Petrostrategies, a French think tank specializing in global energy research, analyses Azerbaijan’s recent economic and political developments. “Baku knows that it is running out of time, as its oil reserves are declining while gas exports can’t earn enough income to replace them. It is trying out a new political strategy to resolve the Karabakh conflict before resorting to arms again, if necessary, as happened in April 2016.” The article was published in the World Energy Weekly, a publication of Petrosrategies.
Azerbaijan has just performed a major internal and external political volte-face, renouncing the European integration plan which it had been pursuing since 2007, banking on an alliance with Russia, strongly reasserting its membership of the Muslim world, and showing a return to traditional family and religious values which it had previously opposed in the name of secularism. The highlight of this change was of course President Ilham Aliyev’s speech at the University of Baku on November 27. However, the change actually started in October, when Aliyev declared that he would no longer tolerate dissidence within his regime. He then began to dismiss senior officials of the Presidential and governmental administration, some of whom had been in office since the reign of his father, whom he succeeded in late 2003. These officials were seen as the guarantors of a secular, pro-Western stance, but their political importance had begun to wane in favor of the “Pashayev Clan”, represented by Aliyev’s wife, Mehriban, who was appointed as the Republic’s first vice-President in February 2017, thus becoming her husband’s successor in the event of his sudden demise.
In a forty-five-minute speech delivered on the occasion of Baku University’s centenary on November 27, Ilham Aliyev violently criticized those who refused to lend his country money when it was in “difficulty” between 1994 (when his country was defeated in the Karabakh war) and the start of oil exports in 1997. “Today, sometimes we hear from some external circles that, they say, we want to help Azerbaijan, we want to see Azerbaijan as a developed country. All this is a lie. […] At a time when the treasury was empty, we applied for loans, but no one gave them to us”, said Aliyev. “Therefore, when someone says that he wants good for Azerbaijan, do not believe it. […] We are building a state based on traditional values. […] Some countries are currently not paying attention to this. They do not distinguish between men and women. […] There is gender equality, we recognize that. But we cannot live outside traditional thinking”. Referring to the fact that Europe is still in economic recession, the Azeri President said: “Where should we integrate into the crisis? Where do we integrate into the society of those who say ‘Stop Islam’? Where to integrate into the society of those who do not see the difference between men and women? […] We will by no means integrate there”, he said.
This public renunciation of the European integration policy took place three days before the inauguration of the TANAP gasline, on November 30, which is to export up to 10 bcm/annum of Azeri gas to Europe. The line’s construction was the outcome of large-scale efforts by the United States and Europe to present TANAP as a way to reduce the EU’s dependence on Russian gas (although its capacity is modest compared to the volumes sold by Gazprom in that market). Today, on the contrary, Baku wants to strengthen its ties with Moscow. In addition, the gasline is being commissioned at a time when there is a lot of gas on the world market, and prices are low. However, the completion of the Shah Deniz 2 project and the gaslines that serve it (including TANAP) has cost more than $40 billion, and it would take the equivalent of an oil price of at least $70/b to ensure its profitability.
Exporting gas from Shah Deniz 2 will not bring Baku the financial renewal that it has been hoping for. This is very frustrating for a country that has already been disappointed not only by a decline in oil production (which started in 2012) but also by persistent and relatively low crude oil prices. Admittedly, after the concession of the ACG fields (Azeri-Chirag-Deepwater Guneshli) was renegotiated in 2017, international companies led by BP began to invest in order to limit falling oil production, but these efforts will be expensive and will only manage to stabilize the level for a few years (perhaps with a slight temporary increase). However, more than half of the reserves in these fields have already been extracted and an unavoidable depletion is now on the cards. But Azerbaijan’s economy isn’t strong enough to forgo the country’s dependence on hydrocarbons. In 2018, its recorded growth only reached 1.4%, and the 3.6% expected for 2019 was revised downwards to 2.3% in September. Neighboring Georgia’s corresponding rate was 4.8% in 2018 and 5.1% in 2019 (first ten months), although it has no oil or gas. A comparison with Armenia is even more infuriating for Baku: Yerevan saw its economy grow by 5.2% in 2018, and a range of 5.5% to 6% is now being advanced for 2019 by the World Bank and the IMF.
Aliyev can no longer hope that increased hydrocarbon revenues will revive his country’s economy, allowing him (if he so chooses) to start improving the distribution of national wealth among the population. The Azeri Head of State may also fear that the sight of Armenia’s peaceful popular revolution in April 2018, which managed to wrest power from a corrupt regime that was deemed unbeatable in only a few weeks, could infect opinion in his own country. The number of protest demonstrations in Azerbaijan increased in 2019, and they are not repressed as harshly as they used to be. Visibly under pressure, the government is even releasing political prisoners. The day after Aliyev’s speech at the University of Baku, the country’s Parliament was dissolved. Why? Was it to allow opponents into the Assembly in the hope of containing popular anger? The President has criticized revolutions taking place in other countries, which, he claims, do not keep their promises. “Now the whole world sees that these revolutions have brought only misfortune to those countries”, he said. He then announced “radical reforms” after the next parliamentary elections.
Azerbaijan has also begun to significantly tighten its ties to Russia. Mehriban Aliyeva made a “state visit” to Moscow between November 20 and 25, during which she met with the Russian leaders and hailed “Russia’s rising position in the international arena”. When Ilham Aliyev welcomed a delegation led by the Russian chief of staff after his speech at the University in Baku, he said that Vladimir Putin is “the President of the leading country in the world” and that he is “number one among the politicians of the world”. Baku may be trying to take advantage of the friction that erupted between Yerevan and Moscow after Armenia’s “Velvet Revolution”; it may be hoping to thus find a satisfactory solution (in its opinion, at least) to the conflict surrounding Nagorno-Karabakh (Artsakh), the Armenian enclave integrated into the Soviet Republic of Azerbaijan by Stalin in 1923, which won its independence after the collapse of the USSR. The Azeri government is presenting the huge cost of this conflict as the main source of the problems facing the country’s economy. Baku knows, of course, that it is running out of time, as its oil reserves are declining while gas exports can’t earn enough income to replace them. It is trying out a new political strategy to resolve the Karabakh conflict before resorting to arms again, if necessary, as happened in April 2016.