Doing business in Azerbaijan

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Doing business in Azerbaijan view of oil fields outside Baku

Oil-rich Azerbaijan is a young entrepreneurial nation with strong prospects. Despite conflict with neighbouring Armenia, tourism is rising, farmers are eyeing EU markets and there’s a warm welcome for British businesses

It’s a Wednesday night and a glamorous crowd has gathered for the opening of Chinar, a restaurant and nightclub. Expensive Mercedes cars disgorge men in well-tailored suits and women in not very much. The paparazzi huddle for protection against a biting wind and snap anyone who passes. But despite the glitz, this isn’t London or Paris. It’s Baku, capital of Azerbaijan.

Inside, chest-achingly loud music is played by European DJs, and London mixologists dispense fancy cocktails while Gordon Ramsay’s ex-sidekick, Jean-Baptiste Requien, floats around overseeing chefs serving an Asian-inspired menu. There’s even an appearance by the Sugababes. It’s the latest example of Azerbaijan’s transition from dilapidated former Soviet republic to modern, European-style democracy.

Tom Ford and Stella McCartney have shops in Baku while hotel groups Four Seasons, Hilton and Marriott will open developments next year. The skyline is awash with cranes, the government is investing in infrastructure and the local construction market is booming, up 30 per cent last year.

The past few years have been exceptionally good for the country, explains Dr Carolyn Brown, UK ambassador to Azerbaijan. “According to the World Bank, it had the fastest-growing economy in the world in 2005, 2006 and 2008,” she says, before rattling off more impressive statistics about the size of the economy (it’s bigger than Serbia, South Africa and two European Union states). As an emerging nation with low national debt and an underdeveloped financial services sector, Azerbaijan has been sheltered from the global downturn.

There is also a warm welcome for British businesses. Businessman Javad Marandi typifies the energetic young entrepreneurs shaping the nation. Marandi—a UK citizen who came to Azerbaijan in the mid-1990s with Coca-Cola—owns the country’s largest distribution business (1,000 vans serving 11,000 retailers nationwide) and is advisor to a construction firm. “Azerbaijan is an easy market for British businesses,” he says. “The biggest expat community is British and there are more UK companies here than other foreign companies.”

This enthusiasm towards the UK is also down to two letters less popular on the other side of the world: BP. The oil major invested heavily early on and is now sitting on developments worth an estimated $25bn (£16.6bn).

Brown warns that firms must be careful when investing here. “It is easy to do business, but it is a frontier market, which means you need to explore opportunities with your eyes open. There are big opportunities, but there are big risks as well,” she says.

Despite improvements in regulations and a series of legislative reforms, corruption remains an issue. Transparency International’s 2009 Corruption Perceptions Index ranked the country at 143. To put that in perspective, Sierra Leone and Zimbabwe are placed 146th. But the picture is improving. As Marandi says: “This is a small and new nation, and it is improving. But there is still the perception of corruption. While it would be wrong to say it has been eliminated, things are better.”

This is mirrored in the approach to corporate governance. Caroline Bright is project manager for IFC’s Azerbaijan corporate governance project, part of a World Bank initiative. Bright says the situation has progressed dramatically. She highlights new laws on related party transactions and the fiduciary duties of directors, as well as a planned voluntary corporate governance code due to come into force later this year.

“We have spent a lot of time explaining what corporate governance is and why it matters,” explains Bright. “A lot has happened and Azerbaijan has done well in the World Bank’s Doing Business ratings. The legal framework to support good governance is beginning to be put in place, and now it is a matter of educating and informing people to make sure it is enforced. Azerbaijan has no separate company law, so changes have to be incorporated into the civil code.”

Brown is also optimistic: “Two years ago the World Bank named Azerbaijan the fastest-reforming economy in the world. It’s now settled into a creditable 38th in the best place to do business report.”

There is an understanding that the economy needs to be less dependent on oil. The word on everyone’s lips is diversification. Bright thinks that fluctuations in the oil price have fuelled a drive for variety. “There is a recognition they can’t depend on high oil prices. They’ve seen what happens when the price drops,” she says.

“Diversification is a buzzword in Azerbaijan,” agrees Marandi. “The question on everyone’s minds is what are we going to do after the oil runs out. There is a huge focus on the green agenda and alternative, renewable sources of energy. After all, Baku means ‘the windy city’ and so we should be able to generate wind power here.”

A more immediate oil alternative looks set to boost the country—gas. Azerbaijan and Turkey have agreed terms for a gas pipeline to western Europe. A gas supply that bypasses Russia has obvious energy security appeal for Europe and explains why the two nations are confident that EU investors will help to turn on the taps in 2016.

Agriculture is another area of government focus. With nine of the world’s 11 climatic zones found in Azerbaijan, almost anything can, and does, grow here. It used to be the fruit-and-bread basket of the Soviet Union, but now most farmers are subsistence producers. One ambition is to help more farmers win EU approval for their foods.

UK Trade & Investment reports a large rise in the number of delegations coming from Britain to focus on sectors such as IT, construction project management, retail, financial services, design and education. And as the hotel construction boom suggests, there is a big push for increased tourism.

As an advisor to Pasha Construction, Marandi has championed complex projects in the country. Pasha teamed up with British project management company Mace and with UK architectural practices to improve the quality of building. “We have used techniques that others in Azerbaijan aren’t using in terms of cost control, architects and project management. This is a huge boost to skills transfer and to building local expertise.”

This will help to develop a middle class. “When we see shops like Mango and Debenhams open, that’s a huge boost,” says Brown. “After the five-star major hotel chains have opened, the next step will be good three-star hotels for businessmen who don’t have limitless expenses.”

War with the neighbours

Azerbaijan lies in the South Caucasus, an unstable region west of the Caspian Sea with Iran, Turkey and Russia as giant neighbours. It is hardly surprising that EU countries are keen to invest in Azerbaijan, but the country is at war with immediate neighbour Armenia, which has occupied a swathe of its western half called Nagorno-Karabakh.

“Currently there is a ceasefire in place,” explains UK ambassador Dr Carolyn Brown. “Both sides are well entrenched and an end to hostilities isn’t likely. Even if the ceasefire were to end, the fighting would be far enough away from Baku for it to not have a major impact on companies based there. If there was any reason for caution, the Foreign Office would change its travel advice.”

There are large ethnic Azeri populations in Russia and Iran, while Turkey is the closest country culturally. Azerbaijan therefore trades extensively with all these nations.

Doing business in Azerbaijan

  • Do your homework. Get to know the country and think carefully about the risks as well as the opportunities.
  • Know who you are going to do business with and give them a chance to get to know you and your business.
    The business culture is built on face-to-face relationships. To succeed here, email won’t cut it.
  • Speak to as many expats as possible—both UK and other foreign nationals—to learn more about the market and how to do business.
  • Try to bring something fresh to the market. Locals are always keen to have a go at something new.
  • Be patient and persistent. If something is worth doing it will take time and effort, but you will reap rewards in the end.

by Richard Cree

azerbaijan.com

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Director is the magazine for business leaders. Free to IoD members and available to purchase through subscription, each edition is full of insightful interviews with entrepreneurs and company directors.

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