A Word from the Executive Director of AmCham Dear Readers,

Spring / Issue 5 The global economic downturn is gathering speed in Europe, Asia and the United States and while there is talk of a recovery in the second half of the year, it is far from a certainty, economists say. Being part of the world economy Azerbaijan Credits is not immune from the effects of the financial crisis and general economic slowdown. While AmCham congratulates Editor: the Government of Azerbaijan on the steps taken to date to Emma Triller minimise the impact on the country's economy we believe that far more needs to be done. We believe it is important Design & layout: that strategic measures be taken now to limit the damage to QuadroM Publishing House be suffered. In particular, AmCham believes that the problem requires a broad range of policy adjustments which go beyond Photographers: tinkering with fiscal and financial legislation. Dena Barmas In our recent ‘White Paper’ entitled ‘Observations and Huseyn Asim-zadeh Recommendations for Improving Azerbaijan’s Business Climate’, we pointed to a number of critical economic policy Journalist: reforms that the business community considers essential for Olga Pukhayeva the healthy development of the economy. The White Paper was drafted before the enormity of the financial crisis was clear but our observations remain true and it is even more Contributors: vital that they be implemented at the earliest opportunity. Natalia Corobco Jim Dillahunty This latest edition of the White Paper was prepared as a part Stanley Escudero of our constant dialogue with the Government of Azerbaijan. F.Youakim Farhat The first edition of the document was presented to the late President Heydar Aliyev in 2001. The second edition was Advertisers: presented to President Ilham Aliyev during the audience Austrian Air granted to AmCham in November 2005. This third edition Bakcell was presented to President Aliyev by Deputy Secretary of Excelsior Hotel Baku Commerce John Sullivan in October last year and submitted Holiday Inn Baku Airport to the country's key ministers. Notwithstanding the somewhat McDermott meagre response to this well crafted document, we continue McDonald’s our efforts to establish effective cooperation with government Mozaik agencies in the face of this economic crisis. PricewaterhouseCoopers R.I.S.K. Wishing you success and prosperity, Royal Bank Nargiz Nasrullayeva-Muduroglu Saipem Salans Shieldbearer Editor’s Comment Cover artwork: Dear Readers, © McCann Erickson Azerbaijan Having shelved the projected work permits and visas Printing: theme for lack of adequate and reliable information, we Nurlar decided to take a look at the state of Azerbaijan’s economy in the backlash of the global economic crisis. Various Publisher: perspectives have been presented for your consideration. American Chamber of Commerce The emerging picture seems to be that although in the short in Azerbaijan term, the economy has not been directly affected, the long Tel: (+994 12) 497 13 33 term prospect is attended by a measure of uncertainty. On Fax: (+994 12) 497 10 91 a brighter note, our interview with the Executive Director of www.amchamaz.org the State Oil Fund provides an insight into the canny and careful investment policies of this institution, and shows Advertising opportunities: clearly that Azerbaijan’s oil revenues are in good hands. Please contact the Editor As always, sincere thanks are extended to all contributing Emma Triller editors for their articles, and to all advertisers for their support. [email protected] We value our members’ input and feedback. Let us hear from Tel: (+994 12) 497 13 33 you. Please write in with your comments and suggestions to [email protected]. The articles in IMPACT AZERBAIJAN express the opinions of the authors and Happy reading! do not necessarily reflect the position of Emma Triller the American Chamber of Commerce in Azerbaijan. 1 contents

IN FOCUS 4 Interview: 16 Customer Service: Shahmar Movsumov, Executive Director, Identifying and Valuing Customers. Part II SOFAZ

The second in a series of three articles that discusses the topic of customer service from the viewpoint of a CEO, author, and researcher with 30 years of experience in Transforming the oil windfall into a permanent designing, implementing and monitoring endowment. programs of customer service.

8 Azerbaijan: A strong fiscal policy By Stanley T.Escudero MEMBERS 18 Member contribution: Azerbaijan: One Year Away from WTO Membership?

As a player of growing significance in the international system, Azerbaijan cannot escape some impact from the collapse of the globally Azerbaijan’s ambition to conclude most of its leveraged credit and credit-derivative system WTO accession negotiations by the end of but how serious will that impact be? 2009 is very likely to be realized provided the current momentum is sustained. 12 Azerbaijan: Economic Outlook: By Natalia Corobco 22 Proposals for Creating Jobs in Azerbaijan The global crisis lays bare the fundamental in the Global Economic Crisis vulnerabilities that exist in the economy Azerbaijan should take even more aggressive of Azerbaijan. Key measures can help action than we have previously proposed to mitigate the negative impact of a global protect its economy, encourage business recession. growth and create new jobs.

2 Spring / Issue 5 contents

AMCHAM AZERBAIJAN New Members 28 About us

As a member of AmCham, your company has access to a vast network of business information and contacts. 29 AmCham structure 30 Members’ News and Events 32 Business Events

SEACOR Environmental Services International Ltd. 34 Committee Highlights

38 Supported Events

39 AmCham Projects: Consumer Price Index Report for 2008 Legislative Update Meeting AmCham Membership Survey 43 M2M Discount Program

3 in focus

Interview: Shahmar Movsumov, Executive Director, SOFAZ

Please give us an overview of the current The State Oil Fund of Azerbaijan structure and status of the State Oil fund. The oil fund is a special government institute (SOFAZ) is a financial institution or entity, which was established in 1999 by Presidential Decree of the late President which accumulates and manages Heydar Aliyev with the purpose of accumulating and managing oil revenues. When it was oil revenues. Azerbaijan became established we were managing 270 million US dollars; currently we stand at around 10 billion. the first EITI Compliant country Two major objectives of the State Oil Fund are to accumulate and manage revenues at the 4th EITI International from the extracting industries with the purpose of providing intergenerational equality. We Conference in Doha, Qatar. strongly believe that wealth, that is, the oil in the ground, is not only for the current generation but for all generations living in this land. For that

4 Spring / Issue 5 in focus

purpose, the objective of the Fund is to form the oil windfall into a permanent endowment. Our second objective is to spend some of the money for the needs of the current generation. The money from the oil fund is used for the creation of a modern infrastructure of economy, as well as for addressing social problems. For instance, we are financing the construction of the settlement for refugees and internally displaced people because of the conflict with Armenia. The Oil Fund is a financial institution. We are formed as an investment house. We have a front office, trading floor, middle office, risk management and back office operations. We are in a way not very much different from any other investment bank on Wall Street, although Wall Street is a bad name now.

What is your contribution to the budget? What is the trend? We are contributing to the state budget by annual transfers. These annual transfers are approved in the budget of the State Oil Fund which is part of the consolidated budget of the whole government and is approved by the government. We started transfers in 2003 and last year the transfer to the budget was 3.8 billion manat, which is about 4.5 billion dollars. For this year the transfer to the budget is 4.9 billion manat, which is roughly about 6 billion dollars. So the contribution to the budget and the transfer to the budget are increasing, but in the meantime we are still saving about 60 percent of the revenues.

If oil prices stay down, will the Government of Azerbaijan use the Oil Fund to cover any occurring budgetary shortfall? And if prices stay below $50, for how long can the Government continue to use the Fund, and for what purposes besides the budget? One of the functions of the Oil Fund is to protect the budget from the volatility of the oil prices. In good years, when the price of oil is high, the surplus of the budget is actually accumulated in the Oil Fund. In bad years, when the price of oil is down, then some of the fund is transferred to the budget. We are the natural stabilizer of the budget. As I have mentioned, we will asset classes which were not hit by the crisis, which allowed transfer to the budget 4 .9 billion manat. And as you can see, the State Oil Fund to finish 2008 with profit. We have had a rate it is an amount fixed in manats that does not account for any of return of around 4 percent, whereas many investment funds price of oil or foreign exchange rate, which means that in fact, and central banks were recording significant losses. The year whatever the price of oil is, they will get 4.9 billion manat from 2008 was an historically painful year. I believe that it will be in the the Oil Fund. In this way we protect the budget from volatility. text books in the future. We managed to go through that storm in quite good shape. But definitely we were very cautious, very What is your forecast for the oil prices? conservative. We believe that in the future, the crisis will create This is a very difficult question and I do not believe anyone opportunities. We are now looking into different opportunities can answer it with any level of certainty. But in general, the and different asset classes. We believe that probably next year consensus in the industry is that the era of cheap oil is over. things will stabilize and we will be able to diversify into more There is no cheap oil in the world and the prices of oil will recover risky and more profitable assets. What we are talking about and rise as soon as there is recovery in the global economy. is probably diversifying into equity as we are mostly in fixed income, which allowed us to be protected from the crisis. But of In this difficult time, will you continue to invest in assets course the long term nature of the fund provides and demands abroad? for more risky, long -term assets, such as equity, and further What assets have already been bought and what kinds of on, maybe in the future, real estate and private equity. additional purchases would be made? The State Oil Fund has been pursuing quite a conservative Your achievement in gathering substantial reserves policy in terms of our external investments and we were in within a relatively short time is phenomenal. Are you

5 in focus

on that endowment. This will allow us to have a permanent stream of income.

Since the State Oil Fund is the country’s lifeline, please explain how the money in the Fund is invested. How is the decision making done? I would disagree that we are a lifeline. I do not think that we can preserve the whole country by depending on the Oil Fund. Azerbaijan has got an economy. We try to diversify that. Mr. President Ilham Aliyev’s major economic program is to diversify the non-oil sector and create jobs in the non-oil sector in order to be more sustainable long term. The Oil Fund currently plays quite a significant role in terms of filling the budget. Most of the money that the Oil Fund is providing to the budget is used for creating infrastructure. We do not want to repeat the mistakes of the Soviet Union, when the government was doing business and building factories and plants. We believe that the government should not do that. The government should create conditions for the private sector to create jobs. That is why the money from the Fund is used for the establishment and construction of necessary infrastructure. In general, as I mentioned, the Oil Fund is very conservative in terms of managing money. We do not take unnecessary risks, we are very careful and we are looking into more or less stable asset classes. In terms of the management structure, the Fund is managed by the Chief Executive Director, myself, and I report directly to the President. At the same time there is an Advisory Board of the Oil Fund, which is headed by the Prime Minster and includes the Minister for Economic Development, Minister of Finance, Governor of Central Bank, Vice- Speaker of the parliament, Economic Advisor to the President as well as President of the National Academy of Sciences. So a diverse body supervises the operations of the Fund.

Could you please specifically name the assets you going to be able to continue building up the Oil Fund? currently invest in. At what cutoff point (low oil price) would you decide that We are investing in sovereign bonds, supranationals like you cannot keep putting money into the oil fund? World Bank, Asian Development Bank, agencies like Fannie In general oil was the driving force behind the growth of the Mae, Freddie Mac in US, KfW in Germany. Oil Fund. There are two major factors that affected it. First We are investing in high credit quality corporate securities. it was the increasing production of oil. The production of oil These are the type of assets that we are currently investing in. in Azerbaijan has grown exponentially during the last few years. At the same time, there was a significant increase How has the global financial crisis affected the SOFAZ in the price, which was the second factor. Currently we are assets, especially in foreign banks? Will you withdraw seeing the production leveling out as well as prices going the money as has been suggested, or change your down, which means that the pace of the previous years will strategy to minimize losses- How do you plan to cover not be matched this year. But in the future, we think that the any losses? production will increase and the prices will go up as well. So When we are saying investing, this means buying securities, we are looking forward to accumulating a significant amount withdrawing means selling the securities. Currently there is no in the Oil Fund. At the same time there is another factor, need to do that. We believe that we are quite well diversified which is expenditures of the government. In general, if we and we will be on the safe side in 2009. Yes the year 2008 was look at the framework of the fund, its major idea which is a very hard year for us, but because of the diversification the transforming the oil windfall into a permanent endowment hit that we received was covered and in addition we had excess dominates, which means that we are looking forward to income that we have received from high quality investments. accumulating a substantial amount to be able to use income That is why I said that we finished the year with profit.

6 Spring / Issue 5 Currently, the State Oil fund is the ultimate example of transparency and good management in Azerbaijan. Please describe some mechanisms in place for ensuring this. I do not want to be seen as very modest but this is a very strong statement. We try to incorporate all the principles of good governance in the oil fund. We are structured like any investment house in the world. We are taking on board the best and brightest in this field. We are investing heavily into our infrastructure internally. We are buying the best portfolio management systems and telecommunications and everything in the house is automated. The Oil Fund has been awarded the United Nations Public Services Award for improving transparency and accountability and that is the recognition of the State Oil Fund in the EITI process (EITI: Extractive Industries Transparency Initiative), through which Azerbaijan has gained full transparency and accountability in Azerbaijan, the first EITI Compliant country among 26 can- the revenues of the government from extractive industry. So didate countries at The 4th EITI International Conference in today, every citizen of Azerbaijan has access to full information Doha, Qatar, won the EITI 2009 award. about what kind of revenues the government received from the crisis in the emerging markets. After the Second World oil, gas, mining. Transparency has already become a routine. War this is the first global crisis. In Azerbaijan, we still have We have already published nine reports and are currently in jobs, we still have transfers, remittances coming in. But they the tenth cycle of reporting. are going down. The construction sector is also going to be In fact EITI has been our strong area and because of our affected because of the oil prices. We will feel it, but what national success, we have been given the privilege of being the major message would be is that economic development one of 5 countries on the International Board of EITI, chosen is cyclical, so whatever goes down has to come up. Usually out of 23 implementing countries. Next week in Doha, Qatar, the phrase is used oppositely- whatever goes up has to come we are going to attend the next EITI International Conference down! In our case, whatever goes down will come up at the and we are looking forward to hearing that Azerbaijan will end of the day. So do not lose hope! become the first fully compliant EITI country in the world. Shahmar Arif oglu Movsumov Your goals and objectives include decreasing dependence Executive Director of the State Oil Fund of the Republic on oil revenues and stimulating the development of the of Azerbaijan non-oil sector. Please elaborate on your efforts in this direction. On May 15, 2006 Shahmar Movsumov was appointed The major goal of President Aliyev’s economic program is to Executive Director of the State Oil Fund of the Republic decrease dependency and increase the growth and role of the Azerbaijan by the decision of the President of Azerbaijan non-oil sector. For that purpose, the right way is to establish best Ilham Aliyev. conditions for the private sector to flourish and to create jobs in the Shahmar Movsumov is 37 years old. He graduated from the economy. This is assisted by better infrastructure as no business Faculty of International Economic Relations of Moscow State will go to a place where there is no water, no infrastructure, no University of International Relations. He received his Master's electricity, nothing. So building infrastructure is of the utmost degree in Public Administration from the Harvard University importance, and we are investing in these projects. John Kennedy School of Government. Dissertator of the faculty of International Relations of What is your message to the private sector in Azerbaijan? Azerbaijan State Economic University. Passed traineeship in The depth of the crisis is enormous and definitely it will affect the USA and Europe. From 1995 worked in the National Bank Azerbaijan as well. There is no way we can avoid substantial of Azerbaijan, coordinating international cooperation affairs, downward pressures on Azerbaijan. So the year 2009 is going monetary management and financial markets development. to be a very difficult year. The year 2008 was mostly difficult Untill his appointment as Executive Director of the State Oil for the financial sector, though most of the economies were Fund Mr. Movsumov held the post of the General Director still on the safe side. The impulses were there, the economies of the National Bank. He is the originator of the Azerbaijani were thriving and looking at what was happening in finance. models of mortgage crediting on the base of which in 2005 Now the economy as a whole has started suffering. In the last the Concept of mortgage crediting and package of relevant quarter of the last year and starting from the first quarter of this legislation has been prepared. year we see the significant downfall in all economies globally. He chairs the National Committee on EITI. The idea of decoupling is not there any more. We can see He speaks English, French, Russian and Turkish languages. that the crisis in the developed world is being continued with He is married with three children.

7 in focus Azerbaijan: A strong fiscal policy

economic situation would be far worse. More important, by Stanley T. Escudero Azerbaijan has set aside ample reserves to enable it to weather United States Ambassador (Ret.) even a lengthy planetary economic storm. President of Shield Bearer L.L.C. Vice-President, AmCham Azerbaijan’s economic performance in 2008 was very good even in face of the collapse of the massively inflated oil prices and the production problems associated with the Azeri-Chirag- Guneshli platform which produced a downturn in the last five months of the year. For the year the oil sector grew 10% and As businessmen and women living and working in Azerbaijan, the non-energy sector, despite lagging in absolute terms, we have to be concerned about the impact on Azeri economic grew by 15% led by construction, services and agriculture. and political stability of the recessionary conditions which A combination of these factors plus rising domestic demand, are depressing much of the rest of the planet. In the past in expansionary monetary policies and rising international prices other places conditions no worse than these have doomed for food and (for much of the year) commodities pushed inflation respected businesses, severely damaged national economies to 17 – 20% depending whose figures you accept. That may and shaken governments. As a player of growing significance seem like a lot of inflation but it is well below the figure for 2007 in the international system, Azerbaijan cannot escape some and the inflation rate is projected by IMF to drop significantly in impact from the collapse of the globally leveraged credit and 2009. I have seen figures as low as 9% for 2009 and, if even that credit-derivative system but how serious will that impact be? seems like a lot, consider that the fiscal and spending policies of the Government of the United States since November of last My researches have led me to interview government officials year are wildly inflationary once the inevitable bill for “stimulus” and bankers and to review the comments of financial intervention comes due. Inflation will be an unavoidable aspect of institutions involved in Azerbaijan. Based on these and on my the response of most governments to the downward pressures own experiences here and elsewhere as a businessman and of the global recession but Azerbaijan’s inflation is not entirely of one-time diplomat, it is my opinion that Azerbaijan’s economy its own making and it is trending downward, not up. and political system are well-managed, that this country is better-positioned than most to withstand the pressures of all Additionally in 2008 Azerbaijan made a great deal more per but the deepest international depression (which would have to barrel from the sale of its oil as the spike in oil prices enabled include a long-term collapse of oil prices) and that the stability early reimbursement of company project investment costs of the nation is in good hands. and this triggered the price ratio shift of 80%-20% in favor of Azerbaijan and away from the oil companies. Let me explain why I think so. This and past excellent performance have enabled the Government of Azerbaijan and the State Oil Fund to accumulate A strong economic position reserves of $16 billion – six times greater than the size of all of Azerbaijan’s public external debt. The fact is that, in spite of equals a good defense everything it had to contend with in the second half of 2008, Azerbaijan’s external position was stronger at the end of the Despite its overdependence on oil and its still underdeveloped year than it was estimated to be at the time of passage of the non-energy sector Azerbaijan’s economy has proven to be mid-year budgetary reassessment and supplemental. As a exceptionally resistant to the stresses which afflict much of the result, Azerbaijan is well positioned to provide budgetary and rest of the world’s economies in part because it is not yet fully other support to ride out the effects of the global crisis. Some integrated into the global economic system. Ironically most foreign budgetary support may well be needed as, based on 2008’s observers, embassies and advisors, including AMCHAM and me oil prices which peaked in July at $147 per barrel, Azerbaijan personally, have for years urged the Azerbaijan Government to conservatively estimated the per barrel price for 2009 at $70 accelerate the integration of its economy, especially its banking per barrel. As this is written oil is selling for about $41 per barrel and credit system, into that prevailing in most of the world. Had and the future of oil prices is uncertain – over the year it could go it done so as thoroughly as we all wished, the current Azerbaijani either way. Yet Azerbaijan’s currency reserves are more than

8 Spring / Issue 5 in focus

adequate to enable coverage of any budgetary shortfall. The the inflow of foreign capital froze as well. The banks found budget will be reassessed as usual at mid-year and, depending themselves unable to refinance loans they had already made on best future projections, the government will have the luxury with their own or borrowed capital, thus reducing their liquidity of choosing whether to cut back on expenditures such as large and the amount of subsequent domestic loans they could make. ongoing infrastructure projects (at the cost of some increase in Obviously the consequent severe reduction in the availability of unemployment) or to draw on reserves to continue them. A less available commercial credit has had a depressive impact on well-managed economy would not have this choice. business activity.

During the period of easy money which preceded the current Strengthening and protecting credit crunch and despite the high rates of interest charged by Azeri banks for short-term credit (long term credit being generally the Banking Sector unavailable) many firms found it possible to refinance existing short-term loans for their projects – mostly in construction – by While the origin of the present crisis could be traced all the simply rolling them over into another short-term loan. Assuming way back to the Bretton Woods Conference of 1944 and the this arrangement would continue, many firms in effect borrowed irresponsible actions of successive US administrations and short-term to finance medium to long-term projects. When the congresses prominently including the so-called “affordable global credit crunch all but eliminated the capacity of the banks housing” program, the proximate cause of the global downturn to refinance their loans the refinancing pipeline dried up for lies with the unregulated avarice of American and international local firms and the era of easy money came to a screeching financial institutions. Unbeknownst to all but the very few who halt. Unable to find additional capital companies began to understood how it worked, the international financial system had default on their loans and banks found themselves taking over become a vast pyramid scheme and, like all successful pyramid assets, usually unfinished construction projects, which had schemes, it seemed to work beautifully until it collapsed. been accepted as collateral for the loans.

Azerbaijan’s banks were never integrated into this system and, What seemed to be unending easy money and the absence while this made them much less efficient as credit facilitators of a liquidity sink such as a stocks/bonds securities market of the entrepreneurial risk-taking which is the fundament of naturally encouraged creation of a speculative bubble in the capitalist system, it also protected them from most of the real estate, made easier by an underdeveloped non-energy consequences of the fall of the pyramid. But still, Azerbaijani sector over-focused on construction. But overbuilding, an banks had begun to acquire capital through foreign banking embryonic mortgage program which has yet to create a basis loans and, when the international credit system froze up, for widespread home purchases, and the impact of the end of in focus

Currency rates and unemployment

One would expect that reduced inflows of foreign currency, which translates into reduced demand for the manat, would affect negatively the value of the manat against the dollar. As of this writing this has not yet happened to any appreciable degree. In part this underlines the wisdom of the recent NBA decision to de-link the manat from the euro and stick solely with the dollar, thus avoiding the impact of the substantial fluctuations in value between the two Western currencies. It may also speak to general confidence in the management the Azerbaijani economy and the size and wise use of its reserves.

From the beginning of his first term in office, President Ilham Aliyev has had as one of his primary domestic concerns the reduction of unemployment. He pledged to create 600,000 new jobs during his first term of office and markedly exceeded that goal. Recently it has even been necessary for some companies engaged in large construction projects to hire foreign labor to ensure timely completion. But especially in the construction industry as well as in the steel and aluminum industries and the oil sector higher prices, reduced demand local banks’ ability to refinance short-term construction loans and the near absence of credit have increased costs of have partially deflated the construction/speculation bubble. production and reduced sales and thus profits as well. A This raises questions about the current value of collateral number of employers in the hardest-hit industries have accepted to secure loans already made. begun to lay off workers to reduce fixed costs. A spike in the previously diminishing unemployment figure is expected A number of the under-funded construction companies will fail and the Government is considering steps to encourage re- – the traditional fate of overextended building contractors in employment wherever possible. For example, I understand hard times. Some banks may also suffer as the value of their that the Government is preparing a stimulus plan involving an domestic loan collateral has diminished and they may find it infusion of two billion manats well-targeted on the construction difficult to rollover their own foreign loans. But the best of the sector and on small to medium enterprises. banks and the banking system which were caught in the middle when the rules of the game changed will survive, thanks to the prudent management of the Government and the National Bank Conclusion of Azerbaijan. Azerbaijan has not escaped unscathed from the near-failure The National Bank of Azerbaijan (NBA) saw this coming of the international financial system and the fall in oil prices. It to some extent and, for quite some time has been imposing has been and will continue to be subject to varying economic tighter liquidity requirements and closer controls over what had pressures stemming from causes beyond its control. But, become increasingly risky credit loan practices by the banks. taking all of this into consideration, and assuming a solution Had they not done so, had the Government of Azerbaijan not to oil production problems by March and no major further drop made provision in the 2009 budget to increase the capital of in oil prices, the IMF anticipates that Azerbaijan will implement the dominant International Bank of Azerbaijan, had NBA not its oil and gas production plans producing 2009 growth in reduced the refinancing rates and monetary reserve levels for the oil and gas sector of some 18% with non-energy sector Azeri banks, had the President not recently issued a decree growth following behind at 6%. The World Bank projects a lowering the inter-bank rate to encourage renewed lending 10.4% rate of GDP growth for Azerbaijan in 2009 with a 30.7% at lower interest rates, the problems would have been much current account surplus. Comparing this to the performance worse. At this point I believe that the NBA and the Government of other nations during the current crisis (recall that US gross are prepared to see the least efficient banks and companies fail domestic product contracted by more than 3% during the last if that is the judgment of the market. But, like a good mentor and quarter of 2008 alone and the World Bank projects only .9% guide, the Government will step in to help the more efficient and world economic growth for 2009 with that figure set at 2.7% productive institutions so that the impact of the global recession for Europe and Central Asia) I conclude that the Azerbaijan is mitigated for the best performers. economy is stable, well-managed and in good shape.

10 Spring / Issue 5 Saipem, 43% owned by Eni, is organised in three Business Units: - Offshore, - Onshore, - Drilling, with a strong bias towards oil & gas related activities in remote areas and deepwater. Saipem is a leader in the provision of Engineering, Procurement, Project Management and Construction Services with distinctive capabilities in the design and the execution of large scale offshore and onshore projects and with technological competences such as gas monetisation and heavy oil exploitation.

Saipem has been in Azerbaijan since 1996 operating the SOCAR owned fleet through various arrangements over the years. In 2008 Saipem completed the ACG Project which consisted of the fabrication and installation of templates, jackets and topsides, weighing up to 15,000 t. Presently Saipem is the Operator of the SOCAR/SAIPEM Alliance established in 2007, operating the DSV “Tofiq Ismayilov” on BP Exploration (Caspian Sea) Limited “Underwater Operations” Project. Saipem intends to strengthen its position in Azerbaijan and the Caspian Sea Region through an increasing and successful cooperation with SOCAR. in focus Azerbaijan: Economic Outlook There were positive signs in the non-oil sector which grew by Natalia Corobco, MBA by 20% in response to a fiscal stimulus undertaken by the IMG strategy & communications government. The oil sector expanded by a more modest 10% albeit from a much higher base. Both oil and non-oil are expected to slow, with the latter falling to 6% over the year3. The construction sector appears to bear the brunt of the decline due to a slump in demand. Growth in the real sector will be negatively affected as banks face plunging levels of In a chilly office just off Fountain Square Mr Oktay Aslan external borrowing and businesses struggle to secure credit. conjures up various scenarios of the future. For the past Further market liberalization can help reverse the trend. six years together with his Turkish friend and partner he Among efforts to stimulate the non-oil sector last year were has been running a marketing agency in Baku. In times of changes in regulations reflected in the Doing Business economic uncertainty advertising budgets get slashed first Report released by the World Bank, which included start-up and Mr Aslan is under pressure. One of his biggest clients procedures, contract enforcement, and property registration. in the banking sector has already put things on hold. It is still unclear whether others will follow suit. But one thing is certain – businesses like these provide a kind of litmus test Historical GDP Growth for the degree of uneasiness prevalent in Azeri corporate 80% offices. 60% Cooling Growth 40% 20% In some emerging markets the turmoil has already been 0% felt to varying degrees. Azerbaijan’s policy-makers benefit 2005 2006 2007 2008E from a significant time lag in how the crisis unfolds. Yet expectations of a slowdown have already been incorporated into the economy resulting in declining consumer spending Nonoil GDP Oil GDP Totsl and private investment. In the short-term the country is shielded from the effects of the crisis thanks to its limited Sources: IMF integration in global financial markets. Over the long-term While agriculture contributes only 5.8% to the GDP it accounts however there are risks of exposure, such as the impact on for nearly 40% of total employment contributing to a chasm key trading partners and declining commodity prices. These in the distribution of wealth4. The introduction of simplified risks occur after several consecutive years of stellar growth. procedures may stimulate the delivery of private services to Surging oil and gas prices have pumped up Azerbaijan’s rural areas and help the reallocation of labor resources in the gross official reserves and state oil fund assets to $16 billion, economy. This process should be underpinned by government approximately six times the size of its external debt1. Most initiatives in the field of professional and business education. economists agree that this would be sufficient to weather Foreign direct investment (FDI) flows have temporarily declined even a severe recession. as major oil and gas exploration projects came to completion and amid waves of profit repatriation. The fate of the Nabucco Preliminary data show that real GDP growth reached a gas export pipeline designed to carry gas from Azerbaijan via healthy 10.8% in 2008 but is forecast to cool off to 8% over Turkey bypassing Russia remains unclear. The Shah Deniz the next two years largely as a result of declining oil prices2. phase two is projected to come on stream by 2013 but there are

1 International Monetary Fund, Aide Memoire for the 2008 IMF Staff Visit Discussions, Dec 10-17, 2008, Baku 2 European Bank for Reconstruction, Growth Forecast Press Release, Jan 27, 2009 3 International Monetary Fund, Aide Memoire for the 2008 IMF Staff Visit Discussions, Dec 10-17, 2008, Baku 4 Asian Development Bank, Asian Development Outlook 2008

12 Spring / Issue 5

in focus

still financing issues to be resolved. A reduction in FDI is planned Falling commodity prices should trigger disinflation in to be offset through public investment in socioeconomic and Azerbaijan but it will go largely unnoticed in a monopolistic employment programs. Private domestic investment is likely environment. A depreciation of the Manat is expected in the to remain modest as long as state-owned enterprises (SOEs) context of a stronger dollar. In response the NBA has changed continue to influence market regulation. the composition of the exchange rate basket, increasing the weight of the euro from 30% to 50%, to avoid hurting exporters Foreign Direct Investment, Net in the non-oil sector. Amid greater risk aversion towards emerging markets and low levels of external financing, the 1.0 NBA reduced the reserve requirements for commercial banks 0.0 from 12% to 9% to stimulate lending7. Fewer scruples in giving out loans may lead to the deterioration in the banks’ asset 1.0 2005 2006 2007 2008E 2009F 2010F portfolio as real estate prices deflate causing a decline in the 2.0 value of collateral. The government of Azerbaijan prepared an 3.0 emergency 400AZN million bank rescue package, of which US$ bil Twoyear moving average 50AZN million has already gone to UniBank to help it meet 4.0 debt service requirements8. Falling commodity prices will lead 5.0 to lower currency inflows and a tighter fiscal policy as the government attempts to cut spending. 6.0

Sources: IHS Global Insight Report Trade Indicators Curbing Price Increases 40,000 Until recently the government has been pursuing an expansionary 30,000 fiscal policy, increasing public spending to finance among other 20,000

things defense, infrastructure, and public sector wages and US$ mil pensions. Strong foreign currency inflows and the prevalence of 10,000 fiscal over monetary policy due to limited exchange rate flexibility 0 created strong inflationary pressures in the economy. In 2008 inflation topped 20% causing sharp price increases5. Although 2005 2006 2007 2008E 2009F 2010F the National Bank of Azerbaijan (NBA) is committed to ensuring price stability as a means to sustaining output and employment, Exports ImportsTrade Balance it is constricted in its ability to control money supply. In December the discount rate was further reduced by two percentage points Sources: Economist Intelligence Unit in a series of cuts to 8% from a high of 15% in September 20086. Given high inflation levels the rate will remain negative in real The public budget was approved on the basis of an oil price terms until further adjustments. assumption of $70 despite prevailing pessimism regarding the future of commodity prices. According to estimates published by the International Monetary Fund, the breakeven price of oil Consumer Price Inflation for Azerbaijan is $40. Given this outlook and considering that infrastructure and social projects will continue to absorb public 25.0% funds, the budget deficit will increase in 2009 and official state Twoyear moving average 20.0% and oil fund reserves will be temporarily depleted. The current account surplus will decline as revenues from petroleum products, 15.0% which amount to over 80% of all exports, take a nosedive.

10.0%

5.0% Containing Risk Exposure

0.0% The global crisis lays bare the fundamental vulnerabilities that 2005 2006 2007 2008E 2009F 2010F exist in the economy of Azerbaijan. While its remoteness from global financial markets protected it from turmoil in the short- Sources: IMF, Economist Intelligence Unit 5 National Bank of Azerbaijan, www.nba.az, data downloaded on Feb 5, 2009 6 Economist Intelligence Unit, Country Report – Azerbaijan, Jan 2009 7 Moody’s Global Banking, Banking System Profile – Azerbaijan, Nov 2008 8 Economist Intelligence Unit, Country Report – Azerbaijan, Jan 2009

14 Spring / Issue 5 DOES YOUR BUSINESSin focus HAVE THE COMPETITIVE ADVANTAGE NEEDED TO SUCCEED IN TODAY’S ECONOMY? term, in the long-term it exposed an underdeveloped financial landscape, which hampers monetary policy and constrains external borrowing. The oil boom has brought an enormous windfall to a small country but the benefits of this wealth are unevenly distributed with 16% of the population still living below the poverty line9. And most importantly the crisis alerts to the overdependence of the economy on the oil sector and revenues from carbohydrates as well as the unsustainable economics of SOEs. There are several key measures that can help mitigate the negative impact of a global recession and bolster the economy to capture future growth opportunities.

• Diversification – reduce the country’s overreliance on exports of commodities by supporting the production of processed goods with higher value added. Stimulate growth in other sectors, such as telecommunications, IT and business services by creating attractive tax regimes for start-ups and rehashing the legal base to guarantee contract enforcement. • Supply side – increase overall output and productivity Long before the financial crisis, PricewaterhouseCoopers Azerbaijan by eliminating the inefficiencies of SOEs. Discourage has been helping companies to achieve the “quick wins”. monopolistic behavior to facilitate the benefits transfer of declining commodity prices through to the consumers Specialists in our Baku office will be happy to meet in Azerbaijan. Reduce tariffs on trade to normalize retail you to help you to turn challenges into opportunities prices and fuel domestic consumption. • Competition – support the development of open, transparent There have been many local and global initiatives, tools and and competitive markets by liberalizing the regulatory campaigns developed in response to the economic downturn. To environment. Promote such measures to counter the shadow facilitate the sharing of best practice, the priority services we can economy, which according to government sources amounts deliver are highlighted below: to 20% of legitimate GDP10. Encourage FDI flows into the non-oil sector by nurturing a healthy consumer market. ► Sustainable Cost Reduction • Education – encourage the development and ► Corporate Restructuring implementation of specialized training, IT, engineering and ► Workforce Optimization business programs, through public, such as the University ► Debt Advisory of Azerbaijan, and private channels to strengthen ► Outsourcing workforce skills, facilitate entrepreneurship, and expedite ► Effective Tax Planning the dissemination of oil revenues throughout the regions. ► Delivering Value from IT ► Strategic Planning & Change Management Growth in emerging markets like Azerbaijan is stalling. Uncertainty ► Project Management and Development of Risk about the future of commodity prices undermines all economic management functions forecasts. It is clear however that as its key trading partners suffer ► Mergers and acquisition the country will export less at lower prices. Budget revenues ► IFRS implementation will decline leading to a decrease in the state’s huge reserves. Banks will borrow and lend less, dampening private initiative even To discuss how we can apply our experience to help more. In a monopolistic environment the effects of disinflation are unlikely to be passed down to the consumers, leaving the poorest you, please contact: 20% even more so. It might be tempting to put the blame for the The Landmark Office Plaza 3 slowdown on someone else, citing external economic factors. 12th floor, 96 Nizami Street Should this attitude prevail there will be few structural changes Baku AZ1010 Azerbaijan in the economy and the oil windfall will be lost upon the younger Tel: [994] 12 497 25 15 generation. A more commendable approach and one that would, Fax: [994] 12 497 74 11 not only make Mr Aslan happy, but convert Azerbaijan from a rich but systemically poor country into a prosperous state is to take the www.pwc.com/az advice of its Turkish neighbor – that is to liberalize.

9 State Statistical Committee, Statistical Yearbook of Azerbaijan *connectedthinking 2008 10 IHS Global Insight Report: Azerbaijan, Jan 15, 2009 ©2009 PricewaterhouseCoopers Azerbaijan. All rights reserved. PricewaterhouseCoopers Azerbaijan refers to the Azerbaijan branches of PricewaterhouseCoopers Eastern Europe B.V. and PricewaterhouseCoopers Central Asia & Caucasus B.V. or, as the context requires, other member firms of PricewaterhouseCoopers International15 Limited, each of which is a separate and independent legal entity. *connectedthinking is a trademark of PricewaterhouseCoopers LLP. in focus Identifying and Valuing Customers. Part II knowing where to efficiently apply it will allow organizations By Jim Dillahunty, to reap the benefits of increased sales, and increase International Speaker and customer loyalty, at the lowest price points, compared to your Consultant in the field of competitors who may lack insightful customer information. Leadership Development Thirdly, it’s important for all organizations whether they are product manufacturers or suppliers of service, to understand the buy decision as exercised by customers. Is the buy This is the second in a series of three articles that decision impulsive? Does it involve competitive and price discusses the topic of customer service from the comparisons? What are the nature of thoughts and feelings viewpoint of a CEO, author, and researcher with 30 of your customers that led them to select your product or years of experience in designing, implementing and service over others available in the marketplace? A better monitoring programs of customer service. Part I in the understanding of these issues will provide organizations a series presented a discussion of fundamentally new strategic advantage over competitors. concepts about the nature of customer service that are applicable in both prosperous and chaotic times. Part Fourthly, and perhaps most important for all organizations II addresses the issues of identifying and valuing your is to gain a clear understanding of exactly what customers customers. Part III in the series will examine the vital roles are trying to accomplish when they use your product or of your communications and employee empowerment in service. Understanding the tasks that customers are trying customer service. to address will give you key insights for future product development, refinements, product line extensions, and add- on sales opportunities. Only a minority of organizations are Identifying the Customer skilled enough in customer service to train their employees to inquire about the nature of the job that a customer is trying to Every firm likes to think that it knows a great deal of information accomplish when they buy a product. about its customers, but in my observation, many organizations mistakenly define the customer as the one who pays for the I recently went into an automotive parts supply store asking product. In today’s 21st-century marketplace the relationship about changing the light bulbs in my car. I complained to organizations have with their customers is much more the sales person that I disliked working on my car as simple interconnected and complex than it was just a decade ago. repairs frequently became complicated. Fortunately, for me I encountered a knowledgeable salesperson that not only There are four primary reasons why it is critically important for all businesses to be able to properly identify and value their customers. While many businesses are correct in identifying their customers as those who sign the check to buy their product, the issue is actually much more complex than that. First, let’s address the issue why it is critically important to know exactly who your real customers are. The value of identifying your customers will give your organization key marketing insights that are especially valuable when operational cutbacks may be needed. Knowing who your customers are and what’s important to them will allow you to cut costs with the precision of a scalpel rather than using an ax.

Secondly having an in-depth knowledge of the customer base allows you to be able to properly determine where to make your investments to both build your sales and your brand value. Capital is a scarce commodity for all organizations and

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asked questions about my driving patterns but also suggested External customer identification and valuation table a complementary product that would ensure that these replacement bulbs provided me with a long life and that I would Frequency of Value per Cumulative Other likely never have to replace them again. The add-on product transactions customer value intangible was corrosion inhibitor which would protect the bulbs from values water. Had the salesperson not been trained to ask questions 1 X Single $1 $1 Response to about where I lived (near the ocean) his firm would have lost purchase promotional an add-on sale and missed the opportunity of gaining a loyal sales. customer. Introduction to your firm. Understanding the nature of your customers is also a problem 3 X Repeat $3 $4 Customer at the corporate level. Recently I reviewed a marketing report buyer can provide commissioned by the executive committee of local hospitals information. which had incorrectly identified its customers as its patients. Identifying the patients as the customers set up a mechanism 4 X $4 $8 Customer whereby the hospital channeled its scarce resources into Frequent relationship and programs that primarily benefited patients, at the expense of buyer begin to build brand value. the physicians and other hospital staff. In fact, the customers of most hospitals are the physicians. It is the physicians 5 X Loyal $5 $13 Loyal customers who bring the patients to the hospital. Individual patients are customer defend the admitted to the hospitals chosen by their physicians. It is not brand and common for an individual to choose a hospital independent of forgive. the advice of their physician. This table can also serve as a template which can be used to The point of the story is to emphasize that the end-user identify the contributions to your firm of external customers. may in fact not be your customer. Frequently the end-user The point I wish to make in the construction of this table is has a customer like relationship with an organization but it to identify the value of the loyal customer. A loyal customer is imperative for marketing organizations to understand that provides 5 X transactions, and the additional value of life-long customer identification can be more complex than simply cumulative transactions that are the sum of; one time (1X), identifying the one who pays for the product or service. repeat (3X), and frequent sales (4X), (in the table illustration the total value of a loyal customer is expressed, as $13), they can also be fiercely loyal to your brand. For example, when Internal and External Apple introduced the iPod and the iPhone the product had serious design flaws which were all but completely ignored by Your customers exist both within and without the formal Apple’s fiercely loyal customer base. structure of the organization. I defined a customer as entities or individuals that benefit from the existence of your organization. In conclusion, to this second chapter in our discussion of That said there are two general classes of customers. Internal customer service, I would like to remind the reader that properly customers are represented by your employees or in-house identifying all of your customers, both internal and external to contractor staff that produces your product or service. your organization, will save your organization money. That External customers include other stakeholders including knowledge will direct you where to invest resources and where stockholders, suppliers, contractors, your accounting and law to cut investment when necessary. I also like to remind the firms, and other individuals and associations that benefit from readers that the end-user that benefits from of your product or the ongoing success of the organization. These individuals service may in fact not be your primary customer. although external to your organization exert considerable influence on the brand value and reputation of your firm, and products. DR. JIM DILLAHUNTY is an international Speaker and Consultant in the fields of Leadership Development, leading in Chaos, Once an organization has begun to institute processes and and Customer Service (see www.NewParadigms.com.) Dr. policies to correctly identify its customers, the next issue is Dillahunty has collaborated with Drs. Ken Blanchard (The One to determine the economic value of each customer class. Minute Manager) and Stephen Covey (The Seven Habits…) in If your firm can properly identify all of its customers and two books; Blueprints for Success, and Roadmaps to Success. be able to assign economic value to each customer class, Jim received his BS and his MS in Materials Engineering it has a significant advantage in the marketplace over your at the University of Massachusetts; he earned his MBA competitors. For the readers review I’ve prepared a sample at the University of Southern California and his Doctorate table that provides a structure for listing internal customers at the University of Phoenix in the field of Organizational and identifying both their economic and intangible value. Leadership.

17 member contribution Azerbaijan: One Year Away from WTO Membership?

resources to those acceding countries which are forthcoming F. Youwakim Farhat and demonstrate progress in reforming their policy, legal, and Team Leader/Senior WTO Advisor, institutional framework for WTO conformity and liberalizing their USAID Trade and Investment Reform foreign trade regime. During the last 18 months, Azerbaijan Support Program in Azerbaijan (TIRSP) has indeed made significant strides in these directions. Yet, much remain to be achieved including actual implementation of reform and commitments.

After a hiatus of almost 3 years, Azerbaijan’s process toward membership in the World Trade Organization (“WTO”) Legal Reforms resumed full speed in 2008. Azerbaijan representatives participated in two productive rounds of meetings with its On the reform front, Azerbaijan significantly advanced the “working party” - the group of WTO members charged with implementation of the legislative action plan that was adopted examining Azerbaijan’s progress in bringing its foreign trade under President Decree in 2006. The plan was intended regime into conformity with WTO accession requirements. In to ensure greater conformity of Azerbaijan’s legal regime addition, Azerbaijan advanced its negotiations with individual with the WTO agreements in key areas such as customs, WTO members by making a number of substantive revisions intellectual property, technical barriers to trade, and sanitary to its market access offers on goods and services and by and phytosanitary measures. As of today, fourteen legal acts holding a series of bilateral meetings during the second half of have been adopted. Two additional draft laws are currently 2008 with key WTO trading partners in Geneva, Washington at the President Office, and ten other drafts laws are at and Brussels. advanced stages of approval at the Cabinet of Ministers. A second legislative action plan has been prepared and is Looking forward, two additional rounds of bilateral expected to be adopted soon. It calls for amendments of a negotiations are anticipated during the first half of 2009, dozen additional legal acts for greater compliance with the plus one round of agricultural support negotiations and one WTO agreements. round of multilateral negotiations with the WTO working party. If such happen, it will be record breaking to have A main feature of this on-going legal reform is the introduction three working party meetings occurring within a 12-month of legal provisions that would guarantee access for businesses span, and a signal of WTO members’ interest in accelerating to rapid appeal to independent administrative bodies and Azerbaijan’s accession. access to judiciary. Other key features include the elimination of unnecessary formalities and requirements (e.g. approvals, Azerbaijan’s ambition to conclude most of its WTO accession contract registration, and unjustifiable licensing); reduction in negotiations by the end of 2009 is very likely to be realized the number of goods subject to non-tariff barriers; elimination provided the current momentum is sustained. This will require of discriminatory taxation policy on trade; and elimination of the government to complete rapidly its remaining reforms for excessive fees on trade-related measures (e.g. licensing, full WTO conformity and to give favorable consideration to customs processing, and certification fees) and their alignment the goods and service market access requests put forth by its with cost of services rendered. The new legal regime will WTO trading partners. provide greater transparency and opportunity for interested parties, including the private sector, to be involved in setting Negotiations rounds are not easily granted by WTO Members to standards and technical requirements which are critical for acceding countries. There are over 30 countries that are in the providing businesses the opportunity to protect their interests process of “acceding” or becoming members of the organization and not be subject to excessive and unjustifiable regulatory (the current membership numbers 153 countries). impediments.

These acceding countries include many of Azerbaijan’s Important changes have also been made to Azerbaijan’s neighbors, such as Iran, Kazakhstan, Russia, and Uzbekistan. international trade regime. In addition to establishing Single WTO Members tend to dedicate more of their scarce Window at the Border as of January 1, 2009 and Single

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WTO members including Canada, Chinese Taipei, Ecuador, European Union, India, Japan, Korea, Moldova, Norway, Sri Lanka, Switzerland, Ukraine, and the United States.

As a result of revised and improved offers by Azerbaijan, bilateral negotiations were held with the United States in Washington in November 2008 and with the European Union in Brussels in December 2008. Azerbaijan’s revisions of its offers were particularly significant with respect to service market liberalization and adherence to certain sectoral initiatives with respect to trade in goods. For example, Azerbaijan has agreed to bind at zero its customs duties in a number of key areas, such as information technology, and on a large number of chemical products. In the insurance sector, Azerbaijan eliminated foreign ownership limitations. Foreign insurance companies are now permitted to establish a wholly foreign-owned subsidiary in Azerbaijan without the need to enter into joint ventures with a local insurer (previously, Window for Registration in 2008, Azerbaijan is implementing foreign companies were limited to a 49% share). In addition, comprehensive reform to key aspects of trade and customs Azerbaijan has abolished the requirement that the president regime. For example, a draft modern Customs is at final stages and one of the vice presidents should be Azerbaijani citizens of approval at the Cabinet of Ministers and is very likely to be for insurance companies and brokerage firms with foreign adopted in 2009. Another example is the Draft Amendments ownership. to the Decree of the President “On Further Liberalization of Foreign Trade in the Republic of Azerbaijan” No. 609 which, once adopted, will bring about major liberalization of import Key Remaining Challenges and export regulations and non-tariff barriers. Progress in market access negotiations beyond this point Apart from enabling Azerbaijan’s WTO Membership, these is, however, largely contingent on further substantial WTO-related legal reforms, will drastically improve the improvements/revisions by Azerbaijan to its goods and service business environment by reducing non-tariff and regulatory offers, particularly in agriculture, sectoral initiatives, and barriers, ensuring greater transparency and stability in the financial services. legal regime, and strengthening the rule of law, thus reducing the cost of doing business and protecting the rights of Based on the experience of other countries which have recently businesses and investors. acceded, it is likely that the WTO will expect Azerbaijan to make commitments to open its market to a level equivalent to To conclude negotiations by the end of 2009, it is imperative that of other WTO members with similar economic conditions that Azerbaijan sustains the current reform momentum. and levels of development. In general, WTO members expect Completing the implementation of its two legislative action acceding countries to make market access commitments not plans will be a major milestone toward enabling accession. exceeding the current levels of protection for both goods and Azerbaijan, in addition, needs to be prepared throughout 2009 services and to follow a path towards liberalization, albeit to gradually address any legal reform for implementing its gradual in some cases. service commitments and other reforms that may be requested by Members during the course of negotiations. Other key challenges facing Azerbaijan’s accession include lack of full understanding by WTO working party members of the role of the state sector and the high level of subsidization Market Access Negotiations – in the agricultural sector. These both need to be addressed as early as possible in 2009 in order not to delay accession. State of Play Azerbaijan needs to make full disclosure of the role of the state sector in the economy in order to facilitate understanding by As for market access negotiations, over 20 WTO Members WTO working party members of the structure of the economy, have expressed interests in conducting bilateral negotiations particularly factors that influence pricing and competition policy. with Azerbaijan on goods and services. In fact, Azerbaijan Members expect monopolistic behavior and privileges granted has concluded its negotiations with Turkey, Oman, and United to actors in the state sector to be dramatically reduced and Arab Emirates and signed the related bilateral protocols, and greater transparency in resource allocation. bilateral protocols with Kyrgyzstan and Georgia are expected to be signed soon. Negotiations are continuing with other The agriculture sector remains a key bottleneck in WTO

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accession negotiations. In addition to binding the rates of import interests of Azerbaijan. Delays only increase the risk of being duties on agricultural products at levels acceptable to WTO subjected to excessive commitments that otherwise might be members, members expect Azerbaijan to make commitments avoided. Azerbaijan’s accession, although technically possible for binding its Amber Box (trade distorting) agricultural domestic by the end of 2009, still requires high level political commitment support at 5% of total agricultural production. Azerbaijan has to conclude WTO related reform in a timely fashion and make thus far agreed to bind at 10%. In either case, Azerbaijan will necessary market access commitments. Azerbaijan should have to drastically reduce its current level of subsidization in sustain the momentum and seize the moment by benefiting the agricultural sector which currently exceeds 20% of total from the current broad support by key WTO members for its agricultural production. accession.

With the dramatic increase in fiscal revenues during recent Mr. Farhat has around 14 years of experience advising years as a result of significant increases in the export of oil, countries on implementing policy, legal, regulatory, and the level of subsidization to agricultural producers has been institutional reform to comply with the WTO accession constantly and significantly rising. Notwithstanding WTO requirements and implement their post-accession accession, Azerbaijan needs to have in place sound public commitments. He made significant contributions to the investment expenditure programs that increase the efficiency accession of Ukraine, Jordan, the Kyrgyz Republic, and in resource allocation on the basis of comparative advantage. Saudi Arabia and provided extensive support to at least 10 Support programs that are distortive, such as price support and other WTO acceding countries including Iraq, Kazakhstan, guaranteed prices, should be avoided. WTO consistency and Lebanon, Serbia, and Tajikistan. A graduate of Johns resource efficiency are two key factors that Azerbaijan needs Hopkins University in 1993, Mr. Farhat has been constantly to consider when granting subsidies. working in the area of economic development under USAID funded projects in Eurasia and the Middle East regions Protecting agricultural producers reduces incentives to focusing on reforms for increasing trade and investment improve quality and increase efficiency in order to increase and improving competitiveness and the environment for competitiveness. As such, by moving toward Green Box private sector development. or non-trade distorting subsidies in the agricultural sector, Azerbaijan will, in addition to meeting WTO requirements, Since April 2007, Mr. Farhat has been leading a team of be creating conditions for reducing production costs and experts working under USAID TIRSP (Prime Contractor improving productivity. Allowed programs under the Green Chemonics International) to assist the Government of Box include infrastructural projects (e.g. irrigation, energy Azerbaijan in accelerating its WTO accession process, efficiency); agricultural research (e.g. seeds, animals, bringing its foreign trade regime into full conformity with technology); agricultural extension and advisory services the WTO agreements, and building the capacity of related (e.g. courses, seminars and technical training in rural areas institutions. focusing on how to produce specific crops that are best suited to the soil/climate/water/market conditions); environmental Mr. Farhat is also the President of Economic Integration programs; and programs to assist with restructuring or Forum, Inc. a small US-based firm specialized in delivering compensating for structural disadvantages. For example, technical assistance and advisory support on WTO accession New Zealand has been using WTO’s Green Box general and post-accession, bilateral and regional trade agreements, services programs exclusively for about two decades and it trade and investment policies, government procurement remains one of the most competitive agricultural producers systems, private sector development and competitiveness, and exporters in the World. and institutional capacity building. Outlook

While much remains to be done in 2009 to bring Azerbaijan’s regime into full conformity with the WTO agreements and enable accession, it is critical to start gearing up toward This article is made possible by the support fleshing out implementing regulations and strengthening the of the American People through the United institutional base to effectively and properly administer and States Agency for International Develop- enforce new WTO related laws. The private sector should also ment (USAID). The contents of this article begin to be acquainted with the new rules in order to clearly are the sole responsibility of the USAID understand its rights and obligations under the new laws. Trade and Investment Reform Support Pro- gram in Azerbaijan and do not necessar- Azerbaijan can benefit from the experience of other recently- ily reflect the views of USAID or the United acceding countries, particularly neighboring countries such as States Government. Ukraine. Delays in accession do not best serve the national

21 member contribution Proposals for Creating Jobs in Azerbaijan in the Global Economic Crisis

promoting Azerbaijan as a place in which to invest. In furtherance of those efforts, we work on several fronts to improve the local business climate. These efforts include our recommendations to the Government of Azerbaijan in our most recent “white paper” issued in September 2008, entitled Observations and Recommendations for Improving Azerbaijan’s Business Climate. The White Paper contains specific constructive recommendations for legal reform affecting nearly all aspects of doing business here such as taxation, finance, insurance, customs and labor.

Since September, as the economic crisis has deepened, countries around the world have undertaken measures to reduce its impact. While, in our view, implementation of the White Paper’s recommendations would be an appropriate local response to the global crisis, we believe that Azerbaijan should take even more aggressive action than we have previously proposed to protect its economy, encourage business growth and create new jobs.

An area of particular concern to AmCham and the business community at large is tax policy and practice, particularly as it relates to employment and job creation. As we observed in the White Paper, the overall tax burden in Azerbaijan is uncompetitive with that of its neighbors and even some “high tax” jurisdictions. With limited global investment and financing opportunities available, we believe that Azerbaijan must forcefully address this fundamental business issue to increase its competiveness in regional and global With an oil-driven economy and limited integration with the markets. global financial system, many thought that Azerbaijan could avoid the adverse effects of the current economic crisis. Even though the impact in Azerbaijan has been less severe Reducing the Tax Burden to than in other countries in the region, most notably Russia and Ukraine, the restricted availability of credit, falling oil Create Jobs and Promote prices, global workforce reductions and reduced remittances from abroad have taken their toll. Azerbaijan must now also Investment take steps to ensure its competitiveness in an increasingly competitive world. At least one of our members has already relocated the majority of its expatriate senior management staff to other countries As the largest business advocacy organization in in large part due to the tax considerations of basing them Azerbaijan, AmCham has long been at the forefront of in Azerbaijan. Azerbaijan will lose out not only on the taxes

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the expatriate employees would have paid in Azerbaijan but also the jobs that would have been created to support those senior managers as well as the expertise and know-how that would otherwise be transferred to Azerbaijani personnel. Equally important, Azerbaijan is losing out on an opportunity to be a regional hub for a major international company with operations around the world.

In Azerbaijan, the highest marginal rate for personal income taxes remains a comparatively very high 35% for annual income in excess of AZN 24,000. This continues to be considerably higher than in Russia, Georgia, Ukraine, Turkmenistan and other countries in the region (e.g., Turkmenistan has a flat rate of 10%, Georgia 12%, Russia, Tajikistan and Ukraine 13%). While, at first glance, personal income tax rates might not appear to be a competitiveness issue, they are. For example, many foreign companies employing expatriates have tax equalization programs in which the employer compensates the employee for Azerbaijan’s higher tax burden. Of course, Azerbaijan then taxes that benefit as well, resulting in prohibitively high compensation costs.

These already high compensation costs are further increased by high social insurance costs – the employer contribution being 22% of compensation. The cost to an employer of hiring labor is a major component of the overall cost of doing business. In Azerbaijan, the total cost of hiring a new employee at marginal rates is an astounding 83% of net salary – a serious deterrent to employers. AmCham is aware of businesses locating in Georgia, in particular, in part to take advantage of lower staffing costs, even though those employers would have preferred to have their regional • personal income tax rates be reduced to a uniform flat base in Azerbaijan. As a consequence, Azerbaijan is losing rate of 15%. business to neighboring countries due to its uncompetitive • to encourage employment, a ‘nil’ tax band for both tax structure. AmCham believes that, if the labor market is to income tax and social contributions be reintroduced for grow and business to thrive, the overall cost of employment income below AZN 500 per month. must be reduced and reduced substantially. • the employer social insurance contribution be reduced to 15% from the current 22%. Compounding this problem, since 2006 employers have • social insurance contributions for expatriates (by both been required to make social insurance payments for their employer and employee) be repealed. expatriate staff. As PSA contractors and many NGOs are exempt from social insurance contributions, the burden falls primarily on foreign investment in the non-oil sector, the sector Reducing Labor Code Burdens which needs the greatest incentives for development and expansion. As we observed previously, expatriate employees on Employers to Promote Job rarely, if ever, take advantage of the benefits of the Azerbaijani social security system. Creation

As a result of the economic crisis, Azerbaijan’s competitors, In addition to addressing the serious tax disincentives to job with their already lower tax rates, are further reducing taxes. creation, AmCham urges changes to the Labor Code to bring In our view, Azerbaijan should, as a matter of urgency, it into line with accepted international practice and eliminating aggressively reduce the overall tax burden (including social unnecessary administrative burdens on employers. insurance contributions) to support job creation and promote investment. Prior to introduction of the Labor Code in 1999, entitlement to Specifically, we recommend that: overtime compensation and vacation depended on the nature of the employee’s job. Generally speaking, a distinction was

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made between managerial/highly-skilled workers and other these inflexible and sometimes complicated rules appears workers. Managerial and highly-skilled staff were not entitled to simply be creation of the basis for a “gotcha” violation to overtime pay but received more annual vacation (30 days during an inspection, for example orders authorizing vs. 21 days). Overtime work for other workers was restricted business trips and vacations. and had to be additionally compensated. Another example is found in Article 138(4) of the Labor Code As far as overtime entitlement is concerned, the adoption of which requires that records of vacations be kept according to the Labor Code was a major step backward, imposing on employee work years, i.e., vacation entitlement is measured employers the same overtime pay restrictions and obligations from the anniversary date of employment. As employees’ work for all employees. As a result, it is no longer legally possible to years are different, this results in unnecessary complexity and require managerial/skilled and professional workers to work bureaucracy which increases the potential for errors. It also overtime except in very limited ‘emergency’ situations for which creates problems in vacation planning at the beginning of the they receive overtime pay. This has substantially increased year. If this must be regulated at all, we consider it logical the cost to employers. The restrictions on overtime work also to adopt the calendar year as the work year and, where an considerably reduce employers’ flexibility in organizing work employee is employed for less than a full calendar year, that and encourage employers (including government offices) to vacation entitlement be prorated accordingly. implement illegal procedures. * * * Consistent with accepted international practice, we recommend that the Labor Code be amended to distinguish In this time of financial crisis, we believe that making it less between salaried managerial and professional staff (which costly for employers to hire new workers should be a priority. should not be entitled to overtime pay) from hourly staff (which Implementation of these recommendations would help should). eliminate Azerbaijan’s worsening competitive disadvantage in attracting investment, both foreign and domestic, and, Many of the current employment-related requirements importantly, create more jobs for Azerbaijani citizens by are holdovers from the Soviet-era which have little benefit eliminating the disincentives to creating more jobs and hiring for either employers or employees. While any particular new employees. requirement may not in itself be burdensome, there is a cost associated with compliance and, in the aggregate, AmCham's White Paper 2008, a compilation of observations these rules impose an unnecessary burden. Moreover, and recommendations for improving Azerbaijan's business by requiring unnecessary paperwork which neither the climate is available for viewing on our website: employer nor the employee need, the primary purpose of www.amchamaz.org

26 Spring / Issue 5 27 AmCham Azerbaijan

The American Chamber of Commerce in Azerbaijan is a private, non-profit business About us association supporting and promoting the interests of business in Azerbaijan.

Established in 1996, AmCham is composed of over 190 members and associates active in every sector of the Azerbaijani economy. We represent 80% of all foreign investment, as well as a significant portion of local investment which allows us to promote American, Azerbaijani and multinational corporations. This includes leading companies in Energy, Banking, ICT, Legislative/ Financial Consulting, Professional Services, Education, Real Estate Development, Health, Transportation, Travel and Production fields.

An active and positive influence in Azerbaijan, we conduct our mission with integrity and respect for the country, observing all local laws and insisting Membership To apply on the highest ethical standards in all relationships and transactions. There are two types of affiliation with To apply for affiliation with AmCham, AmCham: Member and Associate. a candidate must submit a written application in the form adopted by Why join? Member status includes: voting the Board of Directors. Membership privileges and eligibility for Board and applications are available at the Key member benefit – committee chairmanships in addition AmCham office or on our website at best networking opportunities in to the privileges granted to Associates. www.amchamaz.org. The application Azerbaijan! For affiliation as a Member, a candidate form should be completed and sent to must be a legal entity, registered and our office with the company registration As a member of AmCham, your doing business in Azerbaijan and be certificate issued by the Ministry of company has access to a vast network in good standing in the community, as Justice of Azerbaijan. of business information and contacts in determined by the Board of Directors. Azerbaijan and in the US government, A candidate meeting the objective and as well as valuable information on US A legal entity, branch or representative subjective requirements for affiliation businesses across Europe through office of a legal entity is eligible to be ECACC (European Council of American affiliated with AmCham as an Associate, with AmCham is accepted as either a Chambers of Commerce) and US subject to the Board of Directors’ Member or Associate upon receiving Chamber of Commerce. determination of good standing in the an affirmative majority vote of the community. Board of Directors and paying the first Additional Member Benefits include: year’s fee for the candidate’s category Associates are eligible to participate in of affiliation. Annual Employee Salary Survey various activities; receive our regular Quarterly Inflation Survey publications, including the Membership To maintain affiliation with AmCham, AmCham Membership Directory Directory, Annual National Employee Members and Associates must continue AmCham Resource Library Salary Survey and Quarterly Inflation to meet our eligibility requirements, be Survey. Associates, however, are not in good standing in the community, and For more detailed information please entitled to vote or serve on our Board be current with all financial obligations visit our website www.amchamaz.org of Directors. to AmCham.

28 Spring / Issue 5 AmCham Azerbaijan

AmCham Structure

Board of Directors Executive Committee

Dan Matthews President Baker & McKenzie

Stanley Escudero Maksud Mirzoyev Alum Bati Ilgar Veliyev Movlan Pashayev Board Member Board Member Board Member Board Member Board Member Shieldbearer McDonald’s Wicklow Corporate Ernst & Young PricewaterhouseCoopers Services

Bob Dastmalchi Seymur Khalilov Wayne Walz Bakhtiyar Mammadov Donald Lu Board Member Board Member Board Member Board Member Ex-Officio Board Member Chevron BP Nobel Oil Halliburton US Embassy Staff

Nargiz Nasrullayeva- Fatima Ibrahimova Aylan Zaur Kerimov Muduroglu Member Relations and Aghamaliyeva Accountant Executive Director PR Manager Administrative AmCham Azerbaijan Assistant

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Members’ News and Events

welcomes new CEO Ali Agan

Ali Agan, CEO, Azercell, Azerbaijan In December 2008 he was appointed as a Chief Executive Officer of AZERCELL Telecom (Baku, Republic of Azerbaijan). Before this appointment he was working in Azercell as a Deputy CEO. In 2005 - 2008 Ali Agan was CEO & Board Member of MEP Iletisim & Erk Group of Companies (Istanbul, Turkey). In 2003 he founded ATALAY Currency and Gold Trading Co and served as Managing Director untill 2005. AGAN International Trading Co.(Istanbul, Turkey). From 2000 till 2003 he has been working in BAYINDIR Life Insurance Co., BAYINDIRBANK, BAYINDIR Insurance Co. on (as Director, Vice-President and Executive Vice-President respectively) In 1998 he started his career in MONUMENTAL Agency Group Aegon USA, working on a Sales manager position and then being promoted to District Manager & Assistant to RVP. In 1996 in the beginning of his professional life Ali Agan was working as Intern for Business and Economic Development Department, State of Maryland, USA. Also in 1996 - 1997 he was Teaching and Research Assistant in University of Baltimore State of Maryland, USA.

welcomes new CEO Ineke Botter

Ineke Botter, CEO, Bakcell, Azerbaijan Ineke Botter is the CEO of Bakcell, one of the three mobile operations in Baku, Azerbaijan. She has extensive international experience in the finance and telecommunication industry. She holds university degrees in corporate and international law, and started work in the financial world in Amsterdam and London in the 1980s. In 1991, Ineke Botter moved to Kiev, Ukraine to acquire the license for the first mobile telecommunications network, UMC, Ukrainian Mobile Communications for KPN. She moved to Budapest, Hungary in 1992 to work as the Legal and Procurement Director for Pannon GSM. After two years in Hungary, she joined UniSource Mobile in Sweden - a KPN joint venture company - to be responsible for Business Development activities in various parts of the world. In 1995, Ms. Botter joined Czech Telecom as the Head of Mobile Communications. She worked in Prague until early 1998 when she left to join Orange, then owned by Hutchison Whampoa, Hong Kong. She was General Manager for Network roll-out for Orange Switzerland until the end of 1999. In 2000, Ms. Botter returned to the Netherlands to work as the Managing Director Wireless Communications for Versatel Telecom NV in Amsterdam and served on various Orange Boards at the same time. She moved to Stockholm, Sweden in 2001 to become Director of Engineering and Operations for 3, another Hutchison greenfield operation. She worked in Pristina, Kosovo for the United Nations as the Division Manager for Post and Telecommunications Kosovo (PTK) and then moved on to Lebanon as the Managing Director – CEO for Alfa, managed by FDT, in mid 2004 until the expiry of the Management Agreement with the State of Lebanon at the end of 2008. She recently moved to Azerbaijan to accept the position of CEO at Bakcell Ltd.

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BAKER & McKENZIE CELEBRATES 10 YEARS IN AZERBAIJAN Baku, Azerbaijan, 2008 – The global law firm Baker & McKenzie celebrated its tenth anniversary in Azerbaijan. The celebration, which took place on October 8 at the Hyatt Regency, was attended by senior representatives of the government, diplomatic community, banking and finance sector and prominent companies.

US Ambassador Anne Derse and Baku Managing Partner, Dan Matthews Mr. Eldar Orucov, Head of the Legal Department, SOCAR

Mr. Horia Adrian, General Director, Garadagh Cement and Dan Matthews Mr. Rafael Jimenez-Gusi, Member, Baker & McKenzie Executive Board

The Baker & McKenzie team Mr. Emil Mustafayev, Deputy Chairman, International Bank of Azerbaijan

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Business Events

organizations operating in Azerbaijan as well as remuneration Last Monthly Members’ figures for more than one hundred different positions. We Luncheon of 2008 presented the major findings of the survey at the Luncheon as well as outlining some interesting trends comparing the 4 December 2008 last three years.

For our last Monthly Members’ Luncheon of 2008 we prepared a really exciting program. Following the visit of Henrietta Fore, Director of U.S. Foreign Assistance and Administrator of the U.S. Agency for International Development (USAID) to Azerbaijan in November, USAID presented two of its major projects in Azerbaijan -Private Sector Competitiveness Enhancement Program and Trade/Investment Support Program. The panel of speakers included Mr. Scott Taylor, Country Director of USAID in Azerbaijan, Mr. Paul Davis, Mission Economist, USAID/Azerbaijan, Mr. Daniel Cruz-Danilo, Chief of Party, USAID Private Sector Competitiveness Enhancement Program (PSCEP), Mr. John Corrigan, Chief of Party, USAID Trade/ Investment Program and Dr. F. Youwakim Farhat, WTO Expert, USAID Trade/Investment Support Program (TIRSP).

Our panelists discussed the major goals of the new Private Sector Competitiveness Enhancement Program and potential opportunities for building alliances between the program and AMCHAM members as well as the major goals and technical collaboration work being carried out under the aegis of the Trade/ Investment Support Program that includes technical assistance for Azerbaijan’s accession to World Trade Organization.

The second highlight of this luncheon was the presentation of our 2008 National Employee Salary Survey. With 97 companies accounting for over 13,000 employees participating in the survey, the report is the most comprehensive and detailed source of up-to-date information on Azerbaijan’s labor market. It contains information on terms of employment and benefits provided by the leading foreign and local companies and

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Luncheon and Extraordinary General Meeting 27 January 2009 At our first Monthly Members Luncheon of 2009 we focused on the issue of the day - the global financial crisis - and looked at it through the eyes of a local bank. Our Special Guest Speaker was Mr. Jalal Gasimov, Chairman of the Board of Bank of Baku, one of Azerbaijan’s leading commercial banks. Mr. Gasimov elaborated on the global financial and economic downturn and its impact on Azerbaijan and shared with us the steps local banks were taking to withstand the effects of the downturn and how it affected daily operations and services provided to clients.

Mr. Gasimov’s outstanding financial background prior to assuming the post of Chairman of Bank of Baku includes the position of Associate at the Moscow office of McKinsey & Company, Director of Tax Planning, Investment Appraisal and Budget Control Department, Finance Director and Vice- President on Commerce, Business Performance, Finance, Tax and Budget of Azpetrol International Holdings, and a number of board positions at various local and foreign enterprises operating in Azerbaijan.

Mr. Gasimov holds a Bachelor’s Degree in Economics from Azerbaijan State Economic University, a Master’s Degree in Economics from Higher Diplomatic College of Azerbaijan and an MBA from Warwick Business School, UK.

The luncheon also hosted the Extraordinary General Meeting of AmCham, called to approve the amendments to the Charter of the American Chamber of Commerce in Azerbaijan. The main item on the agenda of this meeting (preceding the Annual General Meeting) was the amendment of Article 8.2 of the Charter, aimed at increasing the number of voting Board Members from eight (8) to ten (10).

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Committee Highlights

Redundancy Process: HSE Committee meeting The Representative of Baku Steel Company Mr. Isaac Gur 25 November 2008 raised a question about legislation related to the redundancy procedure, compensations required etc. It was decided to invite guest speakers from prominent companies to share their experiences and best practices with the committee. Ms. Tagiyeva suggested writing an official letter to the Ministry of Labor or Chief of Department of Labor Policy as official feedback from these organizations would be a reliable source for such issues. It was also decided to invite the senior official at the ministry, Abulfaz Maharramov to the meeting, so he could answer the questions of the committee members.

Salary Survey Report: Several companies offered very positive feedback on the process and the final report of the Salary Survey 2008. Members were informed that the CPI Report for Q4 of 2008 would be ready in the second week of January 2009. A representative from an oil company asked why the salary survey does not include such subdivisions as oil exploration and development companies. Ms. The new Chairman of the HSE Committee Anver Zalibekov, Ulduz Tagiyeva answered this question by pointing out that there General Manager of Schneider Electric in Azerbaijan, was are no more than “10 pure oil companies” in Azerbaijan. introduced to the members on the 25th of November, 2008. He greeted members and introduced his working plan for the committee for the next two years. Its mission is to help the community by sharing best practices and experience gained worldwide and helping to implement safety measures for everyday life in the country.

Mr. Zalibekov made a presentation about Reducing Risk of Electrical Risk Hazard.

The presentation described a device which reduces these risks. He emphasized the advantages of installing the device in homes, offices and in other manufacturing facilities.

It was suggested that the advantages of the device be introduced in a broader and more detailed format to the public, including AmCham members and other Immigration process & work permits: institutions. Immigration process and work permits were also discussed at the meeting. Committee members made a decision to address HR Committee Meeting their concerns to the Government in writing. Vefa Rustamova (Chevron), Elnara Alizade (BP) and Dadash Alishov (Booz 18 December 2008 Allen Hamilton) agreed to get together and draft this letter. Ulduz Tagiyeva, HR Manager of McDermott Caspian Contractors opened the meeting and made an extended Tax Related Issues: overview of its actions. Ms. Tagiyeva mentioned that Another suggestion made by Dadash Alishov was to invite a members of the committee were most interested in the guest speaker to clarify concerns about tax matters related to issues relating to pension fund and migration. Ms. Tagiyeva work permits. also asked members what other issues they were interested in and who they would like to see at the coming meetings in Anar Mammadov from A+A Group of Companies raised the question 2009. of whether HR representatives should be foreign or local nationals.

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Elnara Alizade, representative from BP, made a short announcement about the next meeting at BP about education of HR employees.

At the end of the meeting, Nargiz Nasrullayeva-Muduroglu thanked Ulduz Tagiyeva, chairman of the HR Committee for her outstanding leadership of the committee, invited non-committee members present at the meeting to join the committee and also introduced new AmCham employees Fatima Ibrahimova, Member Relations & PR Manager and Aylan Aghamaliyeva, Administrative Assistant, to the committee members.

c) in-depth discussions with the Government

Regarding the relationship between businesses and customs, it was clear that the whole procedure is in place, but is not applicable to everyone as most of the foreign companies cannot enter the market due to monopolies. The judiciary is the main authority to take into consideration when solving this problem, but the whole process takes too long and does not really work, since there is no Tax Ombudsman or independent third parties.

Examples of IT commodities were also discussed at the Tax and Customs Committee meeting. Companies which import computers are charged 19 January 2009 3% of cost whereas the tariff for a spare part is 15%. Conflict of interests still exists between Azerenergy and the Ministry Christos Kostopoulos, Senior Country Economist for World of Taxes since the tariff for gas is 0.05% while for pipes it is Bank Azerbaijan opened the meeting by introducing himself 15%. The representative of World Bank pointed out that WTO and other guest speakers. Mr. Kostopoulos made an overview (World Trade Organisation) accession is the best option to of issues which needed to be covered, such as: solve these problems, as in this case every single product must have its own commodity code.

It was noted that the White Paper was a part of the action taken by the American Chamber of Commerce in efforts to work with the government to solve the problems the business sector is dealing with. However, the 2008 issue of this document did not receive much attention from the government this year, a situation which might change in the near future due to the current crisis.

The Call Centre of the Ministry of Taxes was mentioned as well. The quality of service provided by Call Centres works only for administrative questions such as filling out applications and obtaining information about contacts in the Ministry of Taxes. Although they respond and try to answer queries about difficulties relating to the Tax Code, the quality of service is not high enough. a) Members’ experiences in dealing with customs and other It was stated that the Ministry of Economic Development, border agencies World Bank’s main counterpart, is engaged in reforms geared b) Communication process between Customs and trade towards Azerbaijan’s WTO accession. &industry representatives

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Banking, Finance and Insurance Committee Meeting 21 January 2009 The first Banking, Finance and Insurance Committee Meeting was held on 21 January, 2009. Viladi Maniyev from AIG Insurance Company opened the meeting by introducing guest speaker Dr. Dileep R.Mehta, B.Com (Hons) University of Bombay, 1959; M.Sc (Management), Massachusetts Institute of Technology, 1961; PhD in Business Administration, Harvard University, 1965. Dr. Mehta's remarks addressed the global financial crisis.

Forces responsible for the ongoing global financial crisis The main purpose of this HR committee meeting was to share are reasonably well understood. But this understanding, the best practices of companies such as BP and Azercell in even when widely shared, has failed to produce agreement HR related issues. Elnara Alizade from BP opened the meeting on what government policy measures are appropriate for by introducing Mehriban Eyyubova who went over CIPD and effectively dealing with the severity of the crisis. Dr. Mehta PDPM Programs in her presentation. CIPD, the Chartered analyzed the genesis of the global crisis, the effectiveness of Institute of Personnel and Development is Europe’s largest currently employed and contemplated policy measures, and professional body for those specializing in the management likely responses by financial and non-financial businesses and development of personnel, which later accredited PDPM. in order to understand the anticipated depth and length of Ms Eyyubova listed the advantages for participants, and the ongoing recession in non-technical terms. mentioned various ways in which she personally implemented her knowledge on a daily basis. After the power point presentation, Dr. Mehta answered questions about the effect of the crisis on relatively small During the second part of the meeting, HR Manager of countries like Azerbaijan, and about how long it might last. Julia McDermott Ulduz Taghiyeva introduced the representative Pnchenko from Baker & Partners also gave a presentation of Azercell, Zulfiyya Quliyeva, who prefaced her remarks about the specific effects of the crisis on the marketing and in with some information about Azercell. She then spoke about particular, the mass advertising sector. “Talent Management at Azercell” as a successful experience, commenting on the importance of the program and the new concepts formulated.

Ulduz Taghiyeva closed with a short announcement that adoption of changes to the Labor Code may take place in the second half of the year or by the end of the year. AmCham will enter into discussions related to these issues with the Ministry of Labor. A Consolidation Plan for the HR Committee for 2009 will be also discussed at the next meeting.

HR Committee Meeting 6 February 2009 The HR Committee meeting took place in the Carpet Room, BP, featuring Sue Adlam-Hill, HR Vice-President of BP, Mehriban Eyyubova, HR Advisor of BP and Zulfiyye Quliyeva, HR representative of Azercell.

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AmCham Azerbaijan

Supported Events USAID Administrator Keynote Speaker at EPF/AmCham Luncheon on Public-Private Partnerships 25 November 2008

In cooperation with the American Chamber of Commerce in Azerbaijan (AmCham), Eurasia Partnership Foundation recently organized a luncheon in recognition of the visit of Ms. Henrietta H. Fore, Administrator and Director of U.S. Foreign Assistance U.S. Agency for International Development (USAID). The luncheon, attended by representatives of local and foreign businesses and international organizations, focused on building private-public partnerships to promote corporate social investments in Azerbaijan. Ms. Fore informed U.S. and Azerbaijani business executives about USAID’s Global Development Alliance initiative and discussed current and potential public-private partnerships in Azerbaijan. Fore noted: “Expanding the use of Global Development Alliances is a top priority for USAID. I consistently challenge each USAID Mission Director and Bureau to triple the resources that we leverage. Our objective is not necessarily to increase the number of alliances; instead, we seek to increase the strategic value of our alliances, thereby fostering sustainable development in the developing world.” Administrator Fore also emphasized that by bringing the public and private sector together, USAID merges the private sector’s best ideas and management techniques with the benevolence of development assistance, leading to mutually beneficial approaches that create more stable, democratic, market- oriented societies around the globe.

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Projects Consumer Price Index Report for 2008 The Consumer Price Index Report for 2008 has been released. Over the last twelve months (the base is 100 at 31 December 2007), the CPI rose by 21.92% for Azerbaijani consumers and 20.94% for Expatriate consumers. It is noticeable that the annual inflation figure this year is significantly lower than that of 2007 when the CPI rose by 33.60% for Azerbaijani consumers and 33.39% for Expatriate consumers.

Dr. Farhat mentioned the Kyoto Convention which provides Legislative Update Meeting for safe trading and risk management through electronic submission of applications. 3 February 2009 Decree 609(97): Liberalization of trade regime, legalization of A meeting was held to provide our members with an update foreign trade in Azerbaijan. on legal refoms. Guest speaker Dr. F. Youwakim Farhat, Team Leader and Senior WTO advisor, USAID Trade and Investment Amendments: Reform Support Program in Azerbaijan (TIRSP) gave members a) Elimination of contract registration an overview of the following areas: b) Elimination of expertise of MED c) Elimination of price justification a) Custom Code d) Elimination of sources of financing of import-export b) Decree 609 (liberalization of import/export regulations and e) Elimination of quality certificate etc. non-tariff barriers) c) Technical Regulations Technical Regulations: d) Food Safety According to Dr. Farhat technical issues and the concept of safety are requirements for WTO accession, but not standards In his remarks, Dr. Farhat stated that Azerbaijan requested and quality. membership in 1997, but in order to gain accession a number of laws must be adopted. In the last 12 years, 14 laws regarding Food Safety: WTO requirements have already been adopted. At present, 12 Dr. Farhat mentioned some of the commitments which need are the Cabinet of Ministers, and another 10 are still being drafted. to be made regarding the Law on Food Safety in order to accede to WTO. Customs Code: Out of 24 signatures of ministers needed to present the Code a) Excise duties ( fees charged for domestic and imported for presidential approval, 22 have been already collected. goods) need to be the same. Features of the new Customs Code: b) export duties on some metals c) VAT for imported agricultural products a) Customs duties evaluation d) Fixed fee for vehicles b) Internet based information c) Fixed fee (fees charged by customs should not be a Before responding to questions from the audience, Dr. Farhat percentage of the value of the transaction|) mentioned Decree 782 to implement a fixed fee of less than 100 d) Requirement of PO process. AZN, which is pending approval by the Ministry of Agriculture.

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to respondents via email, and follow up phone calls were AmCham Membership Survey made to prompt the completion of the questionnaires. Questionnaires were sent to 332 potential respondents AmCham’s membership survey, conducted for the first time, from more than 190 member organizations. The survey offered an opportunity for members to communicate their feelings was administered to 91 current members electronically. on a broad range of issues. The survey project was implemented Respondents were split in terms of length of membership. by Business Insight International Research GROUP. The fieldwork Members ranged in terms of industry and the size of the was conducted from December 5, 2008 through January 9, 2009. business they work for. Representatives span a wide variety of positions, with 48% in the middle management, Objectives 19% CEOs, 4% in the executive management board, 9% The objective of the survey was to seek the opinions of working as CFOs, 4% in the supervisory board and 3% on AmCham members on a variety of subjects concerning the Board of Directors membership of this organization. The subjects covered include The second part of the survey consisted of in- depth interviews events, speakers invited to the events, publications and reports conducted with 47 member companies. prepared, types of communications offered to members, the AmCham website, operation of AmCham committees, Conclusions satisfaction with AmCham staff and its overall operation, This is what we learned from the results of the survey: Although business climate issues and member recommendations with satisfaction with our events is considerable, we should aim regard to the areas evaluated. for higher attendance at events. Luncheons are rated as well The report seeks to reveal the expectations of current members organized and rich in networking opportunities. However, so that we at AmCham may better establish the future goals members wish for more speakers from State authorities and of our organization to meet our members’ needs, enhance the ministries. Members are interested in reading publications quality of services provided and ultimately achieve a higher produced by AmCham. However, we should increase membership level. accessibility to material to encourage wider readership. Members are generally happy with our website, finding it easy Methodology to use. They suggested the inclusion of interesting links or The method used to gather data was twofold. Questionnaires analytical articles. Satisfaction was expressed with the content developed in Azerbaijani, English and Russian were sent of our workshops. Members endorse the design and valuable content of the Salary and Inflation Surveys. Our committees Level of satisfaction with the overall operation are perceived as well-organized and effective. Suggestions of AmCham Azerbaijan. were made for the establishment of additional committees, and a wish expressed for more information on the work and results of the committees. We noted the recommendation of our members for more information about and more effective promotion of the M2M Discount program, which is seen as an important aid to saving costs. Key challenges for members are a lack of time and resources to participate in events. We need to aim for more effective and frequent communication with our members. Overall, members find the operation of AmCham quite satisfactory. We are perceived to have played a significant role in the business achievements of our member organizations. Members are happy with our management and structure, and with our efforts to promote cooperation between member companies. Members have a high opinion of the current level of service provided by us and find membership in our Chamber very advantageous. However, members feel that both AmCham and their organizations would perform much better with intensified communication, a higher frequency of events, and a more diversified membership. We wish to thank all those who participated in the survey Base: and thus aided us in forming a clear picture of the needs and 85 respondents expectations of our members. With your help, we have gained valuable insights from the survey. Note: Not responded to Members are invited to read the in-depth Study Report of the by 6 respondents Membership Survey on our website at www.amchamaz.org

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AmCham Azerbaijan

Member to Member (M2M) Discount Program Discount Providers

HYATT AZEL SEABAK - From 5% to 10% for all type of - From 5% to 10% for onsite helpdesk equipment -15% in all F&B outlets support by junior IT technician -15% on laundry and dry cleaning Shop Addresses: - From 10% to 15% for remote admin- services 1. Nizami str., 68 –SONY-AZEL istration by senior IT engineer 2. “28”, May street, 20 (corner of Azad- lyg ave) - AZEL shop 3. Azadlyg ave., 97 – AZEL shop 4. “Nargiz” shopping center at the Foun- ATA HOLDING tains square – Toshiba-AZEL show-room ATA INSURANCE

1. Insurance WICKLOW CORPORATE - Property insurance – up to 15% SERVICES - Motor insurance – up to 10% 5% discounts on hourly fee rates - Cargo insurance – up to 15% - Personal accident – up to 15% SILVERKEY - Machinery breakdown – up to 10% 20% off the basic website price (up - Travel insurance – up to 15% to 20 pages in 1 language, CMS, 1 year free hosting) 2. Free legal advice (during an insur- ance accident or during the process of choosing the most appropriate insur- ance package) LUFTHANSA EXCELSIOR 3. Next insurance year the clients are -7% for tickets (provided they are bought - 15% on our Duke and Heritage eligible to benefit from 5% to 7% dis- in their office) and access to the business rooms counts (in case an insurance accident class lounge in Heydar Aliyev Airport - 15% for all rentals of conference hasn’t happened during the past year) rooms - 10% for all catering contracted with 4. Additional bonuses aimed to en- the rentals of these conference rooms: courage potential clients cocktails, coffee - breaks, dinners, luncheons, etc ATA BANK PUBLIC RELATIONS & PRO- - 10% in our Belvedere Restaurant on Special M2M Discount Package is MOTION GROUP (PRP) all food and beverage items. available at Ata Bank and AmCham 5% discount on all the agency works - 20% on the 1 year membership for offices upon request. (excluding the 3rd party costs) our Aura Spa

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3M 10% on the following 3M products: - Visuals (Digital Projectors, Digital ALTES GROUP Boards, Vikuiti Rear Projection Film) BAKER & PARTNERS Distributors: AZEL, Integral, Meridian - 5% for all Altes Group apartments - 25% on all Baker & Partners ser- portfolio vices including: - Building&Construction (Window Films) - brand analysis and audit Distributors: Times Consulting - brand strategy development - brand management - Medical products (microbiology) Distributors: Vitta Medical Production, - 10% on advertisement in Online ARASH Business Journal CEO-Azerbaijan OFFICE SYSTEMS - 10% on all office chairs - 15% on office furniture (excluding metal) RADISSON - 10% on all Published Retail Room Rates HOLIDAY INN - 10% in all F&B outlets

CRESCENT BEACH HOTEL - 10% for Accommodation PHILOSOPHY TRAVEL PARK INN - 10% Food & Beverage - 5% on any travel arrangements - 10% in All F&B Outlets.

How to join the Program: Members willing to join the Program and offer their products/ services at special discount to AmCham Regular Members have to inform the AmCham office in writing. A discount pro- vider has to indicate the product(s) or service(s) and discount rate(s). How to obtain discounts: All Regular Members, no matter whether they provide dis- counts as part of the Program or not, can obtain discounts. Members can find information about the discounts in the M2M Section of our website www.amchamaz.org How is M2M advertised? The program will only be advertised internally through the Am- Cham communications channels: AmCham Website and Am- Cham Quarterly Magazine – “IMPACT Azerbaijan”. Note: The cards are for personal use only. A card holder is committed to return the card to AmCham in case he/she leaves a Member establishment.

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