Poor Azerbaijan prepares to get rich
By Kieran Cooke
In Baku, Azerbaijan
BBC
2005/05/03 21:16:10 GMT
This poverty stricken former Soviet republic on the shores of the
Caspian Sea is set to become rich. Very rich.
Industry specialists say the Caspian Sea holds some of the world’s
largest remaining untapped deposits of oil and gas.
Exactly how large the energy reserves are is a matter of considerable
debate.
But already the international companies that have begun exploiting
the resources contribute more than $200m to Azerbaijan’s finances
each year.
And that, say the oil majors, is little more than a trickle compared
with the wealth to come.
Benefit or curse
By 2007 it’s estimated that Azerbaijan – a country of eight million,
where people earn on average a little over $1000 per year – will
be receiving at least $7bn in oil revenues annually from Caspian
energy deposits.
“Azerbaijan is a country in transition,” according to Ilham Aliyev,
the country’s 44 year old president.
“We have considerable resources, but money earned from them must be
spent wisely.”
How Azerbaijan will deal with its bonanza in oil revenues is a
topic that occupies the minds of both senior government figures and
international financial institutions like the World Bank and the
International Monetary Fund (IMF).
“Oil wealth can be a big benefit or a curse,” says Ahmed Jehani,
the World Bank’s representative in Azerbaijan.
“If the benefits of rich resources are not shared, then this can lead
to ethnic and other tensions.
“Let us hope the temptation to divert money away from long term
investment does not prove to be too strong.”
Desperate plight
Like many former Soviet republics, Azerbaijan was in dire economic
straits following the collapse of the old USSR.
If the country relies just on oil revenues than other industries will
simply wither away Ahmed Jehani The World Bank
After independence was declared in 1991, the country suddenly found
itself without its traditional Soviet market for industrial and
agricultural exports.
Investment in the oil industry dried up. Hundreds of thousands lost
their jobs.
In addition, Azerbaijan has had to cope with the aftermath of a war in
the early 1990s, with neighbouring Armenia over the disputed enclave
of Nagorny Karabakh.
In the war, Azerbaijan lost more than 14% of territory and over
700,000 refugees were created.
According to a United Nations estimates, more than 50% of Azerbaijan’s
population live below the poverty line.
Much of the country’s infrastructure is in serious need of repair.
Since independence, more than a million have left the country in
search of jobs.
Job creation
Azerbaijan’s leaders have seen oil as the solution to the country’s
woes.
In 1994, Azerbaijan signed what was described as the “contract of
the century” – a $7.4bn production sharing agreement with a number of
leading western oil companies for the exploitation of the country’s
Caspian oil resources.
Since that time, hundreds of millions of dollars have been invested
by the oil majors in oil platforms and other facilities, with the
first oil flowing from the newly opened up Caspian fields in 1999.
Basil Zavoico, the IMF’s representative in Azerbaijan, says the great
challenge is to ensure that the large inflow of oil revenues does
not lead to a surge in inflation and undermine the development of
the critical non oil sector.
“The oil sector does not create many jobs,” Mr Zavoico says.
“The government’s job creation targets can only be met through
developing other economic sectors.”
Choppy waters
Early indications of how Azerbaijan is dealing with the sudden upturn
in its financial fortunes are mixed.
The country’s oil reserves are expected to be largely exhausted
by 2020: Azerbaijan’s financial planners have won international
plaudits for setting up the State Oil Fund, where a large portion
of oil revenues is placed to be invested for the benefit of future
generations.
Yet there are danger signals.
Inflation has entered double figures.
A building boom and the opening of upmarket shops and boutiques in
Baku, the capital, plus the presence of large numbers of new cars on
city streets are seen as evidence of economic overheating.
A recent assessment by Transparency International, a body which
monitors levels of corruption around the globe, placed Azerbaijan
140th out of 146 of the world’s most corrupt countries.
Dangerous reliance
This is not the first oil boom to hit Azerbaijan.
The country claims to be the site of the world’s first commercially
exploited oil fields: by 1900 the Caspian area was producing more
than 50% of the globe’s oil.
Business tycoons like the Rothschild’s and the Swedish Nobel family
rushed to control the Caspian’s resources and built lavish mansions
in a part of Baku still known as “Boom Town”.
The rise of communism and a series of bloody ethnic clashes with
Armenians brought that oil boom to an end in the early years of the
20th century.
The prospect of more fighting with Armenia is never far away.
President Aliyev insists his country must regain lands taken by
its neighbour.
Oil is looked on as the cure for Azerbaijan’s economic woes but the
future is uncertain.
“If the country relies just on oil revenues than other industries
will simply wither away,” says the World Bank’s Mr Jehani.
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