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CONTEXT AND TRENDS
After six years of consecutive GDP growth, in 2011 Azerbaijan experienced a slump to below 1%. "The market is particularly slow," says one partner....
CONTEXT AND TRENDS
After six years of consecutive GDP growth, in 2011 Azerbaijan experienced a slump to below 1%. "The market is particularly slow," says one partner. "The Government needs to provide more security for investors. There are moves towards international financial reporting standards and this is increasing trust in the market year on year but we have a long way to go and we are still waiting for special economic zones (SEZ) to kick-start the market. Maybe we will see this by the end of the year."
In 2011 the final government bank underwent privatisation in the biggest – and most likely last – privatisation the country will see. However many lawyers say bank lending remains too conservative and EBRD (European Bank for Reconstruction and Development) management and customer care (although much improved) is in need of urgent attention. That said many believe there is an authentic commitment to move away from the "corrupt bureaucracy" image of Azerbaijan.
Foreign investment has continued to flow into certain sectors; namely banking, construction (hospitality, roads, bridges and schools) and oil and gas. Funding comes from the UK, Germany and Norway although many report a growing interest from Chinese and Korean companies.
Roughly 85% of all investment is related to the oil and gas sector, which has been experiencing a wave of renewed investment in relation to the development of pipelines in shallow water areas. Development plans have stepped up a gear in the last 12 months on a $15 billion complex development by SOCAR (State Oil Company of Azerbaijan Republic). The project, which has been under discussion for five years has finally reached the execution phase. "They are engaging consultants so it's not just empty talk. This is creating a lot of legal work, we really see it ramping up a gear" says one lawyer.
Banks are attempting to attract international donations for infrastructure projects but currently can only manage small loans within the region of €25 million.
Despite this, the government have been pushing hard to encourage investment outside of oil and gas. Meanwhile, some of the big industrial groups are funding their own large infrastructure projects in the industrial equipment, food processing and petro-chemicals sector.
Partners are quick to stress that legislation is developing in line with European standards. In January 2012 there was a new customs code, which increased the rights of importers to defend their interests. The end of 2011 saw a change of the head of the state migration service, which many say gives them 'hope and optimism'. Already, immigration regulations have been changed to facilitate the quick issue of visas and residents work permits.
In another recent trend, one partner observes: "There is now more litigation activity. Previously, big corporates would avoid the local courts because of corrupt judges, no one was clean. Now it's possible to get a fair hearing even for foreign clients because we have young and confident judges who reject the big evil foreign corporate propaganda. They want access to be based strictly on the law. Still, it could be years before less competent judges are completely routed out of the system."
Islamic finance activity is another evolving feature of Azerbaijani financial law after the government finally gave the green light. Many hope this will boost potential exploitation of liquidity from the Gulf Region.
Azerbaijan is also experiencing the result of four years of business community reform, such as the introduction of electronic filing of tax returns. However, constant fluctuations in the law (particularly with the 'continuing saga' of tax reform) have a detrimental impact on business growth.
Lawyers stress that corruption still remains rife, rendering insolvency law redundant "people just run off with the money when things go wrong and these things don't make the courts," says one partner.
In capital markets, activity is quiet. "We see the potential for growth but it's not happening because people aren't selling their shares. Maybe it's just that the market is still too small and the legal framework is better suited to private deals," suggests one lawyer.
Outside of oil and construction there remains activity within the agriculture sector (cotton/tobacco/fruit industry) and M&A is very quiet as one lawyer explains: "There are a couple of banking deals in the pipeline but acquisitions tend to get suspended or withdrawn at the last minute. Those that make it are driven by very specific European buyers who have found an opportunity. "Large consumer companies did come in full force last year in the automotive, pharma and the beauty industry to meet the consumer needs of a burgeoning middle class in Baku, but there is very little manufacturing going on."
© Euromoney Institutional Investor PLC