US STATE DEPARTMENT CONSIDERS AZERBAIJAN SHOULD USE INCENTIVES TO DEVELOP NON-OIL SECTOR

Today, Azerbaijan
March 7 2006

The US State Department today issued the “Azerbaijan 2006 Investment
Climate Statement”.

The statement says that a long running and unresolved conflict with
Armenia over Nagorno Karabakh has left Azerbaijan with approximately
800,000 refugees and internally displaced persons (IDPs) and the
problem of refugees and IDPs constitutes an enormous burden on
economic and democratic development. However, as a result of the
state policy aimed at poverty reduction and regional development
pursued in Azerbaijan in 2005, the country has achieved high
macroeconomic indicators. As a continuation of this process in 2006,
Gross Domestic Product (GDP) is forecasted to be as high as 30%
this year. In addition, the Baku-Tbilisi-Ceyhan pipeline project,
which will significantly stimulate general development of the country,
is planned to be completed in 2006.

The statement notes that the government of Azerbaijan officially
welcomes foreign direct investment, realizing that it plays a vital
role in development of the countrys economy. 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.

It is also said that 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 section “Performance Requirements and Incentives” of the statement
says that 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, APA informs.

Another section in the statement is about corruption. This section
states that corruption is a significant deterrent to investment in
Azerbaijan, especially in the non-energy sector. Laws and regulations
that exist to combat corruption have not been effectively enforced. A
new anti-corruption law came into force in January 2005. However,
Azerbaijan made little progress on implementation of this law in 2005.

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