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Country Commercial Guides FY 2000: Azerbaijan Report prepared by U.S. Embassy Baku, released July 1999 Note*

CHAPTER IV. MARKETING U.S. PRODUCTS AND SERVICES

A. Distribution and Sales Channels: Azerbaijan's private sector marketing system is only just beginning to develop. An emerging private trading sector is very slowly replacing the moribund centralized state purchasing system. Private traders and small shops selling imported goods are thriving because they are self-financed. State enterprises are unlikely to provide markets for most U.S. goods because they are unable to pay for them. This is exclusively a cash economy.

B. Use of Agents and Distributors: There is an emerging class of western entrepreneurs who act as agents for U.S. companies, but very few Azerbaijani trading firms have established a track record as partners with Western firms. At present, about 70 U.S. firms are resident in Baku, most of who are oil related. The Commercial Section of the U.S. Embassy can provide U.S. businesses with the names of local companies that may serve as agents or distributors. Prospective companies may also contact the American Chamber of Commerce of Azerbaijan or the Chamber of Commerce and Industry of Azerbaijan for possible leads. Refer to Chapter XI, Appendix E for contact information. The lack of a western-style banking system makes it almost impossible to verify the financial bona fides of prospective partners. Because of this, potential exporters should plan to visit Azerbaijan in person to build personal relationships, set up local sale networks, or establish partnerships with local agents or distributors.

C Franchising: Apart from the expatriates, the economy of Azerbaijan, particularly with respect to disposable income, does not lend itself to franchising. However, there have been some instances that have recently materialized. The "American Fast Food" chain out of California became the first U.S. fast food operation to open its doors in March, 1999. Chrysler opened its first dealership in Baku in 1996. Ford and GM have since established dealerships in Baku. A Coca-Cola bottling plant also opened in 1996, under a Turkish licensee. HYATT Hotels began operations in Azerbaijan in 1994. Macdonald's is readying itself to open a restaurant in Baku before the year ends.

D. Direct Marketing: U.S. firms seeking to develop an export market in Azerbaijan are encouraged to set up their own representative offices using expatriate or local sales staff. Ongoing changes to the legal infrastructure require close contact with the local market in Azerbaijan. Before actually establishing an office in Azerbaijan, contact the Commercial Section of the U.S. Embassy.

E. Joint Ventures/Licensing: The GOAZ encourages foreign participation in the economy. Foreign investors can form joint ventures with local companies or other foreign investors. Privatization auctions are open to foreign investors who have purchased options to buy privatization vouchers. Lack of clarity in the tax regime can lead to unanticipated tax claims from various levels of taxation authorities. New tax legislation is under preparation.

F. Steps to Establishing an Office: Foreign investors in Azerbaijan must decide whether to establish a wholly foreign owned enterprise, a joint venture or a representative/branch office. These are the only accepted commercial forms of Azerbaijani legal entities. Companies must register as one of these entities with the Ministry.* The Registration Department of the Ministry of Justice (RDMJ) is responsible for registering all Azerbaijani legal entities, including those fully -- or partly -- owned by foreign companies.

* Registering a Company Branch or Representative Office : The RDMJ requires the following documents in order to register a company branch or representative office (CB/RO) of a foreign legal entity (FLE):

1) A letter from the FLE signed by its president and CB/RO official applying for registration (one copy);
2) A document from the management board of the FLE stating its intent to open an office in Azerbaijan two copies);
3) A notarized power of attorney issued by the FLE to the head of the CB/RO (two copes);
4) Two copies of the head of the CB/ROs identification document/passport and three photos;
5) Two copies of the FLE's company charter and certificate of incorporation or equivalent. Both sets of documents must be notarized and then certified by the consular section of the Azerbaijani Embassy in the U.S.;
6) Statement of good standing from the FLE's bank (one copy);
7) A document signed and sealed by the head of the FLE stating the purpose/objectives of the CB/RO and setting forth the operating principles and regulations of the organization, including the responsibilities and powers of the CB/RO chief executive (five copies);
8) Receipt for payment of the state registration fee (825,000 AZM for a CB and US$2,000 for a representative office. Payment should be made to the State Budget Fund at the National Bank of Azerbaijan, Account 30100062, code 501004);
9) Sample of the registering company's corporate seal or stamp (two copies);
10) CB/RO's Azerbaijani Identification number;
11) A copy of the lease agreement or other document certifying the CB/RO's legal address in Azerbaijan.

Documents 1 through 6 should be submitted in both English and Azerbaijani. Documents 7-11 should be in Azerbaijani.

* Registration of a wholly Foreign-owned or Joint Venture Company: An FLE applying for registration of a wholly foreign-owned or joint-venture company must provide documentation listed above in 1, 2, 5, 6, 8-11. In addition, the FLE must submit five notarized copies of the company's charter approved by the founder of the company. If there were two or more partners that were involved in establishing the company, then notarized copies of the minutes of the general meeting forming the company are required. For joint ventures, RDMJ also requires two copies of the founding contract.

If there is any problem with a company's submitted application and supporting documents, the RDMJ must issue a letter within five working days describing the problem. Otherwise, the application of the company goes directly to the Board of the Ministry and should be approved at the next Registration Board Meeting. Following board approval, the Ministry will issue a registration certificate. A company must present a copy of its registration certificate to open a bank account, register with the state tax authorities, and obtain a statistical code number.

Although the Ministry of Justice has decentralized and opened district offices, FLEs must continue to submit their registration documentation to the Ministry's central office. (see Chapter XI, Appendix E).

G. Selling Factors/Techniques: Personal contact and relationships are critical in Azerbaijan. Individual meetings are much more effective than long distance communication. Business people are generally bi-lingual in Russian and Azerbaijani (very close to Turkish). However, the official language is Azerbaijani. It may be necessary to translate official documents into Azerbaijani, rather than Russian. Business can be conducted with translators.

Letters of credit drawn on Azerbaijani banks are the preferred instruments for import/export operations. Consumer credit mechanisms are rudimentary. Most business is conducted with cash.

Private banks do exist, but account for only about 15% of deposits in the commercial banking sector, which is dominated by the state-owned International Bank of Azerbaijan. The first wholly foreign-owned western bank, the British Bank of the Middle East, began commercial operation in Baku in 1996.

Credit cards are only beginning to be used at a few western establishments and the International Bank of Azerbaijan. The International Bank of Azerbaijan operates 18 ATM machines and through the end of June '99 has issued 6,000 Visa and Evropay International cards. IBA is planning to increase the number of cards issued to 10,000 by the end of this year. It's main competitors in this regard are: Most-Bank Azerbaijan -- 1000 cards; Azerdemiryolbank -- 150 cards; Rabitabank -- 50 cards; and Azerigasbank -- 30 cards.

H. Advertising and Trade Promotion: Newspapers in Azerbaijani and Russian are published daily, except Monday. English-language papers are published weekly. Television advertising is possible on Azerbaijan's two state-held TV stations and on the country's three private TV stations, including one satellite station, that broadcasts to Baku and to the Sumqayit area. In addition, Baku receives three Russian TV channels. Turkish TV is also received. In addition, state radios offer advertisement on their FM and medium wave broadcasts. For further information concerning any media group in Azerbaijan, contact:

Lala G. Nacafova
Information Specialist
U.S. Information Service
American Embassy, Baku
Tel: (9)(9412) 980335/6/7
Fax: (9)(9412) 989312
Homepage: http://www.usia.gov/posts/baku.html

I. Pricing Products: There are GOAZ price controls only for wholesale gasoline. Prices may be quoted in U.S. dollars, but actual sales are in Azerbaijani manat. Azerbaijanis expect to bargain over prices. Storage facilities are limited and prices may vary considerably depending on shipment schedules. Recently, the government has announced excise taxes on imported tobacco and alcohol products for the purpose of protecting domestic industries.

J. Sales Service/Customer Support: Buyers in Azerbaijan are not used to customer service or product support once a sale has been made. Product guarantees are virtually unknown. An U.S. firm operating in this market and able to provide a strong customer service center, e.g., for computers or cars, enjoys a competitive advantage.

K. Selling to the Azeri Government: Selling to the central government or to state enterprises is difficult because government funds are scarce. Except for World Bank and European Bank for Reconstruction and Development (EBRD) projects, there is no financing for major capital projects. Oil revenues are not expected to flow to the GOAZ before 2003, and even then, major revenue will only begin to be realized with main oil output after 2008. At present the GOAZ is running arrears in payments to domestic suppliers. Inter-enterprise debts are massive with little prospect of being reduced. State enterprises are often two to three months late in paying their own employees. Firms selling to the GOAZ should be particularly careful to specify beforehand how the 20% value added tax (VAT) will be handled.

L. Protecting Products from IPR Infringement: Azerbaijani law protects copyrights, patents, trademarks and industrial designs. The U.S.-Azerbaijan bilateral trade treaty also covers intellectual property rights (IPR). Azerbaijan subscribes to various international intellectual property rights conventions. In reality, GOAZ mechanisms to enforce IPR laws are very limited.

M. Need for a Local Attorney: The Azerbaijani legal system does not contain a transparent body of commercial law. The Embassy maintains a list of commercial lawyers in Azerbaijan, some of who have received USG-funded training in the United States. We advise U.S. firms to seek legal advice before signing business contracts. At present there are major international accounting firms who provide business consulting services -- Ernst & Young, Price-Waterhouse, and Arthur Anderson.