Azerbaijan’s Post-Oil Futures

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By Timothy Dolan

Azerbaijan was among the first oil producing nations in the world with documented accounts of it trading in petroleum as early as the ninth century (Beketov, 2018).  However, its post-oil future is near.  Only about 15 years of production is now remaining from this original oil exporting state.  Ironically one of its futures is becoming another Armenia, an agricultural nation and long-time adversary.  It’s an odious fate for Azerbaijan whose oligarchs maintain legitimacy in part through the Armenian foil.  However, the nation, overly identified with its 150 year-old oil-based economy, lacks coherent transition plans.

Baku Azerbaijan’s Flame Towers (Only the Tower on the left is occupied). Source: Timothy Dolan

To the extent the nation’s government has prepared for an inevitable economic shift, it has opted to support an unlikely future.  Over the past generation its leaders have engaged in numerous overtly nouveau riche profligate behaviors mostly devoted to monument building and promotion as a tourist destination.  In order to support two Olympics bids, they built arenas, stadia and a “swimming palace”.  In a quixotic quest to be the “Dubai of the Caucuses”, came other lavish construction projects.  Vast sums were spent constructing the landmark Zaha Hadid designed Heydar Aliyev Center, a vanity project to memorialize Azerbaijan first post-Soviet president costing $250,000,000 to build.  Then came the Baku “Flame Towers” ($350,000,000) and other opulent waterfront edifices that are largely empty. The Azerbaijan government paid Lady Gaga two million dollars for singing John Lennon’s “Imagine” at the opening ceremony of the First European Games, in Baku. Such a kind of Olympics-style event never saw a second after the scheduled Dutch hosts determined it to be not worth doing.  The estimated total cost of the opening ceremony alone was about $100,000,000.  Refitting the capital, Baku’s, coastal skyline from industrial oil town to tourist destination has been striking but mixed. Seeking long-term economic viability by becoming a tourist destination on a shoreline reeking of seeping oil seems misdirected, if not delusional.

Heydar Aliyev Center (A monument to Azerbaijan’s first post-Soviet president). Source: Timothy Dolan

Summary Research Findings

As director of the MPA program at ADA University, which is seen as the most prestigious institution of higher learning in Azerbaijan, this author was charged with overseeing graduate capstone projects that required application of fundamental public management principles to ongoing and emerging issues within the country.  These program participants represent the intellectual tip of the spear for Azerbaijan’s rising generation of political and technocratic leadership.  Four projects, summarized here, suggest some of Azerbaijan’s alternative futures in terms of its strategic economic perpetuation.

First Prong: The Feasibility of Gas Exports to the Balkans

This project constituted Azerbaijan’s official future as a gas exporter through Turkey, under the Adriatic, to Italy, and to the larger Western European market.  This pipeline was already under construction, but there was the potential of a market in the Balkan nations that the State Oil Company of Azerbaijan Republic (SOCAR) deemed worth exploring.  The study found that the upper Balkans had no existing gas distribution infrastructure, with the bulk of their energy resources coming from domestic coal.  The only candidate country with significant potential and existing interest is Bulgaria, which also lies on a spur gas line to Greece.  This finding was not of particular surprise given that SOCAR had already begun preliminary negotiations with Bulgaria for gas line development and sales.  The study was still a bona fide contribution in terms of confirming the relative viability of natural gas delivery to the Balkan nations (Abbasli, L. and Starcevic, M., 2016)

Second Prong: Developing an Agricultural Export Market to China

Huseynova, (2016), assessed the export potential of Azerbaijani agricultural goods to the Chinese market in general.  The approach included getting a sense of Chinese agricultural import demand and exploration of Azerbaijan’s potential to get a share of it.  It was prefaced by a review of the logic of redeveloping the agricultural sector, in part, to relieve the pressure of rural out migration to the cities. The review confirmed a clear decline in agriculture’s contribution to GDP over several years.  The study then shifted to analysis of the Chinese agricultural commodities and its current import sources led by the EU and United States.  These imports were principally in grains and processed foods, which can be transported over long distances without significant loss of quality.  Fresh fruits and vegetables are more locally sourced due to being perishable and thus more sensitive to the rigors of long-distance transport.  Then came analysis of the legal frameworks surrounding food commodities, finding that China had a rigorous tariffs and quotas regime for fruits and vegetables.  The levy took the form of a VAT of 13 percent for all agricultural goods to be collected at the port of entry.  The analysis concluded with a finding of a high likelihood of significant increases in animal or vegetable oils, margarine, safflower and sunflower oil, processed (black) tea and small animal (goat and sheep) leather.

Third Prong: Revitalizing Pomegranate Production

Then came a study on resurrecting the Azerbaijani pomegranate industry.  The core of the pomegranate development project was a feasibility study using econometric return-on-investment (ROI) techniques.  It first commenced with research identifying the pomegranate production centers those being Afghanistan, India and Iran.  The study found the net (2016) value of pomegranate industry investment would be $139,334,826 with a rate of return of 34.3 percent (Asifli, 2016).  The findings further indicated that there is significant potential for tapping into the Chinese, Korean, Western European, and other export markets.  There was a viable foreign market demand for raw fruit and value-added products such as juices, purees and sauces, which can be produced from pomegranates.  Each potential export market had its own niche appeal for pomegranate products suggesting a need for targeted marketing strategies. Western Chinese are already consumers of the raw fruit and is cultivated locally but not exported. Koreans perceive it as health food. European consumers, include, both immigrants who are the traditional raw fruit consumers, and the indigenous Europeans whom, like the Koreans, also perceive health benefits.  The significant range of potential consumers is seen as a positive, given that segmented market demand lessens volatility.

Fourth Prong: Agricultural Equipment Leasing

Mahmudova, (2016) investigated the state of agricultural equipment leasing programs as a means to spur greater agricultural production and prosperity to the rural farming communities of Azerbaijan.  There is already a state-sponsored agricultural equipment leasing system operating in Azerbaijan. However, the system faces several deficiencies especially in relations with the lessees.  This was disclosed in interview with the Azerbaijan’s joint stock Agro leasing company’s chairman.  He expressed concern for “blind selection” referring to requests from entities with no verification of either their need or capacity to pay.  Such a lack of accountability suggests rampant inefficiency at best and corruption at worst.  The result is that they often lease to farmers with no capacity to pay the lease.  The issue of rationalizing the agricultural equipment leasing process is timely as the nation seeks to revitalize its farming sector.  The study suggested a need for an agricultural extension service such as usually provided through university agricultural schools.  The existing agricultural leasing programs currently in place might then also be rationalized and coordinated, in such a way that it would ensure that the types of equipment needed would be aligned with the crops, with the best prospects of profitability and sustainability.

Summary

These capstone projects were more than academic exercises as each had official sponsorship and support from both government officials and private sector executives.  In this they were an effective species of action learning.  Participants were given unique access to officials who are critical to developing long-term strategic plans for Azerbaijan’s post-oil futures. This applied approach to professional preparation to effect change, while well established in graduate curriculum’s elsewhere, was an innovation in Azerbaijan.  It worked to inform both matriculating program participants, and the program sponsors in the field,creating a synergistic mutual benefit.

 

Dr. Timothy E. Dolan was professor and director of the graduate public affairs program at ADA University in Baku, Azerbaijan from 2015-2016 where he was able to both consult with numerous area experts and directly observe life in that country.  He is now member of faculty in the School of International Studies at the American University in Kurdistan. The full text of these capstone reports can be found at this link.

References

 Abbasli, L. and Starcevic, M., (2016),  Investigating SOCAR Expansion to the Balkan Region and Bulgaria through Potential Gas Projects (IAP and IGB).  (ADA University Public Affairs Program Capstone Project Final Report).

 Asifli, M. (2016), Increasing Export Oriented Pomegranate Production in Azerbaijan. (ADA University Public Affairs Program Capstone Project Final Report).

Beketov, O.M. (Translator). (2018) Пряницька, В. Б. Методичнірекомендаціїдляорганізаціїпрактичноїроботиздисципліни «ІНОЗЕМНАМОВА»(англійськамова)(длястудентів 1 курсуденноїформинавчанняосвітньогорівня «бакалавр» спеціальності 185–Нафтогазоваінженеріятатехнології).

Huseynova, Aysel, (2016), Capstone report: Assessment of Azerbaijani agricultural exports to Chinese market (ADA University, Public Affairs Program, Capstone Project Final Report).

Mahmudova, N. (2016).  Developing Agricultural Sector through Leasing in Azerbaijan. (Capstone project final report).

 

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