Economy

MACROECONOMIC OVERVIEW

As it is known, before 1991 Azerbaijan was part of the Union of Soviet Socialist Republics Union (USSR). The economy had the character of planned economy and was inseparably linked with the economies of other Soviet Republics. Azerbaijan due to its rich natural resources was one of the largest and important economic centres of the Soviet Union and had very developed industry (oil and natural gas exploration, oil machinery, chemical and petrochemical production, metallurgy etc.), as well as agriculture (cotton, livestock, vegetables and fruits, cereal, tea, silk etc.).

As a result, very large enterprises active in the oil exploration and extraction industry, agribusiness (especially cotton, cereal, livestock, fruit, tobacco and tea) and the industrial sector (including metallurgical, chemical, petrochemical and oil services/machinery) dominated the economy. A large part of Azerbaijan’s industrial and agricultural production was exported to other republics in the form of raw materials, semi-finished goods, and component parts, resulting in a significant underutilization of Azerbaijan’s economic potential and a situation of high dependency.

After the collapse of the Soviet Union the Azerbaijani economy faced many difficulties and problems. Real Gross Domestic Product (GDP) declined by about 60 percent. During short period, high inflation had eroded real incomes, the exchange rate had weakened and international reserves were nearly depleted. These developments aggravated by collapse of traditional trade links with the other republics of former USSR and the military aggression by the neighbouring Armenia.

In October 1993 Mr. Heydar Aliyev was elected the President of the Republic of Azerbaijan and this fact was of great importance for the stabilization of internal political situation, as well as for the improvement of the national economy. The Government adopted an economic program supported by the International Monetary Fund (IMF) and the World Bank (WB) and started implementing widespread economic reforms.

Since 1995 3 government programs aimed at providing macroeconomic stabilization, structural adjustments and resumption of economic growth have been implemented. Government reforms consisted of several major components: macroeconomic stabilization through responsible fiscal and monetary management; economic liberalization through the removal of production control and the liberalization of domestic and foreign trade regimes; and small scale privatization.

As result of these measures, following the sharp decline in the early 90-s of the last century the country achieved stable and rapid growth for several consecutive years starting from 1996.

GDP Growth in Azerbaijan

Macroeconomic Indicators of Azerbaijan in 2004

GDP……………………………………….…… 8521,8 million USD
Annual growth…………………………………. 10,2%

GDP per capita as of 1 January 2005……… 1041USD
Annual growth………………………………….. 9,2%

Inflation rate…………………………………… 6,7%

Average wage…………………………………. 98,38 USD
Annual growth………………………………….. 26,2%

Investments……………………………………. 5374,4 million USD
Annual growth……………………………..…… 36,1%

Structure of GDP by sectors

SECTORS OF THE AZERBAIJANI ECONOMY. BRIEF INFORMATION

Industry

Oil extraction and refining are key industries of the Azerbaijani economy. For more than century oil has been the main wealth of Azerbaijan. The republic is by right called “Oil Academy”; beginning from 1871 to the present day over a billion ton of oil has been extracted here. And the first oil well in the world was drilled in the local field Bibi Heybat in 1848. And if the oil was extracted only on Absheron peninsula in the beginning, by the time passage new oil fields were discovered in many regions of Azerbaijan, and in 1949, at the bottom of the Caspian Sea. The worldwide fame was gained by the city “Oil Rocks”, built right in the sea. The specialists confirm that in the territory of the republic, no less than three and half billion tons of oil lies hiding. Such a potential attracts the attention of the leading oil companies of the world.

Being one of the oldest known oil producing regions in the world, Azerbaijan served as the major refining centre of the former Soviet Union. After gaining independence in 1991, Azerbaijan entered the new oil era. On the 20th of September, 1994 in Baky a contract was signed for the joint exploitation of the fields “Azeri”, “Chirag” and “Guneshli” (ACG), located in the Azerbaijani sector of the Caspian Sea, by the oil companies of USA, Great Britain, Norway, Russia, Japan, Turkey and Saudi Arabia. This agreement got the name “the Contract of the Century”. The contract provides development of oil deposits for the term of 30 years. It created favourable conditions for investments in the oil sector and beyond and opened once again the door to the world markets for the Azerbaijani oil.

In 1997 Azerbaijan acquired so-called “early oil” from “Chirag” field. Initially it was transported through Baky-Novorossiysk pipeline (northern direction). At the same time Azerbaijan was in the process of construction of Baky-Supsa pipeline in the western direction, which has began operational since April 1999. However, two pipelines were not sufficient for the transportation of existing and potential oil and in November 1999 Azerbaijan, Georgia and Turkey signed an agreement on construction of Main Export Pipeline Baky-Tbilisi-Ceyhan (BTC), which is aimed at bringing rich oil resources of Caspian Sea to the world markets through Mediterranean port Ceyhan. This pipeline will be in use from 25 May 2005.

Parallel with the “black gold”, “the blue fuel” is successfully mined in the republic. The gas industry has created a powerful source of raw materials for the development of the chemical industry, as well as the ferrous and non-ferrous metallurgy that in many respects has been conditioned with the availability of valuable natural resources in the country. In Azerbaijan bowels, there is an enormous amount of mineral wealth. There are the fields of metal ores, manganese, titan, cobalt, copper, gold, and silver. The Zaylik minefields of alunite are worldly famous. In the Lesser Caucasus, sulphuric pyrites, bentonite clays, barite and mercury are mined.

Machine building, food and light industries are also developed.

Agriculture

Agriculture is the second largest sector in the Azerbaijani economy after oil and gas. Approximately 40 percent of the population is involved in this sector. This fact alone makes farming vital to Azerbaijan’s future. Azerbaijan has 9 climatic zones and over 1 million hectares of arable land irrigated by over 40,000 km of canals and pipelines. The combination of climatic conditions and fertile farmlands allow a wide variety of crops to be cultivated. These include fruits (apples, cherries, grapes, olives, lemons, persimmons, melons, watermelons, raspberries, strawberries, currants, plums peaches, pears quince, pomegranates and tomatoes), vegetables (potatoes, carrots, beets, cabbage, cucumbers and onions), grains (wheat, maize, barley), tea and nuts.

Azerbaijan exports cotton, its most important cash crop, and produces a huge part of the world’s caviar. Other major agricultural cash crops are grapes, tobacco, citrus fruits and vegetables.

Under the Soviet Union, agriculture in Azerbaijan was collectivized in large state farms. After the collapse of the Soviet Union the deregulation and liberalization took place in the economy, which led to the rapid changes in the agricultural sector as well. After the 1996 Law on Land Reforms land has been distributed to individuals.

Transport

Azerbaijan is favorably located on the very south-eastern border of Europe. The country has historically served as the bridge between the Western and Oriental traditions having benefited from both.

Nowadays Azerbaijan is the transportation hub of the Caspian Sea region. The country has the largest seaport on the Caspian shores. The Caspian Shipping Company is the leading company in the region with the largest commercial fleet actively involved in transportation of passengers and goods from and to Central Asia, Iran and Russia.

Country has a well developed network of rail roads and regular train ferry connections to the main ports of the Caspian Sea in Russia, Iran, Kazakhstan and Turkmenistan.

Heydar Aliyev Baky International Airport is the busiest in the region. Direct flights operated by leading international airlines connect the capital of Azerbaijan to the major European destinations and other cities of the globe. The airport serves as the transit point for Central Asia countries.

FOREIGN ECONOMIC RELATIONS OF AZERBAIJAN

Foreign trade

Azerbaijan is consistently expanding the international trade as well (see below chart). This is mainly due to two factors: export of ever increasing amounts of Azerbaijani crude oil products and the expanding internal market which resulted in rise in import of manufacturing equipment and consumer goods in the country.

Foreign Trade of Azerbaijan


At the moment the European Union is the main export destination for Azerbaijan; Russia and CIS countries remain the main source of import.

Proportion of EU, CIS and other countries in foreign trade turnover in 2003

Foreign Direct Investments in Azerbaijan

Broad integration of Azerbaijan into the global investment network started with the signing of the first oil contract titled “Contract of the Century” on September 20, 1994. Our country was a pioneer in opening the Caspian Sea as a source for the international co-operation.

Since then, a great number of other oil contracts were signed; more than 400 foreign companies were attracted to implementation of these contracts and subcontracts related to the provision of services. As of today, the volume of foreign direct investments into the Azerbaijani economy exceeded 10 billion USD, and investments into oil constitute 70 percent of this amount.

FDI in Azerbaijan


Today, as per the volume of foreign investment per capita, Azerbaijan occupies one of the first places among CIS and Eastern Europe countries.

The main source countries of FDI for Azerbaijan are currently the United States, UK and Turkey. The biggest investors in Azerbaijan are mainly oil consortia. The AIOC consortium led by “BP” heads the list of investors. FDI outside the oil and gas sector currently are mainly in construction, services, transport, telecom and manufacturing.

ECONOMIC DIVERSIFICATION AND REFORMS

Implementation of social and economic development strategies stands high on the economic policy agenda of Azerbaijan. Based upon unified and transparent concept consistently applied since 1993, these strategies envisage successful transition from the centrally planned to a market-oriented economy, achievement of balanced economic growth, improvement of the population welfare and enhancement of Azerbaijan’s role as an equal partner in global economic cooperation.

The importance of economic diversification and development of the non-oil sector is recognized as a major economic development challenge. To this end, the Government strives to consistently plan and implement a wide range of activities aimed at ensuring balanced and sustained economic development. State programs on Poverty Reduction and Economic Development, Small and Medium Entrepreneurship Development and Social and Economic Development of the Regions of Azerbaijan are among priority policy instruments.

Privatization is another important segment of the ongoing economic reform process in the country. To date, about 31000 small enterprises have been privatized with over 1500 joint stock companies established and 36 tenders held. The privatization process is open for the foreign investors as well. As the result of the governmental policy, the private sector’s share in GDP grew from the virtual zero in early 90-s of the XX century to more than 70 percent in the first years of XXI century.

Private sector share in GDP


Reforms are also being implemented in the banking sector. 17 out of 46 banks operate with a foreign capital. Further development of the banking sector is crucial for boosting entrepreneurship.

Azerbaijan has achieved gradual improvement in the overall legal framework for the investment activities in the country for last several years with a number of practical regulations liberalizing conduct of business and reducing red tape obstacles. It carried out a revolutionary legal reform several years ago with adoption of new Tax Code, Civil and Civil Procedure Codes, Land Code, Labor Code, Customs Code, Foreign Exchange Law and Law on International Arbitration as well as Anti-monopoly Law which made the system a way more transparent and friendly for local and foreign businesses.