ENVIRONMENTAL GROUPS CHALLENGE LENDERS ON AZERBAIJAN FINANCES
9/30/02

A day after World Bank and International Monetary Fund (IMF) officials finished their annual meetings by urging rich nations to trade more energetically with poor ones, a network of environmental organizations has urged the international lenders to force Azerbaijan to avoid improperly using state funds in one of the Caucasus’ major international-trade projects.

In a September 28 letter to the World Bank, the IMF and the European Bank for Reconstruction and Development, groups belonging to the Caucasus Environmental NGO Network objected to the August 13 announcement that the State Oil Fund would "contribute around 80 percent of [the state oil company’s] commitment" to an oil pipeline from Baku through Tbilisi to the Turkish port of Ceyhan. The groundbreaking ceremony for the 1,760-kilometer pipeline took place on September 18. Many observers, including Russian Foreign Minister Igor Ivanov, have expressed skepticism that the pipeline will deliver the returns its investors would like, because of rough terrain and stiff competition. Noting this uncertainty, the letter’s signers say that Azerbaijan should not spend its oil fund – which the government set up in 2000 to channel oil and gas revenues into social programs – on an uncertain oil venture. They also worry that the pipeline’s finances are hard to track. "It is imperative that [the] World Bank and IMF insist that the Azerbaijan government change its decision," said the signers, including Manana Kochaldze of Tbilisi-based Green Alternative. "Projects supported by the Fund [must] be demonstrably geared to relieving poverty and improving social, environmental and public health conditions."

This would be a more stringent policy than Azerbaijan or its international lenders have required. The fund’s authorizing statute gives the Oil Fund latitude to invest in the pipeline and gives President Heidar Aliyev authority to approve a program of fund spending every year. The NGOs are right that the Oil Fund charter emphasizes spending on social welfare. According to the statute, "assets may be used for solving the most important nation-wide problems, and for construction and reconstruction of strategically significant infrastructure facilities, for the purpose of the country’s socio-economic progress." The same statute, while saying most of the Fund’s money will come from oil and gas revenues, allows the Fund to spend its own investment proceeds.

However, World Bank and IMF officials have expressed concern about Oil Fund assets supporting risky infrastructure projects without necessarily bringing payoffs for Azerbaijani citizens. When the IMF committed a $100 million loan to Azerbaijan in July 2001, it stressed the importance of a solid and audit-ready Oil Fund. "Guidelines for the management and investment of Oil Fund assets were established," the IMF said in a statement, "designed to ensure both that these assets are managed prudently and that information about the investment of these funds be made public on a regular basis." This loan commitment came after the World Bank approved Azerbaijan’s latest poverty reduction strategy. In this context, the NGOs charge that Azerbaijan is improperly investing Oil Fund money in the Baku-Tbilisi-Ceyhan pipeline – which may not deliver profits despite enjoying support from the United States and from major private investors.

Apart from the risks, the NGOs argue that an overlap between the state oil company and the oil fund violates the IMF’s insistence on transparency. "The State Oil Company is led by close relatives of President Aliyev and government elites," the organizations charge. "Nothing has changed the existing practice of taking bribes from foreign companies for better terms of contracts." Signers objected in particular to a July 30 decree from Aliyev that the "National Bank is instructed to transfer $118 million from the country’s currency reserves to the State Oil Fund." The NGOs imply that this decree masks suspicious accounting. The bank’s currency reserves, they say, "include foreign companies’ bonuses for Azerbaijan, which were granted before [the Oil Fund] was set up." The organizations suggest that it is now hard to account for where these bonuses actually went: "It is not clear why these bonuses were ’forgotten’ when [the Oil Fund] was established."

The Oil Fund has released audited financial statements for its first full year, in keeping with its guidelines. As the Baku-Tbilisi-Ceyhan pipeline moves forward and Azerbaijan draws down the rest of its current IMF loan, NGOs’ questions about the origin and effect of Oil Fund investments may put those statements under harsher scrutiny.

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Posted September 30, 2002 © Eurasianet
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