Azerbaijan: Baku Hedging Economic Bets

By Shahin Abbasov

Azerbaijan’s days of explosive growth, driven by rising energy production, appear to be over. Baku is now emphasizing economic diversification, but the early returns are mixed as to whether non-energy sectors can place Azerbaijan in a stable growth trajectory.

Back in 2007, Azerbaijan’s annual GDP growth rate stood at roughly 30 percent. This year’s annual rate is projected to be less than 4 percent, according Zohrab Ismayil, the head of Assistance to Free Economy, a Baku-based non-governmental think-tank. Over the first half of the year, government statistics show the country’s economy grew at a modest 0.9 percent rate, thanks mainly to 7.2-percent growth in non-energy sectors.

For most of the last two decades, Azerbaijan’s economy was synonymous with the oil & gas sector, prompting experts to express concern about Baku’s vulnerability to Dutch disease, or an economic over-dependence on energy exports. Currently, the energy sector accounts for 91 percent of Azerbaijan’s exports, and is responsible for generating just under half the country’s GDP. Tariffs, fees and sales from energy exports also account for 74 percent of state revenues.

With energy production peaking, and aware of the Dutch disease threat, officials are starting to spread their investments around. According to Economic Development Minister Shahin Mustafayev, 75 percent of the $17 billion invested in development projects in Azerbaijan in 2010 went to non-energy-related sectors. “Development of agriculture, IT, telecom, transport, environment and tourism are the priorities of Azerbaijan’s economic development,” Mustafayev said. To hasten the evolution of non-energy sectors, the government is planning liberalizing reforms, the minister hinted, although he provided no specifics.

Azerbaijan also has an abundance of cash on hand – with reserves totaling about seven-times the amount of the country’s foreign debt. This means Baku is also looking for foreign investments. In 2011, Mustafayev said that Azerbaijan is investing $4 billion in unspecified ventures in Turkey and another $1 billion in Georgia. Deputy Finance Minister Azer Bayramov said in July that diversification efforts aim to reduce the energy sector’s share of state revenues from 74 percent this year to 38 percent in 2014.

Local economic experts tend not to be as optimistic as government officials about the economic potential of non-energy sectors. Ismayil, the Baku expert, says the energy sector’s continuing dominance of the Azerbaijani economy acts as a disincentive to liberalize.

The agriculture sector is likely to be the bellwether of success or failure for Azerbaijan’s diversification push. The sector currently is responsible for generating about 5 percent of GDP, even though it employs a far larger percentage of the population.

Official statistics show the agricultural sector registered a promising 6.2 percent growth rate during the first half of 2011. However, experts, including Ismayil, contend the sector remains riddled with inefficiencies. One problem area is connected with the operations of AgroLeasing, a state-owned company. The company, Ismayil explained, “leases machinery, equipment and fertilizers to farmers allegedly on favorable conditions.”

“But in reality it is a kind of monopoly, and customs [officials] unofficially ban the import of equipment and fertilizers to other companies and farmers,” Ismayil added.

According to a report published by RFERL last October, state investigators found that the company engaged in questionable business practices, including awarding 91 no-bid contracts worth a total of $140 million. As a result, several mid-level managers and the heads of regional offices were fired, and some were arrested and charged with economic crimes. Ismayil questioned whether the government’s audit and firings succeeded in changing the corporate culture at AgroLeasing. “Where you have monopoly and non-transparency, corruption is always there,” he said.

A cotton planter in the Geranboy Region, speaking on condition of anonymity, echoed Ismayil’s sentiments, saying AgroLeasing’s monopolistic practices kept his operating costs higher than they should be. He said he could obtain fertilizer and machinery only from AgroLeasing. “One cannot buy it somewhere else,” he said.

Ismayil contended that monopolistic practices and corruption created major obstacles in other non-energy sectors. “Local businessmen often complain that the amount of kickback to get favorable loan from the National Entrepreneurship Support Fund is at least 15 percent,” he said.

Officials of both AgroLeasing and the National Entrepreneurship Support Fund did not respond to EurasiaNet.org queries for comment.

Despite the existing problems, the Geranboy planter said that economic conditions for farmers in Azerbaijan were improving. “We now have better access to government sponsored loans. Of course up to 20 percent kickbacks and bribes are a normal thing, but at least we can get loans. Plus we are exempted from any taxes which also helps,” he said. In addition, the state-affiliated company that purchases cotton from planters is offering a generous price for the commodity.

Shahin Abbasov is a freelance reporter based in Baku and a board member of the Open Society Assistance Foundation-Azerbaijan.