Analytical Digest Caucasus
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No. 69 30 January 2015 Abkhazia South Ossetia caucasus Adjara analytical digest Nagorno- Karabakh resourcesecurityinstitute.org www.laender-analysen.de www.css.ethz.ch/cad www.crrccenters.org EnErgy Special Editor: Andreas Heinrich ■■“After Us, the Deluge”: Oil Windfalls, State Elites and the Elusive Quest for Economic Diversification in Azerbaijan 2 By Farid Guliyev, Bremen ■■The Southern Gas Corridor: Initiated by the EU, Completed by Others? TANAP, TAP, and the Redirection of the South Stream Pipeline 6 By Julia Kusznir, Bremen ■■Perspectives for Electricity Generation from Renewable Energy Sources in the South Caucasus Region 11 By Maximilian Kühne, Philipp Ahlhaus and Thomas Hamacher, Munich ■■ChroniCle 13 December 2014 – 26 January 2015 16 ■■Job AnnounCement 2 PhD Positions in the Field of Caspian Studies (Social Sciences) 18 This issue has been produced in the context of a research project on domestic debates and foreign policy-making related to export pipelines in the Caspian region, which is supported financially by the Volkswagen Foundation. Institute for European, Russian, Research Centre Center Caucasus Research German Association for and Eurasian Studies for East European Studies for Security Studies The George Washington Resource Centers East European Studies University of Bremen ETH Zurich University The Caucasus Analytical Digest is supported by: CAUCASUS ANALYTICAL DIGEST No. 69, 30 January 2015 2 “After us, the Deluge”: oil Windfalls, State elites and the elusive Quest for economic Diversification in Azerbaijan By Farid Guliyev, Bremen Abstract Despite the officially stated goal of economic diversification and the billions of petrodollars in government expenditure, Azerbaijan has made slow progress achieving non-oil growth and remains heavily dependent on oil revenues. Why have Azerbaijan’s efforts to reduce dependence on energy export revenue not borne fruit? Two factors seem crucial. First, various public investment projects, mostly on infrastructure, implemented under the banner of diversification were actually exploited by the elites to convert growing public funds into elite assets under their private control. Second, the peak in oil production (in 2010) and the expected depletion of oil reserves over the next two decades seem to have shortened elite time horizons, causing the authorities to spend about 65 percent of the overall savings from the state oil fund. In sum, elite financial interests and short time horizons deflected economic diversification and put Azerbaijan’s long-term development at risk. introduction improving the climate for private business. Corruption Ten years into the oil boom, Azerbaijan’s economy was cited by the IMF mission as a key obstacle. Similarly, remains as reliant on petroleum exports as in 2003, the European Bank for Reconstruction and Develop- when the incumbent President Ilham Aliyev took the ment (EBRD) stated that in 2014, non-oil growth was reins of the presidency: oil and gas constitute 95 percent largely stimulated by government investments, while the of the country’s overall exports, contributes 74 percent prospects for long-term and sustainable non-oil private of government earnings and accounts for 70 percent of business growth without constant government stimulus state budget revenues. High levels of fiscal dependence seem “unclear.” Conditions for doing business outside on oil indicates that the Azerbaijani state effectively is a the oil sector remain “difficult,” discouraging foreign rentier state deriving most of its revenue from oil rents, investments in the non-hydrocarbon sector. Notably, the rather than taxes. Having realized the risks of oil depen- pursuit of diversification based on infrastructure proj- dency, in 2012 the administration of President Aliyev ects has so far failed “to translate into pronounced non- announced its strategic development outlook for the energy exports growth,” the EBRD noted. future. The development concept “Vision 2020” recog- Why has Azerbaijan’s progress towards economic nized the need to overcome petroleum dependence and diversification been so unremarkable? In this article, its corollary of becoming a “raw material appendage for I argue that two sets of factors contributed to slow the world economy.” The document also highlighted improvement. First, state control of oil allowed the state diversification away from oil as the key path toward this elites to use, or sidetrack, various government projects goal. The economic development minister said that by undertaken under the banner of diversification to cap- 2020, the Azerbaijani economy is expected “to rid itself ture rents on a larger scale. Second, the awareness of oil of its dependence on the oil sector.” peak production (2010) and expected depletion dates of In more tangible ways, however, diversification was oil deposits might have shortened the ruling elites’ time understood by the authorities to imply massive public horizons (namely, how much they value the future rel- expenditure on infrastructure projects using oil wealth. ative to the present) creating incentives for higher pub- In a pattern familiar to scholars of the resource curse, lic spending for their own benefit today over saving for billions of dollars were directed from the state budget future generations. toward construction of new bridges, highways, parks, residential towers, convention centers, sport complexes, oil Wealth into elite Private Profit and the world’s tallest flagpole. However, has the gov- High public spending in the political economy con- ernment’s diversification plan been a success? Has it laid text of Azerbaijan operates as the mechanism to reward down solid foundations for sustainable growth for the the close-knit network of cronies loyal to the president. future when oil runs out? Although oil revenue collection has been transparent, The International Monetary Fund’s (IMF) staff mis- corruption proliferated in public expenditure as the gov- sion in Azerbaijan said that progress towards economic ernment largely concealed data on how it spent the oil diversification has so far been “elusive.” The government revenues. Rents are captured by the elites on the spend- has been slow to implement reforms with respect to ing side through the opaque public procurement pro- CAUCASUS ANALYTICAL DIGEST No. 69, 26 January 2015 3 cess, awarding of contracts to regime cronies and elite- for what Russians call raspil (carve up), meaning the connected companies, and other machinations to divert distribution of budgetary funds among state elite and public funds. In the absence of clean procurement rules bureaucratic groups. Investigative journalist Khadija and efficient oversight of public finances, public money Ismayilova concurs, noting that infrastructure proj- is likely to be wasted or plundered. As a result, the state ects represent “the best way to transfer money from the elites and the oligarchs around President Aliyev have state budget to personal pockets.” Independent expert become extremely rich and now seek to secure their new Vugar Gojayev believes that in the Azerbaijani system wealth and property. of institutionalized corruption, large infrastructure out- According to Leiden University political economy lays have become professor Anar Ahmadov, increases in public expendi- “a resource waste and a means of personal enrich- ture have worked to channel national oil wealth into ment for the ruling elite. The tenders in such the portfolios of elites, turning public funds into pri- giant projects were awarded to politically con- vate assets. In apparent neglect of the social welfare of nected monopolies. The government spending their citizens, the ruling elites have focused on acquir- on hosting mega-events and expenditures on ing large chunks of oil wealth for personal consump- ‘white elephant’ projects and other public con- tion rather than investing these funds into long-term tracts have served as a means to funnel money sustainable development. to well-connected companies that in many cases Large business in Azerbaijan is owned by ministers were owned by senior officials or persons close and senior officials in the presidential administration. to them.” As the government increased oil-fueled public expendi- Since the start of the oil boom in 2004, oil exports ture, these state officials-turned-oligarchs have become have generated more than a hundred billion US dollars very rich. The same system is replicated at the local level in revenue for the state coffers. The administration of where medium-sized businesses are either owned or con- Ilham Aliyev decided to spend most of the oil money, trolled by regional governors, who are in turn connected rather than save it. In Azerbaijan, the bulk of the state’s to the power holders in the center. Kemalladin Heyda- share of oil revenue is accumulated in the state oil fund rov, who was the head of the state customs committee SOFAZ. Of about US$108 billion windfall revenue before being appointed the minister of emergencies, is over the last 10 years, the government spent US$70 bil- one of the most powerful Azerbaijani oligarchs. His cor- lion from the oil fund or nearly 65 percent of its overall porate empire includes a business conglomerate Gilan assets. The oil fund’s reserves today stand at US$37 bil- Holding which comprises about 300 firms and subsid- lion. SOFAZ expects to receive an additional US$200 iaries and employs more than 12,000 people. Heydarov’s billion in the coming years. But the amount of actual family also “supervises” the