Quo Vadis, Azerbaijan? The Country’s Growing Challenges

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Oil wells. Azerbaijan

Azerbaijan is a key actor in the South Caucasus, reshaping the borders of influence of regional and extra-regional powers. So far its leading role has been defined by the availability of hydrocarbon resources, which the country has successfully used to manoeuvre between the clashing interests of powerful players and thus managed not to become excessively dependent on any of them.

Oil and gas as a tool of domestic and foreign policy

The major asset in foreign policy of the leaders of the country has been the abundance of hydrocarbon resources, which serves as a political tool from the standpoint of both domestic stability and balancing the interests of the external actors. These two have been closely interconnected: The former was a necessary condition for ensuring foreign investment and realizing major contracts. Domestically, it became evident by the end of 2000s that this monopoly strengthened the objective of the regime self-preservation. The high stakes and interests of external actors in the political stability of the oil-rich country reinforce the ruling elites’ policies of increasing their strategic importance for key players in the region.

With the growing assertiveness of authoritarian Russia in the neighbourhood, as demonstrated by its intervention in Ukraine and its growing confrontation with the West, including in Syria, along with the fall in the world oil prices, the complexity of the task of manoeuvring rose exponentially for Azerbaijan. Azerbaijan has faced challenges both in the realm of support for domestic stability - heretofore fed by oil revenues - and in its ability to manoeuvre in an increasingly complex security environment in the region and beyond.

The fall of the world oil price was thus a double shock for the leadership. It shattered the highly hydrocarbon-dependent economy, which led to the dramatic devaluation of the national currency, the manat, a crisis in the bank system and sharp deterioration of the entire business environment, as reflected in international ratings. It also deprived the leadership of a source of political patronage. At the same time most critical state institutions have proven to be weak - as evidenced by the ongoing scandal over alleged illegal activities at the Ministry of National Security.

At the same time, Azerbaijan has tried to re-position itself in the face of major developments in the region: Iran's nuclear deal with world powers, Russia-Turkey tensions, and the war in Syria. Baku seeks to maintain its strategic value for the West while not significantly alienating Russia, whose state structure has increasingly served as a model for Azerbaijan.

New domestic and security environment

The difficulty and at the same time value of manoeuvring skills increased in light of these events, which take place at a time when domestically Azerbaijan is facing a wave of social protests around the country that were triggered by the economic and the social effects of the oil price fall.

The entrance of Iran to the regional energy sphere poses several challenges to Azerbaijan's foreign policy. First, it has weakened the argument of Azerbaijan’s officials that the country is a bulwark of stability sandwiched between Russia and Iran. Second, the re-emergence of Iran challenges Azerbaijan’s central role in the EU's efforts to diversify its gas supplies and in Western energy interests in the region in general. Third, it weakens the control over alternative pipeline projects and non-inclusion in them of Armenia as a counterbalance to Armenia’s military advantage in the “status quo” and a tool in the bargaining process in Nagornyy Karabakh conflict. Fourth, the Iran factor contributes to keeping oil prices low.

With rivalries turning into confrontations - like those between Russia and Turkey, between Russia and the West, and among various powers over Syria - Azerbaijan's balancing act is becoming more difficult. Yet Azerbaijan tries to take advantage of the new complexities of the security situation - through economic, energy and transit cooperation with Iran, attending a donor conference on Syria in London (in spite of its own economic crisis) and offering to play a mediating role in the Russia-Turkey spat.

Facing a rapid decline in oil revenues, Azerbaijan reduced expenses on lobbying activities and turned to the West for loans. The country is set to host an expensive Formula 1 race in June this year.

While hopes for Azerbaijan lie with the prospect of oil prices stabilizing by the end of the year, the diminishing power of a major political tool – energy resources – may require adjustment to a new reality and a search for its substitute. Besides proposing the country’s role in possible partnership in the security of the wider region, like in Syria, this seems to come in the form of extending the geography of the balancing game - in a way that would allow the elite to preserve the political status quo and at the same time support the economy.

This also is not easy. Going to the West, where the major lending organizations are, would mean reforming the economy, which Azerbaijan apparently is not ready for, as evidenced by the failure to sign a 4bn USD agreement with the International Monetary Fund. Indeed, using oil revenues during the years of boom as the basis of patronage through direct transfers from the State Oil Fund to the state budget rather than re-investing it in the real sector of the economy created a reliance on the unconditional influx and spending of the revenues that is typical of rentier states.  Reforming the economy would mean facing high risks associated with changes in the status quo of elite control over resources.

This explains Aliyev’s turn to the Arab world in search for economic cooperation[1]. Receiving harsh criticism from civil society and the opposition, this foreign policy direction was interpreted by more pro-government actors as “progressive”, as finding common language with Arab banks is much easier than with Western ones.[2]

Will identity matter?

…And there is an identity issue. While the ruling elite is driven mainly by the self-preservation instinct, the power of identity - which would push the country towards  EU integration - rests with society, which was seriously weakened by the crackdown in 2014 and new  legislation significantly limiting the development of independent civil groups and the Western presence. The role of society is also undermined by the mode of the West’s relations with the oil-rich rentier state Azerbaijan, where the elite has a strong grip on natural resources and is a partner of the EU and the USA on major energy projects. Such relations reinforce the state-society divide in the states which do not depend on tax revenue from the public. Thus one way to promote deeper EU-Azerbaijan relations is through more active and consistent EU policy defending and supporting society and its institutions.

But this pragmatism of the ruling elites in ignoring identity, which forms the basis of the Azerbaijan’s secular democratic modern state, may prove dangerous, and take the country in the direction of integration and dependencies, which would weaken its very foundation.

Yet Azerbaijan’s manoeuvring act may be replaced by a strategy of taking sides and strengthening alliances if the power balance in the region changes. The fall of the oil price hit all energy dependent economies in the Caspian and first of all Russia, which has also witnessed unprecedented Western unity in imposing sanctions against it. Azerbaijan may therefore not see Russia as such an attractive and important partner as it was before. And there are some lingering factors in the region, such as the unresolved Karabakh issue, which remains the main national security threat and defines the strength of Azerbaijan's alliance with some actors, and the limits of possible rapprochement with others. This explains Azerbaijan’s recent move to take Turkey's side in its confrontation with Russia, paying demonstrative visits to Ankara after an initial period of cautious neutrality.

Thus against the background of Russia’s open manipulation of conflict and its economic decline, EU-Turkey rapprochement through a deal on refugees may contribute to strengthening both traditional Turkey-Azerbaijan relations, as well as improve Azerbaijan-EU relations, which to this point have been successful only in the field of energy cooperation. While “diversification” will remain a key word in Azerbaijan’s foreign policy, the basic security issues and possible shifts of power balance will place limits on the leadership’s capacity to abstain from taking sides in growing rivalries between the key actors in the region. The recent release of a group of political prisoners may well be an indication of this.

[1] Most recently Azerbaijan signed 8 bilateral documents with the Emir of Qatar which envision the creation of an “economic bridge”   between the two countries. (8 March 2016, Vestnik Kavkaza; http://vestnikkavkaza.net/news/Ilham-Aliyev-We-need-to-create-economic-…)