The arrests of business leaders associated with former Minister of Economic Development Farhad Aliyev and related redistribution of property promise to tarnish Azerbaijan's investment climate, business observers say. Meanwhile, the government has refused all comment on the issue.
The process began with the October 2005 arrest of then Minister of Economic Development Farhad Aliyev on charges of conspiring to overthrow President Ilham Aliyev and was followed by the detention of a number of entrepreneurs, so-called "Farhadians," who had close business ties to Aliyev. The list of those arrested includes the owners of such large industrial facilities as the Bakupoladtokme steel mill, the electronic devices manufacturer Bakelectrostamp and the NJT 2000 plastic pipes factory. [For background see the Eurasia Insight archive].
According to government sources who asked not to be identified, the investigation is expected to extend to the top managers of other large industrial facilities known to have been intimate with the former economic development minister as well.
One of the companies targeted in these investigations Azpetrol, Azerbaijan's largest oil company has already been transferred to a new owner. On December 20, the Economic Court of Azerbaijan decided to transfer ownership of Azpetrol to Ibrahim Mammadov, one of the company's founders and the owner of 0.5 percent of its shares.
Azpetrol's parent company, Azpetrol International Holdings B.V., owns property valued at an estimated $300 million, and controls Azerbaijan's largest chain of gas stations as well as two oil terminals, one of which is connected to the Baku-Tbilisi-Ceyhan pipeline, and an oil transport company that exports Kazakhstani and Turkmen oil via Azerbaijan.
Until October 2005, the company was headed by Rafik Aliyev, brother to Farhad Aliyev, who, like his brother, was arrested on charges of conspiring to overthrow the government of President Ilham Aliyev.
In early 2005, Ibrahim Mammadov granted his shares in Azpetrol to Allied Meridian Oil & Gas, a Dutch company with which the businessman had founded the oil firm in 1997. The oil company was subsequently restructured into Azpetrol International Holdings, which includes two sub-holdings, Azpetrol Group, which runs a network of 60 gas stations, and Azpetrol Oil Services Group, which handles terminals and similar facilities. Mammadov paid $3 million for Azpetrol's non-oil-related assets, including ownership of 30 percent of the Bank of Baku, plus various land holdings and buildings.
Six months after the deal, not long after the arrest of Farhad and Rafik Aliyev in October 2005, however, Mammadov claimed that he had been cheated by Allied Meridian Oil & Gas and that the deal had included a gentleman's agreement that would allow him to retain his shares in the firm, Turan news agency reported. Azpetrol International Holdings had not filed an appeal when the court ordered that its ruling be implemented immediately.
The Dutch had earlier termed the move "a continuation of hostile actions by the Azerbaijani government against the company." In a January 9 statement, the company commented that the decision to implement the ruling before they had had time to file an appeal "is even more disturbing and damaging to the reputation of Azerbaijan."
The company links the dispute with Rafik Aliyev's arrest. "After the arrest of Rafik Aliyev on October 19, 2005, sister units of the company [have been] pressured by the state, tax, security agencies and the State Oil Company (SOCAR)," a December 20 statement reads, adding that Aliyev is being held "on fake charges."
Rafik Aliyev's prison term was extended for another two months after his initial two-month sentence expired at the end of December 2005 so that, according to the law, prosecutors could have additional time to consider his case. A tax inspection of Azpetrol, begun not long after Aliyev's arrest, is also ongoing.
Azpetrol representatives, however, have claimed that they have been denied a chance to defend themselves against the government's charges.
Similar complaints have been heard from other prominent business leaders arrested as part of the Aliyev sweep-up. Aslan Ismaylov, the attorney for Nurredin, Logman and Rovshan Zulfugarly, a trio of brothers who ran the country's largest steel plant and a top electronics firm, reportedly as the business partners of Farhad Aliyev, has stated that he expects to be arrested on charges of expropriating his clients' property.
Azpetrol International Holdings has argued that the government's investigation of their company and alleged pressure placed on the courts will "be a strong signal for local and foreign investors as well as for international financial institutions."
That signal appears to have already reached one foreign investor. A senior manager in the Baku office of one international company told EurasiaNet that recent developments had forced the company to reject plans to invest several million dollars in the Ganja-based Azeraluminium company. "This company was also close to Farhad Aliyev and its managers are under investigation," the source, who spoke on condition of anonymity, said.
Representatives of the foreign and local business communities alike have been guarded in their reactions to the arrests and redistribution of Azpetrol property, with many refusing all comment.
Some experts warn that the recent arrests and re-distribution of property may eventually damage the country's investment climate. "The target of the attacks is certain people who are close to the former minister Farhad Aliyev," commented Inglab Akhmadov, director of the Public Finances Monitoring Center, a Baku-based non-governmental organization. "However, such hostile actions against any business bear serious consequences. The issue is the principle of the inviolability of property rights." [The Public Finances Monitoring Center receives funding from the Open Society Institute Assistance Foundation in Azerbaijan, which is part of the Soros foundations network. EurasiaNet operates under the auspices of the New York-based Open Society Institute]
"The government should be as transparent as possible on this issue, giving clear messages about the reasons for any property redistribution and the arrests of business people," Ahmadov said.
The arrests could also make for political instability in the long run, Ahmadov cautioned, reiterating that the investment climate will be the first to suffer from the cases. "[I]t was clear to property owners close to the ruling elite that keeping [political] power in these hands meant securing [their] business. Without the rule of law, political power is a kind of insurance policy for local businesses. Recent cases affected people from the ruling elite, which means that nobody is insured," Ahmadov said.
One pro-opposition economic analyst agrees. "This is a gross violation of the rights of investors in the country and is a gross interference by law enforcement organs in the business process," said Gubad Ibadoglu, head of the Economic Research Center, a Baku-based non-governmental organization.
Ahmadov sees this message as the most dangerous for Azerbaijan's investment climate by dissuading domestic investors from putting money into local businesses. "There is a trend of investment decline in the construction sector, which was the main recipient of local investments. If this trend continues, we can expect that the money will be directed abroad."
Rovshan Ismayilov is a freelance journalist based in Baku.