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1999-2000The Economist Intelligence Unit15 Regent St, London SW1Y 4LRUnited Kingdom

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EIU Country Profile 1999-2000 © The Economist Intelligence Unit Limited 1999

Comparative economic indicators,

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© The Economist Intelligence Unit Limited 1999 EIU Country Profile 1999-2000

Contents

Azerbaijan

3 Basic data

4 Political background4 Historical background8 Constitution and institutions9 Political forces

11 International relations and defence

14 Resources and infrastructure14 Population15 Education16 Health16 Natural resources and the environment17 Transport and communications18 Energy provision

21 The economy21 Economic structure22 Economic policy25 Economic performance

26 Economic sectors26 Agriculture27 Mining27 Manufacturing28 Construction28 Financial services

29 The external sector29 Trade in goods31 Invisibles and the current account31 Capital flows and foreign debt32 Foreign reserves and the exchange rate

34 Appendices34 Sources of information35 Reference tables35 Population35 Population by age36 Labour force36 Production of energy37 Gross domestic product37 Gross domestic product by sector38 Gross domestic product by expenditure38 Prices and earnings39 Government finances40 Government finances40 Money supply and credit

October 11th 1999

2


41 Production of major crops41 Yields of major crops41 Livestock numbers42 Livestock output42 Industrial production43 Industrial production of selected items43 Banking statistics44 Exports by value44 Exports by percentage45 Imports by value45 Imports by percentage46 Exports by destination46 Imports by country of origin47 Balance of payments, IMF estimates48 External debt, World Bank estimates48 Foreign reserves48 Exchange rate

Azerbaijan 3


Azerbaijan

Basic data

86,600 sq km

7,949,300 (January 1st 1999)

Population in ‘000 (January 1st 1998)

Baku (capital) 1,726Ganja 293Sumgait 274

Ranging from cold in the Caucasus mountain range in northern Azerbaijan totemperate in the Kura plain (average July temperature of 27°C, Januarytemperature 1°C) and subtropical in the Lenkoran lowlands in the south-east

Azerbaijani (a Turkic language) is the state language; the use of Russian is beingphased out

Metric system

Azerbaijani manat, introduced as legal tender in 1993 to replace the rouble.The average exchange rate in 1998 was Manat3,869:$1. The exchange rate onSeptember 17th 1999 was Manat4,313:$1

3 hours ahead of GMT

Calendar year

Fixed: January 1st, January 20th (Martyrs’ Day), March 8th (Women’s Day),May 9th (Veterans’ Day), May 28th (Republic Day), June 15th (NationalSalvation Day), October 18th (National Independence Day), November 12th(Constitution Independence Day), November 17th (National Revival Day),December 31st (Worldwide Solidarity of Azerbaijanis Day)

Moveable: Ramazan Bayram/Id al-Fitr, Novruz (Iranian new year), KurbanBayram/Id al-Adha, Ramazan Bayram/Id al-Fitr

Total area

Population

Main towns

Climate

Language

Weights and measures

Currency

Time

Fiscal year

Public holidays

4 Azerbaijan


Political background

Azerbaijan declared independence from the Soviet Union in October 1991.Political instability from 1988 onwards and severe economic dislocation causedby the break-up of the Soviet economy lasted until 1994. Azerbaijan is now ineffect a dictatorship run by its Communist-era leader, Heydar Aliyev, whoseized power in 1993. Officially described as a “presidential republic” the one-chamber parliament, in which Mr Aliyev’s New Azerbaijan Party has a majority,is a rubber stamp body. Mr Aliyev remained in power following an election inOctober 1998 in which he faced no serious challenge, and he shows no signthat he intends to relinquish office.

Historical background

The term Azerbaijan has been used since early medieval times to refer to thearea of both the present-day Republic of Azerbaijan and Iranian Azerbaijan.The Arab conquest in the seventh century brought Islam to the region. TheIranian language originally spoken in Azerbaijan was supplanted by Turkic (theforerunner of modern Azerbaijani) as the Seljuk Turks conquered the region inthe 11th century. However, Azerbaijan retains a close cultural affinity with Iranto this day. By the mid-18th century a number of khanates existed as semi-independent statelets in what is now the Republic of Azerbaijan. Russia beganextending its influence in the region in the early 18th century and in 1828 theTreaty of Gulistan established the present border with Iran, placing northernAzerbaijan, today’s independent republic, within imperial Russia.

After the Bolshevik coup in 1917 the whole Transcaucasian region was throwninto turmoil as nationalists and foreign powers attempted in turn to seizecontrol. The first Republic of Azerbaijan was established in May 1918, thanksin part to advancing Turkish forces. After their withdrawal a British militaryoccupation lasted from November 1918 until August 1919 to keep theBolsheviks out. The Red Army conquered Azerbaijan in 1920, and the territorywas forcibly absorbed into the Soviet Union. In 1922 Azerbaijan was incor-porated into the Transcaucasian Soviet Federated Republic (TSFR), which alsoincluded Armenia and Georgia. In 1936 the TSFR was broken up andAzerbaijan gained the status of a full Soviet Socialist Republic (SSR). Thousandsof people, Communist functionaries as well as intellectuals from the pre-Sovietperiod, were killed and many more imprisoned during Stalinist purges inthe 1930s.

During the Brezhnev period Azerbaijan was ruled by Mr Aliyev, then the chair-man of the republic’s Communist Party. Azerbaijan gained a reputation foreconomic stagnation, political repression and rampant corruption. MikhailGorbachev, the reforming Soviet leader, sacked Mr Aliyev in 1987 as part of asweep against politicians who had presided over decades of stagnation andcorruption. In the late 1980s the decrease in repression by Moscow allowedseparatism to come out into the open in all the Soviet republics. The ethnic

From Iranian to Russiancontrol—

—followed by a briefperiod of independence

Seventy years ofCommunist rule—

Azerbaijan 5


Armenian majority in Nagorny Karabagh began pushing to leave Azerbaijanand to be united with Armenia. Azerbaijani nationalism grew in response withthe founding in mid-1989 of the Popular Front of Azerbaijan (PFA), a broad-based opposition movement. In September 1989, under pressure from the PFA,the Azerbaijani Supreme Soviet (parliament) declared that republican laws tookprecedence over Soviet legislation and called for the withdrawal of Azerbaijanfrom the USSR. Divisions between the Azerbaijanis and Armenians widenedirrevocably as inter-communal violence broke out in Nagorny Karabagh, butespecially after anti-Armenian riots in Sumgait in 1988 and in Baku in January1990 killed, on the most conservative estimates, dozens of Armenians.

The January 1990 massacre of Armenians in Baku prompted a dramatic andbloody Soviet military intervention on January 20th 1990. At least 150 people,mostly Azerbaijanis, were killed. Moscow installed a front man, AyazMutalibov, as leader in 1990. The election to parliament later that year gave thePFA a symbolically important 9% of the seats despite a rigged vote. The declineof the Soviet Union weakened the Mutalibov regime further. In 1991Mr Mutalibov was forced to agree to PFA demands for the creation of a new 50-member legislative body, the Milli Majlis (National Council), half of whosemembers were drawn from the Supreme Soviet (parliament) and half from thePFA. Following the failed coup in Moscow in August 1991 Azerbaijan declareditself independent.

From 1992 the war over Nagorny Karabagh dominated Azerbaijani politics,with success or failure on the battlefield determining the fate of politicalleaders. Mr Mutalibov was forced from power in March 1992 after a massacreof Azerbaijani civilians in the village of Khojali. In May, after Azerbaijani forceslost their last strongholds in Karabagh, the PFA seized government buildings inBaku and a leading member, Isa Gambar, became acting president. The PFAleader, Abulfaz Elchibey, won the presidential election in June 1992.Mr Elchibey neglected the economy and Azerbaijan’s foreign investmentpotential, and proved a poor administrator. Armenian troops took control ofthe whole of Nagorny Karabagh and went on to capture more and more terri-tory in Azerbaijan proper.

Relations deteriorated with Russia, which was displeased by the PFA’s pan-Turkic agenda, which sought political and commercial alliances in Turkeyrather than Russia. In June 1993, just days after the last Russian troops leftAzerbaijan’s second city, Ganja, a former commander in the Azerbaijani armyin Nagorny Karabagh, Surat Huseynov, led a revolt against the Elchibey govern-ment. Mr Huseynov’s troops were armed with heavy weapons that the Russianshad left behind.

As Mr Huseynov marched on Baku, pro-government troops were unwilling tooppose him. A desperate President Elchibey turned for help to Mr Aliyev, theCommunist-era leader of Azerbaijan who had become the president ofNakhichevan, an exclave of Azerbaijan separated from the rest of the countryby a strip of Armenian territory. Mr Aliyev came to Baku and was duly electedchairman of parliament. In mid-June, with Mr Huseynov’s troops closing on

—end in a traumatic birthfor the new state

A nationalist governmenttakes power—

—but is replaced by theformer Communist leader

6 Azerbaijan


The war in Nagorny Karabagh

Nagorny Karabagh is a mountainous region within Azerbaijan.In the 18th century there were both Armenian meliks (princes)and a Muslim khan ruling the Karabagh region. After the Soviettakeover of the Transcaucasian region, Nagorny (“upland”)Karabagh was earmarked for inclusion in Soviet Armenia.Joseph Stalin, then commissioner for nationalities, reversedthis decision and Nagorny Karabagh was given to Azerbaijan.Although it was granted the status of “autonomous region” inrecognition of its majority Armenian community, the inclusionwithin Azerbaijan rankled with Armenians and they repeatedlytried to have it overturned, alleging discrimination by theauthorities in Baku. When open nationalist feeling began tobe allowed in the Soviet Union in the late 1980s, Karabaghsecessionism became central to Armenian nationalism inArmenia itself. In 1988 the Karabagh Committee forced theSupreme Soviet (parliament) of Armenia to demand theincorporation of the region into that republic. Moscowresponded by imposing direct rule over Nagorny Karabaghand sending in 5,000 troops. In 1989 Azerbaijan halted tradewith Armenia and blockaded Nagorny Karabagh. Armeniaresponded by declaring Nagorny Karabagh part of a unifiedArmenian SSR.

Sporadic fighting among local militias, aided by troops fromArmenia itself, escalated into a full-scale war after Russiantroops were withdrawn in 1992. Armenian forces inflicted aseries of defeats on the Azerbaijani army, prompting politicalturmoil in Baku. The Armenians took control of Karabagh itselfand went on to capture all territory between it and Armeniaand a sizeable buffer zone around the rest of Karabaghamounting to one-fifth of Azerbaijan’s territory. Azerbaijan,with support from Turkey, has successfully imposed a cripplingeconomic embargo on Armenia. The social consequences ofthe war have been immense, with hundreds of thousands ofrefugees and internally displaced persons. Virtually all ethnicAzerbaijanis have left Armenia, Karabagh and the surroundingArmenian-held areas, while the Armenian community in therest of Azerbaijan has left.

The Karabagh conflict was the first full-scale war in the post-Communist world and exhibited many features typical ofsubsequent conflicts: indiscriminate killing, ethnic cleansingand other human rights abuses, legalistic arguments overpreviously unimportant boundaries, active Russian meddling,and Western reluctance to intervene in Moscow’s back yard.On the ground, the combatants saw the war as a way ofrighting historical wrongs done not just in Soviet times butalso in previous centuries. For the Armenians, Karabaghembodies their sense of being a small Christian nation under

threat from alien Muslim neighbours, a feeling that stems mostimmediately from the mass killings of Armenians in Turkeyduring the first world war. Azerbaijanis feel that their country hassuffered because of Russia’s one-sided support for theArmenians, and the war has increased Azerbaijan’s resolve tobreak free from Russian regional influence.

Given the bitterness of the conflict and the apparent lack of a fairsolution for Karabagh’s constitutional status, it is something of amiracle that the ceasefire negotiated in 1994 has held. Thesuccess of the current ceasefire is in part due to the Armenianrealisation that further territorial gains would bring diminishingreturns, while the Azerbaijani forces are in no condition for asuccessful campaign. The presidency of Heydar Aliyev, whosereputation is not tied to the conduct of the war, has also resultedin a less confrontational and vengeful stance in Baku.

While there has been little serious fighting, apart from a briefclash in June 1999, little progress has been made in negotiatinga settlement. The Karabagh Armenians declared themselves anindependent republic on September 2nd 1991. Not evenArmenia has granted recognition, and Azerbaijan refuses to talkdirectly to the enclave’s leadership or grant it any other form oflegitimacy. When in late 1997 the then president of Armenia,Levon Ter-Petrosian, suggested that the Karabagh Armeniansshould compromise with Azerbaijan sooner rather than later,when it had become an oil-rich and powerful country, hecreated a storm that led to his being forced from office. Hissuccessor, Robert Kocharian, was previously leader of NagornyKarabagh. However, Mr Kocharian seems to be using hiscredentials as a Karabagh war hero to press for a negotiatedsolution and he engineered the removal of hawkish officials inNagorny Karabagh in 1999. Mr Kocharian had two meetingswith Mr Aliyev in 1999. While little progress was made at thetalks, they represent important confidence-building steps as thetwo sides try to assess the concessions they will need to make toachieve lasting peace.

Azerbaijan says it will grant Karabagh autonomy as long asformal sovereignty is recognised as Azerbaijani. Karabagh’sArmenians are reluctant to trade their hard-won freedom forlittle apparent gain. They want their independence to berecognised, and are prepared to give up only the lands they holdoutside Karabagh proper—and then only when a binding peacedeal is on the table. Given the gulf between these two positionsit may be Armenia, which badly needs to open up normal traderelations with its neighbours, that eventually persuades Karabaghto accept a compromise, but this is some way off.

Azerbaijan 7


Baku, Mr Elchibey fled to Nakhichevan. Mr Aliyev convinced parliament totransfer presidential powers to him on June 18th 1993, effectively removingMr Elchibey from the presidency. After Mr Elchibey had been formallyremoved by referendum, Mr Aliyev was elected president on October 3rd 1993in an uncontested Soviet-style election with 98.9% of the vote.

Although Mr Aliyev initially co-opted Mr Huseynov and appointed him primeminister, as time went on he increasingly limited his powers. In October 1994Mr Huseynov was dismissed after being implicated in a failed coup—an alle-gation he strongly denied. The threat posed by semi-independent militarycommanders was finally crushed in March 1995, with the bloody defeat of yetanother coup attempt, led by a deputy minister of internal affairs, RovshanJavadov, and backed by the special police forces. In a series of well-publicisedtrials, which continued until 1998, paramilitary leaders as well as senior formerofficials, including some from the PFA government, were tried for involvementin various coup plots. These trials underlined Mr Aliyev’s ability to imposeorder and to neutralise warlords.

The period since 1995 has been marked by the consolidation of power byMr Aliyev and the establishment of a more stable but dictatorial government.The parliamentary election in November 1995 unsurprisingly gave a largemajority to Mr Aliyev’s New Azerbaijan Party. A new constitution was approvedby a rigged referendum at the same time. The fraudulent election alsodemonstrated the weakness of the opposition, which has consistently engagedin petty strife rather than uniting to form a cohesive anti-Aliyev front. In 1998five leading opposition politicians led by Rasul Guliyev, a former speaker ofparliament who fell out with Mr Aliyev and fled abroad, Mr Elchibey of thePFA (now the Party of the Popular Front of Azerbaijan or PPFA) and Mr Gambarof Musavat, formed a pact to boycott the presidential election of October 11th1998. In the run-up to the election the opposition organised impressive ralliesbut by failing to run a candidate against Mr Aliyev the opposition ended uphanding him an easy victory.

Mr Aliyev made some minor concessions to give the impression of a greatermeasure of democracy in the 1998 presidential election. These concessionswere designed to lessen embarrassment to countries such as the US and the UK,which had so effusively supported Mr Aliyev for commercial reasons (Britishand American companies dominate the oil sector). The opposition boycottmeant that only one plausible opposition candidate ran—Etibar Mammadov,head of the Azerbaijan National Independence Party (ANIP). Mr Mammadovcame second with just 11.6% of the vote. Mr Aliyev won 76.1%, which meantthat there was no need for a second-round ballot. Mr Mammadov refused toaccept the result. Mr Aliyev’s grip on power is now so firm that he was able toleave Azerbaijan from April to June 1999 for a quadruple heart bypass oper-ation in the US and a lengthy convalescence in Turkey. The administrationstopped functioning and no major decisions were made in any branch ofgovernment. Mr Aliyev announced in September 1999 that he may stand for athird presidential term in 2003.

Mr Aliyev develops areputation as a strong

ruler—

—and faced littleopposition in the 1998

presidential election

8 Azerbaijan


Important recent events

October 1993: Heydar Aliyev is elected president of Azerbaijan in a rigged poll.

September 1994: A $7bn contract is signed with a consortium of mostly British andAmerican oil companies, the Azerbaijan International Operating Company (AIOC), forthe development of offshore Caspian oil deposits.

October 1994: Unsuccessful coup attempt. The prime minister, Surat Huseynov, isdismissed as a result.

March 1995: A further coup attempt is crushed.

November 1995: A new constitution is adopted by referendum; the ruling party winsa majority in the parliamentary election.

November 1997: Oil starts flowing from AIOC’s oil wells.

October 1998: Mr Aliyev wins re-election as president.

April-June 1999: Mr Aliyev undergoes a heart bypass operation in the US.Government slows to a halt during his three-month absence.

Constitution and institutions

The new constitution of Azerbaijan was adopted in November 1995 by a riggedreferendum. Although it proclaims Azerbaijan a democratic republic, it has notprevented the president assuming wide-sweeping powers. The one-chamberparliament, the Milli Majlis (National Council), is a rubber stamp body packedwith supporters of the government. The president is the head of state and iselected for a term of five years. No person may be elected for more than twoterms. Mr Aliyev has ensured that this provision does not apply to him, as hewas elected president for the first time in October 1993, two years before thenew constitution was adopted. The constitution proclaims the principle of thedivision of various branches of power but all are in practice subordinate to thepresident. Mr Aliyev has wide powers on paper and even wider ones in prac-tice. The president appoints the cabinet of ministers, which is answerable tohim. In co-ordination with parliament, the president appoints the primeminister and the heads of local government. In reality no decision of conse-quence is taken without Mr Aliyev’s personal approval.

Nakhichevan has kept its Soviet-era status of an autonomous republic withinAzerbaijan. The Nakhichevan Autonomous Republic has its own parliamentbody, which decides local economic matters and appoints a local government.Nagorny Karabagh, formerly an autonomous region within Soviet Azerbaijan,was abolished by the Azerbaijani government in 1991, but it is still very muchin evidence as a self-declared republic with its own government, parliamentand army. Its leadership has no ties with Baku.

The constitution

Azerbaijan 9


Azerbaijan’s parliament is a one-chamber body, the Milli Majlis. It is made upof 125 deputies elected every five years by a mixture of straight majority andproportional representation. On paper the Milli Majlis can impeach the presi-dent following representations from the Constitutional Court and it can pass avote of no confidence in the government. In practice, the Milli Majlis playslittle role in local politics aside from approving Mr Aliyev’s decisions.

Judicial power is vested in the Constitutional Court, the Supreme Court, theEconomic Court and lower-level general and specialised courts. As in mostpost-Soviet republics, the judicial branch of power in Azerbaijan is the leastdeveloped. The judicial structure has remained as it was in the Soviet period.Judicial and police corruption is widespread and the use of torture against sus-pects is routine.

Political forces

There are dozens of political parties in Azerbaijan, but only a few are important.

New Azerbaijan Party (NAP). Founded in 1992 by former Communist sup-porters of Mr Aliyev, the NAP opposed President Elchibey. The NAP is led by aclose-knit group of insiders from Nakhichevan with Mr Aliyev as chairman.Another powerful group within the NAP is the former Communist elite. AfterMr Aliyev seized power in 1993 the party grew rapidly as one of the ways inwhich Mr Aliyev consolidated his grip on the country. NAP members hold allthe key positions in the executive branch, and the NAP emerged as the largestsingle party in the parliamentary election in November 1995. Ultimately,Mr Aliyev’s personal power transcends the base provided by his party. It wouldbe a different matter were he to withdraw from power; schisms within the NAPwould rapidly reveal themselves, particularly if Mr Aliyev’s son, Ilham Aliyev,were presented to the party as the president-in-waiting.

Party of the Popular Front of Azerbaijan (PPFA). Founded as thePopular Front of Azerbaijan (PFA) in 1989, it led the campaign for Azerbaijaniindependence and the economic blockade against the Armenia. The PFA wasbroad but fractious—from disgruntled Communist Party functionaries toextreme Azerbaijani nationalists and pan-Turkists (favouring the union of allTurkic peoples from Bulgaria to China). After the PFA seized powerand Mr Elchibey was elected president, the PFA’s political inexperience wasclear—it began to disintegrate, the opposite to what happened to the NAP afterMr Aliyev took power. As a result, Mr Elchibey was overthrown in 1993. ThePFA survived and remains an significant political force, despite factionaldifferences. In 1995 a PFA congress renamed the organisation the Party of thePopular Front of Azerbaijan (PPFA), and the PPFA won three seats in parliamentin the 1995 election.

Musavat. Musavat is led by Mr Gambar, a former leader of the liberal wing ofthe PFA and speaker of parliament during Mr Elchibey’s office. Musavat pro-claims itself to be the successor to the Musavat Party founded in 1911by Mamedemin Rasulzadeh, one of the founders of the Azerbaijan Democratic

The judiciary

The legislature

10 Azerbaijan


Main political figures

Heydar Aliyev: Elected president of Azerbaijan in October1993 and again in October 1998 in an election of dubiousfairness. Mr Aliyev made his name as Azerbaijan’s KGB chief andruled Soviet Azerbaijani as head of its Communist Party branchfrom 1969 to 1987. Like Eduard Shevardnadze in Georgia,Mr Aliyev was one of a number of non-Russians who played animportant role both as tough leaders of their own republics andas top-level Soviet politicians during the long rule of LeonidBrezhnev. Such leaders acted as conduits for Moscow policy inthe republics while at the same time heading up a patron-clientsystem where corruption thrived. Mr Aliyev rose to become amember of the Soviet Communist Party’s Politburo, a post heheld from 1982 to 1987. As the new Soviet leader, MikhailGorbachev, implemented his perestroika policies, Brezhnev-erapoliticians were ousted from the Politburo, and Mr Aliyevwithdrew from Soviet national-level politics altogether in 1987.He thus played no part in either the chaotic lurch towardsindependence in Azerbaijan, or the start of the war in NagornyKarabagh. This has allowed him to divest his administration ofthe more extreme forms of Azerbaijani nationalism and hostilitytowards Armenia.

Mr Aliyev began his return to Azerbaijani politics quietly in 1990,by becoming head of the regional parliament in Nakhichevan,where he has a strong power-base of supporters and relatives.He presented his return to power in 1993 as a step that he tookreluctantly. In reality he outmanoeuvred the incumbent president,Abulfaz Elchibey, and rapidly consolidated his position. At home,Mr Aliyev’s style is one of all-pervasive personal authority, suchthat government seemed to lock up when a heart operation tookhim out of circulation for three months of 1999. A personalitycult has grown up around him, and no other figure ingovernment comes close to matching his high profile. However,his administration has been tarnished by cronyism and corruption.Abroad, Mr Aliyev has confounded those who initially feared thathe would be a Russian yes-man. Instead, he has calculatingly builtup US and European political support for Azerbaijaniindependence by sealing lucrative oil deals with foreign firms.He has steered a careful diplomatic course between theconflicting interests of Russia and the US, and Turkey and Iran,something that his predecessors were unable to do.

The succession to Mr Aliyev is unclear. His son, Ilham Aliyev, is avice-president of the State Oil Company of the Azerbaijan Republic(SOCAR) and deals with relations with foreign oil companies, buthas little political following.

Rasul Guliyev: A former speaker of parliament who fell out offavour with Mr Aliyev in 1996 and resigned. He originally built uphis power-base as director of the largest state oil refinery.Mr Guliyev entered politics in the Popular Front of Azerbaijan (PFA)and was prime minister under Mr Elchibey. However, he backedMr Aliyev and was elected speaker of parliament. Since hisresignation he has lived abroad, but has remained an importantpresence in Azerbaijani politics, in part because of the lack of anyother imposing figure on the opposition scene. The authorities areclearly worried about him. Mr Guliyev is wanted on charges ofembezzlement and has been accused of other crimes including acoup plot, for which there seems little evidence. He boycotted the1998 presidential election, and as of October 1999 remainedoutside Azerbaijan.

Abulfaz Elchibey: Leader of the opposition PFA since 1989. In1974-76 he was imprisoned for dissident activity under Mr Aliyev’sSoviet regime. In June 1992 he was elected president of Azerbaijan.After the army rebellion of June 1993 he left Baku and was soonremoved from the presidency. He returned to Baku in 1997 andwent back into politics, playing a leading role in the boycott of thepresidential election. Mr Elchibey is regarded as a man ofconsiderable intellect and personal integrity, but his background asan uncompromising dissident has made him less than politicallyastute. He has been easily sidetracked and unable to unite theopposition. For instance, in early 1998, as preparations began forthe October presidential election, many of Mr Elchibey’s publicstatements focused on the alleged mass repression of theAzerbaijani minority in Iran—not an issue of relevance to mostpeople in either Azerbaijan or Iran. Like Isa Gambar and EtibarMammadov, Mr Elchibey does not seem to have the force ofpersonality or the personal following to make a strong showing in afuture presidential election if Mr Aliyev stands again.

Isa Gambar: Speaker of the Azerbaijani parliament from May 1992to June 1993. One of the founders and leaders of the PFA, he is nowchairman of Musavat—the oldest political party of the country(established in 1911). With Mr Guliyev and Mr Elchibey, heboycotted the 1998 election.

Etibar Mammadov: The former leader of the PFA’s nationalistwing. In 1991 he left the PFA and set up the Azerbaijan NationalIndependence Party. Despite backing Mr Aliyev’s bid for power in1993, he did not accept a government post. He was the onlyopposition figure of serious standing to contest the 1998presidential election.

Azerbaijan 11


Republic (1918-20). In the 1995 parliamentary election Musavat won justone seat.

Azerbaijan National Independence Party (ANIP). Founded in late 1991,ANIP is chaired by Mr Mammadov, the former leader of the nationalist wing ofthe PFA. Since its foundation, the ANIP has been at odds with the PFA. In June1993 the party opposed Mr Elchibey and backed Mr Aliyev’s accession topower. Mr Mammadov declined Mr Aliyev’s offer of a government position.

International relations and defence

Mr Aliyev seized power in 1993 at a time of crushing military defeats inflictedby Armenian forces. He initially appeared to be steering Azerbaijan away fromTurkish influence, which had been strong under Mr Elchibey. In September1993 Mr Aliyev made Azerbaijan a member of the Russian-dominatedCommonwealth of Independent States (CIS), which Mr Elchibey had refused tojoin. With Russian backing Mr Aliyev negotiated a ceasefire in the war withArmenia, realising that to continue the fighting meant more defeat and insta-bility. Having given Russia no reason to undermine him and having put Turkeyat arms length, Mr Aliyev then put Nagorny Karabagh on the back burner. Hisnext step was to sign a $7bn oil deal with an international consortium headedby British Petroleum (UK) and Amoco (US)—the two companies have sincemerged into BP-Amoco (UK). Since then another 15 oil-production and explor-ation deals have been signed with British, French, American, Norwegian,Turkish, Russian and Iranian oil companies. As a result Azerbaijan’s relationswith the EU and the US are improving and the government has made a pointof making contracts truly international.

Azerbaijan’s relations with Russia have been uneasy. Mr Aliyev got off to a goodstart but relations soon turned sour and in 1994 Russia imposed a transportblockade of Azerbaijan. The Russians were particularly angered by theAzerbaijanis’ decision to develop the Caspian Sea without regard to its legalstatus. Although this was probably not a deliberate policy initially, it soondeveloped into a series of faits accomplis with Azerbaijan defying the basictenets of international law in the Caspian Sea—to which Russia is hardly inany position to object given its own behaviour. To mollify Russia, Azerbaijanagreed in October 1995 to transport some crude oil extracted by internationalcompanies via Russia. Mr Aliyev has refused to allow Russian troops to be basedin Azerbaijan but has allowed Russia to keep control of the Gabala earlywarning radar station. Continued Russian arms sales to Armenia as well as thesmall presence Russian military have been a further strain on relations.Ironically, the main threat from Russia has proved in the long run to be thedisintegration of the Russian North Caucasus, thanks to the war in Chechnyaand the conflict that began in Dagestan, Azerbaijan’s main northern transportroute, in 1999.

Azerbaijan has opposed moves to give the CIS greater powers over its membercountries. To counterbalance Russia’s dominance of the CIS, Azerbaijan hassince 1996 been forging an alternative regional grouping known as GUAM

Foreign policy is based on adelicate balance

Relations with Russia

The Georgia-Ukraine-Azerbaijan-Moldova axis

12 Azerbaijan


from the initials of its member countries: Georgia, Ukraine, Azerbaijan andMoldova (it is now known as GUUAM after Uzbekistan joined). Officiallyformed to discuss economic co-operation, the grouping is being “unofficially”encouraged by the US to act as a buffer to Russian influence and to excludeRussia from the southern former Soviet Union. This move to fend off anallegedly aggressive Russia now looks misplaced given the near collapse of theCIS and political instability in Russia, although the grouping could well help toinsulate partially these countries from the effects of Russia’s internal economicand political collapse. More likely, given the weakness of GUUAM membersand their disparate interests, its main contribution will have been as an oddacronym.

On his first visit to Iran in 1994 Mr Aliyev sought to improve a relationshipthat had been marred by the Elchibey government’s pro-Turkish stance. As partof his oil diplomacy he promised to give Iran a share in the AzerbaijanInternational Operating Company (AIOC) contract. US pressure stoppedMr Aliyev from fulfilling this promise and so he attempted to buy Iran off byincluding it in the Shah-Deniz oil consortium in 1996, which included noAmerican companies. Iran and Azerbaijan share a common cultural andreligious heritage, but their relationship both in Soviet times and since hasbeen troubled. Islamic Iran’s cultivation of good relations with Armenia, aChristian country and an enemy of Azerbaijan, is symptomatic of the tension.The Azerbaijani government accuses Iran of wide-scale espionage and offomenting Islamic activism among Azerbaijan’s Shia Muslim majority. Iran isangered by Azerbaijan’s economic and security ties with the US, Turkey andIsrael. Azerbaijan’s development of oilfields in the Caspian before a redivisionof the sea’s waters has been agreed by the littoral states has further harmedrelations. The Iranian government clamps down hard on separatist activity inits own north-western region, where ethnic Azerbaijanis predominate, and isunderstandably unhappy at the “One Azerbaijan” movement in whichopposition leader Mr Elchibey is a prime mover.

In the case of Turkey, a close cultural bond with Azerbaijan—the two languagesare very similar—has helped build bridges. Turkey has become an importantstrategic ally and trading partner. The Turks imposed an economic embargo onArmenia because of the Karabagh war in support of Azerbaijan, and the Turkishmilitary on occasions built up forces on the border with Armenia to dissuadethe Armenians from marching on Baku. In 1994 Azerbaijan and Turkey signeda ten-year treaty on friendship and co-operation, and in 1996 a treaty on mili-tary co-operation. Allegations that Turkish intelligence tried to oust Mr Aliyevin a coup early in his rule, when it was feared that he would be too pro-Russian, have been confirmed by the Turkish authorities. Mr Aliyev hasinjected a degree of distance into relations with Turkey, preferring to build tieswith the US and NATO. He has nevertheless mobilised Turkish support forbuilding an export pipeline through Georgia and Turkey.

Iran

Turkey

Azerbaijan 13


The Caspian Sea dispute

The legal status of the Caspian Sea has been in dispute since 1993 when Russia objectedto Azerbaijan’s plans to develop oilfields in the centre of the sea. Russia, with Iraniansupport, argues that the Caspian Sea’s legal status is defined by Soviet-Iranian treaties of1921 and 1940. According to these treaties, the Caspian Sea is held in common by thefive littoral states (Azerbaijan, Iran, Kazakhstan, Russia, Turkmenistan). A key principle ofinternational law is that successor states are bound by the treaties signed by theirpredecessors. The issue of the Caspian’s legal status is sometimes cast in terms of itsdefinition as either a sea or a lake. In strict legal terms the Caspian is a lake and thus notcovered by the 1982 UN Convention on the Sea. This is because it is an inland body ofwater to which vessels from non-littoral states have no access. The only route to thehigh seas is via the Volga-Don canal, a Russian sovereign waterway.

Azerbaijan’s view is that it is not bound by the 1921 and 1940 treaties as it did not existas an independent state at the time. It wants both the seabed and the surface to be fullydivided up into national sectors. Azerbaijan has pursued a strategy of fait accompli in theCaspian, developing fields in the centre of the sea with little regard for Russian, Iranianor Turkmen protests.

Kazakhstan has consistently taken a moderate view, calling for negotiations on the legalstatus of the sea and confining exploration to parts of the sea that could not possibly beclaimed by other littoral states. Turkmenistan’s position has often shifted in line withpolitical expediency between arguing for national zones and common ownership. Forthe moment the problem is where the Azerbaijani-Turkmen dividing line lies. In January1997 Turkmenistan claimed sovereignty over the Azeri field and part of the Chirag field,the main offshore areas being drilled. A joint government commission to resolve theissue has made little progress. Azeri and Turkmen attempts to develop one field havecancelled each other out with foreign oil companies avoiding the Azerbaijani-claimedKyapaz field (which Turkmenistan calls Serdar).

Negotiations on a new legal convention for the Caspian began between the littoralstates in 1995. No progress was made. In November 1996 Yevgeny Primakov, the thenRussian foreign minister, presented a compromise proposal that the sea be divided intofive national sectors and one central international zone. The proposal failed but was animportant Russian concession. On July 6th 1998 Russia and Kazakhstan agreed to divideup the northern Caspian Sea’s surface and the seabed between them while maintainingjoint use of the waters of the sea and freedom of navigation in part for environmentalreasons (a provision that gives Russia a veto over any attempt to build pipelines underthe sea). Russia says that until the status of the whole sea is settled the 1921 and 1940treaties remain valid. In practice, Russia’s willingness to compromise means that theseabed, and thus the oil and gas resources, will be divided up as Azerbaijan wants.

Relations with the US and the EU have developed rapidly because of theparticipation of their oil firms in developing the Azerbaijan oil sector. In 1996the US and Azerbaijan established a political dialogue on regional securitymatters. However, US domestic politics have interfered in the relationshipthrough the lobbying process that influences the US Congress. In 1992Congress, under pressure from Armenian American groups, designatedAzerbaijan the aggressor in the Karabagh war and demanded the suspension of

The US and the EU

14 Azerbaijan


most forms of US aid until there was an end to the economic blockade ofArmenia (Section 907 of the Freedom Support Act). The ban has been repeat-edly upheld by Congress and it has become a focus of tension and muchlobbying, since Azerbaijan feels it is being dealt with unfairly, especially givenits role as a commercial and security partner for the West.

In April 1996 Azerbaijan signed a Partnership and Co-operation Agreement(PCA) with the EU; the agreement came into force in 1999. The PCA issupposedly contingent upon Azerbaijan respecting democracy and humanrights, and having a current-account convertible currency. Azerbaijan fails onall three grounds. The UK has developed a strong diplomatic position inAzerbaijan because of the importance of British Petroleum (BP) in AIOC. At theDecember 1996 Lisbon summit of the Organisation for Security and Co-oper-ation in Europe (OSCE), all the European countries, the US and Russia backedthe principle of the territorial integrity of Azerbaijan.

The Azerbaijani military is weak, poorly officered and badly equipped. Thearmy was roundly defeated by the Armenian army in 1993 and 1994, despitetraining by Turkish officers. According to the 1999 edition of The MilitaryBalance from the International Institute for Strategic Studies (IISS) in London,total active strength of the Azerbaijani forces is 66,700 of which 53,000 are inthe army. There is a separate force of 20,000 interior ministry troops. As ofJanuary 1999 the armed forces had 270 tanks, 557 other armoured vehicles and301 artillery pieces. The Azerbaijani air force has 36 fixed-wing combat aircraft,half of which are obsolete, and 15 attack helicopters. The navy has two lightlyarmed frigates and assorted smaller vessels moored in the Caspian.

Resources and infrastructure

Population

The population stood at 7.95m at the beginning of 1999. The population’sgrowth rate has slowed steadily. Average annual growth rates were 3% between1959 and 1970; the rate dropped to 1.8% in 1970-79 and to 1.5% in 1979-89.Between 1989 and 1999 the growth rate was 1.3%. Together with some netemigration, the declining rate of growth in the 1990s is due to a fall in thebirth rate from 26.3 per 1,000 of the population in 1990 to 15.7 per 1,000 in1997. Infant mortality rose sharply during the period of economic collapse to28.2 deaths per 1,000 births in 1993. Infant mortality has declined since then,and in 1998 was 16.6 deaths per 1,000 births—lower than the 1990 level of 23per 1,000 births but still three times the level in developed countries.(Reference tables 1 and 2 contain population statistics.)

Demographic trends

Defence

Azerbaijan 15


Population trends1990 1998

Population 7,186,600 7,876,700

Life expectancy at birth (years) 71.1 71.6 Male 67.4 67.9 Female 74.8 75.0

Source: State Statistical Committee, Statistical Yearbook of Azerbaijan, 1999.

The urban population has mainly grown because of migration from thecountryside to the towns. However, the emigration of ethnic minorities, whomostly lived in the towns and cities, and the faster population growth rate inthe countryside where half of all ethnic Azerbaijanis still live, have slightlyreversed urbanisation. In the 1989 census 53.9% of the population was urban.This fell to 51.7% in 1999. Agriculture remains the largest employer, accoun-ting for 36.6% of those in employment in 1998. (The distribution of the labourforce is shown in Reference table 3.)

According to the 1989 census—the most recent survey of ethnic origin—Azerbaijanis constituted 82.7% of the population, Russians and Armenians 6%,and Lezghins, a Muslim Caucasian people who also live in Dagestan, 2.4%.Other minorities include Ukrainians, Georgians, Tatars, Jews, Tats, Talysh andKurds. Since the census, almost the entire Armenian population outsideNagorny Karabagh has left as a result of the war, while the republic hasreceived an influx of 192,000 Azerbaijanis from Armenia. The government says853,000 Azerbaijanis were displaced within the country as a result of the war.

More than 80% of the population are Muslim: this includes the Azerbaijanis,many Georgians and other indigenous groups such as Lezghins and Kurds.Most Azerbaijanis are Shia Muslims with around 30% Sunnis. Azerbaijani is aTurkic language closely related to Turkish, and more distantly to Turkiclanguages in Central Asia. Until the 1920s the Arabic script was used. It wasreplaced by the Latin alphabet in 1929, but ten years later the Cyrillic scriptwas made compulsory, as a way of increasing dependence on Russia. Amodified Latin alphabet derived from Turkish was introduced in early 1992.Following independence the government began to phase out the use ofRussian, but it is still spoken widely.

Education

The education system is a product of the Soviet era; it has some fields of excel-lence but suffers from an acute lack of investment since the demise of theSoviet Union. The dislocations caused by the Karabagh war plus the exodus ofmany highly educated professionals have put further stress on the system. Thenumber of educational institutions, students and disciplines has fallen inrecent years with one-third of pupils attending school in shifts. The law oneducation of 1992 permits both state and private educational institutions, butthe latter are still undeveloped. Training for industry, transport and agricultureis conducted in a network of vocational schools.

Urbanisation

Ethnicity

The education system

16 Azerbaijan


Although on paper education levels in Azerbaijan look comparable with thoseof more developed countries, and are better than those in Turkey, standards arelow and falling. Over 90% of the population over the age of 15 have received atleast the stipulated eight years of schooling. However, the proportion of grad-uates to the rest of the population fell by nearly two-thirds from 1990 to 1999,to just 12 per 10,000 people.

Health

Azerbaijan inherited a universal system of public health with an extensivemedical infrastructure. The quality of service has long been low owing to inef-ficiency and a Soviet stress on expensive in-patient care over out-patient andprimary healthcare. Preventive care and early treatment are weak. The finan-cing of public health has always been insufficient and inefficient and hasdeteriorated since independence. In the immediate aftermath of independencethe death rate from a range of illnesses soared because of economic collapse.These death rates have since fallen back considerably.

In 1995 the health ministry initiated proposals for healthcare reform. Theseinclude raising the number of medical institutions that are self-financing.There were also plans to reduce the share of wages of healthcare workers that isfinanced by the budget by some 30% in 1996/97, and by 40% in 1997/98. Freemedical services for the poor are to be preserved. The ratio of healthcare spend-ing to GDP fell from 2.1% in 1995 to 1% in 1998.

Natural resources and the environment

Azerbaijan is the largest of the three Transcaucasian countries (86,600 sq km).Of total land area, some 50% is agricultural land, and 2.5% is urban. Forestscover 13% of the country. It has been known since antiquity for its oil deposits.Azerbaijan’s territory is ecologically diverse, and includes plains below sea level,4,000-metre mountains in the Caucasus range, plus desert and sub-tropicalzones. Lowlands occupy more than half the territory. All of Azerbaijan’s riversrun into the Caspian basin. The irrigation system is regulated by waterreservoirs, the biggest being the Mingechaur reservoir on the Kura River. TheCaspian is a productive fishing area and is most famous for its sturgeon, thesource of caviar. However, water pollution is a serious concern and attempts bythe Caspian Sea countries to save the sturgeon’s environment have not gonemuch further than rhetoric.

Pollution in Azerbaijan is the worst in Transcaucasia. It has adequate freshwater reserves but much surface water is polluted. A rise in the level of theCaspian Sea (of about 25 cm per year) is another ecological concern. Despitethe decline in industrial production, atmospheric pollution levels remain high.Land productivity is also undermined by soil salination due to many years ofpoor drainage and irrigation.

Educational standards

Environmental problems

Azerbaijan 17


Transport and communications

Azerbaijan is landlocked. There are just three routes to the high seas, theshortest being through Georgia to the Black Sea, another running throughRussia to the Black Sea and the longest route going south through Iran to theGulf. The Russian and Georgian routes have been periodically disrupted bypolitical instability in the Caucasus. Road and rail links with Russia weredisrupted until 1996 by the Chechen conflict, and in 1999 renewed conflict inChechnya and Dagestan closed one oil pipeline and looked set to dislocatetrade further. Azerbaijan’s economic blockade of Armenia has cut the shortestroute to Turkey. Travel between Azerbaijan and the detached exclave ofNakhichevan is by air or by road through Iran. There are 2,089 km of railways,which are the main source of transport for freight. Much of the rail track androlling stock is in need of overhaul, but Azerbaijan has no repair facilities.

The 24,900 km of road are poorly maintained. The number of passenger carshas remained steady since independence and was 35 per 1,000 people in 1998.The number of trucks, however, fell by 19.7% from 1990 to 1998, in part aresult of the massive decline in external trade. The EU is sponsoring anambitious but as yet ill-defined project to provide east-west transit routes, theTransport Corridor Europe-Caucasus-Asia or TRACECA.

Azerbaijan has direct maritime connections only with other Caspian littoralstates, and can only reach the high seas through the Volga-Don canal, aRussian waterway. Baku has the largest port on the Caspian Sea, but it is in apoor state of repair. Increasing amounts of Kazakh oil are being shipped acrossthe Caspian to Azerbaijan because of pipeline bottlenecks in Russia, an arrange-ment that will end in 2001 when the Caspian Pipeline Consortium’s pipelineto the Russian Black Sea port of Novorossisk opens.

There are flights to other former Soviet republics, although their frequency ismuch reduced, as well as to Germany, the Netherlands, Switzerland, Israel,Iran, Turkey, the UK and the United Arab Emirates. There are internationalairports at Baku, Ganja and Nakhichevan, all of which are in need of recon-struction and repair. Turkish Airlines, Lufthansa and British Airways haveoffices in Baku.

The telecommunications infrastructure is poorly developed. In 1998 Azerbaijanhad just 8.7 telephone connections per 100 people, well below the developedcountry minimum of 40 per 100. The waiting list for new lines is long. Mobiletelephone use has grown rapidly from zero in 1993 to 100,000 subscribers in1998, but it remains costly. Azerbaijan uses the GSM mobile phone system.International telecommunications links are handled through Israel, Turkey, theUK and the US. The communications ministry envisages widespread privati-sation of the sector, with the state retaining only a 51% stake in strategic areas,but this has yet to take shape.

The number of television sets is estimated at around 1.5m. Growing numberscan receive Turkish TV. The local media are in the main pro-government,although some opposition publications are tolerated.

Roads and railways

International links

Telecommunications andthe media

18 Azerbaijan


Energy provision

The production and refining of oil and gas form the bedrock of the economy.According to the BP-Amoco (UK) annual guide to oil and gas statistics,Azerbaijan has proven oil reserves, of 7m barrels, equal to 0.7% of worldreserves and the country is a growing net oil exporter. The State Oil Companyof Azerbaijan (SOCAR) is more optimistic and puts proven reserves at 17.5bnbarrels, which probably reflects the Soviet-era practice of including reservesthat are either not viable or not fully proven into the total. Either way,Azerbaijan’s oil reserves are small in comparison with the Middle East whereproven reserves are put at 674bn barrels or 64% of world reserves. To discoverand develop new offshore oil deposits, Azerbaijan needs billions of dollars ofinvestment in exploration, production and in downstream activities such asrefining and pipeline construction. Offshore production costs are high,although SOCAR’s inefficiency makes its onshore production costs higher.

There has been intensive oil extraction in Azerbaijan since the second half ofthe 19th century. By 1900 Baku was producing 50% of the world’s oil supplies.Oil production peaked in 1943 at 460,000 barrels/day. Production graduallydeclined as the Soviet Union turned the focus of its exploration to Siberia, andequipment and facilities in Azerbaijan deteriorated. Crude production grad-ually fell to 234,000 b/d by 1991. Production in existing fields, particularly theold onshore fields owned by SOCAR, is declining. In 1998 SOCAR produced182,000 b/d, a 27% decline from 1990. Onshore production in 1998 was just34,000 b/d, down by 35%. In November 1997 the Azerbaijan InternationalOperating Company (AIOC) began production. AIOC is a British-American-Norwegian-led oil consortium which signed a contract in 1994. Offshoreproduction by AIOC reached 48,000 b/d in 1998 and climbed rapidly to 89,000b/d in the first half of 1998 and 110,000 b/d in the first six months of thefollowing year. Since early 1999 AIOC production has been exported via a pipe-line through Georgia to the port of Supsa. The pipeline was an old structure,but the refurbishment process was so extensive that most of the pipe is new.Pipeline capacity in 1999 was some 110,000 b/d but in coming years this couldbe doubled with additional upgrading work.

Baku-Supsa was the second export pipeline to be opened. The first, runningfrom Baku to Russia’s Black Sea terminal at Novorossisk, was opened at the endof 1997 with a capacity of around 100,000 b/d. From the beginning of 1999 aspate of deliberate explosions and technical problems rapidly made the pipe-line unusable, and it was effectively closed in July. From September 1999fighting in Chechnya, through which the pipeline runs, made a rapid resump-tion in its operation unlikely. As a stopgap measure some oil was transportedpart of the way through the pipeline, loaded onto trains in Dagestan andcarried along a route avoiding Chechnya, and then put back into the pipeline,but this method was of limited effectiveness. The Russian governmentproposed to build a new section of pipeline to skirt Chechnya, but this did notoffer a rapid solution, either.

Oil and gas

Azerbaijan 19


Oil and gas contracts

The 1994 production-sharing agreement (PSA) signed with the Azerbaijan InternationalOperating Company (AIOC) was the first oil contract signed with Western firms, and sofar has been the most important. At the time of writing 16 such contracts have beensigned. The most important are listed below.

Azeri-Chirag-Gunashli: The “contract of the century” concluded in September 1994for development of the Azeri and Chirag fields and the deep-water section of theGunashli field, holding estimated reserves of 650m tonnes (5bn barrels). The companiesin AIOC are BP-Amoco (UK; holding a 34% stake), the State Oil Company of Azerbaijan(SOCAR; 10%), LUKoil (Russia; 10%), Unocal (US; 10%), Statoil (Norway; 9%); Exxon(US; 8%), TPAO (Turkey; 7%), Pennzoil (US; 5%), Itochu (Japan; 4%), Ramco (UK; 2%)Delta (Saudi Arabia; 2%). Total pledged investment is $7.2bn.

Karabagh: This offshore field was thought to contain up to 1bn b of oil butexploratory wells came up nearly dry. As a result the consortium closed in January 1999.The contract that was originally signed in November 1995 was with the CaspianInternational Petroleum Company (CIPCO), led by Luk-Agip (Russia-Italy; 45%),Pennzoil (30%), LUKoil (12%), SOCAR (8%) and Agip (5%). Pledged investment ifsuccessful would have been $1.7bn.

Shah-Deniz: Instead of containing 1.5bn b of oil, the field contains an estimated 500bn cu metres of gas, which the consortium members claim to be happy with. Theconsortium, which signed a contract in July 1996, is led by BP (with 26%) and Statoil(26%), and also includes SOCAR (10%), LUKoil (10%), OIEC (Iran; 10%), Elf Aquitaine(France; 9%) and TPAO (9%). Total pledged investment is $4bn.

Dan Ulduzu and Ashrafi: This contract, for two fields that were expected to hold900bn barrels of oil between them, was signed in December 1996 by the NorthApsheron Operating Company (NAOC) led by Amoco (30%) with Unocal-Delta (30%),Itochu (20%) and SOCAR (20%). The consortium closed in May 1999 after hitting drywells. Pledged investment if successful would have been $1.7bn.

Lenkoran-Deniz and Talysh-Deniz: The agreement for these fields holding aprojected 400bn barrels of oil was signed in January 1997. The companies involved arethe operator, Elf Aquitaine, with a 40% stake, 5% of which it subsequently sold toPetrofina (Belgium); SOCAR with 25%, Total (France; 10% stake), OIEC (10%), Deminex(Germany; 10%) and Agip (5%). Pledged investment is $1.5bn.

Yalama (D-222): The agreement for this field, with some 400bn barrels in reserves wasconcluded in July 1997 with LUKoil, which is also developing the same deposit where itcontinues into Russian territorial waters. LUKoil’s 60% share is now held by a jointventure in which it is a partner, Lukarco (Russia-US). The remaining 40% stake belongsto SOCAR. Pledged investment is $2bn.

Until the Baku-Novorossisk pipeline started carrying AIOC crude to market atthe end of 1997, virtually all of Azerbaijan’s oil output was processed in thecountry’s three oil refineries. The two main refineries, located in Baku, havecapacities of 235,000 b/d and 150,000 b/d.

20 Azerbaijan


SOCAR production will continue to fall, while AIOC output will reach200,000 b/d in 2000-01. At that point the export capacity of existing pipelinesbecomes a block on increased oil production. (Reference table 4 containshistorical data on oil and gas production.) AIOC is threatening to delay a$3.1bn phase one expansion programme to produce 300,000 b/d by 2003unless there is a government decision on an export pipeline. To cope with thelarge volumes of exports expected towards 2010, the government, AIOC andforeign states have been engaged in lengthy negotiations on a large-capacitymain export pipeline (MEP). A decision on whether and where this was to bebuilt has been postponed a number of times. The Russians have lobbied for theMEP to be laid along the Baku-Novorossisk route, but this seems unlikely bothbecause of immediate security problems in the North Caucasus andAzerbaijan’s concerns about Russia as a regional power and rival oil producer.

There has been considerable pressure from the US and Turkey for the MEP torun from Baku through Georgia and then through Turkey to the TurkishMediterranean terminal of Ceyhan. Baku-Ceyhan is the Azerbaijani govern-ment’s preferred option for political reasons. However, AIOC members, and inparticular the largest shareholder, BP-Amoco, oppose Baku-Ceyhan becausethey argue it is not commercially viable. Independent studies show that Baku-Ceyhan is probably not commercially viable under any circumstances, even ifTurkey were to block oil exports through the Black Sea by levying tolls at theBosphorus. AIOC favours a gradual expansion in capacity for the Baku-Supsaroute, and says that this could then be extended to Ceyhan when conditionsare right. The US government has opposed this proposal, viewing it as a way ofdiluting and then shelving the full Baku-Ceyhan project.

Azerbaijan has become self-sufficient in gas, having phased out imports in1995. BP Amoco puts Azerbaijan’s proven gas reserves at 850bn cu metres.Output fell by 43.6% from 9.93bn cu metres in 1990 to 5.6bn cu metres in1998, but domestic consumption has fallen far more drastically because ofreduced imports. SOCAR has engaged Shell (Anglo-Dutch), Exxon and Conoco(US) to survey new fields. The AIOC delivers associated gas from its offshore oilwells free of charge to SOCAR. In 1999 the government began talking up thecountry’s prospects as a major gas producer and exporter after the Shah Denizfield turned out to contain around 500bn cu metres of gas, rather than the oilthat had been hoped for.

Azerbaijan is self-sufficient in electricity production and has 18.9bn kwh ingenerating capacity (1998 figures). Hydroelectric power stations account for18% of this capacity. In 1990, the year before independence, Azerbaijanproduced 23bn kwh of electricity. Although generation fell consistently year onyear so that by 1997 only 16.8bn kwh was generated, generation rebounded in1998 to reach 18bn kwh. Generating technology is obsolete and in need ofreplacement. Charges for household consumption of electricity are stillsubsidised, and non-payment by domestic and industrial consumers is apersistent problem.

Electricity

Gas

Azerbaijan 21


Energy balance, 1998

(m tonnes oil equivalent)

Elec-Oil Gas tricity Othera Total

Primary production 11.5 4.7 0.4 0.2 16.8Imports 0.1 0.0 0.3 0.0 0.4Exports –5.6 0.0 –0.2 0.0 –5.8Primary supply 6.0 4.7 0.5 0.2 11.4

Net transformation –1.0 –3.0 0.9 0.0 –3.1Final consumption 5.0 1.7 1.4 0.2 8.3

a Other sources of energy production include charcoal and wood.

Source: Energy Data Associates.

The economy

Economic structure

Main economic indicators, 1998

(% unless otherwise indicated)

Real GDP growth 10.0

Consumer price inflation –0.8

General government balance (% of GDP) –4.2

Current-account balance (% of GDP) –33.1

Average exchange rate (Manat:$) 3,868

Source: IMF.

The economy began to recover from a deep recession in 1996, initially growingby 1.3% that year with growth accelerating to 10% in 1998 before slowing in1999. The recovery was driven by investment, most of it from abroad, in theoil industry and associated sectors such as construction and communications.The economy had slumped as a result of the break-up of the Soviet economicsystem and decades of economic mismanagement, resulting in the loss ofmarkets and a disruption in supplies. These problems were compounded by theKarabagh conflict, which soaked up government resources and produced overhalf a million Azerbaijani refugees. As a result, even in the third year ofrecovery, real GDP in 1998 was only 49.5% of its 1990 level. (Reference table 5contains historical data on GDP.)

At the end of the Soviet period, industry, particularly fuel but increasingly alsomanufacturing, and agriculture were the traditional mainstays of the economy.Industry was 22.3% and agriculture 20.3% of GDP in 1998, compared with23.6% and 30.4% of GDP, respectively, in 1991. Changes in relative prices andthe economic shock caused by the collapsing Communist system have causedsignificant changes in the composition of GDP. The fuel sector has become amajor contributor to GDP, accounting for 15% in 1998 (on EIU estimates) asopposed to just 2.6% in 1991. The shares of transport, communications and

22 Azerbaijan


trade have also risen. (Further information on the sectoral composition of GDPis provided in Reference table 6.)

The structure of GDP by expenditure shows a growth in the share of householdconsumption, a sharp fall in government consumption and a drop in the over-all share of trade in the economy. The share of fixed investment in GDP beganrising in 1996, most of it from foreign direct investment (FDI). By 1998 fixedinvestment contributed 40.6% of GDP, more than twice the 1995 figure.(Reference table 7 provides fuller information on GDP broken down byexpenditure.)

Comparative economic indicators, 1998Azerbaijan Georgia Armenia Russia Turkey Iran

GDP ($ bn) 4.1 4.8 1.9 276.6 202.2 61.0

GDP per head ($) 520 898 483 1,888 3,187 983

GDP per head ($ at PPP) 1,191 1,355 2,508 4,141 6,204 6,014

Consumer price inflation (av; %) –0.8 3.6 8.6 27.8 84.6 19.4

Current-account balance ($ bn) –1.4 –0.5 –0.4 2.4 1.9 –2.2

Current-account balance (% of GDP) –33.1 –11.3 –20.7 0.9 0.9 –3.6

Exports of goods ($ bn) 0.7 0.3 0.2 74.8 31.2 12.9

Imports of goods ($ bn) 1.7 1.2 0.8 57.4 45.6 13.7

External debta ($ bn) 0.7 1.8 0.7 149.2 101.2 12.8

a EIU estimates.

Source: EIU.

Economic policy

Azerbaijan faced problems common to most former Soviet republics followingindependence in 1991: a huge terms of trade shock, the end of Soviet subsidiesand the need to reverse decades of failed Communist economics, which hadcreated a highly distorted economy. These factors, which led to a massive dropin output and rampant inflation, were exacerbated by political instability—inthe period 1992-93 Azerbaijan had five heads of state—and most importantlythe war with Armenia. Although there were some attempts to tackle theseproblems early on, such as the 1992 price liberalisation that Azerbaijan wasforced to implement because of a similar liberalisation in Russia, no real prog-ress was made until 1995.

Although the government is in theory committed to both stabilisation andstructural reform, in practice stabilisation is the only step to have been taken.Like other former Soviet republics, a realistic stabilisation programme couldonly begin when Azerbaijan had left the rouble zone in 1993 and escaped thehyperinflationary policies being implemented by the Russian Central Bank.Azerbaijan pursued a tight monetary, tight fiscal policy mix for the first twoyears of stabilisation. Prices were gradually liberalised. The most importantprices in the economy, of money (interest rates and the exchange rate), werealso moved towards more realistic rates making monetary policy more effec-tive. The exchange rate is now a managed float, designed to prevent inflation

Post-Communist challengeswere aggravated by the

war in Karabagh—

—with stabilisationbeginning only in 1995

Azerbaijan 23


but also to prevent over-appreciation caused by oil-related capital inflows.Domestic interest rates are also positive in real terms. As a result inflationslowed from an annual average in 1994 of 1,664% to 3.7% in 1997 (seeReference table 8).

Domestic oil prices are now comparable with international oil prices. However,as Azerbaijan’s borders are largely open, petrol and other refined products areimported at cheaper prices. The effect has been to damage the local refiningindustry, reduce revenue from oil products excises, but also to keepinflation low.

On the fiscal side the government has successfully brought the budget deficitdown to non-inflationary and manageable proportions. Spending was highduring the Karabagh conflict. In 1993 the deficit was 15.3% of GDP, but by1997 it had been cut to 1.7%. Revenue collection remains weak, in partbecause the failure to privatise and pursue a programme of structural reformmeans that few firms outside the oil sector are worth taxing. The governmentcollects royalties from downstream producers such as the State Oil Company ofthe Azerbaijan Republic (SOCAR) and its production subsidiaries, as opposed tothe upstream exploration and production companies, which are majorityforeign-owned—these royalties were worth 1.8% of GDP in 1998. There hasalso been a shift towards indirect taxes with value-added tax (VAT) now themost important source of tax revenue (see Reference tables 9 and 10 for fiscaldata).

In 1997 and 1998 Azerbaijan began experiencing some of the problems oftenassociated with overdependence on the oil sector and “Dutch disease” (when anatural resources boom causes the currency to overappreciate, thereby makingnon-natural resources exports uncompetitive). First, the manat over-appreciated as a result of large oil-related capital inflows. Then the oil exportprice plunged because of weak global demand following the Asian financialcrisis. The drop in world raw materials and commodity prices in 1998 helpedslow annual average inflation to –0.8%, but it also slashed export earnings andcontributed to a liquidity crunch as the money supply shrank. The large deval-uation of the Russian rouble in August 1998 also put the manat under pressure.The fiscal deficit rose to 4.1% of GDP and the manat stopped its strong nomi-nal appreciation.

With inflation under control, the government, in co-ordination with the IMF,was forced to loosen policy. The highly restrictive monetary policy and theliquidity crunch were preventing the development of a non-oil export sector.The government therefore loosened fiscal and monetary policy, with fiscalspending concentrating on cash payments to pensioners and other needysections of the population. The government also devalued the manat by anominal 6.9% on June 8th 1999, a measure that was achieved without creatingpanic or a run on the banks. The devaluation was widely expected and manysavers had already shifted from manat to dollars.

Privatisation and structural reform have lagged well behind changes in mone-tary and fiscal policy. With unemployment at around 20% the government is

The 1998 drop in oil pricesbrought looser fiscal and

monetary policy—

—but that has yet to forcesignificant reform—

24 Azerbaijan


wary of any changes, such as the closure of insolvent firms, which would strainthe social fabric further. In addition, the government has to contend withconsiderable vested interests in industry and the fact that industrial firms andrampant local corruption mean that foreign investors are largely uninterested.On the other hand, the failure to sell off or close loss-making state-ownedindustrial firms is making the economy more dependent on oil and creatinghardship as many of these firms stay afloat by simply not paying their workers.Total inter-enterprise arrears in the economy were Manat35.4trn ($9.1bn or222.2% of annual GDP) at the end of 1998.

Financial sector reform has also been slow to start, in part because the govern-ment is trying to protect the four main Soviet-era banks, which still dominatethe banking market. By protecting these banks and retaining a stake in themthe government hopes to increase their privatisation value while retainingsome control over them in the future. Although bank credit to the privatesector rose steeply in 1997 and 1998, most credits were overwhelmingly short-term and the credit to the private sector/GDP ratio in 1998 was just 3.3% (seeReference table 11 for information on the money supply).

Despite rhetoric about diversifying the export base, the main thrust of policy isto develop the oil sector as fast as possible. This policy is as much political as itis economic. By maximising exposure to the foreign private sector thegovernment believes that it has given foreign countries, through theircompanies, a stake in continued Azerbaijani independence. From an economicangle, foreign investment in the oil sector has led to rapid economic growth inthe short term. Given the need to resurrect a collapsed economy, the Aliyevgovernment made the only choice available to it. The process of developingthe oil sector, in particular the offshore deposits in the Caspian Sea, began withthe signing of the Azerbaijan International Operating Company (AIOC) deal inSeptember 1994. Although Azerbaijan has exaggerated its resource endowment,it is the best placed of the newly independent states to exploit its oil reservesand also has the most open investment environment. However, Azerbaijan’shaste has created political problems with Russia and Iran because of Baku’sdisregard, and at the beginning probably simply ignorance, as to the legalbeginning probably simply ignorance, of the legal status of the Caspian Sea.Another offshoot of the oil boom is conspicuous corruption, which carries therisk of sparking political and social unrest.

The government’s major challenge is to make good on its pledge of structuralreform, as Azerbaijan runs the risk of becoming a two-speed economy. On theone hand, there will be an increasingly well-run, foreign-dominated offshoreoil sector. The oil sector will still be subject to the boom-bust cycle of commod-ity prices but will dominate export earnings—oil products already accountedfor 55.5% of export revenue in 1998 on IMF data. On the other hand, SOCARwill start to wither as will its poorly run and overmanned onshore fields. Themanufacturing sector is now producing at such a low level of capacity that ithas in effect been allowed to close on its own. The government will have toput these plants formally into bankruptcy and hope that they can be given to

—with oil still the maingrowth policy

Economic policy challengesahead

Azerbaijan 25


new owners who will salvage something. The delay in selling off non-oil enter-prises has made them largely worthless.

Equally worrisome is the increasingly dependent but financially weakagricultural sector. As in the other relatively resource-rich former Sovietrepublics the government has neglected the agricultural sector in favour ofquick gains from natural resources. Already the largest employer in Azerbaijan,the sector’s share of those in work will grow because of the high birth rate andlow skills base of rural ethnic Azerbaijanis. Within a few years the result will bea labour-intensive, inefficient sector that employs 40% of the workforce,generates barely 10% of GDP and probably less than 10% of exports, receivesvirtually no investment, and is unable to meet domestic requirements for food.

Economic performance

Gross domestic product

(% real change)

Annual average1998 1994-98

GDP 10.0 –3.5

Source: Azerbaijan State Statistical Committee.

Azerbaijan’s drop in economic output was among the worst in the formerSoviet Union. From 1992 to 1995 real GDP more than halved. The ceasefire inthe war with Armenia over Nagorny Karabagh, the shift towards new tradingpartners such as Turkey and EU countries as well as heavy foreign investmentin the oil sector contributed to a sharp turnaround. Real GDP recovered in1996, with growth accelerating to 10% in 1998 and despite a slowdown realGDP growth in the first half of 1999 was still 5.6% year on year. (See Referencetable 5 for data on GDP.)

The motor of economic recovery has for the most part been rising investmentin the oil sector, in production, exploration and construction. From 1995 to1998 investment grew by an annual average of 59.1%. Foreign investmentaccounted for 69% of total capital investment in 1998. Growth in the servicessector, which had been neglected in the Soviet era, also contributed to the eco-nomic recovery, while agriculture’s contribution has been more erratic. Themanufacturing sector has seen its output plunge with previously dominantsectors such as metallurgy undergoing a 95.6% fall in output from 1993 to1998. Manufacturing is typified by obsolete technology, low labour produc-tivity, uncompetitive products and a lack of investment because of the govern-ment’s unwillingness to restructure the sector.

Inflation accelerated sharply in 1992 with price liberalisation. Prices thenrocketed when the government, under the strain of the war with Armenia,began to monetise its growing budget deficit. Annual average inflation reached1,664% in 1994. The stabilisation programme put into effect in 1995 endedinflation. The drop in raw materials prices and the central bank’s tight mone-tary policy meant that inflation was –7.6% by the end of 1998. The govern-

Economic stabilisation

Investment in the oil sector

Wages and prices

26 Azerbaijan


ment also slashed spending and was able to finance the budget deficit withbonus payments from oil production and exploration agreements. Even theboost to inflation from the June 8th 1999 devaluation of the manat has beenrelatively mild, with year-on-year inflation unlikely to be in double digits forlong.

Real wages remain lower than they were prior to independence, and in 1998were only 30% of their 1990 level. Real wages have been rising steadily since1996. In June 1999 the average monthly wage was Manat176,700 ($45), up by1.9% year on year in nominal terms—in real terms an 8.2% year-on-yearincrease. Public-sector workers have not had the full benefits of real wageincreases because of late payment of wages in the public sector and from state-owned companies. Wages in the public sector have been linked to the mini-mum monthly wage since late 1993. The minimum wage is supposedlyinflation-indexed, but in reality increases have fallen far short of the rapidlyrising cost of living. (Information on prices and wages is set out in Referencetable 8.)

Wages and prices

(% change)


Consumer prices –0.8 156.6

Nominal wages 19.9 132.2

Real wages 20.9 –9.5

Source: TACIS; Azerbaijan Economic Trends.

Economic sectors

Agriculture

Agricultural productionAnnual average

1998 1993-98

% real change in value terms, year on year 3.9 –8.0

Sources: IMF, Azerbaijan Republic: Selected Issues, 1999; EIU calculation of average.

Agriculture is the largest employer with 36.6% of the workforce in 1998. Thesector also generated 20.3% of GDP in 1998. After a decline in 1992-95, the realvalue of agricultural output began to recover in 1996, before dipping again in1997 because of poor weather. The sector has since recovered and meets mostof Azerbaijan’s need for grain. Most farming activity has traditionally beenconcentrated in the fertile lowlands of central Azerbaijan, along the Kura andAraxes rivers, mainly oriented to growing grapes and vegetables. With much ofthis land now either under Armenian control or dangerously near the frontline, vegetable output has halved, and grape production and wine output inparticular have collapsed. The Soviet system of collective and state farms is

Azerbaijan 27


being dismantled but the new farms are smaller than the older ones, losing anypotential economies of scale.

Cotton production has been hit by shortages and price increases of nitrogenfertilisers, defoliants and spare parts for harvesting machinery, most of whichcome from Russia and Uzbekistan, as well as weak export prices. The 1998harvest was the worst performance since independence. Just 112,900 tonnes ofraw cotton were produced, barely one-fifth of 1990 output of 542,900 tonnes.(Reference tables 12 and 13 show the production and yields of agriculturalcrops; Reference tables 14 and 15 show livestock numbers and output.)

Mining

Azerbaijan’s mineral resources include iron, aluminium, zinc, copper, arsenic,molybdenum, marble and fire clay. There are small reserves of gold, which arepresently being mined by Armenia in the occupied Kelbajar region. Mostresources are being exploited, but the mining industry is badly in need ofmodernisation.

There are large reserves of iron and aluminium ores located in the Dashkesanmountains of the Lesser Caucasus. Estimated iron reserves are 200m-250mtonnes. Iron ore extraction has been suspended since the dissolution of theSoviet Union as Georgia, the sole consumer, ceased purchases.

Manufacturing

The industrial sector

(physical volumes of production; % change year on year)


Total industrial production 2.2 –10.8 of which: fuel industry 7.5 –1.5 electricity 5.9 –4.5 metallurgy –54.6 –41 of which: ferrous metals –70.6 –52.5 non-ferrous metals –35.1 –32.4 machine-building –30.4 –30.2 chemicals & petrochemicals –11.4 –16.4 lumber & paper –64.5 –47.6 construction materials –22.2 –28.7 light industry –41.9 –28.9 food industry –2.3 –26.8

Sources: IMF, Azerbaijan Republic: Recent Economic Developments, 1998; TACIS, Azerbaijan Economic Trends; EIU calculations foraverages.

The oil equipment manufacturing sector and related machine-building sectors,such as instrument-making, electrical engineering and radio electronics,account for around one-fifth of Azerbaijan’s industrial potential. Oil industryengineering is Azerbaijan’s oldest industry, and the country used to supply 70%

Cotton

28 Azerbaijan


of the Soviet Union’s requirements. Much of the industry is now obsolete andis operating at a fraction of its former capacity. The government views thesector as being of strategic importance and has not included it in its privati-sation plans. Investor interest has been limited owing to the difficulties ofconverting production to internationally recognised standards. As with themanufacturing sector, the government’s non-reform strategy in effect meansletting the sector wither away.

Since independence there has been a collapse in non-oil related sectors. Thebulk of Azerbaijan’s heavy industry is in the town of Sumgait, just north ofBaku. The industrial enterprises based there used to produce a wide range ofpetrochemicals products (synthetics, rubber, detergents, polymeric buildingmaterials), aluminium, textiles and clothing. But much of Sumgait’s manu-facturing capacity is now at a standstill. The government has designated thearea a free economic zone and has invited foreign investors to produce forexport. Little investment has arrived because of the enormous and probablypointless task of attempting to turn around plants using Soviet technology andmanagement practices with high levels of pollution. Output of individualgoods has dropped to almost zero. In 1998 Azerbaijan produced just 3,100tonnes of steel pipes, down from 146,000 tonnes in 1993; and just 3,400 refrig-erators and freezers in 1998 compared with 228m in 1993.

Other important sectors include textiles and food and beverages. These sectorshave not been immune from the steep rate of collapse. Azerbaijan has trad-itionally been a large textiles producer, with four major plants that use domes-tically produced cotton as inputs. (Reference table 16 contains data on sectoralchanges in industrial production, and Reference table 17 shows the origin ofindustrial production by sector.)

Construction

The contribution of construction to GDP doubled to 16.4% in 1997, comparedwith 8.1% in 1990. Construction work associated with the start of foreigninvestment in the oil industry has taken off since 1995. A significant propor-tion of construction activity goes unrecorded. Construction companies fromTurkey are also active in the Azerbaijani market, building homes and businesspremises. As a result of the boom, wages in the sector are the highest in theeconomy and are 2.6 times the average monthly wage (which was $45 in mid-1999) and ten times higher than the average wage in the agricultural sector.The numbers officially recorded as being in the sector are falling, in partbecause of state-sponsored construction and in part because of the growth ofthe informal economy.

Financial services

The Azerbaijan National Bank (ANB, the central bank) was set up in 1992 butonly truly became independent in 1995. The ANB is responsible for monetarypolicy and the supervision of the financial sector. The ANB’s tight monetarystance has been a key success in ending high inflation. In 1999 the ANB

Banking services

Azerbaijan 29


loosened its monetary stance and the manat was devalued by 6.9% on June8th in response to pressure on the exchange rate caused by the crisis in Russia.

The commercial banking sector contains too many banks and most institutionsare small and undercapitalised. Four Soviet-era state banks continue to domi-nate the market. These four banks have been undergoing restructuring prog-rammes supervised by the ANB to prepare them for privatisation or merger.The International Bank, the best positioned and capitalised of the four, was dueto be privatised by the end of 1998 but the government only managed to sell aminority stake to the European Bank for Reconstruction and Development(EBRD). A savings bank, Amanat Bank, is scheduled for privatisation in 1999while the other two state banks, Sanayeinvestbank (known as Prominvestbankin Russian) and Agrosanayebank (Agroprombank) will be restructured further.The four banks still hold the bulk of deposits, employ the most people andhave the most branches. They also have most of the non-performing loans ontheir books.

From 210 banks in 1995 the sector has undergone consolidation, partlythrough the ANB revoking licences for breaches of prudential regulations. As aresult, by April 1999 there were 71 commercial banks, plus the central bankand the four big banks. Twelve were partly foreign-owned. The 71 commercialbanks and the state-owned banks had capital at the end of the first quarter of1999 of just Manat594.7bn ($151m or 3.7% of 1998 GDP), of which 26.3% isconcentrated in the four state-owned banks. The ANB will allow only 30% ofthe capital in the banking system to be foreign-owned and the four state-owned banks are informally protected by the ANB from new competition. TheANB is gradually raising the minimum level of capitalisation for banks, so thatby January 1999 it will be $1.5m and by 2001 it is to reach $5m. (Bankingstatistics are provided in Reference table 18, while Reference table 11 has dataon the money supply.)

The external sector

Trade in goods

Foreign trade, 1998

($ m unless otherwise indicated)

Main exports, fob Main imports, fob

Oil products 417.9 Machinery & equipment 348.3

Cotton 49.3 Food products 175.3

Food products 46.7 Metals 129.7

Machinery & equipment 33.4 Transport equipment 87.1

Plastics 12.0 Chemicals & petrochemicals 79.4

Total incl others 606.3 Total incl others 1,077.2

Note. Export and import figures used for direction of trade are customs data and differ from thoseused in the balance of payments, mainly because they do not fully take into account transactions byforeign oil consortia.Source: TACIS, Azerbaijan Economic Trends.

30 Azerbaijan


Azerbaijan has traditionally depended heavily on trade, with imports andexports averaging 37% and 46% of GDP, respectively, during the latter half ofthe 1980s. In 1992 Azerbaijan registered a trade surplus, but a deficit openedup in 1993, initially as a result of the decline of the export sector of the eco-nomy. Since 1996 there has also been a rapid increase in imports, attributableto the influx of machinery and equipment for the oil industry, but it is also dueto a rise in consumer goods imports as domestic demand increases. Azerbaijanis increasingly reliant on crude oil exports for export growth, while exportsfrom the uncompetitive manufacturing sector have plunged.

Trade data are often unreliable: the figures for imports and exports presented inthe balance of payments reflect the position best. Balance-of-payments datahave been compiled by both the IMF and the Azerbaijan National Bank (ANB).These series differ a little from each other, but both take into account theimport of technology by international oil companies and also make an esti-mation of unrecorded trade, which mostly means massive smuggled consumergoods imports. However, the only data available on the direction and compo-sition of trade come from the State Customs Committee, which fail to reflectfully these two components (the oil industry and unrecorded trade). As aresult, the State Customs Committee understated exports by 10.8% andimports by 37.5% in 1998. (Reference tables 19 to 22 show the trade figures bycomposition and use customs data. IMF data on the balance of payments aregiven in Reference table 25.)

Following independence in 1991, Azerbaijan moved swiftly to reorient itselftowards new markets outside the former Soviet Union and the Commonwealthof Independent States (CIS, the former USSR excluding the Baltic republics). Asoil exports from the Azerbaijan International Operating Company (AIOC), thekey growth element in exports for the foreseeable future, are sent to Europeanmarkets, so dependence on the CIS is decreasing. Turkey was the largest tradingpartner in 1998. Trade with Iran and Turkey, the two most important partnersoutside the CIS, has proved erratic because of those countries’ volatileeconomies. Exports to Turkey surged in 1998 while exports to Iran plunged. Bycontrast, imports from Turkey rose and imports from Iran fell over the period.

In 1998 the CIS accounted for 38.3% of Azerbaijan’s exports and 37.6% of itsimports, compared with 94% and 80% respectively in 1991. Within the CIS,Russia, Georgia, Turkmenistan and Ukraine remain important trading partners,although all are in decline. Exports to Russia fell from 25.6% in 1993 to 17.5%in 1998, in part because of the halt in rail traffic arising from the war inChechnya and the volatility of the Russian market. Imports from Russiashowed similar trends, and stood at 18% of the total in 1998, down from20.2% of a much smaller value of imports in 1993. (Reference tables 23 and 24show customs data on trade by country.)

Data problems

Less dependence on CISmarkets

Azerbaijan 31


Main trading partners, 1998

(% of total value)

Exports to: Imports from:

Turkey 22.4 Turkey 20.4

Russia 17.5 Russia 18.0

Georgia 12.7 Ukraine 8.6

Italy 7.4 Germany 4.3

Iran 7.3 UAE 4.2

Turkmenistan 2.0 Kazakhstan 4.1

Source: TACIS, Azerbaijan Economic Trends.

Invisibles and the current account

Current account, 1998

($ m except where otherwise indicated)

Merchandise exports fob 677.8

Merchandise imports fob –1,723.9

Trade balance –1,046.2

Net services balance –369.1

Net interest, profit & dividends –13.3

Net transfers 64.1

Current-account balance –1,364.5 % of GDP –33.1

Sources: IMF, International Financial Statistics; Azerbaijan Republic:: Recent Economic Developments, 1995 (for 1993 data), 1998; TACIS,Azerbaijan Economic Trends.

The current-account deficit began to widen in 1993 and reached 33.1% of GDPin 1998, according to the IMF. A key element in the current-account deficit isthe massive and widening deficit on visible trade. There has been a positiveinflow on the services accounts as a result of business travel related to the oilindustry. However, this has not cancelled out the massive flow of servicesdebits because of costs associated with the oil industry. The transfers balance ispositive owing to humanitarian aid to assist the hundreds of thousands ofrefugees from the war with Armenia. The current-account deficit is expected toremain large until at least 2000. With the beginning of significant levels of oilexports by 2001, the trade and current-account balances are expected to shrinkand eventually to show surpluses. This expectation is contingent on thegovernment and AIOC resolving their differences over export pipeline routes.(IMF data on the current account are shown in Reference table 25.)

Capital flows and foreign debt

In 1998 the large current-account deficit was financed by a positive inflow onthe capital and financial accounts of $1.33bn, up from $1.08bn in 1997. Thebulk of these capital inflows, $1.02bn, came in the form of foreign directinvestment (FDI), of which $756.9m went into the oil sector and $74.7m wasoil contract signature bonuses, up-front payments from the oil companies.Portfolio investment remained negligible. Medium- and long-term loan

Capital flows

32 Azerbaijan


disbursements came to $62.4m, according to the IMF. At the same timeAzerbaijan had $73.9m in principal repayments. (Data on capital flows can befound in Reference table 25.)

Azerbaijan’s debt burden remains moderate and manageable, in part because ofthe government decision to finance the current-account deficit through FDIrather than debt inflows. According to the most recent World Bank figures,Azerbaijan’s total foreign debt stock stood at $503.7m at the end of 1997,which the EIU puts at 13.1% of annual GDP. The IMF estimates total debt stockto have been 14.5% of GDP at the end of 1997, which implies a higher figureof $559m. The bulk of the debt is on concessional terms granted by multi-lateral lenders. The IMF remains the single largest creditor and was owed$266.8m at the end of 1997. The EIU estimates Azerbaijan’s debt stock to havereached $656m (15.9% of GDP) at the end of 1998. Although debt is rising, thegovernment hopes that future debt-servicing obligations will be covered by oilrevenue. (World Bank data on debt are shown in Reference table 26.)

Foreign reserves and the exchange rate

Azerbaijan has built up its foreign-currency reserves from about $600,000 atthe end of 1993 to $447.3m at the end of 1998. Reserves were given a furtherboost by the devaluation of the manat on June 8th 1999. By the end of June1999 reserves had reached $633.2m, their highest level yet, equivalent to 3.1months of goods and services import cover (calculated at 1998 import levels).Reserves have been built up using the residue from oil-deal bonuses after allo-cations to cover the budget deficit. Since March 1995 the central bank, theAzerbaijan National Bank (ANB), has had sole responsibility for managingthese foreign-currency reserves. (IMF figures on Azerbaijan’s reserves are shownin Reference table 27.)

The government introduced the national currency, the manat, as a parallelcurrency in mid-1992 at a rate of Manat1:Rb10. After the currency reform inRussia in July 1993 the Azerbaijani government began phasing out the roubleas legal tender. From January 1994 the manat became the sole legal currency.

Despite optimism about Azerbaijan’s oil potential, political turmoil led to aspectacular collapse in the months that followed. From an official rate ofManat118:$1 at the start of 1994, the manat was trading at more thanManat4,300:$1 by the beginning of 1995. The manat subsequently began toappreciate following large oil-related capital inflows. By the end of 1998 it hadappreciated to Manat3,890:$1. The danger is that a real appreciation of themanat could cause “Dutch disease” whereby a fast-appreciating currency makeslarge non-oil swathes of the export sector uncompetitive. After Azerbaijanbegan to experience the fallout from Russian financial crises in May and espec-ially August 1998, the manat stopped its nominal appreciation and a slowdepreciation began. By June 1999, and with IMF approval, the governmentdecided to devalue the manat by 6.9% to help out the non-oil sector and coup-led this with a loosening of the previously highly restrictive monetary stance.(Historical data on exchange rates are shown in Reference table 28.)

Foreign debt

Reserves

Currency

Azerbaijan 33


In practice Azerbaijan is an increasingly dollarised economy. By April 1999total foreign-currency deposits of firms and households were worthManat478.1bn ($111m), equal to 30.8% of M3 (M2 plus the foreign-currencydeposits of firms and households), up from 26% (Manat493.5bn) a year earlier.The foreign-exchange regime has been liberalised but the manat, although inpractice current-account convertible is not yet formally so. Foreign-exchangetrading takes place at the Baku Inter-Bank Currency Exchange (BICEX), whichhas been operational since August 1994.

34 Azerbaijan


Appendices

Sources of information

The availability of statistical information on Azerbaijan is improving. The bestdata are from the IMF, but are available only annually. The EU through itsTACIS programme publishes a very useful quarterly, Azerbaijan Economic Trends.Information from the EBRD and the World Bank both tend to be of poorerquality. Remarkably data from the annual state statistical yearbook matchthose from the IMF and Azerbaijan Economic Trends.

EBRD, Transition Report, London, annual (with an annual update)

Energy Data Associates, 1 Regent Street, London SW1Y 4NR

EU/TACIS programme, Azerbaijan Economic Trends, Brussels, quarterly since1998

IMF, Azerbaijan Republic: Recent Economic Developments, Washington, 1998

UNDP, Azerbaijan Human Development Report, New York, annual

World Bank, Azerbaijan Financial Sector Review, New York, 1997

World Bank, Global Development Finance, annual

Azerbaijan State Statistical Committee, Statistical Yearbook, Baku, annual

Audrey Altstadt, The Azerbaijani Turks: Power and Identity under Russian Rule,1992

J Aves, Post-Soviet Transcaucasia, Royal Institute of International Affairs,London, 1996

Ali Banuazizi & Myron Weiner (eds), The New Geopolitics of Central Asia and itsBorderlands, I B Tauris, London, 1994

Karen Dawisha & Bruce Parrott (eds), Conflict, Cleavage and Change in CentralAsia and the Caucasus, Cambridge University Press, 1997

Anoushiravan Ehteshami (ed), From the Gulf to Central Asia, Exeter University,1995

Suzanne Goldenberg, Pride of Small Nations: The Caucasus and Post-SovietDisorder, Zed Books, London, 1994

Edmund Herzig, The New Caucasus: Armenia, Azerbaijan and Georgia, RoyalInstitute of International Affairs, 1999

International Energy Agency, Caspian Oil and Gas, Paris, 1998

International sources

National sources

Select bibliography

Azerbaijan 35


Reference tables

These reference tables provide the most up-to-date statistics available at the time ofpublication.

Reference table 1

Population1994 1995 1996 1997 1998

Population (year-end; ‘000) 7,643.5 7,726.2 7,799.8 7,876.7 7,949.3

Annual growth (%) 1.24 1.08 0.95 0.99 0.92

Male (% of total population) 49.1 49.2 49.3 49.3 49.1

Female (% of total population) 50.9 50.8 50.7 50.7 50.9

Urban (% of total population) 52.4 52.3 52.1 51.9 51.7

Rural (% of total population) 47.6 47.7 47.9 48.1 48.3

Birth rate (per ‘000 population) 19.1 17.1 17.4 15.7 n/a

Death rate (per ‘000 population) 6.8 6.4 6.2 5.9 n/a

Rate of natural increase (per ‘000 population) 12.30 10.70 11.20 9.80 n/a

Life expectancy at birth (years) 69.10 70.20 71.20 71.60 n/a

Maternal mortality in childbirth (per 100,000 births) 37.00 44.10 31.00 41.10 n/a


Reference table 2

Population by age

(‘000, year-end)

1994 1995 1996 1997 1998

Age bracket 0–14 2,538.8 2,569.0 2,556.8 2,582.1 2,605.915–19 680.2 687.9 707.2 714.2 720.820–39 2,585.5 2,612.5 2,628.7 2,654.5 2,678.840–59 1,168.6 1,178.7 1,206.5 1,218.3 1,229.760–69 440.1 444.7 459.7 464.3 468.570+ 230.3 233.4 240.9 243.3 245.6Total 7,643.5 7,726.2 7,799.8 7,876.7 7,949.3

Working-agea 4,119.1b 4,161.1 4,222.7 4,259.0 4,299.1

Working age (% total) 53.9b 53.9 54.1 54.1 53.2

a Defined as between the ages of 16 and 59 for men and 16 and 54 for women. b EIU estimatebased on figures in the Statistical Yearbook of Azerbaijan, 1999.


36 Azerbaijan


Reference table 3

Labour force

(‘000)

1994 1995 1996 1997 1998a

Agriculture & forestry 895.0 870.0 918.0 964.0 1,085.4

Industryb 373.7 352.1 282.9 257.4 240.2

Construction 191.7 185.1 164.1 151.0 150.2

Transport & communications 190.5 159.1 168.3 175.0 166.8

Trade & catering 365.6 396.2 456.6 511.4 772.3c

Other 834.8 874.8 905.5 841.2 550.4

Total employed 2,851.3 2,837.3 2,895.4 2,900.0 2,965.3

Labour force 3,364.0 3,417.0 3,591.0 3,597.0 3,701.5

Unemployed 513.0 580.0 696.0 696.0 736.2

Unemployed (% labour force) 15.2 17.0 19.4 19.3 19.9

a Statistical Yearbook of Azerbaijan, 1999. b Mining and manufacturing. c Includes other trade-related services.

Sources: IMF, Azerbaijan Republic: Recent Economic Developments, 1998; State Statistical Committee, Statistical Yearbook of Azerbaijan,1999.

Reference table 4

Production of energy1994 1995 1996 1997 1998a

Total oil production (m tonnes) 9.6 9.2 9.1 9.1 11.4 SOCAR 9.6 9.2 9.1 9.1b 9.1 AIOC 0b 0b 0b 0b 2.4 of which: offshore oil production 7.8 7.4 7.7 7.5 9.7

Total oil production (‘000 b/d) 191.7 184.5 182.5 182.5 229.0

Gas production (bn cu metres) 6.4 6.6 6.3 6.0 5.6 SOCAR 6.4 6.6 6.3 6.0b 5.2 AIOC 0.0b 0.0b 0.0b 0.0b 0.4 of which: offshore gas production n/a 6.4 6.1 5.7 5.3

Refined oil (m tonnes) 9.4 8.9 8.7 8.6 8.3 Diesel (m tonnes) 2.3 2.2 2.1 2.1 2.0 Petrol (m tonnes) 1.3 1.0 1.0 1.1 0.6 Fuel oil (m tonnes) 4.1 4.4 4.0 3.8 4.0 Lubricants (m tonnes) 0.2 0.1 0.1 0.1 0.1 Electricity (bn kwh) 17.6 17.0 17.0 16.8 18.0 Thermal energy (m kcal) 12.0 9.9 5.0 3.3 n/a

a Statistical Yearbook of Azerbaijan, 1999. b AIOC produced small quantities of oil and gas in 1997,when its output began.

Sources: SOCAR; Turan news agency; Profile Analytical Centre, Baku; IMF, Azerbaijan Republic: Recent Economic Developments, 1998;TACIS, Azerbaijan Economic Trends, State Committee of Statistics, Statistical Yearbook of Azerbaijan, 1999.

Azerbaijan 37


Reference table 5

Gross domestic product1994 1995 1996 1997 1998

TotalAt current prices (Manat bn) 1,873 10,669 13,663 15,352 15,930$ m (exchange rate)a 1,193 2,417 3,177 3,852 4,117Real change (%) –19.7 –11.8 1.3 5.8 10.0

Per headAt current prices (Manat ‘000) 247 1,388 1,760 1,959 2,013$ (exchange rate)a 157 315 409 491 520Real change (%)a –20.8 –12.8 0.3 4.8 9.0

a EIU estimates.

Sources: State Committee of Statistics, Statistical Yearbook of Azerbaijan, 1999; EIU calculations.

Reference table 6

Gross domestic product by sector

(% of GDP; current prices)

1994 1995 1996 1997 1998a

Industry 20.4 27.3 25.8 24.8 22.3 Fuel sector 6.8 12.6 13.5 13.0 n/a Manufacturing 10.2 9.4 7.66 8.3 2.0

Electricity 3.4 5.3 4.64 3.5 n/a

Agriculture 32.2 25.1 24.7 20.0 20.3

Construction 7.3 3.7 9.3 13.8 16.4

Transport & communications 12.3 17.4 10.3 11.9 n/a

Trade 3.9 4.8 5.2 5.5 14.9b

a State Committee of Statistics, Statistical Yearbook of Azerbaijan, 1999. b Includes trade and whole-saling activities.

Sources: IMF, Azerbaijan Republic: Recent Economic Developments, 1998; State Committee of Statistics, Statistical Yearbook ofAzerbaijan, 1999.

38 Azerbaijan


Reference table 7

Gross domestic product by expenditure1994 1995 1996 1997 1998a

Manat bn; current pricesPrivate consumption 1,432.1 8,999.0 11,980.0 12,043.6 12,893.7 Government consumption 440.5 1,365.0 1,642.0 1,828.7 2,039.9 Gross fixed investment 492.0 1,669.0 3,976.8 5,800.2 6,471.0 Stockbuilding –205.1 868.0 –14.7 70.7 –5.3 Exports of goods & services 1,196.7 3,466.0 3,406.0 4,396.0 4,037.8 Imports of goods & services –1,482.8 –5,698.0 –7,640.4 –8,599.6 –9,288.6 Statistical discrepancy 0.0 0.0 313.5 –187.4 –218.8 GDP 1,873.4 10,669.0 13,663.2 15,352.2 15,929.7

% of GDPPrivate consumption 76.5 84.4 87.7 78.4 80.9 Government consumption 23.5 12.8 12.0 11.9 12.8 Gross fixed investment 26.3 15.6 29.1 37.8 40.6 Stockbuilding –10.9 8.1 –0.1 0.5 0.0 Exports of goods & services 63.9 32.5 25.0 28.6 25.3 Imports of goods & services –79.2 –53.4 –56.0 –56.0 –58.3 Statistical discrepancy 0.0 0.0 2.3 –1.2 –1.4

Note: totals may not sum due to rounding.a State Committee of Statistics, Statistical Yearbook of Azerbaijan, 1999.

Sources: IMF, Azerbaijan Republic: Recent Economic Developments, 1998; State Committee of Statistics, Statistical Yearbook ofAzerbaijan, 1999.

Reference table 8

Prices and earnings

(average % change, year on year)

1994 1995 1996 1997 1998

Consumer prices 1,664.0 411.8 19.8 3.7 –0.8

Industrial producer prices 1,058.4 1,734.0 98.0 11.8 –12.4

Nominal wages 581.4 298.9 45.3 42.4 19.9

Sources: TACIS, Azerbaijan Economic Trends; State Committee of Statistics, Statistical Yearbook of Azerbaijan,, 1997; IMF, AzerbaijanRepublic: Recent Economic Developments, 1998.

Azerbaijan 39


Reference table 9

Government finances

(Manat bn)

1994 1995 1996 1997 1998a

Revenue 633.6 1,872.6 2,401.0 3,023.2 2,318.4 Income tax 27.8 116.9 213.0 331.1 407.6 Profit tax 97.5 408.7 586.0 443.6 340.1 Social security 79.3 249.6 310.3 387.6 603.0 VAT 62.7 176.1 467.6 654.2 718.8 Excises 37.0 88.4 206.3 221.7 94.6 Royalties 0.0 0.0 41.6 341.9 171.1 Customs 12.8 69.0 111.8 233.8 n/a Other 316.5 763.1 464.5 409.2 204.6

Expenditure (incl net lending) 860.8 2,394.7 2,780.7 3,279.9 2,642.2 of which: wages 86.0 389.7 482.8 701.3 n/a goods & services 120.0 731.5 943.8 1161.3 n/a interest 0.3 10.7 43.7 18.5 n/a defencea n/a 247.8 304.7 353.2 n/a justice &security 48.0 203.0 210.9 254.2 275.5 welfare 161.4 538.8 872.3 958.8 n/a of which: Social Protection Fund 161.0 533.6 793.5 841.5 943.0 pensions 73.5 194.5 366.2 421.4 525.7 cash payments 62.4 241.7 307.4 320.5 n/a subsidies 101.9 233.4 285.4 105.9 n/a capital investment 16.1 78.9 68.0 200.6 n/a

Balance –227.2 –119.0 –295.7 –165.2 –323.8

Balance incl lending less repayment –227.2 –522.8 –378.7 –256.7 n/a

a From Azerbaijan Economic Trends and State Committee of Statistics, Statistical Yearbook ofAzerbaijan, 1999.

Sources: IMF, Azerbaijan Republic: Recent Economic Developments, 1998.

40 Azerbaijan


Reference table 10

Government finances

(% of GDP)

1994 1995 1996 1997 1998a

Revenue 33.8 17.6 17.6 19.7 14.6 Income tax 1.5 1.1 1.6 2.2 2.6 Profit tax 5.2 3.8 4.3 2.9 2.1 Social security 4.2 2.3 2.3 2.5 3.7 VAT 3.3 1.7 3.4 4.3 4.5 Excises 2.0 0.8 1.5 1.4 0.6 Royalties 0.0 0.0 0.3 2.2 1.8 Customs 0.7 0.6 0.8 1.5 n/a Other 16.9 7.2 3.4 2.7 1.3

Expenditure (incl net lending) 45.9 22.4 20.4 21.4 16.6 of which: wages 4.6 3.7 3.5 4.6 n/a goods & services 6.4 6.9 6.9 7.6 n/a interest 0.0 0.1 0.3 0.1 n/a defencea n/a 2.3 2.2 2.3 n/a justice & security 2.6 1.9 1.5 1.7 1.7 welfare 8.6 5.1 6.4 6.2 n/a of which: Social Protection Fund 8.6 5.0 5.8 5.5 5.9 pensions 3.9 1.8 2.7 2.7 3.3 cash payments 3.3 2.3 2.3 2.1 n/a subsidies 5.4 2.2 2.1 0.7 n/a capital investment 0.9 0.7 0.5 1.3 n/a Balance –12.1 –1.1 –2.2 –1.1 –2.0

Balance including lending less repayment –12.1 –4.9 –2.8 –1.7 n/a

a From Azerbaijan Economic Trends and State Committee of Statistics, Statistical Yearbook ofAzerbaijan, 1999. Note that the IMF puts the deficit at 4.2% of GDP.

Source: IMF, Azerbaijan Republic: Recent Economic Developments, 1998.

Reference table 11

Money supply and credit

(Manat bn, year-end unless otherwise indicated)

1994 1995 1996 1997 1998

Domestic credit 830.0 1,338.7 1,780.1 2,046.2 2,152.4

Money (M1) 372.4 858.4 1,119.7 1,524.1 1,134.5

Broad money (M3) 1,047.6 1,313.9 1,538.5 2,175.9 1,797.0

Memorandum items: (% change year on year)Domestic credit 915.0 61.3 33.0 15.0 5.2Money (M1) 468.5 130.5 30.4 36.1 –25.6Broad money (M3) 1,116.9 25.4 17.1 41.4 –17.4

Note. M1 is cash in circulation (M0) plus demand deposits of firms and households. M2 is M1 plustime deposits of firms and households. M3 is M2 plus the foreign currency deposits of firms andhouseholds.

Sources: IMF, International Financial Statistics; EIU calculations for percentage change.

Azerbaijan 41


Reference table 12

Production of major crops

(‘000 tonnes unless otherwise indicated)

1994 1995 1996 1997 1998

Grain 1,039.2 921.4 1,018.3 1,127.1 950.3

Cotton (raw) 284.0 274.1 274.4 124.6 112.9

Tobacco 21.0 11.7 11.2 15.1 14.6

Potatoes 150.3 155.5 214.6 223.4 312.5

Other vegetables 482.9 424.1 570.0 495.4 502.3

Grapes 313.8 308.7 275.0 145.3 108.4

Melons & gourds 44.9 41.9 52.1 57.1 78.8

Fruits, berries 323.5 324.4 321.2 330.9 390.6

Tea 19.4 9.4 3.0 1.6 0.9

Gross agricultural output (% real change) –13.0 –6.8 3.1 –6.9 3.9

Sources: State Statistical Committee, Statistical Yearbook, 1999; IMF, Azerbaijan: Recent Economic Developments, 1998; TACIS, AzerbaijanEconomic Trends.

Reference table 13

Yields of major crops

(tonnes per ha)

1994 1995 1996 1997 1998

Grain 1.63 1.51 1.63 1.74 1.62

Cotton (raw) 1.32 1.30 1.29 0.60 0.73

Tobacco 1.97 1.46 1.41 1.91 1.78

Potatoes 8.30 9.70 10.10 8.27 9.53

Other vegetables 15.40 15.70 17.80 15.63 14.01

Melons & gourds 7.11 7.30 7.10 7.87 6.76

Grapes 2.98 3.26 3.47 2.22 3.23

Fruits, berries 3.05 3.12 3.85 4.20 5.47

Tea 2.00 1.03 0.39 0.23 0.13

Sources: State Statistical Committee, Statistical Yearbook, 1999; TACIS, Azerbaijan Economic Trends.

Reference table 14

Livestock numbers

(‘000 head; year-end)

1994 1995 1996 1997 1998

Cattle 1,632.8 1,681.7 1,779.9 1,843.5 1,909.8

Pigs 33.4 30.4 23.4 21.0 26.1

Sheep 4,557.6 4,644.4 4.922.0 5,267.0 5,511.9

Poultry 13,100 12,400 11,400 12,800 13,200

Source: State Statistical Committee, Statistical Yearbook, 1999.

42 Azerbaijan


Reference table 15

Livestock output

(‘000 tonnes unless otherwise indicated)

1994 1995 1996 1997 1998

Meat 84.4 82.0 85.7 90.5 94.7

Milk 783.7 826.5 843.3 881.5 923.9

Eggs (m) 494.0 455.8 477.3 492.4 507.2

Wool 8.9 9.0 9.1 9.6 9.9

Source: State Statistical Committee, Statistical Yearbook, 1999.

Reference table 16

Industrial production

(% change of physical volume except where otherwise indicated)

1994 1995 1996 1997 1998

Total industrial production –24.8 –21.4 –6.7 0.2 2.2 of which: fuel industry –6.7 –6.0 –1.6 0.2 7.5 electricity –11.5 –6.1 –3.6 –6.6 5.9 metallurgy –73.6 –46.9 –75.6 361.9 –54.6 of which: ferrous metals –85.2 –61.6 –72.8 430.3 –70.6 non-ferrous metals –59.9 –33.8 –77.4 262.4 –35.1 machine-building –46.1 –45.8 –18 –0.5 –30.4 chemicals & petrochemicals –39.4 –15.1 25 –28.2 –11.4 lumber & paper –54.7 –76.9 –1.1 7.3 –64.5 construction materials –30.3 –63 –4.1 –4.3 –22.2 light industry –28.3 –11.8 –40.6 –16.5 –41.9 food industry –35.4 –45.1 –34.9 –6.5 –2.3

Source: IMF, Azerbaijan Republic: Recent Economic Developments, 1998; TACIS Azerbaijan Economic Trends.

Azerbaijan 43


Reference table 17

Industrial production of selected items1994 1995 1996 1997 1998

Steel pipes (‘000 tonnes) 31.0 9.9 3.1 13.0 3.1

Pots & pans (‘000 units) 135.0 19.0 4.0 2.0 3.0

Depth pumps (‘000 units) 29.2 23.8 15.0 15.7 14.8

Derricks for depth pumps (‘000 units) 35.0 0.5 0.0 17.7 4.3

Electrical motors (‘000 kw capacity) 834.0 512.0 339.0 416.0 222.0

Power transformers (‘000 kw capacity) 97.0 56.0 124.5 116.7 80.0

Refrigerators (‘000 units) 97.0 25.0 6.8 0.1 3.4

Air conditioners (‘000 units) 119.0 64.0 78.8 36.5 9.6

Buses (units) 201 9 2 40 29

Prefab concrete structures (‘000 cu metres) 249.9 90.5 113.4 47.0 50.3

Bricks (m) 498.0 161.0 117.0 82.8 95.7

Mineral fertilisers (‘000 tonnes) 5.0 1.9 1.9 5.4 0.6


Reference table 18

Banking statistics(bn manat; year-end)

1994 1995 1996 1997 1998

Assets 1,348.22 2,509.32 2,793.90 2,977.57 2,801.38 Reserves 43.89 303.17 242.76 301.94 204.07 Foreign assets 565.81 744.55 639.97 600.62 378.37 Claims on general government 52.49 12.49 32.03 52.69 30.04 Claims on public enterprises 623.57 1,403.59 1,719.82 1,635.51 1,658.84 Claims on private sector 62.46 126.52 159.32 386.81 530.06

Liabilities 1,347.21 2,590.32 2,793.89 2,977.60 2,801.38 Demand deposits 93.7 251.29 250.08 323.8 203.02 Time, savings & foreign currency deposits 674.36 455.53 418.73 651.71 662.47 General government deposits 101.6 98.2 222.31 30.2 82.23 Foreign liabilities 171.66 150.75 311 206.69 218.15 Credit from monetary authorities 56.53 893.23 782.36 838.02 615.87 Liabilities to non-bank financial institutions 0.45 2.84 7.44 6.84 5.55 Capital accounts 121.45 355.3 640.98 831.83 1,020.01 Other items (net) 127.46 383.18 160.99 88.51 –5.92

Note: Assets and liabilities totals do not match because of minor statistical discrepancies.

Source: IMF, International Financial Statistics.

44 Azerbaijan


Reference table 19

Exports by value

($ m, fob)

1994 1995 1996 1997 1998

Total exportsa 636.8 637.2 631.2 781.3 606.2 of which: oil products 215.8 371.9 419.1 480.1 417.9 cotton 102.2 116.8 58.7 123.3 49.3 food products 64.0 38.5 28.6 55.3 46.7 machinery & equipment 89.4 39.4 43.7 37.4 33.4 plastics 10.3 13.6 26.7 22.5 12.0 chemicals & petrochemicals 22.8 19.6 20.8 18.3 11.3 metals 105.2 17.5 6.1 15.3 13.4 others 27.0 19.7 27.6 29.0 22.2

a Import & export figures used for the composition of trade are customs data and differ from thoseused in the balance of payments, mainly because they do not fully take into account transactions byWestern oil consortia.

Sources: TACIS, Azerbaijan Economic Trends; IMF, Azerbaijan: Recent Economic Developments, 1998.

Reference table 20

Exports by percentage

(% of total, fob)

1994 1995 1996 1997 1998

Oil products 33.9 58.4 66.4 61.4 68.9

Non-oil products 66.1 41.6 33.6 38.6 31.1 of which: cotton 16.1 18.3 9.3 15.8 8.1 food products 10.1 6.0 4.5 7.1 7.7 machinery & equipment 14.0 6.2 6.9 4.8 5.5 plastics 1.6 2.1 4.2 2.9 2.0 chemicals & petrochemicals 3.6 3.1 3.3 2.3 1.9 metals 16.5 2.8 1.0 2.0 2.2

Total exports (incl others)a 100.0 100.0 100.0 100.0 100.0


Sources: TACIS, Azerbaijan Economic Trends; IMF, Azerbaijan: Recent Economic Developments, 1998.

Azerbaijan 45


Reference table 21

Imports by value

($ m, fob)

1994 1995 1996 1997 1998

Total importsa 777.9 667.7 960.6 794.3 1,077.2 Food products 205.0 277.1 381.7 180.7 175.3 Machinery & equipment 78.9 82.9 184.0 169.3 348.4 Metals 97.4 42.0 86.8 109.4 129.7 Petroleum products 249.8 88.1 43.4 79.2 63.1 Chemicals & petrochemicals 37.8 61.3 61.1 55.8 79.4 Transport, aircraft & water facilities 22.7 36.6 41.9 49.9 87.1 Paper pulp 6.9 15.2 34.2 27.4 16.1 Plastics 14.4 11.6 30.0 22.9 24.0 Others 46.1 45.3 80.7 89.8 154.1



Reference table 22

Imports by percentage

(% of total)

1994 1995 1996 1997 1998

Food products 26.4 41.5 39.7 22.8 16.3

Machinery & equipment 10.1 12.4 19.2 21.3 32.3

Metals 12.5 6.3 9.0 13.8 12.0

Petroleum products 32.1 13.2 4.5 10.0 5.9

Chemicals & petrochemicals 4.9 9.2 6.4 7.0 7.4

Transport, aircraft & water facilities 2.9 5.5 4.4 6.3 8.1

Paper pulp 0.9 2.3 3.6 3.4 1.5

Plastics 1.9 1.7 3.1 2.9 2.2

Imports (incl others)a 100.0 100.0 100.0 100.0 100.0



46 Azerbaijan


Reference table 23

Exports by destinationa

(% of total)

1994 1995 1996 1997 1998

Turkey 2.6 4.2 6.2 5.3 22.4

Russia 21.9 15.7 17.6 23.1 17.5

Georgia 2.6 7.1 14.5 17.1 12.7

Italy 0.0 4.2 1.6 4.2 7.4

Iran 38.0 29.2 35.8 24.3 7.3

Turkmenistan 2.7 11.1 5.4 1.1 2.3

Ukraine 9.1 5.3 3.5 4.1 2.0

Greece 0.2 1.6 1.5 1.8 2.0

Kazakhstan 2.6 3.2 2.4 1.1 1.7

Sweden n/a n/a 2.9 3.3 0.9

CIS total 43.1 44.7 46.0 48.4 38.3

Non-CIS total 56.9 55.3 54.0 51.6 61.7

a Import & export figures used for direction of trade are customs data and differ from those used inthe balance of payments, mainly because they do not fully take into account transactions byWestern oil consortia.


Reference table 24

Imports by country of origina

(% of total)

1994 1995 1996 1997 1998

Turkey 9.8 21.0 22.5 22.6 20.4

Russia 15.1 13.2 16.5 19.1 18.0

Ukraine 11.1 5.0 9.8 10.8 8.6

Germany 4.1 6.6 8.0 4.9 4.3

UAE 1.2 10.3 11.3 5.3 4.2

Kazakhstan 6.7 2.6 2.0 3.7 4.1

Iran 8.6 12.0 6.9 6.1 4.0

US 1.3 2.0 1.8 2.8 3.7

Turkmenistan 25.1 7.7 1.5 3.2 2.4

Georgia 1.0 2.8 2.9 4.6 2.3

CIS total 62.5 34.2 35.4 44.2 37.6

Non-CIS total 37.5 65.8 64.6 55.8 62.4



Azerbaijan 47


Reference table 25

Balance of payments, IMF estimates


1994 1995 1996 1997 1998

Exports fob 682.0 612.3 643.7 808.3 677.8 of which: oil products 207.0 257.0 402.0 434.0 375.9

Imports fob –845.0 –985.4 –1,337.6 –1,375.2 –1,723.9 of which: oil sector 0.0 –30.0 –213.0 –256.0 –355.7

Trade balance –163.0 –373.1 –693.9 –566.9 –1,046.2

Services, credits 137.0 172.4 149.3 341.8 331.7

Services, debits –170.0 –304.6 –440.9 –726.0 –700.8 of which: oil sector 0.0 –68.0 –166.0 –321.0 –286.2

Services balance –33.0 –132.2 –291.6 –384.2 –369.1

Income balance 0.0 –6.1 –12.1 –9.5 –13.3

Services and income balance –33.0 –138.3 –303.7 –393.7 –382.4

Current transfers (net) 75.0 110.8 66.5 44.8 64.1

Current account balance –121.0 –400.7 –931.2 –915.8 –1,364.5

Foreign direct investment (net) 22.0 330.1 627.3 1,114.8 1,023.0 of which: oil sector 0.0 252.0 487.0 845.0 756.9 of which: oil contract signature bonus payments 0.0 122.0 36.6 64.2 74.7

Portfolio investment (net) n/a –1.7 0.0 1.1 0.4

Loans (net) 54.0 10.1 –110.4 57.3 136.3 of which: disbursements 54.0 –19.6 –136.9 5.3 62.4 amortisation 0.0 29.7 26.5 52.0 73.9

Other capital flows (net) –22.0 61.8 305.7 –81.1 166.4

Capital-& financial accounts balance 54.0 398.7 822.5 1,081.9 1,325.3

Net errors & omissions –12.0 59.7 23.6 –27.0 –20.1

Overall balance –79.0 57.8 –85.0 139.2 –59.2 Changes in gross reserves (– indicates increase) –2.0 –161.6 7.1 –244.2 18.7 IMF credit 0.0 103.8 77.9 105.0 40.5 Arrears 81.0 0.0 0.0 0.0 0.0

Memorandum items (% of GDP):Current-account deficit –9.3 –16.6 –29.3 –23.8 –33.1Exports 52.4 25.3 20.3 21.0 16.5Imports –64.9 –40.8 –42.1 –35.7 –41.9FDI 0.0 13.7 19.7 28.9 24.8FDI into the oil sector 0.0 10.4 15.3 21.9 18.4

Note. Totals may not sum due to rounding.

Sources: IMF, International Financial Statistics; IMF, Azerbaijan Republic: Recent Economic Developments, 1995 (for 1993 data), 1998;TACIS, Azerbaijan Economic Trends.

48 Azerbaijan


Reference table 26

External debt, World Bank estimates


1993 1994 1995 1996 1997

Total external debt 35.5 112.8 321.0 435.3 503.7

Public medium- & long-term 35.5 103.2 206.1 244.9 232.9

Private medium- & long-term 0.0 0.0 0.0 0.0 0.0

Total medium- & long-term debt 35.5 103.2 206.1 244.9 232.9 Official creditors 35.5 103.2 206.1 244.9 224.8 Bilateral 35.5 94.8 107.3 107.3 73.0 Multilateral 0.0 8.4 98.8 137.5 151.9 Private creditors 0.0 0.0 0.0 0.0 8.1Short term debt 0.0 9.6 14.0 15.5 4.0 of which: interest arrears 0.0 3.6 6.0 2.5 0.0 official creditors 0.0 3.6 6.0 2.5 0.0 private creditors 0.0 0.0 0.0 0.0 0.0

Use of IMF credit 0.0 0.0 100.9 175.0 266.8

Principal repayments 0.0 0.0 0.0 0.0 57.6

Interest payments 0.0 0.3 10.1 9.8 20.3

Total debt service (paid) 0.0 0.3 10.1 9.8 77.9

Ratios (%)Total external debt/GDP 2.3 9.5 13.3 13.7 13.1Debt-service ratioa 0.0 0.0 1.3 1.3 6.7

a Debt service (paid) as a percentage of exports of goods and services.

Sources: World Bank, Global Development Finance.

Reference table 27

Foreign reserves


1994 1995 1996 1997 1998

Foreign exchange 2.02 119.62 190.45 460.49 447.20

IMF Special Drawing Rights – 1.25 20.82 5.59 0.11

Reserve position in the IMF 0.01 0.01 0.01 0.01 0.01

Total reserves 2.03 120.88 211.28 466.09 447.33


Reference table 28

Exchange rate

(annual average)

1994 1995 1996 1997 1998

Manat:$ 1,570.23 4,413.54 4,301.26 3,985.38 3,869.00


Editor: John MacLeodAll queries: Tel: (44.20) 7830 1000 Fax: (44.20) 7830 1023

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