Wither Azerbaijan’s Oil Profits?

Today marks the 12th anniversary of the signing of the "deal of the century" that brought the Baku-Tbilisi-Ceyhan pipeline into being. At the time of the signing, there were doubts that the pipeline would ever be built. Those doubts have obviously been put to rest, as the pipeline is now pumping oil from the Caspian Basin to the shores of the Mediterranean Sea. However, the question remains: how evenly are Azerbaijan's oil profits being distributed?

The Azerbaijani government, in conjunction with a consortium led by British Petroleum, inaugurated the multi-billion dollar BTC route in June. [For background see the Eurasia Insight archive]. Another pipeline to be used for natural gas exports, dubbed Baku-Tbilisi-Erzerum (BTE), is due to start operating within weeks, pumping Azerbaijani gas from the Shah Deniz field to the Turkish market, and potentially on to Europe. President Ilham Aliyev has stated that the pipelines will generate roughly $140 billion in revenue over a 20-year-period, a staggering amount considering that the state brought in about $2 billion in revenue in 2005. According to news reports, revenues for 2006 are projected to reach $3.4 billion. Actual revenue could prove much higher since the government's forecast was based on an oil price of $40 per barrel. Brent crude oil was trading on September 20 at about $62 per barrel.

Officials have promised that a fair share of the profits will be devoted to raising living standards in the country. According to an IMF report in 2005, about 45 percent of the population lives below the country's poverty line. The government's main vehicle for the promotion of prosperity is the State Oil Fund, which was established in 1999. The fund, according to an official statement covering the first half of 2006, now totals almost $1.6 billion, up over 10 percent since January 1.

Despite the pledges, many observers outside the Azerbaijani government are skeptical that the country's ruling elite will share Azerbaijan's oil wealth. According to its by-laws, the Oil Fund is accountable only to Azerbaijan's president, who appoints its head and advisory council.

Ilham Aliyev -- who in 2003 succeeded his father, Heidar, as president -- has seen Azerbaijan's reputation for civil society development slip under his watch. In its 2006 annual report, Freedom House placed Azerbaijan in the category of "not free countries," marking a fall in its status in 2003, when the same report designated the country as "partially free."

In an interview with the Azerbaijani Service of Radio Free Europe/Radio Liberty, Ambassador Maurizio Pavesi, the OSCE Representative in Baku, voiced concern that democratization's momentum stands to "run out faster than [the reserves in] the oil and gas fields." He also suggested that in the wake of the governing New Azerbaijan Party's landslide win in the 2005 parliamentary election – a victory secured amid widespread allegations of irregularities – the government lacks any checks on its authority. [For background see the Eurasia Insight archive].

"We have a parliament, which is not a parliament," Pavesi said. "I mean a parliament with a 95 percent majority is more a kind of internal body of the ruling party than a real parliament, as we consider parliaments in our countries, in Western Europe."

In 2002, the Azerbaijani government joined an international anti-corruption effort called the Extractive Industries Transparency Initiative. The IMF and the World Bank welcomed the move, since the initiative requires oil companies to publicly report payments to the Oil Fund. However, says Ilham Shaban, editor of the Baku-based Turan Energy Bulletin, the initiative has shortcomings. While it was originally conceived to allow public scrutiny of oil companies' expenditures, it fails to require recipient governments to disclose how funds are spent. Accordingly, contributions to the Oil Fund can be monitored, while the way the fund is utilized cannot.

According to figures provided by the Oil Fund, it took in roughly $412.3 million in revenue during the first half of 2006, and spent about $288.4 million during the same period. Of expenditures, approximately $29.8 million was allocated on development projects, including housing construction. Over $207 million was transferred to the state budget, with no further information provided. The bulk of the remainder went to financing Azerbaijan's share of the debt for BTC construction.

Shaban said Azerbaijan's oil boom has so far created relatively few jobs. In general, oil extraction is not a job-creating industry, or at least it generates employment of a short-term and finite kind. Once the infrastructure is built, many jobs, especially locally provided blue-collar labor, are no longer needed and workers are let go. Shaban calculates that by the end of 2006, almost 50 percent of 17,000 jobs originally associated with the oil industry will be phased out.

The government's control over the oil revenues has considerable political implications, according to Sabit Bagirov, the head of Baku-based Center of Economic Studies. A former chief of Azerbaijan's State Oil Company, Bagirov says that "the Government wants to control situation in Azerbaijan as it is. We have to say openly that the oil revenues make this task easier. The country's vast wealth is a resource that the government can use to reduce socio-economic tensions and solve problems in the country."

At present, the government has yet to develop a comprehensive strategic plan to manage the projected windfall from oil sales. Some experts in Baku believe that the presidential election, scheduled for 2008, will force authorities to develop such a blueprint. If authorities don't, some observers warn, Azerbaijan could be in for trouble in 20 years, when oil production is expected to slow to a trickle.

"If the government in the next year has the courage to take proper decisions to face real problems