What Lies Ahead for Azerbaijan?

Source: Getty
Article
Summary
The result of Azerbaijan’s upcoming presidential election is not in doubt. But the incumbent president will face a new set of challenges during his next five-year term.
Related Media and Tools
 

Azerbaijanis will vote in a presidential election on October 9. The result is not in doubt. Everyone expects President Ilham Aliev to be elected for a third five-year term. 

The question is, “What happens next?” It can confidently be said that Azerbaijan in 2018 will be a very different place. 

Azerbaijan has come a huge distance from the war-torn, impoverished, newly independent state of the early 1990s. The last few years, following the inauguration of the Baku–Tbilisi–Ceyhan pipeline in 2006, have seen a dramatic rise in its prosperity. At $70 billion, Azerbaijan’s GDP is now more than twenty times bigger than it was in the mid-1990s. The country has also made its mark on the international arena in a variety of ways. It began a two-year term on the UN Security Council in January 2012 and staged the Eurovision Song Contest in the same year. 

The next five years will pose a new set of challenges. The surrounding landscape—including energy supply and demand as well as Azerbaijan’s strategic priorities—is already changing. On the domestic front, the public is likely to grow more vocal about socioeconomic issues and political freedoms. The Azerbaijani leadership needs to respond and adapt with agility. 

Strategic Priorities

Azerbaijan’s next phase of development, which coincides with Aliev’s upcoming third term, will be more of a challenge than those past. The country’s oil boom will come to an end, and it will make a bid to become a significant European gas supplier. 

Baku’s foreign policy balances between its bigger neighbors, and energy is a key driver of its approach. Azerbaijan has cool relations with its southern neighbor, Iran, and a pragmatic relationship with Russia (President Vladimir Putin made a high-level visit to Baku in August). Azerbaijan also works hard to build relations with Western energy companies and Western governments based on its energy resources. 

In 2018, the Trans Adriatic Pipeline (TAP), set to deliver at least 10 billion cubic meters of natural gas annually from Azerbaijan’s Shah Deniz field via Turkey to European states, is due to begin operations. By that year, Azerbaijan’s oil exports are projected to be in decline—indeed, they have already dropped from their peak in 2010.

The TAP project will make Azerbaijan an energy partner of the European Union. But in 2018, Baku’s strategic importance to the United States is likely to have dwindled. Azerbaijan is one of the key transit routes to Afghanistan, but by that year the U.S. withdrawal from that country will be complete. And Washington’s relations with Tehran are likely to improve, which means that the United States will be less focused on containing Iran via its neighbors, like Azerbaijan. 

As former U.S. ambassador to Azerbaijan Richard Kauzlarich comments: 

Changes in the regional security environment (with the withdrawal of Western forces from Afghanistan) and the global energy market (Azerbaijan faces a more competitive market for its gas and oil) mean that relative to a few years ago Azerbaijan is less significant. That means that Azerbaijan must establish a new framework for a positive relationship with the West and the United States as well as with its immediate neighbors.

Unresolved Conflict

Azerbaijan’s neighborhood will not change over the next five years. The essential contours of what is still the biggest long-term issue for both Azerbaijan and Armenia—the dispute over the territory of Nagorny Karabakh that is now twenty-five years old—will also remain. 

Opinion polls suggest that the unresolved dispute is still overwhelmingly the number-one issue for ordinary Azerbaijanis. Almost twenty years after Azerbaijan suffered a traumatic military defeat at the hands of the Armenians, this dispute is also the most difficult to change. As one Western diplomat in Baku put it, “This is the one issue where President Aliev cannot afford to put a foot wrong.”

In recent years, the Azerbaijani government has increased its military budget to $4 billion a year with the stated aim of exceeding the entire Armenian state budget. President Aliev maintains that he desires a peaceful outcome to the dispute but that his country reserves the right to use force in the long run to reconquer lost territory. In the meantime, the ceasefire line, known as the Line of Contact, remains Europe’s most dangerous militarized zone. Each side has deployed more than 20,000 soldiers to face the other, there are frequent shooting incidents, and about three dozen people are killed each year. This is certainly not a “frozen” conflict.

With every year that passes it gets harder to make peace over Karabakh. Armenians get more accustomed to possession of the lands under their control and are more reluctant to make the land-for-peace deal that must lie at the heart of an agreement. For his part, the Azerbaijani leader has to deal with unrealistically high public expectations and a large constituency that favors going back to war. At the same time, all the outside powers are firmly committed to preventing a new and potentially disastrous conflict over the territory. 

This means that the most likely scenario over the next few years is the continuation of the situation of no peace, no war—although the possibility of new fighting, caused either by miscalculation or by a political crisis, also grows stronger every year and must be taken seriously. 

Opaque Politics

There are set to be ten candidates in the October 9 election, although only two are expected to gain significant numbers of votes: the incumbent president and the candidate of the united opposition. The fact that Aliev is running for a third term at all is a subject of controversy. Previously, Azerbaijan had a two-term limit for presidents, meaning that Aliev would have had to stand down this year. However, he organized a constitutional referendum in March 2009 that allowed him to run for a third consecutive term. 

Azerbaijan’s opposition is notoriously poorly organized. Many of its leading figures are veterans of the short-lived Popular Front Party government of 1992–1993, whose public standing has declined over the years. The opposition briefly raised its game this year by nominating a highly respected figure, filmmaker Rustam Ibrahimbekov, to be its unified candidate. Ibrahimbekov, an acclaimed international artist who had been praised by Ilham Aliev and his father, has been especially critical of the current government for corruption and its human rights record. 

In the end, Ibrahimbekov’s candidacy did not go forward, as he was barred from running for office because he had dual Azerbaijani and Russian citizenship. The filmmaker tried and failed to renounce his Russian citizenship in time to run for the presidency. Instead, the main opposition groups have nominated sixty-one-year-old historian Jamil Hasanli as their candidate. 

Azerbaijan is not a democracy, despite holding elections. The opposition is operating in very difficult circumstances. Several activists have been arrested this year; opposition parties cannot hold rallies in central Baku and have limited access to airtime on television.

Over the last year the government has cracked down strongly on dissent. Two leading opposition politicians, Ilgar Mammadov and Tofiq Yaqublu, were arrested in February on dubious charges and are still in detention. Investigative reporter Khadija Ismailova, who has published articles on elite corruption in Azerbaijan, has been subjected to a campaign of intimidation. 

Human Rights Watch recently released a report on the crackdown that concludes, “the government has been engaged in a concerted effort to curtail opposition political activity, punish public allegations of corruption and other criticism of government practices, and exercise greater control over nongovernmental organizations.” 

Responding in early September, Elnur Aslanov, head of Azerbaijan’s Political Analysis and Information Provision Department of the Presidential Administration, rejected the report as politically motivated, saying Human Rights Watch was “working to the orders of various centers. The report does not mention even one of the recent achievements of Azerbaijan, this clearly demonstrates that the authors are fulfilling such orders.” 

The October 9 poll will be observed by fewer international monitors than in elections past. A projected visit by a U.S. delegation to Azerbaijan, led by Deputy Assistant Secretary of State Thomas Melia, to monitor preparations for the vote was canceled at the request of the Azerbaijani authorities. 

All this means that, although in the short term the opposition will do its best to protest the conduct of the election, in the coming years the main arena of political competition within Azerbaijan is likely to be among the ruling elite. 

Former president Heidar Aliev ran Azerbaijan from the late 1960s to 2003, first as Communist Party boss, then as elected leader, with one interruption. He established a power vertical in which he personally oversaw every key decision and amassed enormous authority. 

Under his son, president since 2003, the system is somewhat different. By claiming a third term as president, the younger Aliev will emerge more from under the powerful shadow of his father, who only served two terms. He will have a chance to move aside some of the powerful veterans of his father’s team, such as his seventy-five-year-old chief of staff, Ramiz Mekhtiev.

He will be unable to repeat the feat of total control exercised by his father because the immense increase in wealth over the past few years has empowered other individuals in the country. The political system is now more oligarchic, with powerful positions held by ministers, such as Kemaladdin Heydarov and Ziya Mammadov, who have economic and regional power bases.

The Views of the People

Public opinion is hard to gauge in a country such as Azerbaijan, but the available data suggest that the president retains popularity, while public discontent is directed more against the oligarchs. 

A total of 83 percent of those questioned in fall 2012 for the Caucasus Research and Resources Center’s soon-to-be-released Caucasus Barometer poll said they trusted the president, fully or partially. A noticeably lower figure—49 percent of those questioned—said they believed they were being “treated fairly” by the government, while 39 percent disagreed with that proposition. 

Outward displays of popular discontent have been sporadic. The early part of 2012 saw a number of disparate and seemingly unconnected protests by different groups in the Azerbaijani population. The demonstrations were mainly about socioeconomic issues or local problems. As Shannon O’Lear, an associate professor of geography at the University of Kansas, explains: 

Public protests in Azerbaijan have focused, not entirely but to an interesting degree, on localized issues: a mosque closure, a relative of a local official not being detained after a traffic accident, merchants protesting an increase for stalls in the market, for example. There are also national-level issues that have motivated public dissent such as the unauthorized protest by a few dozen people in Baku in January of this year regarding the death of a soldier by hazing.

So, while people may not feel they are treated fairly by the central government, their grievances are not necessarily directed at the top leadership. O’Lear says this could either be “because other issues are more immediately relevant to people or because the Aliev reign appears to be too solid to threaten. People may be more likely to enact opposition through localized, tangible issues on which they feel they have a chance to make a difference.”

Observers of Azerbaijan, from different perspectives, agree that the public currently sees little alternative to the current ruling elite. Brenda Shaffer, a professor at the University of Haifa who specializes in Azerbaijan, argues that the Azerbaijani public has opted for the stability that the current leadership provides for them. She says, “In the post–Arab Spring world, most recognize that failed states are not good for human rights and that effective governance, even when flawed, is preferable to instability and lawlessness. In Azerbaijan, there is wide support for a gradual evolution of the political system and little attraction to rapid change or shifting ideologies.”

According to pro-democracy activist Hikmet Hajizade, “There can be no opposition in a system like that of [Leonid] Brezhnev’s USSR. There are only around 200 brave activists who have not been broken, who try to protest and who can be called dissidents . . . but there is no popular force behind them. The people have been lulled to sleep.” 

This stability of course may change over the next five years. The key determinant will almost certainly be the economy.

Economic Prospects

After years of record growth, the main issue for Azerbaijan in the near future is whether its current economic model, which is heavily reliant on oil exports, is sustainable. (See “Answers in Depth” below for experts’ detailed answers to this question.) 

Oil revenues from the Baku–Tbilisi–Ceyhan pipeline made Azerbaijan the fastest growing economy in the world between 2005 and 2007. But production is dropping (see figure 1). Speaking in Washington, DC, in September 2013, Gulmira Rzayeva of the Center for Strategic Studies in Baku said that starting in “2015–16 [oil production] will . . . be significantly declining.” Revenues reached a peak in 2010 and are slowly falling—though the State Oil Fund, created in 2001, is designed to protect the state budget against this decline. 

The result of Azerbaijan’s upcoming presidential election is not in doubt. But the incumbent president will face a new set of challenges during his next five-year term.

A dip in the world oil price is more likely to have an economic impact on Azerbaijan’s oil-rich neighbors, Iran and Russia, than on Azerbaijan itself, argues Brenda Shaffer. If oil prices dive in the near future, Azerbaijan will be in relatively good shape because “it regularly bases its state budget on a price lower than the actual,” Shaffer says. Azerbaijan also “has a small population, so it can keep state services at a good level even when the oil price is lower. But oil-export-based states with large populations, such as Iran and Russia, will have a hard time maintaining social services stability when the oil price is low for a long term,” she adds. 

Yet even if Azerbaijan manages to cushion itself against the short-term effects of declining oil revenues, it still faces a new stark reality: the days of big, easy oil revenues are numbered. To meet this challenge, the plan over the next five years is for Azerbaijan to reposition itself as a major gas exporter. 

For many years, the European Union had been pushing the Nabucco gas pipeline project intended to transport gas from Azerbaijan’s Shah Deniz field to the countries of Central Europe. Uncertainties about the commercial viability of Nabucco eventually led to the less ambitious but still significant TAP, which will begin in Greece then run through Albania and across the Adriatic Sea to Italy. According to Laurent Ruseckas of IHS Cambridge Energy Research Associates, the actual route of the pipeline is less important than the fact that there will now be a direct link from the Caspian Sea to Western Europe. “Development of Phase Two of Shah Deniz, as it proceeds, will make Azerbaijan into a significant gas producer,” he says.

At the same time, the Azerbaijan state oil and gas corporation, SOCAR, is expanding internationally so it can remain a player in European energy politics in the future. It is already a major economic investor in Georgia, and it has made a large investment in the Star oil refinery in Izmir, Turkey. SOCAR also recently bought a two-thirds stake in Greece’s gas distribution network

The fact that TAP is more modest than Nabucco suggests it is better insured against fluctuations in European gas demand. The previous experience with the Baku–Tbilisi–Ceyhan pipeline is also encouraging for TAP’s prospects: in that case, as soon as the project was approved, both suppliers and customers factored it into their future plans and made it viable. 

However, the world gas market is more volatile than the oil market, and revenues are lower. As Rzayeva said in September 2013, “If Azerbaijan was getting some $800 per 1,000 tons of oil, then it will only get $50 per 1,000 cubic meters of gas. If you take this comparison you can see what the difference is between oil and gas revenues for the country." 

Other producers are on Azerbaijan’s heels, and its gas will have to compete against sources in Algeria, the eastern Mediterranean, and northern Iraq as well as liquefied natural gas (LNG) that is exported from further afield. 

The longer oil and gas revenues continue to flow into Azerbaijan’s state budget, the more questions society will ask about how the new riches are being distributed. Corruption is already a major concern. A scandal erupted last year when a former university rector, who had fled to France, made damaging allegations about seat buying in parliament. And Azerbaijan ranked 139 out of 176 countries in Transparency International’s Corruption Perceptions Index of 2012, putting it on the same level as Russia.

O’Lear explains that based on the experiences of countries in similar situations, with economies overly reliant on oil exports, “an uneven distribution of oil rent benefits allows a political elite to rule without having to do the work of statecraft to build a foundation for a flourishing society.” She cautions, “If Azerbaijan continues on what would appear to be a similar path, the expectations of its populace will continue to go unmet.”

Looking Ahead

President Ilham Aliev is in a relatively secure position as he prepares to begin a third term. Azerbaijan is prosperous as never before, and the country has secured an important international gas deal that will connect the Caspian Sea and the European Union for the first time. 

However, Azerbaijan’s political system remains worryingly closed and opaque, while the recent experiences of long-serving leaders in neighboring countries—Recep Tayip Erdoğan in Turkey and Vladimir Putin in Russia—show that standing still is not an option. The next five years will be a critical time for Azerbaijan to adapt and reform in order to meet a whole new series of economic and international challenges. 

Appendix: Answers in Depth

In September 2013, Azerbaijan experts were asked, “Is the Azerbaijani economic model sustainable?” They responded:

Gubad Ibadoglu, member of the management board of the Economic Research Center 

“In the short-term yes, but in the medium and long term there are fiscal risks.”

Richard Kauzlarich, former U.S. ambassador to Azerbaijan 

“With stabilized or declining energy exports and the lack of any serious economic diversification into the non-energy sector, the current economic model is not sustainable. If the economic model is not sustainable, then the current political system—built as it is on corruption—will be stressed.”

Laurent Ruseckas, senior adviser at IHS Cambridge Energy Research Associates 

“For five to ten years, probably; over the longer term, clearly not, since it is based on oil export revenues that decline over time. Azerbaijan is likely to emerge as a major gas exporter, and gas export revenues will help, as will condensate production from gas fields. But . . . it is very likely that, absent major increases in world oil prices, Azerbaijan faces a general trend of slow decline in hydrocarbon export revenues. As this gets reflected through less investment of oil money in the domestic economy, growth of the non-oil sectors—which has been pretty robust for the past few years—will presumably start to suffer.”

Brenda Shaffer, professor at the University of Haifa and visiting researcher at Georgetown University 

“Over half of the revenue that Azerbaijan has accumulated from its oil exports has been saved in the national oil fund, thus with its relatively small population, Azerbaijan can weather changes in the oil price. In contrast to oil export, gas projects take a long time until they start showing profit, generally over a decade. However, the initiation of the new gas export projects will also generate economic activity and jobs. Shah Deniz has a large portion of gas condensate. The export of the gas condensate can generate immediate profits, while like all gas export projects, the pipeline exporting natural gas will take a long time to return a profit.”

The author would like to thank Alexandra McLees for invaluable research assistance. Unless stated otherwise, quotations come from answers to questions emailed to commentators.

End of document

About the Russia and Eurasia Program

The Carnegie Russia and Eurasia Program has, since the end of the Cold War, led the field of Eurasian security, including strategic nuclear weapons and nonproliferation, development, economic and social issues, governance, and the rule of law.

 

Comments (1)

 
 
  • St. Barnabas
    Tom de Waal needs to understand that there is no - as of yet - such thing as the "world gas market."
     
     
    Reply to this post

     
    Close Panel
Source http://carnegieendowment.org/2013/10/07/what-lies-ahead-for-azerbaijan/gpd3

More from The Global Think Tank

In Fact

 

45%

of the Chinese general public

believe their country should share a global leadership role.

30%

of Indian parliamentarians

have criminal cases pending against them.

140

charter schools in the United States

are linked to Turkey’s Gülen movement.

2.5–5

thousand tons of chemical weapons

are in North Korea’s possession.

92%

of import tariffs

among Chile, Colombia, Mexico, and Peru have been eliminated.

$2.34

trillion a year

is unaccounted for in official Chinese income statistics.

37%

of GDP in oil-exporting Arab countries

comes from the mining sector.

72%

of Europeans and Turks

are opposed to intervention in Syria.

90%

of Russian exports to China

are hydrocarbons; machinery accounts for less than 1%.

13%

of undiscovered oil

is in the Arctic.

17

U.S. government shutdowns

occurred between 1976 and 1996.

40%

of Ukrainians

want an “international economic union” with the EU.

120

million electric bicycles

are used in Chinese cities.

60–70%

of the world’s energy supply

is consumed by cities.

58%

of today’s oils

require unconventional extraction techniques.

67%

of the world's population

will reside in cities by 2050.

50%

of Syria’s population

is expected to be displaced by the end of 2013.

18%

of the U.S. economy

is consumed by healthcare.

81%

of Brazilian protesters

learned about a massive rally via Facebook or Twitter.

32

million cases pending

in India’s judicial system.

1 in 3

Syrians

now needs urgent assistance.

370

political parties

contested India’s last national elections.

70%

of Egypt's labor force

works in the private sector.

70%

of oil consumed in the United States

is for the transportation sector.

20%

of Chechnya’s pre-1994 population

has fled to different parts of the world.

58%

of oil consumed in China

was from foreign sources in 2012.

$536

billion in goods and services

traded between the United States and China in 2012.

$100

billion in foreign investment and oil revenue

have been lost by Iran because of its nuclear program.

4700%

increase in China’s GDP per capita

between 1972 and today.

$11

billion have been spent

to complete the Bushehr nuclear reactor in Iran.

2%

of Iran’s electricity needs

is all the Bushehr nuclear reactor provides.

78

journalists

were imprisoned in Turkey as of August 2012 according to the OSCE.

Stay in the Know

Enter your email address in the field below to receive the latest Carnegie analysis in your inbox!

Personal Information
 
 
Carnegie Endowment for International Peace
 
1779 Massachusetts Avenue NW Washington, DC 20036-2103 Phone: 202 483 7600 Fax: 202 483 1840
Please note...

You are leaving the website for the Carnegie-Tsinghua Center for Global Policy and entering a website for another of Carnegie's global centers.

请注意...

你将离开清华—卡内基中心网站,进入卡内基其他全球中心的网站。