Foreigners normally tiptoe around Azerbaijan. They all want something from the country, be it in the field of energy or security. The EU wants Azerbaijani oil, gas and cooperation over building gas pipelines to Central Asia. The US and Israel value cooperation over Iran. Turkey has a strategic partnership with the country. Russia wants Azerbaijan not too align too closely with the US and to prolong the lease for the Russian radar station in Gabala. In its turn Azerbaijan is rarely a foreign policy demandeur. It has lots of oil money and a consolidated authoritarian regime which does not want to take lessons over foreign policy or lack of democracy at home.
Appearances can be deceptive
Money and a careful foreign policy between various great power interests made Azerbaijan the ultimate balancer and a fairly arrogant regional player. But the Azerbaijani system is more fragile than the country's foreign partners think. The foundations of that system are increasingly shaky for several reasons.
One key factor is decreasing oil production. Oil production peaked in 2010; it will go down by half by 2017 and two-thirds by 2019. The hope is that new gas reserves will make up for the difference in incomes. This might compensate the fall in revenues, but only partly and insufficiently. The problem is also compounded by pretty profligate spending and a lack of institutionalised rules on how to use the oil money. Other oil-producing countries like Russia or Kazakhstan are more disciplined in 'parking' oil money in reserve funds. These are needed for 'rainy days' as well as insulating national economies from inflationary pressures, excessive liquidity, Dutch disease [the apparent relationship between the increase in exploitation of natural resources and a decline in the manufacturing sector] and the volatility of oil prices.
Azerbaijan, though, is using much more of its oil money for current expenses: the country's oil reserve fund SOFAZ transfers half of its annual income to the state budget. Some of this money has been invested in the future – infrastructure, motorways, and scholarships for studies abroad. Some has been spent on barely productive vanity projects from fountains to posh palaces. But most of it seems to have been siphoned off. One estimate suggests that a kilometre of highway costs on average $18 mln in Azerbaijan, compared to $5.9 million in the US, $6.9 mln in the EU, $2.2 mln in China, $17.6 mln in Russia.
Politics and the economy
With the shaky foundations of the status quo, Azerbaijan does not have much time to diversify its economy. But it is not apparently doing much. The country's elite has been for years in a comfortable, but corrosive equilibrium. The economy is riddled with monopolies and cartels with various highly ranked officials and their families controlling different sectors of the economy – from the import of bananas to road building. Unsurprisingly, the prices in the country are very high for everything, since they are pushed up by both cartels and currency appreciation stemming from an excessive inflow of oil money.
Politically, the situation is not totally unhealthy, but less and less so. From 1969 until 2003 Azerbaijan's political life was (on and off) dominated by Heydar Aliev, once a KGB boss, then first Communist party secretary, then president of independent Azerbaijan. His son, Ilham Aliev inherited the post in 2003. But local experts say that whereas Heydar Aliev, for all (or perhaps due to) his Soviet background was primarily a 'statesman', the current president is primarily a 'businessman'. Under him the elite’s corrupt money-making has morphed from a side-benefit and instrument of governance into the raison d'être of government.
Negative political trends are plenty, among them the removal of constitutional limits on the number of presidential terms, the jailing of bloggers and the denial of visas to Council of Europe rapporteurs. This is matched by a sleazy 'caviar diplomacy' offensive among the European political elite, as outlined in a recent report by the European Stability Initiative. Perhaps not hugely important, but indicative of the political climate and trends in the country, has been the toughening of visa requirements for EU and US citizens (who until a few years ago could receive visas on arrival at the airport, but not any more). A side-story of that is the surprising situation when Azerbaijan's most strategic of all partners, Turkey, has a visa-free travel regime with countries ranging from Morocco to Kazakhstan, and from Serbia to Syria (and soon with Russia and Ukraine), but not with Azerbaijan.
For all the complications of Azerbaijan's political and economic situation, the country is not only strategically important but also has great potential. It is not just some oil-cursed sultanate. Its elite is autocratic and corrupt, but is in a different league from the bloody or bizarre dictators of Central Asia. Azerbaijan is in many ways stuck somewhere in between resource-rich countries that made it, and those that didn't; halfway, as it were, between Dubai, Bahrain or Qatar one the one hand, and Angola or Nigeria on the other. Azerbaijan ranks (place 66 in the world) above Croatia, Romania and Turkey in the cost of doing business, but is behind Armenia and Kazakhstan. Its global competitiveness index (place 55) is better than that of Slovakia, Bulgaria, or Serbia, but lags behind Oman, Tunisia or Sri-Lanka. Azerbaijan has still a lot to improve, but its starting point is not too bad.
The way forward
Fundamentally, Azerbaijan faces a huge contradiction between the entrenched interests of the elite and the need to build a post-oil economy. For that it needs to open up. Its economy, its borders and its political system. Joining the World Trade Organisation and then signing a deep and comprehensive free trade agreement (DCFTA) with the EU should be the country's next priorities. It could also present a more open face to the world by abolishing visas for the citizens of Turkey, EU and US citizens at least.
It does not have much time to waste, nor much money to pour down the thirsty throats of so many corrupt vested interests. Ultimately, its president has to decide whether he wants his cronies to continue enjoying monopolistic rents and ballooning bank accounts, or to sacrifice some of their incomes for the sake of actually developing a post-oil economy. In the end it is not just the future of Azerbaijan that depends on this, but also that of the ruling family which might be too weak to survive a rapid contraction of oil revenues.
The European Council on Foreign Relations does not take collective positions. ECFR publications only represent the views of their individual authors.