting standards to be in-line with International
Financial Reporting Standards (IFRS) by 2009. Audited
financial statements have only been adopted in banking and
finance, where foreign ownership is most advanced.

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-------------- --------------
A.9. EFFICIENT CAPITAL MARKETS AND PORTFOLIO INVESTMENT
-------------- --------------


31. As of December 2007, there were 43 banks and 94 non-bank
credit organizations in Azerbaijan. Two more banks have been
granted banking licenses and are expected to start operations
soon. The banking sector is dominated by the International
Bank of Azerbaijan (IBA),which controls more than 50 percent
of the banking sector. Foreign ownership in the banking
sector is limited to 50 percent on an aggregate basis. There
are 18 banks with foreign capital. As of November 2007,
Moody's Weighted Average Bank Financial Strength Rating for
Azerbaijan was "E ".


32. According to the National Bank of Azerbaijan (NBA),as of
September 2007, total assets of Azerbaijan banks grew 54
percent and reached AZN 5821.4 million. Total capital of
banks grew by 77 percent and reached AZN 1 billion as of
December 1, 2007. Deposits grew by 39 percent and reached AZN
3100 million. Azerbaijan in 2007 established the National
Depository Insurance Fund, which, as of December 2007, has 37
banking members.


33. The NBA has taken steps to improve bank supervision and
raise capital requirements. The capital requirement for
banks is currently set at AZN 10 million (roughly USD 11.7
million). A presidential decree requires installation of
point of sale (POS) terminals in all shops within two years
beginning in January 2006. Despite some progress in
installation of POS terminals, the vast majority of stores
and restaurants do not carry POS terminals or, if they do,
avoid running card transactions to minimize taxation. The
Baku Interbank Currency Exchange (BICEX) carries out
interbank auctions of foreign exchange. Treasury bill
auctions are conducted by the Baku Stock Exchange, which was
established in 2000. Since then, the number of participants
and volume of transactions have increased, but this is not
yet a truly competitive market.


34. In February 2007, Fitch Ratings upgraded Azerbaijan's
long-term issuer default rating to BB with a stable outlook.
Moody's issuer rating for Azerbaijan is Ba1.

--------------
A.10. POLITICAL VIOLENCE
--------------


35. There have been no acts of political violence against
U.S. businesses or assets, nor against any foreign-owned
entity. The risk of political violence affecting foreign
investors remains minimal. In 2006 and 2007, the Azerbaijani
authorities arrested two separate groups that were accused of
plotting terrorist acts against Western interests. Police
periodically uses force to disperse unauthorized
demonstrations or spontaneous acts of public discontent;
police also used force to break up a peaceful protest
following parliamentary elections in 2005.

--------------
A.11.a. CORRUPTION
--------------


36. Corruption is a significant deterrent to investment in
Azerbaijan, especially in the non-energy sector. Corruption
is a significant deterrent to investment in Azerbaijan,
especially in the non-energy sector. Laws and regulations
that exist to combat corruption are not effectively enforced,
with corruption in the regulatory, tax, and dispute
settlement systems most pervasive. Problems in the quality,
reliability, and transparency of governance, as well as abuse
of the regulatory system and poor contract enforcement,
significantly impede the ability of many companies to do
business in Azerbaijan. These problems have driven many
companies, including some major Western firms, from the
market. In the summer of 2007, the government took several
positive steps aimed at tackling the problem of corruption by
adopting a new National Strategy on Increasing Transparency
and Combating Corruption and an ethics code for civil
servants. The New Anti-Corruption National Strategy, set to

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run from 2007 to 2011, replaces and expands upon Azerbaijan's
previous State Program on Combating Corruption. The new
National Strategy commits the GOAJ to undertake a number of
important reforms in a wide range or areas, including
adopting a comprehensive anti-money laundering/counter
terrorist financing law, increasing accountability in
government purchasing, improvement in the operations of the
anti-corruption commission, streamlining government licensing
and regulation, and increasing transparency throughout
government operations.


37. According to Transparency International, the situation in
Azerbaijan worsened in 2007 and the country ranked 157 out of
180 countries, compared to 130 of 163 in 2006. Corruption
appears most pervasive in the regulatory, tax, and dispute
settlement systems; business officials indicate that their
dealings with the State Customs Committee and Ministry of
Taxation pose the greatest concern. Throughout the country,
problems in the quality, reliability and transparency of
governance, as well as abuse of the regulatory system and
poor contract enforcement, significantly impede the ability
of many companies to do business in Azerbaijan and have
driven many companies, including some major Western firms,
from the market.


38. In the past several years, politically connected
businesses appear to have benefited from government
regulatory and other decisions to achieve effective control
over several lucrative sectors of the economy, and U.S.
investors have been among those victimized. Currently,
powerful state-owned enterprises, such as the Azerbaijan
State Caspian Shipping Company (CASPAR) and the State
Airlines (AZAL),have protected their commercial interests by
blocking entrance of new entrants into the market through the
exercise of their regulatory authority -- a clear conflict of
interest. A focus of current international community work in
Azerbaijan is combating corruption and improving governance.
In 2004, Azerbaijan joined the Council of Europe's Group of
States against Corruption (GRECO),but Azerbaijan is not a
signatory to the OECD Convention on Combating Bribery.


39. In 2004, Azerbaijan adopted an implementation plan for
the Extractive Industries Transparency Initiative (EITI) to
promote more transparent management of oil revenues. See
Introduction, above.

--------------
A.11.b. BILATERAL INVESTMENT AGREEMENTS
--------------


40. On October 18, 2000, the U.S. Senate ratified the Treaty
Between the Government of the United States of America and
the Government of the Republic of Azerbaijan Concerning the
Encouragement and Reciprocal Protection of Investment
(commonly known as a "Bilateral Investment Treaty" (BIT).
Azerbaijan and the U.S. exchanged instruments of ratification
on July 3, 2001, and the treaty entered into force on August
2, 2001.


41. In addition to the above agreement, Azerbaijan has
bilateral investment protection agreements with the following
countries: Austria, Belgium, Bulgaria, China, Egypt, Finland,
France, Georgia, Germany, Greece, Iran, Italy, Kazakhstan,
Kyrgyzstan, Latvia, Libya, Moldova, Pakistan, Poland, Saudi
Arabia, Switzerland, Turkey, UAE, Ukraine, and the United
Kingdom.

-------------- --------------
A.11.c. OPIC AND OTHER INVESTMENT INSURANCE PROGRAMS
-------------- --------------


42. OPIC provided USD 100 million in political risk insurance
to U.S.-based financial institutions and U.S. equity partners
in the Baku-Tbilisi-Ceyhan oil pipeline. In 2002, OPIC
invested USD 50 million in Soros Investment Capital for
projects targeted to all three Caucasus countries. OPIC also
disbursed a USD 4.6 million loan to Caucasus Airlines, a
regional air carrier based in Tbilisi. Caucasus Airlines
ceased operations in late 2004 after a dispute arose with
Azerbaijan's state air carrier AZAL over terms on the
Baku-Tbilisi route. In 2005, OPIC provided financing to Baku

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Oil Tools for a joint venture with the State Oil Company,
SOCAR. In 2006, OPIC provided USD 7.5 million to ShoreBank
International Ltd for SME and mortgage loan portfolio
expansion in Azerbaijan.


43. In March 2004, the Export-Import Bank of the United
States (Ex-Im Bank) provided a USD 19.3 million loan
guarantee to Saba, Inc., a mid-sized U.S. company, for
engineering, design, and construction services to build a
business and residential center in Baku.

--------------
A.11.d. LABOR
--------------


44. Azerbaijan has an abundant supply of qualified, trained
technicians and skilled and unskilled laborers at attractive
rates to employers. At the same time, companies cite
increasing problems with hiring skilled professional staff,
which could be result of a decline in quality education and
labor emigration. The collapse of the old Soviet industrial
sector in this country during the 1990s resulted in large
numbers of Azerbaijanis becoming unemployed or underemployed.
Government sources estimate the rate of unemployment at seven
percent, but other sources quote up to twenty percent or
more, with underemployment much higher. The Government has
announced plans to increase the minimum monthly wage
increased from AZN 40 to AZN 60 in 2008. A Labor Code that
took effect in 1999 regulates labor relations. The workweek
is generally forty hours, the right to strike exists, and
industrial strikes occur occasionally. Azerbaijan is a
member of the International Labor Organization and has
ratified more than 50 ILO Conventions. Azerbaijan is
currently engaged with the World Bank in a program to reform
the state pension system.

--------------
A.11.e. FOREIGN TRADE ZONES/FREE PORTS
--------------


45. Although the government announced in 2003 its intention
to create special economic zones, there are currently no
foreign trade zones or free ports operating. The Ministry of
Economic Development has announced plans to create a special
economic zone near the new port to be completed in 2012. The
Ministry of Communication and Information Technologies has
conducted a feasibility study to create Regional Innovation
Zones with an aim to boost development of the sector and to
turn Azerbaijan into a regional information and communication
technology hub.

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A.11.f. FOREIGN DIRECT INVESTMENT STATISTICS
--------------


46. Below numbers are provided by the State Statistical
Committee of Azerbaijan.

Investments (million USD)
2004 2005 2006 2007
Total investments: 5922.7 6669.6 8137.8 N/A
Foreign investments: 4575.5 4444.3 5052.8 5160.0
Domestic investments: 1347.2 2225.3 3085.0 N/A

FDI (million USD)

2004 2005 2006 2007*
Total 4575.5 4444.3 5052.8 5160.0
Foreign companies
and joint ventures 104.2 230.5 368.4 276.9
Turkey 80.1 96.2 136.6 78.8
USA 8.4 24.8 70.0 48.1

Iran N/A 1.2 17.5 2.8
Germany 2.1 21.5 17.4 19.5
Russia 1.8 5.1 4.6 9.6
United Kingdom 4.2 39.5 39.1 70.5
UAE 4.4 5.7 18.3 10.2
France 2.2 2.6 11.1 4.0
China N/A 0.2 1.3 N/A
Italy N/A 4.6 2.8 7.0

BAKU 00000123 010 OF 010



NOTE: 2007 data is January-September 2007.


47. Major Foreign Investors:

Significant foreign investors in the energy sector include
BP, Unocal, ExxonMobil, Devon Energy (Pennzoil),TPAO,
Statoil, Lukoil, Itochu, Agip, ChevronTexaco, ENI,
Halliburton, Schlumberger, Kvaerner, and Aker Maritime
(Technip-Coflexip). Significant non-energy investments
include Garadagh Cement, Castel (brewery),Coca Cola, Pepsi
Cola, Azercell (mobile telephony),Bakcell (mobile
telephony),Azerfo (mobile telephony),and Hyatt Hotels
Baku.
DERSE