Azerbaijan’s ambitious five-year forecast
Government sees its future role as a support hub for the entire Caspian Basin
-by Stanley T. Escudero

Despite the tragic events of September 11th, through its own efforts and in cooperation with international lending institutions and foreign investors, Azerbaijan is now well on its way to continued development in both its energy and non-energy sectors.

The very real reforms now being undertaken in Azerbaijan are such that within five years the country could well be recognizable as the support hub for the Caspian Basin, and as an important oil and gas producer in its own right. But much now will also depend upon the broader impacts of the terrorist attacks as they ripple across the globe.

No one can truly know what the extent of the effects of these demonic attacks will be. From the perspective of Azerbaijan, however, one has to hope that military and other actions taken against terrorists are precise, focused.

Azerbaijan has itself been a victim of both terrorism and aggression. Thus both the government of Azerbaijan, and its people, have made it abundantly clear that their sympathies and support lie with the United States and the civilized nations of the world. In an expanded conflict, moderate secular Azerbaijan could become a target of the fundamentalists.

The global economic slowdown and resultant drop in demand for energy, already evident even before September 11, has not forced oil prices well below the comfort zone that OPEC has established for itself. Here one assumes that OPEC, to the degree that it can do so successfully, will regulate production levels so as to maintain prices. Azerbaijan is not an OPEC member, but the effect on Azerbaijan of the sharp drop in oil prices of the late 1990s amply demonstrated that the Azeri economy is already dependent upon energy markets.

That same slowdown does not lead non-energy sector investors to ignore sound, opportunities for investment in developing markets like that of Azerbaijan. To avoid the Dutch disease and other ills which came to afflict the petrol-states of the 1970's, Azerbaijan must, over the next five years, have access to foreign capital, expertise, technology and markets to develop its own non-oil sector.

The first two factors are beyond the scope of Azerbaijan or of most other nations to influence, let alone control. But even if the third factor leads to somewhat diminished investment capital, and increased investor caution, there remain very interesting investment opportunities in Azerbaijan, and the government in Baku is taking measures to enhance them.

Despite the fact the U.S. economy has been flirting with recession after an unprecedented period of expansion, to an observer some 8,000 miles from the epicenter, a good deal of the economic panic which followed the attacks would seem to be driven more by herd instinct than hard-headed analysis.

Of course, exceptions have to be made for sectors directly affected, such as the airlines industry, and others will seize the excuse provided by the attacks to make needed layoffs or cutbacks. But many companies' shares appear to have fallen for no reason in particular except that the whole market is driven down by popular reaction to the attacks. Some investors are recognizing this and undervalued stocks are already being purchased.

In short, the state of the economy - global, American or Azerbaijani - has not changed materially since September 11th. The real issue is consumer confidence. Assuming consumers and investors worldwide refuse to be intimidated by terrorism, most business opportunities, including those in Azerbaijan, will remain largely unchanged.

That said, there are steps that Azerbaijan can take and is taking to create a more investor-friendly climate - to compete more effectively for what may become a more demanding investment dollar.

Anyone who does business in Azerbaijan's non-energy sector can tell you that it is difficult. Some have found it impossible. Yet “old timers” who have worked in Baku since independence in 1991 give testament to the ongoing development of a demonstrable and positive momentum for reform away from the old Soviet-era structures and procedures, as well as the gradual - though sometimes glacial - adoption of more business-friendly laws and procedures.

Much has been written of Azerbaijan’s disastrous state of affairs prior to 1993, when President Aliyev returned to power. The success he enjoyed, in conjunction with the World Bank and the IMF, in taming inflation, jumpstarting real growth, and providing both a basis for national growth and a template for the entire Caspian region by signing the first of some 22 production sharing agreements with consortia of international oil companies, is also well recorded.

During this same period, Aliyev negotiated a successful ceasefire in a losing war with Armenia, put down three civil insurrections and defeated two coup attempts. By 1995, stability was assured and the slow deliberate process of transforming Azerbaijan from a Soviet colony into a modern, rather democratic, free-market member of the international bazaar had begun. This transformation continues daily.

Foreign companies, international institutions, embassies and others working in Azerbaijan have complained loudly that this process is still too slow and certainly too unpredictable. From their perspectives, they are right. Foreign companies, international banks and friendly foreign nations have made vital contributions to the success of Azerbaijan's development and reform to date. But their own outlooks are driven by their own philosophies and timetables, and are not necessarily always the best perspectives for Azerbaijan.

This does not mean that Western ideas for reform in Azerbaijan are wrong. I am convinced that they are right. I believe in the leadership of Azerbaijan. But to be effective, they must be right at the right time, and they must understand what that means to Azerbaijan.

Like many of the other newly independent former Soviet states, Azerbaijan’s structure is still fragile. Its leadership saw their world stood on its head in 1991. For many, the Soviet experiential base still strongly influences their policy decisions and interpretation of events.

The same is true for the Azeri people, many of whom believe that they lived better under the old Soviet system. Many Azeris still have only the vaguest notion of their personal rights, responsibilities and opportunities under a free-market democratic system. Until 1991, the country had no experience with democracy or free market practices. Then, with no prior preparation, a completely new model was thrust upon them.

In such a society, which experienced violence in the uncertain days after independence, pressure for overhasty reform threatens that stability which is the foundation for any lasting reform process. Reforms simply cannot progress faster than the capacity of a people to absorb them.

Even in the United States, with its centuries-old democratic system, the reform of the civil rights issue proved to be a lengthy and painful process which even now is not complete. Azerbaijan will also require a generation or more to complete its own similarly deep-seated reform process.

Under these circumstances, some governments might attempt to hide behind claims of social fragility to avoid restructuring altogether. The government of Azerbaijan does not. Moreover, the government of Azerbaijan recognizes that economic reforms can and must precede other types of reform so that they can exert a positive pull on the broader restructuring process.

Thus, although recent years have seen significant political reforms - lifting of press censorship, establishment of elected local political structures, changes to the makeup of the central, territorial and local electoral commissions - more meaningful reforms are continuing to take place on the economic side.

Changes to the Azerbaijani economic/commercial legal structure, such as issuance of a reformed tax code, or adoption of enforcement authority for international arbitral awards, are too numerous to detail here. However, it is worth noting that, in Azerbaijan, as in so many developing countries, commercial procedures often depart from those laid down in law.

In this regard, the American Chamber of Commerce and their UK counterpart, the British Business Group, in close cooperation with the American and British Embassies in Baku, have become a key force for productive mutually beneficial change in these procedures.

Working with the Ministries of Taxation, Privatization and Agriculture, and the Department of Customs, AmCham committees have brought about many significant procedural improvements. A recent White Paper presented by AmCham to President Aliyev proposed additional legal and procedural reforms.

In a televised meeting in which he received the White Paper, the President gave full approval to its suggestions. Both sides recognize the benefits of this process, and every signal I have received from the Azerbaijanis suggests that it will continue and even accelerate.

In recognition of the importance to the business community of "one stop shopping" concept in Azerbaijan, earlier this year the President combined the Ministries of Trade, Economy and Privatization, as well as several relevant state committees under a single economic czar --- the dynamic and reform-minded Farhad Aliyev (no relation).

In the short time Minister Aliyev has held office, he has identified several important government entities for privatization. More importantly, he is preparing to release a broad and attractive foreign investment program, as well as an ambitious new plan for government investment in national development.

Once in force, these plans will provide for intimate government/investor cooperation in the identification of specific high-feasibility projects. Troubling issues such as tax holidays, existing debts, Soviet-era employment lists, and pressing environmental matters, are addressed in ways favorable to the investor.

For the right kind of investment package, it may even prove possible to receive a limited percentage of Azerbaijani government investment, which would not imply government control, and which would be withdrawn via auction, once the project is on its feet.

Significant as these steps are, they do not constitute an end in themselves. They merely testify to the sincerity of the Azerbaijan Government in its efforts to create ideal conditions for the free market reform process. A process which I fully expect to remain the vanguard of positive change for the coming five years.

Finally, the cycle comes round to sustainment of the stability that President Aliyev re-established after his return to power in 1993. Aliyev is widely revered as both father and savior of his country. Even his enemies admit their respect for him. But he will be 80 years old when his current, second term as President expires in December 2003. He appears energetic and in full command, but he has had heart surgery. The President has proclaimed that he will run for a third term, an option constitutionally available to him alone of all Azerbaijanis. If he runs, he will surely win.

If he does not run, the issue of succession must be faced. As in any young nation like Azerbaijan, the replacement of a powerful national leader carries with it potential threats to national stability.

Here two things encourage me: the nature of the Azeri people and another of Heydar Aliyev's valuable legacies to his country, the national constitution. Now widely accepted, even by the political opposition, as the best guide for the future of Azerbaijani politics, this key document wisely refrains from designating a successor, which, in the best regional tradition, would have created a rival to the President.

Instead it describes a process, thereby looking to one of the strengths of its people.

The Azerbaijanis have rarely been great warriors or empire builders. But they have historically been and remain superb dealmakers. Better than any people I have ever seen, they know exactly where their interests lie in any situation, and they pursue that interest with a dedication that sometimes confound the Western negotiator.

Without question the Azerbaijani leadership is well aware that there is no returning to an archaic Soviet-style system and that continuing the course established by Heydar Aliyev offers the best chance for the full development of the nation.

Should President Aliyev decide not to run in 2003, I believe that the Azerbaijani establishment will subsume desire for relative political advantage into the need for broader preservation of personal and family position. In short, they will cut a deal. Part of that deal will most probably be the choice as national leader of a person who best understands the system that President Aliyev has created.

That person will also be one who is committed to the continuation of President Aliyev's policies, and who understands the international marketplace well enough to commit to the completion of the deliberate reform policies, especially in the economic sector, which Aliyev has set so strongly in motion.

Once the choice is made and the candidate is properly presented to the people, it is to be expected that he will be elected. Obviously, this is a formula for continuation of desirable change within an overall stable environment. Looking ahead five years, I see a politically stable Azerbaijan dramatically but changed by the continuation of reform policies currently underway.

Depending on developments in the global campaign against terrorism and with the continuing support of the US and Europe, Azerbaijan will by then have begun to assume its role as regional economic hub.

This Azerbaijan will be somewhat more democratic and far more investor-friendly. But it will still be a complex and often confusing place for first time Western businesses. Patience and perseverance will remain the watchwords. Finally, it will be an exciting and, I believe, profitable place in which to work and live.

Stanley T. Escudero is a former United States Ambassador to Azerbaijan. He is currently a business consultant in Baku.