Tough Year Looms for Azerbaijan

Hosting the 2012 Eurovision Song Contest did not contribute to a lot of good press for the government of Azerbaijan. European media in particular vacillated between derision over ostentatious spectacle and outrage over authoritarian fiats.

But 2013 may get a lot worse for Baku. A troubled oil sector, an upcoming presidential election, and the potential for rising tensions with archenemy Armenia portend a challenging year for Azerbaijan’s ruling class.

The country’s uncertain oil output is a singular worry. Azerbaijan, a major oil producer in the former Soviet Union, produced 39.3 million metric tons in 2012, down 7.35 percent from a year earlier, according to Socar, the national oil company. Azerbaijan's extraction economy accounts for approximately 53 percent of GDP and 92 percent of exports, according to Transparency International. Meanwhile, the United States imported thirteen million barrels from Azerbaijan in 2011, compared to more than twenty million barrels in 2010.

The Center for Economic & Social Development, a think tank in Azerbaijan focused on the country’s sustainable economic development, stated in a November 2011 report that the “oil boom in Azerbaijan is doomed to end in a few years.” A precipitous decline in oil revenue, given Azerbaijan’s extremely high dependence on energy extraction, poses a dire threat to the country’s economy even without the expected volatility in this year’s international oil market.

And this year, Azerbaijan’s sovereign oil-wealth fund will run a deficit in the billions of dollars—a severe problem for a government that depends on the fund for almost 60 percent of its total budget.

Thinning oil exports has been already a visible source of strain for the Azerbaijan government, on dramatic display last year when Azerbaijan President Ilham Aliev lashed out at British Petroleum, a vital partner in pipelines and Caspian oil fields, for reduced oil revenues at the giant Azeri-Chirag-Guneshli energy fields (which comprises about 80 percent of total Azeri oil production). Aliev held BP responsible for “grave errors” and “false promises” responsible for an $8 billion government budget shortfall.

To be sure, Azerbaijan's oil revenues continue to rise, even if production is peaking, and typically government takes a higher share of revenues as projects mature and the oil companies have recovered their investments. The government has billions in foreign cash reserves and the Asia Development Bank forecasts Azerbaijan’s GDP in 2013 will grow at a 3.5 percent clip.

But oil revenue woes come as the country prepares for an election. To the shock of no one, Aliev, whose talented father was the last Soviet-era president of the republic and widely thought to be the successor to Mikhail Gorbachev, will run for a third term. Previous parliamentary and presidential elections have seen the ruling Yeni Azerbaijan Party roll over, at times brutally, fractured and flawed opposition parties, and could do so again.

But that Eurovision Song Contest could mean the 2013 presidential election will receive more sustained press coverage than in the past. Popular consternation about oil revenue and pent up frustration over corruption and public sector mismanagement combined with an uncharacteristically unified opposition could create, however unlikely, a more combustible election outlook.

Political instability is not an encouraging ingredient for quieting Azerbaijan’s intensifying cold war with neighboring Armenia (nor, actually, is political stability, which fuels militant rhetoric as a mechanism to maintain a bilateral political status quo). Armenia is also holding a presidential election this year, probably precluding any high-level negotiations between the two sides and adding more worry to a distressing conflict.

Whether or not Azerbaijan successfully navigates its challenges with oil revenue and elections, it faces a rocky path in 2013.

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