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AZERBAIJAN


  
   

REPUBLICAN REFERENCE

Area (sq.km)
86,600

Population
7,771,092

Principal ethnic
groups
Azeri 90%
Russian 2.5%
Armenian 2%
Dagestani 3.2%
other 2.3

Capital
Baku

Currency
Azeri Manat

President
Heidar Aliyev
 

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Background:
Azerbaijan - a nation of Turkic Muslims - has been an independent republic since the collapse of the Soviet Union in 1991. Despite a cease-fire, in place since 1994, Azerbaijan has yet to resolve its conflict with Armenia over the Azerbaijani Nagorno-Karabakh enclave (largely Armenian populated). Azerbaijan has lost almost 20% of its territory and must support some 750,000 refugees and internally displaced persons (IDPs) as a result of the conflict. Corruption is ubiquitous and the promise of widespread wealth from Azerbaijan's undeveloped petroleum resources remains largely unfulfilled.  

Update No: 265 - (28/01/03)

The Baku war memorial controversy
There is one part of history that will not go away in Azerbaijan - the British intervention in the republic at the end of the first World War in 1918. The British were fighting for the Armenians and against the Turks; that is the real problem. The Azeris regard the matter as closed, but not the British, then as now very interested in investing there. 
Foreigners then, as was to be the case in the Second World War, were primarily concerned to obtain Azerbaijan's oil assets, the oldest petroleum industry in the world. The Germans and the Turks, the British and the Americans, the Bolsheviks and the Mensheviks in Russia all had their eyes on Azeri oilfields as the war came to a close, hoping at least to deny them to the enemy. Hence a fierce struggle for Baku, the capital of the republic and of the industry.
In the summer of 1918 a force of 1,000 or so British troops, with a few armoured cars, found its way from Baghdad to Baku. "Dunsterforce" as it came to be known after its leader, Major-General Lionel Dunsterville, was under orders to take and hold the city against 14,500 Ottoman Turkish troops and some 1,000 Azeri ones.
It was not able to keep up the unequal struggle for long, but did prevent the Turks and Germans from getting their hands on Azeri oil before the end of hostilities. The British also rather absurdly flattered themselves that they had foiled a German-Turkish thrust towards India, never a serious proposition, any more than a Russian one was. Geography and distance forbid (the Younghusband expedition to Lhasa in 1904, sent by Viceroy Curzon to forestall Russia found no Russian presence at all in the Tibetan capital).
The fighting left 1,130 Turks dead and 92 British. In the 1920s after the Bolsheviks proved the ultimate winners of Azerbaijan, the graveyards where the British 92 were buried was ploughed up to make way for a park. Today there is no record of their graves.
This is where the Commonwealth War Graves commission comes in, as does Angus Hay, a British businessman resident in Baku, who is also an amateur historian. The idea of a war memorial to be erected in Baku has been proposed by them to the Azeri Government, with the strong advocacy of the British ambassador as well. But President Haidar Aliyev is having nothing of it.
The trouble is the British had sided with the Armenians, who had killed Azeris in large numbers in ethic rioting across the republic in March 1918. When Baku fell in September the Azeris took their full revenge, predatory victims avant la lettre. The Armenians had been victims galore at the hands of the Turks in 1915 at an earlier stage of the conflict, something which the current generation of Turks have never been forgiven for.
The whole affair is a can of worms. It might be thought better to forget all about it, contrary to Mr Hay. But people feel strongly about the remains of their forebears; and Mr Hay believes that Mustafa Kemal Ataturk himself, the founder of modern Turkey, would be in favour of a British war memorial in Baku. When dedicating the British and Commonwealth memorial at Gallipolli in 1934, he said that there was no longer any difference between the "Mehmets" and the "Johnnies" who had fought each other. "To you mothers who sent your sons to a faraway country wipe the tears from you eyes, for your sons are now lying in our bosom and are at peace. After having lost their lives in this land they have become our sons as well." Ataturk was, indeed, a statesman; Aliyev is not. Enough said.

Oil boom turns sweet-and-sour
The Azeris are faring rather well, if one believes their statistics. A GDP growth rate of over 10% per annum has been recorded for every year in the current decade.
The real question is what does it all mean for the people. The Azeris are a long-suffering lot - as they have every reason to be. The Armenians bested them in the early 1990s in one of the modern world's most tragic conflicts, over Nagorno-Karabakh, and now occupy 20% of their territory, unacceptable by any standards. There are still millions of refugees deprived of their homes. 
The boost is coming from the energy sector, always in any country a somewhat doubtful saviour, leading to distortions and lop-sided development, at least in the Third World, to which Azerbaijan now effectively belongs.
Still, some people notably the political elite, are likely to benefit, as there is far more of 'pour-out' about the itinerary of Azeri oil riches than 'trickle-down.'
The GDP is due to grow by 10% in 2003, with inflation only rising by 2.5%, the Economic Development Minister Farkhad Aliyev said in September. This would be after growth of 8.5% in 2002, with industrial production rising by 7.9%.
The driving force has been investment, mostly foreign at that, and concentrated in the energy sector. There has been US$11.28bn investment in the last ten years since independence, of which US$7.9bn, or 70%, was FDI. Most of this latter was in Caspian Sea oil developments, with the AIOC consortium, led by BP-Amoco, to the fore.

US now the main partner
The oil boom is seeing the US, and to a lesser extent the UK, playing a vital role. US Energy Secretary Spencer Abraham was in Baku in September, conferring with President Aliyev. Washington accords great importance, Abraham said, to the development of energy projects in the Caucasus.
The Bush Administration, like its Clinton predecessor, is backing the long-mooted Baku-Tbilisi-Ceyhan pipeline, whose financial viability has been in doubt. The outcome of the crisis in Iraq will be obviously crucial here.
At the moment oil prices of over US$30 per barrel make the pipeline look feasible. But how long will they last? In fact in early January the Saudis engineered a drop, aware that if they go too high their dominance of the world oil industry will be threatened by just such developments as the Ceyhan pipeline project. 
The security of the pipeline, especially from Kurdish insurgents in Turkey, is an issue, which US intervention in Iraq, if that creates a new Kurdish entity there, might either help to resolve or to excacerbate. The branding of Iran as an 'axis of evil' state also helps the prospects of the pipeline in so far as it removes the alternative of an Iranian route for Caspian oil for at least the while.
But the hard-headed bankers needed to pay for the project have to answer to their shareholders and many look askance at the project of a pipeline through remote mountainous areas of Turkey, whose cost over-runs could prove daunting, quite apart from all the other problems.

EBRD to the rescue 
The Azeri government is pleased that the EBRD has come out firmly in favour of financing part of the Baku-Tbilisi-Ceyhan oil pipeline project, which is of great importance to its Caspian Sea oil boom. The EBRD is talking of a US$300m contribution, US$150m from itself and another US$150m from other financial sources.
The EBRD's participation is important in that it could give it a decisive imprimatur for the entire investment community, creating political stability around the project.
But nothing is likely to be put up-front on the pipeline until events in the Middle East unfold, now eagerly awaited. If the US topples the Iraqi regime from the south without much Turkish help, and the Turks start meddling in Northern Iraq's Kurdish provinces, then Washington may begin to back off from the idea, pre-occupied with the prospects of a newly-constituted Iraq.
If Turkey plays a crucial role in toppling Saddam, then the US may find it difficult not to reward it with the pipeline, on which many a Turkish politician's fortune depends.
The EBRD is also being asked to consider the Shah Deniz gas export project from the Caspian Sea.

Stock trading systems renovated 
Baku and Tbilisi are not just cooperating in energy pipelines, from which Azerbaijan would benefit in oil and gas revenues and Georgia in transit fees, but also in working out the kinks in their stock-trading systems.
Georgia established its stock market in 1999 and Azerbaijan one year later. Georgia leads the way heavily in numbers over Azerbaijan, listing 282 joint-stock enterprises on the Georgian Stock Exchange compared with 50 on the Baku Stock Exchange. Azerbaijan has only 14 brokerage companies. The Azeris have a lot of catching up to do.
The Azeri firms listed on the BSE are larger, however, on average than those of the GSE, reflecting the big companies involved in servicing the oil boom, whose main players are the multinationals.
One promising sign for the economy is that the giant foreign firms are beginning to source inputs locally. BP, for instance, has ordered key quality goods from Baku Steel on a permanent contract basis. BP Amoco is the flagship of the huge AOIC consortium in the Caspian Sea fields.

IMF at hand
US approval brings IMF endorsement more or less automatically. The IMF is extending a US$100m loan facility for the next three years, of which US$16m has already been disbursed. But it is insisting on compliance with conditions, the lowering of customs tariffs, further privatisation, the extension of the market economy, etc. One condition that Azerbaijan is baulking at is a raising of oil prices, which are kept low for domestic reasons.
The budget is only going to be one per cent in deficit in the coming period, while taxes are rising as the boom commences. Financially the administration is sound, insists the Finance Minister, Avaz Alekperov.

Russia still counts 
President Aliyev visited Moscow recently and maintains a good working relationship with Putin. The Russians have agreed to a division of the Caspian Sea along lines laid down in Soviet times. Basically, Azerbaijan's borders remain unchanged. 
Aliyev pledged Baku's full support for Moscow in the anti-terrorist campaign. But its really important ally here is the US. Azerbaijan is moving out of the orbit of Russia.

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AGRICULTURE

USAID grant to assist farmers in south of Azerbai
jan

The Mercy Corps international assistance and development agency has been given the right to use a US$750,000 grant allocated by the US Agency for International Development [USAID] for a three-year project on economic support to the southern districts of Azerbaijan, the Mercy Corps Baku office has told Trend News Agency.
The project envisages providing support to over 4,000 farmers in Masalli and Lankaran Districts specializing in animal husbandry and poultry farming.

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ENERGY

Azeri Oil Fund not to pay for gas project development

From US$320m to US$350m are needed to finance the 10 per cent share of SOCAR [State Oil Company of the Azerbaijani Republic] in the project on developing the Sah Daniz gas deposit. The assets of the State Oil Fund of the Azerbaijani Republic [SOFAR] will not be used for this purpose. SOCAR itself will finance its share in the project, SOFAR Executive Director, Samir Sarifov, has said, Bilik Dunyasi News Agency has reported.
He pointed out that SOCAR President Natiq Aliyev would hold negotiations with the European Bank for Reconstruction and Development on issuing a credit to partly cover the expenses of the Sah Daniz project.
At present, there is talk about the size of the credit. In any case, SOCAR will use funds from international financial institutions.

Sebekesi increases investment in Baku electricity network

Barmek Azerbaycan Elektrik Sebekesi of Turkey plans to increase its investment portfolio by 20-25 per cent and the company is obligated to develop Baku's electricity distribution network during its 25-year management period, company head, Husein Arabul, told the press. The company's agreement with the Azerbaijani government on managing the electrical network includes investments of US$230m, as Arabul noted. "The decision to up the investment follows a detailed study of the network's current condition," he said. Since taking over the network's management last January, Barmek Azerbaycan has put around US$7.1m into its regional development, New Europe reported..

Azeri Energy Ministry outlines oil, gas extraction plans for 2003

The Ministry of Fuel and Energy has completed the work on drafting the country's fuel and energy balance and submitted it to the Ministry of Economic Development for consideration, Turan News Agency has reported.
The Ministry of Economic Development has told Turan that the drafting of the balance was delayed mainly because it had taken longer to check the data for gas consumption in the country. Under the document drawn up by the Ministry of Fuel and Energy, SOCAR [State Oil Company of Azerbaijan] is to extract 8.9m t of oil (8.94m t were produced in 2002) and 4.15bn cu.m. of gas (4.19bn in 2002) in 2003. The AIOC [Azerbaijan International Operating Company] is to extract 6.45m t of oil (6.38m t in 2002) and 890m cu.m. (958.8m cu.m.) within the framework of the
Azari-Ciraq-Gunasli project.
The draft balance envisages increasing power output by 6 per cent in 2003 and bring it to 19.8bn kWh (18.6bn kWh in 2002), which can be achieved by putting into operation the new Simal state power plant, which has a capacity of 400 MW. The import of power this year will remain at the level of 2002, i.e. will be around 1.5bn kWh.
The 2003 draft balance does not mention the additional import of 1.5bn cu.m. of gas and envisages gas import at last year's volumes - only 4bn cu.m.

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FOOD & DRINK

McDonald's expansion signals alternative investment opportunities

International fast-food restaurant chain McDonald's established its expanding policy in Azerbaijan with the recent official opening of Baku's second restaurant, next to the Ganjlik metro station, three years after the opening of the flagship restaurant on Fountains Square.
Based on CBN reports, Baku-based investment specialists called the expansion a worthy achievement for McDonald's as well as for the republic, citing it as a clear indicator to potential investors that business can be done outside the oil and gas sector in the country - providing there is the will and the patience to succeed. The US$1m investment by McDonald's is also further proof of the corporation's commitment to Azerbaijan, according to Managing Director of McDonald's Azerbaijan LLC, Maksud Mirzoyev. 

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FOREIGN ECONOMIC RELATIONS

US eyes wind projects in Azerbaijan

The National Confederation of Entrepreneurial Organisations of Azerbaijan recently received a letter of new business offers from the French embassy in Baku, New Europe reported recently. The letter said that nine French companies intended to bolster cooperation in winemaking, mobile catering service, exports of aromatic and officinal herbs, textile, sales of gauges, imports of luminescent lamps and more. The confederation has distributed these offers to national entrepreneurs and having compiled data about Azeri companies active in respective spheres, submitted them to French companies. 
Meanwhile, a US company has expressed an interest in non traditional energy projects in the region. In particular, the US-based AJL Resources company is interested in Azarenerji's projects on the construction of wind and sun electricity power plants. AJL Resources representative, Alfred Lutz, said that he held important meetings at the Ministry of Fuel and Energy, Azarenerji and the Enerjilayiha scientific-research institute during his visit to the Central Asian state.

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