Azerbaijan and their Problematic Petroleum Politics

Wikipedia map of Azerbaijan

Speaking of the Caucasus region…I just discovered this post from a student!  It highlights the political economic challenges of tiny Azerbaijan, and apparently was just hanging out in my “drafts” section.


 

For the majority of Americans, Azerbaijani economics are not only irrelevant, but also shrouded in mystery.  Located in the South Caucasus, Azerbaijan has established itself as an economic and geostrategic power.  Due to its unique position of acting as a border state to Russia, Armenia, Georgia, and Iran, Azerbaijan has facilitated and utilized this position to locate themselves as a hdrocarbon gateway to and from Eastern Europe and the Middle East.

Most of Azerbaijan’s oil ships through the Baku-Tbilisi-Ceyhan (BTC) pipeline
(Original image from Stratfor)

Azerbaijan’s economy is, by most metrics not only rich, but also expanding. Since 2012, the Azerbaijani real GDP has increased to 40%[i], and from 2001 to 2011, they dropped their poverty rates from 50% to 7.6%. [ii] Their economic indicators have been so strong as of recent, that a recent Azerbaijani financial report stated that the Azeri GDP is the equivalent to 80% of the entire South Caucasus GDP; [iii] reaffirming that in a world of post Soviet economic policy, Azerbaijan has become a stalwart in their geographic region. This rapid period of growth was only briefly disrupted by the economic downturn in 2008, though Azerbaijan did fair markedly better than their European counterparts, primarily due to their hydrocarbons market.

Azerbaijan’s increasing oil production
(from the US EIA)

Azerbaijan lives and dies by their oil and gas revenues. Oil and gas revenues alone account for up to 50% of the economy, and the oil wealth of the country has been a chief reason Azerbaijan has refused to diversify their economy. Azerbaijan has crucial pipelines that allow them to facilitate their extensive oil and gas markets, and the Baku-Tbilisi-Ceyhan pipeline has been the primary engine of economic prosperity.[iv] Due to their access and abundance of natural gas and oil, over 60 billion dollars has been invested in Azerbaijan’s oil reserves by multiple international oil companies in an AIOC consortium led by British Petroleum. This foreign investment has been directly funneled into processing and expanding drilling operations, which has contributed to the economic growth of the country at large.

Natural Gas (from the US EIA)

Due to economic reforms, Azerbaijan’s economy can best be contextualized as a partial free market in terms of the oil and gas economy, but state controlled in every other sector. Since 2001, the Ministry of Economic Development of Azerbaijan Republic has monitored agricultural lands via privatization, including diamond mines and other economic sectors. This is juxtaposed against a relatively open hydrocarbons market, which is driven by demand and relatively lax state regulation and privatization. This has given birth to a quasi mercantilist system in Azerbaijan, but one that stills allows the free market to dictate their chief industry.

This is not to say that everything is roses for Azerbaijan. The largest problem that this country faces economically is their lack of economic diversification. In 2007, it was estimated that mining, drilling, and the oil and gas industry made up as much as 95% of Azerbaijan’s economy, and that has not changed significantly. The hydrocarbons market makes up over half of Azerbaijan’s GDP, and as of yet the Aliyev regime has installed no plans to transition away from their oil production. The only substantive policy action taken on the economy as of recently was the approval of the Trans-Anatolian Natural Gas Pipeline,[v] which would lessen European dependence on Russian oil, and if the WTO approves, will only serve to drain Azerbaijan’s oil reserves. As more countries begin to rely upon Azerbaijan for oil, the long term viability for the country’s economy looks dim.

While Azerbaijan’s natural resource exports have boomed, the rest of their economy lacks the same dynamism.
(Graph available at http://www.russian-survey.com/our-nearest-neighbors/61-azerbaijans-integration-into-international-economy)

How does a country whose economy is 95% based off of hydrocarbons transition in a world that is ever pushing towards becoming independent of oil and renewable energy? That question is yet to be resolved. But Azerbaijan, as with many other oil rich countries, will begin to hurt economically if there comes a green technology revolution, and it will test the long term viability of isolating oil and gas revenues as a cornerstone of industry. For Azerbaijan, they have reaped the benefits of geostrategic location and massive oil reserves; perhaps these same advantages will later lead to the stagnation and faltering of their economy, in a world post fossil fuels.

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