Strategic location opportunities
Azerbaijan is located between Eastern Europe and Western Asia in the South Caucasus region, with a population of 10.2 million. As a country connecting Europe and Asia, Azerbaijan’s strategic location is critical in defining prospective opportunities for foreign entrepreneurs. In addition to its location, abundant mineral resources and the accessibility of fertile soils is also an advantage. A geopolitical challenge is the long-standing conflict with Armenia over Nagorno-Karabakh.
The development of the mining sector and pro-business regulatory changes have contributed to rapid GDP growth. Azerbaijan ranks among middle-income countries. In 2022, GDP amounted to $78.7 billion ($7736 per capita). In the GDP structure, industry accounts for 55.9%, services for 32.2%, and agriculture for 4.8%. As for the business environment, there are 356,000 micro, small, and medium-sized enterprises (SMEs) in Azerbaijan.
Azerbaijan’s economy is heavily dependent on oil and gas exports, which account for 35% of GDP and 55% of the budget. As such, the authorities have been implementing plans to economically diversify and integrate the Azerbaijani market more closely with the global market. One of the critical factors attracting foreign investments is the growing consumer market and private sector. Opportunities are also created by the energy transformation, tied to the authorities’ drive to reduce greenhouse gas emissions by 35% by 2030.
Population of Azerbaijan
Azerbaijan has a population of 10.2 million people. The largest ethnic groups are Azeris (91.6%), Lezgiyans (2%), Russians (1.3%), Armenians (1.3%), and Talysh (1.3%). In contrast, the Nagorno-Karabakh region, a part of Azerbaijan based on borders recognized after the breakup of the Soviet Union in 1991, is populated by ethnic Armenians. The largest religious groups are Muslims, mainly Shiites (97.3%) and Christians (2.6%). The official language is Azeri.
With declining fertility rates and increasing life expectancy, Azerbaijan has begun to experience an aging process. People aged 65 or older now account for 8.58% of the population, while those aged 15-64 account for 69.64%. The labor force numbers 5.16 million people. 5.9% of Azerbaijanis live below the poverty line. The urbanization rate is 57.6%. The largest urban center is the capital, Baku, with a population of 2.43 million.
Economy of Azerbaijan
Azerbaijan has been cooperating with the Organization for Economic Co-operation and Development (OECD) and the Organization of Petroleum Exporting Countries (OPEC) in the “OPEC Plus” format since 2009. The oil and gas sectors are critical industries. Azerbaijan has proven oil reserves of 7 billion barrels and gas reserves of 2.5 trillion cubic meters. Since infrastructure for the transit of these resources is essential, Azerbaijan has become a strategic part of the Trans-Caspian International Transport Route (TITR) under the Belt and Road Initiative (BRI).
In the non-oil sectors, substantial growth has been recorded in agriculture and tourism primarily. The high-tech industry, telecommunications, the ICT sector, and the defense industry are also growing steadily. The abundance of fertile soils makes Azerbaijan a perfect location to grow wheat, barley, potatoes, tomatoes, corn, cotton, tobacco, and to raise livestock.
Efforts are being made by the authorities to diversify the economy to reduce dependence on oil. The Strategic Roads Maps of the Government of Azerbaijan outline the scope of actions. According to guidelines, the core of diversification will be the agriculture, tourism, and manufacturing sectors in the coming years. Emphasis is also placed on adapting the education system to the demands of the labor market, expanding infrastructure, and increasing the performance of state-owned enterprises.
International trade
Azerbaijan is the world’s 82nd economy by GDP, 65th largest exporter, and 85th importer. Azerbaijan’s exports are worth $22.2 billion, and imports are worth $11.7 billion. Azerbaijan’s main trading partners are Italy, Turkey, Russia, China, Germany, Israel, Croatia, Georgia, India, Portugal, and Tunisia.
The group of most imported goods is industrial machinery (15.1%), motor vehicles and parts (9.96%), electrical machinery (8.42%), pharmaceuticals (4.52%), iron and steel articles (4.48%), plastics (3.32%), cereals (3.32%), iron and steel (2.92%), oil and mineral fuels (2.86%), and wood (2.77%). Other goods include precision instruments, fats and oils, furniture, paper, sugar, chemical products, clothing, and cosmetics.
In turn, the most exported goods include oil and mineral fuels (88.4%), plastics (1.99%), fruits and nuts (1.85%), cotton (1.23%), vegetables (0.99%), precious stones and metals (0.92%), aluminum (0.84%), fertilizers (0.54%), organic chemicals (0.44%), and iron and steel (0.4%). Other products are copper, natural minerals and stones, industrial machinery, sugar, fats and oils, iron and steel articles, and ores.
Trade agreements
To date, Azerbaijan has concluded 52 bilateral investment treaties (BITs). Of these, 44 are currently in force. Azerbaijan is not a member of the World Trade Organization (WTO). Negotiations for membership began in 2004 but were discontinued.
Azerbaijan has concluded free trade agreements with the following countries:
Belarus
Georgia
Kazakhstan
Kyrgyzstan
Moldova
Russia
Tajikistan
Ukraine
Uzbekistan
Agreements with associations of countries:
European Union (EU)
Azerbaijan-European Union relations
The European Union and Azerbaijan have been developing a mutual relationship since the 1990s. Their current relations are based on the Partnership and Cooperation Agreement (PCA), effective in 1999. It eliminated trade quotas between the EU and Azerbaijan. In 2017, both sides began negotiations to conclude a new agreement. Azerbaijan is a vital partner of the EU for oil and natural gas supplies through the Southern Gas Corridor.
The European Union, within the framework of the European Neighborhood Policy and the Eastern Partnership, supports Azerbaijan in terms of economic integration. In trade relations, the EU is Azerbaijan’s largest trading partner. The value of trade in goods in 2022 was 33.1 billion euros. The EU mainly exports machinery, transportation equipment, and chemicals, while Azerbaijan exports oil, mineral fuels, chemicals, and food. In turn, the value of trade in services amounted to €1.2 billion and was balanced on both sides.
Opportunities and challenges
Azerbaijan has a three-tier scale of import duties. A 0% rate covers most goods for manufacturing purposes, a 5% rate covers semi-finished products, and a 15% rate applies to most finished products. The Azerbaijani government has approved amendments to the Customs Tariff Law, under which entities may be exempted from customs duties and VAT on imports of capital equipment. Importantly, goods produced in Azerbaijan by foreign investors are fully exempt from export taxes.
In addition, under the Production Sharing Agreement (PSA), contractors, their agents, and subcontractors are exempt from duties and restrictions on importing and re-exporting goods related to hydrocarbon production. Incentives to operate in the Azeri market include investor-friendly tax policies and the Alat Free Economic Zone (AFEZ) for companies operating in the transportation, mining, light, and high-tech industries. In contrast, inconsistent licensing, certification, trademark registration procedures, unclear regulations, and corruption are among the impediments.
Opportunities for foreign entrepreneurs are primarily in the energy sector, where cooperation can involve supplying machinery and equipment for oil and gas processing. In turn, economic diversification generates opportunities in sectors such as tourism, education, and construction. Industries such as banking and finance, ICT, transportation, logistics, and agriculture are considered promising for foreign investment. Manufacturers of consumer goods should also consider business in Azerbaijan.