Azerbaijan in an election year

Ahead of a presidential election scheduled in October, a profile of Azerbaijan; its political and economic challenges, and some potential solutions.

Aslan Amani Robert C. Austin
2 May 2013

Azerbaijani foreign minister Elmar Mammadyarov meets with Israeli President Shimon Peres. Azerbaijan is one of the few Muslim-majority countries to pursue cordial relations with Israel. Demotix/Nir Alon. All rights reserved.

Azerbaijan has recently attracted international attention with its foreign policy decisions, startling economic growth, human rights abuses, and attempts to reshape its image by hosting various high-profile cultural, political, and sporting events.

Azerbaijan's rights record has been subject to much criticism. Amnesty International and other rights groups have highlighted the culture of impunity surrounding politically motivated harassment of government critics and periodic arrests based on trumped up charges. Earlier this month, several youth activists were put under pretrial detention in connection to recent Facebook-organised protests. The government is also accused of controlling broadcast media. On a more positive note, there is a relatively free print media and unrestricted access to the Internet.

International governmental organisations such as the OSCE, the EU and the Council of Europe have raised concerns over irregularities in elections and overall lack of political openness.

Criticism of Azerbaijan elections has been uneven: some on the Council say they are scandalous, while others such as Hilary Clinton have highlighted that democracy building is a long term endeavor – be patient. Moreover, the issue of freedom of assembly has been one of the most contentious aspects of Azerbaijan's relations with the CoE and the OSCE's Office for Democratic Institutions and Human Rights. The Venice Commission has noted that de facto restrictions on political rallies run against the legally binding commitments Azerbaijan made when joining the CoE in 2001.

Things with the EU are no different – Azerbaijani policy suggests they think the EU needs Azerbaijani energy more than Azerbaijan needs reform. While Azerbaijan does not pursue Union membership it does take part in the European Neighborhood Policy. Criticism of Azerbaijan by the EU is often muted despite agreements that commit Azerbaijan to fulfilling a broad range of reform commitments.

Responses from Baku suggest that the CoE, the EU, and the OSCE have no case. What is obvious is that the Europeans lack the leverage they had elsewhere as the usual carrots (like visa liberalization or cash) or sticks (like sanctions) do not work.

These unfavourable conditions have contributed to the gradual erosion of political competition. The government has tried to explain the disappearance of the traditional opposition from the Parliament as a proof of strong incumbent performance and ideological bankruptcy of the opposition. But this response has not been convincing for good reasons. In a competitive political environment, political entrepreneurs quickly seize on opportunities and galvanise viable alternatives. The fact that no such alternative has emerged points to the defects of the country's political system.

Economic outlook

Over the past decade, Azerbaijan's GDP grew at an annual rate of 15 percent. While foreign investments in the oil and gas industries fuelled the country's economic growth until 2006, in the subsequent five years the booming revenues from the oil flowing through the newly constructed Baku-Tbilisi-Ceyhan (BTC) pipeline took it to another level. The boost in oil revenues brought a rise in government spending, which in turn resulted in noticeable improvement of living conditions, a massive reduction of poverty and large investments in infrastructure projects.

Global economic rankings such as the World Bank reports and the World Economic Forum Competitiveness Index show that, in comparison to many transition economies in its region, Azerbaijan enjoys a stable macroeconomic environment. Its low debt-to-GDP ratio, relatively strong national currency, cash reserves and foreign assets have provided the country with a certain level of economic security.

However, there are some worrying economic indicators as well. Azerbaijan's budget is financed, to a large extent, through transfers from the sovereign oil fund, and the economy has a very low tax basis outside of the oil sector. Manufacturing and agriculture continue to be characterized by low productivity, and their share in the country's GDP is far below their pre-Independence standards.

Moreover, even official statistics show that the era of double-digit growth is over. Four years later, Azerbaijan is expected to produce only half of the crude oil amounts extracted at the peak of production in 2008-10. As oil revenues continue to fall, government spending is expected to put more strain on the sovereign wealth fund.

In a report released last month, the IMF drew attention to the importance of conducting major economic reforms without any further delay in order to minimize the impact of irreversible fall in oil revenues, and prepare the country for "a soft-landing" into a post-oil economy. Although Azerbaijan has made some progress in recent years in investing in the non-oil economy (this year the government reported a 10 percent increase in the share of non-oil in GDP), most of the growth is related to the transfer of funds from the State Oil Fund to various large infrastructure projects rather than a noticeable increase in productivity.

To be sure, there is logic to investing oil money in infrastructure projects such as roads, water and sewage pipes, but these should happen within a framework of creating a sustainable post-oil economy. The government needs to increase the oversight of such projects, expand the share of the regions outside of the capital city, and more importantly invest in increasing productivity.

The above remains true even when one takes into account Azerbaijan's rich natural gas reserves. A rudimentary calculation that factors in the "barrel of oil equivalence" of natural gas, and the capacity for the proposed Trans-Anatolian Pipeline (TANAP) expected to connect to the future Nabucco-West pipeline, suggests that the gas wealth may not compensate for the loss in oil revenues. For the next two decades, TANAP's "energy value" will remain much lower than that of the BTC at its peak.

Foreign Policy Reflects Domestic Policy

Domestic shortcomings aside, outside of the Karabakh dilemma, Azerbaijan can claim true foreign policy successes. Its neighborhood is nasty and it has to navigate strained relations with Russia (sometimes) and Iran (always) - especially given its ties with Israel and the US; Turkey cannot always be depended upon, Georgia is weak and Armenia is simply an enemy. But as long as there is oil and gas, Azerbaijan can go its own way.

Azerbaijan now pursues what they like to call a multi-vectored or balanced policy, which in essence means depend on no one, play west against east and vice versa when possible, and never get too close to countries that will tell you what to do. Given Azerbaijan’s enhanced self-perception, even the then US Secretary of State Hilary Clinton was unwilling to make any serious criticism of the shortcomings of Azerbaijani democracy when she visited in June 2012. More recently, last year Baku was tough on the Russians over renewal of the Gabala radar station. The Azerbaijanis raised the rent – $7 million a year to $300 million – forcing the Russians to leave. Russia lacked leverage to make Baku think differently.

On a regional level, Azerbaijan looks good and is playing fair with everyone but Armenia. Since Baku has money, Azerbaijan is now a regional investor throughout the Caucasus and Central Asia. It is the region’s biggest exporter (it is almost all in oil) and Baku has done much to promote a kind of regional solidarity by investing in better transportation links between east and west with a degree of success. The BTC pipeline is an example and now there is talk of Baku – Tiblisi – Kars rail link. The elite in Baku understand that they can, for now, lead regional integration and further isolate Armenia at the same time. The strengthening of the Baku-Tiblisi-Ankara alliance is probably a better bet than one that links Moscow-Yerevan-Tehran.

Yet, Armenian occupation of Karabakh and surrounding territories remains the key problem for the region. Armenia and Karabakh are the biggest losers in this as the border with Turkey remains closed, north-south integration is unlikely and Azerbaijan uses its cash to go around Karabakh and Armenia. Turkey’s attempt to re-open the border with Armenia ultimately failed because it failed to take into account the Azerbaijani position.

Karabakh remains the main determinant of Azerbaijani foreign policy. An oft-violated ceasefire has been in place since 1994 and countless UN resolutions demanding respect for Azerbaijani territorial integrity have given Azerbaijan something of a legal-moral high ground. Yet no solution is within reach. This leads many to conclude that both sides like the status quo and manipulate it to maintain domestic control and avoid reform.

Armenia and Azerbaijan now look to external actors to solve it in their favor. This is unlikely as Karabakh is not Kosovo - it is far more complicated. The Minsk Group of the OSCE, which is responsible for negotiations, includes France, Russia and the United States. The essential principles of solution are there but neither side wants to take the plunge even when final status is delayed indefinitely. Moreover, the whole negotiation process is conducted completely in secret. Neither side is preparing the population for a possible compromise.

Unlike Kosovo, where the US forced a solution, there is no single decisive actor to do that and Azerbaijan correctly assesses some members, especially Russia, to be biased and devoted to maintaining the status quo. The very prospect of internationalizing the problem the way Kosovo was after 1999 is rejected by both sides. No doubt Russia would hardly like to see an international Kosovo-style mission in its backyard. That leaves only the status quo, for now, despite the huge growth in Azerbaijan’s military spending.

The Necessity of Reforms

Leaving aside the unquestionable moral case for democratization (to which the government has not been very receptive), political reforms are necessary for a smooth transition to a post-oil economy and maintenance of stability in the region. For the first time in a decade, the political and economic outlook forcefully point to the need for reforms. To make sure that the very real economic gains made in the past ten years do not evaporate into thin air and to prevent the country from descending abruptly into political turmoil, the government needs to implement serious reforms.

To be sure, the government has tried to increase efficiency and combat corruption. Given the government’s impressive investment in higher education, Azerbaijan has the human capital to bring about change. The recent attempt at centralizing basic government services in one office rather than having citizens deal with multiple ministries is an important step in the right direction. However, in the absence of meaningful political reforms these changes are not likely to have a significant positive impact. It is difficult, if not impossible, to create well-functioning political institutions in the absence of effective checks and balances.

A careful reading of international reports on the performance of the Azerbaijani government confirms this point. For instance, Transparency International reports "considerable progress" in creating "a legislative and institutional framework to govern the judicial system", but continuation of serious problems in terms of the influence of the executive branch. Similar conclusions can be reached from the Global Competitiveness Index prepared by the World Economic Forum, which shows considerable progress in many areas of economy, but major obstacles to competitiveness in the form of corruption and cronyism.

Institutions cannot be built overnight. So it is, at best, naive to postpone core reforms. While the economic success of the post-pipeline period makes political reform likely to achieve good results, the declining oil revenues and the political nature of the problems that impede the transition into post-oil economy make reforms necessary.

The government could start by putting the idea of separation of powers into practice by upgrading the parliament from a mere rubberstamp into a more genuine site of lawmaking and oversight over the executive. A more plural and representative parliament will not only ensure that the government apparatus runs more efficiently and responsibly, but also reset Azerbaijan on a path to democratization, and ensure that the next transition of power will happen on peaceful terms.

Reforms could also help resolve the decades-long Karabakh impasse. Azerbaijan needs to grab more than just the legal and moral high ground provided by the UN. Regional projects will help as will its role as a link between east and west. But democratic reforms at home would mean a more positive image abroad, which could end up breathing a new life into the peace process. 

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