THIRD CHAPTER

SECTORIAL ANALYSIS
3.1. INDUSTRY
The industrial sector was the predominant sector in the Azerbaijan economy
before the independence. 42.1% of the national income belonged to the
industrial sector in 1988. Thus there were 1005 industrial organization in
Azerbaijan in 1988. There were 529 heavy industry organizations, 206 light
industry organiza-tions and 263 agriculture organizations in Azerbaijan
before the independence. The first years of the independence can be
characterized as an adaptation to the free market economy. More than 3800
organization was closed in 1995. Several companies continued their
operations that time. On the other hand the production of the industrial
products decreased in 1990-95. Even the increase of the industrial
organizations (from 1005 to 2984) could not stop the decrease in the volume
of the production1. The main reasons of the decrease in the production of the
industrial products were the weakening of the state regulation, lack of the
relevant stabilization programs and the low-quality market control.
However, it should be noted that, the same situation was observed in all
former Soviet states also. 20% of the industrial potential of Azerbaijan
economy was oil refining equipment production, machine building and
construction sectors. The production of the oil refining equipment is the
oldest and the most important sector for the country. This sector met the
70% demand of the USSR. However the old equipment and instruments
were triggers of theend of such kind of organizations.
All industrial institutions connected with the other countries of the former
USSR. Therefore the stagnation was observed in the industry after the
independence. On the other hand, lack of the supply injured the sector. The
sectors depend on the oil and oil products were the strategic sectors
according to the government and these sectors were added to the
privatization plan. On the other hand, the government initiated a program in
order to attract foreign investors. However some limitations were
implemented for the international investments. The industry started to
1
E.Əhmədov-M.Hacıyev, Azərbaycan İqtisadiyyatı, Səda Nəşrləri, Baku, 2004, p.31;
develop after 1995. The ratio of the industry in GDP increased to 29.6% from
20.8 in 1995. The share of the industry in GDP was 37.6% in 2001, and 45%
in 2015. Consequently from 1996, new industrial organizations were opened
as a result of the establishment of macroeconomic stability. 27% of the
population works in the industry. Despite of the economic reviving, the
unemployment problem has not been resolved yet. Most of the industrial
institutions (90%), which were established in the country, are the small and
medium-sized organizations. The productivity of the previously existed
organizations is low. Therefore oil and oil products of Azerbaijan are
exported as a crude material and semifinished goods.
Figure 11. The Share of the Industry in GDP(%)

60

50 48
37.8 45.6
37.6 42.4 43.2
40 38.1 39.2
29.6 28.8 36 34.9 34.6
30 26.2 28.2
27.3 22.9
20 20.8

10

Source: http://www.stat.gov.az/

The oil production technologies, the processing industry, machine building

and construction sectors provide 1/5 of the industry in Azerbaijan. The
processing of energy, electronics, metal working, machine building,
shipbuilding and weaving are also important industries in Azerbaijan. There
are several organizations in the processing sector. However the dependence
from the foreign countries in the industry (especially former USSR
countries) stagnated most of the organizations in the country. The lagging
was observed in manufacturing industry until 1999. The same situation can
be observed in the production of the steel, paper and other industrial
products. The increase has been observed in the manufacturing since 2000.
The wine production is in the first place in the food industry.
The weaving, carpet-weaving, leather products and the furniture production
are the main industry fields within the light industry. There are many small,
medium and large-sized organizations in the weaving sector. Furthermore
there are several cotton manufacturing organizations in this industry.
There was a huge breakthrough in the weaving sector especially. This sector
provided 10-15% of the Azerbaijan industry in the soviet period. There were
50-60 thousand workers in this sector. In 2007, the weaving was only 3-5%
of the country’s industry. There was a huge decrease in the numbers of
employees in this sector.
Generally intermediate goods and semifinished goods are produced in the
heavy industry. The main part of the heavy industry is provided by oil
industry. Sumgayit is the predominant city in terms of the heavy industry.
There are 88 industrial institutions in Sumgayit. The Azerbaijan government
made 25 years’ plan, which considered the reconstruction of the industrial
organizations in the region. The government needs $30 billion dollars of
investment in order to realize this plan.
It is obviously known that, the main reason of the decrease in the industrial
production connected to the collapse of the USSR and disconnection of the
former union states. This shows itself especially in the heavy industry.
However this cannot be said about light industry. In 2000, the industrial
production increased in comparison with the previous year. The
organizations in line with the energy, petrochemical and private sectors
played much more important role in this growth. The increase rate from
2001 to 2004 was less than the figures of 2000. The growth was 8.6% in
industrial production in 2007, excluded oil sector. Despite of the growth in
industrial production, the total production for 2008 was less than the figures
of 1990. Energy production industry, electronics and metal manufacture,
machine building and shipbuilding as well as the weaving are the
predominant industry fields. After the independence, the growth is observed
in metal manufacturing and chemical industries. The huge breakthrough was
attained in line with the production of oil equipment and metallurgy. The
Customs Tax and Value-Added Tax came into force since 1 st January 1997;
protection measures were enlarged. The role of the private sector in the
industry sector has been increased every year (for instance: 26.4% in 1998,
37.3% in 1999, 43.7% in 2000, 53.7% in 2002, and 71% in 2015).

3.1.1. MINING INDUSTRY

Azerbaijan has rich underground resources. The most important resources
are; oil, natural gas, copper, zinc, lead, sulfate, gunpowder, ore, mercury,
molybdenum, cobalt, arsenic, marble, limestone, salt mine and rock-salt. The
use of the natural resources was planned according to the short and long
term demands. Several important mineral deposits were not used
conveniently. Azerbaijan has 200-250 million tons iron reserves. The
extraction of the iron ore was suspended after the collapse of the Soviet
Union. The reason was the refusal to buy and general decrease in world
market consumption of ore products, which stipulated by switch of industry
to aliminium and plastics. However the German and English companies are
interested in the restoration of the deposits.
The agreement with the “RV Investment”company of the United States was
attained in accordance with the using the gold resources. The agreement was
signed for 25 years. According to the agreement the U.S. Company will
invest $620 million dollars for 6 gold reserves($500 million dollars for
operation and 120 million dollars for development).
The gold reserves are located in Gedebey, Dashkesen and Kalbajar, which is
invaded by the Armenian troops. “RV” company is planning to start
operations based on the price of the gold in the world market2.
The mining sector needs urgent modernization. Consequently the mining
sector is confronted with the significant problems. The lack of the modern
technology is the most important problem of this area.

3.1.2. ELECTRICITY
There are 8 thermal power stations and 6 hydroelectric power stations in
Azerbaijan, which utilized for 85% of their capabilities. These electricity
power centers were built during the soviet period, and they have not been
used relevantly after the independence. 82% of the electricity is produced in
thermal power stations, and the other 18% is produced in hydroelectric
power stations. The liberalization of the prices also affected the price of the
electricity. The electricity which is produced in Azerbaijanwas not enough
to meet the domestic demands. The problem displayed itself in the winter
months especially. The reason of the problem was the old technology, which
was used in the electricity production. On the other hands the production
loss increases gradually because of the inconvenient distribution of the
2
Azərbaycanın qızıl yataqlarının işlənməsinə başlanacaq”, Üç Nöqtə Qəzeti, No:41(521), 4 Mart
2003; ‘US Company to Develop Azerbaijan's Gold Deposits in 2005’, Azernews,
http://www.azernews.net/view.php?d=5692 (19.03.2005).
electricity. Azerbaijan imports energy from Russia, Turkey and Iran.
Azerbaijan joined European Union program in order to establish united
energy system with Azerbaijan, Turkey and Georgia.
On the other hand Azerbaijan implements privatization program in order to
abolish the loss in energy sector. In 1996 the president Heydar Aliyev
signed decree on the privatization of the “Azərenerji” for 5 years.
Azerbaijan was consisted of 5 regions in 2000, in terms of the energy issues;
Baku, Nakhchivan, North (Sumgayit), South (Shirvan) and West (Ganja). The
establishment of the joint-stock companies was planned in for those regions.
There is a fuel problem in line with the electricity production in Azerbaijan.
The electricity networks of Baku, Sumgayit, Shirvan and Minghachevir
were given to private sector in order to meet the oil and gas demands of the
country3. The distribution of the electricity was given to Turkish company
“Barmek Holding” with the decree of the president in the 1 st January, 2002.
The electric networks of Baku and North were managed by “Barmek
holding” while other regions were managed by the “Bayva” company. Then
the BayvaCompany rejected the management of these regions. As a result
the authority was given to “Azərenerji” back.
The electricity systems of Baku have been managed by “Bakı Elektrik
Şəbəkə” and the electricity systems of Sumgayit has been managed by
“Sumgayit Elektrik Şəbəkə” since 2007. The reconstruction of the electricity
system of Azerbaijan was discussed in several projects.Recently
PresidentIlham Aliyev signed decree on the “Establishment of Azerisig Open
Joints Stock Company” and this company took the rights of “Baki Elektrik
Shebeke” and partly electricity producer Azerenerji for Absheron peninsula.
The foreign investors are interested in electricity, but no more than the oil
sector. In 2002 the construction of the Yenikənd Hydroelectric Power
Station was completed. The completion of the reconstruction of the
Minghachevir Hydroelectric Power Station increased energy potential of
Azerbaijan. In 2000, the construction of the “North” electricity station was
started near Baku (The value of it was $201 million dollars). The Japanese
companies such as Mitsui and Mitsubishi, the Turkish companies TML
Borova and the Swedish company ABB were the subcontractors in this
project in order to increase the operational capability of the station.

3
Brief Overwiev of Business Practices, New Investment Opportunities and Legal Environment,
Azerbaijan Investment Promotion and Advisory Foundation, Baku, 2005, p.56.
German KWF allocated 15 million dollars’ loan in order to establish
substation. In this area $2.5 billion dollars are needed in order fully
reconstruct Azerbaijan’s energy sector.
Japan Bank for International Cooperation is one of the other significant
financial supporter to this industry. The Organization allocated $339 million
dollars for the development of the energy sector. Furthermore $100 million
dollars were allocated to the construction of the petrochemical centers of
Sumgayit city. Japan Bank also allocated money for the construction of the
gas pipeline from Garadagh to neighboring areas.
President Aliyev signed 4 important agreement in line with the management
of the electricity system. The president signed a state program on “The Use
of the Alternative Energy Resources” in 2004. The president also signed a
state program on “The Development Fuel-Energetics Complex of
Azerbaijan Republic” including 2005-2015. Approximately $1 billion dollar
is needed in order to reach the goals within the state program 4. According to
the program the electricity production will be increased 4.5%. As a result
the electric energy will be 38 billion kWt in 2015. The power of the energy
system will be 6.5 thousand MVt.

4
“Enerji Sektorunun Vəziyyətini Yaxşılaşdırmaq Üçün 1 Milyard Dollar Lazımdır”, 525-ci Qəzet,
No:53 ,