Source: EURLEX
Language: en
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# 52011SC0640

**JOINT STAFF WORKING PAPER Implementation of the European Neighbourhood Policy in 2010Country report: Azerbaijan JOINT STAFF WORKING PAPER Implementation of the European Neighbourhood Policy in 2010Country report: Azerbaijan /\* SEC/2011/0640 final \*/**

  

JOINT STAFF WORKING PAPER

Implementation of the European
Neighbourhood Policy in 2010
Country report: Azerbaijan

1.
Overall assessment

Azerbaijan and the EU first established
contractual relations in 1996 through a Partnership and Cooperation Agreement
which entered into force in 1999. On that basis, the EU-Azerbaijan European Neighbourhood
Policy Action Plan (ENP AP) was approved in November 2006 for a period of five
years.

In 2010,
EU-Azerbaijan meetings took place at the level of the Cooperation Council, the Cooperation
Committee and the three subcommittees. The subcommittee
on Justice, Freedom and Security and Human Rights and Democracy met for the
first time during the year.

This document reports on the progress made
in implementing the EU-Azerbaijan ENP AP between 1 January and 31 December
2010, although developments outside this reporting period are also taken into
consideration when deemed relevant. It is not a general review of the political
and economic situation in Azerbaijan. For information on regional and
multilateral sector processes, please refer to the sectoral report.

Within the Eastern Partnership (EaP), the
EU and Azerbaijan continued to strengthen their relations. Following the
adoption of negotiating directives for an Association Agreement (AA), the
negotiations were launched in July 2010 in Baku and have made good progress
during the reporting period. This Agreement is conceived by both Parties as
illustrating the most advanced and ambitious approach to the Eastern
Partnership vision of association, including a Deep and Comprehensive Free
Trade Area (DCFTA) and a comprehensive programme of approximation to EU acquis.
The negotiations on a DCFTA will start, in the same framework, once the
necessary conditions have been met. These include Azerbaijan’s joining of WTO. In
this respect, no progress has been made in the negotiations on Azerbaijan’s
accession to the World Trade Organisation (WTO).

Overall, Azerbaijan made some progress in
implementing the ENP AP, in particular in the area of macro-economic stability
and efforts to address poverty and attain socio-economic equilibrium.

However, Azerbaijan needs to make
significant further efforts to meet the Action Plan commitments in the field of
democracy, including electoral processes, the protection of human rights and
fundamental freedoms and the independence of the judiciary. In this respect the
EU noted with concern an increasing number of reported arrests of youth
activists in the country in February, March and April 2011 and other measures
of intimidation as well as restrictions on the freedom of expression and
assembly.

Azerbaijan has launched an anti-corruption
campaign in early 2011 and will need to continue efforts in this context.

Progress was noted in the fight against
organised crime, terrorism and illicit trafficking. Progress was also made on
gender equality with the adoption of a law on domestic violence.

Azerbaijan suffered less than the other
Eastern neighbourhood countries from the global economic crisis, and was less
constrained in achieving the objectives of the AP. However, while the general
economic policy stance was prudent and broadly adequate, little was achieved in
the area of structural transformations. The main
macroeconomic challenge remains the diversification of the economy away from
the hydrocarbon sector and the monopolisation of the economy.

Good progress was made in the field of
energy cooperation, including Azerbaijan’s support to the Southern Gas
Corridor. In January 2011, during the visit of European Commission President
Barroso to Baku, a Joint Declaration on the Southern Corridor was signed,
demonstrating the commitment of both sides to ensuring energy supplies to the
European gas market.

Negotiations on a peaceful solution of the
Nagorno-Karabakh conflict continued at the highest level, with some progress,
in particular regarding the exchange of prisoners of war, as a necessary
confidence building measure to further advance the process. An increased number
of incidents of exchanges of fire and casualties on the line of contact
continued to be reported. This remains a cause for serious concern.

2.
Political dialogue and reform

Democracy and rule of law

The conduct of the parliamentary elections
held on 7 November 2010 was not sufficient to constitute meaningful progress in
the democratic development of the country. A large number of international
observers monitored the elections. Several shortcomings were observed in the
course of the electoral process, including the high rejection rate of
registration of opposition candidates and the restricted campaign environment,
with intimidation of opposition candidates and their supporters. Changes in the
electoral code in June 2010 meant a shortening of the election period from 75
to 60 days and a reduction in the campaign period which started 23 days before
the election day. Amendments also included the abolition of state funding for
candidates, who had to resort to other means to finance the campaigns. Overall,
these measures prevented the creation of a level playing field for all
candidates. In addition, on election day, additional shortcomings were observed
including ballot stuffing, multiple voting and flawed counting of votes. There
was no progress regarding the concerns raised by the Council of Europe (CoE)
Venice Commission in the context of bringing the law on the municipalities into
line with the constitutional amendments introduced in 2008.

Apart from the implementation of a number
of training programmes, no tangible progress was made with respect to civil
service reform. However, recognising the need to advance further in this
field, the EU and Azerbaijan, in the context of the EaP, took steps towards the
launching of the Comprehensive Institution Building (CIB) programme, aimed at strengthening
key areas of the Azerbaijani civil service.

The Constitutional Law on Normative Legal
Acts was adopted in June 2010. The purpose of this law is to combine in a
single legal instrument all the important rules for producing state norms. It
addresses the preparation, drafting, adoption, publication and bringing into
force of normative legal acts and facilitates the regulation of legislative
work and cooperation between the legislative and executive branches of power.
The law is expected to improve the legal, material and formal quality of
Azerbaijan’s legislation.

With respect to the functioning of the
judiciary, the lack of independence, inefficiency, lack of transparency and
levels of corruption remained serious concerns which need to be addressed.
Nevertheless, some steps were taken in the area of judicial reform. The
Law on Courts and Judges was amended to decentralise the justice administration,
including through the establishment of Serious Crimes Courts in all regions. The
establishment of Administrative Courts also constitutes a further important
development.

Amendments were also made to the Law on
Lawyers and Advocates by lifting the bar examination for lawyers and judges who
want to become advocates and introducing provisions on the organisation of the
bar on ethical standards. Provisions were also introduced to entrust execution
officers with implementing decisions of all courts and imposing fines for
non-execution of court decisions. Additionally, an increase in the number of
judges by 25 % up to 600 was decided. Despite this positive development, even
more judges are needed. The Judicial Legal Council was strengthened. The
establishment of the Academy of Justice made slow progress. Meanwhile, there
was no progress at all with regard to the establishment of a system of
specialised juvenile justice.

Uneven progress
was made in the fight against corruption. Progress is noted in meeting several
of the 2006 recommendations of the Group of States against Corruption (GRECO)
with regard to public sector human resources management issues. However, in its
2010 evaluation focusing on incriminations and transparency of party funding,
GRECO concluded that significant shortcomings remain in the legislation and its
effective application, particularly regarding the criminalisation of the
phenomenon. There is a perception that the level of corruption has increased
over the last three years, with Azerbaijan being ranked the highest among CIS
countries for corruption. It is noted, however, that an anti-corruption
campaign was launched by the president in early 2011.

Human rights and fundamental freedoms

The Commissioner for Human Rights
(Ombudsman) was reappointed for a second seven-year term in May 2010. The same
person may hold the post for not more than two terms. The regional centres of
the Ombudsman’s office were also strengthened.

No progress or even deterioration of the
situation was noted in the field of freedom of expression and media
freedom. Since 2009 the ranking of press freedom[1] in the country dropped by six
points. The overall situation of media in the country was characterised by lack
of media pluralism and a pro-government bias of mainstream media outlets,
harassment of and violence against journalists, questionable judicial
proceedings against media representatives.

A parliamentary vote in December 2010 rejected
a plan to create an Ombudsman for news and information, although the 2005 Right
to Information Law stipulates that such a function should be established six
months after its enactment. There was no progress in amending the criminal code
to abolish defamation, which constitutes a legal
barrier to freedom of expression in the country. Cases of harassment of journalists and political activists
expressing independent views continue to be regularly reported. The Press
Council remains under the strict control of the authorities. Furthermore, the
existence of a “blacklist” of newspapers published by the Press Council allows
discriminatory actions to be taken. But in November 2010 the two youth
activists, who had been imprisoned for two and a half years charged with
hooliganism, were released following an appeal. At the same time no progress
was noted in implementing the ruling of the European Court of Human Rights of
22 April 2010 with respect to an imprisoned journalist whose rights to freedom
of expression and information and right to a fair trial had been violated.

Further progress was made in upgrading the
material infrastructure of the prison/penitentiary system and the
conduct of law enforcement staff improved. However, widespread torture and
ill-treatment continued to be reported. No progress was made in the direction
of the right to individual complaints under Article 22 of the UN Convention
against Torture.

No progress was observed with respect to freedom
of assembly. In addition to restrictions for political parties and rallies
in relation to the parliamentary elections (see above), the breaking up
of demonstrations and gatherings of religious or non-political nature was also
noted during the reporting period. No progress was made regarding freedom of
association. Following the amendments made in 2009 to the Law on
non-governmental organisations (NGOs), difficulties continued to be observed
with respect to registration of NGOs. Following legal amendments introduced in
May 2009 regarding the law on freedom of religion, religious groups were
obliged to register by 1 January 2010. In the course of the year, there were
several reported cases of harassment of religious groups in relation to
religious meetings or the distribution of religious literature.

The lack of protection of property
rights is a matter of concern. There are reports of illegal expropriation
and evictions without residents’ consent in connection with large-scale infrastructure
developments, particularly in Baku.

In the area of gender equality and empowerment
of women, progress was noted as the Law on Prevention of Domestic Violence
and Protection of Victims of Domestic Violence was adopted in October. 
According to the law, domestic violence complaints will be considered by the
relevant authorities and prosecution will be carried out in accordance with
criminal procedures.  Furthermore, the law foresees the establishment of
special shelters for victims of domestic violence. In addition, the parliamentary
elections in November 2010 led to an increase in the share of female candidates
from 11% to 16%, compared to the previous parliamentary elections. The number
of female members of parliament increased from 14 to 20 members as a result. In
October 2010 the CoE Convention on Action against Trafficking in Human Beings
entered into force.

Cooperation on foreign and security
policy; conflict prevention and crisis management

Since June 2007, Azerbaijan has been
invited to align with CFSP declarations on a case by case basis. In 2010, Azerbaijan aligned with 18 out of 44
CFSP declarations which it was invited to join. There was intense
political dialogue with the government in 2010, including through two Political
and Security Committee political dialogue meetings
in June and September 2010.

There were no developments in the direction
of accession to the Rome Statute of the International Criminal Court
(ICC).

Parliament adopted the Law “on
participation of the Republic of Azerbaijan in peacekeeping operations” in May
2010. The law provides for Azerbaijan's participation in peace-keeping
operations in line with the UN Charter, thus observing the principles of
international law and international agreements.

Strengthening regional cooperation

The Southern Caucasus Integrated Border
Management (SCIBM) promoted by the EU among Georgia, Armenia and Azerbaijan
started in March 2010 (See chapter on cooperation on justice, freedom and
security). The Regional Environmental Centre (REC) for the Caucasus carried
out regional activities in 2010, including in the fields of information and
public participation, environmental policy and local environmental action plans
(See chapter 6, part on environment).

Contributing to a peaceful solution
of the Nagorno-Karabakh conflict

Negotiations within the Minsk Group for a peaceful
settlement continued with the Presidents of Armenia and Azerbaijan holding three
bilateral meetings in 2010. At their meeting in Astrakhan in November, both
Presidents agreed to exchange prisoners of war and bodies of dead servicemen.
However, courageous steps by both sides will be needed if a resolution to the
conflict is to be found.

In autumn 2010, the Minsk Group Co-Chairs
intensified their activities with a visit to the Line of Conduct. A Field
Assessment Mission to the territories surrounding Nagorno-Karabakh also took
place. A joint statement by the OSCE Minsk Group together with the Presidents of Azerbaijan and Armenia during the OSCE Summit in Astana in December
2010 stressed that the ”time has come for more decisive efforts to resolve
the Nagorno-Karabakh conflict” and that a peaceful resolution to the
conflict is the only way to bring real reconciliation to the peoples of the
region. However, tensions remain and the situation continues to be fragile. An
increased number of incidents of exchanges of fire and casualties on the line
of contact continued to be reported and remains a cause for concern.

In support of the negotiations led by the
OSCE Minsk Group, an EU-funded project to contribute to the peaceful resolution
of the Nagorno-Karabakh conflict was launched in June 2010. The project
supports activities in the area of media, public policy and conflict affected
groups.

3.
Economic and social reform

Macroeconomic framework and
functioning market economy

In 2010, real GDP growth slowed to 5%
compared with 9.3% GDP growth in 2009. The slowdown was mainly due to weak
expansion in oil production, following the rapid rise in 2009 which had been driven
principally by increased production from the Azeri-Chirag-Guneshli oilfields in
the Caspian Sea. Growth in the non-oil sector outpaced growth in the oil sector
(7.9% against 1,8% in real terms). The oil sector had driven exceptional growth
rates in recent years. It expanded by an annual average of 37% in the period
2005-2009 and currently accounts for around half of country’s GDP and over nine/tenths
of its exports. Both exports and investment bounced back after contracting in
2009. Exports in 2010 rose by 14,5% driven by increasing global demand and
higher oil and gas prices. Investment rose by 6% linked to a slight recovery in
foreign direct investment (FDI). The relatively small services sector, which
makes up approximately 30% of GDP, continued to expand, mainly driven by
hotels, restaurants and the communications sector. The agricultural sector
contracted by 2.5 % following poor yields in potato and grain products related
to heavy flooding.

Despite the weak expansion in oil
production, the trade balance ran a surplus of around 38% of GDP in 2010,
compared to 34% of GDP in 2009. Higher oil prices boosted export revenue and
dwarfed increases in import spending. The assets of the State Oil Fund of the
Republic of Azerbaijan (SOFAZ, the overseas windfall fund) rose to Manat 17.4 billion
(EUR 16.3 billion) at the end of 2010, making the fund roughly equal to 40% of
GDP. The current account surplus rose above 26% of GDP compared to 23% in 2009.
External public debt remains low at about 10% of GDP. Higher international
commodity prices and the adverse impact of flooding earlier
in the year contributed to a steep rise in inflation
(7.4% compared to 0.6% in 2009). Food products were most affected.

In response to the inflationary pressure,
the Central Bank of Azerbaijan (CBA) raised the refinancing rate by one
percentage point to 3% in November 2010 and to 5% in March 2011. The increase followed
a period of significant monetary easing, in which from October 2008 the
refinancing rate had been reduced by 13 percentage points. In spite of the
reduction in the refinancing rate, average lending interest rates remain high
at around 20%; high financing costs remain an obstacle to development,
particularly for smaller enterprises. The Manat
remained stable against the Euro and the US dollar, helped by higher oil prices
and a growing current account surplus.

The Government’s 2010 budget targeted a narrowing
of the non-oil deficit at the same time as allowing for tax cuts. The budget
deficit remained broadly similar to 2009 at around 15% of the GDP, excluding
transfers from SOFAZ. When SOFAZ transfers were taken into account, the deficit
was 0.9% of GDP. Government consumption was reined back in 2010 after the
marked expansion in 2009. This supported the government's pledge not to
increase expenditure despite rising oil revenues in order to promote greater
fiscal sustainability in line with the Action Plan objective of maintaining a
stable non-oil fiscal deficit. Revenue
declined as a percentage of GDP compared to 2009, under the influence of
several tax reductions which took effect from January 2010. These included
cutting the rate of profit tax from 22% to 20%; lowering the maximum rate of
income tax to 30% from 35%; and raising the threshold at which small firms are
subject to profit tax.

In order to
diversify the economy, the authorities continued to improve the business
environment and enhance competitiveness.  Transport infrastructure was further
improved, in particular the railway corridors.

Employment
and social policy

The official unemployment rate rose
slightly from 0.9% in 2009 to 1.0% in 2010. According to the survey-based ILO
methodology 6% of the total labour force is without a job.

On the basis of an inquiry by the Human
Rights Commissioner (Ombudsman), the Constitutional Court included imperative
clauses in the Labour Code providing for the preservation of salaries of
juveniles during vocational and in-service training. The Law “On Compulsory
Insurance against Occupational Accidents and Loss of the Ability to work as a
Result of Professional Diseases” was adopted.

Informal employment
makes up an important segment of the economy in Azerbaijan and labour rights
are often violated, especially in the private sector. Occupational accidents
are a cause for concern. The Law on Compulsory Insurance against Occupational
Accidents is therefore a positive addition to the existing Labour Code.

In September
2010 Azerbaijan took several measures to reduce poverty, including
increasing allowances to Internally Displaced Persons (IDPs) and to other low income
groups, and raising the minimum salary and basic pension of workers in certain public
sector institutions.

In September
2010, the president also signed a decree to strengthen the social security of those
on low incomes. Allowances will be granted to people with health problems that
are related to work, industrial accidents or military service, and to disabled children.

On social
inclusion and protection, new rules on the pension system entered into
force in July 2010. The retirement age for men will be raised incrementally to
63 years by 2012, and that of women will be raised from 57 to 60 years by 2016.
The base pension was increased as of September 2010. The Azerbaijani parliament
adopted several amendments to the law on pensions, which took effect from 1 January
2010.

During the
reporting period, no significant developments occurred regarding the
implementation of the part of the ENP AP related to agriculture.

4.
Trade-related issues, market and regulatory
reform

After the 2009 decline, bilateral trade bounced
back during the reporting period: compared to the previous year
exports of Azerbaijani products to the EU increased by 33%, while EU exports to
Azerbaijan rose by 45.6%. However, there were no improvements in terms of
diversification of exports, as 99.2% of Azerbaijani exports to the EU still
consist of mineral fuels.

Azerbaijan made only limited progress towards
accession to the WTO, which is the first pre-condition for the EU to consider
starting negotiations with Azerbaijan on a DCFTA. The eighth meeting of the Working
Party took place in December 2010.

No significant
developments occurred as far as the implementation of the customs related
part of the ENP AP is concerned. The revised Customs code has yet to be
adopted. The customs service still needs to make additional efforts as
far as the enforcement of the existing legal framework and the implementation
of the concept of trade facilitation are concerned.

Azerbaijan made some progress on the free
movement of goods and technical regulations. Since January 2010
Azerbaijan has become an observer in the European Committee for Standardisation
(CEN).

Regarding sanitary and phytosanitary
issues, Azerbaijan continued to work towards accession to the WTO and harmonisation
with the norms of the Codex Alimentarius. This process included some approximation
with EU rules. The upgrading of laboratories and training of experts continued
in 2010. In order to meet the AP objectives, facilitate trade and prepare for a
possible future DCFTA with the EU, Azerbaijan would have to make considerable further
progress, particularly with regard to approximation of legislation, its
effective implementation and the enforcement and strengthening of administrative
capacity.

Azerbaijan took the first steps in the
implementation of the "Action Plan on the re-organisation of education on accounting
and audit at high schools and secondary schools, and application of
a certification system verifying the professional level of education in
2010-2012 in view of transition to the international and national accounting
standards". The plan is the last stage of the reform launched in 2003.

Concerning financial services, the CBA reduced the reserve requirements for
domestic and foreign currency deposits of commercial banks from 12% to 0.5%,
and increased deposit insurance coverage from 6,000 to 30,000 manat (EUR 28
000), to ensure sufficient liquidity and strengthen confidence in the banking
sector. In a sign of potential weakness, non-performing loans rose sharply in
2010, approaching 5% of all loans, albeit from a low base. A new law on
non-bank credit institutions was implemented in February 2010, creating a legal
framework and strengthening the central bank’s supervision of this embryonic
sector.

The CBA was also working on plans to
further consolidate the banking system in Azerbaijan and to enhance competition
among banks. The law on non-bank credit organisations was promulgated in
February 2010. It created a legal framework for non-bank credit institutions
and strengthened the CBA’s supervision of the sector. The non banking credit
organisations require licensing by the CBA and those mobilising collateral
deposits must seek approval for opening branch offices. CBA has been given
the responsibility to define the prudential standards and requirements, such as
minimum capital or loan loss provisions, under the aegis of the current
law. In November 2010, the president approved the law on investment funds.

Other key areas

In September 2010 the ministry of taxes
approved a regulation on tax appeals. Under the terms of this regulation a
Board, composed by members to be appointed by the minister, will examine
appeals on tax matters, including allegations of corruption and tax audits and
report to the minister. Azerbaijan continued to expand the network of
agreements on avoidance of double taxation with EU member states: two
agreements entered into force in 2010, one with Luxembourg and one with Italy,
bringing the number of agreements to 17.

In the field of
the competition policy, draft amendments to the competition law
continued to be discussed in the parliament.

There is a minor development to report on
the legal or institutional framework for intellectual property rights as
the Geneva Act of the Hague Agreement Concerning the International Registration
of Industrial Designs entered into force in December 2010. Azerbaijan
ranked 8th in the software piracy study conducted by an independent
expert organisation in May 2010, with 88% of pirated software in use.

The
public procurement system is over 10 years old and well established, but
requires modernisation, as demonstrated by tenderers' complaints of lack of
transparency. SIGMA, carried out at the request of the State Procurement
Authority, a needs assessment to identify required reforms.

In 2010 a Global Assessment of the National
System of Official Statistics of the Republic of Azerbaijan was jointly
undertaken by the European Commission, the European Free Trade Association
(EFTA), and the UN Economic Commission for Europe (UNECE). A three-year action
plan for the implementation of 1993 SNA and 2008 SNA was initiated in 2009. The
dissemination of statistics via Internet has recently significantly increased.

On
enterprise policy, the
implementation of the State Programme on Socio-Economic Development for
2009-2013 continued in 2010. The private sector continued to suffer from
bureaucratic obstacles in registration and licensing procedures and from
corruption, which affected small and medium-sized enterprises (SMEs) in particular.

In spite of the
need to improve inspection systems in the area
of public internal financial control, there were no new developments in
the period under review.

5.
Cooperation on justice, freedom and security

A first meeting of the EU-Azerbaijan
Subcommittee on Justice, Freedom and Security and Human Rights and Democracy
was held in Baku during two days in November and December 2010, underlining the
strong mutual willingness to deepen relations in these policy areas.

Azerbaijan
continued to participate in the Southern Caucasus Integrated Border
Management (SCIBM) regional programme, the implementation of which began in
March 2010. The Border Service Academy was inaugurated in August 2010 to train
officers and border guard staff in modern border management techniques and
approaches. New and reconstructed border crossing points were opened during the
year. In September 2010, Azerbaijan signed an agreement on its state border
with the Russian Federation, as well as an addendum on its delineation.

On migration,
Azerbaijan tightened visa issuance procedures with the entry into force of the
Presidential Decree on Matters Concerning Issuance of Visas for Foreigners and
Stateless Persons Arriving in Azerbaijan, which restricts the categories of
travellers who may receive a visa on arrival into the country. These rules
differ from EU legislation and practice. For the first time, Azerbaijan
enforced a labour immigration quota of 10.700 in 2010.

Regarding the fight
against organised crime and terrorism, in March 2010 Azerbaijan ratified
the CoE Convention on Cybercrime which entered into force in July. The
signature of the Additional Protocol concerning the criminalisation of acts of
a racist and xenophobic nature committed through computer systems is still
pending. Moreover, the CoE Convention on the Protection of Children against
Sexual Exploitation and Sexual Abuse, which Azerbaijan signed in 2008, has not
yet been ratified.

Work continued
in the fight against trafficking in human beings in the context of the
National Action Plan to Fight against Trafficking in Human Beings (2009-2013).
The ministry of interior and the State Committee for Family, Women and
Children’s Affairs organised a roundtable with civil society input and
contributions in September 2010. Azerbaijan signed and ratified the 2005 CoE
Convention on Action against Human Trafficking, which entered into force in
October 2010.

With regard to
the fight against drugs, Azerbaijan continued to implement the five year
action programme (2007-12) on combating drug addiction with a particular
emphasis on law enforcement and cooperation with its partners of the Community
of Independent States (CIS). In July 2010, it attended a CIS expert meeting on
drug trafficking and organised crime with a view to developing future
cooperation programmes on capacity building. In October 2010, Azerbaijan
participated in the ENP regional seminar on the EU drug monitoring system
organised by European Monitoring Centre for Drugs and Drug Addiction and the European
Commission in Brussels.

Azerbaijan continued
the fight against money laundering within the context of the 2009
Anti-Money Laundering law. The financial intelligence unit under the Central
Bank began addressing the issues highlighted by CoE Moneyval committee during
the previous year, which resulted in some improvement in the country’s control
regime. As was the case in 2009, the CoE Convention on Laundering, Search,
Seizure and Confiscation of the Proceeds from Crime and on the Financing of
Terrorism remained unsigned. Moreover, Azerbaijan did not sign the 2003
Protocol to the CoE Criminal Law Convention on Corruption, which criminalises
the active and passive bribery of domestic and foreign arbitrators and jurors.
There is a continuing need to expedite cooperation with relevant experts and
international financial institutions in order to address all issues of concern.

With regard to
cooperation in criminal and civil law matters, the signature of
the Second Additional Protocol to the European Convention on Mutual Assistance
in Criminal Matters is still pending. No further developments took place regarding
Azerbaijan’s accession to the 1980 Hague Convention on the Civil Aspects of
International Child Abduction and to the 1996 Convention on Parental
Responsibility and the Protection of Children. Moreover, Azerbaijan did not
sign the Additional Protocol to the CoE Convention on the Transfer of Sentenced
Persons nor ratify the European Convention on the Transfer of Proceedings in
Criminal Matters.

The ministry of
justice signed a Memorandum of Understanding with the Dutch ministry of justice
on cooperation in criminal matters in August 2010. In September 2010,
Azerbaijan hosted a meeting of the heads of security services of CIS countries.
However, in 2010 Azerbaijan had not yet signed two important Hague Conventions
on international judicial cooperation, namely the 1965 Convention on the
Service of Documents and the 1970 Convention on the Taking of Evidence Abroad
in Civil or Commercial Matters.

As regards data
protection, in May 2010 Azerbaijan signed and ratified the 1981 CoE
Convention on the Protection of Individuals with regard to Automatic Processing
of Personal Data. Azerbaijan has yet to sign and ratify the 2001 Additional
Protocol on supervisory authorities and trans-border data flows. Azerbaijan
adopted the Law on Personal Data, which regulates the collection, processing
and protection of personal data and lays down the responsibilities of state
bodies, local authorities and other entities dealing with these data.

6.
Transport, energy, environment, the information
society, research and development

In the transport
sector, improving infrastructure remains an important priority for Azerbaijan.
Azerbaijan stepped up investments and signed major loan agreements both to
improve road infrastructure (in particular to expand the Baku-Shemakha highway)
and to modernise railway infrastructures and upgrade rolling stock.

In the railway
sector, Azerbaijan approved, in February 2010, regulations transforming
Azerbaijan Railways into a closed joint-stock company
with the view to converting it into
a holding company at a later stage. In July 2010 the Government approved the "State program on development of the
railway system in Azerbaijan in 2010-2014". Azerbaijan Railways also acquired more powers in decision
making and in attracting investors. A computerised ticket sales system was
introduced in August 2010. In the
road sector, Azerbaijan amended the law on traffic rules in July 2010 in order
to introduce lower speed limits. In
the aviation sector the process on preparation of negotiations on the aviation
agreement EU- Azerbaijan has been initialised. In the maritime sector,
Azerbaijan continued to invest in improving its maritime fleet, maritime ports
and their hinterland connections. In March 2010, Azerbaijan launched the
construction of a new shipbuilding plant in the Garadagh district of Baku. Also
in March 2010, Azerbaijan signed a project to construct a Baku Bay marine
bridge aimed at closing the centre of the city for cargo traffic.

Azerbaijan and the EU stepped up energy cooperation including on the basis of their Memorandum of
Understanding on a strategic partnership in the field of energy. In April 2010,
the Energy Commissioner visited Baku. Azerbaijan confirmed that, although it is
pursuing export diversification, the EU remains its priority destination for
energy exports. Azerbaijan sustained oil and gas
exports particularly through the oil and gas pipelines Baku-Tbilisi-Ceyhan (BTC)
and Baku-Tbilisi-Erzurum. In 2010, oil from Turkmenistan was shipped over the
Caspian Sea and exported through the BTC pipe. In June
2010, Azerbaijan and Turkey reached agreement on a framework for gas pricing
and transit through Turkey. This is a key step in the development of the major
Shah-Deniz-II gas field and the strategic Southern Gas Corridor. In September
2010, negotiations started on future gas exports from Shah-Deniz II. Azerbaijan continued the exploration and development of new gas and
oil fields. It actively participated in the Caspian
Development Corporation study funded by the EU, the European Investment Bank
and the World Bank.

In January 2011, on a visit to Azerbaijan,
Commission President Barroso and President Aliyev signed a Joint Declaration on
gas delivery for Europe.

In September 2010, the Heads of State of
Azerbaijan, Georgia and Romania, as well as the Hungarian Prime Minister,
endorsed the AGRI (Azerbaijan-Georgia-Romania Interconnection) project. Its aim
is to export liquefied natural gas from Azerbaijan, through a Georgian Black
Sea terminal, to Romania and beyond. A feasibility study is being conducted. In
September 2010, SOCAR (State Oil Company of Azerbaijan) and Russian Gazprom
agreed to increase gas exports to Russia in 2011 to two billion cubic metres.
Azerbaijan, Georgia, Lithuania, Poland and Ukraine continued work towards a
Euro-Asian Oil Transportation Corridor. Azerbaijani, Bulgarian and Georgian
companies further studied the possibilities of developing compressed natural
gas supply to the EU across the Black Sea from the Georgian coast. In July 2010,
Turkey and SOCAR agreed to construct a gas pipeline for supplies to Nakhichevan
via Turkey. Azerbaijan consolidated its participation in the Extractive
Industry Transparency Initiative, aiming at transparency of oil and gas
revenues.

Azerbaijan continued to implement its state
programme on fuel-energy complex development for 2005-2015, including by
further preparing new energy sector legislation. SOCAR strengthened its
presence in the region, for example by establishing further petrol stations in
Georgia, opening its first station in Ukraine and developing plans to build a
refinery in Turkey. In 2010, Azerbaijan also constructed and rehabilitated its electricity
and gas infrastructure. It initiated the construction of the Black Sea
Electricity Transmission Line (Azerbaijan-Georgia-Turkey).

Azerbaijan remained committed to using more
renewable energy. In 2010, the new State agency of alternative and renewable
energy sources, established in 2009, became operational. In Gobustan region, it
started to develop a pilot renewable park of 5 MW based on wind, solar and
biogas power. It continued implementing energy efficiency measures and started
preparing an energy efficiency strategy. In January 2010, Azerbaijan amended the
rules on the storage and the use of radioactive materials and also trained nuclear
experts.

Regarding climate change, Azerbaijan
continued preparing its Second National Communication to the UN Framework
Convention on Climate Change.

Azerbaijan took steps to prepare Clean
Development Mechanism (CDM) projects, even if so far no CDM project has been
registered at the UN level. Azerbaijan is encouraged
to fully implement the Cancun agreement and in particular devise a low carbon
development strategy including update information on target or actions that it
will implement. The EU continued to provide support to Azerbaijan to
implement the Kyoto Protocol.

In the field of environment, the President of Azerbaijan declared the year of 2010 “The Year of
Environmental Protection in Azerbaijan” and launched a campaign to plant 30
million trees for environmental restoration. The National Environment Action
Plan is still under preparation. The legislative framework continues to require
further development, in particular as regards implementing legislation.
Azerbaijan submitted a National Implementation Plan for 2007–2020 under the
Stockholm Convention on Persistent Organic Pollutants. Continued attention is
required in order to implement existing strategies and plans and to further
enhance monitoring and enforcement.

Azerbaijan
established the State Commission for Integrated Water Management and
strengthened the environmental authorities. Further
strengthening of administrative capacity remains a major challenge, and
coordination between authorities continues to require attention. Azerbaijan
took some steps to promote the integration of environmental considerations into
other policy sectors, such as energy.

Azerbaijan continued to carry out some
other activities to provide information to the public. Procedures and
consultation with the public in the context of environmental assessments and
licensing remain inadequate.

There were no significant developments as regards ratification of, or
accession to, the outstanding relevant Protocols to the UNECE
Conventions. Furthermore, the implementation of several agreements that have already
been ratified requires particular attention. Azerbaijan participated in
regional cooperation under the Framework Convention for the Protection
of the Marine Environment of the Caspian Sea, the Caspian Environment Programme
and also the EU Water Initiative. Cooperation and information exchange took
place between the EU and Azerbaijan, including on water, forestry, waste
management, management of environmental information, nature protection and air
quality.

The REC for
Caucasus carried out regional activities in 2010 including in the fields of
information and public participation, environmental policy and local
environmental action plans. REC also further improved its internal management,
fund-raising and visibility in 2010. Nevertheless, it carries over a financial shortfall
from previous years which is hampering its activities.

Concerning developments in the field of civil protection,
there are activities under the EaP framework. (please see the sectoral
report). As regards the Information
Society, in August 2010 Azerbaijan approved the ‘State
Program on development of communication and information technology for
2010-2012 (Electronic Azerbaijan)’. This includes the privatisation of state owned enterprises, the
creation of an independent regulator and the liberalisation of the market.
Azerbaijan also adopted an “Action Plan for the
Establishment of E-government in the Republic of Azerbaijan in 2010-2011”. There is no clear separation between the
commercial activities and the regulatory role of the ministry of communications
and information technologies (MCIT). The state involvement in the sector has decreased
only slightly, thus hampering the emergence of competition in the fixed and
broadband markets.

MCIT plans to assess the use of 4G mobile
technologies, implement number portability (where a draft is discussed with the
operators), and implement the Central Equipment Identity Register; e-signature
will be implemented by the end of 2010. As part of the State programme ‘e-Azerbaijan’, by
September 2010 the ministry of health had issued approximately 300.000
electronic health cards.

Progress can be
reported on the digitalisation of the telecommunication network (now
approximately 90%) and in the reconstruction of the fixed network. Regarding
newer technologies, WiMAX wireless Internet access services have become
available since the launch of commercial operation.

Investment and capacity
in research continue to remain modest. Azerbaijan continued to increase
the level of participation in the 7th Framework Programme (FP7), although the
overall numbers of applications remained low. Applications involving 13
Azerbaijani research groups were successful; as of November 2010 they received
EUR 500.000 in EU support.

Azerbaijan continued to
participate actively in the International S&T Cooperation Network for
Eastern European and Central Asian countries (FP7 IncoNet EECA project), which
aims to support a bi-regional EU-EECA policy dialogue on science and technology
and to increase EECA participation in FP7.

Azerbaijan is a target country under the
new FP7 International Cooperation Network for Central Asia and South Caucasus
countries (FP7 IncoNet CA/SC) which was launched in April 2010 and which aims
to strengthen and deepen the EU's S&T cooperation with the CA/SC countries,
as well as with the Republic of Moldova.

Azerbaijan is also actively participating in the Black Sea ERA-NET project,
which aims to contribute to the coordination of EU member states’ and partner
countries’ research programmes targeting the extended Black Sea region.

7.
People-to-people contacts, education and health

In 2010, work began on a gradual review of
the legislative framework for the various education sub-sectors following the adoption
of a framework education law in 2009. In this regard, the ministry of education
adopted new regulations on life-long learning in September 2010 establishing an
approach to human resource development, continuing education and adaptation of
skills to labour market needs. The ministry also established a Working Group on
the National Qualifications Framework in May 2010 alongside a Department for
Accreditation dealing with quality assurance in education. Per capita
financing was applied to higher education also in order to improve quality and
enhance inter-university competition. While overall investment in education
increased in 2010, it remains insufficient to ensure adequate development of
human capital that can contribute to economic diversification.

Higher
education reform in Azerbaijan continued to benefit
from cooperation under Tempus, with two projects selected under the
third Call for Proposals of Tempus IV. For the first time a project will be
coordinated by an Azerbaijani higher education institution (Azerbaijan
University of Languages).

One Azerbaijani
student received a scholarship for an Erasmus Mundus Masters Course
under Erasmus Mundus Action 1 for the academic year 2010-11. Academic and
student mobility was further facilitated under Erasmus Mundus Action 2 during
the same period through the expected award of 30 mobility grants. For the first
time, a Jean Monnet grant for an interdisciplinary module was awarded to the
Azerbaijan Diplomatic Academy, providing a basis for future quality public
service training. Azerbaijan is encouraged to make full use of the available
opportunities under Erasmus Mundus.

In the area of vocational
training, work continued on the adoption of State curriculum standards for
initial vocational training; strategic planning guidelines for training institutions
as well their renovation and upgrading. Challenges remain with regard to
modernisation of technical infrastructure and development of teacher
competences. Capacity for reform remains limited, particularly in the context
of an ageing teaching workforce, while the issue of relevance and quality in
training provision needs urgent examination. The Labour Market Review
undertaken by the European Training Foundation in the context of the EaP in
September 2010 provided pointers for future policy planning.

In the area of culture,
Azerbaijan participated in one project under the 2010 Special Action for ENP
countries under the Culture Programme. To advance its regional cooperation in
the framework of the EaP and the Kyiv Initiative, Azerbaijan should ratify the
2000 European Landscape Convention and the 2005 CoE Framework Convention on the
Value of Cultural Heritage for Society.

Azerbaijani
young people and youth organisations continued to benefit from the
opportunities offered by the Youth in Action Programme, through exchanges,
voluntary service and youth cooperation activities in non-formal education.

Azerbaijan pursued health sector
reform, including in the areas of healthcare financing and medical insurance. In
February 2010, in the context of last year’s influenza A(H1N1) epidemic, the EY
and Azerbaijan established communication channels for the exchange of
epidemiological information in the event of a public health emergency of
international concern. Azerbaijan attended the EU's global health conference in
June 2010.

8.
Financial cooperation – 2010 key facts and
figures

Cooperation framework

The Mid-Term Review of the programming document confirmed that the Country
Strategy Paper adopted in 2007 remains a valid framework for cooperation with
Azerbaijan. The new National Indicative Programme (NIP) 2011-13 for Azerbaijan
was adopted in May 2010 and has a budget of EUR 122.5 million. The programme is geared towards
supporting the achievement of key policy objectives as
outlined in the EU-Azerbaijan AP and pursues three priorities: (1) democratic structures and good governance,
(2) socio-economic reform and sustainable development,
trade and investment, regulatory approximation and reform and (3) Partnership and Co-operation
agreement and ENP AP implementation, including in the areas of energy security,
mobility and security.

The NIP 2011-13 includes a specific appropriation to finance new
actions under the EaP, notably a Comprehensive Institution Building programme
(CIB) (with a minimum allocation of EUR 19.2 million for Azerbaijan) and the Regional Development Pilot Programme (with a minimum of EUR 9.3
million).. The CIB Framework Document was signed in January
2011 and identified the following key institutions for support: ministry of foreign
affairs, ministry of economic development, ministry of justice, Civil Service
Commission.

Implementation

Implementation of the measures covered by the Annual Action
Programmes (AAP) for 2007, 2008 and 2009 is under way. The AAP 2007 main programme was the Sector
Budget Support (SBS) in the area of energy efficiency and renewable energies,
and substantial progress in the implementation of this programme was made in
2010. Furthermore, in December 2010, Azerbaijan launched the implementation of
the SBS on justice related to the AAP 2008. This Programme is aimed at
enhancing the regional courts, the Academy of Justice and the penitentiary
sector. In August 2010, the Financing Agreement related to AAP 2009 was countersigned
by the government.

In 2010 a total of EUR 7 million was
committed to Azerbaijan under the bilateral envelope of the European
Neighbourhood and Partnership Instrument (ENPI). The 2010 AAP focused on governance. Twinning projects
on agriculture, employment and social affairs, health, finance and trade have
been identified and are currently under preparation. Considerable resources
have been devoted to the financing of twinning operations. At the end of 2010,
there were four twinning operations ongoing and a further 12 in preparation.

In addition to
the bilateral allocation, Azerbaijan also benefited from cooperation activities
financed under the ENPI inter-regional and regional programmes.

Under the ENPI-financed Neighbourhood Investment
Facility (NIF), one regional project for which
Azerbaijan is eligible,
the "Eastern Partnership-SME Finance Facility", was approved
in 2010, committing EUR 15 million
for technical assistance and risk capital. This multi-country project is
expected to leverage EUR 135 million
in loans from European Finance Institutions (EIB, EBRD and KfW) to support SMEs
in the Eastern neighbourhood
region.

Other EU instruments supplement the ENPI
assistance package. Azerbaijan benefited from cooperation activities financed
under horizontal instruments such as the European
Instrument for Democracy and Human Rights (EIDHR), focusing on media freedom and
freedom of expression, and the Development Co-operation Instrument (DCI)
thematic programmes, including the Non-State Actors and Local Authorities in
Development (NSA-LA), focusing on poverty reduction and sustainable development
strategies.

Donor coordination

In 2010, the EU
Delegation in Azerbaijan ensured the coordination of assistance activities both
within the EU and with other donors. The donor coordination matrix contributed
to identifying good synergies with the World Bank in the area of public finance.

[1] Reporters without Borders (October 2010)

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