EurasiaNet, NY
Nov 25 2006
AZERBAIJAN: COPING WITH THE OIL WINDFALL
Ahto Lobjakas 11/25/06
A EurasiaNet Partner Post from RFE/RL
>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 $3 billion
in oil revenues from our projects. At $60 a barrel, the full-cost
revenues are actually around $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
$1.5 billion to stabilize the economy. In March, a state-run
investment company with an initial budget of $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 November 16, 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 $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.