Azerbaijan: Looking Beyond Energy

For centuries, Azerbaijan acted as a natural crossroads for the ancient Silk Road between Europe and Asia and a home to the world’s diverse cultures, religions and peoples. It has also been endowed with abundant natural resources, of which oil has become the most acknowledged and remembered.

Before the Common Era, inhabitants of present-day Azerbaijan used oil for heating and lighting purposes and as a remedy to cure burns and various skin diseases. While travelling via the Silk Road in the thirteenth century, the famous Venetian merchant and traveler, Marco Polo, used to describe Baku’s oil as one of the most sought commodities in the region. It was not until the late nineteenth century, however, that Azerbaijan’s oil would become known internationally. By the 1870s, the Nobel Brothers and the Rothschild Family were operating several oil wells in Baku and the region’s oil started to be exported abroad. At the beginning of the twentieth century, Azerbaijan was supplying more than 50 percent of the world’s oil.

Oil had remained the primary produce of Azerbaijan after the Bolsheviks annexed the country in 1920 and throughout the Soviet rule. The country’s significance as an oil producer diminished after the World War II, but it rose again after Azerbaijan re-gained its independence in 1991. Therefore, for the second time, oil revitalized Azerbaijan’s prominent role as an oil-producing state and helped attract much needed foreign investment for economic development.

Oil Windfall and Economic Growth

It was the successful completion of the two regional projects, the Baku-Tbilisi-Ceyhan oil and the Baku-Tbilisi-Erzurum natural gas pipelines, and exceptionally high energy prices that allowed Azerbaijan to receive huge oil revenues over the past few years.  In 2006, the country’s GDP grew by 34.5 percent, making it the fastest growing economy in the world. And, despite the recent global financial crisis, Azerbaijan still managed to register the highest GDP growth in Europe in 2009 at 9.3 percent.

Undoubtedly, the oil revenues have been the major catalyst behind such an unprecedented growth. Already more than $40 billion has been invested in Azerbaijan’s economy as foreign direct investment and the country’s exports have steadily increased.  In the next twenty years, the country is expected to generate more than $200 billion in profit from the sale of oil and natural gas. It is how these earnings are used that will determine the future of Azerbaijan.

Avoiding Resource Curse & Non-Oil Economy

There are a number of challenges that await Azerbaijan in the near future. As a resource-rich state, Azerbaijan needs to successfully avoid the common pitfalls and problems associated with a heavy dependence on natural resources and diversify its economy. Many resource-rich states have generated massive revenues from the export of their natural resources and experienced a rapid growth in the early stages, particularly in their energy sector. But only few of these states have properly managed to utilize these temporary windfalls and sustain the initial growth. The main reason behind the success or failure of resource-rich states has been the quality of resource management.

Azerbaijan has already taken several steps to tackle these challenges, including the establishment of the State Oil Fund (SOFAZ) prior to the major influx of oil revenues, which was critical in achieving macroeconomic stability and alleviating the impact of the global financial crisis in 2008. Yet, the long-term success of Azerbaijan will depend, among other things, on whether the government are able to reach a level of diversification to sustain long-term growth and strengthen the tradable non-oil sector of the economy.

Preparing for the Next Boom: The Euro-Asian Trade

The key to the success of this relatively small and landlocked country will be in its ability to make the most of its strategic location. Azerbaijan is situated at the crossroads that connect the transportation networks and markets of Europe, Asia, the Middle East and the Mediterranean region. As a strategic intersection, it could potentially accommodate the rapidly growing transit traffic from China and East Asia to South-East Europe via the East-West Corridor and from South East Asia and the Middle East to Russia and North-West Europe via the North-South Corridor. Capturing some of the Euro-Asian trade and becoming a reliable gateway to European and Asian markets in the Caspian region will help diversify the economy and lay the economic foundations of post-oil Azerbaijan.

Euro-Asian Trade Potential

In 2000, Eurasian trade turnover embraced some 300 million tons of goods, consisting of 72 million tons of European exports into Asia and 228 million tons of Asian exports into Europe. By 2015 this trade turnover is expected to reach 460 million tons. Energy products from Middle Eastern and Persian Gulf countries remain the primary Asian import to Europe—making up approximately 60 percent of total imports—yet East Asia’s trade share of 20 percent will continue to grow in the coming years.

The volume of inland transportation, especially container trade, is expected to double from 65 million tons in 2002 to 135 million tons in 2015. The number of goods and products shipped by container will increase as well, reaching 40 percent of total exchanged cargo by 2015. Although these forecasts have been negatively affected by the recent global financial crisis, the upward trend is not likely to change. Today, almost all containers moving between Europe and Asia—some 95 percent—are transported by sea via the Suez Canal and the Mediterranean Sea. In 2005, the estimated number of containers shipped by sea from East Asia to Europe totaled over three million units. By 2015, this figure is expected to triple, reaching 10 million containers per year.

Azerbaijan and Euro-Asian Transportation Networks

There are two potential inland alternatives to the current Europe-Asia maritime transportation routes and both involve Azerbaijan: the East-West transport corridor and the North-South transport corridor. The former consists of a China/East Asia-Central Asia-Caucasus-Europe route, while the latter would link the routes of the Asian continent, the Caspian region and Europe via an Indian-Iranian-Russian axis. The roads and railways that run from Baku to Georgia are a part of the East-West corridor, and the roads and railways that run along the Caspian Sea to connect Russia and Iran are a part of the North-South corridor. Both networks are part of the Asian Highway Network. Both corridors have great potential for reviving the traditional Silk Road with container trade.

oca6_6-15Connecting the separate countries’ transit networks is critical if Azerbaijan is to become open to European, Middle Eastern and South Asian markets. Over the last five years, Azerbaijan has invested more than $2.5 billion into construction of new and modernization of existing roads and railways. Among the many transportation projects that are two that will have far-fetched implications for Euro-Asian trade. The first one is the Kars-Akhalkalaki railway project, which is currently under construction. Once completed, this rail segment will connect Azerbaijani, Georgian and Turkish railways, uniting the Trans-European and Trans-Asian Railway networks from Beijing to Vienna. The annual volume of transit via the Kars-Akhalkalaki railway is expected to reach 10 million tons within the five years of its operation. The second project is the Qazvin-Rasht-Astara railway segment that will connect the Azerbaijani, Iranian and Russian railways. This project will also increase transit of goods in the North-South direction.

In short, by linking transportation networks, Azerbaijan is using its oil revenues to help revive the ancient Silk Road and diversify the country’s economy by opening new opportunities that extend far beyond the energy sector. By doing so, Azerbaijan will not only profit economically from the Euro-Asian transit traffic but will also modernize and standardize its infrastructure to European standards, adapt to legal and procedural requirements of continental trade, strengthen its non-oil economy and become a reliable bridge between Europe and Asia.

* Taleh Ziyadov is a Ph.D. candidate at the University of Cambridge (UK), specializing in issues of energy security, transportation and non-oil economy in Central Eurasia. He is also a research fellow at the Azerbaijan Diplomatic Academy (ADA), Baku, Azerbaijan.

Note: Some segments of this article have previously been published in T. Ziyadov, “Azerbaijan”, in F.S. Starr, ed., The New Silk Roads: Transport and Trade in Greater Central Asia, (Washington: Johns Hopkins University – Central Asia-Caucasus Institute, 2007). For detailed citations and references please refer to the above study.

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