5 replies to this topic

[MJ]

SURVEY - AZERBAIJAN: Oil strategy can change nation: Political uncertainties weigh heavy on the minds of companies which can pluck this country from its poverty, write Stefan Wagstyl and David Stern
Financial Times; Nov 22, 2000
By DAVID STERN and STEFAN WAGSTYL

The next few years will determine whether Azerbaijan, the poorest country in Europe, will join the ranks of the oil-rich.

In that time, the international oil companies which have flocked to Baku will go a long way towards establishing how much of the potential mineral wealth can be converted into proven reserves and hard cash.

And Azeris, led by their 77-year-old autocratic president, Heydar Aliyev, will determine how that money will change Azerbaijan.

Today, oil industry executives think there is enough oil and gas to turn Azerbaijan into an important energy supplier, even if the Caspian Sea may not become the next Arabian Gulf. But there are still great uncertainties about whether Azerbaijan will use the revenues wisely.

The omens are mixed. Many countries have mis-spent their oil money through the corruption of their leaders. Far fewer have used their profits to benefit most of their citizens.

President Aliyev pledges: "As a result of our oil strategy, in the next decades Azerbaijan will experience a new dawn." But the challenges the country faces are formidable, including developing its mineral resources; fighting corruption; reducing regional tensions; and preparing for Mr Aliyev's eventual political departure.

Azerbaijan's heyday was 100 years ago when it briefly produced half the world's oil. When the Soviet Union collapsed it was pumping oil from decrepit wells, planted among some of the world's worst industrial pollution. Its economic troubles were compounded by a war with Armenia, over the disputed territory of Nagorno Artsax, and by civil strife which only ended after President Aliyev came to power in 1993. The former KGB general and Brezhnev confidant brutally consolidated his authority.

Mr Aliyev's triumph coincided with a surge in interest from oil companies, culminating in the 1994 "contract of the century" with the Azerbaijan International Operating Company.

Today, BP Amoco, the AIOC leader, estimates Azerbaijan has 7bn barrels of oil, or 0.7 per cent of world reserves, although Socar, the Azeri state oil company, puts the figure at 17.5bn barrels. BP Amoco puts gas reserves at 850bn cubic metres, or 0.6 per cent of the global total.

Oil industry executives still hope for more big finds, but the anticipation levels are lower today than two or three years ago. The impact on Azerbaijan, with its population of only 8m, is already considerable: output last year was nearly 280,000 barrels a day (b/d), or 50 per cent more than in 1997.

The big production surge is yet to come through the planned development by AIOC of the Azeri-Chirag Gyuneshli offshore field (ACG), which could raise output to nearly 1m b/d by 2010. As a bonus there is AIOC's proposed development of the Shah Deniz gasfield.

Oil companies have invested more than Dollars 3bn in Azerbaijan, driving economic growth to an annual average of 9 per cent in 1998-2000. A further Dollars 8bn could come if the oil companies proceed with ACG and Shah Deniz and build the necessary export pipelines. All this in a country with a gross domestic product of only Dollars 4bn.

The pipelines are a strategic issue. Azerbaijan favours exporting oil to the Mediterranean - via Georgia and Turkey - and gas to Turkey. This would reduce its dependence on Russian routes and the Russian-influenced Black Sea. The US supports the plan to help reduce Russian influence in the Caucasus and bind together the region's smaller states. But Russia would much prefer its own routes to be used.

The oil companies want the gas pipeline but have yet to make up their minds on oil exports. The balance might be tipped in the Mediterranean route's favour if more discoveries are made, perhaps in the five offshore test wells to be drilled this year and early next.

Meanwhile, the government is considering how to manage oil's economic impact. President Aliyev plans an oil fund, to be invested partly overseas in income-generating assets and partly domestically in budget support and infrastructure.

The Azeri economy is enviably stable, with government borrowing under control, inflation low, and the foreign exchange rate solid. However, market-oriented reform is slow. The International Monetary Fund wants to see more progress in privatisation, banking reform and administrative change.

As important as specific reforms is a change in the country's corruption-ridden culture. Politics and business are unhealthily intertwined, including at the highest level, where for example, the president's 38-year-old son - Ilham Aliyev - is both a leading light in the ruling New Azerbaijan party and a senior Socar executive.

Outside oil and gas, investment is pitifully low. Swiss-based Holderbank runs the Garadagh cement plant. French brewer Castel owns a factory on the outskirts of Baku. The Baku Hyatt Hotel attracts praise. But as a European ambassador says: "A five-star hotel, a cement works and a beer factory do not make an economy."

Michael Mered, the IMF representative, says: "If reforms are not quickly implemented . . . Azerbaijan could lose the current environment of economic stability and law and order, which the government has fought hard to establish."

Much rests on Mr Aliyev's frail shoulders. The president says he will not retire early. He was last elected in 1998 with over 70 per cent of the vote, and only recently announced plans to seek a third five-year term in 2003.

But although his mind is sharp his health seems to be weakening following heart illness. "What will happen when he is gone?" is the question most Azeris ask.

The president has made his survival an issue by concentrating power in his hands. He has repressed challengers from his own party and from the opposition by violence, intimidation, and media manipulation. In this month's parliamentary elections, the ruling party resorted to widespread fraud.

Mr Aliyev seems to be grooming his son as his successor. But it is unclear whether Ilham Aliyev can master the ruling party, let alone the country. Given Azerbaijan's troubles in the early 1990s, a peaceful succession cannot be taken for granted. One Azeri journalist says: "This time (in the parliamentary polls) we sat quiet. The time for action will come when (President) Aliyev goes."

The oil industry may be ready to tolerate autocracy, but might take fright at prolonged civil strife. Also, Baku's relations with the US and the EU will be strained if the future brings further assaults on Azeris' democratic rights.

The parliamentary election, witnessed by international monitors, cast a shadow over Azerbaijan's application to join the Council of Europe, the political rights forum. Azerbaijan was accepted, along with Armenia, but only on condition that it tackles electoral abuses. Without more respect for democracy, Azerbaijan may find itself on the fringes of the international community - oil or no oil.

The country mostly looks west for support. But there are also signs that relations with Russia may be improving. Despite military ties between Moscow and Armenia, Azerbaijani officials see a new attitude towards the Caucasus under President Vladimir Putin, who is due to visit Baku in the next few days.

Without Russian intervention it is difficult to see how there can be lasting peace in the southern Caucasus, including a settlement of Azerbaijan's most painful international problem - the loss of Nagorno Artsax to Armenia. Even though the province is populated mostly by ethnic Armenians, few Azerbaijanis accept the status quo. They also worry about an estimated 20m ethnic Azeris living across their southern border in Iran, where they are viewed with some suspicion.

Azerbaijan lives in one of the world's tougher neighbourhoods. However, its most important challenges almost certainly lie within.

Copyright: The Financial Times Limited http://globalarchive...itle=Azerbaijan

[MJ]

SURVEY - AZERBAIJAN: Entrepreneurs face formidable barriers: DOING BUSINESS by Robert Corzine: Corruption and an inconsistent legal system top the list
Financial Times; Nov 22, 2000
By ROBERT CORZINE

Azerbaijan has proved to be a minefield for many foreign companies trying to establish operations in the country. A combination of a lack of transparency, an inconsistent legal system and widespread corruption have produced what many foreigners say is "an extremely hostile place to invest".

But that hostility has not prevented some foreign companies from taking the plunge, even though one local Azeri businessman voiced an especially jaded view of such efforts in the non-oil sector: "A person who is smart puts his money in some British or Swiss bank. A smart person does not invest in Azerbaijan."

The big international oil companies have certainly invested considerable amounts in Azerbaijan, but those investments have been ring-fenced through production-sharing agreements signed with the government. The personal involvement and interests of President Heydar Aliyed and the strategic importance of the big oil companies to Azerbajan's future economic and political stability have made them more or less immune to the difficulties of everyday business life experienced by smaller companies.

It is companies in the non-oil sector in particular which have struggled to overcome the obstacles entrenched in the Azeri business system, as the high level of political protection offered as a matter of routine to the oil companies is noticeably absent.

Azeri and foreign businessmen say the business environment suffers from a number of ills. These include:

* Exceptionally low pay levels - in some cases only Dollars 30 to Dollars 40 a month - for civil servants act as an incentive and encouragement for corruption and harassment of the private sector. "This breeds the need to augment income any way they can," says one long-term western businessman in Baku.

An international banker in Baku notes: "Costs of formality are very high. Once you have a formal company you attract a lot of inspectors.

* A lack of transparency and clarity in the legal system leaves too much scope for individual civil servants to interpret the law and regulations as they see fit, complains a local businessman. "All those people pay for their jobs, so they wont stick their neck out until they get their money back," says a diplomat who has lobbied the Azeri government to improve the situation. "A lot of small companies can't do a lot of things legally. They make unintentional mistakes and then get crucified by the government."

* The old Soviet-era mentality of suspicion still pervades certain government agencies, including the tax authorities. One foreign businessmen describes how that suspicion operates in every day life: "They look at every piece of paper, so they are bound to find something."

* Centralisation of real power in the presidency has led to avoidance of decision-making at lower governmental levels. "There's only one person who can make a decision of any importance, and that's President Aliyev, says a senior diplomat. But the unwillingness of officials lower down the government chain to stick their necks out means that even relatively minor matters can filter up to the president.

But not all foreign businessmen tell the tale of constant woe. Some have identified niches which do not seem to attract the same type of attention by the authorities. And even some of those who have endured constant battles with the authorities do not have entirely negative views about Azerbajan.

A spokesman for one company that has failed after repeated attempts to establish a significant business position in Azerbaijan - largely because of difficulties with a deeply flawed privatisation process - says: "This is definitely an oil country with a future. And it's a young country that is bound to make a few mistakes."

One European businessman has targeted such niche areas, especially in the agricultural sector, where the government has emphasised the importance of foreign investment to boost employment prospects in the countryside. Some businessmen and diplomats say every aircraft that brings oil-related equipment to Azerbaijan from Europe should return fully laden with Azeri agricultural products. But in some agricultural areas farmers are tied to existing agro-processors through a complex series of credits and debts, thus limiting their freedom to supply new entrants or diversify their products.

Copyright: The Financial Times Limited
http://globalarchive...itle=Azerbaijan

[MJ]

SURVEY - AZERBAIJAN: Link still in the pipeline Plans for oil supply are still being dogged by suspicions and counter-proposals
Financial Times; Nov 22, 2000
By ROBERT CORZINE

BTC PROJECT by Robert Corzine


The proposed oil pipeline between Baku in Azerbaijan and Ceyhan on Turkey's Mediterranean coast has become the focus of a fascinating strategic and business battle.

To some, such as the US government, it is as much a geo-political concept as a physical project. But that vision of the pipeline underpinning the political independence of the former Soviet republics of the region has sparked opposition from some big international oil companies. They view Washington's interest as a clear case of political interference in the commercial affairs of private enterprise.

US involvement in the Baku-Tbilisi-Ceyhan pipeline (BTC) has also aroused the suspicions of those countries which are competing with Turkey to become the main oil export conduit from the Caspian Sea region, such as Iran and Russia.

John Wolf, the outgoing US State Department official who has spearheaded Washington's efforts to breathe life into perhaps the world's most talked about "paper pipeline", admits that the definitive economic case for ETC has yet to be made. But he argues that substantial progress has been made over the past 18 months.

"Eighteen months ago nobody thought ETC would be a reality," he says. "No investor would step forward. But the creation of a sponsor s group and the commitment by the companies in that group to spend Dollars 120m on basic engineering is a pretty visible start."

Mr Wolf has described BTC as a "very complicated and unusual project". Those sentiments would no doubt be echoed by the oil companies which are studying various options for exporting oil from the Caspian.

Over the next few years a series of studies, both technical and financial, will help define whether BTC becomes the reality that the US hopes for, or whether it will retain its "paper" status.

Basic engineering will take about eight months, after which the companies involved will have to decide whether to proceed with a 12-month period devoted to detailed engineering. At that point additional investors may be invited to join the consortium. It will also be the deadline for initial volume commitments, one of the most contentious issue to have emerged in recent years, with some companies arguing that insufficient oil has been found so far in Azerbaijan to justify the multi-billion dollar scheme.

American officials have been pressing oil companies operating in Kazakhstan to make early commitments to ship oil across the Caspian Sea to ensure that adequate volumes are available when the decision to go ahead with detailed engineering is taken.

"The long-term economics and vision can only be fulfilled with Kazakhstan," says Mr Wolf. "There are economically valid reasons for Kazakhstan to participate. There are producers in western Kazakhstan who want a western route."

Although the Kazakh government signed the Istanbul Declaration in 1998 which commits the signatories (Azerbaijan, Georgia, Turkey, and Kazakhstan) to take all steps to promote the BTC option, Kazakh government officials have recently appeared lukewarm to the proposal. They talk instead about the viability of a pipeline to Iran, a project which Washington opposes strongly.

Senior western diplomats in Almaty argue that too much oil already moves through the Straits of Hormuz. They claim that the world is dangerously dependent on a waterway that could easily be disrupted by regional rivalries, and that a western route from the Caspian is needed on security of

supply grounds.

BP, the British-based energy group that operates the offshore fields from which the oil for the pipeline will be produced, says it is proceeding on the basis that "BTC will be a reality", even though it is also studying alternatives, including swaps with Iran and the viability of the northern route through Russia.

"If the volumes are there then we see BTC as the best option," says a BP spokesman in Baku.

In recent years Turkey, the ultimate destination for the pipeline, has been suspicious of BP's intentions about BTC. In recent months Turkish officials have made it clear that they intend to link construction of the oil pipeline — estimated to cost at least Dollars 2.7bn — with that of a natural gas pipeline to Turkey from BP's giant Shah Deniz field in Azerbaijan.

BP rejects suggestions that the two pipelines are inter-linked. "We want a gas sales agreement (with Turkey) whenever we can get it," says a spokesman. "We want to do business with Turkey."

BP officials acknowledge that certain efficiencies and benefits could flow from working on both pipelines at the same time, especially when it comes to land acquisition and the sharing of support facilities. But they insist that the two projects should not become merged as a single entity, and that the Baku-Tbilisi-Ceyhan option will stand or fall on economic grounds only.

Copyright: The Financial Times Limited http://globalarchive...itle=Azerbaijan

[MJ]

SURVEY - AZERBAIJAN: An oasis of wealth Many ethnic groups have fled, taking with them much of the city's character
Financial Times; Nov 22, 2000
By DAVID STERN

BAKU by David Stern

In the most recent James Bond instalment, The World is Not Enough, 007 Bond, played by Pierce Brosnan, travels to Baku to protect an oil magnate's daughter. There he finds a place probably not very unlike what he is used to in Monte Carlo: casinos, beautiful women and lots of bad guys bent on controlling the world's oil supplies. And lots of caviar.

It's all a good yarn, but reality is a bit different, of course. Baku's casinos were closed in 1998 as part of a morals campaign. So far the pipeline which Mr Bond was sent to defend has yet to begin construction. And the caviar factory located in the middle of the Caspian, where Pierce and Sophie Marceau escape a very fishy death, does not exist.

But, in a sense, the Bond film could be seen to mirror a greater reality — one in which the Azeri capital provides a glittering façade behind which the country's greater ethnic and economic realities are hidden.

Baku, for all its poverty today, is an oasis of wealth for the rest of the country. Outside the capital live around 6m Azerbaijanis, who can only look enviously onto the smart cafes and boutiques of Fountain Square, the city's main gathering point and promenade. Business, politics and culture are all concentrated there, while most people living in the countryside are limited to a few hours of electricity per winter day.

The division between the capital and provinces is more than just economic or cultural — it is linguistic as well. Azeri, a Turkic language, dominates in the provinces, whereas in Baku it is not uncommon to find native Azerbaijanis who speak only Russian.

The division to a large degree is a product of the Soviet era Natives of Baku like to describe to visitors a golden age, when a cosmopolitan, multi-ethnic metropolis thrived on the shores of the Caspian and Russian was the lingua franca. Azeris, Georgians, Armenians, Russian, Jews and the whole array of Caucasus nationalities all supposedly lived in harmony there once.

"The city was better then. We all used to travel and live together. No one paid any attention to who was Azeri or who was Armenian. Today it is much worse, much poorer," says Larissa Buyantseva, a local writer.

The post-Soviet era has been tough on the city, however. Economic hardship and conflict have driven away many of the ethnic groups that gave Baku its distinctive flavour. Refugees from the Artsax war, as well as labourers from the provinces, have flooded in, looking for work The infrastructure has deteriorated, while corruption has flourished.

But there are also signs of rejuvenation. Today the city is crawling with oilmen. Although the boom that was promised a few years ago has still failed to materialise, most of the petroleum multinationals are still in Baku, albeit in a reduced form.

Thanks in part to the foreign oilmen, the city is reclaiming some of its multicultural identity. Scots, Italians and Turks have replaced Russians, Armenians and Jews. And the Azerbaijanis show a new-found national pride, turning Baku into much more of an Azeri capital than ever before.

Baku has maintained much of its turn-of-the-century charm. Mansions built by the Rothschilds, the Nobels and various Azeri oil barons still stand in the city centre. The mansard roofs and carved stone doorways and awnings give the place an almost Parisian feel.

Even if the casinos are no longer open, the city still boasts its share of restaurants, cafes and discotheques. The oil money has found its way to at least small part of the Azeri population, who seem intent on matching their western counterparts in enjoying the finer things in life.

But there are warning signs that some of Baku's charm could be lost forever. The city's cultural heart — its medieval walled old city, the Icheri Sheher — is gradually being destroyed for its prime real estate.

Walking through the winding alleyways and narrow streets of the quarter, some parts which date from the 15th century, one feels almost in another world entirely. Old men sip tea and play dominoes under fig trees in secluded squares. Children play in cobble-stoned alleyways, while mothers sit and gossip in front of carved doorways or in back courtyards. The wail of the muezzin breaks the afternoon quiet.

Slowly but surely, however, the old quarter is being reduced. Newly-built embassies now stand on top of archaeological sites, experts say. Some western businesses have restored the quarter's mansions, but just as many buildings have been razed.

Perhaps in time, if an oil boom does occur, residents of Baku will realise what they have lost and somehow be able to regain it.

Copyright: The Financial Times Limited http://globalarchive...itle=Azerbaijan

[alpha]

All the talk about Azeri economic superiority is just a facade to cover up the rotten nature of their whole economy. Economy that's too dependent on one source of income. There is absolutely no diversification of economy. It's true that they have a huge chemical and agricultural sector, but these are waning industries. Azerbaijan resembles some of the Gulf countries, where the wealth is concentrated in a few hands, and as time goes on they will absolutely lose their national characteristics and will become toys in the hands of oil companies. Furthermore, the income from oil is not invested in infrastructure and is constantly washed out of the country. In the Information Age, it's not the natural resources that will determine the wealth of the country, but the vast knowledge of country's citizens. When they got rid of Russians, Armenians, and Jews they lost most of the human capital in Baku. In contrast I don't see Armenia's economy as bleak as Azeri's. First and foremost it's not over dependent on one sector. Second, the country is more democratic, which is one of the cornerstones for having a successful market economy. I think with wise management Armenia has a better chance to develop its economy than Azerbaijan.

[MJ]

Which means that having oil is not necessarily a fortune, but it may also be misfortune...