Azerbaijan

Capital Baku
Population 9.53 million (2018) CIA
President Ilham Aliyev

Introduction

Azerbaijan first gained its independence in 1918, establishing itself as the first democratic state in the Muslim community. It was part of the Soviet Union from 1920, but declared its independence in 1991. Azerbaijan is bordered by Russia to the north, the Caspian Sea to the east—a key part of its natural resource-based economy—Iran to the south, and to the west are Turkey and Georgia, and Armenia, with whom Azerbaijan has a closed border. The majority of Azerbaijan’s residents are Muslim—the vast number Shia—but few are actively practicing. Consumption of alcohol is common. Unlike Iran, politics in Azerbaijan tends to be divested from religion, and neither the constitution nor the government designates a state religion.

Azerbaijan’s politics are marked by its communist legacy and relatively authoritarian governance. Ostensibly, it is a semi-presidential republic. For most of its post-soviet independence, the politics of Azerbaijan have been centered around one family. Its current president, Ilham Aliyev, has been in power since 2003, succeeding his father Heydar Aliyev who ruled the country from 1993 until his death in 2003 at the age of 80. Both Aliyevs have headed the ruling New Azerbaijan Party—a party of power that lacks a clear ideology and is centered around nationalism and the personality of the leadership.

Many observers consider Ilham Aliyev to be less skillful than his father in managing the country’s politics and international relations than his father whose memorials fill the country to the point of a personality cult. Propped up by the revenues from the country’s vast oil and gas resources, the Aliyev regime has built a powerful security machinery, and has been accused of gross human rights violations to suppress dissent and political opposition. To no one’s surprise, the 56-year-old Aliyev secured a seven year extension to his rule in the presidential elections of 2018 in which no opposition candidate gathered more than 3 percent of the vote.

Despite criticism of authoritarianism and abuses leveled at Azerbaijan, it is highly integrated into western and global groups: in addition to the UN and WTO, it is a member of the Council of Europe, the OSCE, and it a part of NATO’s Partnership for Peace. It was one of the founding members of the Commonwealth of Independent States (CIS) and the GUAM Organization for Democracy and Economic Development. Azerbaijan’s ties to the Turkic community are important—it is a member of the Turkic Council and TURKSOY community—but, most important, Azerbaijan receives significant support from Turkey in the Nagorno-Karabakh conflict with Armenia, a fact that has broken down diplomatic relations between Turkey and Armenia.

The Nagorno-Karabakh conflict influences a great deal of Azerbaijan’s geopolitical climate: upon Azerbaijan’s independence from the Soviet Union in 1991, the Armenian-majority region asserted their own autonomy and seceded to created the Republic of Artsakh. The Nagorno-Karabakh War was fought between Armenia and Azerbaijan over the disputed territory until 1994, when a shaky ceasefire was called, and Nagorno-Karabakh became a de facto independent state, but still an active conflict zone and frozen conflict.

The economy of Azerbaijan is advanced—on par with many European and western economies. It is based in natural resources, chiefly oil and gas from the Caspian Basin. Its economy allows for low levels of unemployment and the opportunity to invest in infrastructure and development domestically and in the region as a whole. Because of its reliance on natural resources, Azerbaijan has struggled with high inflation and aspects of resource curse, but the government has worked to modernize the system. It has received generally positive ratings from international organizations on its reforms, ease of doing business, and competitiveness.

Outside of energy, Azerbaijan has invested in agriculture, tourism, technology, and, importantly, transportation. This last feature could play a key role in Azerbaijan’s development over the next decade, as it is at a transportation crossroads—situated at the Caspian Sea with routes to markets in Russia, Turkey, Iran and the Middle East, and Europe through Georgia. It is set up to be a connecting point for projects like China’s One Belt, One Road, assisting other economies while building its own.

Azerbaijan is a force to be reckoned with in the Caucasus. Its economy is strong—it does not need western money to keep its coffers full—which precludes it from political conditionality as a means to bring western norms to the country’s political landscape. Nevertheless, to attract keep its oil flowing, Azerbaijan has significant incentive to keep the market open to potential investors and institutions. Like Armenia, Azerbaijan is marked by the effects of the Nagorno-Karabakh conflict, but unlike Armenia, Azerbaijan is not beholden to neighbor Russia. The biggest risk for the Azerbaijani economy and government is that the oil revenues will dry up, leading to a downturn in political economy and satisfaction. Azerbaijan should predict this, and would be wise to pursue alternative streams of revenue that will keep the country afloat in the future.

Quick Facts

Basics
Capital City Baku
Country Population 9.8 million
Largest City (Population) Baku (2.1 million)
2nd Largest City (Population) Sumqayit (325,000)
3rd Largest City (Population) Ganja (323,000)
4th Largest City (Population) Mingachevir (100,000)
5th Largest City (Population) Lankaran (85,000)
President (Dates) Ilham Aliyev (2003-Present)
Prime Minister (Dates) Novruz Mammadov (2018-Present)
Currency Azerbaijani Manat
Politics
President Ilham Aliyev
Prime Minister Novruz Mammadov
Freedom House Score (1=Free, 7=Not Free) 6.5
Ruling Party New Azerbaijan
Past Presidents (Dates) Heydat Aliyev (1993-2003)
Abulfaz Elchibey (1992-1993)
Isa Gambar (1992)
Yagub Mammadov (1992)
Ayaz Mutallibov (1991-1992, 1992)
Past Prime Ministers (Dates) Artur Rasizade (2003-2018, 1996-2003)
Ilham Aliyev (2003)
Fuad Guliyev (1994-1996)
Surat Huseynov (1993-1994)
Panah Huseynov (1993)
Ali Masimov (1993)
Rahim Huseynov (1992-1993)
Firuz Mustafayev (1992)
Hasan Hasanov (1991-1992 )
How Central Banker is Appointed Appointed by Parliament
Average Voter Turnout in Last 5 Elections
(% of Total Population)
72.65
Trade and Commerce/Economics
10 Major Import Partners
(% of Total Imports)
Exports Major
Partners (10)
Major Industries
by GDP
Top Exports Sanctioned by
(and Start Date)
Sanctioning
(and Start Date)
1. Russia (16%)
2. Turkey (14%)
3. China (7%)
4. UK (5.8%)
5. US (5.1%)
6. Germany (4.1%)
7. Italy (3.9%)
8. Japan (3.4%)
9. Ukraine (3.1%)
10. Norway (2.6%)
1. Italy (23%)
2. Turkey (9.1%)
3. Germany (8.8%)
4. Other Asia (6.9%)
5. France (5.8%)
6. Israel (5.5%)
7. Georgia (4.0%)
8. Portugal (3.5%)
9. Czechia (3.5%)
10. Russia (3.4%)
Petroleum and Petroleum Products
Natural Gas
Oilfield Equipment
Steel
Iron Ore
Oil
Gas
Machinery
Demographics
Largest Ethnic Groups
(% of Total Population)
Largest Religions
(% of Total of Population)
Population Living
Abroad
Azeri (92%)
Lezgin (2%)
Armenian (1.35%)
Shia Islam (75%)
Sunni Islam (21%)
Christian (3%)
~20 million
Major International Organizations (and date of accession)
1 UN–1945
2 Council of Europe–2001
3 GUAM–1997
4 BSEC–1992
5 OSCE–1992
6 CIS–1993
7 EBRD–1992
8 IMF–1992
9 OIC–1992
10 World Bank–1992
11 EAPC–1997
12 ECO–1992

Politics

Azerbaijan, according to its constitution, is a semi-presidential, secular, democratic republic. The country was, during the brief period of its independence (1918–1920) from the Russian Empire before incorporation into the Soviet Union, the first democratic, multiparty state amongst the Muslim nations. During the Soviet Union, it transitioned from being part of the Transcaucasian Republic to its own Soviet Socialist Republic. After the turbulent 1990s, Azerbaijan’s politics have been dominated by the Aliyev family dynasty. Azerbaijan is so far the only post-soviet state, where political power has passed down from a father to son. Heydar Aliyev, a former KGB regional chief, ruled Azerbaijani politics with skill and an iron fist from 1993 until 2003, when he was succeeded by his son Ilham Aliyev, who is rumoured to eventually pass the political power to his children.

In the late 1980s, the crumbling of Soviet power unleashed a wave of ethnic violence between the Azerbaijani and Armenian populations in the region, as the Armenian-majority Nagorno-Karabakh stated its aim to join the newly independent Armenian republic. The Soviet security forces intervened only after violent pogroms had broken out in Baku against the Armenian minority. The newly independent Armenia and Azerbaijan descended into open war, and Azerbaijani politics fell into chaos. Short-lived presidencies followed each other, and the country’s only-democratically elected president Abulfaz Elchibey only lasted for a year before being ousted in a military coup d’etat in June 1993.

By mid-1990s, the conflict with Armenia had concluded in a ceasefire that left Azerbaijan losing control of 20% of its internationally recognized territory. Moreover, the Azerbaijani politics has ever since been dominated by the iron fist rule of the Aliyev family. The political struggle in Azerbaijan can be seen through the lens of Soviet legacy: the old communist elite—including the success dynasty of Heydar Aliyev, and the new intelligentsia, which opposes the Soviet legacy in leadership and institutions. The head of the local KGB-branch in the Soviet period, Heydar Aliyev swept in during the political turmoil of the early 1990s and became the country’s president in 1993 with the help of the military.

After consolidating power and defeating a failed coup attempt himself, the Aliyev rule of the country has remained undisputed. Backed by a robust internal security apparatus, Heydar Aliyev kept the country under his tight control until his death in 2003. His legacy is cemented in a personality cult which is reflected in his title as the “Father of the Azeri nation.” Since Heydar Aliyev’s death, the country has been ruled by his now 56-year-old son, Ilham Aliyev, who secured another 7-year extension to his rule in the 2018 presidential elections, where no real opposition candidates were allowed to run.

Executive

The constitution of Azerbaijan gives the president supreme political authority in the country. The president appoints and dismisses the prime and cabinet ministers with the consent of the national assembly, the “Milli Meijils”, calls the elections of the assembly, approval of the budget, social programmes, power to call constitutional referendums and the power to appoint all the regional leaders except in the Nakhchivan Autonomous Republic. The country is divided into ten economic regions which are further divided into 59 districts. The Autonomous Nakhchivan Autonomous Republic is a separate exclave of Azerbaijan, squeezed in between of Armenia, Iran and Turkey. The autonomous region has been ruled since 1995 by Vasif Talibov, who supported Heydar Aliyev’s bid to power and has since ruled the region as something of his personal fiefdom.  

Legislative

The national assembly, known as the “Milli Meijils”, is a unicameral parliament of 125 deputies. The elections for the assembly are held every five years in single-seat constituencies, using the first-past-the-post system. The electoral system puts the New Azerbaijan Party at a definite advantage. In the previous 2015 elections, the ruling party secured 69 of the seats. Most of the other seats went to small pro-government parties (none of which gained more than 3 seats) and to independents loyal to the regime. The opposition boycotted the elections because of imprisonment of opposition politicians and journalists. For the first time in twenty years, the OSCE did not send election observers to the country, citing government restrictions that would have prevented the organisation from carrying out its work. The next elections are scheduled to be held in November 2020 .

Media, NGOs, and Civil Society

The human rights situation in Azerbaijan has gotten worse in the recent years as the marginalized opposition, and last remaining independent media outlets and journalists have been pushed out of the public politics of the country. As a symbolic gesture of goodwill, the government has traditionally released some of the political prisoners on Nowruz (the Iranian New Year), but in 2017, the last year data was available, no prisoners were released.

The increasingly draconian measures of the Aliyev regime has been connected to the country’s economic turmoil in the last couple years which, critics argue, has been exacerbated by not the fall in oil and gas prices but by systemic corruption and economic mismanagement. Simultaneously, the Aliyev family dynasty’s grip on power was further tightened in 2017, when the president appointed his wife Mehriban Aliyeva as the country’s first Vice-President. Following the appointment, the few online media outlets, which criticized the move, were abruptly shut down by the authorities. No significant independent media remain operational in the country, and the increasing capability of the regime to limit access to undesired web content has further limited the media freedoms in the country. One of the last remaining platforms for debate is Facebook which has just under 2 million users in Azerbaijan.

Conclusion

Azerbaijan boasts vast gas and oil reserves which enriched the country during the commodity boom of the early 2000s. Critics argue that energy profits have disproportionately benefited the country’s ruling elite who have built and hid massive fortunes in foreign shell companies at the expense of the country’s development. The ruling New Azerbaijan Party that has been in power alongside the Aliyev’s since the mid-1990s embodies the nature of the regime by being a classic party of power that lacks any clear ideology beyond loyal support for the Aliyev family and secular nationalism. Until 2010, opposition parties were still able to hold on to marginal representation, but since then the tightening political controls have entirely squeezed out any genuine parliamentary opposition to Aliyev’s rule.

Aliyev’s vision for building Azerbaijan is a mixture of nationalism, cultural traditionalism and modernism. Oil and gas money has quickly transported Baku into a Dubai style urban development with glass skyscrapers and vast shopping malls. On the hillside, overlooking the capital lays the Martyr’s Lane - a cemetery and an eternal fire monument to the heroes of the country who have died fighting in the war against Armenia or killed by the Soviet intervention during the ethnic violence and anti-Armenian pogroms in Baku in 1990.

The most extreme example of the state nationalism around the conflict with Armenia was perhaps seen in 2012 with the case of Ramil Safarov. Safarov, an Azerbaijani military officer, participated at a NATO Partnership for Peace language camp in Hungary in the early 2000s along military personnel from other partnership countries. At the camp, he murdered an Armenian officer with an axe and was sentenced to life in prison in Hungary. The Orban government, with the assurances from Baku, allowed him to be transported to Azerbaijan to serve rest of his sentence. At arrival, he was immediately pardoned, promoted and celebrated as a national hero.

Compared to nationalism, religion plays only a minor role in the Azerbaijani society. Azerbaijan is a 98% Muslim country and has a crossover of Turkic and Iranian influence. However, in global surveys, only around 20% of the country’s population contend religion plays an important role in their life. Use of the veil is rare, and there are no restrictions on the consumption of alcohol, food products or sexual relations between men and women on religious grounds. Ethnically and linguistically Azerbaijanis are a Turkic people, sharing a heritage with the nations of Central Asia and Turkey. However, religiously, almost all of Azerbaijanis are Shia Muslim because of the history of Persian influence in the region. Iran’s Azeri population of more than 15 million, in fact, outsizes that of Azerbaijan itself. Because of the Shia heritage, Sunni radicalism has been minimal in Azerbaijan and helps to explain why the crossover between Azerbaijan and the Sunni Muslim republics of Southern Russia has been only a minor issue during the conflicts of the 1990s and early 2000s.

Geopolitics

Azerbaijan’s foreign policy is driven by its semi-authoritarian government, its endowment of natural resources—which increase its geopolitical significance—and the need to transport those natural resources to external markets, and the convergence and contradiction of the interests of regional actors. On the one hand are the strategic considerations of the Azerbaijani state; on the other hand, the policy of Azerbaijan seeks to balance the historic, religious, cultural legacies and ethnic affiliations of Azerbaijani people.

Baku wants to overcome security risks and provide stability to its population, asserting its political independence and territorial integrity, while also projecting Azerbaijan as a key partner. Often, this manifests in a dance between regional partners, quietly cultivating influence in the region by playing off conflicts and contradictions between its neighbors. The Nagorno-Karabakh conflict—20% of Azerbaijan’s territory under Armenian occupation—is a dance between regional powers.

Baku has political and historic ties to Russia, historical and religious bonds to Iran, and ethnic and traditional intellectual links to Turkey. It has a transactional, patronizing relationship with Georgia, and a highly antagonistic relationship with Armenia, due to the Nagorno-Karabakh conflict. With the collapse of the Soviet Union, the Azerbaijani government, under the Popular Front of Azerbaijan (PFA) made attempts to build good relationships with all its neighbors, but largely failed. Its lack of national ideology to compliment the image of Azerbaijani nationality led to an overemphasis on Turkey and reliance on pro-Turkish foreign policy, an approach that antagonized Russia and Iran.

Russia, fearing loss of control in its sphere of influence, manipulated ethnic groups in Azerbaijan to keep a hold on the domestic situation. Iran, meanwhile, developed a defensive posture, working to ensure Azerbaijan was not used as a pivot point against Iran. But Turkey and Azerbaijan continued to build their relationship, based on their fraternal bond and economic relationship. Azerbaijan has worked to develop the Eurasian transport corridor with itself as key player; it is well situated at the strategic crosshairs of the east-west/north-south transit routes.

With the west, Baku tries to keep an even keel—a push and pull of drawing of western relationships for influence and inclusion while maintaining an arm’s length distance on normative goals, such as maintaining a positive human rights track record or keeping to standards for the rule of law and tempering of the executive. It is not bashful about using its oil money to lobby interests, including recent scandals of payoffs to European officials at institutions like the Council of Europe and the European Bank for Reconstruction and Development (EBRD) to maintain favourable standing in the organizations despite the country’s dark human rights record.

Regional

Nagorno-Karabakh and Armenia

Nagorno-Karabakh is a key element of Azerbaijan’s foreign policy in the region. The territory is technically tied to Azerbaijan, but is home to a large group of Armenians and de facto controlled by Armenia. These Azerbaijanis and Armenians cohabitated during the Soviet Union, but as it inched closer to collapse in the late 1980s, a group of Armenians began an increasingly militant movement to unify with Armenia. The territory voted to secede and join Armenia, but Azerbaijan was unwilling to allow this. The result was war. Azerbaijan suffered defeat in 1994—shortly after Heydar Aliyev came to power. The territory came under Armenian control. Azerbaijan reacted to defeat by breaking off all diplomatic relations with Yerevan. It worked with its Turkic brother country, Turkey, to impose an economic blockade on Armenia, isolating Yerevan from regional ties and cutting it off as a potential partner to other global powers, as well. This maneuver has been largely successful: Armenia has languished, and most transport lines are rerouted through Georgia, instead.

The region is still disputed, and the countries are technically at war—a slow burn war of attrition, with no end in sight. Azerbaijan wants to force Armenia and Nagorno-Karabakh to return to 1988 status quo, which would require expelling Armenian troops from Nagorno-Karabakh and all surrounding areas; ethnic Armenians would likely find the territory inhospitable and flee as well. The conflict greatly undermines regional stability: there are outbreaks and skirmishes on both sides of the line of conflict. A flare-up in 2016, due to an Azerbaijani offensive, resulted in Armenians pushing back; in the end, Azerbaijan was only able to make minimal territorial gains, while a several hundred soldiers died. Indeed, Nagorno-Karabakh is the most clear manifestation of Azerbaijan’s military build-up and the shifting balance of power in the region due to Azerbaijan’s capitalizalizing on its wealth of nature resources: in the 1988–94 war, Armenia’s military performed better, and Azerbaijan accepted the ceasefire from a position from weakness.

As Azerbaijan’s coffers swelled with oil cash, it rapidly expanded its defense budget—swelling from $140 million in 1996 to $3 billion in 2015—increasing its military might as it has become increasingly dissatisfied with the outcome. The conflict resolution efforts continue to take place within the OSCE Minsk Group that has convened since 1992, and is co-chaired by the United States, Russia, and France. Azerbaijan has continuously criticized the chairs of anti-Azerbaijani bias because of the influential Armenian diasporas living in those countries and has proposed to promote Turkey or even Kazakhstan as co-chairs. The Armenian and Azerbaijani leadership have met under the auspices of the group, but especially after the flare up of the conflict in 2016, any peaceful resolution seems distant. Attitudes to conflict resolution have only grown more uncompromising on both sides and the arms race intensified. Armenia acquired advanced Iskander ballistic missiles in 2013, and in response, Azerbaijan recently bought the Harop missile system from Israel.

Turkey

Turkey was the first country to recognize Azerbaijan’s independence after the collapse of the Soviet Union. During former Azerbaijani president Heydar Aliyev’s visit to Turkey in 1997, he commented that Azerbaijan and Turkey are one nation but two states. Both countries are Turkic nations—the difference being that Turkey is Sunni-majority and Azerbaijan Shia-majority. Still, the two have maintained close bonds. In the Nagorno-Karabakh conflict, Turkey has consistently supported Azerbaijan, helping shut off Armenia; in response to the 2016 escalation, Turkey was the only external power to issue official statements that solely put blame for the conflict on Armenia.

Azerbaijan has invested in PR campaigns in Turkey, and Baku has allegedly bribed Turkish politicians to prop up the alliance and sabotage any rapprochement efforts between Ankara and Yerevan. To this effect, while Armenia and Turkey signed protocols in 2009 on normalization of relations between the two countries, the protocols were never ratified by either’s parliament.There were strong allegations that Azerbaijani lobbying and money a were decisive factor on stymying any action by Turkey. The two Turkic nations also share an important transactional link: Azerbaijan has natural gas and oil it needs transported to European markets, and Turkey has aspirations to be a regional energy hub. In 2011, Turkey’s BOTAS and Azerbaijan’s SOCAR, two powerful national energy companies, signed on to the Trans-Anatolian Natural Gas Pipeline (TANAP), drawing on Azerbaijan’s Shah Deniz gas field; this was to be in addition to the Trans Adriatic Pipeline (TAP), a consortium project that Baku and Ankara signed on to in 2012—part of the Southern Gas Corridor.

Russia

Baku is cautious in handling Moscow. The smaller country to the south recognizes its considerably larger neighbor’s interest in the region as a sphere of influence—the near abroad—and respects that, but also is not beholden to it. Indeed, Azerbaijan may have more in common with Russia’s poor human rights record, authoritarian governance, and transparency issues that it would like to admit. Russia provides opportunity for cooperation, but over the years the relationship has been strained by the power maneuvers between the two countries.

Baku also recognizes Russia’s support of Armenia in the Nagorno-Karabakh conflict and its potentially pivotal role in settling the dispute. Nevertheless, wary of Russia’s influence and wanting to diminish its reliance on Russia, Azerbaijan has developed several key gas and oil routes to Europe through Georgia and Turkey—effectively bypassing Russia. Azerbaijan has declined to join the Russia-led Collective Security Treaty Organization (CSTO)—it also has not joined NATO—opting instead to be a founding member of GUAM, an organizational balancing act among Ukraine, Moldova, Georgia, Azerbaijan to balance Russian influence in CIS.

Azerbaijan’s relationship with Russia—whether antagonistic or cooperative—can lead to triangulation with other powers in the region. Azerbaijan, Russia, and Iran have been in talks about developing a north-south corridor to connect India with northern Europe via railroads through the three countries for cargo transportation. In its standoff with Armenia over Nagorno-Karabakh, Russia has sold Azerbaijan $4 billion of modern assault weaponry a move that benefited Azerbaijan’s security but also played into Russia antagonizing a reluctant Armenia. There have been several breakdowns of their relations over the years centered on resources and power posturing. Russia has warned Azerbaijan off signing on to deeper relations with the EU, including the Association Agreement, and so far Azerbaijan has acquiesced.

Georgia

Azeris make up the largest ethnic minority in Georgia, and Azerbaijan is one of Georgia’s top foreign investors: these two facts set the stage for the relationship between the neighbors. Their ties are close, and are driven by strategic engagement and cultural factors. Georgia and Azerbaijan are the founding members of GUAM. Azerbaijan—primarily through its state oil company, SOCAR—has invested heavily in Georgia’s infrastructure, particularly railways, highways, and pipelines. The Baku-Tbilisi-Ceyhan, Baku-Supsa, and Baki-Tbilisi-Erzurum pipelines bring Azeri resources to Turkey and Europe through Georgia, and it is an integral part of the Southern Corridor project.

The Russo-Georgian war forced Azerbaijan to re-evaluate regional security and relationship to Russia. There are certain parallels between the ethnic conflicts and breakaway zones that face both their countries: after the Nagorno-Karabakh conflict, Baku tried to convince Georgia to join their economic blockade against Yerevan; the government in Tbilisi declined a full blockade, but did agree not to re-export Azeri oil or natural gas to Armenia. The two will likely continue to have a strong partnership in the region, with Azerbaijan investing in Georgia and potentially influencing its trajectory in the coming years. But, Tbilisi could likewise influence the politics of its neighbor, bringing it closer to the west through its own security and trade cooperation projects.

Iran

Iran initially had very high expectations of its relationship with Azerbaijan; it felt power relations were in its favor and that it would be able to capitalize on a relationship built on shared history and needs. For much of history, Azerbaijan was part of Iran, and the two share the world’s largest population of Shia Muslims. But in many ways, these similarities and shared past have made Tehran and Baku competitors rather than cooperative.

Though Azerbaijan struggled in the initial years after the collapse of communism, it gradually gained confidence and consolidated power; Azerbaijan’s emerging geopolitical importance and richness of natural resources skewed the favor in Azerbaijan’s balance, away from Iran. The Persian neighbor to the south responded with a generally defensive policy, solidly supporting Armenia in the Nagorno-Karabakh conflict. As Azerbaijan’s wealth has continued to flourish, Iran has made attempts to rekindle relations, but to little avail: Azerbaijan has joined Israel in curtailing Iran, including signing a $1.6 billion weapons deal with Israel in 2012, which some see as the joining of two countries that both view Iran as a potential threat. While several million Iranian citizens are ethnic Azeris, Azerbaijan is wary of creeping Iranian influence in the county. So, while Iran and Azerbaijan might seem like natural allies, their relationship is more of an an auxiliary antagonistic relationship defined by their choices of conflicting strategic partners.

Global

The European Union

Azerbaijan keeps the EU, like Russia, within its strategic sphere, but at arm’s length. The county is part of the EU’s Eastern Partnership (EaP), and in 2004, President Aliyev affirmed Azerbaijan’s desire to integrate in the Europe’s institution. Actions speak louder than words, though: Azerbaijan’s pursuit of political authoritarianism, corruption, and opaque systems have driven an increasingly deep wedge between Baku and Brussels. But when scolded, Baku fights back, arguing that the EU is guilty of a double standard—perhaps best highlighted by EU complicity in the highly-publicized money laundering scandal. Azerbaijan has also reprimanded the EU for failing to take a strong stance on the Nagorno-Karabakh conflict and defending Azerbaijan’s territorial integrity against Armenia the way it defends Georgia’s breakaway regions against Russian incursion.

Still, the country and the political-economic bloc share a strategic relationship, particularly on natural resources: Europe sees Central Asian gas—led by Azerbaijan—as a way to diversify away from reliance on Russia’s resource power plays. The Shah Deniz consortium, led by BP, successfully constructed the TANAP and TAP pipelines from Azerbaijan’s largest natural gas reserve to Europe, through Turkey and Georgia. The pipelines have gone online, and are expected to bring 6 billion cubic meters of to Turkey and 10 billion cubic meters to south east Europe starting in 2019. In addition, in September 2017, Azerbaijan’s state oil company, SOCAR, signed with the BP-led consortium to extend the production sharing deal for Azerbaijan’s biggest oil fields from 2024 until 2050, providing natural resource stability and tightening Europe’s reliance on the country. The play between the country and the normative goals of the EU is likely to continue, a delicate balancing act.

The United States

The United States supported the region’s transformation from Soviet Union-era authoritarian system to pluralistic democracy—Azerbaijan’s transition was more complicated, and the U.S. has continued to push for reform and advancement of rule of law, transparency, and respect for certain democratic rights in society. This was exacerbated by a sore point in their relationship: the strength of the Armenian diaspora and lobby in the United States, who has pushed for pro-Armenian resolutions and policy—including on the Nagorno-Karabakh conflict—much to Baku’s chagrin. In 1992, U.S. Congress banned direct foreign aid to Azerbaijan, making Azerbaijan the only post-Soviet state not receiving aid to assist its economic and political transition stability. Subsequent U.S. presidential administrations faulted the ban, citing its lack of merit, a roadblock to peace in the conflict, and a detractor for U.S. foreign policy in the region.

After the attacks on the U.S. in 2001, Azerbaijan rose in importance as a strategic partner; Congress gave the president power to reverse the ban legislation, which was done in exchange for Azerbaijan’s military cooperation. The U.S. used Azerbaijani airspace and airports during its maneuvers in the region, and Azerbaijan sent small deployments—a couple hundred soldiers—to Iraq and Afghanistan. Azerbaijan is still actively engaged in its military relationship with the United States, most notably though its cooperation with the U.S.-centric NATO. The two countries share a mutual wariness of Iran and support of Israel, something that has bound them together. This relationship has space to grow. The U.S. has also seen Azerbaijan as a way to diversify Europe’s energy resources away from Russia, and has helped pave the way for multibillion dollar investments in the oil and gas sectors.

China

The relationship between China and Azerbaijan is nascent, with plenty of space to develop. China has dubbed Azerbaijan as part of its One Belt, One Road (OBOR) economic and transit project—Azerbaijan is part of the Central-Asia/Caucasus route. There are plans between the two to upgrade maritime infrastructure to increase the transport potential of the Caspian Sea under this initiative. Azerbaijan has expressed a desire to have between 10–15% the Chinese cargo destined for Europe to pass through its territory, which would bring both economic benefit, from transit fees, and political sway, from the high percentage of goods Europe would rely upon. China has increasingly invested in Azerbaijan’s neighbors, most notably Georgia; Azerbaijan has invested in Georgia as well, and it would not be surprising to see joint projects—on the other hand, the two could become competitors for the Georgian resources and market.

Conclusion

Azerbaijan’s geopolitical relationships are best cast through triangulation of demands and needs. Its relationships with individual actors—like Georgia, Russia, or Iran—are given shape by comparing the convergence or divergence of the security needs of those countries with each other. Baku often finds itself in the middle: not as a peacemaker, but as a party that can cast itself as an unwilling mediator or one that can benefit from situational ambiguity.

Azerbaijan is somewhat underdeveloped in its normative goals, a problem for cooperation with partners like the EU and U.S., but less concerning for partners like Turkey, and potential partners, like China. The symbolic and strategic importance of Nagorno-Karabakh cannot be understated, and this keeps Azerbaijan in a mutually wary relationship with Russia. Still, Baku’s regional might is largely a consequence of its natural resource endowment, and as that value dries up or depreciates, a dip in prestige and responsibility could follow, if Azerbaijan has not properly hedged its regional and global partnerships.

Economics

Azerbaijan’s economic might is based in its oil and gas. It is the best-performing of the Caucasian countries and has the most international investment and cooperation. After its transition from a command-economy under the Soviet Union, the oil business started booming in the mid-2000s. Boosted by the Baku-Tbilisi-Ceyhan oil pipeline, completed in 2005, the oil exports briefly, in 2007, grew Azerbaijan’s economy on a world record rate. Most of the foreign investment in Azerbaijan is oil-based, led primarily by AIOC, a BP-led consortium of global energy companies; the country boasts 21 product-sharing agreements with these companies.

As with any oil-driven economy, its performance is closely tied to global crude oil prices. With the fall of oil revenues, especially following the 2014 global price drop, Azerbaijan’s economy experienced a deep recession. Its GDP dropped from $75 billion in 2014 to $38 billion in 2016. In terms of purchasing power parity, Azerbaijan remains by far the wealthiest country in the Caucasus. In 2016, GDP per capita (PPP) $15,800 compared to Georgia’s $9,800 and Armenia’s $8,800. But the natural resource boon comes with a liability: Azerbaijan’s biggest problem is the need to diversify its economy away from its extreme dependence on oil and gas. Azerbaijan has achieved moderate successes in diversification: in 2018, non-oil exports rose by 20%, mostly in agricultural produce, but the overall share of exports is still overwhelmingly skewed towards the export of oil and gas.  

Structure of the Economy and Key Markets

Despite oil and gas revenues accounting for nearly half of the country’s GDP and 90% of its exports, three-quarters of Azerbaijan’s labor force work in other sectors. The agricultural sector continues to employ over 35% of the labor force, highlighting a stark contrast between Baku’s skyscrapers and the poor rural areas, where sustenance farming remains a means to make a living for many. Over half of Azerbaijan’s territory is classified as agricultural lands. Famous for the Beluga caviar, fish stocks of the Caspian Sea are now largely depleted, while fruit sent to Russia is the country’s most important agricultural export.

Seeking to diversify the oil-dependent economy, Azerbaijan has in recent years sought to promote the country as a high end tourist destination. The sector has grown on an impressive rate from 900,000 visitors in 2006 to 2.2 million in 2016. Baku’s vast shopping malls and extensive selection of western brands attract visitors mainly from Russia, Georgia, Turkey and Iran. To attract visitors from further apart, Azerbaijan introduced an e-visa system in 2017, and Baku has hosted a number of high profile international sporting events (e.g. F1 races since 2016 and part of the European Football Championship in 2020).

Beyond gas and oil exports, Azerbaijan has steered away from economic integration with outside blocs. The country is not a member of the World Trade Organization, has not joined the Russian-led Eurasian Economic Union, and only has limited economic cooperation with the European Union. But recently, Baku has sought to turn the country into a regional trade hub with good connectivity to all directions. Cargo ships connect Baku across the Caspian sea to Central Asian ports in Kazakhstan and Turkmenistan. The Baku-Tbilisi-Kars railway, opened in 2017, connects Azerbaijan to Turkey on rail, aiming to increase the freight turnover eventually to over 17 million tons a year as part of the increasing overland trade in Eurasia.

Seeking to capitalize on China’s Belt and Road Initiative, Azerbaijan’s aim is to have between 10 and 15% of China’s overland shipments to Europe to pass through its territory. The East-West connectivity is supplemented by investments in North-South routes. Already connected to Moscow on rail, Azerbaijan and Iran are seeking to open a rail link for passenger and freight traffic between Baku and Tehran in the near future.

Trade Snapshot

Oil and gas exports account for around 90% of Azerbaijan’s exports, the main destinations of which are EU markets, accounting for 57%; Italy has the biggest recipient share with 23%. Of individual countries, Turkey is the second most important export market, comprising 9% of Azerbaijan’s exports. Russia is another important partner for Azerbaijan, less so for exports than imports: it is Azerbaijan’s biggest import partner, accounting for 16% of its imports. Turkey is, again, the second most valuable import partner with 14%, followed by China, at 7%, and the UK, representing 5.8% of imports.

The products topping Azerbaijan’s import list are also related to the oil and gas industry: valves and large iron pipes both represent 2.8% of Azerbaijan's imports, respectively; and iron pipes, packaged medicaments, and wheat each make up 2.4%. The EU is currently a less important trade partner, but it has potential to grow: the European bloc and Caucasian country are in ongoing conversations about regional development programs and economic integration.

Foreign Money Flows

Azerbaijan has the highest foreign investment per capita for all Commonwealth for Independent States (CIS) countries. In 2017, Azerbaijan invited 14.6 billion in FDI; figures are expected to grow in 2018. The foreign money pouring into Azerbaijan is—unsurprisingly—based in the oil and gas market. The most important baseline was the “Contract of the Century”—officially, the Azeri, Chirag and deep-water Gunashli (ACG) International Contract No. 1—which was signed by President Heydar Aliyev and ratified by Azeri Parliament in 1994. The contract implements 20 product-sharing agreements with various international energy corporations, and established $60 billion in investment. Shortly after the contract, Azerbaijan organized the Azerbaijan International Operating Company (AIOC) consortium, including 11 global energy companies: BP, Amoco, Lukoil, Pennzoil (now Devon), UNOCAL, Statoil, McDermott, Ramco, TPAO, Delta Mimir (now Amerada Hess), and SOCAR. Over the years, three companies, McDermott, Ramco, and Lukoil, have sold their shares; three other companies, ExxonMobil, ITOCHU, and INPEX have taken up membership in the consortium. The consortium has had a pivotal role in bringing foreign financing into the country to develop Azerbaijan’s oil sector. It has led to discovery and production in some of the world’s more lucrative gas and oil reserves, and has yielded sizable gains for the countries involved and the Azeri government.

A second aspect of oil and gas has also prodded along foreign investment and cooperation: the transportation of the resources to receiving markets. But this was addressed through joint investment projects, which included both foreign investment in Azerbaijan and Azeri investment in Georgia and Turkey. Opened in 2006, the Baku-Tbilisi-Ceyhan (BTC) pipeline is the world’s second-longest pipeline, after the Druzhba pipeline from Russia to Eastern Europe. The BTC transports Azeri oil from the Azeri-Chirag-Gunashli oil field to European markets; similarly, the Baku-Tbilisi-Erzurum (BTE) pipeline, also known as the South Caucasus Pipeline, transports natural gas from the Shah Deniz field to Turkey. These pipelines have led to significant investment in Azerbaijan, as Europe and other countries see Azerbaijan as a potential alternative to Russian natural resources to fuel Europe.

While natural resources dominate, the government in Baku has taken steps to encourage investment in other sectors in Azerbaijan. The country has advertised four key sectors it wishes to develop and attract investment to: agricultural, tourism, transportation, and information technology. Azerbaijan has made efforts to join the global markets, including establishing exports to the EU- and Russia-led trade zones, despite not being a member of either. President Aliyev established a free trade zone in 2016 adjacent to the Alyat seaport, south of Baku. Azerbaijan has heavily invested in defense industry that is propped up by the country’s oil wealth which enables the country to maintain a $1.6 billion defense budget. In recent years, Azerbaijan has deepened defence industry cooperation particularly with Israel—the two countries have signed multi billion arms sale deals, making Israel Azerbaijan’s second largest arms trade partner after Russia.

Tax Law

In its effort to attract foreign investors to the oil and gas market while also promoting market diversification, Azerbaijan has taken a two-pronged strategy towards its tax system and business law: the first is to maintain programs in place to keep international energy businesses in Azerbaijan—the status quo; the second is to formulate programs and laws favorable to encourage diversification of small and medium enterprises not in the energy sector. The country is a top reformer with regard to business, as noted by the World Bank’s Doing Business Report several years ago, when the government consolidated its process and made it easier to start a business, enabling potential investors to spend less time and money on the process. The government in Baku put in place a set of Customs Tariff laws, which provides exemptions for up to seven years for those businesses bringing in capital, technology, and equipment for the sectors the government has highlighted in its business diversification plan, including agriculture, tourism, IT, and transportation.

Aside from the seven-year exemption, businesses involved in the key sectors can also exempt up to 50% of revenue from property, income, and land taxes for seven years. Currently, legal entities in Azerbaijan have a 20% tax on profit from worldwide income. Signatories to a PSA related to natural resources must pay a pre-negotiated rate of anywhere from 25% to 32%; they can also opt to pay withholding tax between 5% to 10% on gross payments from work or services undertaken in Azerbaijan. The standard rate for Value Added Tax (VAT) is 18%, though some areas are exempt. The country has worked in recent years to iron out its tax system and also cut down on corruption, fostering a more business-friendly environment.

Conclusion

Azerbaijan of today is wealthy and stable. Both these are dependent on unsustainable factors—the unilateral leadership of President Aliyev, who will eventually have to appoint a successor, and the wealth of oil and natural gas, which will eventually run dry. Because of this, Azerbaijan is working to expand its economy away from its dependence on natural resources and develop other sectors, such as tourism, agriculture, transport, and IT. The government in Baku has enacted laws and policies to invite in FDI and foreign cooperation on multilateral projects; but it has promoted these only half heartedly, as its state coffers continue to swell with oil money. Nevertheless, Azerbaijan has taken steps to integrate into the global economy, and despite not being a member of trade blocs, it has pursued favorable trade—something that could continue to emerge with the support of the economies and countries on the other side of the equation. Azerbaijan’s current economic strength should not be taken as evidence of future success, but cooperating countries have as much invested in Azerbaijan’s stability and prosperity as Azerbaijan does. They should work with Baku to push forward development while maintaining the wealth of the natural resource economy.

Culture & Society

Compared to its ancient neighbors, Azerbaijan is young, with only brief history of independent statehood. Armenia, Georgia, and Iran have histories of independent statehood stretching several millennia. Prior to the post-Soviet period, Azerbaijan only existed as independently for a brief period of under two years just after the 1917 Russian Revolution.

The area of the modern-day Azerbaijan has been at the crossroads of different empires for thousands of years: the Persians, Ottomans, Russians all ruled over its territory, each leaving their mark on the cultural heritage of the country. From 861 until 1538, the Caspian shores of Azerbaijan were ruled by the Shirvanshah—a Persianized Arab dynasty. Reflecting the mixed influence, ethnically and linguistically Azerbaijani are part of the Turkic peoples. Religiously, they are Shia, reflecting the Persian influence.

Now, the capital city, Baku, remains the most populous city in the Caucasus region. It is over a thousand years old, and became a cosmopolitan hub of traders, artists, gangsters, and tycoons in the late 19th Century, when the oil deposits around the city caught the attention of people across Europe and beyond. In the oil-boom years, it became the self-anointed “Paris” of the Caucasus. Alfred Nobel, of the Nobel Prize, made his fortunes in the Baku oil fields.

In the Soviet period, Baku was a multi-ethnic and multicultural culture capital of the region. Muslim Magomaev, renowned as the Frank Sinatra of the Soviet Union, was born there. The famed chess grandmaster, Garry Kasparov, also spent his youth there. Like many of his fellow Armenians, most of whom left Azerbaijan after the collapse of the Soviet Union, Kasparov has embraced the cosmopolitan identity of Baku more than that of Armenia.

The city remains a multiethnic hub for the region, full of oil wealth and towering skyscrapers akin to those in Dubai. To heighten its international profile, Baku has recently hosted a number of international sporting events, most notably the F1 circus, raced on the wide avenues of the capital. Many tourists come from the neighboring Iran to get a taste of the secular, consumerist life. Vast shopping malls, availability of premium western consumer goods, fast food chains and a vibrant nightlife make Baku feel like a modern city, where old traditions and religion only play a small role.

Outside of the glitz of Baku, the rest of Azerbaijan is full of culture and intrigue as well. The country is known for its crude oil baths, taken specifically in Naftalan oil. Seeing a tourist market potential, spas in Azerbaijan have started offering the detoxification crude baths at a premium price. But the practice is older, with humble origins. Azeri people have used the properties of the Naftalan oil for decades to treat temporary or chronic ails.

With its cosmopolitan, mixed history, Azerbaijan has a strong Turkic allegiance, but its people come from all over Central Asia and the Caucasus. This gives Azerbaijan a distinctive blend. Its arts, including pottery, music, paintings, and carpets, are varied and beautiful. An observant visitor to the region will note aspects of Georgian dress or Armenian poetry and verse. The landscape is visually stunning, offering an abundance of trekking to the more adventurous. If one wants to sample a bit of the Caucasus and Central Asian region, Azerbaijan is the place to go. It combines many elements of history, art, culture, and feelings into a single, diverse country on the Caspian.

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