Tag Archives: economy

Azerbaijan – The New Year Eve presidential speech: External legitimacy & economic issues

Year 2017 is drawing to a close. All the goals we set ourselves at the beginning of this year have been achieved. Stability has been established in Azerbaijan“. With these words, the Azerbaijani President Ilham Aliyev started his last New Year’s Eve speech. First, the speech emphasised the growing international ties of the country and the commitment to “multiculturalism”. Second, the conflict over Nagorno-Karabakh was mentioned at length, specifying how Azerbaijan enjoyed both a diplomatic and military advantage over Armenia. In this regard, it was proudly said that, as a result of the warfare operations in April 2016, Azerbaijan had recovered some villages previously under the control of the enemy. Finally, the economic situation was tackled, arguing that, despite the low oil prices, the country successfully had managed its currency reserves and promoted its non-oil sector.

The emphasis on multiculturalism and international ties seems to reveal a willingness to boost the external legitimacy of the country. As already discussed in this blog, Azerbaijan has recently adopted a much less confrontation attitude vis-à-vis the international community. Political discourse now consistently portrays Azerbaijan as an internationally-oriented and multicultural country. For instance, in addition to including the multicultural nature[1] of the country in the aforementioned New Year’s speech, President Aliyev raised this theme again while giving his Christmas congratulations to the Azerbaijani Orthodox Christian community. In President Aliyev’s words: “‘The atmosphere of intercivilizational and intercultural dialogue (…)  day played an exceptional role in building rich traditions of multiculturalism and tolerance, national moral and public values, establishing civil solidarity in our multinational and multiconfessional society[2]”.

Nevertheless, this type of rhetoric does not shield Azerbaijan from international criticism. Notably, in September 2017 the European Parliament called for an investigation into Azerbaijan’s alleged attempts to corrupt influential Europeans, paying them money in exchange for a favourable representation of the country. In the same month, MEP Daniele Viotti formally asked the Commission Vice-President (and High Representative for Foreign Affairs and Security Policy) Federica Mogherini to specify the Commission’s position about Azerbaijan’s repressive approach to the LGBT community[3]. The head of the Council of Europe Thorbjørn Jagland also voiced his concern over political prisoners in Azerbaijan and suggested legal actions that could lead Azerbaijan being ejected from the Council of Europe.

Along with its (only partially successful) search for international legitimacy, the president’s speech also addressed economic issues. However, it is worth noting the relatively limited emphasis placed on these issues. This is in sharp contrast to past declarations, especially those given in the happy years of the oil bonanza (i.e. when the oil price was extraordinarily high). For instance, in his presidential inauguration speech in 2013, President Aliyev declared that: “We conduct an independent policy. Our independent policy is underpinned by economic independence”.

Azerbaijan has tried to foster its economy partly to offset the drop in oil prices (as already discussed in this blog). While the New Year’s Eve speech did not provide too many details, there have recently been attempts to increase tourism and foreign investments. However, there are limits to their implementation and effectiveness.

In December 2016, the setting up of a national Tourism Council was approved by presidential decree. According to Abulfas Garayev, Minister of Culture and Tourism, in its first year of existence, the Council has already taken important decisions[4]. Remarkably, in 2017, the number of visitors increased by 20% to almost 2.5m tourists, who it is estimated spent around 1.3 billion in the country[5].  Muzaffar Agakarimov, the adviser of the Chairman of the Azerbaijani Tourism Association, recently declared to local media that: “Incoming tourism is becoming more popular in Azerbaijan, [which] is the most important part of the overall tourism sector as it brings foreign currency and creates new workplaces for local people,”. Additionally, he pointed out the abolition of licenses for tourism companies and the plans to construct more hotels, including budget ones[6].

Notwithstanding this optimism, the full development of the tourism sector faces some challenges. For instance, high taxes and fees make it particularly expensive to fly to and from Baku (reportedly, many Azerbaijani citizens chose to save money by using Tbilisi airport, in neighbouring Georgia). These costs have discouraged some foreign low-cost companies, such as the Russian ‘Pobeda’, which decided to discontinue their Baku route[7].

Similar considerations can be made about the attempts to attract foreign investors. However, foreign investments are hindered by bureaucratic obstacles, such as the slow privatisation process and unfair advantages to state enterprises[8]. These considerations are fully in line with a report of the German-Azerbaijani Chamber of Commerce about Azerbaijan’s business climate, based on a survey conducted among 300 companies from 19 EU countries. According to more than half of the respondents, the business and investment climate is negatively affected by custom scontrol and corruption, and by the ineffective measures to tackle these problems[9]. These issues were also lamented by some Azerbaijani experts. As the local expert Nemat Aliyev noted, foreign bankers and investors are discouraged not only by the economic crisis but also by “monopolism, corruption and bribery[10].

The contradiction between Azerbaijan’s craving for foreign investments and the endurance of such obstacles is not easily explicable. However, it can be partially understood in light of Dr Farid Guliyev’s research. According to him, in the years of the oil boom the state channelled oil profits into the construction of extravagant infrastructure projects. These empowered a small elite of private entrepreneurs, whose success is rooted in political support and oil earnings. Considering the potential risks related to a radical shift of the status quo, this elite is not likely to support a genuine diversification of the economic structure, regardless of the benefits for the country as a whole[11].

In conclusion, the tone of the recent New Year’s Eve speech by President Ilham Aliyev is entirely in line with the challenges Azerbaijan is currently facing. The drop in oil prices, and the related economic consequences, are making Baku not only reform its economic structure but also its attitude in international forums. Azerbaijan needs to make economic and foreign policy adjustments to combat its diminished leverage vis-a-vis the rest of the world.

Notes

[1] Additionally, 2016 was proclaimed the year of multiculturalism.

[2] Azerbaijan News Gazette. 2018. ‘President Ilham Aliyev extends Christmas congratulations to Azerbaijan`s Orthodox Christian community’, January 5 (Retrieved through LexisNexis).

[3] Also Western newspapers, such as “The Guardian”, covered this issue.

[4] TendersInfo. 2017. ‘Azerbaijan: The board meeting devoted to the results of the Ministry of Culture and Tourism in 2017 has been held’, December 28 (Retrieved through LexisNexis).

[5] Turan Information Agency. 2017. ‘This Year Tourists Spent 1.3 Billion Dollars in Azerbaijan – Deputy Minister’, December 18 (Retrieved through LexisNexis).

[6] Azer News. 2018. ‘Association: New types of tourism develop in Azerbaijan’, January 4 (Retrieved through LexisNexis).

[7] Guliyev, E. 2017. ‘Azerbaijani Citizens Prefer to Fly through Georgia, AZAL Prefers to Remain Silent’, Turan Information Agency, October 2 (Retrieved through LexisNexis).

[8] CountryWatch Reviews. 2018. ‘Investment Climate Azerbaijan’, January 6 (retrieved through LexisNexis).

[9] Turan Information Agency. 2017. ‘EU-companies about the business climate in Azerbaijan’, January 16 (Retrieved through LexisNexis).

[10] BBC Monitoring Trans Caucasus Unit. 2016. ‘Azeri opposition daily says foreign companies flee Azerbaijan’, January 29(Retrieved through LexisNexis).

[11] Guliyev, F. 2017. ‘Azerbaijan’s Uneasy Transition to a Post-Oil Era. Domestic and International Constraints’, PONARS Eurasia Policy Memo No. 475, May.

Taiwan – Softly, Softly, The President Navigates DPP and Cross-Strait Relations

Presidents who are not ceremonial executives generally come under scrutiny following the first 100-day honeymoon after inauguration, when the policy horizon is no longer paved with unencumbered goodwill from the electorate, legislator, or international community. President Tsai Ing-wen is no exception. Indeed, as the executive with majority party support of the erstwhile opposition Democratic Progressive Party (DPP) in the legislature, the first woman elected to the presidency in Taiwan is likely to be closely watched to see if she is able to implement her policy agenda. That such success evaded the former president elected from the DPP, President Chen Shui-bian, whose agenda was stonewalled by the Pan-Blue majority in the legislature, likely compounds interest and attention on President Tsai. Yet, having a legislative-majority support comes with challenges: in particular, China is keeping close watch on if, when, or how the executive and legislature in Taiwan may adopt policies that veer away from the “one China” 1992 consensus. There is, then, much to appreciate in President Tsai’s ability to maintain her steadfastness that balances the demands of some of the core constituencies of the DPP on the one hand, and the demands and pressures of China on the other.

The DPP, like most parties, comprises factions, and a core bloc in the party favours independence. President Tsai’s previous run as presidential candidate for the DPP in 2012 drew on this core, and she lost out to former President Ma Jing-yeou in that race. The second time around in the 2016 elections, President Tsai was careful to apply the lessons learned: she has been steadfast in maintaining a cautiously-worded stance regarding relations with China that acknowledges the importance of the 1992 meeting that gave rise to the “one China” consensus but without explicitly recognising the one China principle.

The moderates in her party support the delicate stance: in the July 2016 party congress, a motion was made to remove the objective of Taiwan independence contained in Article 1 of the party’s charter. The new resolution, if passed, will change Article 1 to read: “. . . it is the party’s objective to establish cross-strait status quo. . .” However, at the same congress, the pro-independence faction also moved to change the country’s official title from the Republic of China to Taiwan, with the reminder that the DPP has legislative majority and control of the executive to effect changes. The second motion was also sent up to the DPP Central Executive Committee for review.

Possibilities such as the second motion are concerning to China, and China’s response has been to tighten the diplomatic screws while calling out President Tsai’s failure to acknowledge the 1992 consensus. There are concerns that China may tighten the economic screws, which will hurt Taiwan’s sluggish economy. As an indication, tourists from China have fallen by 30 percent since President Tsai’s inauguration, and that has made an impact on the tourist industry in Taiwan, as protestors highlight.

It is clear that this is no easy path to trudge: Taiwan’s unique standing in the international community is bound in its relations with China, so that cross-strait relations reverberate onto domestic agenda and the government’s policy-effectiveness. China has been very clear on what it needs to see from President Tsai, in order to maintain ongoing political peace and economic stability. Meanwhile, the electorate is beating the drums for a quick economic turnround, but is also resistant to painful reforms that are likely to be part of the turnaround. How well the President’s softly, softly approach, to the factions in her party, to the electorate, and to China, will clearly be tested thoroughly.

Azerbaijan – F1 and the limits of public diplomacy

From 17-19 June, the Formula One Grand Prix took place in Baku. In contrast to the “European Games” in 2015, the race received limited attention from governmental actors and the Azerbaijani media. Two explanations are possible. The first lies in the changed domestic circumstances. Given the global low energy price and its dramatic setback on citizens’ life standards, politicians deemed it inappropriate to focus too much attention on such frivolous spending. The second lies in the disappointing international reception to last year’s “European Games”.

President Ilham Aliyev, who is known for his interest in sports events, kept an unexpectedly low profile before, during and after the F1 race. Even though he and his wife, Mehriban Aliyeva, attended the opening ceremony and presented the trophies at the end, in the preceding months, Mr Aliyev almost never mentioned this event[1]. For example, on 16 June, the day before the race, the most high-profile remark to Parliament came from Ali Hasanov, the president’s aide for public and political affairs. This is in contrast with the attention paid the “European Games”. On that occasion, the President personally inaugurated most of the sports facilities and did not miss a chance to voice his enthusiasm. At the award ceremony, he used phrases like: “These Games united our people even more, instilled a sense of pride in us – just look at what we are capable of accomplishing!”. One year on, the quest for attention seems to have been dimmed. We can see this in the media coverage of the event too where studies reveal that the Formula One race received considerably less attention[2]).

The first explanation for this change lies in domestic conditions and the dramatic drop in energy prices. As already analysed in this blog,  Azerbaijan faced a devaluation of its currency at the beginning of the year, which has led to the dissatisfaction of its citizens. In the following months, the local Manat has remained extremely weak and unemployment has risen. This situation does not seem temporary and a mix of recession and high inflation is likely for the next two years[3]. With the exception of those who managed to rent out their balconies to view proceedings, the race, which placed an additional burden on the shrinking state budget, does not seem to have brought any particular benefits to the population. That said, the decline in living standards does not seem to have affected the Aliyev family. In April, the four-day-war in Nagorno-Karabakh caught most the public attention, but at the same time the leaked “Panama Papers” revealed that Leyla and Arzu Aliyeva, daughters of the President, held a 56 per cent stake in the development of a profitable gold mine. Given this situation, any undue emphasis on the F1 race, when most citizens are struggling to make ends meet, could have easily sounded like “let them eat cake”.

The second explanation, which complements the first one, is that, after the European Games, Azerbaijan had an abrupt awakening about the limits of public diplomacy. Even though President Aliyev recently declared that: “The first European Games (…) were very successful”, very few heads of European states (namely Bulgaria, Luxemburg, San Marino and Monaco) flew to Baku to attend them. Most politicians simply declined the invitation. However, a day before the inauguration ceremony, the German Bundestag, on the grounds of human right violations, prohibited high-ranking state officials from attending the event.  Additionally, in spite of some official claims about the influx of tourists (without providing any numbers), international arrivals were probably below expectations. In addition to this disappointing international attendance, few international reporters focused on the competition. Instead, most of the international press wrote about the country’s human rights record, rather than about the brand-new infrastructures. Notably, The Washington Post criticised the pop-singer Lady Gaga for performing at the opening ceremony, while some human rights defenders were held in jail[4]. Even though presidential speeches never mentioned these facts, domestic actors observed the limited PR effect of this initiative. For example, Emil Huseynli, chairperson of the `Support for youth development’, declared that the cold reception to the games was part of a global smear campaign against Azerbaijan. Additionally, some Azerbaijani news sources reported that some Youth Groups protested against the fact that, according to them, the European Parliament politicised the Games “as a way of putting pressure on Azerbaijan”. In short, it soon became apparent that instead of boosting the international reputation of the country, the Games put the spotlight on undesired topics.

In conclusion, a year ago Azerbaijan seemed a confident actor, determined to win over the international community by means of a well-funded public diplomacy campaign. However, the changed economic circumstances, together with the lessons learned about the limited efficacy of this strategy, seem to have brought about a partial reconsideration of this strategy.

This research was supported by a FP7/Marie Curie ITN action. Grant agreement N°: 316825

Notes

[1] Looking at the English version of the official Website of the President of Azerbaijan, this event has been only mentioned, along with numerous other points, in occasion of the opening of Azerbaijani-German Economic Forum in Berlin.

[2] Translated into English by BBC Monitoring.

[3] BMI Research. 2016. “Stagflation To Persist”, Business Monitor Online, March 10 (Retrieved through LexisNexis).

[4] “Blinders in Azerbaijan”. 2015. The Washington Post, August 9 (retrieved through Lexis Nexis).ze

Azerbaijan – Fall in oil price, economic crisis and possible political consequences

The drop in the global oil price represents a cold shower for the oil-producing economies. In 2008 a barrel cost $140, whereas in January 2016 it is now down to $30. The Middle-Eastern dynamics, first and foremost the rivalry between Saudi Arabia and the previously-sanctioned Iran, do not suggest a quick reversal of this trend. In light of that, the oil-rich economies have had to review their budget allocations and growth forecasts. Azerbaijan is no exception in this regard.

If we compare the first presidential speeches of 2015 and 2016, President Ilham Aliyev seems extremely aware of the trend affecting the country. In 2015, reviewing the economic performance of the past year, Mr. Aliyev proudly said: “Our main economic indicators for 2014 are very positive. I can say that perhaps they are the highest in the world”. By contrast, at the beginning of 2016 the president had to admit that: “The development which was observed in previous years has not been achieved. That was not possible, because, as I have already noted, the price of oil has fallen 3-4 times”.

The drop in oil prices is not purely an economic issue. Indeed, this dynamic may have strong repercussions on the political system, which is dominated by the president. Remarkably, Azerbaijan is by far the wealthiest country in the South Caucasus. According to CIA Factbook, in 2014 the GDP Per Capita was $17,800. In comparison, Georgia’s and Armenia’s was $9,200 and $8,200 respectively. Azerbaijan is also the most authoritarian of the three countries. In fact, according to the Freedom House, the country is Not Free. These data are relevant because various analyses point to a link between oil wealth and the authoritarian regime in the country. More precisely, Farid Guliyev[1] considers that the oil revenue, managed by a State Oil saving Fund, has benefited and expanded a patronage network and ultimately has fostered the stability of the ruling regime. Similarly Jody La Porte[2] considers oil wealth to have promoted elite cohesion and economic prosperity. These circumstances have made it possible to effectively marginalise existing and potential opposition movements[3].

Over the years, the huge energy revenues have triggered a dynamic which often characterises oil-producing states: rentierism. Azerbaijan can be considered a rentier state since the bulk of the state budget is made up of oil and gas dividends instead of taxes. In fact, given the abundance of energy resources and the positive global energy trend (for producing states), oil and gas were the main economic focus of the country. The CIA Factbook data shows that energy commodities constitute 90% of national exports, which, in turn, compose 43.3% of the state GDP. Even if the Azerbaijani president has periodically mentioned the importance of boosting the non-oil sector, various experts seemed skeptical about the practical application of that. Farid Guliyev, analyzing the phenomenon, observes that it has mainly concretized in the form of pharaonic infrastructures, carried out by elites’ cronies and payed for by oil money[4]. Similarly in summer 2015 another local expert, under condition of anonymity, called this emphasis on the development of the non-oil sector as an empty litany: many words and no concrete actions.

This rentierism, in the absence of abundant oil revenues, does not seem sustainable anymore. Suddenly, diversification has become a top priority and the declarations about it no longer sound like an empty statement: the poor state of the local finances requires something to be done. Looking at the steps taken, the stabilization of the currency seems the main targeted area. That has been made urgent by the decision taken by the Central Bank on 21 December to unpeg the Manat (which is the local currency) from the Dollar and let the currency fluctuate. This happened only after half of the hard-currency national reserves were used up in a desperate attempt to postpone the inevitable. As a result, in a few days the Manat lost one third of its value.

The devaluation of the local currency has been feared for a long time. From mid-November, hard currency was available only in banks, tourist facilities and airports. In fact, almost everybody expected it to happen in the immediate aftermath of the European games in summer 2015. Not only citizens but also banks considered this possibility extremely realistic and started to grant loans in dollars. Radio Free Europe has reported the story of a desperate debtor who explained how, no matter insistent he was, he could not obtain a loan in the local currency. Even if it was expected, the devaluation hit  many citizens hard, seeing prices rocketing up in few hours and their life-time savings shrinking. In reaction, protests took place in various cities and in some cases resulted in clashes with the police and arrests. At the moment, measures taken to mitigate the monetary shock include: the imposition of limits on foreign currency outflows and the introduction of a 20 per cent currency tax aimed at discouraging direct investments or real estate purchases abroad[5]. Additionally, the president has recently approved some poverty-reduction measures. Among them, some pensions will be increased by ten per cent. In the next months new welfare provisions, such as scholarships and extra-employment benefits, will be probably introduced.

Considering these circumstances the state budget for 2016 has been revised and now forecasts factor in the oil price at $25 per barrel instead of $50. Additionally, the presidential office plans to grant fiscal advantages to investors who will diversify the economy. For example, for seven years entrepreneurs who import equipment in Azerbaijan not only will not pay taxes but also will have only half of their income taxed[6]. However, even if almost everybody talks openly of the economic difficulties, the new circumstances will not end tout court the willingness of the country to host international grand events. For example, the organization of the Formula One Grand Prix, scheduled for June 2016, will not be affected by any new measure.

In light of these elements, it is worth looking at how the president frames the issue. On January 2016 the website of the World Economic Forum published an article authored by Mr. Aliyev. On that occasion, consistent with what he had said in previous days (and which is reported at the top of this post), Ilham Alieyv admitted that global trends were not favorable to the structure of the Azerbaijani economy. However, he declared that the government was doing everything in its power to mitigate the negative circumstances. He also added that, in spite of the low oil price, Azerbaijan is still crucial in providing energy security to Europe. Thus, the authorities are actively managing the things they have control over. The next weeks and months will show the response of the population. There is no obvious development. Even if the Azerbaijani establishment is perfectly in control of its security forces, some nervousness among top elites can reasonably be expected. As Thomas de Waal masterfully put it: “The public, it seems, can forgive an authoritarian government almost anything except a falling standard of living”.

This research was supported by a FP7/Marie Curie ITN action. Grant agreement N°: 316825

Notes

[1] Guliyev, Farid. “Oil and Political Stability in Azerbaijan: The Role of Policy Learning.” Caucasus Analytcal Digest 47 (2013)

[2] LaPorte, Jody. “Hidden in Plain Sight: Political Opposition and Hegemonic Authoritarianism in Azerbaijan.” Post-Soviet Affairs 31, no. 4 (2015): 339-366.

[3]The oil revenue does not only affect domestic policies but also foreign policy strategies.  In this regard, the ESI Think Tank coined the term “Caviar Diplomacy”, which refers to the Azerbaijani strategy of winning over Western public figures in exchange for precious gifts.

[4] Guliyev, Farid. “‘After Us, the Deluge’: Oil Windfalls, State Elites and the Elusive Quest for Economic Diversification in Azerbaijan.” Caucasus Analytical Digest 69 (2015).

[5] AAP Newsfeed. “CIS: Azerbaijan imposes currency controls.” January 19, 2016.

[6] “New law excepts some Azeri entrepreneurs from tax for seven years”, BBC Monitoring Trans Caucasus Unit (2016), January 19.