Azerbaijan: Opportunities Beyond the Oil Sector.
U.S. Department of Commerce (BISNIS)/U.S.-Azerbaijan Chamber of Commerce (USACC) Event
Washington, D.C.

November 30, 2005

Ladies and Gentleman, thank you and good morning. It is my pleasure to be here with you to highlight an important, and developing, aspect of our broad relationship with Azerbaijan: commerce. The U.S. is first and foremost a trading nation, and Azerbaijan presents commercial opportunities in a wide range of sectors, from oil and gas to agriculture and telecommunications. Companies coming to Azerbaijan will find a developing market and an Azerbaijani government interested in attracting more foreign investment to spur development. You will also find a U.S. Embassy that is "Open for Business" and ready to assist you in your efforts. Indeed, one of the most important charges I have as Ambassador in Baku is the promotion and protection of U.S. businesses in Azerbaijan.

Before I discuss some of the areas in which I see opportunities, and challenges, for U.S. businesses in Azerbaijan, I would like to say a few words on the overall political and economic picture in Azerbaijan. Many of you are no doubt aware that Azerbaijan held parliamentary elections earlier this month. In short, we saw some progress in certain areas, but election day did see some instances of fraud, particularly during the vote count. However, the overall situation in Azerbaijan remains relatively stable and has been free from violence. At the same time, the government has also taken some steps to address problems by overturning the results of two races and annulling the results of four others. We continue to work with the Azerbaijani government not only on election issues, but also on a broad spectrum of rule of law, court reform, and anti-corruption efforts.

On the economic side, it is no secret that Azerbaijan is blessed with rich deposits of oil and gas and with them the potential for a bright future. 2005 has seen the celebration of first oil in the Baku-Tbilisi-Ceyhan pipeline, and work continues on the South Caucasus Gas Pipeline, due for completion in 2006. Azerbaijan is expecting phenomenal GDP growth of roughly 30% for 2006, building on rapid growth in 2004 and 2005 as well. President Aliyev's administration has made non-oil sector development a top priority, setting a target of 600,000 new jobs. Despite some challenges, such as increasing inflation and currency appreciation, which stem largely from the cascade of oil revenue into the economy, Azerbaijan is poised to mature into a relatively stable middle-income country. All of this means a rapidly developing market for your goods and services, in a country with good access to the Caucasus and Central Asian markets for future growth. U.S. exports to Azerbaijan in 2004 were roughly $158 million, the largest share of which was machinery and industrial goods. Let me highlight some particular sectors that may be good opportunities for U.S. businesses.

Azerbaijan's agriculture sector is recovering following a near collapse after the break up of the Soviet Union. Last year, the U.S. exported $42 million in agricultural products, mainly meats, to Azerbaijan. The overwhelming majority of farmland is now privatized, with hundreds of thousands of small 2-4 acre farms spread throughout the country. President Aliyev has made rural development a top priority, and continued growth and demand for agricultural inputs is expected. Agricultural processing is one growth area in Azerbaijan, with many fruits and vegetables processed for export abroad. At the same time, Azerbaijan needs to make substantial infrastructure investments in order to sustain growth. Whether it is tractors, fertilizers, or other implements, all present opportunities for U.S. firms. Agriculture will remain the second-largest sector and largest employer in Azerbaijan for many years to come. I am proud to say that U.S. companies are beginning to have some success penetrating this sector, and believe there is more success to be had.

Azerbaijan's telecommunications sector represents another growth area for U.S. firms. Overall, U.S. exports in the telecom sector were about $5 million in 2004. The mobile telephone market is presently the most active sub-sector of the industry, and has received considerable foreign investment since 1994. Currently, two mobile GSM operators - Bakcell and Azercell - operate in Azerbaijan. The government has often discussed the possibility of a third GSM provider, but has yet to take concrete steps. A U.S.-backed telecom company, CATEL, operates wireless local and CDMA mobile networks across Azerbaijan, but has sometimes found the going to be tough. In my view, continued tight control of the Ministry of Communications and Information Technologies, which retains a 51% share in most telecommunications enterprises, will slow overall development of the sector and decrease some opportunities for U.S. telecom equipment providers. With the appointment of a new minister in 2004, however, the ministry is undergoing fundamental changes, which has begun to create a more open and cooperative attitude in the sector. U.S. firms looking for opportunities in Azerbaijan should focus on medium-sized, private Azeri firms with a minimum two or three-year track record. State enterprises are unlikely candidates for performing distribution and sales activities on behalf of U.S. firms; these enterprises generally lack the resources to cover the costs of maintaining U.S. product inventory for the local market. Given Baku's dominance of the market in this sector, it is best to work with a Baku-based firm for onward distribution throughout the country.

Azerbaijan's medical sector is poised for significant growth driven largely by government investment in healthcare and increasing incomes brought on by oil revenue and development. In 2004, U.S. exports to Azerbaijan in this sector were just slightly over $4 million. Azerbaijan does not produce medical equipment domestically and consequently there is a demand for high quality U.S. or European equipment. The healthcare industry is dominated by state-run clinics and hospitals, and has historically been an extremely corrupt sector of the economy. However, the recent dismissal of the long-serving Minister of Health may open the door for greater reform and more effective investment into Azerbaijan's health sector. At the same time, a number of private clinics, catering mainly to wealthy Azerbaijanis and expatriates, provide a market for top-quality U.S. sourced equipment, such as x-ray and MRI machines, treatment units, ambulances, and healthcare supplies. Unless working under a government tender, you can expect potential Azerbaijani buyers to have modest financial resources and require some extra work to carry off a successful deal.

Azerbaijan's construction sector was a $5.5 million U.S. export market in 2004. However, the building sector is booming, with much room for more U.S. exports. Looking out over Baku, you can now see dozens of new, multi-story apartment complexes going up, with renovation work on nearly every street corner. Virtually all high-quality building materials are imported, with notable opportunities in flooring, tile, paints, drywall, plumbing fixtures, doors and windows, and heating and cooling systems. U.S. and European imports have a reputation for better quality than their Turkish or Russian competitors, and there are Azeri consumers in a position to pay. Distributor arrangements with local firms are a good way to enter the market, though many local firms lack the financial resources to maintain large inventories in what is still largely a "cash and carry" sector of the economy. Several Azerbaijani firms in the brick, ceramic, and furniture industries are interested in procuring U.S. equipment or setting up joint ventures with U.S. firms, creating additional opportunities in this sector.

As you can see, Azerbaijan has a number of potentially lucrative commercial possibilities for U.S. firms interested in working in the market. This is not to say that there are not challenges. One major and ongoing difficulty in Azerbaijan is respect for the rule of law. For your business, this generally means that respect for contracts, and the ability to use courts to defend your interests, is weak. When foreign firms are able to win court judgments against Azerbaijani defendants - which does happen on occasion - these firms often find that enforcement of the judgments is very difficult. Alternative dispute resolution such as arbitration is a relatively new and undeveloped concept in Azerbaijan. Most often, U.S. firms attempt to resolve the problem outside of court and with minimal public visibility. Many also turn to the Embassy for assistance, particularly if the dispute involves an agency of the government.

Alongside rule of law issues, Azerbaijan continues to struggle with widespread corruption in the public and private sectors. The 2005 Transparency International Corruption Perceptions Index placed Azerbaijan 137 out of 158 countries. While this result was a slight improvement from 2004, corruption is nonetheless an unfortunate fact in Azerbaijan. As U.S. firms you obviously cannot engage in activities that violate U.S. law, and must also keep in mind the connections and practices of your Azerbaijani partner. As a result, due diligence as part of any deal is extremely important. While you can expect to encounter corruption in government agencies as well, you should also be prepared for a bureaucracy that is often difficult to navigate and at times arbitrary. Many firms experience problems with the Tax Ministry or Customs Service at some point during their work. The administrative process in Azerbaijan takes time, but you can succeed if you are persistent and transparent in your approach. Once again, the Embassy can assist should you find yourself at an impasse with a government agency.

Perhaps the final challenge to U.S. firms doing business in Azerbaijan is competition from other foreign firms, particularly Turkish and Russian, in the market. In many sectors, Turkish or Russian firms may already be active and provide a low-cost alternative to U.S. products. Generally, these substitutes are of lower quality and recognized as such. However, the proximity of Turkey and Russia, and to a lesser extent Europe, means that Azerbaijani consumers are more accustomed to these products and less likely to endure long lead times before receiving their orders. Successful U.S. firms find a way to capitalize on the comparative quality of their product, while mitigating the higher cost and longer lead times for U.S. goods through creative financing, such as Export-Import Bank programs, or shipping from warehouses closer to the market.

In conclusion, I would like to underscore again the opportunities and benefits in the Azerbaijani market. Azerbaijan is poised for rapid - indeed almost explosive - growth over the next few years. This growth will affect all sectors of the economy, creating not only opportunities in the sectors I just mentioned, but also areas like retail and franchising businesses. Whether you choose to pursue some of these, or other, opportunities in Azerbaijan, or you find yourself facing a challenge to your work in Azerbaijan, please consider enlisting the Embassy as an ally in the process. We stand ready to assist in any way we can, and view it as one of our top priorities to do so. Finally, I hope to see many of you in Baku in the coming months, and show you first-hand that the U.S. Embassy in Azerbaijan is indeed, "Open for Business."

Thank you.