Primarily known for its oil and gas production, Azerbaijan has a high-tech sector on the rise and worth noticing. Its information and communications technology (ICT) has been booming, with the sector doubling in size every three years since 2004. In 2012, the ICT sector grew by 18%, far outstripping growth of 9.7% in the non-oil sector and just 2.2% in the economy as a whole. The much-needed diversification of the Azerbaijani economy is underway.
A state-owned venture capital fund has just been set up where the government is aggressively pushing the development of its ICT sector. The problem is that spending by the government and state-owned Azer-Telekom remains the primary driving force behind the growth of this ICT sector, raising serious questions of how sustainable this growth is. Will this rate of growth continue once Baku stops investing? It is highly unlikely, making foreign investment crucial to Azerbaijan’s high-tech boom. Foreign companies and investors are already looking to invest in this high-tech sector. Most recently in March, South Korea’s LS Cable & System announced plans to build an optical fibre factory in Azerbaijan.
As Azerbaijan’s economy slows, as recent signs have indicated, Baku might become reluctant to become the sole investor in the ICT sector. Failing to spur growth in the high-tech sector will not bode well with an increasingly assertive and consumer-driven middle class in Baku, who are demanding new products and services. When Baku becomes cash-strapped, foreign investment and outside funds will become increasingly necessary to keep these newly affluent Azerbaijani’s happy. However, a cash-strapped government and a restless middle class is not enough to encourage foreign investment. Deeper structural reforms need to be enacted to convince foreign investors that they won’t be hindered by laws and regulations which choke off innovation and competition.
Tightly controlled by the government, the high-tech sector has discouraged foreign venture funds to invest in private, local high-tech start-ups. Foreign investment in private high-tech companies is also discouraged by a banking system that provides loans to state-owned enterprises at below-market interest rates. Excessive red-tape is also a huge problem, which both foreign companies and private local firms face during registration and licensing procedures. Unless a genuine attempt to reform is made, foreign cash will be held back and the ICT sector will be endangered.
So it is fair to conclude that Azerbaijani’s slowing economy and over-reliance on a volatile oil and gas market could find Baku in tough economic times in the future. Unable to sufficiently fund the high-tech sector, reforms will become more pressing and foreign cash more necessary. So I urge foreign investors, hold onto your cash for now. The current economic and political environment is encouraging patronage, corruption and state concentrated power. But time is ticking, pressure for reform will gradually mount and your opportunity to invest could be around the corner.
