Azerbaijan is potentially on the cusp of a massive economic boom. Foreign investment increased fivefold in 1996 to $342m - 80% of which was in the oil sector. These huge oil reserves could provide vast opportunities not only for the extractive sector, but also for a variety of support industries.
Of all the former Soviet republics, Azerbaijan is the one which currently appears most likely to fulfil its economic potential. By the year 2010, Azerbaijan expects to have received some $14bn of foreign investment - much of it in the oil and gas sector, which currently accounts for 71% of exports. More than 50 separate oil and gas deposits in the Caspian Sea are under exploration, and experts say that there is an 85% post-survey chance of striking oil (by comparison, North Sea exploration figures run at about 15%). Five major consortia have product-sharing agreements with SOCAR, the national oil company and Azerbaijan's biggest creditor.
These opportunities have an impact far beyond the immediate parameters of the Azerbaijani extractive sector. The rude health of the oil industry will increase the openings in support sectors, such as construction, transport and telecommunications. As Baku becomes a boom town, it will find that its facilities, accessibility and relative political stability increasingly make it a centre for foreign business operating throughout Transcaucasia and central Asia: some oil companies are already running projects in Kazakstan and Georgia from there.
If Azerbaijan's opportunities are unlike those of their former Soviet counterparts, however, the risks have a depressing feel of deja vu about them. In many respects, Azerbaijan shares the typical post-USSR experience. The transfer from command economy to free market has promoted economic difficulties, with large sections of the population living below the poverty line. This in turn leads to social tensions, which the government is reluctant to exacerbate by implementing painful IMF austerity and restructuring measures.
The most crucial point for foreign business regards the apportionment of revenue from oil and gas production. The experience of other former Soviet bloc countries indicates that progress will be slow and not always simple.
In addition, local taxation rates are high and the penalty regime tough. Entrenched interests and bureaucracy impede investment: government officials often demand 'commissions', consultancy fees, or that their relatives receive certain jobs or contracts. Money, business, and government power are closely intertwined. Moreover, the importance of personal relationships means that talks and contracts may become invalid if the interlocutor is replaced - a common occurrence as political and economic change continues.
In one respect, however, Azerbaijan is much better off than some of its neighbours. Crime is not the substantial issue which it can be elsewhere in the former USSR, and problems are largely limited to theft, corruption and fraud. Local businessmen are fond of saying that the mafia has gone to Moscow. Although some foreign apartments and offices have been subject to break-ins, most expatriates feel safe. The government is wary of local private security companies, which it fears could be used as a cover for political opposition. Only one security company has been licensed by the Interior Ministry, though several others operate nonetheless. This figure will increase in the future, not least because the Council of Europe is demanding the deregulation of police guarding private premises..
In terms of external relations, the spectre of Russia still looms the largest of all outside influences - even though Azerbaijan is the only former Soviet republic with no Russian guards on any of its external borders. In particular, the Russian oil giant Lukoil brings immense and constant pressure to bear on virtually every aspect of the Azerbaijani oil industry. Lukoil's leverage is increased by the fact that the Caspian is the first major offshore development not to be located in a major sea, and as such needs pipelines to get the oil out - and Russia is an obvious route for such pipelines. (This problem is, of course, usually solved offshore by the use of supertankers.)
Russia is also seeking influence over the dispute between Azerbaijan and Armenia over Nagorno-Karabakh, where a de facto ceasefire has been in place since May 1994 (though a permanent settlement has yet to be negotiated). Azerbaijan has strenuously resisted proposals for the deployment of any peacekeeping forces which are predominantly Russian. Despite the ceasefire, there remains a real risk that the war in Nagorno-Karabakh could flare in coming years if a solution is not found imminently - though any resumption of hostilities would be unlikely to impinge on the good security environment in Baku, where most foreign investors are based. Azerbaijani ministers like to portray their country as the new Saudi Arabia, boasting seemingly limitless resources of 'black gold'. The rush for this particular brand of gold will rage for a while yet.
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