EurasiaNet Business & Economics - Electoral Politics in Azerbaijan Could Complicate Pipeline Loans

BUSINESS & ECONOMICS

ELECTORAL POLITICS IN AZERBAIJAN COULD COMPLICATE PIPELINE LOANS
Mark Berniker 9/16/03

Investors in the Baku-Tbilisi-Ceyhan oil pipeline are watching Azerbaijan’s presidential campaign warily. Lenders worry that electoral politics connected with the October 15 election could prompt fresh delays in arranging financing for pipeline construction.

Even without factoring in Azerbaijani electoral politics, the Baku-Tbilisi-Ceyhan (BTC) project is striving to overcome environmental questions that have given international lenders pause. [For background see the Eurasia Insight archive]. Stiff pressure from environmentalist groups has helped prompt the European Bank for Reconstruction and Development (EBRD) and International Finance Corporation (IFC) to support public meetings and the conduct of impact studies to examine how the 1,760-kilometer pipeline will affect people who live along its route. [For background see the Eurasia Insight archive].

"The EBRD is concerned, and is under pressure from international NGOs," says Kaan Nazli, a research analyst with Eurasia Group, a Manhattan-based risk analysis firm. "The EBRD financing for BTC is not a done deal. There is a risk the EBRD will give the BTC only conditional approval." Any EBRD financing delay, Nazli added, could set back the projected BTC completion date. The pipeline is currently projected to begin pumping oil in late 2004 or early 2005.

Hesitation on the part of international lenders could force Azerbaijan’s continued reliance on its State Oil Fund www.oilfund.az to cover construction costs, Nazli said. The fund is ostensibly designed to use energy profits to finances social services and infrastructure projects with broad public benefits.

"If there are any delays [in disbursements from the EBRD], the government would undoubtedly be forced to tap into the State Oil Fund for funds for the [pipeline], which the International Monetary Fund would dislike," says Nazli. The fund, which reportedly has at least $727 million in assets according to the fund’s website, so far has allocated roughly $164 million to finance pipeline construction, according to local reports. Nazli said the EBRD and the IFC, the World Bank’s private-sector lending arm, are expected to make decisions on their lending parameters in late October.

Meanwhile, Azerbaijan is bracing for what could be a contentious presidential vote. Many observers believe Ilham Aliyev, the son of ailing President Heidar Aliyev, remains the heavy favorite to succeed his father. [For background see the Eurasia Insight archive]. However, a corruption case pending in US federal court in New York has implicated top Azerbaijani officials, possibly creating a political headache for those working to ensure a dynastic political transition in Baku. [For background see the Eurasia Insight archive].

In addition, a consolidation of opposition presidential candidates could pose a problem for Ilham Aliyev’s candidacy. Media reports on September 15 indicated that the leader of the Popular Front Party, Ali Karimli, would withdraw from the presidential race and throw his support behind Etibar Mamedov, head of the Azerbaijan National Independence Party. The move would leave only two major opposition leaders -- Mamedov and Musavat Party chief Isa Gambar � still in the presidential race. Karimli’s withdrawal could thus provide new momentum for opposition efforts to field a single candidate to oppose Aliyev. [For background see the Eurasia Insight archive].

Regardless of how their own consolidation efforts turn out, opposition leaders have indicated that they expect the ruling New Azerbaijan Party to try to rig the election. Some have held out the prospect of organizing mass protests in the event that Ilham Aliyev wins what the opposition deems to be an unfair vote.

"Given the political situation in Baku, it is highly unlikely that presidential elections will run smoothly," says Emmanuel Karagiannis, an expert on Caspian Basin energy issues who is an assistant professor at the Kazakhstan Institute of Management, Economics and Strategic Research in Almaty.

According to Nazli, the EBRD and IFC are scheduled to meet just days after the presidential poll. A confused post-election environment in Baku could encourage the lenders to defer a commitment. A delay, especially one that prompts Azerbaijani officials to dig deeper into Oil Fund coffers, could prompt new tension between Baku and international financial institutions, in particular the International Monetary Fund (IMF).

The IMF has emphasized the need for Azerbaijan to refrain from using Oil Fund money to finance pipeline construction. "The key challenge facing Azerbaijan over the medium term will be to ensure that the projected boom in oil exports is managed effectively and in a manner consistent with sustainable non-oil growth and poverty reduction," the IMF remarked in a June summary of discussions with Azerbaijani authorities.

Editor�s Note: Mark Berniker is a freelance journalist specializing in Eurasian affairs.

The Central Eurasia Project aims, through its website, meetings, papers, and grants, to foster a more informed debate about the social, political and economic developments of the Caucasus and Central Asia. It is a program of the Open Society Institute-New York. The Open Society Institute-New York is a private operating and grantmaking foundation that promotes the development of open societies around the world by supporting educational, social, and legal reform, and by encouraging alternative approaches to complex and controversial issues.

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