Azerbaijan oil: a mixed blessing

On the outskirts of the Azeri capital, one can find the starting point of the $4 billion Baku-Tbilisi- Ceyhan (BTC) pipeline, a marvel of 21st-century construction and engineering that has just begun to pump oil on a 1,093-mile journey from the Caspian Sea to the Turkish Mediterranean port of Ceyhan.

On the other end of town, one can also find Veli Garacayli's crumbling cement apartment building, the product of 1960s-era Soviet construction and engineering. Hot water hasn't flowed through the radiators in a decade, after the boiler that serves the building and several others nearby broke down, and water for bathing and drinking is available only two or three hours a day.

Mr. Garacayli, a radio and television repairman who has been unemployed for the past five years, says the sorry state of his building and the ones around it makes him question whether any of the growing oil revenues in Azerbaijan - one of the world's most corrupt countries - will make their way to his neighborhood.

"If Azeris don't show their concern, the officials who control the oil money will split it among themselves," Garacayli explains in the living room of his small apartment. "The problem isn't only that these people will pocket the money, but they also won't invest it in the country."

With oil revenues set to reach $160 billion over the next 20 years, the question of where the money will go and how it will be spent is one that seems to be on everyone's mind in Azerbaijan these days. But economists inside and outside the country are warning that based on the problems Azerbaijan has had with combating large-scale corruption and in building solid democratic institutions, the oil revenue could end up being as much of a curse as a blessing.

"If you have this money coming in and you don't have a clear and transparent government system, you will have corruption. It means you will have a very unstable social situation," says Ingilab Ahmadov, an economist who is the director of the Baku-based Public Finance Monitoring Center.

The oil being pumped in Azerbaijan (most of which will be shipped via the BTC) comes online at a time when the country of 8 million is struggling economically.

Some 40 percent of the population lives below the poverty line. Teachers in the country earn only about $50 per month. And while the impact of the oil money can be seen in Baku - where new high-rises dot the skyline and shiny German sedans compete for road space with rusting Russian Ladas - the areas outside the capital suffer from neglect and their decaying infrastructure.

For years Azerbaijan has been ranked among the world's most corrupt countries. But the government has recently taken some steps to change that, including raising the salaries of public servants and setting up an anticorruption unit within the state prosecutor's office.

Last May the Azeri government also signed on to the British-sponsored Extractive Industries Transparency Initiative, which obligates it to publicly declare its oil revenues and submit to independent audits. But Rena Safaraliyeva, executive director of the Azerbaijan office of the corruption watchdog group Transparency International, says the country still has a long way to go.

"Corruption is widespread and not very much concealed," she says. "My view is that the government is trying to eliminate petty corruption but they are not serious about going after grand corruption."

The potential for that kind of corruption could be great. While this year $150 million will be transferred to Azerbaijan's state oil fund, that figure will reach $650 million next year. Eventually, it's expected to yield $15 billion per year.

And while the revenues going into the fund are being dealt with in a transparent manner, observers warn that the fund's expenditures are not.

"There's no clear strategy right now for the money in the state oil fund and there's no democratic way for deciding how this money will be used," says Galib Efendiyev, who directs an oil revenue-monitoring program at the Open Society Institute office in Baku. "There's no input from the society on how the money will be used. One person, the president of the fund, controls how it is used."

Mr. Efendiyev and others in Azerbaijan had been hoping that the country's November parliamentary elections would loosen the ruling Yeni Azerbaijan Party's grip on the institution and allow it to become an independent voice on the question of how the oil revenue will be spent. But Western observers criticized the election as being deeply flawed. Only a handful of candidates from the country's political opposition were elected.

"If the parliament could gain people who are really into developing legislation, then a lot of legislative acts could be broadened and mechanisms of controlling the execution of laws could be made stronger," he says.

The way to make oil revenues better a country's situation, experts say, is through reform and the establishment of democratic and transparent government. But some warn that the outlook for Azerbaijan succeeding in doing that - particularly in light of the country's recent elections - could be bleak.

"Only those countries enjoying an efficient, accountable and democratic state prior to the exploitation of oil for export (e.g. Norway) have been able to manage oil revenues and produce better development outcomes," wrote Stanford University professor Terry Karl in a 2003 article for Transparency International. "This is the crux of the oil trap."