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Last Updated: Tuesday, 3 May 2005, 21:16 GMT 22:16 UK
Poor Azerbaijan prepares to get rich
By Kieran Cooke
In Baku, Azerbaijan

This poverty-stricken former Soviet republic on the shores of the Caspian Sea is set to become rich. Very rich.

Caspian Sea fishermen
The Caspian Sea contains riches other than fish

Industry specialists say the Caspian Sea holds some of the world's largest remaining untapped deposits of oil and gas.

Exactly how large the energy reserves are is a matter of considerable debate.

But already the international companies that have begun exploiting the resources contribute more than $200m (106m) to Azerbaijan's finances each year.

And that, say the oil majors, is little more than a trickle compared with the wealth to come.

Benefit or curse

By 2007 it is estimated that Azerbaijan - a country of eight million, where people earn on average a little over $1,000 per year - will be receiving at least $7bn in oil revenues annually from Caspian energy deposits.

President Aliyev
President Aliyev says Azerbaijan must regain land lost to Armenia

"Azerbaijan is a country in transition," says Ilham Aliyev, the country's 44-year-old president.

"We have considerable resources, but money earned from them must be spent wisely."

How Azerbaijan will deal with its bonanza in oil revenues is a topic that occupies the minds of senior government figures and international financial institutions like the World Bank and the International Monetary Fund (IMF).

"Oil wealth can be a big benefit or a curse," says Ahmed Jehani, the World Bank's representative in Azerbaijan.

"If the benefits of rich resources are not shared, then this can lead to ethnic and other tensions.

"Let us hope the temptation to divert money away from long term investment does not prove to be too strong."

Desperate plight

Azerbaijan was in dire economic straits following the collapse of the USSR.

If the country relies just on oil revenues then other industries will simply wither away
Ahmed Jehani
World Bank

After independence was declared in 1991, the country suddenly found itself without its traditional Soviet market for industrial and agricultural exports.

Investment in the oil industry dried up. Hundreds of thousands lost their jobs.

In addition, Azerbaijan has had to cope with the aftermath of a war in the early 1990s, with neighbouring Armenia over the disputed enclave of Nagorno-Karabakh.

In the war, Azerbaijan lost 14% of its territory and over 700,000 refugees were created.

According to a United Nations estimate, more than 50% of Azerbaijan's population live below the poverty line.

Much of the country's infrastructure is in serious need of repair. Since independence, more than a million have left the country in search of jobs.

Job creation

Azerbaijan's leaders have seen oil as the solution to the country's woes.

In 1994, Azerbaijan signed what was described as the "contract of the century" - a $7.4bn production-sharing agreement with a number of leading Western oil companies for the exploitation of Caspian oil.

Since that time, hundreds of millions of dollars have been invested by the oil majors in oil platforms and other facilities, with the first oil flowing from the newly opened up Caspian fields in 1999.

Basil Zavoico, the IMF's representative in Azerbaijan, says the great challenge is to ensure that the large inflow of oil revenues does not lead to a surge in inflation and undermine the development of the critical non oil sector.

"The oil sector does not create many jobs," Mr Zavoico says.

"The government's job creation targets can only be met through developing other economic sectors."

Choppy waters

Early indications of how Azerbaijan is dealing with the sudden upturn in its financial fortunes are mixed.

Main government building, Baku
In Baku, there is concern that the economy is overheating

The country's oil reserves are expected to be largely exhausted by 2020: Azerbaijan's financial planners have won international plaudits for setting up the State Oil Fund, where a large portion of oil revenues is placed to be invested for the benefit of future generations.

Yet there are danger signals.

Inflation has entered double figures.

A building boom and the opening of upmarket shops and boutiques in Baku, the capital, plus the presence of large numbers of new cars on city streets, are seen as evidence of economic overheating.

A recent assessment by Transparency International, a body which monitors levels of corruption around the globe, placed Azerbaijan 140th out of 146 in its ranking of the world's most corrupt countries.

Dangerous reliance

This is not the first oil boom to hit Azerbaijan.

The country was the site of the world's first commercially exploited oil fields: by 1900 the Caspian area was producing more than 50% of the globe's oil.

Business tycoons like the Rothschild and Nobel dynasties rushed to control the Caspian's resources and built lavish mansions in a part of Baku still known as "Boom Town".

The rise of communism and a series of bloody ethnic clashes with Armenians brought that boom to an end in the early years of the 20th century.

The prospect of more fighting with Armenia is never far away. President Aliyev insists his country must regain land taken by its neighbour.

Oil is looked on as the cure for Azerbaijan's economic woes but the future is uncertain.

"If the country relies just on oil revenues then other industries will simply wither away," says the World Bank's Mr Jehani.

Oil wealth 'can cause corruption'
20 Oct 04 |  Business
Oil boom destroys Baku charm
19 Jul 04 |  Business
Country profile: Azerbaijan
31 Oct 04 |  Country profiles

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