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Azerbaijan Country Profile |
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General InformationThe Political ClimateAzerbaijan is a transitional economy with important oil reserves and significant agricultural potential. Azerbaijan's macroeconomic situation continued to improve in 2008, largely driven by growth in the energy sector. The GDP growth was estimated at 10.8% in 2008, driven by construction, services, and agriculture, according to Asian Development Outlook 2009. 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. Consequently, the Parliament (Milli Majlis) and the judiciary exercise little independence, and many observers describe the strong presidential rule 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 reelected 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 late December 2008, Azerbaijan's Constitutional Court approved amendments to the constitution, which removed the restrictions on the number of times a President can run for consecutive reelection. In March 2009, Azerbaijan voted to lift the country's two-term presidential limit, enabling President Ilham Aliyev to be reelected indefinitely.
It is widely recognised that corruption is deeply entrenched and institutionalised throughout Azerbaijani society and poses an obstacle to both social and economic development in the country. 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.
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 in 2005, and the State Programme on Combating Corruption 2004-2006, which was succeeded in July 2007 by the National Strategy on Increasing Transparency and Combating Corruption 2007-2011. Although some high-ranking officials have been removed 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. Moreover, according to the Freedom House 2008, the government's presence in anti-corruption commissions restricts any independent public inquiry of corrupt activities. In Transparency International's Global Corruption Barometer 2009, 28% of the Azerbaijani households surveyed believe that the government's fight against corruption is 'very ineffective', and 45% report having paid a bribe the previous year. A number of anti-corruption campaigns will be launched in Azerbaijan in the time-frame 2009-2010 as part of the programme of the Council of Europe, as reported by Today Az. These campaigns will include combating corruption and money laundering, human rights enforcement, and assistance with conduct of democratic elections. 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 of all because of the systemic level of corruption which has deterred many potential investors from entering the market. The only sector attracting relatively high levels of foreign investment is the oil and gas sector (see this profile's special section on Azerbaijan's oil and gas sector for more information).
The relatively low influx of investment outside of the oil and gas sector is explained by weak legal institutions and government/business monopolies that hinder an effective liberalisation of goods and services. According to the Heritage Foundation 2010, non-transparent, arbitrary and corrupt government bureaucracy, weak legal institutions and predatory behaviour by politically connected monopoly interests have severely hindered investment outside of the energy sector. 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 2009 report, 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 Azerbaijani system 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 2009, corruption within the business and private sector is perceived to be widespread - 24% of respondents gave it a score of 5 on a 5-point scale (1 being 'not and all corrupt' and 5 'extremely corrupt'). Among business executives surveyed in the World Economic Forum Global Competitiveness Report 2009-2010, corruption is identified as the most problematic factor for doing business in Azerbaijan. The high perception of corruption is supported by the fact that 25% of companies surveyed by the World Bank & IFC Enterprise Surveys 2009 identify corruption as a major constraint on doing business, while 32% expect to make informal payments to civil servants in order to 'get things done'. In a similar vein, Global Integrity 2008 reports that SMEs in Azerbaijan are subject to extortion by public officials. 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, etc. According to the Heritage Foundation 2010, ongoing problems in Azerbaijan include arbitrary tax and customs administration that creates opportunities for graft, as well as regulatory practices that favour monopolies, and corruption at all levels. 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.
Companies operating in Azerbaijan face serious problems with obtaining the proper licences to do business, including continual demands for bribes from public officials; 50% of the companies surveyed in the EBRD & World Bank BEEPS Azerbaijan 2005 state that corruption is a problem for doing business in Azerbaijan, and costs about 3% of annual sales. This is much higher than the corresponding average figure for other countries in the CIS. According to the World Bank & IFC Doing Business 2009, Azerbaijan was the best reformer country in 2007-2008, with improvements on 7 out of 10 indicators of reform. These reforms were in business registration, protection of investor rights, property registration, and tax administration. According to the US Department of State 2009, 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. According to the World Economic Forum Global Competitiveness Report 2009-2010, companies identify inefficient government bureaucracy as significant problem for doing business in Azerbaijan.
Azerbaijan has passed several pieces of anti-corruption legislation that are already in place, including laws regulating gifts to civil servants or public officials 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. 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 US Department of State 2009, in practice, courts are weak, judges are often inexperienced, and economic legislation is poorly understood. The same source reports that the Economic Court, which has jurisdiction over commercial disputes, is weak, widely regarded as corruptible, and its decisions are often inconsistent. 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). Foreign investors should note that they can face investment disputes if their activities are seen as a threat to vested political interests. In such situations the foreign investor may be required to take on a local partner with ties to central government officials. It is recommended that companies develop implement and strengthen integrity systems and carry out extensive due diligence.
Oil and Gas SectorCorruption and Progress in Azerbaijan's Oil and Gas Sector
The remarkable growth in Azerbaijan's market economy can be explained by the rapidly increasing production and export of oil and gas. The oil and gas sector accounts for more than 70% of Azerbaijan's exports and for 60% of its GDP. The state holds huge interests in the sector, and there are close links between the oil and gas industry and governmental institutions. Despite measures taken by the government to address issues of corruption and transparency, accusations of corruption and irregular practices in the oil sector continue.
In 1999, Azerbaijan created the State Oil Fund (SOFAZ) to collect and manage oil revenues. SOFAZ contributes to the state budget to support investments in infrastructure, education, poverty reduction and other social projects. International and local NGOs claim that SOFAZ is under the control of the Presidential Bureau and that massive fraud and misappropriation of the fund's money by top politicians and officials has taken place. For example, the government spent a large sum of money from SOFAZ to pay pensions and raise civil service salaries in a presidential election year. Furthermore, local NGOs have accused SOFAZ of funding development in the oil sector instead of strengthening other sectors in the country. Despite these criticisms, SOFAZ won a UN Public Service Award for 'improving transparency, accountability, and responsiveness in the Public Service', because of its implementation of the Extractive Industries Transparency Initiative (EITI). Judicial SystemIndividual Corruption
According to Transparency International's Global Corruption Barometer 2009, the judiciary in Azerbaijan is perceived by the population to be the most corrupt institution in the country. This is supported by Global Integrity 2008, according to which Azerbaijan's judicial system remains subject of international criticism. The NGO Cooperation Network Against Corruption (Korrupsiyaya qarsi QHT sabakasi) reports that the largest number of citizen complaints about corruption still involves the courts. Citizens usually calculate the potential cost of bribery when deciding whether or not to initiate a lawsuit.
Lawyers in Azerbaijan complain that they function as 'brokers' rather than legal defenders and, according to Global Integrity 2007, a prison sentence can be shortened for around USD 2,000, the investigation of a traffic accident can be suspended for USD 1,000 and overriding substantial evidence in a judgement can be bought for USD 50,000. According to Transparency International 2007, Azerbaijani judges tolerate their court staff demanding bribes. They argue that illicit payments are the only way to achieve a reasonable standard of living for the staff. Business Corruption
Despite the fact that Azerbaijan's leadership admits that the judicial system does not adhere to the rule of the law, not much progress has been seen in the implementation of institutional reform. The courts work too slowly and produce unfair judgements, especially in disputes between private companies. Consequently, companies often prefer to drop cases or 'negotiate with the judge'. Therefore, the additional costs of bribing a judge must be added when choosing to engage business partners or other entities in an Azerbaijani court. However, according to a World Bank & IFC Investment Climate Surveys 2005, companies have a relatively high confidence in the legal system in relation to enforcement of contracts/property rights in disputes.
Investors should note that the judicial system has certain deficiencies, as judges may make decisions that do not reflect the laws of Azerbaijan, thus conflicting with statutory civil rights. In cases of corruption, companies can appeal directly to the judicial-legal council. However, so far no judges have been fired for corrupt practices. According to the Bertelsmann Foundation 2008, corruption in the country's Economic Court (entrepreneurs often call it the 'Economic Exchange') is a serious obstacle to investment growth in Azerbaijan. Political Corruption
Judicial corruption and lack of judicial independence are serious problems in Azerbaijan. By law, the judicial branch is independent, but the system is subordinated to the executive in practice. This is supported by the Heritage Foundation 2010, which assesses the Azerbaijani court system as vulnerable to corruption, political interference, and inefficient bureaucracy.
The selection mechanism for judges is reportedly flawed, as it is possible for judges to purchase judicial appointments. All services are for sale in the Azerbaijani judicial system and, according to Transparency International 2007, judges pass judgements based on two principles: they decide in favour of the highest bidder or they decide on the basis of political considerations. Frequency
The World Bank & IFC: Doing Business 2010:
- It takes 39 procedures and 237 days at a cost of 18.5% of the claim to enforce a commercial contract.
World Economic Forum: The Global Competitiveness Report 2009-2010:
- Business leaders give the Azerbaijani judiciary's level of independence from influences of government, citizens and companies a score of 3.9 on a 7-point scale (1 being 'heavily influenced' and 7 'entirely independent').
- Business executives give the efficiency of the legal framework for private companies to settle disputes and to challenge the legality of government actions and/or regulations a score of 3.8 and 4.1 respectively on a 7-point scale (1 being 'extremely inefficient' and 7 'highly efficient').
The World Bank & IFC: Enterprise Surveys 2009:
- Just over 49% of companies surveyed believe that the court system is fair, impartial and uncorrupted.
- 6.5% of companies identify the functioning of the courts as a major constraint.
Transparency International: Global Corruption Barometer 2009:
- 39% of households surveyed consider the judiciary to be 'extremely corrupt'.
- 63% of households who had contact with the judiciary in 2008 report to have paid a bribe.
- Citizens give the judiciary a score of 4.0 on a 5-point scale (1 being 'not at all corrupt' and 5 'extremely corrupt').
The World Bank & IFC: Investment Climate Surveys - Azerbaijan 2005:
- 4% of companies identify the legal system as a major constraint for doing business.
- 10% of companies resolve disputes through court action compared to the regional average of 37%.
- 69% of companies have confidence in the legal system to enforce contracts/property rights in disputes. PoliceIndividual Corruption
In Transparency International's Global Corruption Barometer 2009, the police are widely perceived to be corrupt. The road police are an example of a corrupt state agency. After a significant increase in road police wages in 2005, some improvements were seen; however, according to Global Integrity 2007, these improvements have not resulted in lasting changes. Reportedly, one will have to pay AZN 400 as an illegal 'installation' fee to the road police's registration department when purchasing a car. The booming car purchase statistics imply that illegal road police revenue obtained via documentation of car purchases and mandatory tests is a lucrative AZN multi-million business. It also reports that the traffic police frequently stop cars with foreign plates to demand bribes even if they have not committed an offence and have all documents in place. Global Integrity 2008 reports that citizens continue to pay bribes to passport officials, despite the new legislation accelerating the waiting period from one month to one week. Business Corruption
According to the World Economic Forum Global Competitiveness Report 2009-20010, companies indicate that the reliability of police services to protect them from crime constitutes a competitive disadvantage. Trade, service, farming and manufacturing SMEs in Baku consider the police to be a state structure that often breaks the law. Political Corruption
According to Global Integrity 2007, the law enforcement agencies are under strong political control from the government and an effective mechanism to protect enforcement agencies from such influence is lacking. There is no special mechanism for citizens to file complaints about the police.
Global Integrity 2008 reports that while corruption is still endemic in Azerbaijan, citizens are sometimes successful in claiming their rights. A recent example involves an opposition activist from the Nakchivan Autonomous Republic of Azerbaijan (NAR), Intigam Ismayilov, who refused to pay a USD 6 bribe to the local police department to get his citizenship identification card. When Ismayilov complained to the Interior Ministry of NAR, he was arrested and sentenced to 15 days in jail. However, after the media got hold of the story, Ismayilov was released after having spent three days in prison. Consequently, Zakir Mammadov, chief of the relevant department of the Interior Ministry of NAR, was fired.
In 2008, the head of the State Anti-Monopoly Service (DAİX) under the Ministry of Economic Development Samir Dadashev was arrested with four other top employees on bribery charges. The press speculated on the true motives of these arrests, including internal political rivalry within the ruling elite, as reported by Global Integrity 2008. Frequency
World Economic Forum: Global Competitiveness Report 2009-2010:
- Business executives give the police in Azerbaijan a score of 4.3 on a 7-point scale (1 being 'cannot be relied upon at all' and 7 'can always be relied upon').
Transparency International: Global Corruption Barometer 2009:
- 72% of households who had contact with the police in 2008 report to have paid a bribe.
The World Bank & IFC: Enterprise Surveys 2009:
- 10.5% of companies surveyed identify crime, theft and disorder as a major constraint on doing business.
Global Integrity: Azerbaijan Country Report 2008:
- A passport can be purchased within 5-7 days for a USD 209 bribe, plus USD 49 to cover the official fee.
EBRD & World Bank: BEEPS Azerbaijan 2005:
- Companies are rarely inspected by the municipal police. Licences, Infrastructure and Public UtilitiesIndividual Corruption
Many citizens identify the process of obtaining licences and permits as corrupt, as illustrated by Transparency International's Global Corruption Barometer 2009. According to the same source, citizens also perceive corruption in relation to getting utilities connected and repaired as widespread.
Transparency International Azerbaijan, some Baku citizens have complained that agencies providing utility services issue inflated bills, and subsequently claim that customers have failed to pay. In Ganja, the police were reportedly asked by the city electric power distribution company to harass citizens who failed to pay their electricity bills. According to Global Integrity 2007, a driver's licence can be obtained within two days without any exams or tests if bribes are paid. Business Corruption
Azerbaijani SMEs face corruption on a regular basis when trying to open their own company. Registration is a problem as well as interference by law enforcement bodies. Business licences are reviewed by the Ministry of Justice and this process works as a form of screening the applying company. Reportedly, ministry officials make extra-legal determinations of whether the investment is appropriate before registering it. The US Department of State 2009 reports that the Ministry of Justice operates in a non-transparent and arbitrary manner, and some investors have alleged that bribes are required when attempting to register their companies. According to Global Integrity 2008, business inspections by government officials to ensure public health standards are seldom carried out in a uniform manner, and bribes are a given. Political Corruption
According to the Bertelsmann Foundation 2008, every third AZN from the country's consolidated budget in 2006-2007 was spent on infrastructure projects. However, there are serious problems with this spending as the system is not transparent. According to the investigations of the journalist Salaxov, AZN tens of millions were allocated from the budget without detailed descriptions of costs, and then spent without any public bidding. According to Global Integrity 2008, the construction sector in Azerbaijan is plagued by endemic corruption. Frequency
The World Bank & IFC: Doing Business 2010:
- It takes an average of 10 days, 6 procedures and a cost of 3% of GNI per capita to start a company, which is less than the regional average.
- It takes an average of 207 days, 31 separate procedures and close to 370% of income per capita to construct a warehouse.
- It takes an average of 2.7 years to close a company at a cost of 8% of the estate.
World Economic Forum: The Global Competitiveness Report 2009-2010:
- Business executives give government administrative requirements (permits, regulations, reporting) in Azerbaijan a score of 4.2 on a 7-point scale (1 being 'extremely burdensome' and 7 'not burdensome at all'), constituting a competitive business advantage for the country.
The World Bank & IFC: Enterprise Surveys 2009:
- 35% of companies expect to give gifts to get an operating licence.
- Over 71% of companies expect to give gifts to obtain a construction permit.
- Over 51% of companies expect to give gifts to get a phone connection.
- More than 54% of companies expect to give gifts to get an electrical connection.
- 40.6% of companies expect to give gifts to get a water connection.
- 8.5% of companies identify business licencing and permits as a major constraint on doing business.
Transparency International: Global Corruption Barometer 2009:
- 47% of households who had contact with registry and permit services in 2008 report to have paid a bribe.
- 57% of households who had contact with medical services in 2008 report to have paid a bribe.
EBRD & World Bank: BEEPS Azerbaijan 2005:
- Around 20% of the companies surveyed indicated that bribery is frequent in obtaining business licences and permits.
- 6% of the companies stated that bribery is frequent when getting connected to and maintain basic public services such as telephone lines and electricity. Land AdministrationIndividual Corruption
According to Transparency International's Global Corruption Barometer 2009, land administration is perceived by Azerbaijani to be a corrupt institution. A large majority of the respondents of the survey assesses the problem of bribes being paid to land authorities in Azerbaijan as 'very serious'. Business Corruption
Global Integrity 2008 reports that up to 40% of transactions in relation to real estate ownership certificates occur via 'unofficial payments'. Political Corruption
In April 2007, the Serious Crimes Court sentenced former Health Minister Ali Insanow to 11 years in prison and confiscated of USD 17 million worth of his property after convicting him of embezzling large amounts of state property and abusing authority.
The Heritage Foundation 2010 reports that the amendments to the Civil Code adopted in 2007, that enable the authorities to forcibly purchase property, are likely to create additional opportunities for the abuse of property rights in Azerbaijan. Frequency
The World Bank & IFC: Doing Business 2010:
- 4 procedures taking an average of 11 days (nearly three times less than the OECD average) and a cost of 0.3% of the property value are required to register property in Azerbaijan.
World Economic Forum: The Global Competitiveness Report 2009-2010:
- Business leaders give protection of property rights a score of 4.2 on a 7-point scale (1 being 'very weak' and 7 'very strong').
Transparency International: Global Corruption Barometer 2009:
- 49% of the households surveyed reported to have paid a bribe to land services in 2008.
- 40% of households consider grand or political corruption in land matters to be a 'very serious problem'.
- 43% of respondents consider bribes to land authorities to obtain favorable decisions a 'very serious problem' in Azerbaijan.
Global Integrity: Azerbaijan Country Report 2008:
- A property certificate from the State Real Estate Register Agency can be purchased for a USD 123 bribe.
- The standard bribe for permission to build a one-entrance, multi-story apartment building in Baku is USD 150,000. Tax AdministrationIndividual Corruption
According to the Transparency International Global Corruption Barometer 2009, Azerbaijani tax officials are perceived as being prone to corruption. Nevertheless, the problem of taxation for minor taxpayers has apparently decreased somewhat in recent years. Business Corruption
According to the EBRD & World Bank BEEPS Azerbaijan 2005, bribery connected to taxes and tax collection is widespread in Azerbaijan, and it is common practice to 'negotiate' a fine with tax officials if small violations of tax laws are discovered during audits. Similarly, Global Integrity 2008 reports that tax laws are not enforced uniformly and, in some cases, SMEs are required to pay extra fees in relation to taxes. According to Freedom House 2006, the Ministry of Taxes is highlighted as one of the top two institutions of greatest concern to foreign companies. It is reported as a normal activity for companies and high-income taxpayers to negotiate an amount of money to be paid to the tax authorities so as to report a lower level of production in the company's tax return. Political Corruption
The Ministry of Taxes has some investigative powers in corruption offences if these arise during investigations of suspected tax evasion. During the last three years, the Ministry of Taxes has created an Internal Security Department responsible for fighting corruption among its staff. According to Global Integrity 2007, there have been significant, positive developments in the Ministry of Taxes and in general: tax laws are now enforced uniformly and without discrimination. However, some privileged groups are able to reduce their tax payments due to their political connections, or can negotiate fixed amounts with tax officials. Frequency
The World Bank & IFC: Doing Business 2010:
- Companies spend an average of 376 hours and make 22 payments a year dealing with taxes at a total tax rate of 41% of profits.
Transparency International: Global Corruption Barometer 2009:
- 14% of households who had contact with tax revenue services throughout 2008 report to have paid a bribe.
The World Bank & IFC: Enterprise Surveys 2009:
- 43% of the surveyed companies expect to give gifts in meetings with tax officials.
- 10% of the surveyed companies identify tax administration as a major constraint on doing business.
EBRD & World Bank: BEEPS Azerbaijan 2005:
- Almost 30% of the companies surveyed reported that bribery in connection with taxes and tax collection is widespread (the CIS average is 20%).
- On average, the surveyed companies were inspected by tax authorities just 0.5 times a year and the duration of these visits averaged 4.3 hours. Customs AdministrationIndividual Corruption
The Azerbaijani customs system has improved considerably in recent years. Previously, customs and border control officers charged citizens between USD 10-150 to enter or exit the country via Baku Airport. According to Global Integrity 2007, this practice has for the most part come to a stop. Business Corruption
The US Department of State 2009 identified the State Customs Committee as the institution of the greatest concern for foreign business. Reportedly it is common for foreign businesspeople to be asked for bribes by customs officials when crossing Azerbaijani borders. According to Global Integrity 2007, total bribes may reach 35% of the value of imported goods.
According to the Heritage Foundation 2009, Azerbaijan's weak legal regime, arbitrary customs administration, regulatory conflicts of interest, subsidies, export restrictions for some goods, and customs corruption add to the cost of trade. In 2008, Azerbaijan announced that it intends to establish a one-stop shop for customs entry/clearance in 2009, as reported by the US Department of State 2009. Political Corruption
Despite recent successes and improvements in customs service, Global Integrity 2008 reports of customs and excise laws not being enforced uniformly and not without discrimination. Frequency
The World Bank & IFC: Doing Business 2010:
- A standard export shipment of goods takes an average of 48 days and 9 documents at a cost of USD 2,980 per container.
- A standard import shipment of goods takes an average of 50 days and 14 documents at a cost of USD 3,480 per container.
World Economic Forum: The Global Competitiveness Report 2009-2010:
- Business executives give the customs procedures in Azerbaijan a score of 3.9 on a 7-point scale (1 being 'extremely inefficient' and 7 'extremely efficient').
The World Bank & IFC: Enterprise Surveys 2009:
- 7% of the trade companies surveyed identify Azerbaijani customs and trade regulations as a major constraint on doing business.
- 27.7% of companies expect to give gifts to get an import licence.
EBRD & World Bank: BEEPS Azerbaijan 2005:
- Approximately 15% of the companies surveyed stated that bribery is frequent in dealing with customs/imports.
- The customs authorities only very rarely inspect companies. Public Procurement and ContractingBusiness Corruption
According to the ACN Azerbaijan Monitoring Report 2006, the Azerbaijani public procurement system lacks transparency. Obligatory publishing of tender proposals is allegedly not enforced, and no corruption cases involving public procurement officials have been investigated. The same source indicates that business representatives believe that many of the most valuable projects are not published at all. It is possible to find procurement notices on the website of the State Agency on Procurement. Companies are recommended to use a specialised public procurement due diligence tool in order to mitigate the corruption risks associated with public procurement in Azerbaijan.
See more on public procurement under 'Public Anti-Corruption Initiatives' in the Initiatives section. Political Corruption
According to Global Integrity 2008, Azerbaijan's increased oil revenue has also created new corruption opportunities in the area of government contracting. The implementation of these projects, their costs, and their supply contracts are completely non-transparent, as reported by Global Integrity 2008.
See more on public procurement under 'Public Anti-Corruption Initiatives' in the Initiatives section. Frequency
World Economic Forum: The Global Competitiveness Report 2009-2010:
- Business leaders give the diversion of public funds to companies, individuals, or groups due to corruption a score of 3.8 on a 7-point scale (1 being 'very common' and 7 'never occurs').
- Business leaders give the favouritism of government officials towards well-connected companies and individuals when deciding upon policies and contracts a score of 3.6 on a 7-point scale (1 being 'always show favouritism' and 7 'never show favouritism').
The World Bank & IFC: Enterprise Surveys 2009:
- 37.6% of the companies surveyed expect to give gifts to secure a government contract.
- The value of a gift expected to secure a government contract is 1.1% of the contract value.
EBRD & World Bank: BEEPS Azerbaijan 2005:
- About 9% of the companies surveyed reported that bribery was frequent in obtaining government contracts. Environment, Natural Resources and Extractive IndustryBusiness Corruption
According to Global Integrity 2008, business inspections by government officials to ensure public environmental standards are not carried out in a uniform and even-handed manner. Usually inspectors and businesspeople negotiate monthly or quarterly bribes for favorable treatment.
The Azeri Committee of Oil Industry Workers' Rights Protection (COIWRP) has illustrated how top managers from oil companies, such as of the state-owned SOCAR, systematically extract money by forming private companies to which they submit orders at prices much higher than the market price. Subsequently, the companies typically pay 50% back to the managers, such as those of SOCAR, and keep the other 50%, sometimes even without carrying out any work.
In 2003, The Azeri Committee of Oil Industry Workers' Rights Protection submitted a complaint to the IFC and EBRD concerning corrupt practices at SOCAR. The complaint states: 'Corruption in SOCAR increases every year and this money can be seen as Western backing for criminal practices which deny benefits for the wider population of Azerbaijan'. See this profile's special section on Azerbaijan's oil and gas sector for more information. Political Corruption
NGOs claim that the State Oil Fund is basically controlled by the Presidential Bureau and that massive fraud and misappropriation of the fund's money by top politicians and officials take place systematically.
In 2003, the Ministry of Taxes began an investigation of suspected corruption in the state oil company SOCAR. The investigation revealed 800 private companies involved in a corruption scheme. A few low-ranking officials were arrested, but the investigation was halted when it reached governmental levels. See this profile's special section on Azerbaijan's oil and gas sector for more information. Frequency
EBRD & World Bank: BEEPS Azerbaijan 2005:
- 11% of companies state that bribery is frequent when dealing with environmental inspections. Public Anti-Corruption InitiativesLegislation: Azerbaijan ratified the Council of Europe Criminal and Civil Law Conventions on Corruption in 2004 and the United Nations Convention against Corruption in 2005. Azerbaijan has also passed some anti-corruption legislation in recent years. On 13 January 2004, the Law on Combating Corruption was adopted. This law defines corruption-related offences regarding public officials. Other relevant legislation includes the Law on Procedures on Declaration of Finance Related Information by Public Officials, the Law on Public Procurements, the Law on State Protection of Persons Participating in Criminal Proceedings, the Law on Money Laundering (draft), the Criminal Code (in Russian) and the Criminal Procedure Code (in Russian). The Criminal Code criminalises the major forms of corrupt activity, including active and passive bribery, attempted corruption, extortion, bribing a foreign official, money laundering and abuse of office. It also forbids officials to receive gifts valued more than USD 55, to hold additional jobs and to engage in business activities. However, it is noted by the ACN Network that Azerbaijan's definition of bribery does not fully comply with international standards. Moreover, as emphasised by GRECO, Azerbaijan's existing mechanism for checking property declarations submitted by public officials is inefficient in practice, since these declarations cannot be checked in any way. The Law on Rules of Ethical Conduct of Civil Servants was passed by Parliament in 2007 and aims at increasing transparency and efficiency of the public institutions. In February 2009, the Azerbaijani parliament passed the Law on the Prevention of the Legalization of Criminally Obtained Funds or Other Property and the Financing of Terrorism. In June 2009, President Aliyev signed a Decree on strengthening the fight against corruption-related law violations in the area of management of state and municipal property and resources. Access the Lexadin World Law Guide for a collection of legislation in Azerbaijan. Government Strategies: In 2004, a presidential decree was passed regarding the State Programme on Combating Corruption to cover the period from 2004 to 2006. A common criticism of the bureaucracy in Azerbaijan is that political connections and patronage networks are used to obtain jobs in public agencies. The State Programme on Combating Corruption represent an attempt to counter this kind of cronyism and introduces the implementation of a central system of competitive, anonymous examinations to determine the job placement in the public sector. In addition, a rotation principle for public officials in the police and in the tax and customs authorities has been introduced as a measure to counter corrupt practices in these organs. According to the Monitoring Report on Azerbaijan 2006 by the Anti-Corruption Network for Eastern Europe and Central Asia, a network of NGOs called the Information and Cooperation NGO Network had some success in influencing the wording of the state programme. A National Strategy on Increasing Transparency and Combating Corruption covering 2007-2011 was issued by the President in July 2007. The most recent development was a State Programme for Poverty Reduction and Sustainable Development 2008-2015 approved by President Aliyev in September 2008, which aims at strengthening the judicial and procurement systems and improving the business environment. Anti-Corruption Agencies: The Commission on Combating Corruption (CCC) was legally established in May 2005. The CCC consists of 15 members, five appointed by the President, five by the Parliament and five by the Constitutional Court. Among the main objectives of the CCC is taking part in policy formation on corruption issues, analysing the state and effectiveness of the fight against corruption and receiving complaints from individuals. Reportedly, this agency is not used for addressing anti-corruption issues fairly and systematically, but rather for settling scores between rival political fractions. Until now, the CCC has not launched any important cases, and the cases that have been opened have been politically motivated. Furthermore, the CCC secretariat has only five staff members, which is far too little considering the amount of work to be done. In reality, the staff simply refers specific cases to other offices. Prosecutor General's Office: Within the Prosecutor General's Office, a special Anti-Corruption Department has been set up to detect and investigate instances of corruption and submit the cases to the courts. The department has a staff of 60 employees; 40 of which are prosecutors and investigators. According to Prosecutor General Zakir Garalov, 150 people have faced corruption charges since 2005. Of these, 56 cases have been taken to courts by the office's Anti-Corruption Department and another 258 people have been found guilty for corruption by the courts. According to Global Integrity 2007, the department very seldom independently initiates investigations into allegations of corruption by law enforcement officials. The department is planning to create an information database on corruption offences in the future. In addition to the work of the Prosecutor General, the police also investigate instances of corruption. The main police department involved in these investigations is the Department for Combating Organized Crime, staffed with 75 policemen. In March 2005, a 'Unit for special investigation measures in corruption crimes' was formed and is currently staffed with 10 police officers. Auditor-General: Auditing in Azerbaijan is supervised by the Chamber of Auditors. The Chamber of Auditors has set up a specialised department for combating corruption, as reported by the GRECO Evaluation Report Azerbaijan 2006. The Chamber is independent, but is reportedly influenced by the Ministry of Finances and the Ministry of Taxes. According to Global Integrity 2008, the government seldom acts on the findings of the audit agency. The reports of the Chamber of Auditors are not publicly available. Another institution responsible for auditing in Azerbaijan is the Accounting Chamber (in Azeri). Ombudsman: The Constitutional Law on the Human Rights Commissioner (Ombudsman) was adopted in 2001, and provides the legal basis for the work of the Ombudsman. The Ombudsman is meant to restore freedom and human rights if they are violated by public officials or municipal or government bodies. However, the Ombudsman cannot investigate any activities of the President, deputies of the Parliament or judges. The Ombudsman submits motions to the President or to the Parliament. The law states that the Ombudsman can examine complaints of violations of human rights related to red tape, loss of or delayed delivery of documents in courts, as well as delays in the execution of court judgments. The Ombudsman is elected by majority vote in Parliament from among three candidates nominated by the President. According to Global Integrity 2008, the Ombudsman institution in Azerbaijan is subject to political interference, especially from the president's office. The government does not act in any particular way on the findings of the ombudsman agency in Azerbaijan, as reported by Global Integrity 2008. Access the Ombudsman Annual Report 2009 (in Azeri). EITI Implementation: Azerbaijan decided to implement the Extractive Industries Transparency Initiative (EITI) principles of good management of natural resource wealth in 2003. Azerbaijan has produced several reports on its progress in this field. The State Oil Fund is responsible for Azerbaijan's implementation of the EITI principles, and cooperates with the Coalition of Azerbaijan Non-Government Organization. EITI in Azerbaijan is seen by several observers as a positive exemption from the general unwillingness of corporation with NGOs. The US Department of State 2009 reports that Azerbaijan has taken significant steps to implement the EITI. In February 2009, the EITI Board designated Azerbaijan as EITI compliant. Azerbaijan must be revalidated within 5 years, as reported by EITI. Access the EITI Validation Report 2009. E-Governance: The UNDP is involved in developing Azerbaijan's e-governance portfolio programmes and has worked to develop a UNDP-Azerbaijan evaluation of the e-governance portfolio programmes. Furthermore, citizens and companies can declare their taxes on the website of the Ministry of Taxes. The idea behind this initiative has been to reduce the meetings between citizens/companies and civil servants. Public Procurement: Public Procurement in Azerbaijan is regulated by the 2001 Law on Public Procurement. Tender notices and business opportunities are published on the website of the State Agency on Procurement. According to the Law on Public Procurement, major procurements require competitive bidding, and unsuccessful bidders can ask for an official review of the bidding process and challenge the concrete procurement decision in the courts. The State Agency on Public Procurement is permitted to ban certain companies from bidding in future procurements. Almost all results are published in state newspaper within five banking days, however, some results are kept secret, as reported by Global Integrity 2008. In addition, there are no clear mechanisms to enforce the conflict of interest regulations for public procurement officials. Global Integrity 2008 illustrates that the law on procurement is ineffective because companies guilty of major violations of procurement regulations are not prohibited from participating in future procurement bids. Whistle-Blowing: There are no legal measures that ensure the protection of public or private employees should they report instances of corruption. No legislation exists that forces public officials to report instances of corruption, apart from police officers. Police officers are required to report violations of the law to their superiors if they encounter such violations. However, all citizens, including civil servants, are required to report imminent or committed crimes of a serious or very serious nature, including corruption offences. Global Integrity 2008 reports that many government bodies have online forums and hot-lines where people can report corruption. The Anti-corruption Portal lists telephone numbers for corruption hotlines for some state agencies. A new draft Law on the Prevention of Conflicts of Interest includes legal whistle-blower protection, but implementation hereof is yet to be seen. General Comments on the Public Anti-Corruption Initiatives: Although Azerbaijan adopted anti-corruption legislation in 2005 and a National Strategy on Increasing Transparency in Combating Corruption, as well as an ethics code for civil servants in 2007, little progress in implementing these measures has been made, as reported by the US Department of State 2009. One of the reasons could be a reluctance to implement policies that could hamper the interests of the ruling elite. The auditing capacity of the legislative branch is weak, and government investigations of civil servants are usually politically driven.
Private Anti-Corruption InitiativesMedia: Freedom of speech and the press is guaranteed in Azerbaijani law; however, the authorities notoriously limit press freedom in practice. The state controls much of the media, including the four main television stations. Azerbaijan banned foreign radio stations from broadcasting on local frequencies on 1 January 2009. Foreign stations now may only broadcast via satellite, Internet, or cable. US Acting Deputy State Department spokesman Gordon Duguid said previously that the move would 'represent a serious setback to freedom of speech'. A supposedly objective and unbiased public television station was set up in 2005. However, it was immediately criticised for its negative coverage of the opposition election bloc and its favourable coverage of the governing bloc. Some of the media outlets are controlled by family members of the President or by people close to the President. Independent and opposition papers struggle financially and are often subject to heavy fines and imprisonment of their staff. According to Freedom House 2008, press freedom has declined over the past couple of years. Azerbaijan ranks 150th out of 173 countries in the Reporters Without Borders Worldwide Press Freedom Index 2009, and 168th out of 195 countries on Freedom House's Freedom of the Press Index 2009. Azerbaijan was criticised by the international community in 2007 for having the highest number of imprisoned journalists among OSCE member states. The European Parliament's human rights committee has called the press freedom situation in Azerbaijan 'unacceptable'. There are many examples of physical harassment of journalists who investigate and produce reports on corruption issues, according to the Reporters Without Borders Azerbaijan Country Report 2009. Civil Society: In general, civic traditions in Azerbaijan are weak, although the NGO sector has been growing in recent years. NGOs sometimes face difficulties in registration. The maximum registration period for NGOs, according to Azerbaijani law is 40 days. If there is no response from the authorities after this period, registration is granted automatically. However, the registration authorities (Ministry of Justice) are plagued by delays. Global Integrity 2008 reports that the government sometimes creates barriers to the establishment of new anti-corruption NGOs by using taxes and police enforcement. In total, the country has 2,100 NGOs, out of which nearly 230 deal with anti-corruption. There are 14 NGOs associated in the Information and Cooperation NGO Network. The mission of the network is to stimulate the work on anti-corruption issues among civil society organisations in Azerbaijan. The network has arranged working groups for developing legislation on anti-corruption measures, and has had some influence on the legislative process. Political and oppositional NGOs are reportedly under consistent pressure from the authorities. Transparency International Azerbaijan: Transparency International Azerbaijan has issued several reports on the level of corruption in the country. Some of these have a special focus on companies. In general, Transparency International Azerbaijan is a very active player on the field, but has itself faced some problems regarding registering as an NGO with the Ministry of Justice. Transparency International Azerbaijan has set up an Advocacy and Legal Advice Center (ALAC). Under this project, a hotline has been opened for reporting instances of corruption. It is also possible to report instances of corruption via e-mail. The initiative is supported by USAID, OSCE Baku and the American Bar Association Central Europe and Eurasia Law Initiative (ABA CEELI). The ALAC has had some successes in addressing specific instances of corruption. Fund of Struggle Against Corruption: The fund aims at eradicating corruption in Azerbaijan by carrying out research in the field of corruption. The fund administers investigations, seminars and conferences with the purpose of revealing insights into the condition of corruption in Azerbaijani society, and has made some interesting reports and surveys of SMEs and their exposure to corruption. Anti-corruption Portal: The Anti-corruption Portal is an Internet-based portal hosted by the Internet Access and Training Program (IATP). The Anti-corruption Portal aims at implementing the first public consultation centre online to address corruption issues directly from citizens and serving as their online liaison with the Government of Azerbaijan. The purpose of this project is to try to fill the implementation gap of existing law. Observers note that one of the reasons for the lack of the realisation of the anti-corruption mechanisms is the passivity of the public and the absence of a public control mechanism towards implementing anti-corruption regulations. The aim of the portal is to educate and arm citizens in the struggle against corruption, enable their active participation in this struggle and to raise their civic awareness and legal literacy. The portal also provides free legal consultation and services for citizens. National Confederation of Entrepreneurs Organisations (AEC): AEC is a non-governmental and non-commercial organisation that unites many entrepreneurs and entrepreneurs' associations. AEC engages in anti-corruption work.
ResourcesThe websites listed below provide useful facts on Azerbaijan as well as contacts and tools for companies operating in Azerbaijan:
Sources for further reading:
Conventions and IndicesUNCAC Status: Signed 27 February 2004. Ratified 1 November 2005.
Status on UNCAC Implementation
This field describes the country's status on the United Nations Convention against Corruption. Please note any declarations and reservations made upon ratification. The list of signatories can be found on the UNODC website. Read more about the UNCAC.
Other Relevant Conventions or Treaties
Transparency CPI: 2009: 143/180 (Score 2.3)
Transparency CPI
This field consists of the score for the country in question on the Corruption Perceptions Index from Transparency International as well as its ranking.
World Bank CORR Index (-2.5 - +2.5): 2008: -1
World Bank Corruption Index
This field consists of the score for the country in question on the 'Control of Corruption' indicator in the World Bank Governance Research Indicator Country Snapshot (GRICS): 1996-2008.
OECD Country Risk Classification (0-7): 2010: 5
Country Risk Classification
The classification of countries by risk category has the aim of providing OECD countries with a basis for calculating the premium interest rate to be charged to cover the risk of non-repayment of export credits. Countries are placed in risk categories 0 - 7, with 0 being the lowest risk category and thus the least expensive. Conversely, premium group 7 is the highest risk category. Each classification is comprised of 2 components: 1) an assessment of the country's economic/financial situation, and 2) its overall political stability. Access the complete list of OECD Country Risk Classification figures.
Data Verification:
Latest update: September 2009
Data verified by: Global Advice Network Information NetworkCountry Profile SourcesGeneral Information Sources
- The World Bank & IFC: Doing Business 2010.
- The Heritage Foundation: Index of Economic Freedom - Azerbaijan 2010.
- World Economic Forum: The Global Competitiveness Report 2009-2010.
- US Department of State: Investment Climate Statement - Azerbaijan 2009.
- Transparency International: Global Corruption Barometer 2009.
- The World Bank & IFC: Enterprise Surveys 2009.
- Today Az: 'PACE adopts new program on Azerbaijan 2009-2010', 3 July 2009.
- Today Az: 'Amendments to Azerbaijani Constitution to increase efficiency in human right: Deputy Minister', 12 June 2009.
- Reuters: 'Azerbaijan votes to lift Aliyev term limit', 18 March 2009.
- World Economic Forum: The Global Competitiveness Report 2008-2009.
- Global Integrity: Azerbaijan Country Report 2008.
- Freedom House: Freedom in the World - Azerbaijan 2008.
- Freedom House: Nations in Transit - Azerbaijan 2008.
- The Bertelsmann Foundation: Transformation Index - Azerbaijan 2008.
- Government Accountability Project: Privatization and Corruption: The World Bank and Azerbaijan, 8 August 2008.
- RIA Novosti: 'Azerbaijani court approves scrapping limit on presidential terms', 24 December 2008.
- Today Az: 'Fund of combat against corruption: 50-60% of Azerbaijani population gives bribes to settle their problems', 15 December 2008.
- Reuters: 'Azerbaijani says vote turnout high despite boycott', 15 October 2008.
- GRECO: 'CE to Estimate Azerbaijan's Successes in Corruption Fighting', 11 April 2008.
- Global Integrity: Azerbaijan Country Report 2007.
- US Department of State: Background Note: Azerbaijan 2007.
- Transparency International: Global Corruption Report 2007.
- Asian Development Outlook: Azerbaijan 2007.
- UNDP Azerbaijan Development Bulletin: 'Azeri opposition's chances in 2008 presidential election slim', 2007.
- Sofaz: 'State Oil Fund of Azerbaijan wins the UN Public Service Award!', 18 May 2007.
- OECD Anti-Corruption Network for Eastern Europe and Central Asia: Azerbaijan Update on Implementation Measures 2006.
- GRECO: Evaluation Report on Azerbaijan 2006.
- Freedom House: Nations in Transit - Azerbaijan 2006.
- EBRD & World Bank: Business Environment and Enterprise Performance Survey (BEEPS) Azerbaijan 2005.
- American Chamber of Commerce in Azerbaijan: Observations and Recommendations for Improving Azerbaijan's Business Climate 2005.
- The World Bank & IFC: Investment Climate Surveys - Azerbaijan 2005.
- Transparency International Azerbaijan: Country Corruption Assessment: Public Opinion Survey in Azerbaijan 2004.
- COIWRP: Report on Corruption in Azerbaijan Oil Industry Prepared for EBRD & IFC Investigation Arms 2003.
Corruption Levels Sources
Judicial System
Police
Licences, Infrastructure and Public Utilities
Land Administration
Tax Administration
Customs Administration
Public Procurement and Contracting
Environment, Natural Resources and Extractive Industry
Public Anti-Corruption Initiatives Sources
Private Anti-Corruption Initiatives Sources
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