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COUNTRY PROFILE 2000

AzerbaijanThis Country Profile is a reference tool, which providesanalysis of historical political, infrastructural and economictrends. It is revised and updated annually. The EIU’sCountry Reports analyse current trends and provide atwo-year forecast

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EIU Country Profile 2000 © The Economist Intelligence Unit Limited 2000

Comparative economic indicators, 1999

1


Contents

3 Basic data

4 Political background4 Historical background9 Constitution and institutions

10 Political forces12 International relations and defence

15 Resources and infrastructure15 Population16 Education16 Health17 Natural resources and the environment17 Transport and communications18 Energy provision

19 The economy19 Economic structure20 Economic policy23 Economic performance

25 Economic sectors25 Agriculture26 Mining and semi-processing28 Manufacturing29 Construction30 Financial services

31 The external sector31 Trade in goods32 Invisibles and the current account33 Capital flows and foreign debt35 Foreign reserves and the exchange rate

37 Appendices37 Sources of information38 Reference tables38 Population38 Population by age39 Labour force39 Production of energy40 Gross domestic product40 Gross domestic product by sector40 Gross domestic product by expenditure41 Prices and earnings41 Government finances42 Money supply and credit43 Production of major crops43 Yields of major crops43 Livestock numbers44 Livestock output44 Industrial production

August 24th 2000

2


44 Industrial production of selected items45 Banking statistics45 Exports by value46 Exports by percentage46 Imports by value47 Imports by percentage47 Exports by destination48 Imports by country of origin48 Balance of payments, IMF estimates49 External debt, World Bank series50 Foreign reserves50 Exchange rates

Azerbaijan 3

© The Economist Intelligence Unit Limited 2000 EIU Country Profile 2000

Azerbaijan

Basic data

86,600 sq km

8,020,000 (January 1st 2000, EIU estimate)

Population in ‘000 (January 1st 1998)

Baku (capital) 1,726Ganja 293Sumgait 274

Ranging from cold in the Caucasus mountain range in northern Azerbaijan totemperate in the Kura plain (average July temperature of 27°C, Januarytemperature 1°C) and subtropical in the Lenkoran lowlands in the south-east

Azerbaijani (a Turkic language) is the state language; the use of Russian is beingphased out

Metric system

Azerbaijani manat, introduced as legal tender in 1993 to replace the rouble.The average exchange rate in 1999 was Manat4,120:US$1. The exchange rateon July 31st 2000 was Manat4,476:US$1

3 hours ahead of GMT

Calendar year

Fixed: January 1st, January 20th (Martyrs’ Day), March 8th (Women’s Day),May 9th (Veterans’ Day), May 28th (Republic Day), June 15th (NationalSalvation Day), October 18th (National Independence Day), November 12th(Constitution Independence Day), November 17th (National Revival Day),December 31st (Worldwide Solidarity of Azerbaijanis Day)

Movable: Ramazan Bayram/Id al-Fitr, Novruz (Iranian New Year), KurbanBayram/Id al-Adha

Public holidays

Fiscal year

Time

Currency

Weights and measures

Language

Climate

Main towns

Total area

Population

4 Azerbaijan


Political background

Azerbaijan declared its independence from the Soviet Union in October 1991.Political instability from 1988 onwards and severe economic dislocation,caused by the break-up of the Soviet economy and war with Armenia, lasteduntil 1994. Azerbaijan, officially described as a “presidential republic”, is nowin effect a dictatorship run by its communist-era leader, Heydar Aliyev, whoseized power in 1993. The unicameral parliament, in which Mr Aliyev’s NewAzerbaijan Party (NAP) has a majority, is a rubber-stamp body. Despite illhealth, Mr Aliyev shows no sign that he intends to relinquish office.

Historical background

The term Azerbaijan has been used since early medieval times to refer to thearea of both the present-day Republic of Azerbaijan and Iranian Azerbaijan.The Arab conquest in the seventh century brought Islam to the region. TheIranian language originally spoken in Azerbaijan was supplanted by Turkic (theforerunner of modern Azerbaijani) when the Seljuk Turks conquered the regionin the 11th century. However, Azerbaijan retains a close cultural affinity withIran to this day. By the mid-18th century a number of khanates existed assemi-independent statelets in what is now the Republic of Azerbaijan. Russiabegan to extend its influence over the region in the early 18th century. In 1828the Treaty of Gulistan established the present border with Iran, placing the areaof today’s independent Republic of Azerbaijan within imperial Russia butleaving most speakers of Azerbaijani in Iran.

After the Bolshevik coup in 1917 the Transcaucasus was thrown into turmoil asnationalists and foreign powers attempted to seize control. The first Republic ofAzerbaijan was established in May 1918, thanks in part to advancing Turkishforces. After their withdrawal a British military occupation lasted fromNovember 1918 until August 1919, keeping the Bolsheviks out. The Red Armyconquered Azerbaijan in 1920, forcibly absorbing it into the Soviet Union. In1922 Azerbaijan was incorporated into the Transcaucasian Soviet FederatedRepublic (TSFR), which also included Armenia and Georgia. In 1936 the TSFRwas broken up and Azerbaijan gained the status of a full Soviet SocialistRepublic (SSR). Thousands of people, communist functionaries as well asintellectuals from the pre-Soviet period, were killed and many moreimprisoned during Stalinist purges in the 1930s.

During the Brezhnev era Azerbaijan was ruled by Heydar Aliyev, head of therepublic’s Communist Party and a KGB officer. Azerbaijan became known foreconomic stagnation, political repression and rampant corruption. MikhailGorbachev, the reforming Soviet leader, sacked Mr Aliyev in 1987 as part of asweep against politicians who had presided over decades of stagnation andcorruption. In the late 1980s Mr Gorbachev’s liberalising policies allowedseparatism to emerge. The ethnic Armenian majority in Nagorny Karabakhdemanded that the territory be taken from Azerbaijan and given to Armenia.

Seventy years ofcommunist rule

A brief period ofindependence

From Iranian toRussian control

Azerbaijan 5


Azerbaijani nationalism grew in response, with the founding in mid-1989 ofthe Popular Front of Azerbaijan (PFA), a broad-based opposition movement. InSeptember 1989, under pressure from the PFA, the Azerbaijani Supreme Soviet(parliament) declared that republican laws took precedence over legislationfrom Moscow and called for the withdrawal of Azerbaijan from the SovietUnion. Divisions between the Azerbaijanis and Armenians widened irrevocablywith inter-communal violence in Nagorny Karabakh, but especially after anti-Armenian riots in Sumgait in 1988 and in Baku in January 1990 killed, on themost conservative estimates, dozens of Armenians.

The massacre of Armenians in Baku prompted a dramatic and bloody Sovietmilitary intervention on January 20th 1990. At least 150 people, mostlyAzerbaijanis, were killed. Moscow installed a front man, Ayaz Mutalibov, as thenew leader of Azerbaijan. The parliamentary election in 1990 was rigged, butthe PFA won a symbolically important 9% of the seats. The gradual collapse ofthe Soviet Union weakened Mr Mutalibov. In 1991 he was forced to agree to aPFA demand for the creation of a new 50-member legislative body, the MilliMajlis (National Assembly), half of whose members were drawn from theSupreme Soviet and half from the PFA. Following the failed coup in Moscow inAugust 1991 Azerbaijan declared itself independent.

From 1992 onwards the war with Armenia over Nagorny Karabakh dominatedAzerbaijani politics, with success or failure on the battlefield determining thefate of political leaders. Mr Mutalibov was ousted in March 1992 afterArmenian forces massacred Azerbaijani civilians in the village of Khojali. InMay 1992, after the Armenians captured the last Azerbaijani strongholds inKarabakh, the PFA seized government buildings in Baku. A leading PFAmember, Isa Gambar, became acting president. The PFA leader, AbulfazElchibey, won the presidential election called in June 1992. Mr Elchibey was apoor administrator, neglecting the economy and foreign investmentopportunities. Armenian troops took control of almost all of NagornyKarabakh and captured more and more territory in Azerbaijan proper.

Relations with Russia deteriorated. The PFA sought to sideline Russia in favourof closer ties with Turkey. In June 1993, just days after the last Russian troopsleft Azerbaijan’s second city, Ganja, a former commander in the Azerbaijaniarmy in Nagorny Karabakh, Surat Huseynov, led a revolt against the Elchibeygovernment. Mr Huseynov’s troops were armed with heavy weapons that theRussians had left behind.

Mr Huseynov marched on to Baku and found that pro-government troops wereunwilling to oppose him. Mr Elchibey turned for help to Mr Aliyev, thecommunist-era leader of Azerbaijan. Mr Aliyev had restarted his political careerfollowing his sacking by becoming the president of Nakhichevan, an exclave ofAzerbaijan separated from the rest of the country by a strip of Armenianterritory. Mr Aliyev came to Baku and was duly elected chairman of parliament.In mid-June, with Mr Huseynov’s troops closing on Baku, Mr Elchibey fled toNakhichevan. Mr Aliyev convinced parliament to transfer presidential powersto him on June 18th 1993, in effect removing Mr Elchibey from the

Former communist leadertakes over

A nationalist governmenttakes power

A traumatic birth forthe new state

6 Azerbaijan


presidency. After Mr Elchibey had been formally removed by a riggedreferendum, Mr Aliyev was elected president on October 3rd 1993 in anuncontested Soviet-style election, with 98.9% of the vote.

The war in Nagorny Karabakh

Nagorny Karabakh is a mountainous region within Azerbaijan. In the18th century there were both Armenian meliks (princes) and a Muslim khanruling in the Karabakh region. After the Soviet takeover of the Transcaucasianregion, Nagorny (“upland”) Karabakh was earmarked for inclusion in SovietArmenia. Joseph Stalin, then commissioner for nationalities, reversed thisdecision and Nagorny Karabakh was given to Azerbaijan. Although it wasgranted the status of autonomous region in recognition of its majorityArmenian community, its inclusion within Azerbaijan rankled with Armeniansand they repeatedly tried to have it overturned, alleging discrimination by theauthorities in Baku. When openly nationalist politics were allowed in theSoviet Union in the late 1980s, Karabakh secessionism became central toArmenian nationalism in Armenia itself. In 1988 the Karabakh Committeeforced the Supreme Soviet (parliament) of Armenia to demand theincorporation of the region into that republic. Moscow responded by imposingdirect rule over Nagorny Karabakh and sending in 5,000 troops. In 1989Azerbaijan halted trade with Armenia and blockaded Nagorny Karabakh.Armenia responded by declaring Nagorny Karabakh part of a unified ArmenianSoviet Socialist Republic.

Sporadic fighting among local militias, aided by troops from Armenia itself,escalated into a full-scale war after Russian troops were withdrawn in 1992. TheNagorny Karabakh Armenians and the Armenian army inflicted a string ofdefeats on the Azerbaijani army, prompting political turmoil in Baku. TheArmenians took control of most of Karabakh and conquered all the territorybetween it and Armenia as well as a sizeable buffer zone around the rest ofKarabakh amounting to one-fifth of Azerbaijan’s territory. Azerbaijan, withsupport from Turkey, has successfully imposed a crippling economic embargoon Armenia. The social consequences of the war have been immense, withhundreds of thousands of refugees and internally displaced persons. Virtuallyall ethnic Azerbaijanis have left Armenia, Karabakh and the surroundingArmenian-held areas, while the Armenian community in the rest of Azerbaijanhas fled.

The combatants saw the war as a way of righting historical wrongs perpetratednot just in Soviet times but also in previous centuries. For the Armenians,Karabakh embodies their sense of being a small Christian nation under threatfrom alien Muslim neighbours, a feeling that stems most immediately from thegenocide of Armenians in Ottoman Turkey during the first world war.Azerbaijanis feel that their country has suffered from Russia’s one-sided supportfor the Armenians, and the war has increased Azerbaijan’s resolve to break freefrom Russian regional influence.

Despite the bitterness of the conflict and the apparent lack of a fair solution forKarabakh’s constitutional status, the ceasefire negotiated in 1994 has held. Thesuccess of the ceasefire is in part due to the realisation by Armenia that further

Azerbaijan 7


territorial gains would bring diminishing returns, while the Azerbaijani forcesknow that they cannot afford to resume fighting. The Azerbaijani president,Heydar Aliyev, whose reputation is not tied to the conduct of the war, hasadopted a less confrontational and vengeful stance than his predecessor,Abulfaz Elchibey.

Although there has been little serious fighting, apart from a brief clash in June1999, little progress has been made in negotiating a settlement. The KarabakhArmenians declared themselves an independent state on September 2nd 1991.Not even Armenia has granted recognition. Azerbaijan refuses to talk directlyto the Nagorny Karabakh leadership and so grant it legitimacy. When in late1997 the then president of Armenia, Levon Ter-Petrosian, suggested that theKarabakh Armenians must compromise with Azerbaijan sooner rather thanlater, he created an uproar that led to him being forced from office. Hissuccessor, Robert Kocharian, was previously leader of Nagorny Karabakh.However, Mr Kocharian is using his credentials as a Karabakh war hero to pressfor a negotiated solution and he engineered the removal of hawkish officials inNagorny Karabakh in 1999. Mr Kocharian and Mr Aliyev have held a series ofmeetings. Although little progress was made at the talks, they representimportant confidence-building steps as the two sides try to assess the con-cessions that they will need to make to achieve lasting peace.

Azerbaijan says that it will grant Karabakh autonomy as long as its formalsovereignty over the territory is recognised. Karabakh’s Armenians want theirindependence to be recognised, and are prepared to give up only the lands thatthey have conquered outside Karabakh proper—and then only when a bindingpeace deal is on the table. Given the gulf between these two positions, acompromise is some way off.

Although Mr Aliyev initially co-opted Mr Huseynov and appointed him primeminister, as time went on he increasingly limited his powers. In October 1994Mr Huseynov was dismissed after being implicated in a failed coup—anallegation that he strongly denied. The threat posed by semi-independentmilitary commanders was finally crushed in March 1995, with the bloodydefeat of yet another coup attempt, led by a deputy minister of internal affairs,Rovshan Javadov, and backed by the special police forces. In a series of well-publicised trials, which continued until 1998, paramilitary leaders as well assenior former officials, including some from the PFA government, were triedfor involvement in various coup plots. These trials underlined Mr Aliyev’sability to impose order and to neutralise warlords.

Since 1995 Mr Aliyev has consolidated his power and established a more stablebut dictatorial government. A parliamentary election in November 1995unsurprisingly gave Mr Aliyev’s New Azerbaijan Party (NAP) 70 of the 125 seatsin the Milli Majlis, most of the rest being won by pro-government“independents”. At the same time a new constitution was approved in a riggedreferendum. The fraudulent election also demonstrated the weakness of theopposition, which has consistently engaged in petty strife rather than unitingto form a cohesive anti-Aliyev front.

Mr Aliyev emerges as astrong and brutal ruler

8 Azerbaijan


In 1998 leading opposition politicians formed a pact to boycott thepresidential election of October 11th 1998. In the run-up to the election theopposition organised impressive rallies, but by failing to put up a jointcandidate against Mr Aliyev it ended up handing him an easy victory. Onlyone plausible opposition candidate ran—Etibar Mammadov, head of theAzerbaijan National Independence Party (ANIP). Mr Mammadov came secondwith just 11.6% of the vote. Mr Aliyev won 76.1%, and there was therefore noneed for a second-round ballot. Mr Mammadov refused to accept the result.

Mr Aliyev made some minor concessions to give the impression of a greatermeasure of democracy after the 1998 presidential election. These concessionswere designed to lessen embarrassment for countries such as the US and theUK, which had effusively supported Mr Aliyev for commercial reasons (Britishand US companies dominate the oil sector). Mr Aliyev’s grip on power is nowso firm that he was able to leave Azerbaijan from April to June 1999 for aquadruple heart bypass operation in the US and a lengthy convalescence inTurkey. The administration stopped functioning and no major decisions weremade in any branch of government. Mr Aliyev announced in September 1999that he may stand for a third presidential term in 2003.

Important recent events

November 1995: A new constitution is adopted by referendum; the ruling party winsa majority in the parliamentary election.

November 1997: Oil starts flowing from the oil wells of the Azerbaijan InternationalOperating Company.

October 1998: Heydar Aliyev wins re-election as president.

April-June 1999: Mr Aliyev undergoes a heart bypass operation in the US.Government slows to a halt during his three-month absence.

October 1999: The foreign minister, a presidential aide and presidential foreign policyadviser resign in protest at alleged concessions to Armenia in the Nagorny Karabakhtalks.

December 1999: Ilham Aliyev, the president’s son, becomes fifth deputy chairman ofthe ruling New Azerbaijan Party.

April 2000: Police violently break up an opposition demonstration calling for a free andfair parliamentary election in November 2000.

The parliamentary election in November 2000 is expected to lead to anothervictory for the NAP. The opposition has organised a series of protests againstthe way in which the election is being organised. It may turn out to be lessflawed than the 1995 election because of pressure from the Council of Europe,but the NAP and “independents” are still expected to win.

He faces little opposition inthe 1998 election

Azerbaijan 9


Karabakh continues to intrude into Azerbaijan’s political life, despiteMr Aliyev’s attempt to put it to one side. In October 1999 the foreign minister,Tofik Zulfugarov, along with Eldar Namazov, a key presidential aide, and thepresidential foreign policy adviser, Vafa Guluzade, resigned in protest atperceived concessions to Armenia in the Nagorny Karabakh talks. Any progressin these talks was in any case derailed at the end of October 1999 whengunmen attacked a session of the Armenian parliament in Yerevan in anabortive coup, killing the prime minister and the speaker of parliament.

Mr Aliyev has begun to secure his family’s political future by placing his son,Ilham Aliyev, in a senior post in the ruling NAP. Ilham Aliyev was elected fifthdeputy chairman of the NAP with responsibility for youth during the party’sfirst congress on December 22nd 1999. At 38 years old, Ilham Aliyev is half ofhis father’s age and works as first vice-president of the State Oil Company ofthe Azerbaijan Republic (SOCAR), the state-owned local oil company.

Constitution and institutions

The new constitution of Azerbaijan was adopted in November 1995 by a riggedreferendum. Although it proclaims Azerbaijan a democratic republic, it has notprevented the president from assuming wide-ranging powers. Parliament is arubber-stamp body packed with government supporters. The president is thehead of state and is elected for a term of five years. No person may be electedfor more than two terms. Mr Aliyev has ensured that this provision does notapply to him, as he was elected president for the first time in October 1993,two years before the new constitution was introduced. The constitutionproclaims the principle of the separation of powers, but all are in practicesubordinate to the president. Mr Aliyev has considerable powers on paper andconsiderably more in practice. The president appoints the cabinet of ministers,which is answerable to him. In co-ordination with parliament, the presidentappoints the prime minister and the heads of local government. In reality, nodecision of consequence is taken without Mr Aliyev’s personal approval.

Azerbaijan’s parliament is a one-chamber body, the Milli Majlis (NationalAssembly). It is made up of 125 deputies elected every five years, of whom 100are elected from constituencies on a first-past-the-post basis and the remaining25 by proportional representation. On paper the Milli Majlis can impeach thepresident following representations from the Constitutional Court and it canpass a vote of no confidence in the government. In practice, the Milli Majlisplays little role in politics aside from approving Mr Aliyev’s decisions.

Judicial power is vested in the Constitutional Court, the Supreme Court, theEconomic Court, and lower-level general and specialised courts. As in mostpost-Soviet republics, the judiciary is the least developed branch ofgovernment. Judicial and police corruption is widespread and the use of tortureagainst suspects is routine.

The judiciary

The legislature

The presidency

10 Azerbaijan


Nakhichevan has kept its Soviet-era status of an autonomous republic withinAzerbaijan. The Nakhichevan Autonomous Republic has its own parliamentbody, which decides local economic matters and appoints a local government.Nagorny Karabakh, formerly an autonomous region within Soviet Azerbaijan,was abolished as part of the Azerbaijani state in 1991, but it is still very muchin evidence as a self-declared republic with its own government, parliamentand army.

Political forces

There are dozens of political parties in Azerbaijan, but only a few are important.

New Azerbaijan Party (NAP): Founded in 1992 by former communistsupporters of Heydar Aliyev, the NAP opposed the president, Abulfaz Elchibey.The NAP is led by a close-knit group of insiders from Nakhichevan, withMr Aliyev as chairman. Another powerful group within the NAP is the formercommunist elite. After Mr Aliyev seized power in 1993 the party grew rapidly,one of the means by which Mr Aliyev consolidated his grip on the country.NAP members hold all the key positions in the executive branch, and the NAPis the largest single party in parliament.

Party of the Popular Front of Azerbaijan (PPFA): Founded as thePopular Front of Azerbaijan (PFA) in 1989, it led the campaign for Azerbaijaniindependence and the economic blockade against Armenia. The PFA was broadbut factious—from disgruntled Communist Party functionaries to extremeAzerbaijani nationalists and pan-Turkists (favouring the union of all Turkicpeoples from Bulgaria to China). After the PFA seized power it began todisintegrate, the opposite to what happened to the NAP after Mr Aliyev tookpower. As a result, Mr Elchibey was overthrown in 1993. The PFA remains asignificant political force despite factional differences, and in 1995 renameditself the Party of the Popular Front of Azerbaijan (PPFA). The party must nowchoose a new leader, following the death from cancer Mr Elchibey died ofcancer in August 2000.

Musavat: Musavat is led by Isa Gambar, a former leader of the liberal wing ofthe PFA and speaker of parliament during Mr Elchibey’s term of office. Musavatproclaims itself successor to the Musavat Party founded in 1911by Mamedemin Rasulzadeh, one of the founders of the Azerbaijan DemocraticRepublic (1918-20).

Azerbaijan National Independence Party (ANIP): Founded in late 1991,ANIP is chaired by Etibar Mammadov, the former leader of the nationalist wingof the PFA. Since its foundation, the ANIP has been at odds with the PFA. InJune 1993 the party opposed Mr Elchibey and backed Mr Aliyev’s accession topower. Mr Mammadov declined Mr Aliyev’s offer of a government position.

Nakhichevan

Azerbaijan 11


Main political figures

Heydar Aliyev: Elected president of Azerbaijan in October 1993 and again inOctober 1998 in flawed elections, Mr Aliyev made his name as Azerbaijan’sKGB chief and ruled Soviet Azerbaijan as head of its Communist Party from1969 to 1987. Like Eduard Shevardnadze in Georgia, Mr Aliyev was one of anumber of non-Russians who played an important role both as tough leadersof their own republics and as top-level Soviet politicians during the long rule ofLeonid Brezhnev. Such leaders acted as conduits for Moscow policy inthe republics while at the same time heading a patron-client system in whichcorruption thrived. Mr Aliyev became a member of the Soviet CommunistParty’s Politburo, serving from 1982 to 1987. The new Soviet leader, MikhailGorbachev, sacked Mr Aliyev in 1987 because of his association with theBrezhnev era. As a result he played no part in either Azerbaijan’s chaotic lurchtowards independence or the outbreak of the war in Nagorny Karabakh.

Mr Aliyev began his return to Azerbaijani politics quietly in 1990, by becominghead of the regional parliament in Nakhichevan, where he has a strong powerbase of supporters and relatives. He presented his return to power in 1993 as astep that he took reluctantly. In reality he outmanoeuvred the incumbentpresident, Abulfaz Elchibey, and rapidly consolidated his position. At home,Mr Aliyev’s style is one of all-pervasive personal authority, such that govern-ment ground to a halt when a heart operation took him out of circulation forthree months in 1999. A personality cult has grown up around him, and noother figure in government comes close to matching his high profile. However,his administration has been tarnished by cronyism and corruption. Abroad,Mr Aliyev has confounded those who initially feared that he would be aRussian stooge. Instead, he has calculatingly built up US and European politicalsupport for Azerbaijani independence by sealing lucrative oil deals with foreignfirms. He has steered a careful diplomatic course between the conflictinginterests of Russia and the US, and Turkey and Iran, something that hispredecessors were unable to do.

The succession to Mr Aliyev is unclear. His son, Ilham Aliyev, a vice-presidentof the State Oil Company of the Azerbaijan Republic (SOCAR), deals withrelations with foreign oil companies and is being groomed to be the nextpresident. Ilham Aliyev, however, has little political following.

Rasul Guliyev: A former speaker of parliament who fell out of favour withMr Aliyev in 1996 and resigned, he originally built up his power base asdirector of the largest state oil refinery. Mr Guliyev entered politics in thePopular Front of Azerbaijan (PFA) and was prime minister under Mr Elchibey.However, he backed Mr Aliyev and was elected speaker of parliament. Since hisresignation he has lived abroad, but has remained an important presence inAzerbaijani politics, in part because of the lack of any other imposing figure onthe opposition scene. The authorities are clearly worried about him.Mr Guliyev is wanted on charges of embezzlement and has been accused ofother crimes including a coup plot, for which there seems little evidence.

12 Azerbaijan


Isa Gambar: Speaker of the Azerbaijani parliament from May 1992 toJune 1993. One of the founders and leaders of the PFA, he is now chairman ofMusavat—the oldest political party of the country (established in 1911). WithMr Guliyev and Mr Elchibey, he boycotted the 1998 election.

Etibar Mammadov: The former leader of the PFA’s nationalist wing, in 1991he left the PFA and set up the Azerbaijan National Independence Party. Despitebacking Mr Aliyev’s bid for power in 1993, he did not accept a governmentpost. He was the only serious opposition figure to contest the October 1998presidential election.

International relations and defence

Mr Aliyev seized power in 1993 at a time of crushing military defeats inflictedby Armenian forces. He steered Azerbaijan away from Turkish influence, whichunder Mr Elchibey had included covert military assistance. In September 1993Azerbaijan joined the Commonwealth of Independent States (CIS), which MrElchibey had refused to do. With Russian support, Mr Aliyev negotiated aceasefire with Armenia, realising that continued fighting would have led todefeat and instability. Having given Russia no reason to undermine him andhaving put Turkey at arm’s length, Mr Aliyev then put Nagorny Karabakh toone side. His next step was to sign a US$7bn oil deal with an international con-sortium headed by British Petroleum (UK) and Amoco (US)—the two companieshave since merged into BP Amoco (UK). A string of oil deals since then hasgiven the EU and the US every reason to bolster Azerbaijan’s independencewhile turning a blind eye to human rights violations and corruption.

Azerbaijan’s relations with Russia have been uneasy. Mr Aliyev got off to a goodstart but relations soon turned sour and in 1994 Russia imposed a transportblockade of Azerbaijan. The Russians were angered by Azerbaijan’s decision todevelop Caspian Sea oil without regard to its legal status. Although probablynot a deliberate policy initially, it soon developed into a series of faits accomplisin which Azerbaijan was defying the basic tenets of international law in theCaspian Sea—to which Russia is not in a strong position to object, given itsown behaviour. To mollify Russia, Azerbaijan agreed in October 1995 totransport some crude oil extracted by international companies via Russia.Mr Aliyev has refused to allow Russian troops to be based in Azerbaijan but hasallowed Russia to keep control of the Gabala early warning radar station.Continued Russian arms sales to Armenia and Russian bases there havestrained relations. Ironically, the main threat from Russia has proved in thelong term to be the disintegration of the Russian north Caucasus, thanks toMoscow’s wars in Chechnya.

Azerbaijan opposes moves to give the CIS greater powers over its members. Tocounterbalance Russia’s dominance of the CIS, Azerbaijan has since 1996 beenforging an alternative regional grouping known as GUAM after the initials ofits founders: Georgia, Ukraine, Azerbaijan and Moldova (now expanded toGUUAM after Uzbekistan joined). Officially formed to discuss economicco-operation, the grouping is being “unofficially” encouraged by the US to act

GUUAM axis

Relations with Russia

Foreign policy is based on adelicate balance

Azerbaijan 13


as a buffer to Russian influence and to exclude Russia from the southernformer Soviet Union. However, given the weakness of GUUAM members andtheir disparate interests, it is largely ineffective.

Mr Aliyev has tried to improve Azerbaijan’s relationship with Iran, which wasmarred by the Elchibey government’s pro-Turkish stance. As part of his oildiplomacy Mr Aliyev promised to give Iran a share in the AzerbaijanInternational Operating Company (AIOC) contract. US pressure stoppedMr Aliyev from fulfilling this promise and so he attempted to buy Iran off byincluding it in the Shah Deniz oil consortium in 1996, which included no UScompanies. Iran and Azerbaijan share a common cultural and religiousheritage, but their relationship in both Soviet and post-Soviet times has beentroubled. Although around 20m of Iran’s 63m inhabitants speak Azerbaijani,Iran has good relations with Armenia. The Azerbaijani government accusesIran of wide-scale espionage and of fomenting Islamic activism amongAzerbaijan’s Shia Muslim majority. Iran is angered by Azerbaijan’s economicand security ties with the US, Turkey and Israel, as well as its behaviour in theCaspian Sea. The Iranian government clamps down hard on separatist activityin its own north-western region, where ethnic Azerbaijanis predominate, and isunhappy at the “One Azerbaijan” movement in which the opposition leaderMr Elchibey is a prime mover.

In the case of Turkey, a close cultural bond with Azerbaijan—the two languagesare very similar—has helped build bridges. Turkey imposed an economicembargo on Armenia in support of Azerbaijan because of the Karabakh war.The Turkish military on occasions built up forces on the border with Armeniato dissuade the Armenian army from marching on Baku. In 1994 Azerbaijanand Turkey signed a ten-year treaty of friendship and co-operation, and in1996 a treaty of military co-operation. Allegations that Turkish intelligencetried to oust Mr Aliyev in a coup early in his rule, when it was feared that hewould be too pro-Russian, have since been confirmed by the Turkishauthorities. Mr Aliyev has injected a degree of distance into relations withTurkey, preferring to build ties with the US and NATO.

The Caspian Sea dispute

The legal status of the Caspian Sea has been in dispute since 1993, when Russiaobjected to Azerbaijan’s plans to develop oilfields in the centre of the sea.Russia, with Iranian support, argues that the Caspian Sea’s legal status isdefined by Soviet-Iranian treaties of 1921 and 1940, according to which theCaspian Sea is held in common by the Soviet Union and Iran. A key principleof international law is that successor states (in this case Russia, Azerbaijan,Kazakhstan and Turkmenistan) are bound by the treaties signed by theirpredecessors. The issue of the Caspian’s legal status is sometimes cast in termsof its definition as either a sea or a lake. In strict legal terms the Caspian is alake and is therefore not governed by the UN Convention on the Sea. This isbecause it is an inland body of water to which vessels from non-littoral stateshave no access. The only route to the high seas is via the Volga-Don canal, aRussian sovereign waterway.

Turkey

Iran

14 Azerbaijan


Azerbaijan claims that it is not bound by the 1921 and 1940 treaties as it didnot exist as an independent state at the time. It wants both the seabed and thesurface to be fully divided up into national sectors. Azerbaijan has pursued astrategy of fait accompli in the Caspian, developing fields in the centre of thesea with little regard for Iranian, Russian or Turkmen protests.

Kazakhstan has consistently taken a moderate view, calling for negotiations onthe legal status of the sea and confining exploration to parts of the sea that areunlikely to be claimed by other littoral states. Turkmenistan’s position hasoften shifted in line with political expediency between arguing for nationalzones and common ownership. For the moment the problem is where theAzerbaijani-Turkmen dividing line lies. In January 1997 Turkmenistan claimedsovereignty over the Azeri oilfield and part of the Chirag oilfield, two ofAzerbaijan’s largest offshore fields. A joint Azerbaijani-Turkmen commissionhas failed to resolve the dispute. The dispute over the Azerbaijani-claimedKyapaz field (which Turkmenistan calls Serdar) has meant that the fieldremains undeveloped.

Negotiations on a new legal convention for the Caspian began between thelittoral states in 1995. No progress was made. In November 1996 YevgenyPrimakov, the then Russian foreign minister, presented a compromise proposalthat the sea be divided into five national sectors and one central internationalzone. The proposal failed but was an important Russian concession. OnJuly 6th 1998 Russia and Kazakhstan agreed to divide up the northern CaspianSea’s surface and seabed between them while maintaining joint use of thewaters of the sea and freedom of navigation, in part for environmental reasons(a provision that gives Russia a veto over any attempt to build pipelines underthe sea). Russia says that until the status of the whole sea is settled the 1921and 1940 treaties remain valid. In practice, Russia’s willingness to compromisemeans that the seabed, and therefore the oil and gas resources, will eventuallybe divided up as Azerbaijan wants.

Relations with the US and the EU have developed rapidly because of their oilfirms’ substantial involvement in Azerbaijan. However, US domestic politicshave interfered in the relationship. In 1992 the US Congress, under pressurefrom Armenian American groups, designated Azerbaijan the aggressor in theKarabakh war and demanded the suspension of most forms of US aid untilthere was an end to the economic blockade of Armenia (Section 907 of theFreedom Support Act). The ban has been softened as a result of counter-lobbying by Azerbaijan and friendly oil companies.

In April 1996 Azerbaijan signed a Partnership and Co-operation Agreement(PCA) with the EU; the agreement came into force in 1999. The PCA issupposedly contingent on Azerbaijan’s respecting democracy and humanrights, and having a current-account convertible currency. Azerbaijan fails onall three grounds. The UK has developed a strong diplomatic position inAzerbaijan because of the importance of BP in AIOC. The UK has beenconspicuously quiet on issues of human rights and democratisation inAzerbaijan, despite its new “ethical” foreign policy.

The US and the EU

Azerbaijan 15


The Azerbaijani military is weak, poorly officered and badly equipped. Thearmy was roundly defeated by the Armenian army in 1993 and 1994, despitetraining by Turkish officers. The International Institute for Strategic Studies(IISS) in London puts the total active strength of the Azerbaijani forces at69,900, of whom 55,600 are in the army. There is a separate force of 15,000militia and border guards controlled by the interior ministry. Heavy weaponstend to be kept separate from units to prevent their use in possible coups. As ofJanuary 2000 the armed forces had 259 tanks, 464 other armoured vehicles and303 artillery pieces—the Nagorny Karabakh Armenian forces have more tanksthan the entire Azerbaijani army. The Azerbaijani air force has 49 fixed-wingcombat aircraft, half of which are obsolete, and another 33 are in store. The airforce has 15 attack helicopters. Flying hours are limited and serviceability poor.The navy has one lightly armed frigate and assorted smaller vessels inthe Caspian.

Resources and infrastructure

Population

The EIU estimates that the population was just over 8m at the beginning of2000. The population growth rate has slowed steadily. Average annual growthrates were 3% between 1959 and 1970, 1.8% in 1970-79 and then 1.5% in1979-89. Between 1989 and 1999 the growth rate slowed to just 1.3%. Togetherwith some net emigration, the declining growth rate in the 1990s isattributable to a fall in the birth rate from 26.3 per 1,000 of the population in1990 to 15.7 per 1,000 in 1997. Infant mortality rose sharply initially afterindependence from 23 per 1,000 births in 1990 to 28.2 per 1,000 births in1993. It has fallen back since then to 16.6 deaths per 1,000 births—which isstill three times the level in developed countries. (Reference tables 1 and 2provide population statistics.)

Population trends(year-end)

1990 1998

Population (‘000) 7,186.6 7,949.3

Life expectancy at birth (av; years) 71.1 71.3 Male 67.4 67.9 Female 74.8 75.0

Source: State Statistical Committee, Statistical Yearbook of Azerbaijan, 1999.

Historically the urban population has grown because of migration from thecountryside. However, the emigration of ethnic minorities, who mostly livedin the towns and cities, and the faster population growth rate in thecountryside, where half of all ethnic Azerbaijanis still live, have reversedurbanisation. In the 1989 census 53.9% of the population was urban. This hadfallen to 51.7% by 1998. Agriculture remains the largest employer, accountingfor 37% of those in employment in 1999. Most of the 32.8% of the population

Ruralisation

Demographic trends

Defence

16 Azerbaijan


under the age of 15 years in 1999 live in the countryside. (The distribution ofthe labour force is shown in Reference table 3.)

According to the 1989 census—the most recent survey of ethnic origin—Azerbaijanis constituted 82.7% of the population, Russians and Armenians 6%and Lezghins, a Muslim Caucasian people who also live in Russian Dagestan,2.4%. Other minorities include Ukrainians, Georgians, Tatars, Jews, Tats Jews,Talysh and Kurds. Since the census almost the entire Armenian population out-side Nagorny Karabakh has left as a result of the war, while the republic hasreceived an influx of 192,000 Azerbaijanis from Armenia. The government saysthat 853,000 Azerbaijanis were displaced within the country as a result of the war.

More than 80% of the population is Muslim: this includes the Azerbaijanis,many Georgians and other groups such as Lezghins and Kurds. MostAzerbaijanis are Shia Muslims, but around 30% are Sunni Muslims. Azerbaijaniis a Turkic language closely related to Turkish and more distantly to the Turkiclanguages of Central Asia. Until the 1920s the Arabic script was used. It wasreplaced by the Latin alphabet in 1929—until that date the Soviet Unionreferred to the Azerbaijanis as Turks—but ten years later the Cyrillic script wasmade compulsory. A modified Latin alphabet derived from Turkish wasintroduced in early 1992. Following independence the government began tophase out the use of Russian, but it is still widely spoken.

Education

The education system is a product of the Soviet era: some pockets of excellencealongside areas of very low standards. The disruption of the Karabakh war andthe exodus of many highly educated professionals have put further stress onthe system. The number of educational institutions, students and disciplineshas fallen in recent years, with one-third of pupils attending school in shifts.The law on education of 1992 permits both state and private educationalinstitutions, but the latter are still undeveloped. Training for industry, transportand agriculture is conducted in a network of vocational schools.

Although on paper education levels in Azerbaijan look comparable with thoseof more developed countries and are better than those in Turkey, standards arelow and falling. More than 90% of the population over the age of 15 havereceived at least the stipulated eight years of schooling. However, theproportion of graduates in the population fell by nearly two-thirds between1990 and 1999, to just 12 per 10,000 people.

Health

Azerbaijan inherited a universal public health system with extensive medicalinfrastructure. The quality of service has long been low owing to inefficienciessuch as the Soviet emphasis on expensive in-patient care over out-patient andprimary healthcare. Preventive care and early treatment are neglected. Thefinancing of public health has always been insufficient and has deteriorated

Educational standards

The education system

Ethnicity

Azerbaijan 17


since independence. In the immediate aftermath of independence the deathrate from a range of illnesses soared because of economic collapse. These deathrates have since fallen back considerably.

In 1995 the health ministry initiated proposals for healthcare reform. Theseincluded raising the number of medical institutions that are self-financing andreducing the share of wages of healthcare workers that is financed by thebudget. Free medical services for the poor were preserved. The ratio ofhealthcare spending to GDP fell from 1.4% in 1995 to 1.1% in 1999. Thegovernment has a habit of cutting back on budgeted healthcare spending as away of keeping the deficit in check—in 1998 the government underspent themoney allocated to healthcare by 46.4% and in 1999 by 15.5%.

Natural resources and the environment

Azerbaijan is the largest of the three Transcaucasian countries. Some 50% ofthe total land area is agricultural land and 2.5% is urban. Forests cover 13% ofthe country. Azerbaijan is ecologically diverse, including plains below sea level,4,000-metre mountains in the Caucasus range, deserts and subtropical zones.Lowlands occupy more than half of the territory. Azerbaijan’s rivers all run intothe Caspian basin. The irrigation system is regulated by water reservoirs, thelargest being the Mingechaur reservoir on the Kura River.

Azerbaijan has the worst pollution in Transcaucasia. It has adequate fresh waterreserves but surface water is polluted. Despite the decline in industrialproduction, atmospheric pollution levels remain high. Land productivity isalso undermined by soil salination, owing to many years of poor drainage andirrigation. A rise in the level of the Caspian Sea (of about 25 cm per year) isanother ecological concern. The productivity of the Caspian as a fishing area,famous as it is for its sturgeon, is under threat. Attempts to save the sturgeon’senvironment have yet to advance beyond rhetoric.

Transport and communications

Azerbaijan is landlocked. Of its three routes to the high seas the shortest isthrough Georgia to the Black Sea, the second shortest through Russia to theBlack Sea. The longest route is south through Iran to the Persian Gulf. TheRussian and Georgian routes have been periodically disrupted by politicalinstability. Road and rail links with Russia were disrupted by a Russian blockadeand the Chechen war until 1996 and then again during the latest war inChechnya in 1999. Azerbaijan’s economic blockade of Armenia has cut theshortest route to Turkey. Travel between Azerbaijan and the detached exclaveof Nakhichevan is by air or by road through Iran. Nakhichevan has astrategically important 33-km border with Turkey. There are 2,089 km ofrailways, the main source of freight transport. Much of the rail track androlling stock needs repair or replacement.

Roads and railways

Environmental problems

18 Azerbaijan


Freight(m tonne-km)

1995 1996 1997 1998 1999

Freight turnover 8,016 7,631 9,792 11,167 15,083 % change, year on year –12.7 –4.8 28.3 14.0 35.1

Source: TACIS, Azerbaijan Economic Trends.

The 24,900 km of road are poorly maintained. The number of passenger carshas remained steady since independence and was 35 per 1,000 inhabitants in1998. The number of trucks, however, fell by 19.7% between 1990 and 1998, inpart a result of the massive decline in the volume of external trade. The EU issponsoring an ambitious but as yet ill-defined project to provide east-westtransit routes, the Transport Corridor Europe-Caucasus-Asia or TRACECA.

Azerbaijan has direct maritime connections to other Caspian littoral states butcan reach the high seas only through the Volga-Don canal, a Russian waterway.Baku port is the largest port on the Caspian Sea, but is in need of repair. Thereare flights to other former Soviet republics, although their frequency is muchreduced, as well as to Germany, the Netherlands, Switzerland, Israel, Iran,Turkey, the UK and the United Arab Emirates. During 2000 a number offoreign airlines curtailed their services to Baku, reporting that they were being“overcharged” by the airport.

Telecommunications infrastructure is poorly developed. In 1998 Azerbaijanhad just 8.7 telephone connections per 100 inhabitants, well below thedeveloped country minimum of 40 per 100. The waiting list for new lines islong. Mobile telephone use has grown rapidly from zero in 1993 to 100,000subscribers in 1998, but it remains costly. Azerbaijan uses the global system formobile communications (GSM) phone system. Azercell, the mobile telephonecompany, is the largest private-sector taxpayer in the country, accounting for1.4% of government revenue (0.2% of GDP) in 1999. The governmentenvisages widespread privatisation of the sector, with the state retaining only a51% stake in strategic areas, but this has yet to take place.

The number of television sets is estimated at around 1.5m. Growing numberscan receive Turkish TV. The local media are mainly pro-government.Independent and opposition channels and publications are harassed in therun-up to elections, such as the parliamentary election due in November 2000,but tend to be tolerated after the government has won the polls.

Energy provision

The production and refining of oil and gas form the bedrock of the economy.According to the BP Amoco (UK) annual guide to oil and gas statistics,Azerbaijan has proven oil reserves of 7m barrels, equal to 0.7% of worldreserves, and the country is a growing net oil exporter. The State Oil Companyof Azerbaijan (SOCAR) is more optimistic and puts proven reserves at17.5bn barrels, which probably reflects the Soviet-era practice of including inthe total reserves that are either not viable or not fully proven. Either way,

Oil and gas

Telecommunications andthe media

International links

Azerbaijan 19


Azerbaijan’s oil reserves are small in comparison with those of the Middle East,where proven reserves are put at 674bn barrels, or 64% of world reserves. BPAmoco puts Azerbaijan’s proven gas reserves at the end of 1999 at 850bn cumetres, 0.6% of world reserves, compared with 48.14trn cubic metres (32.9% ofworld reserves) for Russia and 23trn cu metres (15.7% of world reserves) for Iran.

Azerbaijan is self-sufficient in electricity and has generating capacity of18.9bn kwh (1998 figure), of which 18% is from hydroelectric power stations.Generating technology is obsolete and in need of replacement. Electricityproduction was 18.1bn kwh in 1999. In 1990, the year before independence,Azerbaijan produced 23bn kwh of electricity. Although industrial consumptionhas fallen sharply, Azerbaijan remains highly energy-inefficient. Charges forhousehold consumption of electricity are still subsidised, and non-payment bydomestic and industrial consumers is a persistent problem. (For data onproduction of energy see Reference table 4.)

Energy balance, 1999(m tonnes oil equivalent)

Elec-Oil Gas tricity Othera Total

Primary production 14.0 5.0 0.4 0.2 19.6Imports 0.3 0.0 0.4 0.0 0.7Exports –8.0 0.0 –0.2 0.0 –8.2Primary supply 6.3 5.0 0.6 0.2 12.1

Net transformation –4.0 –1.5 0.6 0.0 –4.9

Final consumption 2.3 3.5 1.2 0.2 7.2

a Other sources of energy production include charcoal and wood.

Source: Energy Data Associates.

The economy

Economic structure

Main economic indicators, 1999(% unless otherwise indicated)

Real GDP growth 7.2

Consumer price inflation –8.5

General government balance (% of GDP) –2.8

Current-account balance (% of GDP) –15.0

Average exchange rate (Manat:US$) 4,120

Sources: TACIS, Azerbaijan Economic Trends; IMF.

Azerbaijan’s economy is growing extremely rapidly thanks to substantialforeign investment in the oil sector and growth in associated sectors such asconstruction and communications. Real GDP growth reached 10% in 1998, butthen slowed because of weaker oil prices and lower investment to a stillrespectable 7.2% in 1999. Only in 1996 did the economy begin to recover from

Electricity

20 Azerbaijan


the deep recession caused by the break-up of the Soviet economic system,resulting in the loss of markets and a disruption in supplies, and the legacy ofdecades of economic mismanagement. These problems were compounded bythe Karabakh conflict, which soaked up government resources and producedmore than 500,000 Azerbaijani refugees. As a result, even in the fourth year ofrecovery, real GDP in 1999 was only 53.1% of its 1990 level. (Reference table 5contains historical data on GDP.)

At the end of the Soviet period industry, particularly fuel but increasingly alsomanufacturing, and agriculture were the traditional mainstays of the economy.Changes in relative prices and the economic shock caused by the collapsingcommunist system have caused significant changes in the composition of GDP.Industry accounted for 23.6% of GDP and agriculture for 21.7% of GDP in1999, compared with 23.6% and 30.4% of GDP respectively in 1991. The fuelsector has become a major contributor to GDP, accounting for around 16% in1999 (on EIU estimates) compared with just 2.6% in 1991. The shares oftransport and communications, trade, and construction have also risen.(Further information on the sectoral composition of GDP is provided inReference table 6.)

The structure of GDP by expenditure shows a growth in the share of householdconsumption and a sharp fall in government consumption since 1991. Theshare of fixed investment in GDP began to rise in 1996, most of it from foreigndirect investment (FDI). Foreign investment inflows are expected to remainhigh and variable in the future because of the sequencing of investment andthe effect of changing oil prices (Reference table 7 provides fuller informationon GDP by expenditure.)

Comparative economic indicators, 1999

Azerbaijan Armenia Georgia Russia Turkey

GDP (US$ bn) 4.0 1.9 4.1 184.6 198.7

GDP per head (US$) 500 491 759 1,265 3,086

Consumer price inflation (av; %) –8.5 0.8 19.2 85.8 65.1

Current-account balance (US$ bn) –0.6 –0.3 –0.4 25.0 –1.4

% of GDP –15.0 –14.8 –14.1 13.5 –0.7

Exports of goods fob (US$ bn) 1.0 0.2 0.5 74.7 29.3

Imports of goods fob (US$ bn) 1.4 0.7 1.0 39.4 39.8

External debt (US$ bn) 1.0 0.9 1.9 174.3 101.8

Trade balance fob (% of GDP) 61.6 95.2 12.1 61.8 –5.3

Source: EIU, CountryData.

Economic policy

Azerbaijan faced problems common to most former Soviet republics followingindependence in 1991: a huge terms-of-trade shock, the end of Soviet subsidiesand the need to reverse decades of failed communist policies, which hadcreated a highly distorted economy. These factors, which caused a collapse inoutput and rampant inflation, were exacerbated by political instability and the

War in Karabakh added totransition problems

Azerbaijan 21


war with Armenia. Although there were some minor attempts to tackle theseproblems early on, no real progress was made until 1995.

The government has made good progress on stabilisation. Like other formerSoviet republics, a realistic stabilisation programme began only whenAzerbaijan left the rouble zone in 1993 and escaped the hyperinflationarypolicies of the Russian Central Bank. Azerbaijan pursued a tight monetary andfiscal policy mix for the first two years of stabilisation. Prices were graduallyliberalised. The most important prices in the economy, interest rates and theexchange rate also became more realistic, making monetary policy moreeffective. The exchange rate is now a managed (or “dirty”) float, designed toprevent inflation but also to avoid any overappreciation as a result of oil-related capital inflows. Domestic interest rates are also positive in real terms. Asa result inflation slowed from an annual average in 1994 of 1,664% to –8.5% in1999 (see Reference table 8 for historical prices and earnings data).

Domestic oil prices are now comparable with international prices. However, asAzerbaijan’s borders are largely open, petrol and other refined products are im-ported at cheaper prices. The effect has been to damage the local refining industryand reduce revenue from oil product excises, but also to keep inflation low.

On the fiscal side the government has successfully brought the budget deficitdown to non-inflationary and manageable proportions. Spending was highduring the Karabakh conflict. In 1993 the deficit was 15.3% of GDP, but by1998 it had been cut to 1.9%. The government is finding it difficult to collectdirect taxes. The failure to privatise and to pursue a programme of structuralreform means that few firms outside the oil sector are worth taxing andcorruption is rampant. The government collects royalties from downstreamproducers such as the State Oil Company of the Azerbaijan Republic (SOCAR)and its production subsidiaries, rather than from the upstream exploration andproduction companies, which are majority foreign-owned—these royaltieswere worth 1.1% of GDP in 1999 (see Reference table 9 for fiscal data).

In 1997 and 1998 Azerbaijan began experiencing some of the problemsassociated with overdependence on the oil sector and so-called Dutch disease,when a natural resources boom causes the currency to overappreciate, therebymaking non-natural resources exports uncompetitive. In 1997 and 1998 themanat overappreciated because of large oil-related capital inflows. During 1998the oil export price dropped because of weak global demand following theAsian financial crisis. The drop in world raw materials and commodity prices in1998 and 1999 helped to slow annual average inflation to –0.8% and –8.5%respectively, but up until the second quarter of 1999 it also slashed exportearnings. The result was a liquidity crunch as the money supply shrank. Thelarge devaluation of the Russian rouble in August 1998 also put the manatunder pressure. The consolidated fiscal deficit rose to 4.2% of GDP in 1998 andthe manat stopped its strong nominal appreciation.

With inflation under control, the government, in co-ordination with the IMF,loosened policy. Fiscal spending concentrated on cash payments to pensionersand other needy sections of the population. The government also devalued the

The 1998 drop in oil pricesbrought looser fiscal and

monetary policy—

Stabilisation began onlyin 1995

22 Azerbaijan


manat by a nominal 6.9% on June 8th 1999, a measure that was achievedwithout creating panic or a run on the banks. The devaluation was widelyexpected and many savers had already shifted from manat to dollars. The resultwas that the money supply surged: M3 (broad money plus foreign-exchangedeposits) rose by 21.5% between the end of 1998 and the end of 1999. Thegovernment contained the budget deficit at 2.8% of GDP in 1999 by cuttingspending and by improving collection of indirect taxes such as value-addedtax (VAT).

Privatisation and structural reform have lagged well behind changes inmonetary and fiscal policy. With the rate of unemployment at around 20%,compared with an officially recorded rate of 1.2%, the government is wary ofclosing insolvent firms as this may strain the social fabric. In addition, thegovernment has to contend with considerable vested interests in industry andthe fact that local ownership of industrial firms and rampant local corruptionmean that foreign investors are largely uninterested. However, the failure tosell off or close loss-making state-owned industrial firms is making theeconomy more dependent on oil and creating hardship, as many of these firmsstay afloat by simply not paying their workers.

The government’s voucher privatisation programme has also run intoproblems owing to the limited number of companies that the government isputting up for sale. Azerbaijan’s privatisation vouchers, distributed in 1996,were due to expire in August 2000, but the expiry date has now been extendeduntil 2002. Moreover, the programme has resulted in a major scandal and a lawsuit between foreign investors and Viktor Kozeny, a controversial financieroriginally from the Czech Republic. The investors claim to have paidMr Kozeny up to US$650m to buy up Azerbaijani privatisation vouchers.Mr Kozeny claims that he was forced to hand over massive bribes toAzerbaijani officials who misled him.

Financial sector reform has been grindingly slow. The government began tomerge three of the four main Soviet-era banks, Amanat Bank (the SavingsBank), the Sanayeinvestbank (known as Prominvestbank in Russian, theindustrial investment bank) and Agrosanayebank (known as Agroprombank inRussian, the agro-industrial bank) only in June 2000. These banks dominatethe local market but have considerable balance sheet problems. Although bankcredit to the private sector rose steeply in 1997 and 1998, most credits wereshort-term, making up 85.6% of credit outstanding at the end of the firstquarter of 2000. (See Reference table 10 for information on the money supply.)

The government aims to exploit the oil sector as fast as possible. This policy isas much political as it is economic. By maximising exposure to foreign com-panies the government believes that it has given foreign countries a stake incontinued Azerbaijani independence. Foreign investment in the oil sector hasled to rapid economic growth in the short term. Given the need to resurrect acollapsed economy, the Aliyev government made the only choice available toit. Although Azerbaijan has exaggerated its resource endowment, it is the bestplaced of the newly independent states to exploit its oil reserves, and also hasthe most open investment environment. However, Azerbaijan’s haste has

Oil is still the maingrowth policy

—but significant reformhas still not come

Azerbaijan 23


created political problems with Russia and Iran because of its disregard for thelegal status of the Caspian Sea. Another offshoot of the oil boom is conspicuouscorruption, which carries the risk of sparking political and social unrest.

The government’s major challenge is to make good on its pledge of structuralreform, as Azerbaijan runs the risk of becoming a two-speed economy. On theone hand, there will be an increasingly well-run, foreign-dominated offshoreoil sector. The oil sector will still be subject to the boom-bust cycle ofcommodity prices but will dominate export earnings—oil and oil productsaccounted for 75.9% of export revenue in 1999. On the other hand, SOCAR’sfuture is uncertain as its resource base is skewed towards ageing, onshore fieldswith low reserves. The manufacturing sector is now producing at such a lowlevel of capacity that many plants have in effect closed. The government willhave to put these plants formally into bankruptcy and hope that they can begiven to new owners who will salvage something. The delay in selling off non-oil enterprises has made them largely worthless.

The agricultural sector is likely to become dependent on government subsidies.As in the other relatively resource-rich former Soviet republics, the governmenthas neglected the agricultural sector in favour of quick gains from naturalresources. Already the largest employer in Azerbaijan, the sector’s share ofthose in work will grow because of the high birth rate and low skills base ofrural ethnic Azerbaijanis. Within a few years the result will be a labour-intensive, inefficient sector that employs 40% of the workforce, generatesbarely 10% of GDP and probably less than 10% of exports, receives virtually noinvestment and is unable to meet domestic requirements for food.

Economic performance

Gross domestic product(% real change)

Annual average1999 1995-99

GDP 7.2 4.8

Source: Azerbaijan State Statistical Committee.

Azerbaijan is now one of the fastest growing economies in the former SovietUnion thanks to substantial foreign investment into the oil sector. Real GDPgrowth accelerated to 10% in 1998, before slowing to 7.2% in 1999. The rapidexpansion of the offshore oil sector is, however, creating a new form ofeconomic distortion. Growth in Azerbaijan comes mainly from offshoreoilfields and related construction and communications sectors, and to a lesserextent from a rebound in the agricultural sector. The rest of the economy,however, is in the doldrums and looks unlikely to revive in the near future. Inthe years before substantial oil-related investment Azerbaijan suffered one ofthe worst recessions in the former Soviet Union, with real GDP more thanhalving between 1992 and 1995.

Economic growth is rapidthanks to foreign

investment

Economic policy challengeslie ahead

24 Azerbaijan


By 1999 the fuel sector accounted for 16% of GDP, and oil and oil productsprovided 75.9% of export revenue (there are few other fuel exports). In 1995the fuel sector had been just 6.8% of GDP, and oil and oil products contributed58.4% of export revenue. Oil exports alone in 1999 were worth 19.4% of GDP,up from 8.6% of GDP in 1995. The services sector, ignored in the Soviet era,has also picked up rapidly, thanks in part to spillover from the oil sector.

Foreign direct investment (FDI) has been the key to Azerbaijan’s economicrevival. Most FDI has been into oil production and exploration, the largestsingle contribution having come from the Azerbaijan International OperatingCompany (AIOC). In 1995-98 investment rose at an average annual rate of59.1%. Fixed investment contributed 40.6% of GDP by 1998, more than twicethe 1995 figure, but slowed to 30.2% of GDP in 1999 because of the closure ofoil consortia and the end of initial investment at AIOC. Despite that, in 1998-99 AIOC was responsible for US$808m of investment (9.9% of GDP).

By contrast, less than 0.5% of GDP of foreign investment has gone into theagricultural sector, the second largest contributor to GDP and Azerbaijan’slargest employer. Agriculture’s contribution has been uneven, but the sectorstarted to recover in 1998 and grew rapidly in 1999, in part because of partialreform to the sector in 1997.

The manufacturing sector, a legacy of poorly thought-out Soviet economicplanning, has for the most part been shunned by foreign investors. As a result,manufacturing output has plunged. Metallurgy, once an important sector, wasby 1999 producing at just 4.4% of its 1990 level. Despite an oil-relatedconstruction boom, Azerbaijan’s construction materials sector in 1999 hadoutput of just 7.3% of its 1990 level. Light industrial activity by 1999 hadfallen by 94.2% compared with 1990, although there is probably some lightindustry that operates in the informal economy. The government’s unwilling-ness to close inefficient and insolvent industrial enterprises has contributed toa substantial build-up of inter-enterprise arrears. Total inter-enterprise arrears inthe economy were Manat35.4trn (US$9.1bn, or 222.2% of annual GDP) at theend of 1998, compared with domestic credit of just Manat2.2trn (13.5% ofGDP). Put otherwise, informal credit was 16 times larger than formal credit.

The government’s stabilisation programme, which coincided with an end tothe fighting with Armenia, has been successful in putting an end to highinflation. By 1997, two years after the start of stabilisation, inflation was backinto single digits for the first time in more than a decade. In 1998 and 1999prices fell steeply. As Azerbaijan is an open economy it has benefited from thereal depreciation of its main trading partners’ currencies, which has loweredimport costs. In 1999 prices fell by 8.5% on an annual average basis.

Inflation had risen sharply following the 1992 price liberalisation and had thencontinued to rise as the government printed money to pay for the war withArmenia. By 1994 annual average inflation had reached 1,664%.

Real wages have started to recover since 1996. It is generally private-sectorworkers, particularly those who work for foreign companies and are paid inhard currency, who have benefited the most from the recovery in real wages.

Wages and prices

Azerbaijan 25


The government has a habit of paying public-sector workers late, in part adeficit-reduction measure used by many former Soviet republics. Moonlightingis common in the public sector and some public-sector workers more thancompensate for late payment by the extraction of bribes. (Information onprices and wages is set out in Reference table 8.)

Wages and prices(% change)


Consumer prices –8.5 2.4

Producer prices –6.1 12.1

Nominal wages 9.0 24.2

Real wages 20.2 21.2

Source: Azerbaijan Economic Trends.

Economic sectors

Agriculture

Agricultural production


% real change in value terms, year on year 7.1 0.5

Sources: IMF, Azerbaijan Republic: Selected Issues, 1999; EIU calculation of annual averages.

Agriculture is the largest employer, with 36% of the workforce in 1999 and a21.7% share of GDP. After a decline in 1992-95, the real value of agriculturaloutput began to recover in 1996, before dipping again in 1997 because of poorweather. The sector has since recovered and meets most of Azerbaijan’s grainneeds. Most farming activity has traditionally been concentrated in the fertilelowlands of central Azerbaijan. The Soviet system of collective and state farmsis being dismantled, but the new farms are smaller than the older ones, losingpotential economies of scale. By end-June 1999 there were 44,561 private farmsin Azerbaijan, up by 74% from 25,608 at the end of 1998, although the averagesize of the farm fell from 6.5 ha to 3.7 ha. Over the same period the number ofstate farms was cut from 306 to 201, while their landholdings dropped from478,000 ha to 297,100 ha.

Cotton production has been hit by shortages and price increases of fertilisers,defoliants and spare parts for harvesting machinery, most of which come fromRussia and Uzbekistan. Weak export prices have not helped—the LiverpoolIndex price of cotton dropped by 46% between 1995 and 1999. The 1999 cropwas the worst performance since independence: just 96,800 tonnes werecollected, a mere 17.8% of the 1990 crop of 542,900 tonnes. (Reference tables11 and 12 show the production and yields of agricultural crops; Referencetables 13 and 14 show livestock numbers and output.)

Cotton

26 Azerbaijan


Mining and semi-processing

Azerbaijan’s energy sector has come full circle. At the beginning of the 20thcentury the country, then part of Tsarist Russia, accounted for nearly half ofglobal oil production. At the end of the 20th century Azerbaijan had become aleading prospect for the world oil and gas industry, with more than a dozenforeign consortia exploring or producing oil and gas. Although Azerbaijan willnever regain its earlier position, it is now the best placed of the former Sovietrepublics to exploit its oil and gas wealth because of its open investmentenvironment and relative closeness to the high seas. Oil dominates theeconomy and contributed 75.9% of export revenue in 1999. Foreign firms areresponsible for most investment into the oil sector in Azerbaijan and willinevitably fund the exploration and development costs needed to develop theCaspian Sea. In addition, they are likely to come up with most of theinvestment for the downstream sector: refining and pipeline construction.

Production has been revived by the Azerbaijan International OperatingCompany (AIOC). The British-US-Norwegian-led oil consortium signed itsagreement with Azerbaijan in 1994 and began producing in November 1997.AIOC output is expected to reach 300,000 barrels/day in 2003, followingphase-one expansion, which involves investment of US$3.1bn (the fact that1999 GDP was just US$4bn puts this into perspective). By 1996-97 productionhad slumped to 182,500 b/d from 250,900 b/d in 1990 (the peak in the past20 years was in 1980, when oil production was 282,000 b/d). By 1999, thanksto AIOC, Azerbaijan produced 276,800 b/d. In global terms Azerbaijaniproduction is still insignificant, just 0.4% of world production of 74.1m b/d in1999. AIOC should reach peak production of 800,000 b/d in around 2008-10.

Azerbaijan’s oil wealth, however, has become highly politicised. The main localoil producer, the State Oil Company of the Azerbaijan Republic (SOCAR), is thecountry’s largest employer, with 78,000 workers, and the diversion of oilmoney into private pockets has long been established practice. SOCAR’s firstvice-president dealing with foreign consortia is Ilham Aliyev, the son of thepresident of Azerbaijan, Heydar Aliyev. SOCAR is saddled with ageing onshorefields. So far the government has resisted the privatisation of SOCAR, whichwould make it more efficient. The government has deliberately involved asmany foreign companies in the oil consortia as possible to give foreigners astake in Azerbaijan’s future. This politicisation has, however, affected decision-making on export pipeline routes and led to tensions with some of Azerbaijan’sleading investors.

The hype that surrounded the initial opening up of Azerbaijan and otherCaspian Sea countries to foreign investment has waned. Sobering factors haveincluded the collapse in oil prices in 1998, notwithstanding the rally in oilprices starting in 1999, and the realisation of the difficulty of doing business inthe region, the costs of business and the difficulties of building exportpipelines—all of which were initially underestimated. In addition, Azerbaijanoverestimated the resource base. Two exploration consortia, the NorthApsheron Operating Company (NAOC) and the Caspian InternationalPetroleum Company (CIPCO), closed in 1999 after disappointing results. The

Oil and gas

Azerbaijan 27


Shah Deniz consortium, lead by BP Amoco (UK) and Statoil (Norway) found anestimated 500 bn cu metres of gas rather than oil. In addition, Arco (US)withdrew from the Yalama (D-222) exploration venture.

Oil and gas export pipeline problems

Azerbaijan announced that it would make a decision on its main exportpipeline (MEP) by October 1998. However, the date has slipped as a result ofdisagreements over the possible route between the oil companies, which willhave to fund and use the MEP, and the government. Azerbaijan has fourMEP options

A north-western route, from Baku to the Russian Black Sea oil terminal atNovorossisk (Baku-Novorossisk). This route has the advantage of already beingcovered by an existing 115,000-barrels/day pipeline, operational as of 1997,and the further advantage of ending at an important oil terminal, which isundergoing expansion. However, the disadvantages of Baku-Novorossisk arethat it passes through Russia, a competitor in the oil industry, that the RussianNorth Caucasus is unstable and that the pipeline operator, the Russian state-owned firm Transneft, has frequently been forced to shut the pipeline. For themoment Azerbaijan is unable to fill its Baku-Novorossisk quota, but in the longterm it is likely to shun this route.

A westerly route to the Georgian Black Sea port of Supsa (Baku-Supsa). Thisroute is already covered by an existing 115,000-b/d pipeline, which opened in1999 and which, unlike Baku-Novorossisk, is cheap and efficient. In addition,Georgia is an oil importer and so has no interest in seeking to controlAzerbaijani oil exports, unlike Russia and Iran. AIOC favours expanding Baku-Supsa as an interim measure for AIOC phase-one expansion before taking adecision on an MEP later. Although the most commercially viable option,Baku-Supsa is being blocked by Turkish and US political pressure in favour ofBaku-Ceyhan (see below).

A south-western route from Baku to the Georgian capital, Tbilisi, and then intoTurkey and finally to the Turkish Mediterranean oil terminal at Ceyhan. Likethe Baku-Supsa route, Baku-Ceyhan would cross the territory of an oil importerwith no interest in restricting Azerbaijani oil exports. The route also haspolitical support from the US and Turkey. However, it is the most expensiveoption because of its length, nearly 1,800 km. To be commercially viable Baku-Ceyhan would need a total oil throughput commitment of close to 7bn barrels,equal to Azerbaijan’s entire reserves. Although AIOC initially opposed Baku-Ceyhan owing to issues concerning its commercial viability, there has beengrowing corporate support for the project, and BP Amoco and Statoil, two ofthe participants in AIOC, have joined the sponsor group that will conduct thefeasibility study of the pipeline. Since the confirmation, in August 2000, by theexploration consortium OKIOC of its discovery of a large oilfield in thenorthern Caspian in the Kazakhstan sector, the Kazakh government now wantsto participate in the project with 30m tonnes annually. It therefore looksincreasingly likely that this pipeline will be built.

A southern option through Iran to the Persian Gulf. This would involvereversing the flow on existing Iranian pipelines coming up from the Persian

28 Azerbaijan


Gulf. Azerbaijan has given this possibility little thought as Iran is a competitorin the oil market and so might seek to restrict export volumes. In addition, Iranis under US sanctions. There is also no great desire outside Iran to see yet moreof the world’s oil coming out of the existing Persian Gulf oil bottleneck.

The gas sector was in a worse position than the oil sector at independence.Azerbaijan was importing gas from suppliers such as Turkmenistan, which wereputting up prices, and domestic non-payment was rampant. Although gasproduction started to recover convincingly only in 1998, Azerbaijan managedto eliminate gas imports in 1996. Prospects for the gas sector have nowimproved thanks to the unexpected discovery of gas at Shah Deniz. The resultis that Azerbaijan is likely to become an important supplier of gas to Turkeywithin the next ten years. The Shah Deniz consortium is proposing a ShahDeniz-Erzerum gas export pipeline with initial capacity of 5bn cu metres/year,rising to 16bn cu metres/year. The Shah Deniz consortium expects to be able toexport 2bn cu metres/year to Turkey by the end of 2002. The Shah Deniz findhas in effect sunk the US-encouraged idea of a Trans-Caspian Pipeline (TCP) tocarry Turkmen gas under the Caspian Sea and then via Azerbaijan and Georgiato Turkey. Azerbaijan and Turkmenistan could not agree on their respectivevolumes for the pipeline, slated to cost at least US$2bn and carry up to 30bn cumetres. Matters have not been helped by reports that a leading Turkmen officialasked for a US$500m bribe.

Azerbaijan’s other mineral resources include iron, bauxite, zinc, copper, arsenic,molybdenum, marble and fire clay. There are small reserves of gold, which areat present being mined by Armenia in the occupied Kelbajar region. Mostresources are being exploited, but the mining industry is badly in need ofmodernisation.

There are large reserves of iron and aluminium ores located in the Dashkesanmountains of the Lesser Caucasus. Estimated iron reserves are 200m-250mtonnes. Iron ore extraction has been suspended since the dissolution of theSoviet Union, as Georgia, the sole consumer, ceased purchases.

Manufacturing

The oil equipment manufacturing sector and related machine-building sectors,such as instrument-making, electrical engineering and radio electronics,account for around one-fifth of Azerbaijan’s industrial base. Oil industryengineering is Azerbaijan’s oldest industry and the country used to supply 70%of the Soviet Union’s requirements. Much of the industry is now obsolete andis operating at a fraction of its former capacity. The government views thesector as being of strategic importance and has not included it in itsprivatisation plans. Investor interest has been limited owing to the difficultiesof converting production to internationally recognised standards. As with therest of the manufacturing sector, the government’s non-reform strategy ineffect means letting the sector wither away.

Other minerals

Azerbaijan 29


Since independence there has been a collapse in non-oil-related sectors. In1999 metallurgy production was just 4.4% of its 1990 level, paper and pulpproduction 1.2% of its 1990 level and construction materials 7.3%. The bulk ofAzerbaijan’s heavy industry is in the town of Sumgait, just north of Baku. Theindustrial enterprises based there used to produce a wide range of petro-chemicals products (synthetics, rubber, detergents, polymeric buildingmaterials), aluminium, textiles and clothing. Much of Sumgait’s manufacturingcapacity is now at a standstill. The government has designated the area a freeeconomic zone and has invited foreign investors to produce for export. Littleinvestment has arrived because of the enormous and probably pointless task ofattempting to turn around plants using Soviet technology and managementpractices and with high levels of pollution.

The industrial sector(physical volumes of production; % change, year on year)


Total industrial production 3.6 –4.9 of which: fuel industry 7.0 1.3 electricity 1.5 –1.9 metallurgy 61.3 –15.3 of which: ferrous metals –84.6 –15.3 non-ferrous metals 81.7 –8.6 machine-building –55.7 –32.3 chemicals & petrochemicals 8.9 –5.9 lumber & paper –21.1 –41.5 construction materials –21.6 –27.1 light industry –40.6 –31.5 food industry 3.9 –19.4

Sources: IMF, Azerbaijan Republic: Selected Issues, 1999; TACIS, Azerbaijan Economic Trends; EIU calculations for averages.

Other important sectors include textiles and food and beverages. These sectorstoo have suffered a steep rate of collapse. Azerbaijan has traditionally been alarge textiles producer, with four major plants that use domestically producedcotton as inputs. The sector is precisely the sort of labour-intensive, non-oilactivity that economic policy should be aiming to foster. Instead, in 1999 lightindustrial activity was just 5.8% of its 1990 level. (Reference table 15 containsdata on sectoral changes in industrial production, and Reference table 16 givesproduction data for selected items.)

Construction

The contribution of construction to GDP was 9.4% in 1999, compared with8.1% in 1990, according to government figures. The IMF believes that con-struction’s contribution tends to be larger than government figures indicate. Asignificant proportion of construction activity goes unrecorded. Constructionwork associated with the start of foreign investment in the oil industry hastaken off since 1995. Companies from Turkey are also active in the Azerbaijanimarket, building homes and business premises. As a result of the boom, wages

30 Azerbaijan


in the sector are among the highest in the economy. The numbers officiallyrecorded as working in the sector are falling, in part because of the decline ofstate-sponsored construction and in part because of the growth of theinformal economy.

Financial services

The Azerbaijan National Bank (ANB, the central bank) was set up in 1992 buttruly became independent only in 1995. The ANB is responsible for monetarypolicy and the supervision of the financial sector. The ANB’s tight monetarystance has been an important success in ending high inflation. In 1999 the ANBloosened its monetary stance, and the manat was devalued by 6.9% on June8th in response to pressure on the exchange rate caused by the crisis in Russia.

The commercial banking sector contains too many banks and most institutionsare small and undercapitalised. The International Bank of Azerbaijan (IBA), thebest positioned and capitalised of the four Soviet-era banks that continue todominate the market, was due to be privatised by the end of 1998 but thegovernment managed to sell only a minority stake to the European Bank forReconstruction and Development (EBRD). In June 2000 the ANB began tomerge three of the four into one bank following a restructuring programme.Amanat Bank, Sanayeinvestbank and Agrosanayebank are now being mergedinto the United State Industrial Bank. The new bank and the IBA still hold thebulk of deposits, employ the most people and have the most branches. Theyalso have most non-performing loans on their books.

From 210 banks in 1995 the sector has undergone consolidation, partly as aresult of the ANB’s activity in revoking licences for breaches of prudentialregulations. Consequently, by June 2000 there were 66 commercial banks, plusthe central bank and the four big banks, three of which are merging. Thecommercial banks and the state-owned banks had capital at the end of 1999 ofManat631.4bn (US$144m; 3.8% of GDP), of which 24.8% is concentrated inthe four state-owned banks. Of the total, 11 were partly foreign-owned and had15.6% of banking sector capital at the end of 1999. The ANB will allow only30% of the capital in the banking system to be foreign-owned and the state-owned banks are informally protected by the ANB from new competition.Azerbaijan’s remaining 55 commercial banks are small and weak and accountfor 59.6% of banking sector capital, a mere Manat6.8bn (US$1.6m) per bank.Many of these banks will have to close, as the ANB’s minimum capitalrequirement will be US$5m in 2001. (Banking statistics are provided inReference table 17, while Reference table 10 has data on the money supply.)

Banking services

Azerbaijan 31


The external sector

Trade in goods

Foreign trade, 1999(US$ m unless otherwise indicated)

Main exports fob Main imports fob

Oil products 704.4 Machinery & equipment 342.2

Food products 60.2 Food products 207.5

Machinery & equipment 34.7 Metals 111.1

Chemicals 22.8 Mineral products 89.8

Cotton 21.7 Chemicals 57.6

Unrecorded by customs 96.6 Unrecorded by customs 399.9

Total incl others 1,025.2 Total incl others 1,433.4

Note. The components of trade are customs data but the totals are balance-of-payments data.


Azerbaijan has traditionally depended heavily on trade, with imports andexports averaging 37% and 46% of GDP respectively during the second half ofthe 1980s. In 1992 Azerbaijan registered a trade surplus, but a deficit hasopened up since 1993, initially as a result of the decline of the export sector.Since 1996 there has also been a rapid increase in imports, mostly owing to theinflow of machinery and equipment for the oil industry, but also because ofrising demand for consumer goods. Azerbaijan is increasingly reliant on crudeoil exports for export growth, while exports from the uncompetitivemanufacturing sector have plunged.

Trade data are often unreliable: the figures for imports and exports presented inthe balance of payments are the most reliable. Balance-of-payments data havebeen compiled by both the IMF and the Azerbaijan National Bank (ANB, thecentral bank). These series differ slightly from each other, but both take intoaccount the import of technology by international oil companies and alsomake an estimate for unrecorded trade. However, the only data available onthe direction and composition of trade come from the State CustomsCommittee, which fail to reflect fully these two components (the oil industryand unrecorded trade). As a result, the State Customs Committee understatedexports by 9.4% and imports by 27.9% in 1999. (Reference tables 18-21 showthe trade figures by composition and use customs data. IMF data on thebalance of payments are given in Reference table 24.)

Following independence in 1991, Azerbaijan redirected exports to new marketsoutside the former Soviet Union and the Commonwealth of IndependentStates (CIS). As oil exports from the Azerbaijan International OperatingCompany (AIOC)—the most important growth element in exports for theforeseeable future—are sent to European markets, so dependence on the CIS isdecreasing. Azerbaijan’s main export market in 1999 was Italy, which provided33.7% of export revenue because of oil shipments to the Trieste terminal.

Less dependence onCIS markets

Data problems

32 Azerbaijan


In 1999 the CIS accounted for 22.7% of Azerbaijan’s exports and 31.4% of itsimports, compared with 94% and 80% respectively in 1991. Within the CIS,Russia and Ukraine remain important trading partners, although all are indecline. Exports to Russia fell from 25.6% of total exports in 1993 to 8.9% oftotal exports in 1999, in part because of the volatility of the Russian market.The weakness of the rouble meant that in 1999 Russia accounted for 21.9% ofimports, compared with 18% in 1998.

One of Azerbaijan’s trade problems is that large neighbouring markets—Iran,Russia and Turkey—are volatile economies with unstable currencies. Turkey, forexample, was the largest trading partner in 1998. However, the steep recessionin Turkey in 1999 cut Turkey’s share of Azerbaijani exports to 7.4% from 22.4%in 1998 and its share of Azerbaijani imports to 13.8% in 1999 from 20.4% in1998. Exports to Iran in 1999 were just 2.4% of total exports, down from a1994 peak of 38%. A major export to Iran is diesel, because of domesticproduct shortages in Iran. Imports from Iran are more modest, just 4.6% of thetotal in 1999, down from a peak of 12% in 1995. (Reference tables 22 and 23show customs data on trade by country of origin and destination.)

Main trading partners, 1999(% of total value)

Exports to: Imports from:

Italy 33.7 Russia 21.9

Russia 8.9 Turkey 13.8

Georgia 7.7 US 8.0

Turkey 7.4 UK 6.5

US 3.2 Japan 5.4


Invisibles and the current account

Current account, 1999(US$ m except where otherwise indicated)

Merchandise exports fob 1,025.2

Merchandise imports fob –1,433.4

Trade balance –408.2

Net services –228.3

Net income –45.0

Net transfers 81.8

Current-account balance –599.7 % of GDP –15.0

Sources: IMF, International Financial Statistics; Azerbaijan Republic: Recent Economic Developments, 1998; Azerbaijan Republic: SelectedIssues, 1998; TACIS, Azerbaijan Economic Trends.

The current-account deficit shrank dramatically in 1999 to 15% of GDP owingto higher volumes of oil exports, thanks to foreign investors and higher oilexport prices as a result of the cut in production by OPEC and other majorproducers in March 1999. The current-account deficit had widened to 33.1% ofGDP in 1998, according to the IMF. From 1996 to 1998 a key element was the

Azerbaijan 33


massive and widening deficit on visible trade, which reached US$1bn (25.4%of GDP) in 1998, but which was cut to US$408m (10.2% of GDP) in 1999. Thecurrent-account deficit was also cut in 1999 because of a 28.5% fall in thedeficit on services and income. Azerbaijan ran a surplus on transport invisiblesin 1999, reversing a deficit in 1998 owing to falling trade. The relative strengthof the manat, however, led to more travel abroad, pushing travel invisibles intodeficit in 1999 from a surplus in 1998. The import of construction services,related to a large extent to the oil sector, rose.

The current-account deficit is expected to fall further after the AzerbaijanInternational Operating Company (AIOC) proceeds with its phase-oneexpansion plan, scheduled for 2001. By the time of full field development atAIOC, expected in 2008, Azerbaijan should be running a current-accountsurplus. However, as the closure of oil consortia in 1999 and the collapse of oilprices in 1998 showed, the oil sector is volatile and the government over-optimistic. (IMF data on the current account are shown in Reference table 24.)

Capital flows and foreign debt

Azerbaijan’s large current-account deficits have been financed with largepositive inflows on the capital and financial accounts, in particular oil-relatedforeign direct investment (FDI). In 1999 the deficit was financed by an inflowon the capital and financial accounts of US$828.4m, down from US$1.33bn in1998. Most of the capital inflow, US$510.3m, was FDI, of which US$349.2mwent into the oil sector and US$155m was oil contract signature bonuses—up-front payments from the oil companies. Portfolio investment remainednegligible. (Data on capital flows can be found in Reference table 24.)

Foreign direct investment in Azerbaijan

Stocks and inflows: Azerbaijan has been the third most successfulCommonwealth of Independent States (CIS) country in attracting foreigndirect investment (FDI). Cumulative inflows between 1994 and 1999amounted to US$4.4bn, which is modest when compared with the inflows intoVisegrad countries. However, in per head terms FDI in Azerbaijan in the 1990sreached US$502, which is by far the highest in the CIS and also comparablewith some of the central European transformation leaders. The only CIScountry having a per head rate close to that of Azerbaijan is Kazakhstan,another oil-producing central Asian republic.

Origin and distribution: The largest foreign investor in Azerbaijan in the1990s has been the US, with a share amounting to US$1.2bn. The UK has beenthe second largest with US$672m, closely followed by Turkey, which hasinvested US$660m. The origin of FDI in Azerbaijan is reflected in thedistribution of shares in the Azerbaijan International Operating Company(AIOC), the largest energy development under way in the country. UScompanies hold almost 42% of AIOC shares, UK companies hold nearly 20%,Azerbaijan and Russia each hold 10%, Norway has nearly 9% and Turkey holdsaround 7%. An overwhelming 60% of the total FDI (US$2.7bn) in the 1990swas directed to the oil industry. Since foreign investment in the oil sector

Capital flows

34 Azerbaijan


started in 1995, it has averaged 17.3% of GDP annually. The second mostpopular destination of foreign investment has been industry (with 16%), andthe construction sector received 8%. FDI inflows are heavily concentrated inthe Baku region, as all the inflows into oil exploration are directed there. Thesecond most important destination for FDI is the neighbouring industrial cityof Sumgait, where most foreign capital into oil refinement and petrochemicalsindustries is invested.

Determinants: FDI inflows to Azerbaijan have been almost entirely driven byits oil and gas endowment. Most of the foreign investment is directed to the oilsector and to oil-related industries. Outside the oil and gas sectors littleengagement has been observed. This is mainly attributable to the poorinvestment climate and severe bureaucratic obstacles. In addition, there isvirtually no infrastructure, which makes business activity impossible in manyinstances. Azerbaijani law provides for standard investment incentives: freerepatriation of profits, guarantees against nationalisation withoutcompensation, exemption from custom duties on imported materials andequipment, a ten-year guarantee against “damaging” legislation, andpreferential treatment in development areas and selected investment. No freeeconomic zones have been created yet, although in order to stimulate a morebalanced development of the country the government is seriously consideringtheir establishment. The first area to be made a free economic zone would bethe industrial zone of Sumgait, which needs major investment to realise its fullpotential. In general, the determinants of FDI inflows into Azerbaijan are itsmineral resources and not its internal market potential as in central Europeancountries; government policies aimed at attracting FDI to sectors other than oiland gas are less influential.

Impact: FDI inflows into Azerbaijan in 1995-99 have largely covered itscurrent-account deficit and have also been an important engine of growth. Oiland gas have contributed most to GDP growth since 1995, and FDI into thesesectors has created positive and increasingly important effects in other parts ofthe economy. Being narrowly based and directed to a capital-intensive sector,FDI has not, however, generated any substantial employment.

Potential: Thanks to Azerbaijan’s enormous mineral resources there is still alarge potential for FDI inflows into oil and gas sectors. There are also plenty ofrewarding destinations for FDI in downstream activities—petrochemicals andsecondary related industries. Moreover, increasingly attractive opportunitiesexist in other fields of the Azerbaijani economy: telecommunications services,light manufacturing, especially cotton-based manufacturing, and transport.The emerging sector for investment is agriculture, accounting for around 20%of Azerbaijani GDP. Azerbaijan has a great potential as a food-exportingcountry; there are growing opportunities for FDI in food-processing, packagingand other related areas. FDI inflows into sectors other than oil and gas,however, will depend in the long term on structural reforms, the progress ofprivatisation, the creation of a more friendly investment climate and animprovement in infrastructure.

Azerbaijan 35


Azerbaijan’s debt burden remains manageable, in part because of thegovernment’s decision to finance the current-account deficit through FDIrather than debt inflows. However, the debt burden is growing relatively fast.According to the most recent World Bank figures, Azerbaijan’s total foreigndebt stock was US$693.4m at the end of 1998, which the EIU estimates to havebeen 16.9% of annual GDP, up by 36.7% year on year. The ratio of debt to theexport of goods and non-factor services was 68.7% in 1998, according to ourcalculations, up from 44.1% in 1997 because of lower exports and higher debt.The ratio is expected to have fallen in 1999 following the surge in exports.

Most debt is on concessional terms granted by multilateral lenders with longmaturities. As a result of poor debt management, Azerbaijan had US$24.8m inprincipal payment arrears to official creditors at the end of 1998. The IMFremains the single largest creditor and was owed US$321.2m at the end of1998. Although debt is rising, the government hopes that future debt-servicingobligations will be covered by oil revenue. (World Bank data on debt are shownin Reference table 25.)

Foreign reserves and the exchange rate

Azerbaijan has built up its foreign-currency reserves from about US$600,000 atthe end of 1993 to US$672.6m at the end of 1999, equal to 3.8 months ofgoods and services import cover (EIU estimate; services debts are estimated atUS$700m in 1999). Reserves have been built up using the residue from oil dealbonuses after allocations to cover the budget deficit. Since March 1995 theAzerbaijan National Bank (ANB, the central bank) has had sole responsibilityfor managing these foreign-currency reserves. The government is talking aboutsetting up a National Oil Fund, but wants it to be under presidentialsupervision. The IMF is calling for the National Oil Fund to be accountable toparliament—in either event, the yet-to-be-regulated fund contained US$75mfrom oil windfalls between December 1999 and May 2000. (IMF figures onAzerbaijan’s reserves are shown in Reference table 26.)

The government introduced the national currency, the manat, as a parallelcurrency with the rouble in mid-1992 at a rate of Manat1:Rb10. After thecurrency reform in Russia in July 1993 the Azerbaijani government began tophase out the rouble as legal tender. From January 1994 the manat became thesole legal currency.

Political turmoil led to a spectacular collapse in the months that followed.From an official rate of Manat118:US$1 at the start of 1994, the manat wastrading at more than Manat4,300:US$1 by the beginning of 1995. However,the manat then began to appreciate following large oil-related capital inflows.By the end of 1998 it had appreciated to Manat3,890:US$1. The danger wasthat a real appreciation of the manat could cause “Dutch disease”, in which afast-appreciating currency makes large non-oil swaths of the export sectoruncompetitive. After Azerbaijan began to experience the fallout from Russianfinancial crises in May and August 1998, the manat stopped its nominalappreciation and a slow depreciation began. In June 1999, with IMF approval,

Currency

Reserves

Foreign debt

36 Azerbaijan


the government initiated a 6.9% nominal depreciation of the manat, whichended 1999 at Manat4,378:US$1, down by 12.5% in nominal terms year onyear. In real terms the manat ended 1999 down by 1.8% against the US dollar,according to Azerbaijan Economic Trends. (Historical data on exchange rates areshown in Reference table 27.)

Azerbaijan is an increasingly dollarised economy. M3—broad money andforeign-currency deposits—at the end of 1999 was worth Manat2,092.5bn(US$478m; 12.7% of annual GDP), up by 22.2% year on year. Foreign-currencydeposits made up 32.9% of M3, up from 28.9% at the end of 1998. Totalforeign-currency deposits of firms and households in the banking system,equal to just under US$20 per head at the end of 1999, greatly understate thetrue amount of hard currency in circulation in Azerbaijan. The foreign-exchange regime has been liberalised but the manat, although in practiceconvertible for current-account purposes, is not yet formally so.

Azerbaijan 37


Appendices

Sources of information

The availability of statistical information on Azerbaijan is improving. The bestdata are from the IMF, but are available annually. The EU through its TACISprogramme publishes a useful quarterly, Azerbaijan Economic Trends, althoughthe time lag on the publication of data is quite long. Information from theEuropean Bank for Reconstruction and Development (EBRD) and the WorldBank both tend to be of poorer quality. Remarkably, data from the annual statestatistical yearbook match those from the IMF and Azerbaijan Economic Trends.Academic coverage of post-independence Azerbaijan is weak, often sufferingfrom partisanship resulting from the Nagorny Karabakh war. The James BakerInstitute at Rice University, Texas, has undertaken the most extensive review ofthe oil sector in Central Asia and the Caspian in a series of reports that aremore in-depth and thoughtful than the International Energy Agency’s CaspianOil and Gas report.

Azerbaijan State Statistical Committee, Statistical Yearbook

TACIS, Azerbaijan Economic Trends (http://aet-tacis.azeurotel.com)

EBRD, Transition Report, London, annual (with an annual update)

Energy Data Associates, Bishops Walk House, 19-23 High Street, Pinner,Middlesex HA5 5PJ

EU/TACIS programme, Azerbaijan Economic Trends, Brussels, quarterlysince 1998

IMF, Azerbaijan Republic: Recent Economic Developments, Washington, 1998

UN Development Programme, Azerbaijan Human Development Report, New York,annual

World Bank, Azerbaijan Financial Sector Review, New York, 1997

World Bank, Global Development Finance, annual

Audrey Altstadt, The Azerbaijani Turks: Power and Identity under RussianRule, 1992

J Aves, Post-Soviet Transcaucasia, Royal Institute of International Affairs,London, 1996

Ali Banuazizi & Myron Weiner (eds), The New Geopolitics of Central Asia and itsBorderlands, I B Tauris, London, 1994

Karen Dawisha & Bruce Parrott (eds), Conflict, Cleavage and Change in CentralAsia and the Caucasus, Cambridge University Press, 1997

Anoushiravan Ehteshami (ed), From the Gulf to Central Asia, ExeterUniversity, 1995

Select bibliography

International sources

National sources

38 Azerbaijan


Suzanne Goldenberg, Pride of Small Nations: The Caucasus and Post-SovietDisorder, Zed Books, London, 1994

International Energy Agency, Caspian Oil and Gas, Paris, 1998

Reference tables

These reference tables provide the most up-to-date statistics available at the timeof publication

Reference table 1

Population

1994 1995 1996 1997 1998

Population (year-end; ‘000) 7,643.5 7,726.2 7,799.8 7,876.7 7,949.3

Annual growth (%) 1.24 1.08 0.95 0.99 0.92

Male (% of total population) 49.1 49.2 49.3 49.3 49.1

Female (% of total population) 50.9 50.8 50.7 50.7 50.9

Urban (% of total population) 52.4 52.3 52.1 51.9 51.7

Rural (% of total population) 47.6 47.7 47.9 48.1 48.3

Birth rate (per ‘000 population) 19.1 17.1 17.4 15.7 n/a

Death rate (per ‘000 population) 6.8 6.4 6.2 5.9 n/a

Rate of natural increase (per ‘000 population) 12.3 10.7 11.2 9.8 n/a

Life expectancy at birth (years) 69.1 70.2 71.2 71.6 71.3

Maternal mortality in childbirth (per 100,000 births) 37.0 44.1 31.0 41.1 n/a


Reference table 2

Population by age(‘000; year-end)

1994 1995 1996 1997 1998

Age (years) 0-14 2,538.8 2,569.0 2,556.8 2,582.1 2,605.915-19 680.2 687.9 707.2 714.2 720.820-39 2,585.5 2,612.5 2,628.7 2,654.5 2,678.840-59 1,168.6 1,178.7 1,206.5 1,218.3 1,229.760-69 440.1 444.7 459.7 464.3 468.570+ 230.3 233.4 240.9 243.3 245.6Total 7,643.5 7,726.2 7,799.8 7,876.7 7,949.3

Working-age populationa 4,119.1b 4,161.1 4,222.7 4,259.0 4,299.1 % of total population 53.9b 53.9 54.1 54.1 54.1

a Defined as between the ages of 16 and 59 for men and 16 and 54 for women. b EIU estimatebased on figures in the Statistical Yearbook of Azerbaijan, 1999.


Azerbaijan 39


Reference table 3

Labour force(‘000 unless otherwise indicated)

1994 1995 1996 1997 1998a

Agriculture & forestry 895.0 870.0 918.0 964.0 1,085.4

Industryb 373.7 352.1 282.9 257.4 240.2

Construction 191.7 185.1 164.1 151.0 150.2

Transport & communications 190.5 159.1 168.3 175.0 166.8

Trade & catering 365.6 396.2 456.6 511.4 772.3c

Other 834.8 874.8 905.5 841.2 550.4

Total employed 2,851.3 2,837.3 2,895.4 2,900.0 2,965.3

Labour force 3,364 3,417 3,591 3,597 3,702

Unemployed 513.0 580.0 696.0 696.0 736.2 % of labour force 15.2 17.0 19.4 19.3 19.9

a Statistical Yearbook of Azerbaijan, 1999. b Mining and manufacturing. c Includes other trade-related services.

Sources: IMF, Azerbaijan Republic: Recent Economic Developments, 1998;Azerbaijan Republic: Selected Issues, 1999; State StatisticalCommittee, Statistical Yearbook of Azerbaijan, 1999.

Reference table 4

Production of energy(m tonnes unless otherwise indicated)

1995 1996 1997 1998a 1999

Total oil production 9.2 9.1 9.1 11.4 13.8 SOCAR 9.2 9.1 9.1 9.1 9.0 AIOC 0 0 0b 2.4 4.8 of which: offshore oil production 7.4 7.7 7.5 9.7 12.3

Total oil production (‘000 b/d) 184.5 182.5 182.5 229.0 276.8

Gas production (bn cu metres) 6.6 6.3 6.0 5.6 6.0 SOCAR 6.6 6.3 6.0 5.2 5.8 AIOC 0.0 0.0 0.0b 0.4 0.2 of which: offshore gas production 6.4 6.1 5.7 5.3 5.4

Refined oil 8.9 8.7 8.6 8.3 7.9

Diesel 2.2 2.1 2.1 2.0 1.9

Petrol 1.0 1.0 1.1 0.6 0.4

Fuel oil 4.4 4.0 3.8 4.0 3.9

Lubricants 0.1 0.1 0.1 0.1 0.1

Electricity (bn kwh) 17.0 17.0 16.8 18.0 18.1

Thermal energy (m kcal) 9.9 5.0 3.3 n/a n/a

a Statistical Yearbook of Azerbaijan, 1999. b AIOC produced small quantities of oil and gas in 1997,when its output began.

Sources: SOCAR; Turan news agency; Profile Analytical Centre, Baku; IMF, Azerbaijan Republic: Recent Economic Developments, 1998;Azerbaijan Republic: Selected Issues, 1999; TACIS, Azerbaijan Economic Trends; State Statistical Committee, Statistical Yearbook ofAzerbaijan, 1999.

40 Azerbaijan


Reference table 5

Gross domestic product

1995 1996 1997 1998 1999

TotalAt current prices (Manat bn) 10,669 13,663 15,791 15,930 16,489US$ ma (market exchange rate) 2,417 3,177 3,962 4,117 4,002Real change (%) –11.8 1.3 5.8 10.0 7.2

Per headAt current prices (Manat ‘000) 1,388 1,760 2,015 2,014 2,061US$a (market exchange rate) 315 409 506 521 500Real changea (%) –12.8 0.3 4.8 9.0 6.0

a EIU calculations.

Sources: State Statistical Committee, Statistical Yearbook of Azerbaijan, 1999; TACIS, Azerbaijan Economic Trends; EIU calculations.

Reference table 6

Gross domestic product by sector(% of GDP; current prices)

1995 1996 1997 1998 1999

Industry 27.3 25.9 25.2 25.2 23.6

Agriculture 25.1 24.7 20.0 20.6 21.7

Construction 3.7 9.3 11.7 10.5 9.4

Transport & communications 17.4 10.2 10.5 14.3 14.4

Trade 4.8 5.2 5.8 5.1 5.1

Others 14.0 14.6 19.5 17.6 18.8

Indirect taxes 7.7 10.1 7.4 6.7 7.0


Reference table 7

Gross domestic product by expenditure(Manat bn; current prices; % of total in brackets)

1995 1996 1997 1998 1999

Private consumption 9,250 12,189 12,181 13,408 14,785a

(86.7) (89.2) (77.1) (84.2) (89.6)

Government consumption 1,121 1,427 1,862 1,753 n/a (10.5) (10.4) (11.8) (11.0) n/a

Gross fixed investment 1,664 3,976 6,001 6,467 4,983 (15.6) (29.1) (38.0) (40.6) (30.2)

Stockbuildingb 864 311 –462 –223 –385 (8.1) (2.3) (–2.9) (–1.4) (–2.3)

Exports of goods & services 3,463 3,410 4,583 3,905 5,615 (32.5) (25.0) (29.0) (24.5) (34.1)

Imports of goods & services –5,694 –7,650 –8,374 –9,381 –8,509 (53.4) (56.0) (53.0) (58.9) (51.6)

GDP 10,669 13,663 15,791 15,930 16,489

a Total consumption (private and government). b Stockbuilding and statistical discrepancy.

Sources: World Bank; TACIS, Azerbaijan Economic Trends.

Azerbaijan 41


Reference table 8

Prices and earnings(av; % change, year on year)

1995 1996 1997 1998 1999

Consumer prices 411.8 19.8 3.7 –0.8 –8.5

Industrial producer prices 1,734.0 98.0 11.8 –12.4 –6.1

Nominal wages 298.9 45.3 64.8 19.5 9.0

Real wages –30.6 22.5 59.3 20.4 20.2

Sources: TACIS, Azerbaijan Economic Trends; State Statistical Committee, Statistical Yearbook of Azerbaijan, 1997; IMF, AzerbaijanRepublic: Recent Economic Developments, 1998; Azerbaijan Republic: Selected Issues, 1999.

Reference table 9

Government finances(Manat bn; % of GDP in brackets)

1995 1996 1997 1998 1999

Revenue 1,584.7 2,012.9 2,565.2 2,327.3 2,797.6 (14.9) (14.7) (16.2) (14.4) (17.0)

Tax revenue 1,154.5 1,857.2 2,321.3 2,096.7 2,400.2 (10.8) (13.6) (14.7) (13.0) (14.6)

Income tax 114.0 206.4 313.2 411.9 448.3 (1.1) (1.5) (2.0) (2.5) (2.7)

Profit tax 431.6 610.2 439.4 341.1 367.8 (4.0) (4.5) (2.8) (2.1) (2.2)

Land & property tax 9.0 9.5 36.6 48.1 91.3 (0.1) (0.1) (0.2) (0.3) (0.6)

VAT 152.8 317.6 589.6 719.2 790.6 (1.4) (2.3) (3.7) (4.4) (4.8)

Excises 88.6 198.3 226.6 95.8 114.4 (0.8) (1.5) (1.4) (0.6) (0.7)

Royalties 0.0 41.6 331.1 174.3 179.6 (0.0) (0.3) (2.1) (1.1) (1.1)

Customs 232.4 396.0 338.5 283.9 314.0 (2.2) (2.9) (2.1) (1.8) (1.9)

Other taxes 126.1 77.6 46.3 22.5 94.2 (1.2) (0.6) (0.3) (0.1) (0.6)

Non-tax revenue & transfers 430.2 155.7 243.9 230.6 397.4 (4.0) (0.8) (1.5) (1.4) (2.4)

continued

42 Azerbaijan


1995 1996 1997 1998 1999

Expenditure incl net lending 2,141.8 2,409.4 2,943.6 2,641.7 3,257.2 (20.1) (17.6) (18.6) (16.3) (19.8)

State services 134.4 133.8 206.0 196.4 253.2 (1.3) (1.0) (1.3) (1.2) (1.5)

Defence 247.8 304.7 353.3 375.9 435.4 (2.3) (2.2) (2.2) (2.3) (2.6)

Justice & security 203.0 210.9 255.3 288.5 344.4 (1.9) (1.5) (1.6) (1.8) (2.1)

Education 375.8 509.0 564.0 581.5 795.1 (3.5) (3.7) (3.6) (3.6) (4.8)

Healthcare 148.3 200.6 193.8 155.4 186.2 (1.4) (1.5) (1.2) (1.0) (1.1)

Social security 182.6 352.8 524.0 614.7 603.9 (1.7) (2.6) (3.3) (3.8) (3.7)

Culture, art etc 48.9 64.1 78.7 79.2 89.1 (0.5) (0.5) (0.5) (0.5) (0.5)

Economy & infrastructure 183.7 296.6 326.7 201.3 252.8 (1.7) (2.2) (2.1) (1.2) (1.5)

Payments for domestic debt 161.0 83.0 15.7 11.0 31.2 (1.5) (0.6) (0.1) (0.1) (0.2)

Payments for external debt 16.9 44.2 229.7 5.7 22.3 (0.2) (0.3) (1.5) (0.0) (0.1)

Other expenditure 439.4 209.7 196.4 132.1 243.6 (4.1) (1.5) (1.2) (0.8) (1.5)

Fiscal balance –557.1 –396.5 –378.4 –314.4 –459.6 (–5.2) (–2.9) (–2.4) (–1.9) (–2.8)

Source: TACIS, Azerbaijan Economic Trends

Reference table 10

Money supply and credit(Manat bn unless otherwise indicated; end-period)

1995 1996 1997 1998 1999

Domestic credit 1,338.7 1,780.1 2,046.2 2,152.4 1,952.8

Money (M1) 858.4 1,119.7 1,524.1 1,134.5 1,357.4

Broad money (M3) 1,313.9 1,538.5 2,175.9 1,797.0 2,183.4

Memorandum items (% change, year on year):Domestic credit 61.3 33.0 15.0 5.2 –9.3Money (M1) 130.5 30.4 36.1 –25.6 19.7Broad money (M3) 25.4 17.1 41.4 –17.4 21.5

Note. M1 is cash in circulation (M0) plus demand deposits of firms and households. M2 is M1 plus time deposits of firms and households. M3 isM2 plus the foreign-currency deposits of firms and households.

Sources: IMF, International Financial Statistics; EIU calculations for percentage change.

Azerbaijan 43


Reference table 11

Production of major crops(‘000 tonnes unless otherwise indicated)

1995 1996 1997 1998 1999

Grain 921.4 1,018.3 1,127.1 947.1 1,098.3

Cotton (raw) 274.1 274.4 124.6 112.6 96.8

Tobacco 11.7 11.2 15.1 15.2 8.6

Potatoes 155.5 214.6 223.4 310.0 394.1

Other vegetables 424.1 570.0 495.4 502.6 670.8

Grapes 308.7 275.0 145.3 144.0 n/a

Melons & gourds 41.9 52.1 57.1 78.8 202.9a

Fruits, berries 324.4 321.2 330.9 390.6 394.4a

Tea 9.4 3.0 1.6 0.9 2.7

Gross agricultural output (% real change) –6.8 3.1 –6.9 3.9 7.1

a January-November.

Sources: State Statistical Committee, Statistical Yearbook, 1999; IMF, Azerbaijan: Selected Issues, 1999; TACIS, AzerbaijanEconomic Trends.

Reference table 12

Yields of major crops(tonnes/ha)

1994 1995 1996 1997 1998

Grain 1.63 1.51 1.63 1.74 1.62

Cotton (raw) 1.32 1.30 1.29 0.60 0.73

Tobacco 1.97 1.46 1.41 1.91 1.78

Potatoes 8.30 9.70 10.10 8.27 9.53

Other vegetables 15.40 15.70 17.80 15.63 14.01

Melons & gourds 7.11 7.30 7.10 7.87 6.76

Grapes 2.98 3.26 3.47 2.22 3.23

Fruits, berries 3.05 3.12 3.85 4.20 5.47

Tea 2.00 1.03 0.39 0.23 0.13

Sources: State Statistical Committee, Statistical Yearbook, 1999; TACIS, Azerbaijan Economic Trends.

Reference table 13

Livestock numbers(‘000 head; year-end)

1994 1995 1996 1997 1998

Cattle 1,632.8 1,681.7 1,779.9 1,843.5 1,909.8

Pigs 33.4 30.4 23.4 21.0 26.1

Sheep 4,557.6 4,644.4 4.922.0 5,267.0 5,511.9

Poultry 13,100 12,400 11,400 12,800 13,200

Source: State Statistical Committee, Statistical Yearbook, 1999.

44 Azerbaijan


Reference table 14

Livestock output(‘000 tonnes unless otherwise indicated)

1995 1996 1997 1998 1999

Meat 82.0 85.7 90.5 99.9 104.5

Milk 826.5 843.3 881.2 946.5 991.0

Eggs (m) 455.8 477.3 491.6 507.0 524.8

Wool 9.0 9.1 9.5 10.3 11.0

Sources: State Statistical Committee, Statistical Yearbook, 1999; TACIS, Azerbaijan Economic Trends.

Reference table 15

Industrial production(physical volumes of production; % change, year on year)

1995 1996 1997 1998 1999

Total industrial production –21.4 –6.7 0.2 2.2 3.6 of which: fuel industry –6.0 –1.6 0.2 7.5 7.0 electricity –6.1 –3.6 –6.6 5.9 1.5 metallurgy –46.9 –75.6 361.9 –54.6 61.3 of which: ferrous metals –61.6 –72.8 430.3 –70.6 –84.6 non-ferrous metals –33.8 –77.4 262.4 –35.1 81.7 machine-building –45.8 –18 –0.5 –30.4 –55.7 chemicals & petrochemicals -15.1 25 –28.2 –11.4 8.9 lumber & paper –76.9 –1.1 7.3 –64.5 –21.1 construction materials –63 –4.1 –4.3 –22.4 –21.6 light industry –11.8 –40.6 –16.5 –41.8 –40.6 food industry –45.1 –34.9 –6.5 –2.3 3.9

Sources: IMF, Azerbaijan Republic: Recent Economic Developments, 1998; IMF, Azerbaijan Republic: Selected Issues, 1999; TACIS,Azerbaijan Economic Trends.

Reference table 16

Industrial production of selected items

1994 1995 1996 1997 1998

Steel pipes (‘000 tonnes) 31.0 9.9 3.1 13.0 3.1

Pots & pans (‘000 units) 135.0 19.0 4.0 2.0 3.0

Depth pumps (‘000 units) 29.2 23.8 15.0 15.7 14.8

Derricks for depth pumps (‘000 units) 35.0 0.5 0.0 17.7 4.3

Electrical motors (‘000 kw capacity) 834.0 512.0 339.0 416.0 222.0

Power transformers (‘000 kw capacity) 97.0 56.0 124.5 116.7 80.0

Refrigerators (‘000 units) 97.0 25.0 6.8 0.1 3.4

Air conditioners (‘000 units) 119.0 64.0 78.8 36.5 9.6

Buses (units) 201.0 9.0 2.0 40.0 29.0

Prefab concrete structures (‘000 cu metres) 249.9 90.5 113.4 47.0 50.3

Bricks (m) 498.0 161.0 117.0 82.8 95.7

Mineral fertilisers (‘000 tonnes) 5.0 1.9 1.9 5.4 0.6


Azerbaijan 45


Reference table 17

Banking statistics(manat bn; year-end)

1995 1996 1997 1998 1999

Assets 2,590.32 2,793.90 2,977.57 2,801.38 3,195.13 Reserves 303.17 242.76 301.94 204.07 177.85 Foreign assets 744.55 639.97 600.62 378.37 665.95 Claims on general government 12.49 32.03 52.69 30.04 69.44 Claims on public enterprises 1,403.59 1,719.82 1,635.51 1,658.84 1,722.20 Claims on private sector 126.52 159.32 386.81 530.06 559.69

Liabilities 2,590.32 2,793.89 2,977.60 2,801.38 3,195.13 Demand deposits 251.29 250.08 323.80 203.02 215.83 Time, savings & foreign-currency deposits 455.53 418.73 651.71 662.47 826.07 General government deposits 98.20 222.31 30.20 82.23 84.95 Foreign liabilities 150.75 311.00 206.69 218.15 303.46 Credit from monetary authorities 893.23 782.36 838.02 615.87 592.89 Liabilities to non-bank financial institutions 2.84 7.44 6.84 5.55 2.17 Capital accounts 355.30 640.98 831.83 1,020.01 1,152.11 Other items (net) 383.18 160.99 88.51 –5.92 17.67

Note: Assets and liabilities totals do not match because of minor statistical discrepancies.

Source: IMF, International Financial Statistics.

Reference table 18

Exports by valuea

(US$ m; fob)

1995 1996 1997 1998 1999

Total exports 637.2 631.2 781.3 606.2 928.6 of which: oil products 371.9 419.1 480.1 392.9 704.4 food products 38.5 28.6 55.3 46.7 60.2 machinery & equipment 39.4 43.7 37.4 33.4 34.7 metals 17.5 6.1 15.3 13.4 24.7 chemicals & petrochemicals 19.6 20.8 18.3 11.3 22.8 cotton 116.8 58.7 123.3 47.2 21.7 plastics 13.6 26.7 22.5 12.0 13.1

a Figures are customs data and differ from those used in the balance of payments, mainly becausethey do not fully take into account transactions by Western oil consortia.

Sources: TACIS, Azerbaijan Economic Trends; IMF, Azerbaijan: Recent Economic Developments, 1998.

46 Azerbaijan


Reference table 19

Exports by percentagea

(% of total: fob)

1995 1996 1997 1998 1999

Oil products 58.4 66.4 61.4 64.8 75.9

Non-oil products 41.6 33.6 38.6 36.2 24.1 of which: cotton 18.3 9.3 15.8 8.1 2.3 food products 6.0 4.5 7.1 7.7 6.5 machinery & equipment 6.2 6.9 4.8 5.5 3.7 plastics 2.1 4.2 2.9 2.0 1.4 chemicals & petrochemicals 3.1 3.3 2.3 1.9 2.5 metals 2.8 1.0 2.0 2.2 2.7


Sources: TACIS, Azerbaijan Economic Trends; IMF, Azerbaijan: Recent Economic Developments, 1998.

Reference table 20

Imports by valuea

(US$ m; fob)

1995 1996 1997 1998 1999

Total imports 667.7 960.6 794.3 1,077.2 1,033.5 of which: machinery & equipment 82.9 184.0 169.3 348.4 342.2 food products 277.1 381.7 180.7 175.3 207.5 metals 42.0 86.8 109.4 129.7 111.1 transport, aircraft & water facilities 36.6 41.9 49.9 87.1 90.4 chemicals & petrochemicals 61.3 61.1 55.8 79.4 57.6 petroleum products 88.1 43.4 79.2 27.9 20.8 plastics 11.6 30.0 22.9 24.0 17.7 paper pulp 15.2 34.2 27.4 16.1 9.5



Azerbaijan 47


Reference table 21

Imports by percentagea

(% of total)

1995 1996 1997 1998 1999

Machinery & equipment 12.4 19.2 21.3 32.3 33.1

Food products 41.5 39.7 22.8 16.3 20.1

Metals 6.3 9.0 13.8 12.0 10.8

Transport, aircraft & water facilities 5.5 4.4 6.3 8.1 8.7

Chemicals & petrochemicals 9.2 6.4 7.0 7.4 5.6

Petroleum products 13.2 4.5 10.0 2.6 2.0

Plastics 1.7 3.1 2.9 2.2 1.7

Paper pulp 2.3 3.6 3.4 1.5 0.9



Reference table 22

Exports by destinationa

(% of total)

1995 1996 1997 1998 1999

CIS total 44.7 46.0 48.4 38.3 22.7 of which: Russia 15.7 17.6 23.1 17.5 8.9 Georgia 7.1 14.5 17.1 12.7 7.7 Ukraine 5.3 3.5 4.1 2.0 2.6 Turkmenistan 11.1 5.4 1.1 2.3 1.0 Kazakhstan 3.2 2.4 1.1 1.7 0.4

Non-CIS total 55.3 54.0 51.6 61.7 77.3 of which: Italy 4.2 1.6 4.2 7.4 33.7 Turkey 4.2 6.2 5.3 22.4 7.4 US 0.2 0.3 0.3 2.3 3.2 Iran 29.2 35.8 24.3 7.3 2.4 Greece 1.6 1.5 1.8 2.0 1.4 Sweden n/a 2.9 3.3 0.9 0.0



48 Azerbaijan


Reference table 23

Imports by country of origina

(% of total)

1995 1996 1997 1998 1999

CIS total 34.2 35.4 44.2 37.6 31.4 of which: Russia 13.2 16.5 19.1 18.0 21.9 Ukraine 5.0 9.8 10.8 8.6 3.7 Kazakhstan 2.6 2.0 3.7 4.1 2.4 Georgia 2.8 2.9 4.6 2.3 0.9 Turkmenistan 7.7 1.5 3.2 2.4 1.2

Non-CIS total 65.8 64.6 55.8 62.4 68.6 of which: Turkey 21.0 22.5 22.6 20.4 13.8 US 2.0 1.8 2.8 3.7 8.0 UK 1.4 1.5 1.8 6.4 6.5 Japan 0.2 0.3 0.1 0.0 5.4 Iran 12.0 6.9 6.1 4.0 4.6 Germany 6.6 8.0 4.9 4.3 4.5 UAE 10.3 11.3 5.3 4.2 1.2



Reference table 24

Balance of payments, IMF estimates(US$ m unless otherwise indicated)

1995 1996 1997 1998 1999a

Exports fob 612.3 643.7 808.3 677.8 1,025.2 of which: oil products 257.0 402.0 448.0 434.0 704.4

Imports fob –985.4 –1,337.6 –1,375.2 –1,723.9 –1,433.4 of which: oil sector –30.0 –213.0 –256.0 –355.7 –194.9

Trade balance –373.1 –693.9 –566.9 –1,046.2 –408.2

Services: credits 172.4 149.3 341.8 331.7 256.8

Services: debits –304.6 –440.9 –726.0 –700.8 –485.1 of which: oil sector –68.0 –166.0 –321.0 –286.2 –189.2

Services balance –132.2 –291.6 –384.2 –369.1 –228.3

Income balance –6.1 –12.1 –9.5 –13.3 –45.0

Services & income balance –138.3 –303.7 –393.7 –382.4 – 273.3

Current transfers (net) 110.8 66.5 44.8 64.1 81.8

Current-account balance –400.7 –931.2 –915.8 –1,364.5 –599.7

continued

Azerbaijan 49


1995 1996 1997 1998 1999

Foreign direct investment (net) 330.1 627.3 1,114.8 1,023.0 510.3 of which: oil sector 175.5 452.9 844.3 831.7 349.2 of which: oil contract signature bonus payments 175.3 36.6 64.2 74.7 155.0

Portfolio investment (net) n/a 0.0 1.1 0.4 n/a

Loans (net) 10.1 –110.4 57.3 136.3 –111.0 of which: disbursements –19.6 –136.9 5.3 62.4 –44.0 amortisation 29.7 26.5 52.0 73.9 –67.0

Other capital flows (net) 61.8 305.7 –81.1 166.4 429.1

Capital & financial account balance 402.0 822.5 1,092.1 1,325.3 828.4b

Net errors & omissions 59.7 23.6 –27.0 –20.1 0.0

Overall balance 57.8 –85.0 139.2 –59.2 228.5 Changes in gross reserves (– indicates increase) –161.6 7.1 –244.2 18.7 –228.5 IMF credit 103.8 77.9 105.0 40.5 n/a Arrears 0.0 0.0 0.0 0.0 0.0

Memorandum items (% of GDP)Current-account balance –16.6 –29.3 –23.8 –33.1 –15.0 Exports 25.3 20.3 21.0 16.5 25.6 Imports –40.8 –42.1 –35.7 –41.9 –35.8 FDI 13.7 19.7 28.9 24.8 8.9 FDI into the oil sector 10.4 15.3 21.9 18.4 4.8

Note. Totals may not sum owing to rounding.a Azerbaijan Economic Trends figures, with the capital and financial account total recalculated. b Azerbaijan Economic Trends total is US$599.7m.

Sources: IMF, International Financial Statistics; Azerbaijan Republic: Recent Economic Developments, 1998; Azerbaijan Republic: Selected Issues, 1998; TACIS, Azerbaijan Economic Trends.

Reference table 25

External debt, World Bank series(US$ m unless otherwise indicated; debt stocks as at year-end)

1994 1995 1996 1997 1998

Public medium- & long-term 103 206 248 236 308

Private medium- & long-term 0 0 0 0 63

Total medium- & long-term debt 103 206 248 236 371 Official creditors 103 206 248 228 302 Bilateral 95 107 110 76 103 Multilateral 8 99 138 152 199 Private creditors 0 0 0 8 68

Short-term debt 10 14 16 4 2 of which: interest arrears 4 6 3 0 0

Use of IMF credit 0 101 175 267 321

Total external debt 113 321 438 507 693

continued

50 Azerbaijan


1994 1995 1996 1997 1998

Principal repayments 0 0 0 58 3

Interest payments 0 10 10 20 21 of which: short-term debt 0 0 1 1 0

Total debt service 0 10 10 78 24

Ratios (%)Total external debt/GDP 3.4 11.1 13.8 14.0 16.9Debt-service ratio, paida 0.0 1.3 1.2 6.6 2.3

Note. Long-term debt is defined as having original maturity of more than one year.a Debt service as a percentage of earnings from exports of goods and services.

Source: World Bank, Global Development Finance.

Reference table 26

Foreign reserves(US$ m unless otherwise indicated; end-period)

1995 1996 1997 1998 1999

Total international reserves excl gold 120.9 211.3 466.1 447.3 672.6

Golda 0.00 0.00 0.00 0.00 0.00

Total reserves incl gold 121.9 211.3 466.1 447.3 673.6

Memorandum itemsGoldb – 2 1 1 –Gold (m fine troy oz) 0 0 0 0 0

a Valued at 75% of the fourth-quarter London price. b National valuation.


Reference table 27

Exchange rates(Manat per unit of currency unless otherwise indicated; annual averages)

1995 1996 1997 1998 1999

US$ 4,413.5 4,301.3 3,985.4 3,869.0 4,121.2

£ 6,965.1 6,710.7 6,524.5 6,407.5 6,668.0

Rb 968.05 839.96 688.94 398.66 167.39


Editor: Veronica KalemaAll queries: Tel: (44.20) 7830 1007 E-mail: [email protected]

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