Former Ambassador Speeches

"Improving the Business Climate in Azerbaijan"

Speech by Ambassador Reno Harnish at conference
"Business climate of Azerbaijan: achievements and problems"
organized by the Ministry of Economic Development of Azerbaijan

November 16, 2004
Baku, Azerbaijan

Introduction - Moving Beyond Energy

• In the thirteen years since Azerbaijan regained its independence, great strides have been made in the energy sector, securing a promising future for Azerbaijan. A farsighted government created a welcoming environment for international investors. Individual Azeris stepped forward and learned new skills.

• Just as a man can't survive on a single lung, Azerbaijan cannot depend solely on its energy sector - which in any event is based on nonrenewable resources. Azerbaijan must do in other sectors what it has done in the energy sector. This will increase Azerbaijan's wealth and put it on a solid footing, building a robust economy for the future.

• Overall, any investor, domestic or foreign, needs to know that when he or she signs an agreement to do business in Azerbaijan that that agreement will be honored and followed-through. In addition, investors need a clear and specific mechanism for the resolution of disputes - one that functions at the working-level, not requiring intervention by ministers or elected officials.

• Specifically, Azerbaijan needs to build a good reputation with international financing bodies and international investors. It needs to reform the operation of joint ventures. And it needs to remove obstacles to the building of new industries to absorb both skilled and entry-level laborers.

• Relations with Foreign Financing - the case of Caucasus Air

• In the non-energy sector, Azerbaijan needs start-up capital from international investors. At this stage, relations with institutions like the U.S. Overseas Private Investment Corporation (OPIC) are vital. Because Azerbaijan is a relatively new presence in international investment markets, its reputation is still being established.

• Recently, OPIC provided a loan to Caucasus Airlines, which also had substantial U.S. private investment. This company was working to provide air service between Azerbaijan and Georgia. Unfortunately, it was forced to close its operations on October 18 after failing to resolve an ongoing commercial dispute with AZAL Airlines.

• It appears likely that AZAL violated its commercial agreement with Caucasus Airlines, as well as the Azerbaijan-Georgia bilateral aviation agreement, and wasn't interested in finding a mutually beneficial solution to the dispute.

• This is more than a story about civil aviation - it is a case where negative perceptions of Azerbaijan's business climate have been reinforced in the minds of OPIC and of many foreign investors, the very parties that Azerbaijan needs to get on its side. It could also make it more difficult for OPIC to continue to support needed projects in Azerbaijan.

• Azerbaijan must be as welcoming to foreign investment in the non-energy sector as it is to such investment in the energy sector. Each interaction with a foreign investor is a brick that can build Azerbaijan's reputation, and either attract or frighten away future investors.

• The Structure of Joint Ventures - the case of CATEL

• Currently, all new foreign investment must enter into a 51/49 percent joint venture with the GOAJ. This is what cell phone service provider CATEL has had to do. The GOAJ also has a stake in the more lucrative cell phone provider Azercell.

• CATEL has experienced problems with the GOAJ, which has not renewed CATEL's license to operate. Under the law the GOAJ must either renew the license or explain why they haven't renewed it.

• The GOAJ is functioning both as an investor and as a regulator. Probably the JV structure needs to be changed. Until then, GOAJ policy should not favor one JV over another - contracts and licenses given to one JV should be given to all, equally and fairly.

• Again, a transparent and smoothly functioning JV structure is a necessity if Azerbaijan is going to attract the investment capital it needs.

• Entry-Level Employment - the case of McDonald's

• Youth unemployment is a problem in Azerbaijan, especially in the regions. Azerbaijan needs entry-level jobs for them -not career-track jobs but starter jobs that teach necessary workplace skill for young people to move on to better jobs as their education increases.

• McDonald's has two restaurants in Baku, each employing over 100 young Azerbaijanis. McDonald's has plans to expand, to open two new restaurants and a business center. This will create over 400 new jobs, some of them career-track business jobs. McDonald's also plans to make Azerbaijan the support hub for its expansion into Central Asia.

• Unfortunately, despite what this project can do for Azerbaijan's labor market, McDonald's continues to experience difficulty with the Baku city government over its expansion plans.

• Skilled Labor and Maritime Infrastructure - the case of ABS

• With the pipeline projects drawing to a close, a huge cadre of highly skilled workers will be entering Azerbaijan's workforce. At the same time, there is a huge demand for ship servicing and repair in the Caspian, as well as a need for new and larger ships to transport Kazakh oil to Baku for export to world markets.

• Azerbaijan should seize this opportunity to revive its dormant shipbuilding industry, to absorb these workers in continuing high-skilled employment and to advance its interests in the Caspian generally.

• Unfortunately, ship classification, a key function, remains under the control of a Russian monopoly. Shipping itself remains under the control of a local monopoly, the Caspian Shipping Company (CASPAR).

• The American Bureau of Shipping (ABS), a world leader in ship classification, has a draft agreement to operate in Azerbaijan but the implementation of this agreement has been blocked by CASPAR and by the Azerbaijan Maritime Administration.

• Again, this is not a question of a single American company having difficulties, but of a whole sector of great importance to Azerbaijan's development being held back,

• Conclusion - the common thread

• It is in the interest of Azerbaijan to develop its non-energy economy as a way of creating a more robust prosperity for the country. It is also in the interests of the United States, which wants to see a strong and prosperous Azerbaijan.

• Azerbaijan needs to create a climate where even the smallest investor knows that when an agreement to do business in Azerbaijan is signed, that agreement will be honored and enforced. Additionally, there must be a clear method for the resolution of disputes that functions at the working-level not requiring intervention by ministers or elected officials.