THE HOLLOWS AND PITFALLS BEHIND BIG OIL PROSPECTS IN AZERBAIJAN

Alec RASIZADE


Dr. Alec Rasizade, senior associate at the Historical Research Center in Washington (U.S.A.).


In his last government purge, president Heidar Aliev reshuffled the entire cabinet of ministers including its chief Fuad Guliev, followed later by resignation of the outspoken parliament speaker Rasul Guliev. Vice premier Artur Rasizade took over as prime minister at the time when the free fall of national economy was increasingly hastening a civil upheaval with unpredictable consequences. If not the sagacity and indisputable authority of its experienced leader, the present regime might well follow the suit of preceding Azerbaijani governments in a rapid succession of incumbent strongmen in presidential quarters, who failed to deliver on their fabulous promises to create, as they put it, a Second Kuwait around Baku. What awaits an American agenda in contemporary Azerbaijan, as Mr. Aliev has returned into the marble palace overlooking the Caspian Sea?

The Pitfalls of Belligerence

Since 1988, the recurring cycles of succession in the period between Aliev-first secretary and Aliev-president culminated, as a rule, in a loss to Armenians of yet another piece of Azerbaijan S.S.R. titular territory and the resulting displacement by incited mobs of yet another sitting ruler from the marble palace: Kamran Bagirov, Rahman Vezirov, Ayaz Mutallibov, Abulfaz Elchibey, plus interim figureheads. Since the demise of the U.S.S.R. neither the Kremlin-Byzantine style, nor a Western political understanding apply to this pattern. The indigenous Azerbaijan politics is probably a mix of Caucasian egalitarian restiveness at the bottom and traditional Middle Eastern intrigue on the top, fed by past hatreds, clan cronyism, pervasive corruption and, of course, the personal enrichment through political power. We must as well take into account the long history of deceitful submission to regional and world powers whenever the Azeri chiefs had to deal with them. It would take a life of a distant orientalist to fathom these driving forces (beyond the acclaimed anthropological studies, historical research, human rights issues, immediate political advice and economic analyses), and consistently caution our government against the complications of the oil-driven U.S. policy in a land of distinctive political culture.

Having survived three coup detat attempts since his comeback in 1993, president Aliev too could fall a victim to a social explosion ignited by tremendous plight, notwithstanding the present political apathy of his fatigued people, as it happened to his predecessors. But, being wiser, Mr. Aliev immediately reached an armistice agreement with the Armenians (who had by then accomplished their strategic goals), and has managed to maintain it so long, averting engagement in a self-destructive reconquest effort, thus cutting short any expectations of him to follow the beaten path of bellicose antecessors.

Azerbaijans ragtag military, which hardly may be called a regular army, or navy, or air force, has a record of combat ineffectiveness, as well as low discipline and morale, entrenched corruption through the ranks, mass draft dodging, stolen ammunition, resold weapons, unfed and ill-trained conscripts (with the exception of the black-clad presidential guard units). The military brass have built personal villas or simply siphoned resources off the war appropriations constituting almost half of the government budget. Said a Western ambassador in Baku: No one was faster than the Azeri army in running away, leaving weapons, armor and civilians behind.1 Deployment of this force in its present condition on the battlefield would inevitably lead to a new military setback and another army mutiny, as happened twice before, terminating yet another presidency.

Mr. Aliev is too astute a Machiavellian statesman to let that vicious circle repeat itself in his tenure. His policy reflects the extreme unwillingness of Azeri public to galvanize the warfare. Lacking martial traditions, the ordinary Azeris openly voice strong indignation against the avaricious venality of their politicians, generals and businessmen, none of whose offspring are serving on the frontline, being engaged instead in the profitable oil business and murky export-import operations. Even academics, the main source of patriotic rhetoric, have become subdued. Substantiating the public hearsay, Mr. Aliev has staged a series of open trials of high-ranking officials and generals, which revealed high treason and betrayals ranging from surrendering Azerbaijans towns in a bid to topple the governments in Baku, to selling, via Georgia, Azeri gasoline to fuel Armenian tanks.

Historically, any rising regional power had been vying for command of the port of Baku on the Caspian crossroads when longing for dominance, as do the contemporary great powers in a post-colonial urge for energy resources and global markets. Indeed, Baku was the general headquarters and the major logistical base for the Soviet Middle East Command. Huge stockpiles of arms and ammunition for a possible intervention into the Persian Gulf were stored in Azerbaijan. A similar geostrategic role for Baku should be considered in respect to the Caucasus and Central Asia today by our foreign policy planners. It must be consistent and well balanced.

To be preoccupied with petroleum matters, endorsing the precarious leaders, who all were only 10 years ago zealously anti-American top communist bosses and KGB generals, while ignoring the egregious omens in a nation which is still seething from the loss of socialist social security, is a stupendously perfunctory policy of self-delusion for the U.S. government and corporate community, risking to get a renegade Azerbaijan repeating the expropriation remedies of the next-door Iran, Iraq and other frustrated nations.

Our think-tankers, along with the intelligence establishment, tend to overestimate certain aspects of Azerbaijans prospects, such as the Karabakh conflict and Caspian oil potential (inspirited by Azeri interlocutor sources trying to boost their value for the U.S. policy in the region), and brush aside all other important factors of life that ordinarily are the driving force of any political change and can overturn the balance of power as swiftly and as suddenly, as in Iran in 1979.

Nonetheless, the Washington policymakers are neglecting those forces in a redundant euphoria cultivated by our industry-paid analysts and influential dignitaries serving the big oil corporations, who chair several U.S.-Azerbaijan lobby groups here. Austere insights, challenging such a perverse embellishment, are not encouraged, and veracious interlopers even endanger their personal safety. The dismal reality of contemporary Azerbaijan, however, is a far cry from the prevailing superficial oil-bonanza publications. To assess the looming dangers, let facts speak for themselves, skirting, where possible, the well-known oil rush issues and the protracted Nagorno-Karabakh controversy, in a hope that, departing from the long-standing Washington tradition, some concerned officials would heed a dissonant voice of precaution before (not after) any calamity had happened in Baku.

Economic Plight

Azerbaijans economy has developed within the framework of the greater U.S.S.R. economy, on the basis of that social system and division of labor. Isolated for a century from the surrounding regional markets and leapfrogging the stages of industrial development, todays dropout Azerbaijan has an unbalanced and rapidly deteriorating industry dependent on Russia for raw materials and markets, and insufficient agriculture (foodstuffs make up to 50% of imports), along with a disproportionately large research, development, education and technology sectors created for the needs of Soviet industrial and military superpower.

According to statistics, these proportions have been shifting, for better or worse, in the first six years of independence in Azerbaijans detrimental elan to sever itself from indispensable economic dependence upon the former U.S.S.R. markets, industrial might and food supplies. Machinery manufacturing and petrochemical productionthe two pillars of Azeri industryhave fallen by 85% in 1991-1996, whereas the output of crude oil and natural gas has risen to 50% of the gross national product.2 The economy has been shrinking in the following sequence (year-on-year) since the dissolution of the U.S.S.R. in 1991: by 26% in 1992, 23% in 1993, 22% in 1994, 17% in 1995, and 6% in 1996 (as appraised by local economists), leaving more than half of the nations 4 million-strong work force totally or virtually unemployed.3

Official statistics corroborate this plunge by providing the figures of gross domestic product that has plummeted 64% between 1991 and 1996, with industrial production diminished by 70% and agricultural reduced by half. Azerbaijan has suffered much more severely from economic disintegration than Russia, Ukraine or Kazakhstan. The bulk of the nations industrial, agricultural, transport and energy infrastructure has exceeded several times the depreciation period. The economy is suffering an investment famine. Of the total capital investment, 75% was provided by foreign oil companies into their own projects. The balance was made by the government from external credit programs.4

The private sector has not taken an important role, especially in manufacturing. Almost all the private enterprises are functioning in primitive commerce, service and intermediary businesses, including money-laundering front-shops. Meanwhile, the immense Soviet industrial potential left in Azerbaijan, comprises the moribund petrochemical, metallurgical and power plants, oil equipment factories, and the local subsidiaries of the huge and sophisticated Soviet arms industry, which nevertheless do not meet the modest needs of the newborn Azeri military in conventional weapons, while overwhelmingly depend on the industrys parent companies in Russia. Alas, this inherited advanced sector could not be spared from rampant devastation by desperate workers in cahoots with their superiors intending to sell parts, instruments and truckloads of machinery to Iranian and Turkish merchants at dumping prices during the tumultuous first years of independence. The older industrial and infrastructure equipment (most visiblyrails and trolley lines) along with collective farm cattle and other plundered public stocks have managed to cross the open borders into Iran and Turkey as raw materials in exchange for commodities made there (the merchandise to be resold to Azeri consumers), or were cheaply reimbursed in hard currency.

The overnight-made wealth of the first Azeri millionaires, who only yesterday were ordinary commoners, is popularly explained by such pillage transactions.5 Having thwarted the illicit trafficking and wholesale larceny schemes, president Aliev, who had a splendid record of anti-corruption crusades when he was the first secretary of the Communist Party of Azerbaijan, nowadays is not questioning the legitimacy of fast made fortunes, endorsing in fact the robber-baron breed of national bourgeoisie. Opposition politicians claim that the most successful businesses (cigarette and alcohol importing, the new supermarkets, privatized gas stations) are controlled by clans with close financial ties to the government, which lets them make millions.6

Big Oil and Native Politics

Trying to skip the oil prospects which, concerning Baku, mostly preoccupy an American mind, one cannot pass by some notable puzzles of local oil politics less known here than the platitudes of a metropolis that had been producing half of the worlds oil supply by 1900, invented a kerosene distilling machine, drilled the first oil well, built the first oil tanker, the first oil pipeline and the first offshore oil platform in the world.

One mystery is that nobody in the government, foreign oil companies and international trade organizations has exact data on the annual oil production in Azerbaijan. I have vainly posed this question at all levels of the state-run SOCAR national oil company, and asked several senior executives of each of the three American oil corporations operating in the main consortium: Amoco, Unocal and Pennzoil. Indeed, president Aliev himself has explicitly expressed his ire at a televised meeting with the SOCAR board about having no comprehensive tabs on the amount of oil production and the revenue from its sales, as well as little information about where that money goes.7

The universal perception in the Baku petroleum community is that the actual production of crude and then refined oil has been 2-3 million tons more in the recent years than was statistically reported. It is commonly understood there that such a tally, after selling the unreported quantity on world markets, provides the hard cash for military procurement, government purchase of grain and other commodity staples, as well as the stabilization of Azeri currency against the U.S. dollar, and other urgent needs of national importance. Substantial part of this cash feeds the arcane funds, such as the presidential fund, the emergency fund, the fund for culture, and scores of charity funds serving in fact as fronts for commercial business of their real bosses in the highest echelons of power. Pretending to support the refugee camps, these funds digest, by the way, international humanitarian supplies, which totaled last year $118 million from 14 countries including $26 million from U.S. non-governmental organizations.

Another part of the hidden cash-for-oil finds its way into the pockets and secret foreign bank accounts of the most highly circumscribed elite of senior officials and their shadowy cronies, causing unexplained vanishments, assassinations and recriminations between the opposition and the government, whose investigation vows have never been fulfilled. To give just a few most obtrusive examples, lets mention the 1993 allegation by the then Popular Front (PFA) government interior minister Iskender Hamidov, insisting that foreign minister Hasan Hasanov had amassed about $30 million on overseas accounts, received from international oil companies and kickbacks from other deals while he was prime minister in 1990-1992. Another story published by the fresh-sacked state secretary to president Aliev, Neimat Panahov, described the then chairman of parliament Rasul Guliev as one of the richest men in Europe, holding in total assets around the world $1.75 billion proceeding from the clandestine export of crude oil and oil products. And, according to the ongoing investigation, the recently arraigned last PFA prime minister Panah Huseinov had managed to stash abroad around $20 million during his only 2 months in office.8 Such an endemic underground activity might become a topic for an ample research of the political environment in which American ventures have to operate in Azerbaijan. Here I would not risk a digression from the title of this article.

The second enigma that should be of greatest anxiety for American oil corporations, is the extent to which all the signed agreements would persist in a land of Caucasian excitability and misery, where the law, including international and commercial commitments, is subject to interpretation by every succeeding government. An unforeseen turn of events can alter or even revoke many technically sophisticated and financially feasible deals, resulting effectively in the loss of equipment brought and investments made, along with the bonuses paid to current officials. I have perused dozens of elaborate projects, financial evaluations, analytical surveys, political reports and academic articles, as well as transcripts of congressional hearings. Surprisingly, none of them has addressed the simple yet fundamental question of a potential eruption of social discontent that might have turned the petroleum pyramid of Azerbaijan upside-down. It is not necessary to delve into studies to affirm the historical pattern of other oil-wealthy nations with similar social-economic conditions and political mentality: Algeria, Iran, Libya, Iraq, Mexico, Venezuela, Indonesia. At a certain point of their development they all had to nationalize their oil industries started and developed by Western companies, not waiting for decades for expiration of concession terms. Can Azerbaijan be an exception to this general rule in the post-Aliev era?

Most of the countrys establishment and opposition leaders remain incredulous about an exception and the internationalization of petroleum production at all. The first sovereign president of Azerbaijan Ayaz Mutallibov was a champion of keeping the national oil industry exclusively state-owned without sharing it with international companies. The oil policy was revised after the PFA rebellion ousted him in the 1992 cycle of Nagorno-Karabakh setbacks. The PFA started negotiations with Western oil companies, being unable to operate the industry sufficiently. Part of the bargain was a matter of hefty (in the scale of Azerbaijan) bounties and overseas account kickbacks received by the PFAs ruling cabal.9

On the eve of signing the final accord in London in June 1993, the mutiny led by PFAs commander-in-chief on the Karabakh frontier Suret Huseinov, replaced the PFA government with one of Heidar Aliev. The new round of haggling over the deal with the consortium (which had to pay the bonuses anew) resulted in the September 1994 signing of a $7.5 billion deal of the century (as it was dubbed by Azeri media) at an ostentatious Baku ceremony. The prime minister-turned Suret Huseinov, elbowed off the deal, immediately attempted another coup, but was foiled and escaped to Russia.

As it is clearly seen, all the political skirmishes in Azerbaijan hinge on big oil deals and profits, due to the native mentality often mistaking the government policy for personal advantage and the national wealth for individual fortunes. Speaking frankly, the central question of todays Azeri politics is simple: who will be entitled to stash away the cash for national oil? There is no divergence reminiscent of Western political programs: liberalism, socialism, conservatism, trade-unionism, clericalism, populism or green movement. Neither is present an articulate divide between the Islamic political philosophies of modernization and fundamentalism, like elsewhere in the Middle East. The so-called political parties are little more than mere coteries of hungry henchmen banded around a strongman for the sole purpose of attaining power, and through itpersonal benefits, which ultimately spring from an access to the national oil income.

Being the only source of comparably large revenue, Azerbaijans offshore deposits under the Caspian shelf allegedly promise 30-40 million tons of annual oil production when all consortia will work in full force, bringing into national coffers 3-4 times more income than today. Official ideology proclaims that the increased output, with international technical assistance, shall catapult the benighted country into the modern age. But many in the country are very doubtful that huge amounts of proceeds will not be skimmed off by a few ruling profiteers. They argue that, unlike Saudi Arabia or Iran, Azerbaijan has no concept of building a diversified economy based on the oil revenue reinvestment; contrary to Kuwait or Norway, Azeri nationals have not been allotted individual shares in the national petroleum company, which presumably belongs to them; and even compared to Turkmenistan, the oil-subsidized benefits do not and realistically will not trickle down in any form to the masses to alleviate their transitional throes. All contracts are structured so that the international oil companies get the bulk of the early revenues to repay their investment, meaning that large sums will not hit Azeri coffers for nearly a decade.

All evidence shows that Azerbaijan is currently on the notorious way of Nigeria, which has earned from its oil exports $210 billion over the 25 years of international depleting, but remains among the worlds 20 poorest countries with a monthly average income of $26, no economic reform program and a $37 billion external debt. At the May 1997 Washington session of the U.S.-Azerbaijan Chamber of Commerce (USACC), prime minister Artur Rasizade had doubled the projected oil revenues to the same $210 billion. There is no reliable plan how this equation could work in Azerbaijan differently from Nigeria.

After 1994, Azerbaijan has signed 14 more deals on other promising offshore and onshore fields, having drawn up to $50 billion in investment pledges. Noteworthy is that the oil deals and pipeline routes are considered in Baku as instrumentals in Azeri foreign policy, especially impelling to Western pressure on Armenia, and as an anti-Russian leverage in the controversy over the legal status of the Caspian Sea. The agreements with Russian, Iranian, Turkish and French companies were purely motivated by the carrot policy of the cunning Azeri leader, who is currying favor with great and regional powers.

The Azerbaijani sector of the Caspian Sea has revealed 145 prospective structures. The first and largest consortium, Azerbaijan International Operating Company, an 11-company venture with a 40% American stake, is working the 3 richest deposits containing 1/3 of all estimated reserves, and is projected to obtain in 30 years of operation $99 billion in total revenue, of which $78 billion must be left to Azerbaijan, while all other participants are to gain a $21 billion return on their $7.5 billion expenditure. But it turns out that payoffs are far from certain. AIOCs chief executives admit that for each dollar invested into petroleum production, additional three dollars are being spent for the related refurbishment of degenerated infrastructure of Azerbaijan. Most of the other groups are years away from even looking for oil. Heavy production is not expected for another five years.10

The kernel of the third confronting conundrum lies in the fact that, unlike Kazakhstan and Turkmenistan, or Nigeria and Saudi Arabia, Azerbaijan, being itself the oldest oil-producing nation in the world, has inherited a full-cycle petroleum industry created under the decades of centralized planning in the U.S.S.R. In many ways the petroleum institutions of Baku have played a pivotal role in the development of Soviet oil industrythe largest in the worldthrough the past decades. Bakuvian geologists, engineers and scientists had explored and started industrial production on the vast oil and gas deposits of West Siberia, Tartaria, Bashkiria, Kazakhstan, Northern Caucasus, Central Asia; they drilled in Iraq, Syria, Algeria, Indonesia, Egypt, Iran, Angola, China, India and elsewhere, not to say about the entire Caspian littoral.

The U.S.S.R. government invested heavily into the buildup of petroleum machinery and equipment factories in and around Baku, which supplied nearly 70% of all instruments, machines and pipes to the U.S.S.R. oil fields, becoming central for the entire Soviet petroleum industry. The only Soviet plant for the construction of mobile offshore drilling rigs was situated near Baku (80% of Azerbaijans oil production is extracted offshore). Behemoth refinery and petrochemical plants built in Baku and the nearby Sumgait were used to process crude oil pumped here from the Northern Caucasus, Kazakhstan and Turkmenistan, into petroleum products of great demand on world markets. And finally, Baku was a home to scores of major petrochemical research and development institutions of the U.S.S.R., advanced industrial laboratories and several professional colleges embracing all levels of industry, led by the world-renowned flagship Petroleum Academy.

Alumni of this school still constitute the core of the nation's technocratic cadre. And when, after all, someone promulgates from the presidential palace that Azerbaijan has no choice but to appeal to Western corporations to come and manage its oil production, it is impossible to persuade them that an industry, which hitherto was capable of producing its own oil, cannot perform that task anymore. Thousands of actually deposed (in favor of Western personnel paid up to hundredfold for the same job) professionals and skilled workers on all levels of Azeri oil industry, languishing on miserable salaries, are eager to rectify the mischief. We need to realize the practical gravity of this sensitive issue, departing from a typical arrogant attitude toward other oil-producing underdeveloped nations.

Some analysts in Baku, based on geological surveys by local petroleum research institutes, came to a conclusion that the whole epic of Caspian oil rush is greatly inflated by the conjunction of several special interests: (1) as the Wests alternative pressure on Persian Gulf oil prices (though the real price of Caspian oil will be higher due to the costly deep offshore technology and the complicated, geographically as well as politically, routes of its delivery from the landlocked Azerbaijan); (2) to raise the stock market value of participating oil corporations; (3) to encourage the independent Azerbaijan government both internally and externally in its anti-Russian and anti-Iranian pro-Western audacity; (4) by Azeri regimes seeking the double-standard support of the West for an oil-rich nation while keeping the popular discontent at bay with fables of enormous oil income to transform the nation after the current period of endurance; and, most important, (5) the hoax of 200 billion barrels in oil reserves (compared with Saudi Arabias 250 billion) and $4 trillion in oil revenue waiting for investors, is being sustained by the rapacious effervescence of numerous think-tanks, law firms, banks, trade missions, entrepreneurs, journalists, politicians, academics, expatriates, construction and service companies trying to snatch their share from the investment pie in contracts and consulting. Given the fact that all the current oil concessions in Azerbaijan are based on Soviet geophysical explorations, it will soon transpire, why the U.S.S.R. petroleum industry, after 100 years of intensive depletion, had ignored the potential gusher left beneath the Caspian Sea, and moved instead to the permafrost Siberian oil fields.11

It should be skeptically added that the volume of oil income by itself, without hard work and restructuring the economy, is not enough to propel the nation into the modern age and decent life. During the 30 years of extraction, all consortia put together, will be able to give Azerbaijan no more than $3 billion annually in export revenue, which is equal to the 2 billion Soviet rubles (in the 1980s prices) that Azerbaijan secured annually in trade surplus within the U.S.S.R. for decades. The result is obvious today, and there is no confidence it will be better in the future.

Social Plague

Since 1993 one million Azeris have been displaced, becoming an economic and social burden to a small nation of 7.5 million inhabitants. Unemployment tallies based on official data provide an example of tremendous distress unseen even in the years of Great Depression in the United States. Labor resources of Azerbaijan last year made up roughly 4 million men and women. In 1970 the disparity between the number of labor resources and the work force employed in all branches of the economy was about 0.6 million, in 19801 million, in 19901.4 million, and in 1995 it has reached 2.1 million.12 Thus, 52% of economically active population are completely unemployed in Azerbaijan, having no legitimate source of income. The remaining 48% earn about $30 in average monthly wages while even the government estimated the subsistence level at $86 per person, including children and dependants.13 How long this officially conceded transgression will resist a civil upheaval?

Both the government and World Bank statistics indicate an abject destitution of Azeri citizenry, marking the lowest standard of living in Europelower than in Bosnia, Albania, Armenia and Georgia (and ahead only of Moldova). The dramatic reduction of food consumption, when stores are brimming with free-market abundance, is the direst evidence of teetering on the brink of social disorder, notwithstanding the fairy tales of oil-boom prosperity. Compared to benchmarks of the 1985 Azerbaijan S.S.R., meat products acquisition per capita diminished in the Azerbaijan of 1995 almost 2.5 times, dairy products 2 times, eggs 2 times, fish 3 times, sugar 3 times, butter 3.5 times. Only vegetable, fruit, beans, rice and bread are remaining on a steady demand. Back in 1985 the food consumption in Azerbaijan S.S.R. was 1.5 times lower than the minimal physiological norms established by the U.S.S.R. Academy of Medical Sciences. Another indication of impoverishment since 1985 is the decreasing purchase of staple commodities, let alone the steep decline in new housing construction.14

The total circulation of newspapers has been cut down 20 times by the shortage of imported paper. The public transit authority, deprived of supplies from the former Soviet-bloc countries, has no means to pay for substitute vehicles, and dangerously runs the remaining jalopy buses and decrepit trains chugging to their final fatality together with the jammed passengers, who cram into them for a few cents.

The state of public healthcare system is horrendous, while there is no private alternative. Patients have to bring into the crummy hospitals their own medicine, food and linen, where the doctors expect payoffs before providing any treatment, which is officially free of charge. They buy the drugs on black market, where large part of the humanitarian aid (intended for refugees) is being diverted, or right in the clinics from personnel making a substantial addition to their pittance of government salary. As the international relief agencies still believe that their supplies reach the final destination and are distributed to the needy, the ordinary people cannot afford medication, and the number of the sick, including from malnutrition, is soaring along with the mortality rate. Life expectancy in Azerbaijan, which boasted a 77-year average in 1985, was 66 years in 1995.

The squalid cities of the country are crumbling under massive urbanization, the influx of refugees (two-fold increase in the greater Baku population alone), and the general public ignorance of the necessity to maintain urban facilities and utilities, not to mention the stint of municipal resources. Only 13 of 75 major towns have a sewage system, and only 35 of them have water treatment plants. More than half of the streets are not lit after dark. Mechanical cleaning of streets is practically unknown. Trash goes uncollected, festering in apartment building entryways of inner cities and garbage dumping sites of housing projects in the outskirts. This in turn has contributed to the sharp increase of bowel diseases, including dysentery, salmonellosis, cholera and other epidemics forgotten during the Soviet era. Part of the problem has a cultural dimension: the recently citified Azeri peasants, who replaced the 250,000 Armenians expelled from Baku, have simplified their urban life by throwing their refuse and trash projectiles from apartment windows.

Baku, the capital of an anticipated oil boom, is entering the 21st century with deterioration of all essential urban utilities in the most primitive forms. The frazzled and cruddy piping system constructed during the previous oil boom of 1900s, and the Soviet-added water purifiers meet the citys needs neither in quantity, nor in quality of water. (Foreigners bring their drinkable water by air from as far as Turkey or Dubai on the Persian Gulf.) Levels of hazardous admixtures in this water main, running down 200 miles from the northern Daghestani border, exceed all sanitary norms. The equally distant southern main created in the1970s, pumps water out of the river Kura flowing, along with its tributary Araxes, through Turkey, Georgia, Armenia, Iran, Azerbaijan, and collecting all the way the sewage of their towns as well as the pesticides, cotton defoliants and other agricultural chemicals washed down from the fields of entire Transcaucasia. This murderous solution mixed with the accompanying silt infects the puny dwellers of the city.

Perhaps the most manifest change in this once clean cosmopolitan city is visible on the Caspian seafront boulevardthe favorite thoroughfare with Bakuvians, turned today into a fetid dumping area on the pretext of shoring up against the rising sea level. Presently only 55 square meters of the vandalized park greenery fall on each citizen, which is 21 sq. m less per capita than in 1985, when Mr. Aliev personally led campaigns for planting trees in the city and its vicinity.

After refusing in 1995 to import the natural gas from Turkmenistan (ostensibly relying on domestic gas production), the government has left the urban settlements of Azerbaijan without heating in winter seasons. With the exception of downtown Baku, other cities have no running hot water at all. The parliament had to convene in February 1997 for hearing the civic grievances of Ganja and Sumgait, the second and third largest cities, experiencing shortages of heating, fuel, electricity and gas, whereas the energy resources constitute half of the countrys GNP.

The aforementioned woes are only the tip of an iceberg of a thousand urgent problems facing the backward republic with great oil revenue ambitions. It can smash the Caspian oil concessions at any time regardless of the double standard criteria made up by American businessmen and politicians. Who is able to predict its wayward itinerarythe social endurance of desperate populaceby the yardsticks of prudence, given our unwillingness to talk about anything but big oil prospects, smart pipeline choices and Azeri cultural traditions?

Temporized Reforms

What is the government of Azerbaijan attempting to undertake to salvage the nation from the abyss of economic despair, beyond the radiant hopes for the long-awaited early oil export flow or the newly promoted Sumgait special economic zone, which is a hostage to the vagaries of foreign investment rationale?

Ideologically, Azerbaijans ruling fathers have ushered in a period of transformation from totalitarianism to a market-oriented secular democracy. With the iron-grip governance of president Aliev, a relative political stability seems to have settled after the first turbulent years of Caucasian-style politics. On the other hand, the present calm (along with current interpretation of law, constitution and oil contracts), is tightly bound to Mr. Aliev personally and, given his septuagenarian limits, may be disrupted with his physical finale. Apart from Armenian irredentism, two more secessionist insurgencies are simmering in the northern and southern extremities of the Republic: the aboriginal Lezghians, whose homeland straddles the Caucasian frontier with Russia, covertly supported by their ethnic kin from the Russian Daghestan, and the Persian-speaking Talyshe people gravitating toward Iran, which is itself uneasy about the behavior of its own 15-million Azeri minority. That in turn lays at least a moral obligation of ethnic solidarity upon the weak shoulders of the Republic of Azerbaijan, already overburdened by one million internal refugees.

Inspired by the nearby success of their kindred brethren in Chechnia, Ossetia and Abkhazia, the Lezghians openly dodge army drafts, defy decrees from Baku and boycott the Azeri administration. According to government investigations, the Lezghian separatists were responsible for several terrorist explosions in the Baku subway and kidnapping Azeri officials on their own territory. Besides the agitation for sovereignty, Lezghian activists, along with the Chechens, demand now a share of tariffs from the oil export pipeline running through their territory.

A separate Talyshe Republic was declared by colonel Gumbatov amid the turmoil of Baku power struggle in the summer of 1993 and lasted till the end of the year, when it was quelled by troops. Tehran did not intervene, but continues its multifaceted efforts on the Talyshe territory, which gets increasingly involved into Irans economic and proselytizing domain.15 Another independent province, the Nagorno-Karabakh Republic, was proclaimed by the Armenians in 1992, and still holds steadfastly to its gains, embracing 1/5 of Azerbaijans internationally recognized territory on the west. (Since it has been overly covered by news media, I am evading this subject in favor of the less reported issues.)

Far beyond that western frontier lies the Nakhichevan Autonomous Republic isolated from Azerbaijan proper by Armenian territory and territorial advances, with its own perils aggravated by the double economic blockade on the part of both Armenia and Azerbaijan. While nominally remaining a part of Azerbaijan, this little republic is drifting away from the dwindling authority of Baku and under the patronage of Turkey, which is the official guarantor of its status by the Kars Treaty of 1921 signed by Armenia, Azerbaijan, Georgia and Turkey. It is hard to imagine how this tiny exclave sandwiched between Armenia and Iran, could have survived so long without the 6-mile Turkish conduit and vital supplies since the downfall of the granted U.S.S.R. borders. According to Art 134 of Azerbaijans constitution, the NAR is an autonomous sovereign state within the Republic of Azerbaijan. (Azeri diplomacy offers the same status to the Armenian NKR.) With the end of its native paramount leader Heidar Aliev, the NAR is likely to invoke its autonomous sovereignty, as it did before, when Mr. Aliev himself, being Nakhichevans chief-in-oblivion in 1990-1993, spurned the presidential rule from Baku and established separate relations with Turkey, Iran, and even with Armenia.

These and other political impediments, social-consequence considerations, hinder the pace of transition reforms, along with the remarkable peculiarity that Mr. Aliev in person has to endorse any single government decision of major or lesser importance, brooking no argument. Therefore the economic reform in Azerbaijan has been stalled by and large. In the summer of 1996 a new cabinet of ministers was brought in, endowed by the president with a mandate to accelerate reforms, first of allto conduct blanket privatization recommended by the IMF.

Following the experience of privatization campaign in Russia, the new administration started its privatization effort by issuing vouchers to every Azeri citizen. In fact, however, each viable business already has an underground owner, and the distribution of national property at fire-sale prices is just a matter of legal paperwork plus a lump sum of redemption paid under desk to government officials.

Azerbaijans rubber-stamp parliament has passed in 1996 the long-awaited land reform bill. Keeping 45% of the land mass under state control and 33% in municipal property, the law is supposed to transfer the rest to private ownership with all the subsequent rights. Foreigners are not entitled to real estate property in Azerbaijan. If implemented fairly, without extortion (which is inescapable on local level), this crucial law could substantially ease social tensions in hinterland.

One of the major flaws in the government program is the absence of a credible concept for employment policy. The lack of jobs for half of the nations able-bodied human beings, which shall be worsened by massive layoffs after blanket privatization, may spark civil disturbances. There is no welfare system left after the rupture of socialist safety net, and no more existing middle class (80% of population in 1991), which could provide a nucleus for social stability. Today, the pauperized engineers, teachers, scientists, intellectuals, all kinds of skilled workers and professionals are scrambling for survival under the juggernaut of capitalism by selling out their valuables, then cars, then apartments, and trying to emigrate.

Their hopes for a better life have been dashed by the hollow transition reforms and the razor-thin margin of society, which has become obscenely rich by trading on cozy connections with the government, on war supplies, oil and cotton exports, and further swindling the losers by involving them into financial schemes. Imagine the hate for the reforms and the dismay of millions who, like my retired father, have lost their life savings with the demise of the U.S.S.R. financial system and the annual hyperinflation rate of 2000% in 1992-1994. They had never been reimbursed neither by Moscow, nor by Baku. As if that robbery were not enough, the second round of middle-class extinction unfolded on the stage of independent Azerbaijan in 1995 with the bankruptcy of mutual investment funds devised as the only affordable means of popular accommodation to market economy. Attracted by exorbitant payoffs, the naive rank and file invested everything earned from selling the remains of family property. The funds turned to be no more than pyramid schemes that simply paid off the initial investors with money supplied by the later ones. When they collapsed for lack of new investments, all savings were eliminated overnight: for great many it has been the only source of income. The government, busy with lucrative oil haggling, did not bother about a restitution to the bereft investors, among them my mother-in-law, a former school teacher, who receives a pension equivalent to $10 a month. It all turned the middle class, the 4/5 of citizenry, into an explosive mix of social discontent. The middle class, the backbone of any stable modern nation, any predictable civilized society, has been finished since then in Azerbaijan.

In their stead, the contemporary Azerbaijan is fostering an emerging volatile class, which cannot be named entrepreneurial in the Western sense. Aspiring to accumulate what they call the starting capital, this welter of self-styled merchants is busy in the primitive shuttle and retail trade operated out of small shops, suffering from racketeers of all kinds: from police and the customs to government officials of all ranks, who demand their cuts.

The only viable home-grown class, able to reinvest into the national economy, thus creating new jobs, represents the unbridled remnants of communist leadership, the ubiquitous KGB types, rural and industrial bosses who, armed with a necessary leverage of administrative power, have effectively appropriated the most productive and profitable parts of state property prior to its legal devolution officially aimed at creating the equal starting terms for every citizen. Well organized by any definition of a Mafia, they do not conceal their opulence, stirring up egalitarian instincts of downtrodden masses. That discontent, in turn, prevents them from making serious investments at home beyond the lavish lifestyle, posh apartments and prestigious cars.

The wealthiest man in Azerbaijan, the former parliament speaker and industrialist Rasul Guliev, having made no significant investment at home, found himself in New York as soon as he resigned. Before him was prime minister Panah Huseinov, who fled to Turkish Cyprus where had a major investment made. The next rich prime minister, Suret Huseinov, followed his money providently transferred to Russia, and this list could be continued. Private Azeri investments in Turkey alone accounted in 1997 for a total of $700 to $800 million.16 The most interesting point is that these and other leery officials have vehemently solicited foreign companies to invest into the development of natural resources and free economic zones in Azerbaijan. For some enigmatic reason, apparently stemming from a better knowledge of the native country and people, their own capitals eluded the home investment gimmicks.

U.S. Policy Planning

The principal obstacle for the U.S. government concerning Azerbaijan is section 907 of the Freedom Support Act passed by Congress in 1992, which singles out this nation from any assistance program extended to former Soviet republics, until Azerbaijan lifts its economic blockade of Armenia imposed as a contingency of the Karabakh war.17 Several Clinton administration attempts to waive the congressional restriction for the sake of American oil companies and national strategic interest, have failed since then on the Capitol Hill. In 1996, the Porter amendment stipulating a proportional humanitarian aid for the NKR if Azerbaijan were determined eligible, was passed by the House, but rejected in the Senate.

Although participating in the sluggish talks in the framework of the Minsk Group formed by the Organization for Security and Cooperation in Europe (OSCE) to surmount the Karabakh impasse, U.S. diplomacy gave up on its pursuit of Azeri-Armenian reconciliation, after the failure of its few mediation efforts: the missions of Cyrus Vance, John Maresca and Strobe Talbott. The latest initiative has failed to persuade both presidents to agree on a settlement at the OSCE Lisbon summit in December 1996. Due to Caucasian historic experience, the traditional Washington diplomatic cures, such as the land for peace formula or an international peacekeeping force, do not work here. Unlike Israel, the Transcaucasian nations have committed ethnic cleansings, which seem to be final to their national psychology. Unlike the former Yugoslavia, the republics of Transcaucasia are wedged between the formidable regional powers: Russia, Iran and Turkey, each having special interests including territorial claims. In Azerbaijan particularly, U.S. operatives have to steer between unfriendly Russia and hostile Iran, like between a hammer and an anvil, being disadvantaged by congressional restrictions.

Meantime, section 907 puts no restraints on the six largest American oil corporations operating in Azerbaijan, whose lobby is outbalancing now the Congressional tilting to Armenia.18 Their combined investments, bonuses and revenues provided to Azerbaijan, grossly outweigh the United States assistance for Armenia: the anticipated cumulative international investments and loans would range from 1 to 2 billion U.S. dollars annually in the next 30 years, by contrast to $600 million received by Armenia from the U.S. government in 1992-1997.

In an effort to save American strategic achievements in the region, some foreign policy theorists suggested the creation of a link similar to the Northern Tier theory promoted by J.F. Dulles in the early 1950s. Designed as a bulwark against the Soviet expansion toward the Middle East, it was implemented in 1955 in the form of the Baghdad Pact (renamed CENTO in 1959). On the contemporary political map of the area the new bloc has included such imaginary beachheads of Western strategy as Georgia, Ukraine, Uzbekistan, Azerbaijan and Moldova (GUUAM) with the further addition of Turkey and Romania. It could rather be named the Central Tier for its role as a cordon sanitaire to contain Russian expansion from the north and to deter an Iranian and other fundamentalist advancement from the souththe two dominant tides between which this chain would stretch.

Another task of the GUUAM/Central Tier would be providing a secure surface and maritime transit corridor for the export of huge natural resources from the landlocked Caspian Basin and Central Asia, which are significant to the Western economy. Ironically, the first high-ranking official, who formulated this doctrine, was the Russian foreign minister E.M. Primakov in a March 1997 speech at the State Duma. As a historian however, I should remind the fates of the Baghdad Pact and CENTO, remembering the words of George Santayana: Those who fail to understand the past are condemned to repeat it.

The two central powers of that security organization fell and converted into anti-Americanism precisely as a result of their ignorance of internal social deficiencies: Iraq in 1958-1968, and Iran in 1979. A similar collapse for the same reason (unless their emaciated populace assent to a mass masochism) will occur to the central and weakest members of the GUUAMGeorgia and Azerbaijan,no matter how much oil they export or how loyal to Washington they are presently. (Baghdad and Tehran had at their time perfectly exceeded both calculations.)

In Azerbaijan our policy planners are obviously on the well-forgotten trail of Baghdad Pact antecedents. The cordial reception for president Aliev at the White House in August 1997 exemplified that, conniving at the ethnic cleansing, muzzled press, human rights violations, electoral travesties, institutionalized corruption, international aid embezzlement, political oppression, autocratic rule and incipient personality cult, the Clinton administration has clearly opted for a double-standard stability over democracy in Azerbaijanthe policy U.S. Congress would have never tolerated in application to any European nationfor the latest example, to Belarus.

We all want to believe that the abstract Azerbaijan, in our energy assessments and strategic designs, has reached a certain level of stability, democracy and economic sufficiency. Just listen to our exuberant experts who return from their regular fact-finding trips to Baku, presumably for a reality check. After fretting a little about democracy and ignoring welfare at all, they start touting the countrys strategic value and oil-boom prospects, judging by the number of modern shops that have popped up on downtown Baku streets, unaffordable to ordinary Azeris save a few thousand people working for foreign companies.19 Not foolish, Azeri officials too have learned how to use these trumps to their own advantage, becoming more and more intransigent to internal and external correlations, manipulating the stability shibboleth of the West and its petroleum obsession.

The Azeri idea of using the Caspian oil as an instrument of national policy sometimes is jarring against the grain of our political ethics, especially nowadays when Congress is squeamish about foreign lobby interference into decision making.20 Unaware of the U.S. democratic process, Azeri officials, opposition leaders and news media make no secret of their plans to influence the foreign policy legislation in Washington by luring American big business into oil concessions and other profitable contracts. Open any Azeri newspaper, and you will find a statement, an editorial, an article or news report proudly claiming that in return Amoco has recruited a congressman, that Pennzoil has stamped out another attempt to introduce an anti-Azerbaijan bill, that Unocal is battling an Armenian campaign in California, and that the newly arrived Exxon, Mobil and Chevron together shall finally eliminate section 907 because they are very influential. These stories, signed by academics and politicians, create a corrupted image of U.S. political institutions in Azeri public opinion. They honestly believe that Washington has no choice, but to succumb to the oil allurement in favor of Azerbaijan. Such an approach to the settlement of Nagorno-Karabakh and other regional problems serves to generate a serious confusion to our mediators and policy planners. The self-indulging mantra of blaming everything on Moscow likewise harbors a reliance on big corporations behest in American politics, as leaders in Baku believe that Azerbaijan is an oil-blessed regulator in a great game of industrial powers for the Caucasus and Caspian Basin.

Compromising between the inaudible reports of democracy monitoring watchdogs and the impressive voice of oil corporations lobby, the State Department has elected a no-rebuke policy to overlook that Azerbaijan did not live up to its patrons expectations. The generally assumed argument at the Foggy Bottom is this: Well, we know the problems, but Azerbaijan is in a transitional period; consolidation of one-man rule by president Aliev is a lesser evil in contrast to opposition; and after all, that is the Caucasus, and he provides stability there. That is true at first blush, and I have no intention to dissuade from this logic, but my scholarly obligation is to remind the history-tested principle: there is no stability without democracy and middle-class prosperity. Otherwise, we shall lose much more in a debacle after the imminent demise of the Heidar Aliev era with the natural end of the 77-year-old leader.

Although Azerbaijan has been relegated henceforth to the category of a third world nation, its people perceive their perils in a way different from other inferior societies, raising many unforeseen obstructions for the U.S. political and economic strategy. The basic psychological problem we are doomed to face in Azerbaijan for years ahead is that, due to the U.S.S.R. legacy, wide segments of population there are well educated and have seen much better days of a welfare state. The second major imperative for an American Realpolitik derives from the intrinsic Caucasian spirit of equality and social justice. Strong egalitarianism is in the blood of any Caucasian native, impeding the implantation of capitalist values. Distinctive from the surrounding nations, none of the Caucasian folks can endure any form of tyranny, special privileges and gaping social disparities for a long time. Unless a tangible recovery is extended to every Azeri family within 1-2 years, the stability and transition prescriptions imposed by the West and IMF, will be eventually rejected, and a radical popular outrage is likely to be leveled at the oil concessions as the most visible symbols of inequality, corruption, frustration and national humiliation.

We are currently consumed, until the next obvious blunder, with a simplistic illusion of the increasing oil production as a panacea for all the maladies of Azerbaijan, misguided by the special-interest publicity of our oil corporations and the catapult ideology of Azeri leadership. Such an attitude of mind leads to an aberrant U.S. policy in Transcaucasia, as it has many times proved since 1991. If not treated specifically, Azerbaijan may present American policymakers with a considerable quandary, following the path of other outcasts lost in that region.

We have to learn from their lessons over and over again that corrupt governments, no matter how loyal they are to us, are not the best guarantees of a stable democracy and free development, let alone the long-term U.S. national interest. Before long, having pumped off handsome fortunes, the powerful best friends of America safely scamper to the civilized and secure Europe, leaving Uncle Sam culpable in the shambles of their respective countries. In the case of Azerbaijan, Our Indispensable Man in Baku might apparently take a refuge not in traditional Moscow but, for the first time, in London, setting, perhaps, a new pattern for his post-U.S.S.R. successors.

The deepening polarization in a society of Caucasian passion is fraught with a permanent threat of internal civil commotion, which is a nutrient medium for a spectrum of other political solutions. No surprise that almost every radical movement in the world has now local chapters and articulate native following on Azerbaijans political arena with growing chances of success. The consequent backlash would translate into a profound impact on oil concessions and jeopardize other U.S. strategic goals in Azerbaijan and the Caucasus, on the whole.


1 Newsweek (New York), 29 November, 1993, p.56. On the Azeri military embezzlement, see: Soldier of Fortune (Boulder, Colorado), November 1994, pp.33-37; Respublika, 18 August, 1993; Azadlyq, 18 April, 1994; Xalq gazeti, 30 October, 1994; Cumhuriyet (Istanbul), 2 June, 1995 (unless otherwise denoted, all the quoted periodicals were published in Baku, Azerbaijan).

2 See: Azerbaijan in Figures. (Central Statistical Agency), Baku, 1997, pp.8-11.

3 See: R. Musaev in: Millet, 4 February, 1997; N. Imanov in: Populyar, Winter 1997, p.10.

4 See: Azerbaijan: Economic Update. (The World Bank). Washington, 1998, pp.36-38.

5 The most outstanding characters were epitomized in the series of Wild Capitalism stories in the social-democratic Istiqlal weekly, 1992-1994, and similar articles in almost every Azeri periodical of the same period.

6 See: U.S.News & World Report (Washington), 10 November, 1997, pp.63-65.

7 See: Bakinskiy rabochiy, 19 November, 1995.

8 See, respectively: Zerkalo, 21 March, 1993 (on H. Hasanov); Meydan, 28 September, 1995 (on R. Guliev); Muxalifet, 20 November, 1996 (on P. Huseinov). Komsomolskaia pravda (Moscow) had added in its 26 July, 1994 issue, among others, two Azeri ambassadors to a roster of oil scam profiteers: the presidential son-in-law M. Mamedkuliev in London, and R. Rizaev in Moscow, each maintaining enormous bank accounts of inscrutable origin.

9 See: Vyshka, 28-30 December, 1993; Respublika, 12 September, 1994. Socialist leader Zardusht Alizade compared the oil concessions to an unnecessary surgery prescribed by profit-seeking international corporations and grafted local politicians: Istiqlal, 18 May, 1995.

10 See: L.Agaev, I.Veliev, Kontrakt veka i problemy neftedobychi na Kaspii, Baku, 1997, pp.83-114.

11 See, for example, an article in the Monitor analytical journal, May 1997, pp. 24-31. A mainstream American overestimation was presented by an article in The New York Times, 6 August 1997.

12 See: G. Naibli, Labor Resources of Azerbaijan, Baku, 1996, pp. 9-10.

13 See: Azerbaycan, 21 May, 1997. At the 1997 annual meeting of the World Bank and the IMF in Hong Kong, an income of less than $1 a day per person was defined as the worst poverty.

14 The figures are sourced from Azerbaijan in Figures (Baku, 1996) in comparison with the statistical abstract 70 Let pod znamenem Oktyabria (Central Statistical Agency, Baku, 1987).

15 See: Kayhan International (Tehran), 23 November and 21 December, 1993.

16 See: Trend economic journal, Spring 1998, p.12.

17 The clause reads: "United States assistance under this or any other act... may not be provided to the government of Azerbaijan until the President determines and so reports to Congress, that the government of Azerbaijan is taking demonstrable steps to cease all blockades and other offensive uses of force against Armenia and Nagorno-Karabakh.

18 For the recently exposed lineup of the former top U.S. government officials in the pay of the consortia corporations, including Lloyd Bentsen, James Baker, John Sununu, Brent Scowcroft, Zbigniew Brzezinski, Richard Armitage and other prominent Washington personalities, cashing in on the promotion of Azerbaijan oil cause, see The Washington Post, 6 July, 1997.

19 Read, for instance, a Letter from Baku by Thomas Goltz in The National Interest journal (Washington), Summer 1997, pp. 37-45.

20 A sample saga of direct promotion of Caspian oil projects, using levers of money contributions and high-level political connections in Washington, now under a Senate committee investigation, was presented by The Washington Post, 9,18,19 September, 1997.


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