Azerbaijan: Coping With The Oil Windfall

Azerbaijan's oil is expected to last until 2025 (RFE/RL) BAKU, November 21, 2006 (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.

Police disperse an opposition demonstration in Baku in 2005 (RFE/RL)

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.