Quest Economics Database
World of Information Europe Review World of Information
July 29, 2007 Sunday
Azerbaijan
BODY:
The ‘Texas of the East’ can legitimately claim to be the world’s
oldest oil and gas producer. Political geography, however, has not
been kind to Azerbaijan. Not only has the Nagorno-Karabakh struggle
with neighbouring Armenia been a major distraction, but the dispute
is compounded by Azerbaijani concerns about its own enclave of
Nakhichevan within Armenia. Azerbaijan’s Armenian (and Christian)
population are largely located in the enclave of Nagorno (meaning
mountainous) Karabakh. Armenia had sought to annex the enclave, which
it has considered part of Armenian territory since the nineteenth
century, by establishing an ethnically ‘cleansed’ corridor between
the enclave and its eastern border.
The dispute with Armenia
2005 had been one of the few years in Azerbaijan’s post-independence
history not dominated by its dispute with Armenia over the separatist
Nagorno-Karabakh enclave in the country’s south-west. However, there
were significant developments on this front, at least in terms of
restarting dialogue. President Aliyev had met with his Armenian
counterpart, Robert Kocharian, twice in 2005, and their respective
foreign ministers held several meetings. The OSCE Minsk Group, formed
in 1992 to settle the dispute also insisted that momentum was
gathering for a breakthrough, the last such occasion being in 2001.
Against these positive developments must be weighed other, less
encouraging events. Dozens of Azeri and Armenian servicemen continued
to be killed along the cease-fire line in small-scale clashes. More
worryingly, both countries doubled their defence spending in 2005 (to
US$300 million) and again in 2006, while Nagorno-Karabakh’s hard-line
separatist administration was re-elected in a landslide in the June
2005 elections.
Regarding its other neighbours, Azerbaijan’s relations improved
markedly with Iran. Azerbaijan-Iran relations have long been
complicated by the presence of a 15-20 million-strong Azeri minority
in north-western Iran – greater than the population of
Azerbaijan-proper (eight million). However, President Aliyev visited
Tehran in January and Iran agreed to provide its Nakhichevan enclave
with natural gas. Azerbaijan also worked hard in 2005 to cultivate
relations with Kazakhstan. At stake is control of the export route to
Europe for Kazakh natural gas. Azerbaijan and its backers, including
the US, favour south Caucasus routes such as that proposed by the
Southern Caucasus Pipeline Company, while Russia has lobbied for
transit across its own territory. In December, the presidents of
Azerbaijan and Kazakhstan signed agreements deepening trade relations
between the two countries.
Oil saves the day
In 2006, real GDP growth was estimated at over 30 per cent, making
Azerbaijan the fastest growing economy in the world. This high rate
of growth is due almost solely to oil exports. Azerbaijan has 7.0
billion barrels of proven oil reserves, and oil currently accounts
for around 80 per cent of all exports. By 2010, oil production is
expected to reach 1.3 million barrels a day. Oil exports to Europe
through the newly constructed Baku- Tbilisi- Ceyhan (BTC) pipeline (a
project reportedly worth some US$3.9 billion) began in June 2006. The
pipeline extends over 1,770 kilometres from Baku via Georgia and into
the Mediterranean Turkish port of Ceyhan where the oil is loaded onto
super tankers for European markets. However, despite the opening of
the BTC pipeline, Russia remains the primary route for Azerbaijan’s
oil exports to Europe. In 2005, Azerbaijan exported 4.1 million tons
of oil through the Baku- Novorossiysk pipeline to Russia. In 2006,
the amount is expected to be about 5 million tons. Azerbaijan still
relies on Russia, and to a minor extent Iran, to supplement its gas
output. However, gas production is forecast to reach 28 billion cubic
meters a year by 2010. A Baku- Tbilisi pipeline to Erzurum in Turkey
for gas exports to Europe is expected to open next year.
The challenge for the government will be to maintain macroeconomic
stability in the face of massive hard-currency inflows. Poverty and
inequality are equally significant concerns. Approximately half of
the population lives below the poverty line. In order to sustain
economic growth and spread economic wealth more equally, the
government will need to forge ahead with financial and legal reforms
which tackle corruption and create a favourable environment for the
establishment of enterprises beyond the oil and gas industries.
Free and fair elections
The last round of parliamentary elections was held on 6 November
2005. In the lead-up, international observers welcomed improved
candidate registration procedures and the government’s active
engagement with international observer missions. Most observers,
however, also noted that significant improvements were still needed
to bring campaign procedures up to international standards. Voter
turnout in the parliamentary elections was poor (47 per cent), and
the international observer community was sharply divided about the
overall fairness of the outcome which allotted 63 of the 125 seats to
the Yeni Azerbaycan Partiyasi (YAP) (New Azerbaijan Party) led by the
President and eight to the opposition Azatluk coalition. Opposition
leaders alleged massive ballot rigging and staged rallies against the
outcome.
The government responded by cancelling the result in some precincts,
but the opposition believes that the government did not do enough to
address the irregularities. The election was in the end depressingly
familiar for opposition supporters. The OSCE and the Council of
Europe declared that the elections ‘did not meet international
standards despite some improvements’ and opposition parties rejected
the results out of hand. Although the ruling YAP lost its legislative
majority, the result revealed that the main opposition parties had
won only ten seats. The election of scores of pro-government
independent MPs ensured that YAP would not be denied a majority on
most issues. Moreover, President Aliyev’s wife and uncle won seats in
parliament. Having dominated Azeri politics since 1969, these
victories did nothing to dispel the notion that the Aliyev clan were,
for all intents and purposes, a royal family.
Post-election demonstrations in Baku, the largest being
20,000-strong, took place in November and December. Riot police took
a less forgiving view than they had prior to the election, which
elicited a formal protest from the US State Department. After weeks
of delay, Azerbaijan’s Central Elections Commission announced in
December that results in ten constituencies were to be overturned and
elections re-run in May 2006. This did little to appease the
opposition parties and those few who had managed to win seats
launched a boycott of the Milli Mejlis. The NGO International Crisis
Group (ICG) declared the elections to be a ‘lost opportunity’ and
called upon the Council of Europe to suspend Azerbaijan’s membership
and for the international community to impose a diplomatic embargo on
the regime in Baku.The opposition to President Aliyev is currently
divided and marginalised. He is expected to be returned to office in
2008.
Outlook
With the SCP and BTC pipelines operational in 2006, thereby
increasing Azerbaijan’s capacity to exploit its oil and gas reserves
on the Caspian, continued rapid economic growth is assured. However,
this growth will almost certainly be dominated by the hydrocarbon
sector. Although President Aliyev has promised to work towards
diversifying the economy up to 2025, the ‘Long-term strategy’ (op
cit) is in its infancy
The ‘lost opportunity’ of the 6 November election is likely to remain
just that – lost. Key opposition parties are insisting on a boycott
of the Milli Mejlis. US criticism of the regime became more muted
from 2005 and it appears unlikely that the kinds of embargoes
recommended by the ICG will be implemented. Indeed, Russia has
criticised the OSCE and Council of Europe’s negative report card on
Azerbaijan’s elections, no doubt reminding Baku that it can always
rely on support closer to home. An Azadliq leader, Jalal Sardaroglu,
declared that the West had betrayed Azerbaijan’s democrats. Given
Azerbaijan’s vast oil and gas reserves and the high price of energy
resources, it seems unlikely that many governments will move to
seriously jeopardise their relations with Baku. Rumours in the Azeri
press of a US interest in establishing radar bases in Azerbaijan
further reinforce the view that the Aliyev government has little to
fear in the way of sanctions.
Risk assessment
Economic Fair
Political Good/imbalanced
Regional stability Poor