4. Debt Management Policies

Austria's external debt management has no significant impact on U.S. trade. At the end of 1993, Austria's external Federal Government debt amounted to AS 212.9 billion (18 billion dollars), or 19.2 percent of the Government's overall debt. In terms of GDP, Austria's public external debt amounted to 10.1 percent in 1993 and is estimated to rise to 11 percent in 1994. Debt service for Austria's external federal debt amounted to AS 29.2 billion (2.5 billion dollars) in 1993 and was equal to 1.4 percent of GDP and 3.6 percent of total exports of goods and services.

5. Significant Barriers to U.S. Exports

Austria's tariff regime will change when it impliments the EU common external tariff on January 1, 1995. U.S. exporters will face higher tariffs in many sectors including computers, modems, fax machines, and other electronic equipment.

In some sectors, competition is restricted, especially in agriculture. High tariffs combined with complicated licensing and quota systems limit agricultural imports. Discretionary licenses are required for imports of some food products, including dairy product, red meats, poultry, grains (except rice), fruits, vegetables, sugar, brown coal, and some weapons.

Trade of cheese and beef between the U.S. and Austria is conducted under two bilateral agreements. The first, dating from 1980, gives the U.S. a 600 ton quota for U.S. high quality beef (HQB) in Austria, and the U.S. granted Austria a duty free quota of 7,850 tons for cheese. The second accord, negotiated in 1992 under GATT Article XXVIII as a result of trade concessions withdrawn by Austria on oilseeds products, provides for an additional HQB quota of 400 tons for the U.S. In the fall of 1993, the U.S. requested consultations, claiming that Austria was in violation of the agreements because of changes in the import mechanism, failure to release the full quota in a timely manner, and substantial increases in levies. In the first half of 1994, the import mechanism was changed, but the import levy, which can reach as high as four dollars a kilogram, remains in place. The U.S. beef quota is likely to be folded into the EU-wide HQB quota. Due to the EU ban on hormones, this would effectively curtail exports of U.S. beef to Austria.

The Government of Austria generally welcomes foreign direct investment. One hundred percent foreign ownership is permitted, and there are no restrictions on repatriation of earnings, interest payments, and dividends. However, investors must sometimes deal with complicated administrative procedures to obtain approval for new operations. Environmental regulations and land use plans that differ between provinces complicate both domestic and foreign investment. For example, environmental and administrative approval of one recent large U.S. investment took nearly two years.

In July 1993, Austria implemented a highly restrictive residency law aimed at curbing illegal immigration. It applies to all residents, except those from EU countries and Switzerland, staying longer than six months. Procedures are complicated and lengthy, and it has made timely approval for American business executives, their representatives, and their families difficult.

Austria's 1993 Banking Act presents a number of obstacles for market entry of U.S. banks. Branches of non-EEA banks must be licensed, while EEA banks may operate branches on the basis of their home country licenses. For bank branches or subsidiaries from a non-EEA member country, the limits for single large loan exposures and open foreign exchange positions will shrink considerably, because the endowment capital from their parent companies can no longer be included in the capital base used for calculating these limits. Other providers of financial services, such as accountants, tax consultants, and property consultants must specifically prove their qualifications, such as university education or experience in order to practice. Other service companies also require a business license, one of the preconditions of which is legal residence. As a result, U.S. service companies often must form a joint venture with an Austrian firm. U.S. companies holding investments in several EEA member countries benefit from more liberal regulations with the enforcement of the EEA.

Imports of foodstuffs, plant pesticides, pharmaceuticals, or electrical equipment are permitted only if the products pass standards set by the Austrian Testing Institute or a government agency. Due to the sometimes broad and diverse testing procedures for pharmaceuticals, responses may take as long as three or four years. The Austrian Consumer Protection Law and the Law Against Unfair Competition require that textile products, apparel, household chemicals, soaps, toiletries, and cosmetic preparations must be marked and labeled in German. All telecommunications equipment, including customer premises equipment, private networks, cable TV networks and value-added services, is subject to approval by the Austrian Post and

Telegraph Administration (PTT). The Austrian approval policy for customer premises equipment tends to be liberal.

Austrian government procurement is non-discriminatory and complies with the General Agreement on Tariffs and Trade (GATT) Agreement on Government Procurement. Austria does not have restrictive "buy-national" legislation and the principle of the best bidder is usually maintained. Bid times are sufficiently long to allow foreign firms to submit bids. In the military sector, the Austrian Government often requests offset arrangements; in early 1993, it concluded such an agreement with the French Government for the purchase of Mistral missiles. With Austria's participation in the EEA, Austria enacted its first federal procurement law, adapting the EU's Single Market legislation on procurement. The Austrian Government did not, however, implement Article 29 of the EU Utilities Directive which mandates price preferences for EU firms.

6. Export Subsidies Policies

The Government provides export promotion loans and guarantees within the framework of the OECD Export Credit Arrangement and the GATT Subsidies Code. Preferential financing is the main form of subsidy. In mid-1991, the Austrian Kontrollbank (AKB), Austria's export financing agency, revised its guarantee policy to set rates according to country risk rather than fixed rates. As a result, the extension of guarantees has become more restrictive. The Government assumes guarantees for credit transactions of the AKB if the proceeds of such transaction are used for financing exports and contributes to the AKB's borrowing costs. The AKB's Export Fund provides export financing programs for small and medium-sized companies with annual export sales of up to AS 100 million. Austria is a member of the GATT Subsidies Code.

7. Protection of U.S. Intellectual Property

Austrian Laws are consistent with international standards, and Austria is a member of all principal_multilateral intellectual property organizations, including the World Intellectual Property Organization. Austria took an active position on intellectual property during the Uruguay Round negotiations. To adopt to EU laws, as required by the EEA agreement, Austria amended in March 1993 its copyright law to provide for the protection of computer software. The Government also implemented in April 1994 the Protection of Inventions Act and a law implementing protection certificates for medicine patents in July 1994.

A levy on imports of home video cassettes and a compulsory license for cable transmission is required under Austrian copyright law. Fifty-one percent of total revenues go to a special fund used for social and cultural projects. A draft law which was prepared by the Justice ministry to introduce compulsory licensing of videocassettes to tourist and educational institutions was postponed in September 1994. Austrian copyright law requires that the owner of intellectual property must prove the entire chain of rights up to the producer. In the case of films, this has made prosecution of cases for video piracy rare.

8. Worker Rights

a. The Right of Association.-Workers in Austria have the constitutional right to associate freely and the de facto right to strike. Guarantees in the Austrian Constitution governing freedom of association cover the rights of workers to join unions and engage in union activities. Labor participates in the "Social Partnership," in which the leaders of Austria's labor, business, and agricultural institutions give their concurrence to new economic legislation and influence overall economic policy. b. The Right to Organize and Bargain Collectively.-Austrian unions enjoy the right to organize and bargain collectively. The Austrian Trade Union Federation (OGB) is exclusively responsible for collective bargaining. All workers except civil servants are required to be members of the Austrian Chamber of Labor. Leaders of the OGB and labor chamber are democratically elected. Workers are legally entitled to elect one-third of the board of major companies.

c. Prohibition of Forced or Compulsory Labor.-Forced or compulsory labor is prohibited by law.

d. Minimum Age of Employment of Children.-The minimum legal working age is 15. The law is effectively enforced by the Labor Inspectorate of the Ministry for Social Affairs.

e. Acceptable Conditions of Work.-There is no legally-mandated minimum wage in Austria. Instead, minimum wage scales are set in annual collective bargaining agreements between employers and employee organizations. Workers whose incomes fall below the poverty line are eligible for social welfare benefits. Over 50 percent of the workforce works a maximum of either 38 or 38.5 hours per week, a result of collective bargaining agreements. The Labor Inspectorate ensures the effective

protection of workers by requiring companies to meet Austria's extensive occupational health and safety standards.

f. Rights in Sectors with U.S. Investment.-Labor laws tend to be consistently enforced in all sectors, including the automotive sector, in which the majority of U.S. capital is invested.

Extent of U.S. Investment in Selected Industries.-U.S. Direct Investment Position Abroad on an Historical Cost Basis-1993

2Figure obtained using the 1992 average annual exchange rate of 20 manat 1 dollar.

3Some U.S. assistance was available through regional programs for which a country-by-country breakdown is not available. Figures should be considered as indicators of order of magnitude only. Most data was furnished by the State Statistics Committee of Azerbaijan.

1. General Policy Framework

Azerbaijan, a country of 7.5 million people with rich natural resources, has significant potential as a trading and investment partner of the United States. Exploitation of its enormous oil and gas reserves in the Caspian Sea will require foreign capital and know-how, and Azerbaijan has taken the first step toward developing these resources by signing a production sharing agreement with a consortium of western oil firms, including several U.S. companies, in September 1994. Azerbaijan has an array of heavy industries, particularly oil refining, petrochemicals, oil field equipment, and air conditioners, that will require foreign investment to make them viable in a world economy. Finally, Azerbaijan is richly endowed with a diverse agricultural sector producing grapes, cotton, tobacco, silk, tea, and other fruits for export.

Azerbaijan has yet to realize its potential largely because recent governments have been preoccupied with issues of survival and instability arising from the conflict in Nagorno-Karabakh, a break-away, formerly autonomous province of Azerbaijan inhabited mostly by ethnic Armenians. Azerbaijan has been unable to resolve the conflict and approximately 20 percent of its territory has been occupied by Nagorno-Karabakh Armenian forces. President Heydar Aliyev, a former member of the Soviet Union's Politburo and former communist ruler of Azerbaijan in the 1970s, has announced his government's commitment to democratic and market-based reforms, though he favors a process of gradual reform rather than economic shock therapy. First Deputy Prime Minister Quliyev is responsible for economic performance and reform, while four deputy prime ministers in the Cabinet of Ministers have responsibility for directing different economic ministries, though all answer ultimately to President Aliyev. Ministerial and sub-ministerial changes are taking place following an internal political crisis in October 1994 which resulted in the dismissal of the Prime Minister. Some of these changes will affect economic decisionmakers.

The economy remains dominated by large state enterprises and, in the agricultural sector, by large state and cooperative farms, all of whose production is theoretically based on state orders prepared by the government ministries. The national parliament passed a privatization law in August 1994, but the process has languished as no implementing legislation has yet been approved. Private business has begun to appear, primarily in the retail sector in the main cities and towns. In addition, many state enterprises are beginning to produce and even market their products independently of central government control.

The economy declined about 25 percent in the first nine months of 1994 compared to the same period in 1993. The government, continuing its subsidies of key commodities, allowed budget deficits to remain above ten percent of GDP in the first nine months of 1994. The government does not yet have a realistic plan for financing this deficit, and will probably continue to rely on the inflationary policy of issuing more currency.

Azerbaijan declared its currency, the manat, sole legal tender January 1, 1994, and has allowed the manat to float against major currencies since April 1994. Foreign currency exchanges have been introduced to help make the manat convertible, but are still operating at very low volumes.

Although Azerbaijan became an active member of the Commonwealth of Independent States (CIS) in 1993, it has not signed the proposed ruble zone agreement. Joining the CIS eliminated tariff and other restrictions on Azerbaijan's critical trade with Russia, Ukraine, and other CIS countries, but commercial ties continue to slump due to payment problems on Azerbaijan's part and disagreements over Azerbaijan's debts with some CIS members, especially Russia. The conflict in Chechenya has disrupted Azerbaijan's main trade route with Russia, and Moscow has imposed restrictions on Azerbaijani use of the Volga-Don Canal, the only water route linking Baku to the outside world.

2. Exchange Rate Policy

The Azerbaijani manat has been allowed to float against major currencies, and has suffered a sharp, steady devaluation as a result of Baku's expansionary_fiscal and monetary policies. The manat has lost more than 90 percent of its value. In October 1994, the rate reached 2,500 manats to the dollar. The government imposes several controls on foreign exchange, including a surrender requirement and a limit on the amount of foreign currency that can be taken out of the country.

3. Structural Policies

Structural change is coming to Azerbaijan, albeit slowly and more as a result of the breakdown of the centrally planned system rather than through a government reform plan.

Pricing Policies: Several key commodities, including bread, natural gas and gasoline, remain under price controls. While the government raises these controlled prices periodically, they remain artificially low, and shortages of these goods occur, along with corruption and black market activity. In addition, nearly all goods are produced by state enterprise monopolies, and the government continues to set prices it will pay to these enterprises based on fixed cost-plus formulas.

Tax Policies: The government implemented a new tax system in 1992 through a series of presidential decrees. This system is composed mainly of four taxes: a 28 percent value-added tax; an enterprise profit tax, with a standard 35 percent rate and differential rates allowed on certain enterprises; excise taxes of up to 90 percent of the price for selected goods; and a personal income tax, progressive in nature but not strictly enforced. Other important sources of government revenue are a royalty on crude oil production, and a tax on vehicle ownership.

Regulatory Policies: The government regulates the export of strategic commodities produced in Azerbaijan, which include the main hard currency earners such as refined oil products, cotton, and wine. Potential buyers of such commodities must pay for an export license or cooperate with an Azerbaijani partner that has obtained a general license for that commodity.

4. Debt Management Policies

In September 1993, Azerbaijan signed a "zero option agreement" with Russia under which Russia will pay Azerbaijan's share of the external debt of the former Soviet Union in return for Azerbaijan's share of the former Soviet Union's assets. The Azerbaijani budget deficit remains at high levels, amounting to over 10 percent of GDP in 1994. Since Russia has stopped financing Azerbaijani debt outlays with rubles, Azerbaijani officials increased contacts with the International Monetary Fund (IMF), World Bank, and the European Bank for Reconstruction and Development (EBRD). However, borrowing programs will not be granted until Azerbaijan tightens its policy to meet generally accepted financial criteria, which has proposed to do by the end of 1994. Azerbaijan has no borrowing relationship with commercial banks, and in the short term is likely to finance budget shortfalls through printing manats and issuing credit through the National Bank.

5. Significant Barriers to U.S. Exports

Corporate Barriers to U.S. Exports: The most significant barrier to trade with the United States is the lack of hard currency reserves. Azerbaijan pays for nearly all imports with barter goods, primarily oil-based products, cotton, oil field equipment, diesel fuel, chemical products of organic synthesis, silk, waste metals and tobacco. Selling goods or services to Azerbaijan almost always entails receiving barter goods in payment.

Lack of laws and institutions which regulate fairness in trade, and poor infrastructure create barriers. Azerbaijan has no bankruptcy or commercial transactions laws. Only some banks have access to foreign exchange. The customs service and