The overall investment climate in Azerbaijan continues to improve, although significant challenges remain.  Azerbaijan’s government has sought to attract foreign investment, undertake reforms to diversify its economy, and stimulate private sector-led growth.  The Azerbaijani economy, however, remains heavily dependent on oil and gas output, which account for roughly 88 percent of export revenue and over half of the state budget.  The economy of Azerbaijan grew 5.6% year-on-year in 2021, compared to a 4.3% contraction in the previous year.  Both oil and gas (1.7%) and the non-oil and gas (7.2%) sectors of the economy expanded as the economy continued to recover from the pandemic.  While the oil and gas sector has historically attracted the largest share of foreign investment, the Azerbaijani government has targeted four non-oil sectors to diversify the economy: agriculture, tourism, information and communications technology (ICT), and transportation/logistics.  Measures taken in recent years to improve the business climate and reform the overall economy include eliminating redundant business license categories, empowering the popular “Azerbaijan Service and Assessment Network (ASAN)” government service centers with licensing authority, simplifying customs procedures, suspending certain business inspections, and reforming the tax regime.

Despite substantial efforts to open the business environment, progress remains slow on structural reforms required to create a diversified and competitive private sector, and corruption remains a major challenge for firms operating in Azerbaijan.  A small group of government-connected holding companies dominates the economy, intellectual property rights enforcement is improving but remains insufficient, and judicial transparency is lacking.

Under Azerbaijani law, foreign investments enjoy complete and unreserved legal protection and may not be nationalized or appropriated, except under specific circumstances.  Private entities may freely establish, acquire, and dispose of interests in business enterprises.  Foreign citizens, organizations, and enterprises may lease, but not own, land. The average time needed to resolve international business disputes through domestic courts or alternative dispute resolution varies widely.

Following the release in November of a tripartite ceasefire declaration by Armenia, Azerbaijan, and Russia, which brought an end to the fall 2020 intensive fighting in the Nagorno-Karabakh conflict, the Azerbaijani government is seeking new investments in the territories around Nagorno-Karabakh that were previously under the control of Armenian-backed separatists.  Azerbaijan’s 2022 budget includes an allocation of AZN 2.2 billion (USD 1.3 billion) for the restoration and reconstruction of these territories.  These funds will be reportedly used to restore road infrastructure, electricity, gas, water, communications infrastructure, and the education and healthcare sectors, along with the restoration of cultural and historical monuments.  The government is also pursuing green energy projects in this region. Reconstruction is expected to continue over the coming years, along with continued special budget allocations provided for rebuilding and resettling these territories.  Demining these territories as part of reconstruction efforts remains a priority of the Azerbaijani government.