AZERBAIJAN FINANCIAL TIMES SPECIAL REPORT | Friday January 25 2008 www.ft.com/azerbaijan2008 Oil wealth has been a mixed blessing The country stands ested in making economic suc- exchange rate. We will manage it cess Ð not just in oil Ð the back- well and invest it, so there is at a crossroads, ground for his election victory”. long-term economic growth.” report Leyla Boulton Western diplomats and local Greater wealth, however, officials say that Mr Aliyev, who weakens incentives for an and Isabel Gorst succeeded his late father, Hey- authoritarian regime to liberalise dar, a former Soviet politburo the economy and society, in zerbaijan, the newest member, in 2003, understands the sharp contrast with Azerbaijan’s supplier of oil and gas to dangers of oil wealth. poorer neighbour, Georgia. Europe, faces an historic The question is whether this “The crucial difference is that choice. It either escapes former deputy head of Socar, the Georgia doesn’t have Azerbai- Aor succumbs to the “oil curse”, national oil company, can act on jan’s money,” says the senior the combination of corrupt gov- the lessons of the past. western diplomat. ernment and lopsided economic “The good news is that the “With this money the Azerbai- development that afflicts many president understands the histor- janis have become more confi- oil producers. ical lessons, but intention is one dent. They have a much stronger This year is decisive, because state, and they have the means what is already the world’s fast- to buy off critics who are sound- est-growing economy expects a Wealth weakens the ing early warnings. The hard- record inflow of petro-dollars core opposition, meanwhile, is from high oil prices, increasing incentives for an left out in the cold, along with production, and a bigger share of authoritarian regime anybody from Azerbaijani society profits from revenue-sharing or business who might get in arrangements with BP, the Brit- to liberalise the touch with them.” ish energy group. Oil revenues economy and society Lacking Azerbaijan’s oil this year, according to one senior income, Georgia’s president western diplomat in Baku, could Mikheil Saakashvili has pushed reach $30bn. through radical reforms to Ilham Aliyev, the country’s thing and success is another,” simpify taxation, boost state rev- president, is expected to win a Matt Bryza, US deputy assistant enues and reduce red tape. second five-year term in elections secretary of state, said on a visit “It is easier to do reforms in in October, with little challenge to Baku last week. Georgia because in Azerbaijan from a weak and repressed oppo- “We have our own strategy for you have a lot of powerful sition. using our money,” maintains groups,” says one Azerbaijani “The mass of money that is Elman Rustamov, the central businessman, referring to local flowing into the country is not bank governor, who is one of a monopolies that dominate the just an asset but a challenge that handful of western-oriented tech- economy and have ties to offi- we have to manage,” acknowl- nocrats in charge of the econ- cials. “Our president can’t just edges Araz Azimov, a senior gov- omy. “We do not intend to spend come in and say ‘I’m firing every- ernment official who says the it quickly. That would be infla- one’. That is why we need to do 46-year-old president “is inter- tionary and put pressure on the things step by step.” Azerbaijan’s best hope for now lies in talented modernisers put Inside this issue in government by the president, Politics This year sees a services are in urgent need of but they have to operate within presidential election, but there repair Page 3 the confines of a distinctly Byz- are continuing worries about antine system. the democracy deficit and Foreign affairs The `frozen “This second generation [of levels of corruption amid fears conflict' with Armenia over the leaders] wants to modernise but Derricks cluster in the Caspian Sea just off Baku. The country is trying to use the good times to modernise and diversify the economy AP that stability has come at disputed enclave of Nagorno it has its limitations,” explains the expense of freedom Karabakh is Azerbaijan's one observer. “There is a deliber- fight corruption, although few for company registration. “You according to International Finan- says Gregory Jedrzejczak, the Page 2 greatest foreign policy ate vagueness built into the sys- believe this will make much dif- can now establish a legal entity cial Reporting Standards (IFRS) World Bank’s country manager challenge as it displays tem to stop anyone from gather- ference in a country where, to in three days,” says Rashad where they have not already in Baku. He notes that while Infrastructure The greater confidence on ing too much strength,” observes quote one businessman, “corrup- Rasullu, deputy general secretary done so. Ilgar Veliyev, managing other oil producers such as Rus- country wants to be a the world stage Page 4 one western official. tion is everywhere, so many peo- of the Azerbaijan-Turkey Busi- partner at Ernst & Young in sia and Kazakhstan fell back in transit hub between In an important first step ple have to change their atti- nessmen’s Association, whose Azerbaijan, also detects a sharp the World Bank’s rankings last east and west for road towards transparency, the coun- tudes”. More tangibly, President members include some of the increase in the number of compa- year on the ease of doing busi- and rail traffic and try in 2003 embraced a UK-spon- Aliyev instructed his officials to country’s most active foreign nies seeking to have their ness around the world, Azerbai- for oil and gas sored initiative requiring energy make the country more attrac- investors. “Previously, it could accounts audited. jan rose, albeit by one place. pipelines, but President Ilham producers to publish their oil tive to investors, particularly in take four to six months.” “Now the incentive for reform Much more remains to be done its own revenues. the non-oil sector. A new accountancy law is much weaker, you have to give on the economy Ð as the govern- basic Aliyev More recently, President Ali- As a result, Azerbaijan this requires some types of larger the Azerbaijanis credit for yev appointed a committee to year introduced a one-stop shop company to draw up accounts improving things nonetheless,” Continued on Page 4 2 ★ FINANCIAL TIMES FRIDAY JANUARY 25 2008 Azerbaijan Wealth is being deployed to cut dependence on oil ECONOMY ensure that: “Azerbaijan is better we should develop quickly. We Industries that thrived during than a quarter of the 8m popula- seven year window when things Mr Movsumov defends the not worse off when the oil boom have lost a lot of time”. the Soviet era, such as agricul- tion. look bright for Azerbaijan, we government’s fiscal policy, say- The government wants ends.” Time is not on Azerbaijan’s ture and oilfield equipment man- The government has begun dip- expect the country’s fiscal direc- ing that private investment will to foster competitive Money will be no object. “We side. The country was slower ufacturing, have contracted since ping into Sofaz to finance mod- tion eventually to exact a high not materialise until Azerbaijan’s are going to have so much money than some of its neighbours in independence. ernisation of the country’s crum- toll on macro-economic stabil- infrastructure has improved. non-oil sectors, that, even if we wanted to, we starting market reforms. Oil pro- The government says services, bling infrastructure, prompting ity.” “We have a lot of money and writes Isabel Gorst could not spend it. It would not duction at Azeri will peak in the food processing, tourism and IT some economists to warn that Sofaz’s main mission – to stop we want to make people rich. If be physically possible,” he says. next few years and, unless a big are targets for diversification. development is coming at the the oil windfall stoking inflation there are no roads, no water, no Azerbaijan’s foreign exchange field is discovered, oil revenues Plans are under way to revive expense of fiscal discipline. – will fail if funds are constantly electricity, no one will invest,” An old man with a bucket of reserves have risen fivefold since will fall after 2020. Annual expenditure has diverted to the budget, he says. he points out. pomegranates lingers outside one the BP-operated Azeri oilfield Sabit Bagirov, president of the increased by more than 64 per Mr Babayev says: “It is not However, foreign businessmen of Baku’s luxury clothing shops came onstream in 2005 and are Far Centre, an economic think- `We are going to have cent in the past two years. An serious to talk like this. We must say the lack of competition and attracting no interest. Inside, ele- expected to reach $6.5bn this tank, says: “We are not like increase in remittances from use the paper we receive from oil corruption present an even gant Azerbaijanis shop for luxu- year. The foreign debt burden is Saudi Arabia or Kuwait or Rus- so much money Azerbaijanis working in Russia is today to maximise the develop- greater obstacle. One western rious European attire. low at 7.7 per cent of GDP. sia. We must use the money to that, even if we also boosting the money supply. ment of the country and build diplomat in Baku describes the A wave of money is hitting the Windfall oil profits, stored in create the foundations of a com- Inflation, officially put at 16.4 the foundations of the future, not non-oil investment environment country, as oil production climbs Sofaz to guard against inflation, petitive, non-oil economy and cit- wanted to, we per cent last year, but unoffi- just sit on a mound of hard cur- as a “shark pool” for outsiders.