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.

 

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