AZERBAIJAN COPES WITH THE OIL WINDFALL
By Ahto Lobjakas for RFE/RL (22/11/06)

ISN, Switzerland
Nov 22 2006

>From the minute you arrive in Baku, you can smell the oil.

In a glass jar it looks nothing like the black viscous substance one
would expect, but more like petrol. Experts praise Azerbaijani oil
as among the best in the world.

Overheat concerns But the oil does have a dark side. According to a
recent report by the European Bank of Reconstruction and Development
(EBRD), Azerbaijan is one of the world’s fastest-growing economies
with over 26 percent growth.

However, local officials admit the economy could "overheat."

Azerbaijan remains an economy in transition whose long-term future can
only be secured by means of a viable non-oil sector. And the question
many are asking is how, in a country where corruption is so rampant,
is that money going to be spent?

Clare Bebbington, a spokeswoman in Baku for multinational oil
company British Petroleum (BP), which is Azerbaijan’s main partner
in tapping the oil wealth, describes managing this wealth as an
"enormous opportunity," but also an enormous challenge.

"In 2006, the government of Azerbaijan will receive around US$3
billion in oil revenues from our projects. At US$60 a barrel, the
full-cost revenues are actually around US$230 billion. That is an
unprecedented shock for any economy, it’s also many, many times the
current levels of GDP," Bebbington says. "Now, it’s impossible to
predict the oil price, what the oil price will be in the future and
BP doesn’t make a prediction. But what we have tried to do is to be
as open as possible in terms of making some sort of projection about
the likely level of receipts so that people can begin to understand
what will happen over the next decades."

Apart from oil, Azerbaijan is also betting on gas. The Shah Deniz gas
field in the Caspian Sea southeast of Baku is estimated to contain
some 50 to 100 billion cubic meters of gas.

Diversification One of Azerbaijan’s potential pitfalls is lack of
economic diversification. Mikayel Jabbarov, Azerbaijan’s deputy
economic development minister, says his government is aware of the
dangers.

"We’re planning well enough against any severe shocks. Our non-oil
economy is growing very fast, in fact last year, data which analyses
non-oil economic development in Azerbaijan for the years 1999-2005
indicates that the non-oil sector in Azerbaijan on the average
has grown faster than in CIS [Commonwealth of Independent States]
countries, in EBRD countries, and also in Black Sea and Caspian Sea
countries," Jabbarov says.

The government has set up what Jabbarov calls a "hydrocarbon fund"
of US$1.5 billion to stabilize the economy. In March, a state-run
investment company with an initial budget of US$100 million was
created to give loans to small- and medium-sized companies working
outside the oil industry.

However, within Azerbaijan there is much criticism of the government’s
oil fund. Its critics have said there is little to no oversight of
the body. And corruption is still cancerous in Azerbaijan. The country
languishes near the bottom of the annual corruption perceptions index
drawn up by Transparency International.

Energy hub Jabbarov says that Baku also has clear ambitions to become
a transit hub for Central Asian oil and gas.

"What we would like certainly to see is the continued increase of
transit, [the] continued increase in shipping, in transportation of
hydrocarbons, and in other products as well," Jabbarov says.

Oil tankers already cross the Caspian Sea to feed the
Baku-Tbilisi-Ceyhan pipeline to Turkey. Hopes for a trans-Caspian
gas pipeline to supply Turkey and the EU further down the line are
receding, however, despite Baku’s lobbying.

Energy experts in Baku say Western multinationals do not believe
there are sufficient gas resources available cheaply enough in either
Turkmenistan and Kazakhstan to justify such an investment. This
augurs well for Russia’s drive to dominate the transit market from
Central Asia.

Problems with democracy Azerbaijan’s democracy is still weak, with
restrictions on media and dubious electoral practices. Recently,
an Azerbaijani court gave police the right to detain two journalists
for two months for publishing an article allegedly insulting Islam.

And on 16 November, Azerbaijani police broke up an opposition rally
demanding an end to pressure against independent media.

Critics say the EU has turned a blind eye to Azerbaijan’s nastier
democratic practices largely because it is interested in Azerbaijani
oil.

Frozen conflict Then there is the unresolved issue of Nagorno-Karabakh,
a region inside the internationally recognized borders of Azerbaijan,
but occupied by Armenian troops together with seven neighboring
districts since a 1994 cease-fire ended fighting.

The war with Armenia has bequeathed Azerbaijan more than 800,000
refugees, most living in bleak conditions in and around Baku.

Azerbaijan’s government says it wants the conflict resolved by
peaceful means, but has not ruled out war. According to Deputy Minister
Jabbarov, the defense budget accounts for 15 percent of all government
spending in 2006, and exceeds US$1 billion.

Compared to Azerbaijan’s neighbors, that’s a huge sum that’s likely
to be sustained. But in the military, as in every other sector of
public life, a problem remains: where exactly is that money going?

Sometimes the answer to that question is visibly evident. On the
outskirts of Baku, palatial villas perch on hillsides overlooking
the Caspian Sea. Fancy restaurants are packed with foreign and local
oil executives.

But there is another Azerbaijan of rural poverty and refugee camps,
of post-apocalyptic vistas of oil-polluted wastelands – an omen
perhaps of what could happen when the oil runs out.