nabucco caucasus analytical digest

8/9/2019 Nabucco Caucasus Analytical Digest

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No. 16 26 April 2010

Continuity and Change in Azerbaijans Energy Diplomacy 2By Murad Ismayilov, Baku

Te State Oil Company SOCAR: A Microcosm o Azerbaijani Development? 5By Heidi Kjrnet, Oslo

Oil and Gas Revenues Management in Azerbaijan:Crude Dependence and Its Consequences 8By Kenan Aslanli, Baku

Tl m

Te Signifcance o the State Oil Fund o Azerbaijan Republicor the Budget o Azerbaijan 12

STTSTcS

Oil and Gas Reserves and Production International Comparison 13 mp

Major Oil and Natural Gas Pipelines Around the Caspian Sea 16

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Research Cetre or EastEuropea Studes, Breme

Ceter or SecurtyStudes, ETH Zurch

HEinRiCH Bll STifTngSTH CCSS

resourcesecurityinstitute.org www.laender-analysen.de www.boell.ge

DGOResource

Security

Institute
http://resourcesecurityinstitute.org/http://resourcesecurityinstitute.org/


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caucasus analytical digest 16/10caucasus

continuity and change in zerbaijans nergy ioayBy Murad Ismayilov, Baku

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Azerbaijans perceptions about the great powers and its place in the world have changed over time. In theinitial post-independence period, Azerbaijan placed great hope on the west in securing its three main goals:retaining independence, restoring territorial integrity, and securing economic recovery and sel-suciency.Since then, however, it has become disappointed in the wests ability and desire to address its key interestsand has begun to diversiy its ties, including to Russia and Iran.

changing peretionsTe end o the Cold War and the collapse o the SovietUnion unleashed what is commonly reerred to as the

new great game in Central Eurasia, a contest amonggreat powersfrst and oremost the United States, Rus-sia, urkey, the European Union, China, and Iranor the control over energy resources in the Caucasus(namely, Azerbaijan) and Central Asia (namely, Kazakh-stan, urkmenistan, and Uzbekistan), as well asgiventhe landlocked nature o the states in the regiontrans-portation routes or those riches. Te outcome o thisstruggle is largely believed to determine who will dom-

inate Central Eurasia in the 21st century, just as theresults o the 19th century great game between GreatBritain and Russia in Central and South Asia werelargely contingent on the control over, and ownershipo, the railroad networks.

Azerbaijan entered the new great game with aclear set o objectives in mind, ones that defned thecountrys initial approach to pipeline diplomacy andconditioned the pipeline choices it made at the earlystage o its independence. Te pipeline politics, andsecurity practices that came with it, however, providedor a contextual ramework which constrained somepractices and enabled others, thus prompting a whole

array o regional processes unintended originally bythe strategists in any o the states involved with theenergy politics in the broader region. Tese securitypractices and their unintended eects, on the one hand,and the gradual consolidation o the regional states onthe otherboth associated with the pipeline politicsand some broader structural orces (e.g. unexpectedlyhigh energy prices in the 2000s)worked in conjunc-tion to engender the change in key objectives driving

Azerbaijans energy politics, a process conditioned bythe evolution o perceptions Azerbaijan has been hold-ing o the regional and international system, as well as

o its potential place therein. Tis shit in goals andperceptions has worked to defne the extent to which

Bakus gas diplomacy today is dierent rom its oilpolitics in the 1990s.

Tis being so, this article is an attempt to ana-lyze the ways in which, and the mechanisms through

which, Bakus pipeline diplomacy aected and was itselaected by the change in those perceptions.

Key bjetives behind zerbaijans pieineioay

At least three principal objectives were guiding Azerbai-jans pipeline diplomacyas well as its oreign policyin the early atermath o its independence: retaining

independence, restoring territorial integrity, and secur-ing economic recovery and sel-suciency.First and oremost, Azerbaijans survival as an inde-

pendent ully-unctioning state was not something thatthe leaders in Baku could or did easily take or granted.

At a minimum, upholding the independence Baku hadjust secured rom Moscow seemed as challenging asgaining it. Te danger o losing independence loomedespecially large among Azerbaijanispoliticians andcivil society alikein light o the tragic experiencethat their frst statehood suered in 1920, when Azer-baijan, ollowing a short-lived independence, was orce-ully incorporated into the Soviet Union. Fresher mem-

ories o what came to be known as Black Januaryaninux o Soviet troops in Baku on January 20, 1990that let at least 137 people deadadded to the agonyo the early post-independence years.

Second, in an eort to secure western supportor its territorial integrity in the conict with A rme-nia over Nagorno-Karabakh, Baku hoped to instru-mentalize pipeline diplomacy and get the west toput pressure on Armenia to withdraw rom Azerbai-

jani terr itory.And third, suering rom a severe economic disrup-

tion in the early post-independence years, Baku sought

to secure the western fnancial support that provedessential in boosting the Azerbaijani economy in those


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years, support that no other sidenot even Moscowwas capable o providing at the time.

Tis triad o objectives upon which Azerbaijans pipe-line diplomacy rested in the early 1990s, was itsel rootedin, and derivative o, three underlying realitiespercep-tual and actualcharacteristic o the time: the beliein Baku and the broader regionthat the west, and theUS in particular, was committed to the independenceand territorial integrity o the post-Soviet states andhad the capacity to uphold this commitment; the con-viction that western involvement with Azerbaijan andthe broader region, unlike Russian, was not driven by

colonial or neo-colonial impulses; and the recognitionboth by Baku and by other countries in the broaderregiono the inherent weaknesseseconomic, mili-tary and politicalo their young polities and, relatedto that, their incapacity to address on their own thechallenges that aced their young post-colonial state-hoods at the early stage o independence.

Tese basic realities, and the multitude o interestsand objectives they worked to generate, have overlappedand intersected to create a complex contextual rame-

work in which Bakus decision or westbound exportroutes was made in the 1990s. Tree energy transpor-

tation projectsthe BakuSupsa and the BakubilisiCeyhan oil pipelines and the BakubilisiErzerumgas pipelinewere born as a result, eectively linking

Azerbaijan, Georgia and urkey to each other and tothe west. Te successul completion o the three pipe-lines, ones that make up the core o the US-inspiredeast-west energy corridor, led many to suggest that USengagement with the region heralded an approachingend to Russias historical predominance in this part othe world, with the regional states, including Azerbai-

jan, ostensibly committed to unconditional and unidi-rectional pursuit o institutional, economic, culturaland political integration with the west. Te post-9/11

American intrusion into Central Asia only worked toreinorce this line o thinking.

isaointentsTe transormation o, and the evolution in, the percep-tual and actual realities that underpinned Azerbaijansenergy diplomacy in the 1990s, however, ensured thatthese calculations proved rather misleading. Te pro-cess that those changes worked to unleash engenderedthe shit in the content and direction o Bakus pipelineand overall energy diplomacy in the 2000s.

Tere are at least our ways in which the realities

o the 1990s have experienced proound transormationover the period o the past two decades. First, as much

as it had hoped its pipeline diplomacy would produce adierent result, Baku has ailed to secure explicit recog-nition, either by Washington or by Brussels, o the actthat Armenia occupies part o its territory.,Te realityo this situation is demonstrated in the voting recordon United Nations General Assembly Resolution 10693(passed on 14 March 2008), rearming the territorialintegrity o Azerbaijan and demanding the immedi-ate withdrawal o all Armenian orces rom all occu-pied territories there. Te United States and Francevoted against, while other EU states chose to abstainin the vote; none o them voted in avour o the reso-

lution. Lack o movement in this direction has signif-cantly undermined both Azerbaijans interest in the westand the perceived role that pipeline diplomacy couldplay in addressing Bakus major oreign policy objec-tives. Azerbaijans sophisticated energy diplomacy hasapparently ailed to create a collateral eect leading toa quick resolution to the conict over Nagorno-Kara-bakh on terms avorable to Baku; no longer, thereore,does Baku view energy diplomacy as a panacea or all itsproblems. And the westno longer viewed as an hon-est and almighty brokeris now seen as either unwill-ing or unable to bring about what Baku would consider

a air resolution to the conict.Second, Russias challenge to Georgias territorialintegrity in August 2008, combined with the westsdemonstrated inability to block or repel Moscow onthat point, have eectively worked to urther under-mine the credibility o the west, in that it served to

jeopardise both the wests commitment to the regionalstates security and territorial integrity and its capacityto live up to that commitment. Not only did the west,including the United States, ail to prevent the Russianassault, butin its atermathNAO ailed to extenda long-planned invitation or Georgia to join its Mem-bership Action Plan (MAP) and rather chose to delay

the countrys membership in the organization or anindefnite uture.

Tird, with multi-billion dollar oil revenues ood-ing the Azerbaijani economy, Baku has gone through aperiod o exceptionally strong GDP growth, a act thatimmeasurably boosted the countrys economy, raised thelevel o its sel-suciency and sel-reliance, and, conse-quently, has given Baku the sel-confdence that it canmake its own way, something Azerbaijan earlier lacked.I anything, Azerbaijans move to fnance the construc-tion o the BakubilisiKars railway in light o both

Washingtons and Brussels reusal to do so, is a case in

point. On the one hand, both the EU and the UnitedStates declined to und the project and did so or politi-


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cal reasons, calling attention to a reality that the westlike Moscowwould not always act in Bakus best inter-ests and, hence, ull reliance on the latter may not bethe best strategy or Azerbaijan to employ in the pur-suit o its national interests. On the other hand, Azer-baijans move to cover a signifcant portion o projectcosts on its own highlighted the level o sel-suciencyand independence that Baku had reached over the lasttwo decades.

Finally, with the supportboth fnancial and polit-icalthat the west, and the United States in particular,provide being increasingly conditioned upon institut-

ing democratic orms o governance and with the west-ern criticism o Azerbaijans perormance in this respectbecoming ever more persistent, Baku has now cometo view this as no less o a threat to its sovereignty

which it has so dearly cherishedas Moscows perceivedattempts at reversing the collapse o the Soviet Unionin the early part o the 1990s. Just as Moscows allegedeorts to instrumentalize its energy resources, as wellas what is commonly reerred to as the rozen con-icts in the broader region, have long been perceived asderivative o, and serving, Russias neo-imperial ambi-tions, the way in which, and the extent to which, the

west has come to use democratic discourse in its rela-tions with its partners in the east and south, has cometo be viewed among the elites in Baku as a mechanismthrough which western neo-imperialist penetration andcontrol are being eected. In the eyes o Azerbaijanspolitical elite, western democratic knowledge, akin toRussian neo-imperialism, has come to be seen as directlythreatening regime stability, on the one hand, and con-straining the state in its ability to exercise ull sov-ereignty and enjoy autonomy in its domestic and or-eign policies, on the other, two objectives that ormedthe rationale behind Bakus energy politicsand theirnearly exclusive western orientationduring the 1990s.

Both Moscow and Washington, thereore, have nowcome to be perceived as neo-imperial powers in pur-suit o dominance and control.

Strategy changeTis transormation o realities on the ground has had asignifcant bearing on the nature o Azerbaijans energypolicy at the onset o the twenty-frst century, an evo-lution that can be seen in the very dierent way Bakuis pursuing gas diplomacy now compared to the way itplayed oil diplomacy in the past. In a regional and inter-national context in which any choice o route and desti-

nation or energy exports has come to be perceived as onecreating opportunities, but also raught with challenges,

Azerbaijans energy policy has evolved to be guided bytwo major precepts.

First, in an open eort to urther diversiy its link-ages with the outside world and the ensuing dependen-cies and interdependencies that come rom them, Bakuis now keen to have its gas distributed among as manyplayers in the region as possible, rather than limitingits exports to a single (western) market only. In prac-tice, that means engaging in eorts to develop easternand southern dimensions to the east-west energy trans-portation network that the frst stage o Azerbaijansenergy policy has produced. And second, economic

considerationsmore than anything elsehave cometo drive Baku in its choice o routes through which itsgas would be exported. While Bakus commitment tourther develop the western dimension o the energycorridor o which it is a part still holdssomethingreected in the countrys unwavering support or theNabucco gas pipeline projectthe evolution o Azer-baijans energy policy toward at least two countriesRussia and Iranis expressive o this change.

With Azerbaijan driven by these two tenets, Russiahas now been allowed a greater role in Bakus energyexport calculations, a change reected in the move by

the latters state oil company to enterin late 2009into a short-term contract with Russias Gazprom onexportor market priceso no less than 500 mcmo Azerbaijani gas annually (1 bcm o gas is actuallyexpected to be exported to Russia in 2010). Guidedby the same set o principles, Baku has now moved toopen upi slowlyto Iran, a country that the US haslong sought to isolate: the east-west transport corridor

was designed to bypass Iran as much as it was meantto undermine Russias monopoly over regional trans-port routes. Azerbaijans move to export some o its oilthrough Iran during and ater the August 2008 crisis,as well as the short-term contract it signed with Irans

National Gas Export Company in January 2010 onthe export o 100 mcm o gas to Iran annually throughthe existing Gazi-MagomedAstara gas pipeline is areection o Bakus increasing willingness to developthe southern dimension o its energy diplomacy. In itsquest or alternative export routes or its gas, Azerbai-

jan has now also reached out, in one way or another, toBulgaria, Italy, Greece and Romania in the west; Israeland Syria in the south; and China in the east.

conusionTe eorts by Azerbaijan to diversiy its energy exports

should be viewed in a broader context o Bakus attemptsto diversiy its economy, including in the non-energy


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sector, and expand the range o its partners. Te latter,in turn, is a reection o a growing conviction in Baku

that independence is not only about reedom o land,but is also about reedom o choice.

About the Author:Murad Ismayilov (email: [email protected]) has recently completed an MSt Program in International Relations atthe University o Cambridge and currently serves as Program Manager or Research and Publications at the AzerbaijanDiplomatic Academy. Tis contribution has been prepared or the research project entitled Te Energy Sector and thePolitical Stability o Regimes in the Caspian Area: A Comparison o Kazakhstan and Azerbaijan, conducted by theResearch Centre or East European Studies at the University o Bremen and unded by the Volkswagen Foundation.

Te ideas expressed here reect the personal views o the author and do not necessarily represent the views o the Azer-baijan Diplomatic Academy or the Ministry o Foreign Aairs o the Republic o Azerbaijan.

e State i coany Sc: miroos of zerbaijani eveoent?By Heidi Kjrnet, Oslo

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Baku has not shown signs o moving towards resource nationalism, but Azerbaijans national oil companySOCAR plays an important role in the countrys petroleum sector. In addition to being partner to the inter-

national oil companies present in Azerbaijan, the company is an actor in policy ormation. Close ties betweenthe government and the company ensure that SOCAR, in addition to being one o the biggest taxpayersin Azerbaijan, also carries out political and social tasks or the government. At the same time, commercialtasks are intertwined with petroleum policy and regulation, and the Azerbaijani national petroleum sectorseems to be moving in a more opaque direction.

Sc as a miroos of zerbaijanRegimes pursuing resource nationalist policies generallymake the national oil companies (NOCs) an importantvehicle or increased control over the petroleum sector.

Azerbaijan has not ollowed Russia and Kazakhstansexample in curtailing the international oil companiespresence in the country. Studying the national oil com-

pany SOCAR nevertheless provides interesting insightsinto the Azerbaijani regime. Viewed as a microcosm othe challenges that Azerbaijan itsel is acing, SOCARcan shed light on the countrys prospects or modern-ization or stagnation.

zerbaijani petroeu poiyPetroleum resources have been paramount in Azerbai-jans economic and political development since inde-pendence. Te signifcance o the international oilcompanies (IOCs) presence in Azerbaijan is markedparticularly by two events: the signing o the so-called

Contract o the Century with an international consor-tium to develop and produce oil rom the Azeri-Chi-

rag-Guneshli felds in the Caspian Sea in 1994, andthe construction o the BakubilisiCeyhan (BC)pipeline transporting oil rom Baku to Ceyhan in ur-key by a BP-led consortium, which ended the Russianmonopoly on the transport o energy resources romthe Caspian region. SOCAR was established in 1992as a merger o Azernet and Aznetkimiya, two com-

panies with historical roots in the Azerbaijani SovietSocialist Republic. Te company is the national part-ner to the IOCs in all the production sharing agree-ments (PSAs) that exist between Azerbaijan and or-eign partners. As such SOCAR has a 25 per cent stakein the BC oil pipeline and in the South Caucasusgas Pipeline (SCP), and it is partner to over 20 PSAs.Some o the PSAs have been abandoned due to unsat-isactory exploration results. SOCAR manages the pro-duction and sale o oil and gas rom the old Soviet-era felds in Azerbaijan. Tese make up a very smallshare o the countrys total oil and gas production and

exports, and SOCARs output has been declining byaround 1 per cent a year. 80 per cent o the countrys


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lished twelve years ater SOCAR, which is tasked withsupervising SOCARs activities. In reality the minis-trys role is severely limited by the PSAs, which have thestatus o law and regulate all aspects o the IOCs pres-ence in Azerbaijan as well as the consortias activitiesrom production through Corporate Social Responsi-bility (CSR) obligations, to taxation and local content.Te PSAs, and SOCARs strong position and close tiesto the president, leave little room or the ministry toengage directly with the petroleum sector.

Over time, the conict between commercial andnon-commercial goals within SOCAR could stimu-

late competition between groups inside the companycoupled with groups in government circles avouringreorm to increase eciency and others avouring thestatus quo. For now, the social work o SOCAR maybe a sign o its political subservience to the president.However, the competition between commercial andother goals could change i orces within the companyor government unite to promote reorm o the company,or i the goals set or the company are altered altogetherin a political eort to modernize it. For the time being,however, despite Azerbaijans status as an implement-ing country under the Extractive Industries ranspar-

ency Initiative (EII), SOCAR is moving in the com-plete opposite direction, concealing more inormationthan beore. For instance, in the annual report or 2008,

which was published signifcantly later in 2009 than hasbeen the case with previous annual reports, SOCARdid not reveal its revenues rom the sale and export ooil and petroleum products, which have fgured in ear-lier reports. Further, SOCAR does not have a boardo directors. Te companys presidents and vice-presi-dents are appointed by the president o Azerbaijan. Aboard could potentially separate political and commer-cial decisions and translate the political inuence in amore transparent manner than today, but plans to estab-

lish one have not yet materialized.

Scs oe in petroeu poiyForationHistorically, SOCAR has played a special role in Azer-baijani petroleum policy ormation. Under the short-lived Popular Front government in 19921993, SOCAR

was responsible or negotiations with oreign partnersover the extraction o resources in the Caspian. Tere

was a short intermission when Heydar Aliyev came topower and the companys seat at the negotiating table

was given to one o his close allies, but SOCAR regained

its role shortly ater. SOCAR was at the time the onlybody in the newly-independent state that had the com-

petence to negotiate with international partners over oilproduction. o this day, the company has a dual role inthe Azeri-Chirag-Guneshli contract, both as a companyand as a government agency, strengthening the impres-sion that commercial interests on the one hand, and pol-icy ormation and regulation on the other, are not dis-sociated in the Azerbaijani petroleum sector. SOCARis currently negotiating with urkish counterparts onthe transport o Azerbaijani gas rom the Shah Denizfeld via urkey to Europe. ransport o gas is an issuewith signifcance beyond the feld o energy, since theexport routes o energy are an important part o oreign

policy. Most likely, SOCARs negotiating positions aredecided in close cooperation with the president. Hav-ing a seat at the negotiating table is, however, an indi-cator o the companys strong position in Azerbaijanspetroleum policy ormation.

conusionTere is a proound lack o separation o commercial andpolitical tasks in the relationship between the Azerbai-

jani government and the Azerbaijani national oil com-pany SOCAR. SOCAR has established itsel as a strongactor in the sector, seemingly acting in close coopera-

tion and agreement with the president, who keeps a closeeye on the petroleum sector and has his trusted all ies inthe companys management.

Having been the sole body in the country with com-petence to deal with international partners in the oil busi-ness in the early 1990s, SOCAR has since been able toretain a strong role in Azerbaijani petroleum policy or-mation. Tis has resulted in a situation where the govern-ment body charged with oversight o the company, theMinistry o Industry and Energy, has neither the author-ity nor the political strength needed to control SOCAR.However strong the companys role in petroleum pol-icy ormation has been historically, it would neverthe-

less seem that SOCARs special role in the petroleumsector is premised upon its subservience to Azerbaijanipetroleum and oreign policy, as well as delivery o cer-tain social goods. Hence, an emancipation o SOCARdoes not appear imminent. Due to the potential compe-tition between commercial and non-commercial goalsset out or the company, we may, however, see a devel-opment where SOCAR, in pursuit o greater commercialeciency, may need to cut back on its social and polit-ical obligations. For the time being however, SOCARis not displaying any signs o imminent reorm. Rather,the movement seems to be in a more opaque direction.

(Information about the author and further readingoverleaf.)


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About the AuthorHeidi Kjaernet is a Research Fellow at the Fridtjo Nansen Institute in Norway. She is currently writing a PhD the-sis on the national oil companies o Azerbaijan, Kazakhstan and Russia or the University o romso, and recentlyco-edited Caspian Energy Politics. Azerbaijan, Kazakhstan, Turkmenistan (Routledge, 2010) and co-authored RussianRenewable Energy(Ashgate, 2009).

Tis article was written as part o the research project RUSSCASP Russian and Caspian energy developments,fnanced by the PEROSAM program o the Research Council o Norway. Te project is carried out with the Fridt-jo Nansen Institute, the Norwegian Institute or International Aairs and Econ Pyry as consortium partners andalso includes other institutions and researchers.

Further reading

Te World Bank Group and the Center or Energy Economics/Bureau o Economic Geology (2008) A CitizensGuide to National Oil Companies, Washington DC/Austin, exas: Te World Bank.

Victor, Nadejda Makarova (2007) On Measuring the Perormance o National Oil Companies (NOCs), Stan-ord, CA: Stanord University.

i and as evenues manageent in zerbaijan:crude eendene and ts consequenesBy Kenan Aslanli, Baku

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Azerbaijans macroeconomic and fscal indicators during the global economic crisis reect the dependenceo the Azeri economy on oil and gas. Te addiction will continue to increase rom year to year. Te coun-trys rising oil dependence might upset macroeconomic and fscal equilibriums, and intensiy the risk o civilunrest among vulnerable social groups. Social repercussions are possible i oil and gas revenues are managedpoorly or distributed unjustly.

nreased i and as eendene inzerbaijans onoyAt a time when Azerbaijans dependence on energy rev-

enue is increasing, the government is spending moneyin non-transparent ways. Unortunately, there is littlesocietal oversight to check these tendencies.

Azerbaijans revenues rom oil and gas are expectedto total $198 billion in net present value terms through2024. Tis sum will ow rom the annual growth o oiland gas extraction on the basis o the joint developmento oil and gas deposits in the Azerbaijani sector o theCaspian Sea and higher prices in the world oil market.

As the mission statement o the State Oil Fund o Azer-baijan Republic (SOFAZ), established in 1999, pointsout, part o the projected income will be sterilized in the

domestic economy, while another part should be savedor uture generations, and it wil l be invested in the inter-

national securities market. For this purpose, SOFAZcooperates with the Reserve Assets Management Pro-gram (RAMP) o the World Bank, which has been in

existence or more than 40 years. oday, the World Bankmanages $114 million o Azerbaijans money.

In 2009, the strategic currency reserves o the coun-try increased by $1.8 bn., and taking into considerationthe assets o SOFAZ, totaled $20 bn. Revenue obtainedrom oreign exchange assets management totaled $430million, o which $287.7 million went or national or-eign debt servicing. As a result, earnings obtained romassets management exceeded payments or loans by aactor o 1.5. But, at the same time, oreign trade turn-over ell to approximately a third o previous levels andexports declined rom $47 billion (2008) to $14 bil-

lion (2009). SOFAZ has been actively working to pro-vide greater transparency and accountability leading to


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will cause a drop in Azerbaijans ranking in the OpenBudget Index (prepared by the International BudgetPartnership, USA) or the next period. In such a situa-tion, the relevant state agencies (the Economic Commis-sion o the Parliament and the Chamber o Accounts)should initiate investigations.

Another important point is that the budgets o 2009and 2010 have unreasonably large defcits compared tothe surpluses o recent years. Tese were 0.7% o GDPin 2009 and 4% o GDP in 2010. In the context o bud-get surpluses during recent years, these fgures seemtoo high. Te current priority or budget expenditures

are public investments which lack transparency (unor-tunately, international initiatives designed to increasetransparency, such as the Extractive Industry ranspar-ency Initiative [EII] do not cover public investmentissues). Tis expense line should be decreased in theupcoming years. International loans allocated or inra-structure will be added to the budget. Also, the decreas-ing share o tax revenue in the budget rom year to yearrequires serious reorms in the fscal system. State-levelmeasures are needed to remove obstacles in the tax sys-tem that make investments in the non-oil economyunattractive. Since the share o income tax rom the

population in the budget is small, society is passive inmonitoring the budget process.

Fators causing poor i and as evenuemanageent in zerbaijanSeveral actors acilitate the poor management o oiland gas revenues in Azerbaijan. One o the most impor-tant ones are underdeveloped democratic institutions.Te undemocratic electoral process and the ineectivepublic administration are weakening Azerbaijans dem-ocratic institutions. Te act that newly created institu-tions, such as the human rights ombudsman and munic-ipal governments, quickly lose public respect indicates

the eebleness o public trust in such elements o dem-ocratic governance.

A poorly-unctioning division o power also con-tributes to poor management o oil and gas revenues,as the absence o checks and balances has a negativeimpact on the budget process. Hence, there is a well-established public belie that the main player in thedecision-making process is the Presidential Adminis-tration rather than the Parliament. Such concerns arestrengthened due to little public participation in thedecision-making process. Te main reason why peopleare not actively involved in the budget process is the

above-mentioned public distrust and a traditional cul-ture o low participation.

In addition, the present structure o the Cabinet oMinisters (CM) prevents it rom managing aairs eec-tively. Addressing this problem requires an evaluationo the entire structure and a more clear defnition ounctions. Despite the act that certain measures havebeen taken within the various technical assistance proj-ects o the European Union, USAID and World Bank,they did not produce any results. In act the structuralreorm o the CM is impossible without clear political

will. Te CM either does not have a strategic plan or it isnot open to public involvement since it was designed tobe accountable to a limited group o people. Te Cabinet

o Ministers ailure to coordinate and defne the strate-gic actions o the economic ministries and committeesaects them as well. All this is consequently reected inthe ineective management o public fnances.

Te closed classifcation o numerous budget expen-ditures and lack o proper fscal orecasting complicateany control mechanisms. I the frst actor that causes anon-transparent budget is the gaps existing in the bud-get legislation, the second one is the pressure the Par-liament aces in this direction. Te act that Azerbaijanranked 50th among 85 countries included in the 2008Open Budget Index proves that budget classifcations

do not ully cover the various types o expenses.Moreover, the high level o corruption in the coun-try makes all state control measures directed at the bud-get or other economic felds ineective. And a marketeconomy has not been completely established yet in thecountry. Obstacles to liberalization, such as the persis-tence o monopolies and state intererence into the mar-ket, prevent the normal unctioning o market economylaws. Consequently the shadow economy becomeslarger and the state budget is deprived o considerableunds. Also, state monopolies, such as the State OilCompany (SOCAR), intensiy nationalistic and pro-tectionist attitudes in economy.

priorities of pubi xenditureTe budget has become more dependent on oil lately. Asthe state budget becomes increasingly dependent on oil,more o the non-oil parts o the budget are being cut. Atleast 50% o the 2010 budget is orecast to come romthe oil sector. Tis shit means that the budget reliesor its revenue on a ew companies and this change hasa dramatic impact on the budget process. In particular,it means that citizens play a small role in creating thebudget and defning how it is spent.

Moreover, a regional disbalance o the budget can

be observed as a result o the oil boom. 90% o the statebudget income comes rom Baku and the Absheron pen-


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insula. Tere is also an interurban disbalance, which isound in the requent change o the expense prioritieso the budget.

Te share o social protection and provision expensesin the budget as a share o GDP ell rom 3% to 1.9%rom 2003 to 2007 and then increased again to 3%and 3.7% during 20092010. Signifcantly increasedamounts o social protection and provision expenses

were allocated to pensioners, reugees and internallydisplaced persons (IDP); other needy layers o popu-lation also received benefts. Overall, the governmentplanned to spend 1,192 million AZN on social expenses

in 2010, despite the adverse impacts o the ongoing cri-sis on the entire economy. 2010 will be a lost year orsalary and pension raises. We can observe drops in theamount o unds or salaries in comparison with 2009.aking into account that the 2009 budget will be imple-mented with a defcit, it becomes clear unds or salariesin 2010 will be at the same level as they were in 2009.Tis means that there will not be sucient increases inthe salaries o public sector employees. Any increase

will come rom increasing the minimum wage and onlyaect citizens receiving extremely low salaries. A 5.3%increase in transers rom the State Social Protection

Fund will increase the minimal pension level. In the2010 budget, allocations to education will be 5.6% lessthan compared to 2009. Te absolute amount o socialexpenses in the state budget o Azerbaijan is dynam-ically growing. However, its share in the structure ooverall budget expenditures is decreasing. Te indica-tor or 2010 is 10.6%.

Te real poverty level is still very high, regardlesso ocial statistics setting it at 11% or 2009. During

the crisis, the income o the population grew every year,but prices went up as well. In the long run, there wasno change in the real incomes or social welare level othe population. Te large weight o reugees and IDPsin the total number o population (12%) should alsobe considered.

Income tax rom physical persons comprises only11% o total budget revenue (2008). Te tax burden onthe economy is 15% (2009). Te underdeveloped bud-get discipline and budget culture should also be men-tioned here. Te populations lack o participation inbudget ormation is related to the underdevelopment o

small and medium-sized businesses. Te coordinationand management o oil and gas revenues rom a singlecenter is very weak. Te frst impression might be thata single center controls the management system o anover-centralized state fnance system. An over-central-ized budget system is undoubtedly a serious obstacleor local fnancial opportunities and or their produc-ing positive economic outcomes.

conusionEven i oil and gas prices bottom out in the currentdecade, the orecasted levels o production, i realized,

would still make it possible to increase Azerbaijans rev-enues rom petroleum development. Tis trend mightupset the macroeconomic and fscal equilibrium, andintensiy the risks o civil conrontation among vulnera-ble social groups. I the government manages its oil andgas incomes poorly and distributes the profts unjustly,there are likely to be some social repercussions.

About the AuthorKenan Aslanli is a policy analyst examining fscal, macroeconomic and energy issues based in Baku, Azerbaijan anda local contractor or the International Budget Partnership (Washington DC, USA). Tis contribution was prepared

as part o the research project entitled Te Energy Sector and the Political Stability o Regimes in the Caspian Area:A Comparison o Kazakhstan and Azerbaijan, conducted by the Research Centre or East European Studies at theUniversity o Bremen and unded by the Volkswagen Foundation.

References World Bank, Azerbaijan Country Economic Memorandum A New Silk Road: Export-led Diversifcation,

December 23, 2009. National Budget Groups fscal policy recommendations: http://www.nbg.az Te Statement o the Central Bank o Azerbaijan Republic about the Main Directions o Monetary Policy in 2010:

http://www.cbar.az/assets/1122/Monetary_2010.pdf
http://www.nbg.az/http://www.cbar.az/assets/1122/Monetary_2010.pdfhttp://www.cbar.az/assets/1122/Monetary_2010.pdfhttp://www.nbg.az/


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Table and Diagram

e Signiane of the State i Fund of zerbaijan eubi for theudget of zerbaijan

Transfers fro the State i Fund of zerbaijan eubi to the udget 20032010

Year ount of transfers to budget(in iion Z)

nrease fro revious year(%)

2003 100 -

2004 130 30.0%

2005 150 15.4%

2006 585 290.0%2007 585 0.0%

2008 1,100 88.0%

2009 4,900 345.5%

2010 4,915 0.3%

Note: 1 USD = 0.8 AZN

Source: Statement by National Budget Group, http://www.osi.az/index.php?option=com_content&task=view&id=1880&Itemid=449

Soia xenses and p 20032010

213.1 236.6302.9

341.5

612.8

846.4

920.0

1,192.33%2.80%

2.40%

1.90%

2.20%2.20%

3%

3.70%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

0

200

400

600

800

1,000

1,200

1,400

2003 2004 2005 2006 2007 2008 2009 2010

Direct social expenses (mln. AZN) Share of social expenses in GDP (%)

Note: 1 USD = 0.8 AZN

Sources: State Statistical Committee of Azerbaijan Republic, http://www.azstat.orgNational Budget Group, http://www.nbg.az
http://www.osi.az/index.php?option=com_content&task=view&id=1880&Itemid=449http://www.azstat.org/http://www.nbg.az/http://www.nbg.az/http://www.azstat.org/http://www.osi.az/index.php?option=com_content&task=view&id=1880&Itemid=449


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Statistis

i and as eserves and prodution nternationa coarison

istribution of Word i eserves (proven eserves, nd of Year 2008)

Middle East59.9%

Africa10.0%

South and CentralAmerica

9.8%

North America

5.6%

Asia Pacific3.3%

Russian Federation6.3%

Kazakhstan3.2%

Azerbaijan0.6%

Norway0.6%

EU 270.5%

76.0%

10.2%

7.1%

0.5%

0% 10% 20% 30% 40% 50% 60% 70% 80%

OPEC

CIS

OECD

EU 27

Source: BP Statistical Review of World Energy June 2009, http://www.bp.com/statisticalreview


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istribution of Word atura as eserves (proven eserves, nd of Year 2008)

Middle East41.0%

Africa

7.9%

South and CentralAmerica

4.0%

North America4.8%

Asia Pacific8.3%

Russian Federation23.4%

Kazakhstan1.0%

Turkmenistan4.3%

Usbekistan0.9%

Azerbaijan0.6%

Ukraine0.5%

Norway1.6%

EU 271.6%


41.0%

30.8%

9.0%

1.6%

17.6%

0% 5% 10% 15% 20% 25% 30% 35% 40% 45%

Middle East

CIS

OECD

EU 27

Rest of world


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Wordwide i prodution 19972008 (in ousand arres aiy)


1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Russian Federation 6,227 6,169 6,178 6,536 7,056 7,698 8,544 9,287 9,552 9,769 9,978 9,886

Saudi Arabia 9,482 9,502 8,853 9,491 9,209 8,928 10,164 10,638 11,114 10,853 10,449 10,846

USA 8,269 8,011 7,731 7,733 7,669 7,626 7,400 7,228 6,895 6,871 6,847 6,736

Kazakhstan 536 537 631 744 836 1,018 1,111 1,297 1,356 1,426 1,484 1,554

Iran 3,776 3,855 3,603 3,818 3,794 3,543 4,183 4,248 4,233 4,282 4,322 4,325

Azerbaijan 182 231 279 282 301 311 313 315 452 654 869 914

0

2,000

4,000

6,000

8,000

10,000

12,000

Mbbl/d

Wordwide atura as prodution 19972008 (in iion cubi meters)

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Russian Federation 532.6 534.8 534.6 528.7 526.2 538.8 561.4 573.3 580.1 593.8 592.0 601.7

USA 535.3 538.7 533.3 543.2 555.5 536.0 540.8 526.4 511.1 524.0 540.5 582.2

Iran 47.0 50.0 56.4 60.2 66.0 75.0 81.5 84.9 103.5 108.6 111.9 116.3

Canada 165.8 173.4 176.8 182.2 186.5 187.9 184.7 183.7 187.4 188.4 184.1 175.2

Turkmenistan 16.1 12.0 20.6 42.5 46.4 48.4 53.5 52.8 57.0 60.4 65.4 66.1

Norway 43.0 44.2 48.5 49.7 53.9 65.5 73.1 78.5 85.0 87.6 89.7 99.2

Azerbaijan 5.6 5.1 5.4 5.1 5.0 4.7 4.6 4.5 5.2 6.1 9.8 14.7

0

100

200

300

400

500

600

700bcm


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crnile

16 March 2010 Georgian President Mikheil Saakashvili meets with Russian opposition fgure Garry Kasparov in bilisi

17 March 2010 President o the European Commission Jose Manuel Barroso says that he is concerned over the ake V reporto a Russian invasion o Georgia broadcast by the V channel Imedi

18 March 2010 Te EBRD will allocate a 180 million Euro loan to Georgia or two projects: a new railway route and a high-voltage power transmission line

21 March 2010 Nowruz is declared a national holiday in Georgia

23 March 2010 Tree inmates are transerred rom the detention acilities in Guantanamo to Georgia

24 March 2010 Te Georgian authorities reject an application or citizenship o St. Petersburg based businessman and presiden-tial hopeul Aleksandr Ebraelidze

25 March 2010 Georgian President Mikheil Saakashvili meets with NAO Secretary General Anders Fogh Rasmussen in Brussels26 March 2010 Georgian protesters ask or a street named ater ormer US President George W. Bush in bilisi to be renamed

31 March 2010 Te Georgian Foreign Ministry protests Russian plans to build heliports in the breakaway region o South Ossetia

6 April 2010 US President Barack Obama thanks Georgia or its signifcant contribution to the Aghan deployment

7 April 2010 A Georgian battalion is sent to Aghanistan

7 April 2010 Azerbaijan conducts counter-terror operations along the border with Russia

8 April 2010 Russia and the breakaway region o South Ossetia sign an agreement on Russias operation o a military base inthe region or 49 years

8 April 2010 Te Georgian Parliament approves Irakli Kavtaradze as the new Georgian ambassador to Azerbaijan

9 April 2010 Georgian President Mikheil Saakashvilis spokesperson Manana Manjgaladze says that Russia is interering inKyrgyzstans internal aairs

9 April 2010 EU Commissioner or Enlargement and European Neighbourhood Policy Stean Fule visits Azerbaijan

9 April 2010 Te State Oil Company o Azerbaijan (SOCAR) says that Russia has become the largest importer o Azerbaijanigas with Georgia ranked second and Iran ranked third

11 April 2010 11 April is declared a day o national mourning in Georgia to commemorate the death o late Polish PresidentLech Kaczynski

11 April 2010 Baku commemorates the Jewish victims o the Holocaust

12 April 2010 Head o Adjara Autonomous Republics government Levan Varshalomidze criticizes Georgian Prime MinisterNika Gilauri or ignoring his requests to delegate technical unctions to Adjaras local authorities

13 April 2010 Armenian President Serzh Sargsyan and US President Barack Obama meet on the sidelines o the nuclear secu-rity summit in Washington

13 April 2010 US President Barack Obama urges urkey and Armenia to make every eort towards the normalization o relations

14 April 2010 Georgian President Mikheil Saakashvili addresses the nuclear security summit in Washington14 April 2010 Te Georgian Interior Ministry says that it has seized a small amount o highly enriched uranium

14 April 2010 Chinese MPs and members o the ChinaAzerbaijan interparliamentary riendship group visit Baku

15 April 2010 EU Commissioner or Energy Gnther Oettinger visits the State Oil Company o Azerbaijan (SOCAR) head-quarters in Azerbaijan

16 April 2010 Opposition leader Levan Gachechiladze says that he will not run or the bilisi mayors oce during the nextlocal elections in May and will not support any o the opposition candidates

16 April 2010 Azerbaijan and Russia reach an agreement on the delimitation o state borders

16 April 2010 Head o Legislation and Legal Expertise Department o the Azerbaijani Presidential Administration Shahin Ali-yev says that Azerbaijan aces a shortage o lawyers

18 April 2010 Georgian President Mikheil Saakashvili attends the state uneral o Polish President Lech Kaczynski

20 April 2010 Georgian rade Unions start a miners warning strike in Zestaoni and Chiatura in Western Georgia to demandbetter saety conditions to counter an increasing number o accidents

Fro 16 marh to 20 ri 2010


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caucasuscaucasus analytical digest 16/10

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ISSN 1867 9323 2010 by Heinrich Bll Stiftung, Forschungsstelle Osteuropa, Bremen and Center for Security Studies, Zrich

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