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Informal Politics in : Corruption and Rent-Seeking Patterns By Hannes Meissner, Hamburg Abstract In Azerbaijan, post-Soviet clientelist networks, united under the rule of the president’s family, largely deter- mine the patterns of corruption and rent-seeking. This article sheds light on how these networks operate.

Introduction bers of the Nomenklatura privatized official positions International indexes list Azerbaijan as one of the most and material goods in order to hand them down to their corrupt countries in the world. The 2010 Transparency clientele in exchange for loyalty. As a result, politics— International Corruption Perceptions Index ranks the the distribution of power in practical terms—no longer country 134 out of the 178 states that it tracks. The fact involved society as a whole but focused on promoting that Azerbaijan shares this ranking with countries like the specific interests of a personal network. These infor- Nigeria, Sierra Leone, Zimbabwe and Togo demonstrates mal networks had a pyramid structure because subordi- the extremely high level of corruption even more clearly. nates set up their own clientelistic networks at lower levels. However, the index is based on perceptions and there- This system is characteristic of Azerbaijan. When fore does not say anything about the underlying corrup- Moscow appointed as Secretary General tion and rent-seeking patterns. of the Communist Party of Azerbaijan in 1969, his mis- This article sheds light on the corruption structures sion was to break the influence of clientelist networks in and practises officials frequently employ. Section one politics and administration. In fact, Aliyev immediately surveys the informal structure of the political system. began to purge the party and administrative apparatus, The pyramid of the various clientelist networks, united removing 80 percent of the staff. Nevertheless, he simi- under the president’s family, defines the patterns of cor- larly recruited new people according to local and personal ruption and rent-seeking. Considering this, the subse- criteria. Apart from his KGB colleagues, he mainly drew quent sections draw a distinction between corruption in on relatives and friends from his home region Nakhchi- general terms and corruption related specifically to the van and , where his parents resided. By doing country’s oil abundance. In this regard, section two anal- so, Aliyev became the unchallenged head of a patronage yses to what extent the ruling regime benefits from the network that pervaded the entire republic. As he incor- sale of public posts and money illegally demanded from porated elements of the traditional networks from both the population in exchange for public services. Section regions, the so-called -clan and the Yeraz-clan three sheds light on how members of the ruling elite sys- (“Yeraz” stands for “ ”) also gained tematically misuse their public positions to siphon off political influence. It is disputed to what extent these oil and gas revenues. This particular form of corruption groupings can be described as clans in the proper mean- (related to resource incomes) is generally characterized as ing of the word, since they do not share traditional com- “rent-seeking”. Since oil revenues are more or less trans- mon roots. They are rather patronage networks that are parent, this corruption takes place indirectly by embez- not deeply tied by cultural traditions. zling public investments carried out through the state Aliyev had come to office as a reformer. However, budget, the state oil fund (“SOFAR”) and the state oil in the national press that enjoyed more liberties than company (“SOCAR”). before, Aliyev soon became a synonym for corruption and the abuse of power. The rule of clientelist networks Post-Soviet Clientelism and Corruption in combination with the republic’s oil abundance gave It is distinctive for peripheral Soviet successor states that Azerbaijan one of the highest corruption rankings in the clientelist networks, tracing back to Soviet and pre-Soviet Soviet Union. rule, exert a controlling power over the formal politi- When Aliyev regained political power in 1993 as pres- cal order. These clientelist networks are the basis for the ident, the old networks, among them the Nakhchivan- distribution of political and economic power. At the clan and the Yeraz-clan, expanded their monopoly power same time they determine the patterns of corruption over the entire economy, including the oil sector and the and rent-seeking. financial system. In some cases, the extent of this power Clientelism is a mutual relationship between a person was apparent, as when Heydar Aliyev appointed his son or group of persons higher ranked in the societal or polit- Ilham as vice president of SOCAR. Since SOCAR is the ical order and an entourage seeking protection and partic- key player in the Azerbaijani oil sector and the position ular advantages. In the Soviet Union, high-ranked mem- of vice president is the most influential one within the CAUCASUS ANALYTICAL DIGEST No. 24, 11 February 2011 7

company, through this appointment, the Aliyev fam- He not only has an influential position within the ruling ily secured its control over state oil policy. The family YAP, but manages an extensive business grouping. For gained additional influence from the privatization pro- example, he possesses a majority share of the mobile tele- cess in general and the granting of licences in the course phone network Azercell. Consequently, he is regarded as of building up the national oil sector and the associated one of the most powerful persons in the country. Another transport system in particular. The low rates of economic key role is regularly attributed to Kamalladdin Haydarov, diversification inherited from Soviet times and the state Minister of Emergency Situations. He is a close friend control over the economy proved advantageous to the of and one of the richest oligarchs in the clientelist exertion of influence. country, not least due to his control over the cash flows In the following years the Aliyev family succeeded in of the tax authorities and the customs service. preserving its dominance, thanks to Heydar Aliyev’s asser- tiveness. Since his death in 2003, competition between General Corruption (Outside the Oil Sector) the clientelist networks has increased, although the Ali- To ensure a steady source of income, the ruling regime yev family still controls the informal system. While the draws on corrupt networks pervading the state and soci- new president Ilham Aliyev weakened the position of ety since Soviet times. As a result, the population is reg- the Yeraz-clan, the Aliyev family is now competing with ularly confronted with systemic corruption. Therefore it the -rooted Pashayev family of the president’s wife. is not surprising that corruption is generally perceived However, these competitions are never strong enough to as something extremely centralized, although notions lead to open struggles. The ruling clientelist networks are about who exactly is leading the corruption system vary. rather united by their common interest to preserve access It is also unclear, whether all the money accrues to one to oil rents by authoritarian means of rule. or a few individuals and whether a share of the money is Figuring out how members of the ruling elite con- redistributed (for example, to Nakhchivan). Despite dis- trol the economy is complicated by the fact that com- agreement over the ultimate beneficiaries, there is gen- panies are not listed publicly, making it nearly impos- eral agreement about the nature of the system itself. As sible to prove ownership. Moreover, the companies are a member of a Western embassy in Baku told the author, often officially owned by people other than the elites it is most likely that sources of income open up at the themselves, but working in the elite’s interests. Overall, lowest levels of the pyramid even though these are not the division of the national economy reflects the infor- directly controlled by someone at the top. The money mal political power structure to a high degree. In this then flows upward. way, economic and political cooperation and rivalries It is generally acknowledged that a significant share are mutually dependent. Political Scientist Samuel Lus- of the money originates from the illegal sale of official sac points out that the political weakening of the Yeraz- posts in the administration, the army, the education sys- clan had first and foremost an economic component. tem, and numerous other bureaucracies. This specific When Rafiq Aliyev, a key figure of the Yeraz-clan, owned corruption pattern had already been practised in Soviet AzPetrol Holding, he had a dominant position within the times. The going rate is determined by an informal price Azerbaijani oil transportation network. In October 2005, list and varies depending on the rank within the pyra- Rafiq and his brother Farhad, who was then Minister of mid, going up to several hundred thousand dollars. As Economic Development, were arrested for allegedly pre- Lala Shevket, leader of the Liberal Party of Azerbaijan paring a coup attempt against Ilham Aliyev. In December pointed out, it is only possible to purchase posts at lower 2005, the Azerbaijani Economic Court transferred the stages. The balance of power at the top is not put at risk property of AzPetrol Holding to Ibrahim Mammadov, by what happens at the lower levels. who is a leading figure of the Kurdish-clan. Another lead- The purchaser acquires the opportunity to recoup his ing figure of the Yeraz-Klan, Rasul Guliyev, controlled or her investment and more by demanding illegal sums refineries in Baku and oversaw the refining and transport of money from the population in exchange for public of Turkmen oil flows. He was forced into exile in 1996, goods. Such bribes have one of two purposes. Either allegedly for having ambitions to seize power. people pay money in order to get their matters arranged Regarding the other clientelist networks, the Pashayev more quickly and more effectively, or to gain material family possesses a huge economic empire. Pashayev- advantages at the expense of others. Among the popu- Holding is engaged in a wide range of business activ- lation, a vast number of experiential reports circulate ities; first of all in the construction sector (Pashayev- on how officials ask for money, leading to public cyni- Inshaat) and the banking sector (Pasha Bank), but also in cism. For example, it is widely believed that a portion the insurance industry and the tourism sector. As for the of the money regularly collected from parents by teach- Aliyev family, Heydar Aliyev’s brother Jalal is a key player. ers is passed to the respective school director. From there, CAUCASUS ANALYTICAL DIGEST No. 24, 11 February 2011 8

portions of the money are said to flow further upwards, also the pilot country since it was the first to meet all of finally accruing to the minister of education and from EITI’s formal criteria. However, as independent experts there to the president and his family. However, there is and civil society representatives united in the Baku-based little evidence to trace the exact money flows. Accord- EITI-coalition complained to the author, the govern- ing to an Azerbaijani journalist, it might be possible that ment is misusing the EITI in order to improve its image this notion just refers back to the arguments of officials, to strengthen their power and to maximise their prof- who use it to legitimize their material demands. How- its, while pursuing their rent-seeking interests unrestrict- ever, an Azerbaijani businessman working in the con- edly on the expenditure side through public investments. struction sector confirmed that each entrepreneur needs To siphon off public finances, members of the ruling a protector within the pyramid of power who receives elite regularly accept tenders from construction compa- a share of the profits. Other examples point to taxmen nies that are more or less directly associated with them. and customs officers collecting money, shares of which Such companies are often founded just for that reason are then passed further upwards. during the tender process. The companies then embez- zle a huge portion of the public finances assigned to Rent-Seeking in the Oil Sector them. In this regard, rent-seeking practices follow a sim- In Azerbaijan, rent-seeking is embedded in the broader ple pattern that varies only in small details. First, signifi- context, since members of the ruling elite accumulate cant sums of money are transferred to the company. Sec- oil money in different ways. Very often, there is only a ond, the respective companies save money by producing blurry line between legal and illegal actions. On the one poor quality-work. As Himayat Rizvangizi, chair of the hand, the country’s oil executives are profit-seeking cap- Baku based NGO “Himayadar” noted, the booty is then italist entrepreneurs. On the other hand, they benefit divided up between the participating actors, drawing on from different forms of corruption. A illustrative exam- cash payments and dubious bank transfer mechanisms ple is an illegal business transaction that took place in in the process. Since expenditures are hardly transparent, the late nineties. According to Lussac, the key players little is publically known about the exact corruption rates, were three top managers of SOCAR, the Georgian Oil which in general depend on the situation and the actors Company and the “Azersun Holding,” a company owned engaged. Regarding the rent-seeking structure, Zhorab by a close friend of Heydar Aliyev. Under this scheme, Ismayil, chair of the Baku-based “Free Economic Cen- out of 100,000 barrels of oil, which were processed in ter” and member of the EITI-Coalition, identifies three a Baku refinery, only 60,000 barrels were declared. The crucial sites, in particular the state budget, the projects remaining 40,000 barrels were shipped and sold illegally implemented by the SOFAR, and the company expen- in Armenia and Georgia. ditures of SOCAR. However, such enrichment strategies only take place With regard to the state budget, rent-seeking is not on an occasional basis. What is more important is that limited to public construction projects, but it is definitely members of the ruling elite systematically misuse their centred there. There are several reasons for this. On the public positions to siphon off oil and gas revenues. The one hand, it is an easy and lucrative form of siphoning way this takes place in Azerbaijan is an open secret among money. According to Azerbaijani financial experts, 40 government representatives, local financial experts, West- percent of the over 13 billion U.S. dollar state budget of ern diplomats and businessmen. Two features are charac- 2009 was spent on public investment projects. On the teristic for the country context. First, since oil revenues other hand, various ministries benefit from the high allo- are more or less transparent, rent-seeking takes place cations, since they all run their own construction proj- indirectly, by embezzling public investments carried out ects. As an Azerbaijani journalist noted, in this regard, the through the state budget, the state oil fund and SOCAR. ministers run their ministry like absolute autonomous Second, the construction sector plays an important role. landlords. For example, Hamish Macdonald revealed in The fact that oil revenues are more or less transpar- a report broadcast on Al Jazeera in 2008 that the con- ent is due to the regime’s interest in promoting the coun- struction of the 80 million dollar five-storey complex of try as a reliable supplier on the world market in order the Baku international bus station was carried out by to attract more investment and maximise profits. At the “Baku 21st Century”, a company that apparently belongs international level, Ilham Aliyev claims that he is firmly to the Transport Minister. The same is true for AzVirt, committed to a transparent and accountable utilization a company that was contracted to build a 14-kilometer of Azerbaijan’s oil wealth to the benefit of the entire pop- road from the city of Baku to the airport. Aside from the ulation. Accordingly, Azerbaijan plays a prominent role in question of necessity—a new motorway to the airport the Extractive Industries Transparency Initiative (EITI). had just been finished—the construction cost 23 million The country is not only one of the EITI pioneers, but U.S. dollars for every kilometer, well above comparable CAUCASUS ANALYTICAL DIGEST No. 24, 11 February 2011 9

international prices. The government justifies these high that there is evidence that rent-seeking also takes place costs with compensation payments to residents, who had in acquisitions. In this regard, overpriced materials and to be relocated. However, the budgets do not reflect this. products are regularly purchased from persons and com- In contrast to this, the construction of a 22 kilometer panies that are close to the management. In other cases, stretch of motorway south of Baku that was funded by quantities were ordered that far exceeded the need. This the Worldbank cost 1.5 million U.S. dollars per kilometer. took place both with large scale purchases (pipeline facil- SOFAR was awarded the United Nations Public Ser- ities) and small (soap). According to Zhorab Ismayil, vice Award in the “Improving Transparency, Accountabil- the money is accumulated by persons in key positions ity and Responsiveness” Public Service Category in June within SOCAR and redirected upwards. In contrast, the 2007 in Vienna. However, while the revenues and expen- ties between SOCAR and multinational companies have ditures of SOFAR are indeed subject to a maximum of been kept free from corruption, most likely in order transparency, the same does not hold true for the manage- not to damage the company’s international reputation. ment of SOFAR financed projects carried out by contrac- According to Lussac, in the nineties, Heydar Aliyev even tors. In a report on the use of SOFAR funds to improve fired a high-ranked manager (Marat Manafov) who had the living conditions of refugees, the Azerbaijani jour- asked foreign companies for a bribe of between 50 and nalist Hijran Hamidova revealed precise details on how 360 million dollars for his team and him. and to what extent contracted construction companies saved money through poor quality work and how they Conclusion exceeded costs. In addition, the author published fixed As in other peripheral Soviet successor states, clientelist corruption rates which varied according to the contractor networks dating back to Soviet and pre-Soviet rule con- and subcontractor, as well as to the project stage. She fur- trol the formal political order of Azerbaijan and its entire ther stated that the legal and fiscal authorities were also economy. These networks also determine the patterns of engaged in the embezzlement of assigned funds, since corruption and rent-seeking. Such practises are, how- they asked for bribes to remain quiet about irregularities ever, embedded in a broader context, since members uncovered during inspections. Summing up, the journal- of the ruling elite accumulate money in different ways. ist determined that almost half of the allocations from Frequently, there is little distinction between legal and SOFAR were used for corrupt purposes. illegal actions. Much of the public sector is corrupt, as Rent-seeking practises at SOCAR have not yet been demonstrated by the sale of public posts and the illegal investigated to the same extent. Notwithstanding, sev- demands for money from the population in exchange for eral local NGOs have gained information based on infor- public services. Members of the ruling elite are rent-seek- mants within the company. Zhorab Ismayil claimed that ing, since they systematically misuse their public posi- the numerous social construction projects carried out by tions to siphon off oil and gas revenues. Since oil reve- SOCAR itself provide an opportunity for rent-seeking. nues are more or less transparent, such corruption takes This is affirmed by Mirvari Gahramanli. “In some cases, place indirectly when officials embezzle public invest- the construction costs are too high, while other proj- ments carried out through the state budget, the state ects exist only on paper”. Both experts further stated oil fund (SOFAR) and the state oil company (SOCAR).

About the Author Hannes Meissner is a PhD candidate at the University of Hamburg and the German Institute of Global and Area Stud- ies (GIGA). The subject of his thesis is the resource curse and the future of initiatives to enhance accountability and transparency over oil and gas revenues (EITI etc.). His case studies are Azerbaijan and Turkmenistan. This analysis was conducted in the framework of an international research project on “The Energy Sector and the Political Stability of Regimes in the Caspian Area: A Comparison of Kazakhstan and Azerbaijan”, funded by the Volks­wagen Foundation.

Related Internet Links • Public Finance Monitoring Center: http://www.pfmc.az/. • Oil Workers’ Rights Protection Organization: http://www.nhmt-az.org/ts_general/eng/index.php. • Samuel Lussac (2010): The State as a (Oil) Company? The Political Economy of Azerbaijan, in: garnet-eu.org,http:// www.garnet-eu.org/fileadmin/documents/working_papers/7410.pdf.