AZERBAIJAN: OVERVIEW OF CORRUPTION AND ANTI- CORRUPTION QUERY SUMMARY Please provide an overview of the most important As with many authoritarian regimes, Azerbaijan is economic, political and social developments in characterised by the large concentration of power in Azerbaijan in the past years. the hands of the ruling elite, which blurs the line between business and politics. The ruling family has CONTENT extended its reach into virtually all lucrative sectors of the economy and patronage networks permeate all 1. Introduction spheres of public life and hamper the long-term 2. Corruption in Azerbaijan economic and social development prospects of the 3. Main drivers of corruption country. 4. Legal and institutional anti-corruption framework 5. Other governance challenges Oil and gas revenues sustained the regime for many 6. References years, contributed to impressive levels of economic growth, expanded the government’s room for manoeuvre in both foreign and domestic policy and helped preserve stability in the country. The revenues allowed the government to stage prestige CAVEAT: events such as the Eurovision Song Contest and the This answer builds on a previous Helpdesk Answer European Games, Formula 1, Islamic Solidarity available here. Games and to carry out large-scale construction projects. \\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\ As the hydrocarbon revenues level off and are set to decline, the space for dissenting views in politics is also closing rapidly: harassment, intimidation and Author(s) unjustified arrests have become commonplace Roberto Martinez B. Kukutschka, Transparency among members of opposition parties, the media and International civil society. [email protected] Reviewer(s) In February 2017, President Aliyev appointed his Matthew Jenkins & Maira Martini, Transparency wife, Mehriban Aliyeva, to the newly created position International of first vice president, placing her first in line to take Vugar Gojayev, Human Rights Watch over the presidency. This unprecedented degree of nepotism reduced any future chance for free and [email protected] independent elections, and further entrenched power Date: 01 September 2017 within the ruling clan. © 2017 Transparency International. All rights reserved. This document should not be considered as representative of the Commission or Transparency International’s official position. Neither the European Commission,Transparency International nor any person acting on behalf of the Commission is responsible for the use which might be made of the following information. This Anti-Corruption Helpdesk is operated by Transparency International and funded by the European Union. AZERBAIJAN: OVERVIEW OF CORRUPTION AND ANTI-CORRUPTION 1 INTRODUCTION addition to stifling political dissent, the regime has managed to sustain itself through a deeply entrenched Azerbaijan has undergone significant economic system of political patronage fed by the significant transformation and development since the country’s inflows of oil revenues (Freedom House 2013a). independence in 1991. Before the collapse of the Soviet Union, Azerbaijan had a broad economic base, In 2010, however, oil production started to slow and with developed industrial, agriculture and service while high oil prices and public expenditure in non-oil sectors (Asian Development Bank 2014). sectors kept the economy growing, the vulnerabilities Independence brought about an economic collapse of the country’s economic model became apparent: that was among the worst in the Commonwealth of Azerbaijan failed to diversify its economy and invest Independent States (CIS): a combination of trade adequately in non-oil sectors (Freedom House 2013) disruption, loss of public financing from Moscow and and became highly dependent on transfers from the the transition to a market economy, led to the country's State Oil Fund of the Republic of Azerbaijan (SOFAZ), gross domestic product (GDP) shrinking year-on-year which constituted only 9.7 per cent of total state budget until 1996. By 1995, GDP was only 37 per cent of what revenues in 2007, but climbed to almost 60 per cent by it had been in 1989. Compounding the country's 2010, (Asian Development Bank 2014). This entwined economic woes, the conflict with Armenia exacerbated the country’s fiscal policy with global oil prices, which the economic decline and led to an influx of around one exposed the country’s economy to a high degree of million Azernaijanis as refugees and internally external volatility. Moreover, by using much of the oil displaced people (Asian Development Bank 2014). revenue to fuel public spending and stimulate the economy instead of developing a broader revenue President Heydar Aliyev came to power in 1993 and base, the government of Azerbaijan compromised managed to secure a ceasefire with Armenia, kick-start SOFAZ’s main objective: conserving the oil wealth for the economy and restore domestic stability and a future generations (Asian Development Bank 2014). functioning state, while creating an authoritarian Since even leading industries in the non-oil economy regime characterised by patronage networks, were indirectly funded by the oil sector – the disregard for civil and political rights and repression of construction and transport industries, as well as much political dissent (Freedom House 2013). In 1994, the of the private sector were reliant on government country signed the first major oil contract with international firms. This, combined with a surge in contracts from the public investments (Asian foreign direct investment (FDI) and the construction of Development Bank 2014) – the steep decline in oil the Baku-Tbilisi-Ceyhan oil pipeline, injected billions of prices from 2014 had a tremendous impact on the dollars into the economy. country’s economic performance. Construction plummeted by 27.6 per cent as the government The economy resumed growth in 1996 due to the onset slashed public investment in response to plunging of oil investment through production sharing revenues; manufacturing declined by 1.4 per cent, and agreements (PSAs) between the state oil company, the production of construction materials and SOCAR, and foreign oil firms for exploration and petrochemicals also declined by 10.6 per cent and 9.1 production (Asian Development Bank 2014). As a per cent respectively (Asian Development Bank 2017). result, Azerbaijan experienced a period of remarkable Overall, Azerbaijan’s GDP contracted by 3.8 per cent economic growth between 2000 and 2010: on average, in 2016 and is expected to decline by a further 1 per the economy grew by 15.3 per cent a year, and the cent in 2017 (International Monetary Fund 2017). share of the population living in poverty decreased from almost 50 per cent in 2001 to less than 16 per cent in The persistently low prices of oil have put additional 2008. These impressive levels of economic growth pressure on the country’s economy, which led were mainly driven by the oil sector, which grew at an President Ilham Aliyev to announce an adjustment in average pace of almost 22 per cent per year (Asian the country’s economic strategy in late 2016. The new Development Bank 2014). strategy focuses on the development of four non-oil sectors – agriculture, transportation, tourism and In 2003, after Heydar Aliyev’s death, his son, Ilham information and communication technology – as part of Aliyev, took over the presidency of the country. In 2 AZERBAIJAN: OVERVIEW OF CORRUPTION AND ANTI-CORRUPTION an effort to diversify the economy (US Department of The CPI and the World Bank’s control of corruption State 2016). indicators only provide a very general overview of the levels of corruption in countries and are not designed In sum, after the oil bonanza of the early 2000s, to provide much information on the exact nature of Azerbaijan’s economic model appears to have lost its corruption within a country. For this reason, it is steam and the underlying structural and governance important to look at other measurements and sources issues have become more evident in light of the to get a more nuanced understanding of the nature of economic recession, due to rising prices, corruption in a country. In the case of Azerbaijan, unemployment and systemic corruption. different types of corruption have been documented. 2 CORRUPTION IN AZERBAIJAN Petty corruption Extent of corruption and nature of Bribery is a prevalent issue in Azerbaijan. corruption Transparency International’s 2016 Global Corruption Barometer (GCB) reveals that 38 per cent of Corruption has many faces in Azerbaijan, ranging from Azerbaijanis paid a bribe in the 12 months prior to the petty corruption (such as bribery) to political corruption, survey in order to obtain a public service (Pring 2016). which is “the manipulation of policies, institutions and Moreover, companies interviewed for the World Bank’s rules of procedure in the allocation of resources and 2013 Enterprise Survey corroborate the high bribery financing by political decision makers, status and rates in the country. While only 16 per cent of firms wealth” (Transparency International 2009). As a result, report having paid a bribe, over 40 per cent stated that the country is a perfect example of what Acemoglu and they are expected to bribe to secure government Robinson (2012) defined as an extractive institutional contracts or obtain construction permits. setting – a system designed to extract resources from the many to concentrate power and opportunity in the Despite the high levels