Azerbaijan Business Snapshot - Paternalistic & Patronage Based
(International Politics - Risk & Threat)
Doing business in any former Soviet republic is, even in 2018, a difficult and sometimes intimidating venture. Let us take Azerbaijan as an example. Azerbaijan is still a transitional economy with important oil and gas reserves as well as having significant agricultural potential (still not fully exploited). In the years preceding the global financial crisis, Azerbaijan performed impressively in economic terms, with double digit GDP figures, backed by growth in the oil and energy sector.
However, it remains widely recognised that corruption is still deeply institutionalised throughout Azerbaijani society and poses an obstacle to both social and economic development in the country according to US Department of State and Global Integrity reports. The political system is paternalistic and patronage based - consisting of networks of a core of central individuals in the administration distributing revenues - especially from the massive exploitation of oil and gas.
The oil and gas sector accounts for over 70% of Azerbaijan's exports and for about 60% of GDP. The state holds huge interests in the sector and there are close links between this sector and governmental institutions. Despite measures taken by the government to address issues of corruption and transparency, accusations of corruption and irregular practices in the oil sector continue. For instance according again to the US Department of State, the oil and gas sector is considered by many to be one of the greatest sources of corruption within the country despite the fact that Azerbaijan was named the first country to be fully compliant with the Extractive Industries Transparency Initiative (EITI) principles and criteria in 2009.
Azerbaijan created the State Oil Fund (SOFAZ) in 1999 to collect and manage oil revenues. The SOFAZ charter states it will contribute to the state budget to support investments in infrastructure, education, poverty reduction and other social projects. International and local NGO's claim that SOFAZ is under the control of the Presidential Bureau and that massive fraud and misappropriation of the fund's money by top politicians and officials has taken place. (Note: the Head and six 6 main officials of SOFAZ are appointed by the President). For example, the government regularly spends large sums of money from SOFAZ to pay pensions and raise civil service salaries in a presidential election year. Furthermore, local NGO's have accused SOFAZ of funding development in the oil sector instead of strengthening other sectors in the country.
The country has few institutional checks on graft and the rapid growth in the energy sector has offered considerable opportunities for the institutionalisation of corruption. This makes it a difficult and challenging market to do business in. Government and business elites are interlinked as top officials regularly invest in strategic industries. Moreover, government members control companies and influential elites treat companies as private property.
This snapshot focused briefly on mainly the oil and gas sector but other areas of concern are the judiciary, police, customs and the issuing of Licences - all sectors that present their own raft of risk and corruption issues.
A full and detailed Azerbaijan report is available upon request.
