Azeri oil is becoming a barrier for democracy

by Gubad Ibadoglu

© Free Thought Univ.

Gubad Ibadoglu is the Chairman of the Public Initiatives Center and Senior Analyst at the Economic Research Center. He is the National Coordinator for Azerbaijan’s Steering Committee of the Eastern Partnership Program’s Civil Society Forum. He has been selected as a civil society representative for the Extractive Industries Transparency Initiative (EITI) Board for 2013 - 2015.

The well-known American economist, Daren Acamoglu, suggests four fundamental causes of economic growth across nations in his book titled “Introduction to Modern Economic Growth”. They are as follows: 1) luck; 2) geographical location; 3) institutions, and 4) culture. While applying those parameters to assess the economic situation in Azerbaijan, we can claim that the short-term economic growth of the country has been driven by two main fundamental causes in recent years. First, Azerbaijan’s citizens are lucky. Unlike its neighboring countries, Azerbaijan is one of the small countries in South Caucasus with 9 million inhabitants. It is endowed with natural resources, especially oil, gas and resources from mining. Second, Azerbaijan is a country of geographic importance for Europe as it is a country rich in carbo-hydrogen. In total, Azerbaijan is said to hold 7 billion barrels in reserve – 0.6% of the global reserves. It is also a country that has benefitted from being a transition country. 

President Aliyev & family

Concerning its institutions and the development of its political and economic culture, when Azerbaijan restored its independence in 1991, it lagged behind Georgia. In comparison to neighboring Armenia and Georgia, Azerbaijan split from the former USSR under relatively favorable and promising conditions for economic growth. Armenia had similar parameters as Azerbaijan. Bad governance and authoritarianism, restrictions on political liberties, including impediments imposed on free media and activities of opposition-oriented political institutions all contributed to a deteriorating situation. In that context, in 1994, Azerbaijan started exploiting oil and gas jointly with leading transnational companies (BP, Statoil, ChevronTexaco, Inpex Exxon Mobil, and others) in the region. Later, infrastructure was developed in order to transport oil and gas – “pipeline diplomacy” is what came to describe its relations to the West. Infrastructure activities together with the increase in production coincided with the rise in oil prices. Thus, on one hand, Azerbaijan benefitted from the hike of oil prices. On the other hand, it affected the behavior of the incumbent government as they were gaining more revenues than expected but without having the necessary experience to manage these.  Therefore, the economy lacks the necessary diversification.  It is estimated that oil and oil products amounted to 93% of Azerbaijan’s total exports in 2012, thereby creating 74% of the total revenues and representing 47% of the GDP. The main focus has thus been on oil revenues rather than on broadening the possibilities for income generation. 
Initially, the ruling family Aliyev had the monopoly over the management of the oil resources, and they started spending these revenues in the absence of rules or without due consideration for the achievement of equity among generations. According to the latest statistical data, between 2001 - 2013, over 60% of revenues gained from sales in oil and gas in Azerbaijan have been spent for exuberant and very costly infrastructure projects. It is estimated that oil revenues have already generated 100 billion dollars. The lack of public and parliamentary supervision over spending, including non-compliance with accountability and principles of transparency, and extravagant projects funded through oil revenues, has created favorable conditions for the appropriation of such revenues.  Most of it is spent to cater to internal needs. As a result of the lack of transparency for domestic investments, most oil money is either transferred to the shadow economy, which has been thriving on corruption, or it is spent out of the country through various means. These facts were revealed in a recent report published by the Tax Justice Network in 2012. According to the calculations of the authors, the amount of Azeri capital registered in offshore zones is estimated to be around 48 billion dollars.


The capital of Azerbaijan, Baku, is booming thanks to its oil revenues, and it is also for that reason, that it has become heavily dependent on these revenues. The modernization of its infrastructure at the expense of exorbitant projects plays a significant role for the drastic expansion of corruption in the country. Due to the squandering of “corrupted oil money” the shadow economy is booming which, on one hand, increases the overall price level in the formal sector, and, on the other hand, augments the amounts for bribery. This, in turn, has become a sort of “obligatory payment” for both businesses and citizens in the informal sector. Consequently, there is a strong correlation between the costs of corruption through the increase of oil revenues in Azerbaijan and the scale of its shadow economy. Furthermore, the overabundance of huge infrastructure projects (roads, bridges, schools, hospitals) has not only increased the level of corruption but also the popularity and authority of those in power. Azerbaijan’s authorities are not only taking advantage of oil revenues for policing internal stability in the country, but they are also mobilizing those funds to garner foreign support. In fact, some of the oil money is used for lobbying in Europe. Some individuals have benefited from “caviar diplomacy” as they have closed their eyes to the violation of democratic values in the country and, in most cases, they have even blocked discussions on human rights cases at the European Court of Human Rights in Strasbourg.
Currently, the key problems of Azerbaijan are the disproportionate growth levels between the rural and urban areas, and the lack of the economy’s diversification. Last year, Azerbaijan occupied the 139th place - among 176 countries - in terms of its Corruption Perceptions Index, an index developed by Transparency International.
In a nutshell, this fall, Azerbaijan, one of the most corrupted countries in the world, will hold its presidential elections. The incumbent president has already decided to run for elections for the third time. Therefore, only few people anticipate that this election will bring about democracy and decrease Azerbaijan’s level of corruption. Many people believe that as long as oil revenues continue to flow and the decision-making power remains under the authorities’ absolute monopoly, no one will be fighting for democracy, or even demand less corruption. The majority of people in Azerbaijan do not even question the depletion of its oil resources. In fact, projections seem to suggest that the country is soon running out of oil. Thus, according to such figures, the steep decrease of oil production is anticipated to happen in 2018. At the same time, gas revenues are unlikely to offset the decrease of oil revenues. The population of Azerbaijan is awaiting the year 2018 with great suspension: not only will it see the sharp depletion of its oil resources, but ironically enough, it will also be celebrating its 100th anniversary of the first Democratic Republic in the Muslim East. (21 June 2013)