MACROECONOMIC INDICATORS

GDP GROWTH

• Volume - 12,561 bln USD - IMF (2005)

• In 1997-2004 GDP growth averaged nearly 10% annually

• In 2005 GDP growth was 26.4%

• IMF forecast for GDP growth in 2006 is 38%�

•� January-April 2006 in comparison with January-April 2005 - 39,5%

GDP per capita - USD 1,493 – IMF (2005)

INVESTMENT

• Law on protection of Foreign Investment adopted in 1992

• Azerbaijan received 25 billion dollars of foreign investment (1992-2005)

• Azerbaijan has highest ratio of FDI (Foreign Direct Investment) per capita among Eastern European Countries

INDUSTRIAL OUTPUT in 1st quarter of 2006 (works, services) - growth 45,5 %

FOREIGN TRADE TURNOVER - (January-March 2006) - $1943,3 million, (growth in comparison with January-March 2005 - 20,8 %)

export - $ 1037,8 million,

import - $ 905,5 millionďż˝

STATE BUDGET INCOMES - (January-March of 2006) - 658,7 billion manats (AZN) (growth in comparison with January-March 2005 - 47,5 %). Exchange Rate: 1 USD = 0.9012 AZN

INFLATION RATE (early 2006) - 5.3 %

MAJOR INDUSTRIAL PRODUCTS - Oil and natural gas, petroleum products, oilfield equipment, steel, iron ore, cement, chemicals and petrochemicals, textiles.

MAJOR AGRICULTURAL PRODUCTS - Cotton, grain, rice, grapes, fruit, vegetables, tea, tobacco, livestock, wine

PRIVATE SECTOR CONTRIBUTION TO GDP - 75%

OIL

• Oil in Azerbaijan has been produced for 150 years

• by 1911, half of the world oil was produced in Azerbaijan

• In 1994 - 2002 than 22 contracts were signed with 35 large multinational oil companies from 15 countries

• According to this contracts in the years to come 60 billion dollars of foreign investment will be invested in oil and gas sector.

Being one of the oldest known oil producing regions in the world, Azerbaijan served as the major refining center of Former Soviet Union. After gaining independence in 1991, Azerbaijan entered the new oil era. On September 20, 1994 Azerbaijan signed the "Contract of the Century” with International Consortium of Oil Companies on exploration of Azeri, Chirag and Guneshli (ACG) oil fields, located in the Azerbaijani sector of the Caspian Sea. The contract provides development of oil deposits for the term of 30 years. It created favorable conditions for investments in the petroleum sector and beyond and opened once again the door to the world markets for Azerbaijani oil.

In 1997 Azerbaijan acquired early oil from "Chirag” field. Initially it was transported through Baku – Novorossiysk pipeline (northern direction). At the same time Azerbaijan was in the process of construction of Baku – Supsa pipeline in the western direction, which has began operational since April 1999. However, two pipelines were not sufficient for the transportation of existing and potential oil and in November 1999 Azerbaijan, Georgia and Turkey signed an agreement on construction of Main Export Pipeline Baku – Tbilisi – Ceyhan (BTC), which is aimed at bringing rich oil resources of Caspian Sea to the world markets through Mediterranean port Ceyhan (May 2006 first delivery for BTC from port Ceyhan). The partner companies involved in the construction of the main pipeline were BP, SOCAR, Unocal, STATOIL, TPAO, ENI, Itochu, Delta Hess, TFE and INPEKS. Azerbaijan has undertaken 25 % of the project finance. By July 2003 15% of BTC has been completed.

Recent explorations of ACG have shown that deposits of oil which could be developed increased from 4.2 billion barrels to 5.4 billion barrels, which is equaled to 730 million tons. For the rational use of these opportunities the full-scale exploration project was launched in August 2001. This project focuses on the exploration of central part of Azeri field. Oil from this platform will be transported to Sangachal terminal through 187 km sub-water pipeline. To proceed large amounts of oil and gas enlargement of Sangachal terminal is of a great importance. As a result of the implementation of this part of the project development of oil in the platforms Chirag – 1 and Markezi Azeri will reach 250 thousand barrels a day by the first quarter of 2005. Next stage of the project will focus on the development of eastern and western areas of Azeri fields, which will complete the exploration of Azeri field. As a result of development of oil in Azeri field will increase to 800 thousand barrels a day (40 million tons a year). The third phase of the development of ACG will come to an end by 2007 and by that date total exploitation only in those three fields will exceed one million barrels a day. In 21-th century the oil recovery in Azerbaijan is forecasted at a rate of 30-50 million tons.

State Oil Fund of Azerbaijan (SOFAZ) was established in 2001 to save resources for the future generations. Main purpose is to diversify economy. Reserves $810 million, will increase more than $1 bln annually starting 2006.

NON-OIL SECTOR

Following this initial recovery after the collapse of economic regime established in former Soviet Union, the Azerbaijani economy is now poised to meet the challenges of the transition to a market economy, while at the same time, developing oil resources that will provide the engine for long-term sustainable growth and rising per capita incomes across all segments of the population.

The government is aware of the potential dangers of building an economy that is overly dependent on a single industry or economic sector — oil — and the risk that this industry could inadvertently hinder the development of other sectors of the economy. The goal of Azerbaijan’s economic policy is to achieve balanced growth. To attain this goal, Azerbaijan has been implementing economic reforms supported by advice and the financial resources of the International Monetary Fund (IMF), the World Bank and other bilateral and multilateral creditors. The government’s broad program of reforms includes the following:

• Liberalization of prices;

• Widespread cuts in government subsidies;

• Tight budgetary and fiscal controls to limit inflation;

• Restructuring the banking sector to improve transparency;

• Modernizing the tax structure;

• Instituting a land reform program; and

• Privatizing state-owned assets.

During the years the reforms have been in place, Azerbaijan’s economy has been undergoing a structural shift, in which services, transportation, communications, trade and construction sectors are rapidly expanding.

Macroeconomic stability was regained and inflation has been brought to lower level. Investment activity in both oil and non-oil sector of the economy have ensured the growth of the economy. As the result of recent achievements international rating agency Fitch IBCA has upgraded Azerbaijan’s long-term foreign exchange credit rating to "BB-”.

Privatization process as an important part of structural reforms in the country has continued. As the result of the first stage of privatization by January 2000, 21544 small companies and units have been privatized and 996 joint-stock companies has been established. By March 2001 this number was 23539 and 1230 correspondently. Since the commencement of privatization process by the year 2002, 33700 companies have been privatized.

Manufacturing: The oil equipment and related machine-building sectors constitute the most promising manufacturing sectors. Since Azerbaijan’s independence, there has been a shift in manufacturing from oil-based industries, such as chemicals, to sectors such as finished metal goods, including pipes, machine tools and computers. Petrochemical products, including synthetics, rubber, detergents and polymeric materials, as well as aluminum smelting, textiles and clothing, and food and beverages, comprise the bulk of other manufacturing operations. The government has designated the industrial zone of Sumgayit, country’s third large city, as a free economic zone in an effort to attract foreign investors to produce goods for export.

Agriculture: Agriculture has always been the important part of Azerbaijan economy. More than 30 percent of Azerbaijan’s workforce is engaged in some form of agriculture. Most of the country’s farming activity is centered in the fertile lowlands of central Azerbaijan, along the Kura and Araz rivers. Territory of Azerbaijan is divided into 59 agricultural regions extending across 10 geographic zones.

Crops, including cotton and grapes, and livestock are evenly spread across these regions, while tobacco production is concentrated in specific regions. Crops constitute over two-third of agricultural production, while livestock accounts for the rest. Major cash crops in Azerbaijan are grapes, cotton and tobacco, which have traditionally been produced and marketed by the state.

After the collapse of the Soviet Union the deregulation and liberalization took place in the economy, which led to the rapid changes in the agricultural sector as well. After the 1996 Law on Land Reforms land has been distributed to individuals. Former state-owned farms have been granted operational autonomy, which has greatly increased their productivity. Private farming, especially in the areas of vegetable, fruit and livestock production, is gradually gaining strength.

Mining: Azerbaijan is endowed with iron, gold, aluminum, zinc, copper, marble and fire clay. In particular, the country has large reserves of iron ore and aluminum ore. Foreign investment is needed to develop and modernize existing mining operations.

Infrastructure: There are 2,089 km of railways, which provide the main source of transportation for freight. The network of roads for vehicles serves domestic cargo traffic and provides access to international highways. Sea cargo transportation is very important for Azerbaijan, connecting the country with other states of Central Asia, Iran and Russia. Baku is the largest port on the Caspian Sea for cargo-handling facilities and for ferry lines connecting Europe and Asia. Azerbaijan maintains regular flights with Commonwealth of Independent States (CIS) countries, as well as with Germany, Israel, Iran, Turkey, Austria, Pakistan, the Netherlands, Greece, Poland, China, Italy, the United Kingdom and the United Arab Emirates. Azerbaijan Airlines (AZAL), British Airways, Lufthansa, Austrian Airlines, Turkish Airlines, Aeroflot and other regional carriers maintain air service. The country’s telecommunications infrastructure is in the process of being rebuilt and modernized, but additional investments are needed for the future.

Banking

� Banking system of Azerbaijan Republic includes the National Bank and credit organizations. The regulation of the banking activity is conducted by the Constitution of the Azerbaijan Republic, present Law, the Law "About National Bank of the Azerbaijan Republic", other legislative and normative acts of the National Bank of Azerbaijan (NBA). National bank was created in February 1992 on the base of Azerbaijan State Bank (former affiliate of Soviet State Bank). NBA serves as Azerbaijan’s central bank and in that capacity manages the monetary affairs of the state as well as supervising all commercial banks. National Bank is the regulatory agency responsible for government capitalization and liquidity policy. Commercial banking sector is represented by two state-owned banks, International Bank of Azerbaijan (51% of shares owned by the state) and United Universal Joint-Stock Bank (created as a result of merger of Savings Bank, Industrial Bank and Agriculture Bank, 100% shares owned by the state), and large number of private commercial banks. In 2001 the restructuring of state banks was completed and significant steps have been taken toward privatization of state-owned International Bank and United Universal Joint-Stock Bank. As a result of reforms in banking sector new electronic payment system was introduced and accounting and banking supervision was brought to international standards level.

Trade and Foreign Investment

Since re-establishing its independence, Azerbaijan has swiftly reoriented itself towards new markets outside of the former Soviet Union.

Major export markets include Iran, Russia, Georgia and Turkey. Major import markets are EU, Turkey, the United Arab Emirates, the Ukraine and Germany. Major Export Products - Oil and oil products, food products, machinery and equipment, textiles, chemicals, metals and plastics

Major Import Products - Machinery and equipment, transport facilities, mineral products, metal, chemicals, plastics, food products.

Environment

Azerbaijan is the largest country in South Caucasus. Almost 50 percent of the total area is agricultural land, 2.5 percent is urban land (with Baku comprising 2.15 percent) and 13 percent is forest territory. Lowlands occupy more than half of the country. Azerbaijan is notable for its ecological diversity. Its territory includes vast plains below sea level, mountain peaks with heights of over 4,000 meters, deserts, Alpine meadows, salt marshes and sub-tropical woods. The country has nine of the twelve climate zones.

Azerbaijan accounts for 15 percent of all water resources in the South Caucasus countries. All of the country’s rivers flow into the Caspian Sea. The irrigation system is regulated by water reservoirs. The Caspian Sea fishing stock is capable of producing six times more fish than the Black Sea, however, water pollution is a growing concern that must still be addressed.

Azerbaijan is notable for its diversity of species, both flora and fauna. Of the 4,500 plant species, 143 are considered endangered. Of the 20,000 fauna species, 109 types of animals are endangered. More than 2,100 century-old trees are protected by the state.

The State Committee for Ecology and the Use of Natural Resources, which reports directly to the President, has responsibility for developing and managing environmental protection programs. The Committee has made important progress by introducing a number of important laws and regulations to safeguard Azerbaijan’s natural resources.