Azerbaijan - Economy

Azerbaijan is one of the oldest oil-producing regions of the world. Here in ancient times the Zoroastrians, for whom fire was a sacred symbol, built temples around the "eternal fires" of burning gas vents. At the beginning of the 20th century, as international competition increased in the first great era of economic globalization, Azerbaijan was supplying almost half of the world's oil. As a constituent republic of the USSR it was a leading supplier to the rest of the Union until the focus of Soviet oil development efforts shifted to the Ural mountains and western Siberia during the 1970s and 1980s. Remaining oil reserves are estimated in the BP statistical review of world energy for 2002 to be about 7 billion barrels. For oil, its reserve to production ratio (R/P ratio) of 64.3 is topped only by Sa'udi Arabia and Iran. Proven reserves of natural gas are estimated at 440 billion cu m (15.5 trillion cu ft). In addition, the country is endowed with ample deposits of iron, aluminum, zinc, copper, arsenic, molybdenum, marble, and fire clay.

Azerbaijan boasts a diversified industrial sector that accounts for approximately a third of GDP (2000 est.) up from less than a fifth in 1998, and 15% of employment (including construction), a figure that has remained unchanged. Agriculture, which employs about 40% of the labor force and accounts for 20% of GDP (including forestry), also rests on a relatively diversified base, producing cotton, tobacco, grapes, and a variety of foodstuffs. The transport sector is well developed, integrating the country's various regions and facilitating both domestic and external trade.

Despite its economic potential, Azerbaijan has been slow in making the transition from a command to a market economy. Large state companies continue to dominate the economy and below-market price controls still cover many key commodities. The war with Armenia has also slowed economic growth by disrupting trade ties and draining government revenues. In 1992, Azerbaijan implemented an economic blockade against both Armenia and the enclave of Nagorno-Karabakh, which is still in effect despite the cease-fire reached in 1994. In 1992 the United States passed Section 907 of the Freedom Support Act, restricting assistance to Azerbaijan until "demonstrable steps" were taken to lift the embargo and cease offensive actions. In January 2002, however, US president George W. Bush waived Section 907 purportedly due to Azerbaijan's support of the US-proclaimed War on Terror. In August 2002, CCC, a Greek-based construction and project management firm, won the tender for laying pipes for the Baku-Tbilisi-Ceyhan (BTC) oil pipeline officially approved September 2002 and scheduled to go into operation in 2005. Trade has traditionally been with Russia and the former Soviet republics and the economy is still greatly affected by events in those countries.

In 1994, Russia, citing its own conflict in Chechnya, closed all rail and road borders with Azerbaijan. Cut off from its major source of production inputs and main outlet for manufactured projects, Azerbaijan's industrial production fell by more than 20% in 1995. Overall, it is estimated that from 1991 through 1995 the economy declined by about 60%. Recently, Azerbaijan has begun to shift trade to Iran and Turkey and away from Russian and Ukraine. The BTC pipeline is designed to avoid Russia. Foreign investment, the majority in hydrocarbons, began a period of steady growth in the late 1990s, and in 2001 the economy registered its fifth straight year of real GDP growth. For 1999 to 2001, based on data supplied by the government of Azerbaijan, growth rates were 7.2%, 11.1% and 8.5%, respectively, with a forecast of about 9% (US State Department estimate) for 2002. Nevertheless, the country's GDP is not expected to reach its 1991 level until 2007.

Localized fighting with Armenia broke out in the spring of 1997 and in the summer of 1999, and efforts to reach a peace agreement have failed to date. The prospects for long-term economic growth have been significantly enhanced in 2002, however, by the cutting of one Gordian knot: the official sanctioning in September 2002 of the BTC pipeline from Baku to the Turkish Mediterranean, which has been pending since the under the country's first production sharing contract (PSC) was agreed to in 1994 with the Azerbaijan International Operating Company (AOIC). The AOIC is an international consortium of companies headed by British Petroleum (BP) as operator with a plurality share of 34.1% share. Actual construction on the BTC pipeline is to begin in March 2003. Azerbaijan's second PSC, signed and ratified in 1996, for the Shah Deniz gas pipeline involving another consortia headed by BP (with 25.5% and also designated operator) and Norway (Statoil with 25.5%) more typically failed to be sanctioned in October 2002 as planned due to problems sorting out finance. Final sanctioning is in 2003. Azerbaijan's economic development will ultimately depend on the diversification of its production for export, but in the near future the prospect is for the increasing dominance of the hydrocarbon sector as a percent of GDP and as a percent of exports.