Azerbaijan green-lights foreign direct investments Analysis by Caliber.Az

The priorities of transformation of the domestic economy for its fuller inclusion in the system of international division of labour are to increase the competitiveness of the non-oil sector and its greater export orientation. It is planned to achieve these goals mainly through the growth of capitalisation of the economy by increasing the share of private investments, primarily foreign ones. The most important measure here is the qualitative improvement of the business climate, and the formation of new incentives for the business ecosystem, including the attraction of portfolio investors. Economy Minister Mikail Jabbarov said the day before that the Azerbaijani government is finalising the development of a strategy to encourage foreign direct investment (FDI).

For the second year, our country has been working on the implementation of the strategic programme "National Priorities of Socio-Economic Development: Azerbaijan 2030" and its critical component for the medium term - "Strategy of Socio-Economic Development of Azerbaijan for 2022-2026".

The programme tasks in these documents include economic reforms to improve the quality of the business climate, and the introduction of new incentives to increase the pace of private sector development. In particular, measures are envisaged to modernise legal and regulatory documents and regulations and to implement international best practices in the field of business promotion. There are also plans to deepen fiscal reforms and simplify lending rules.

At the same time, liberalisation of business administration is planned. All these measures will, among other things, cover the manufacturing sector, and foreign trade operations, and promote local and foreign investment, with a focus on the introduction of know-how and digital technologies as part of the Fourth Industrial Revolution (4IR).

This primarily means the participation of international private companies and donor structures in non-oil projects in Azerbaijan, which will become a long-term priority of the state policy of capitalisation of the economy. "Various measures are being implemented in Azerbaijan to increase the attractiveness of the investment environment: the 'single window' principle is applied for foreign investors and they are supported in various areas. At the same time, the government is developing a strategy to encourage foreign direct investment (FDI)," an article by Azerbaijani Economy Minister Mikail Jabbarov published the day before in the official newspaper Azerbaijan reads.

It should be noted that the work on the development of a new strategy to encourage FDI, which has been underway for three years, is nearing completion: the efforts of specialists from the Ministry of Economy and the Agency for the Promotion of Exports and Investments of Azerbaijan (AZPROMO) are aimed at implementing the best international practices in this area. The long-term goals of the strategy include improving the investment climate and increasing the efficiency and return on investment by modernising investment mechanisms and instruments. It is also planned to increase the share of portfolio investors (including transnational corporations) in order to attract FDI mainly in the real sector of the economy. Thus, the mechanism of public-private partnership will be actively used in the process of increasing the capitalisation of the domestic economy.

The objectives of the strategy include the creation of favourable and competitive conditions for FDI, with a focus on the implementation of effective high-tech export-oriented projects with a high level of added value. Optimisation of fiscal and other incentive mechanisms to attract international investors to invest in the agrarian and industrial sectors and infrastructure of the territories of Azerbaijan liberated from occupation has also been identified as a promising direction of the new strategy.

The best option for localisation of projects within the FDI promotion strategy is to use the potential of dozens of agro-parks, technoparks and industrial districts created in the country, as well as the FEZ in Alat launched this summer. These clusters offer residents numerous tax, customs, utility and other preferences.

It should be recalled that in parallel with the development of the strategy to stimulate FDI, a strategy to promote foreign direct investment for 2020-2025 was developed with the participation of specialists from the International Finance Corporation (IFC). This document identifies such areas as alternative energy, logistics, transport, and such sectors as the chemical industry, food processing and agriculture, light industry and IT technology as the main areas for attracting international investors.

It is noteworthy that the AZPROMO agency has made a significant contribution to promoting the country's investment potential at the global level by launching recently the information website Invest in Azerbaijan (http://invest.gov.az). This platform provides information on the conditions created for investors in Azerbaijan, applicable incentives, as well as data on current and prospective business projects, mainly in the field of agro-industry, industry, energy, logistics and transport. In turn, since the beginning of last year, AZPROMO has been actively cooperating with the European Union and its main lending body, the European Bank for Reconstruction and Development (EBRD), to promote FDI in Azerbaijan.

In particular, within the framework of the EBRD's technical cooperation programme with AZPROMO, packages are being developed in line with the investment targeting strategy for five priority projects in sectors such as agriculture and fisheries, and investors are being sought, especially from European markets. This initiative includes analysing target markets and investors, training AZPROMO staff in effective presentations and organising road shows in priority European markets to attract investors.

The efforts of the republic's economic bloc, which is forcing the modernisation of legislation, introducing new digital tools and developing a profile strategy to attract foreign investment, are very timely. "Over 2003-2022, total investments in Azerbaijan's economy totalled $310.4 billion, with about half of them - $154.1 billion - foreign. Well, the volume of direct foreign investments in 2003-2022 totalled $100.7 billion," Economy Minister Mikail Jabbarov said in his article. This is a very good indicator both regionally and when assessed internationally.

Meanwhile, it should be noted that over three-quarters of all foreign investments traditionally fell into the sphere of production and transportation of hydrocarbon raw materials. This investment flow was maximum during the period when active exploration and construction of drilling rigs at the Azer-Chirag-Guneshli, Shahdeniz and Absheron oil and gas fields were underway, as well as during the laying of Sangachal and other terminals, laying of BTC oil and gas pipelines, Southern Gas Corridor, etc. Today, due to the completion of the main construction stages of many energy projects, the investment flow into the oil industry has comparably reduced.

On the other hand, investments in non-resource industries are now much more in demand in Azerbaijan within the framework of the policy of new industrialisation and diversification of the economy. However, over the past twenty years, less than a quarter of foreign investment has been channelled into non-oil sectors. In particular, according to AZPROMO data, total foreign direct investment in the non-oil sector in 2018-2022 is estimated at $5.093 billion, and in total over the past five years, the non-oil sector accounted for 21.2% of all FDI in the country's economy. Today, these figures cannot be considered sufficient, especially when compared to the scale of investment in the oil and gas sector.

In fact, that is why the government's efforts have recently been aimed at changing the current investment proportion in favour of non-resource industries. In a number of areas, these steps have been very effective: in two years, phenomenal success has been achieved in attracting foreign companies' capital to the renewable energy sources (RES) sector.

Investors from the Persian Gulf countries and the United Kingdom are investing hundreds of millions of dollars in already implemented and prospective projects for the construction of solar and wind power plants. Taking into account the laying of an energy cable under the Black Sea, the construction of powerful wind turbines in the Caspian Sea, the production of "green" hydrogen and other RES projects, the volume of FDI in the country's economy will amount to many billions of dollars.

We can only hope that the initiative with the new FDI promotion strategy will be successful in diversifying foreign investment flows towards industry, agro-industrial complex and IT industry. Participation of the world's leading companies in the capitalisation of the Azerbaijani economy is crucial, as, in addition to financial resources, it will attract new technologies to the domestic production of competitive products that are in demand abroad.