Azerbaijan Country Profile
General Information
The Political Climate
Azerbaijan is a transitional economy with important oil reserves and significant agricultural potential. In the years preceding the global financial crisis, Azerbaijan performed impressively in economic terms, with double digit real GDP figures, backed by growth in the oil and energy sector. The current President Ilham Aliyev took over from his father, Heydar Aliyev, in 2003. Although the government of Azerbaijan consists of three branches, the institutional setup ensures a strong role for the President and the executive branch. Consequently, the Parliament (Milli Majlis) and the judiciary exercise little independence. Many observers describe the strong presidential influence as a barrier to further democratisation, and the lack of judicial and parliamentary independence as fostering an environment that enables corruption. President Ilham Aliyev was re-elected with 87% of the votes in the October 2008 presidential election, which was boycotted by the opposition. The OSCE reported progress compared to prior elections, but said they did not meet international standards. In the following years, amendments were approved to the constitution, which removed the restrictions on the number of times a President can run for consecutive re-election. Also, Azerbaijan voted to lift the country's two-term presidential limit, enabling President Ilham Aliyev to be re-elected indefinitely. In the November 2010 parliamentary elections, the ruling party of Ilham Aliyev won with a majority of 73 out of 125 seats. Some foreign observers had reported flaws in the elections, while others described it as more democratic than previously, according to an article by PressTv.
It is widely recognised that corruption is deeply institutionalised throughout Azerbaijani society and poses an obstacle to both social and economic development in the country, as illustrated by both the US Department of State 2010 and Global Integrity 2009. The political system is paternalistic and patronage-based, consisting of networks of central persons in the administration distributing revenues - especially from the massive exploitation of oil and gas - amongst themselves and other strategically important figures at the expense of the generally impoverished population. Public officials at all levels are rarely held accountable for engaging in corrupt practices, according to the Bertelsmann Foundation 2010.
Since his inauguration in 2003, the President has decreed several anti-corruption initiatives, most notably the adoption of the Law on Combating Corruption in 2004, the establishment of the Commission on Combating Corruption (CCC) in 2005, and the National Strategy on Increasing Transparency and Combating Corruption 2007-2011. However, Freedom House 2011 reports that the new anti-corruption strategy has not yet resulted in a measurable improvement of the corruption environment, while the CCC remains dependent on the ruling elite and has shown that it is not ready to challenge politically powerful interests. Although some high-ranking officials have been dismissed on account of corruption, it is argued by many observers that the country's anti-corruption policies and structures have been used as tools in struggles between the different factions of political elites, rather than to reduce corrupt practices in general. Similarly, according to Global Integrity 2009, the government's presence in anti-corruption commissions restricts any independent public inquiry of corrupt activities. In Transparency International's Global Corruption Barometer 2010, nearly 60% of the households surveyed believe that the government's fight against corruption is 'somewhat/ very effective', while approximately a quarter reports that it is 'somewhat/ very ineffective'. However, despite these perceptions, 47% of the households in the same survey reported having paid a bribe the previous year. According to the US Department of State 2010, criminal cases related to petty corruption were opened during 2010, specifically on bribery charges. However, these cases had little or no impact on the prevalence of bribery and petty and grand corruption in the country.
Business and Corruption
Azerbaijan's economy continues to undergo transformation and restructuring. In addition to its openness to global trade, relatively moderate taxation and government spending have been essential to the transition to greater economic freedom. Nonetheless, Azerbaijan remains a challenging market for doing business, not least due to the systemic level of corruption which has deterred many potential investors from entering the market. Similarly, non-transparent and arbitrary regulations, corrupt government bureaucracy, weak legal institutions, and predatory behaviour by politically connected monopolistic interests have severely hindered investment outside the energy sector, according to the US Department of State 2011.
In Azerbaijan, government and business elites are strongly interlinked as top officials regularly invest in strategic industries. Moreover, government members control companies and influential elites treat state companies as private property. The intermingling of political and business interests is exemplified in the US Department of State 2011, which describes how the Azerbaijan State Caspian Shipping Company (CASPAR) and the national airline (AZAL) have effectively blocked foreign companies from entering their respective markets by using their mirror regulatory authorities to set up barriers for foreign investment in the sectors.
The country has few institutional checks on graft and the rapid growth in the energy sector has offered considerable opportunities for the institutionalisation of corruption. According to Transparency International's Global Corruption Barometer 2010, corruption within the private sector is perceived as less widespread when compared to other sectors, with only around 10% of the respondents evaluating it as 'extremely' corrupt. Among companies surveyed in the World Economic Forum Global Competitiveness Report 2011-2012, corruption is identified as the greatest constraint on foreign companies operating in Azerbaijan. This perception is corroborated by the fact that one-quarter of companies surveyed by the World Bank & IFC Enterprise Surveys 2009 identify corruption as a major constraint on doing business. Similarly, the World Economic Forum Global Competitiveness Report 2011-2012 establishes that public funds are commonly diverted to companies, individuals, or groups due to corruption. Given these reasons, companies are recommended to use a specialised public procurement due diligence tool in order to help mitigate the costs and risks of corruption involving public procurement processes in Azerbaijan. In addition, companies are recommended to develop and implement integrity systems, and to carry out extensive due diligence before committing funds or when already doing business in the country.
Regulatory Environment
Corruption is institutionalised in Azerbaijani bureaucracy. Citizens as well as companies frequently face bureaucrats who are not subject to oversight during the course of their duties, which offers significant leverage for bureaucrats to demand bribes or to offer undue advantages to friends. The US Department of State 2011 reports that corruption, lack of transparency and politically connected economic monopolies remain among the greatest obstacles for companies operating in Azerbaijan. Civil servant salaries have traditionally been low, but recent years have seen rising salaries and training being undertaken to raise awareness in the bureaucracy about corruption. These initiatives offer some hope for the future, but in an environment of heavily institutionalised corruption, change does not come easily. There have been instances of civil servants keeping their government jobs or obtaining new government jobs even though they have been convicted of corruption. Similarly, in Transparency International's Global Corruption Barometer 2010, nearly 25% of Azerbaijani households perceive public officials to be 'extremely corrupt', and this category is considered to be among the most corruption-prone sectors in Azerbaijan in the survey.
Companies operating in Azerbaijan may face serious problems when obtaining the required licences for doing business, including continual demands for bribes from public officials; almost two-thirds of the companies surveyed in the EBRD & World Bank BEEPS Azerbaijan 2008 state that corruption constitutes a problem for conducting business in Azerbaijan. This figure is much higher than the corresponding average figure for Europe and Central Asia. In a similar vein, business executives surveyed in the World Economic Forum Global Competitiveness Report 2011-2012 perceive government administrative requirements to be quite burdensome. Moreover, business executives also report that government policy-making is sometimes opaque and that government officials often favour well-connected companies and individuals when deciding on policies and contracts. According to the US Department of State 2011, the government has created a new business registration mechanism based on the principle of a one-stop shop under the Ministry of Taxes, allowing companies to register within 3 days. However, the tax authorities have a reputation as being notoriously corrupt. Foreign citizens and companies cannot own land, but can lease it. The Law on Protection of Foreign Investments permits foreign direct investment in most sectors. Prohibited areas include those relating to national security and defence, and the government carefully controls other key sectors, such as energy and communications.
Azerbaijan has passed several pieces of anti-corruption legislation, including laws regulating gifts to civil servants and ministers' relations with private companies. However, laws and regulations that exist to combat corruption are not effectively enforced, with corruption in the regulatory, tax and dispute settlement systems being most pervasive, according to the US Department of State 2011. 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. According to the same report, in practice, courts are weak, judges are often inexperienced, and economic legislation is poorly understood. Moreover, the Economic Court, which has jurisdiction over commercial disputes, is weak, widely regarded as corruptible, and its decisions are often inconsistent. In addition, business executives surveyed in the World Economic Forum Global Competitiveness Report 2011-2012 report that the judiciary is not independent from political influences of members of government, citizens or companies. The Law on International Arbitration of 2000 allows international arbitration of commercial disputes to be conducted both in Azerbaijan and in any foreign jurisdiction mutually agreed upon by the parties. However, in practice arbitration is seldom used to resolve disputes. Azerbaijan is a signatory to several international conventions regulating the mutual acceptance and enforcement of foreign arbitration, including the New York Convention 1958, and is a member of the International Centre for the Settlement of Investment Disputes (ICSID). Access the Lexadin World Law Guide for a collection of arbitration and other laws in Azerbaijan.
