Investment opportunities in azeraijan |
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Because of its massive oil and gas reserves Azerbaijan possesses a considerable potential for hard currency earnings. The signing of the US$ 8 billion agreement in September 1994 to develop oil is crucial to the long-term development of the economy. If the oil deal and the associated investment programme remain on track, oil revenues of US$ 3 billion a vear or more are likely from the early years of the next century. Economic activity in agriculture, industry, and in the non- recorded sector -- mostly trade and services is rising. There is also a general increase in private enterprise which has been growing steadily, over the last few years and is now estimated to account for about 25 of GDP which is estimated at a nominal US$ 2 billion. However, recorded real output has declined by about 17% in 1995. This has been largely caused by shrinking activity in the state sector, the loss of export markets in the former Soviet Union(FSU) and by disruption following the conflict over Nagorno-Karabakh and, more recently, Chechnya. Inflation fell steadily in the first half of 1995 following a monthly average of around 50% in November and December 1994. By the sununer of 1995 a period of price stability was reached, but in September inflation rose to over 5% a month, largely because of seasonal factors. Unemployment is officially recorded at about 1%, but unofficial estimates suggest it may be as high as 10%. Wages, which fell steadily for several years, levelled off during 1995. The minimum wage has not been increased since February. Many incomes are supplemented by barter deals, and involvement in the parallel economy. As a result of tighter monetary policy during the spring, base targets were introduced. The National Bank of Azerbaijan raised its re financing rate to 17.5% a month and, in spite of being negative during 1994, there is now a more positive outlook. Credit auctions were held every month from the spring onwards and bv August interest rates were down to 8% a month. A nominal exchange rate remained stable for most of the year and undoubtedly contributed to the fall in inflation. Following the introduction of a tighter fiscal policy the government budget deficit was reduced to about 7% of GDP. Public expenditure fell to 30% of GDP, compared to 47%'in 1994. The current account deficit was expected to have risen to 17% by the end of December, 1995 largely thanks to the inflow of oiI monies -- the so-called "oil bonus". Overall trade levels dropped over 1995, mainly because of the disruption of trade routes caused by the Chechnya crisis. The external trade debt was j . ust under US$ 300 million, representing about 18% of GDP. Most of this was owed to Russia, Turkmenistan and Turkey. About US$ 80 million is also owed to Pennzoil for its gas operations. On the revenue side, tax receipts have been disappointing due to a weakness 'in collection methods following the abolition of surrender requirements in 1994 which accounted for about half of the total revenue. Part of this loss has been made up by temporary taxes on oil and cotton exports and by a rise in crude oil extraction royalties. The government is now 'der'ng a comprehensive reform of energy consi I taxation. In the medium term, additional oil and gas production, both onshore and offshore, and the resulting royalties and revenues point to an increasingly optimistic future. Government spending was cut back in 1995 to 30% of GDP compared to 47% in 1994, due largely to the real wage cuts in the state sector and the removal of bread subsidies. There are plans to reduce the govemment's role, and consequently wage expenditure, in certain activities which may be privatised, such as parts of the health-care system and the media.
'ne authorities requested a Systemic Transformation Facility (STF) in 1994 and a Stand-By Arrangement in 1995. Two tranches of the STF (US$ 91.26 million) and one tranche of the Stand-By (US$ 14.6 million) were 'ded in 1995 following the govemment's provi I successful implementation of a strict macroeconomic stabilisation progranune which included liberalisation of prices and unification of the exchange rate. The govenunent appears determined to maintain its policy of macroeconomic stabilisation and to initiate the structural reform process.
Investment Climate T'he government has taken several measures to lay the foundations for a stable investment climate and is introducing various incentives. Structural economic reforms are making steady progress, a pnvatisation programme has been launched and the political situation is increasingly stable. The outlook is now more optimistic than in earlier years and the long term potential is definitely positive.
A governznent programme put forward in April 1994 envisaged privatisation of medium-sized enterprises (50-300 employees) in 1996-98 and large-scale privatisation from 1998. A pnvatisation programme, approved by parliament in July 1995, aims to transfon-n at least 20 large enterprises into joint-stock companies and sell majority stakes to both domestic and foreign purchasers. A plan to use vouchers for a mass privatisation scheme has also been approved. The goverrunent programme of April 1994 earmarked 8,000 small enterprises (about 30% of the total) for pn'vatisation in 1994-95. Little progress was made. A new pn'vatisation programme, also approved by parliament in July 1995, envisages that small enterprises (less than 50 workers) will be auctioned or sold directly to individual workers before the end of 1995. This would result in the privatisation for about 9,000 small enterprises, accounting for about 5% of state assets. In November 1991 all fon-ner Soviet property in Azerbaijan was nationallsed. There is no individual property restitution law. Over 10,000 small private enterprises are registered with local authorities, but many are. inactive. Development of the sector has been hampered by administrative delays in approving the new Company Law which has now been ratified. The pre-independence management structure and relationship between enterprises and ministries remains largely intact, supported by budgetary subsidies and bank credits to enterprises. There has been some managerial reform of large enterprises by division into smaller units, but no major enterprise restructuring. At the end of 1994 subsidised credits to state owned enterprises from the two major state banks, Agroprom and Prominvest, were ten-ninated. In the spring of 1995, direct subsidies from state budget, including those on bread, were eliminated. A new Bankruptcy Law was approved by parliament in July 1994.
Four state banks (Prominvest, Agroprom, Amanat, International) are protected from competition from conunercial banks by a number of measures, including a decree in June 1994 which requires state-owned enterprises to bank with the state sector, and selective tax privileges. New minimum capital requirements are likely to force consolidation of the 200 small connnercial banks by the end of 1995. The National Bank of Azerbaijan has been granted significant powers to exercise prudential regulation. There are no active investment funds and, although a Law on Securities and Stock Exchange has been passed, no Stock Exchange has yet been established.
A major boost has been given to the sector by the US$ 8 billion investment agreement signed in 1994 to exploit the Azen', Chirag and Guneshli deepwater fields in the Caspian Sea by a multi-national consortium which now includes I I compwiies and operates as the Azen' International Operating Consortium (AIOC). The Azefi and Chirag project is a 30 year development to exploit estimated reserves of 600 million tonnes. First production is expected towards the end of 1996. Daily production early next century is expected to rise to 720,000 barrels a day. The Government of Azerbaijan has now signed a second agreement for a US$ 1.7 billion project concering the exploitation of the Kavabakh field with Lukoil, Pennzoil and Agip. Negotiations are also in progress with BP and Statoil concerning the Shakhdeniz field. One of the main issues concerning the exploitation of Azen' oil and gas has been the development of export pipelines. As a precondition to investment under the first production sharing agreement, the Azerbaijan International Operating Company (AIOC) requires finalisation of an early oil pipeline route and a decision was made on 9 October 1995 to pursue two routes: north through Russia and west through Georgia. In an attempt to meet the conditions of the western oil companies an IGA was signed between President Aliyev and Prime Minister Chemomyrdin on 18 January which allows for the flow of Azefi oil through Russia to the Black Sea port of Novorossilsk. The "Western route" through Georgia to the port of Batumi allows for a possible extension to the Mediterranean via Turkey when Full Field Development commences. Crude oil output fell to 9.16 million tonnes in 1995 compared to 9-56 million tonnes in 1994.
THE CONSORTIUM: members of the Azerbaijan lntemadonal Operadng Company consortium to exploit the deepwater Caspian fields include: Biffish Petroleum (BP), Den Norkse Stats Oqeselskap (Statod), Amoco Corp., Pennzod Co., Unocal Cofp., McDermott Intemadonal Inc., Exxon Corp., Ramco Energy, Lukoff (Russia), Delta NinVr (Saud Arabia), Turksh Petroleum Corp. and the Azeri state oil company, SOCAR.
There is also an extensive petrochemical industry located to the north of Baku. This comes under the control of the state group, Azerichimia. There are five major complexes with a total of about 27 production plants. Activity is significantly reduced due to a shortage of investment, the use of old and environmentally-damaging technology and lack of maintenance. The Wanic Republic of Iran and Azerbaijan are thm4ng a joint company to cany out drilafng operations in the Caspian Sea. The now company wi# be formed between the State 00 Company of Azerba#an (SOCAR) and the Nadonal Iranian Drifing Company. Acfivffies will take place in the Southem Caspian and in Iranian territorial waters.
In manufacturing there has also been a partial shift in emphasis to finished metal goods, machine tools and computers. The republic once was the principal manufacturer of all air conditioning units for the Soviet market. Other productive sectors include textiles, food processing and beverages. Azerbaijan also has an integrated aluminium industry with an alumina refinery at Gence and a 50,000 tpa smelter at Sumgait which is need of rehabilitation and modemisation.
Several bridges which link the country to the outside world were damaged during conflict and are being rebuilt with financing help from the EU and neighbouring countries. About half of the 24,000 kilometres of roads are paved. As the economy progresses there is likely to be a greater demand for road transportation to potential export markets in Russia, Iran and Georgia. The rail network consists of 2,125 kilometres of track, of which 1,280 kilometres are electrified and 806 kilometres are double track. The most important routes are to Russia, Iran, Georgia, and to Nakhichevan, though that route is presently closed. One of the current difficulties is the lack of maintenance for locomotives and rolling stock which used to be carried out either in Russia or Ukraine. Baku also has a metro which suffered extensive fire damage early in 1995 and needs modemisation and expansion. The principal port and airport are at Baku. The capital is also the operating base for the Caspian Sea Shipping Company which used to dominate maritime transportation in the Caspian. The rapidly rising level of the Caspian is creating new problems of access at all existing ferry terminals in the Caspian. Baku has four oil-berthing quays which can accommodate two tankers each. The port authority operates 24 gantry cranes with a maximum capacity of 16 tons. The airport is going through a modemisation programme which will eventually bring it up to full international operating standards. Already there have been improvements to the passenger departure and arrival areas and ground handling services. There are also some international flights from Genja airport. Although taxis have been pn'vatised they are few and far between, but almost any private car is likely to offer lifts. However, a growing number of Turkish-built vehicles operating as taxis or "yellow cabs" can be seen on Baku's streets.
It is estimated that up to 120,000 tonnes of fuel saved when the new Yenikend hydropower station is completed. It will have a generating capacity of 1 12.5 MW(check).
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