Download Azerbaijan: Oil dominates development on Caspian Sea

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Azerbaijan: Oil dominates development on Caspian Sea
March 10, 2008
Oil and natural gas are currently giving an enormous boost to economic growth. Expectations of a production
peak increase the necessity of diversifying the economy and tackling structural reforms.
Azerbaijan is an important player in the energy sector
Azerbaijan has long been one of the principal players in the energy sector: 0.6% of the world's proven oil reserves
are on Azerbaijani territory, which is comparable to the reserves of Angola or Norway. As regards natural gas
reserves, Azerbaijan accounts for 0.7% and is thus on par with the Netherlands but ranks behind Kazakhstan and
Norway, which each account for 1.7%.
Buoyant economic growth thanks to oil and gas
At 25%, Azerbaijan registered one of the world’s highest GDP growth rates last year. Besides this extremely high
rate of expansion, the energy price boom has pushed up fiscal revenues and the current account surplus. Both
external debt and public-sector debt are low. In line with the positive development of revenues from the oil sector,
foreign-exchange reserves have also risen to roughly USD 4 bn. Due to expansionary fiscal policy, however, the
budget surplus is only modest. However, the government’s generosity also has its drawbacks: 2007 saw inflation
double and reach 16.7% on average in year-over-year terms, following a moderate 3% at the beginning of the
millennium.
Structural reforms required to diversify economy
In 2006, the energy sector accounted for 85% of total exports and more than half of government revenues. As oil
output is currently forecast to reach its peak already in 2009/2010, economic diversification is urgently required for
the near future. However, both the country’s poorly developed financial sector - private-sector credit currently
comes to no more than 16% of GDP - and the difficult economic and legal frameworks are standing in the way of
diversification.
The latter aspect is also reflected in foreign investors’ behaviour: while about USD 5 bn has been invested in
Azerbaijan since 2004, more than two-thirds of this amount were swallowed by the oil sector but the rest of the
economy is still underrepresented. Whereas direct investment remains difficult, foreign trade is more dynamic:
Azerbaijan's exports grew by 70% in 2006, and imports have been up more than 20% per annum since 2004.
Major imported goods are machinery, plant and motor vehicles. Hence, Azerbaijan is an attractive sales market
for companies from these industries. For private investors, by contrast, there are hardly any investment
opportunities as yet: at 9% of GDP, equity market capitalisation is still very low and the bond market is
underdeveloped, too.
In 2007 Azerbaijan’s economic output came to roughly USD 30 bn and is thus comparable to Latvia or Kenya.
The country’s relatively low per-capita income was approximately USD 3,400 in 2007, or half of Russia’s
per-capita income. About one-third of the population of Azerbaijan is employed in agriculture which, despite its
high share in employment, only contributed 6% of GDP.
Political system concentrated on the president
In the centralised political system of Azerbaijan, which has been an officially independent state since 1991, all
political life is concentrated on the president. Since 2003 the highest office has been held by Ilham Aliev, who took
over from his father. The latter had ruled the country since 1993. The president, directly elected for a five-year
term, has such extensive powers that he dominates the other executive bodies as well as the legislative and
judiciary branches of power. President Aliev is expected to run for a second term in the presidential elections
scheduled for this year. The political opposition, which consists of numerous small parties critical of the
government, is fragmented, weakened by official measures and represented in parliament by a few delegates
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Talking Point
only. The balance of power is highly unlikely to shift in the foreseeable future. Only in 2013, at the end of
President Aliev’s second term in office, which according to the constitution must also be his last term, will the
situation become more exciting again.
Unresolved political conflict
International attention is repeatedly being drawn to the conflict between Armenia and Azerbaijan over
Nagorno-Karabakh. The conflict centres on an area of 4,400 square kilometres at the heart of Azerbaijan where
Armenians from the Persian and Ottoman Empire had been relocated in 1829, after the end of the second war
between Russia and Persia. The current conflict has been simmering since the end of World War I but only broke
out openly in war between Armenia and Azerbaijan following the collapse of the Soviet Union. Even though a
ceasefire is in place since 1994, the conflict has by no means been resolved as evidenced by last week’s
renewed eruption of fighting. In an interview with the Wall Street Journal only a few weeks ago Elmar
Mammadyarov, Azerbaijan's minister of foreign affairs, addressed the smouldering conflict. He said Azerbaijan
was prepared to grant Nagorno-Karabakh the largest degree of autonomy possible, but would not tolerate the
region's continuing occupation by Armenian troops. The fact that presidential elections are scheduled in
Azerbaijan for this year suggests there is little hope that an agreement on a compromise solution will occur in the
near future.
A longer version of this article was published in the Börsen-Zeitung on March 1, 2008.
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Thorsten Nestmann (+49) 69 9103-1894
Evelyn Moser
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