Capitalism In Azerbaijan: Exploring The Dominant Economic Ideology

Azerbaijan, officially the Republic of Azerbaijan, is a transcontinental country located in Eastern Europe and West Asia. It is a former Soviet republic with a majority Muslim population and a secular government. Azerbaijan's economy is heavily dependent on oil, with the country's oil industry dating back to the ancient period. While the country has been transitioning towards a free-market economy since the demise of the Soviet Union, it still faces challenges due to the legacy of central planning and bureaucratic administration inherited from the USSR. The country's path towards capitalism has been marked by conflicts with neighbouring countries, particularly Armenia, over the disputed region of Nagorno-Karabakh.

Azerbaijan's transition to a free-market economy

The country's economy was primarily based on agriculture and raw materials such as silk, copper, cobalt, and oil during the 19th century. The abolition of serfdom and the development of capitalism led to the strengthening of economic ties between Azerbaijan and the imperial industry, particularly in the oil sector. By the 1870s, Baku had become the world oil centre, and the country's oil industry continued to grow, attracting local, Russian, and foreign capital.

Following the collapse of the Soviet Union, Azerbaijan gained independence in 1991 and began its transition to a market economy. The country has a unitary semi-presidential republic form of government and is a member of various international organisations, including the World Trade Organization and the Council of Europe.

Azerbaijan's economy is heavily reliant on its oil and gas sector, with two-thirds of the country rich in these resources. The country has signed contracts with major oil companies and has become an essential player in the global energy market, supplying oil and gas to Europe and reducing its dependence on Russian energy sources.

While Azerbaijan has made strides in transitioning to a free-market economy, challenges remain. The country has been criticised for corruption, income inequality, and human rights violations. Additionally, the recent conflict with Armenia over the Nagorno-Karabakh region has impacted economic development and led to human rights abuses.

Overall, Azerbaijan's transition to a free-market economy has been a complex process influenced by historical, political, and economic factors. The country continues to face challenges but has also made significant progress in developing its economy and fostering international trade.

The role of oil in Azerbaijan's economy

Oil has played a significant role in Azerbaijan's economy, both historically and in the present day. The country is one of the birthplaces of the oil industry, with evidence of petroleum being used in trade as early as the 3rd and 4th centuries. The richness in natural resources, particularly oil, has been the most important factor contributing to the country's history and economic development.

Historical Role of Oil in Azerbaijan

The existence of important oil fields in Azerbaijan dates back to ancient times, with the first reliable information about oil extraction on the Absheron Peninsula, where Baku is located, dating back to the 7th and 8th centuries. The demand for oil grew steadily over the years, turning the oil industry into a capital production sector. By the end of the 19th century, the upsurge in the industry attracted significant investments, leading to the construction of new factories and plants.

During this period, Baku became a center of world oil commerce, and by the turn of the 20th century, it was producing 50% of the world's oil. The economic potential of Baku was even recognized by the Soviet Union, which established its domain over the region. However, the oil industry in Azerbaijan saw many ups and downs during the Soviet period, which lasted from 1921 to 1991.

Post-Soviet Independence and the Oil Sector

After gaining independence from the Soviet Union in 1991, Azerbaijan focused on developing its oil and gas sector as the main driver of its economy. This period, known as the "Azerbaijani Renaissance," marked the country's acquisition of autonomy and the ability to manage its hydrocarbons stocks independently.

The government of Azerbaijan began to create alternative infrastructure for energy exports, particularly through the restoration of two major pipelines: Azerbaijan-Georgia (Baku-Supsa) and Azerbaijan-Russia (Baku-Novorossiysk). Most of the country's oil now passes through these routes. Additionally, the Baku-Tbilisi-Ceyhan (BTC) pipeline, which transports oil from the Caspian Sea to Western markets via Tbilisi and Ceyhan, is a significant regional pipeline.

Current Role of Oil in Azerbaijan's Economy

Today, oil and gas are the main drivers of Azerbaijan's economy, contributing significantly to its total exports, GDP, and revenues. Oil and gas make up two-thirds of the country's GDP, placing Azerbaijan among the top ten most fossil fuel-dependent economies globally. Azerbaijan is one of the 20 largest oil producers in the world and is a significant player in per capita oil production.

The country currently produces 848,000 barrels of oil per day and has 7 billion barrels of oil reserves, ensuring a steady supply for over a decade. About 20% of production comes from a consortium of 10 companies (AIOC) led by BP, and the majority of the oil is exported, mainly through the BTC pipeline.

The country has also started exporting gas, with 1.2 trillion cubic meters of reserves and a production capacity of 16.9 billion cubic meters. Consumer use accounts for 9.2 billion cubic meters, while the rest is exported primarily to Turkey and Russia.

Impact of Oil on Azerbaijan's Economy

The development of the oil and gas sector has had a profound impact on Azerbaijan's economy. It has enabled the country to attract significant foreign investment, with more than $60 billion invested by major international oil companies in the AIOC consortium. The oil wealth has strengthened the stability of the country's regime and enriched its ruling elites. Additionally, it has allowed the state to host lavish international events and engage in extensive lobbying efforts abroad.

However, the country's economy is characterized by corruption and inequality, and the private sector remains weak, with the economy dominated by state-owned enterprises. The transition to a free-market economy has been challenging due to the previous command economic system and the impact of the USSR's heritage on bureaucratic administration.

In summary, oil has played a crucial role in shaping Azerbaijan's economy, both historically and in the present day. The country's rich natural resources have attracted investments, driven economic growth, and contributed significantly to its exports and GDP. While the oil sector has faced challenges and volatility, the government has made efforts to reduce economic imbalances and promote economic diversification.

Azerbaijan's developing country status

Azerbaijan is a small, upper-middle-income nation with a high level of economic development and literacy. It has a diverse economy with a strong agricultural sector and is one of the world's top ten most fossil fuel-dependent economies. Azerbaijan's economy is heavily based on oil and gas exports, with gas and oil comprising two-thirds of its GDP. The transition to oil production in the late 1990s led to rapid economic growth from 1995 to 2014.

Azerbaijan's path to becoming a capitalist economy has been challenging due to its previous command economic system and the lingering influence of the USSR on its bureaucratic administration. The country has struggled to fully transition to a free-market economy, and its private sector remains weak, with the economy dominated by state-owned enterprises. More than half of the formal labour force works for the government.

Azerbaijan's economy faces issues such as corruption and inequality. The country's oil wealth has strengthened the regime and enriched the ruling elites, enabling them to host lavish international events and engage in lobbying efforts abroad. However, the economy needs to diversify, as warned by the World Bank, which also highlighted the need to address the risk of a "youth bulge" entering the workforce and potentially raising the national poverty rate.

Despite these challenges, Azerbaijan has made progress in certain areas. It has begun to replace old economic ties and structures, and its defence industry has emerged as an autonomous entity with growing capabilities. Additionally, the country has a strong agricultural sector, claiming the largest agricultural basin in its region, with about 54.9% of its land dedicated to agriculture.

In summary, Azerbaijan's status as a developing country is characterised by a complex mix of economic growth and diversification efforts, a heavy reliance on oil and gas exports, a dominant state-owned enterprise model, and ongoing challenges related to corruption, inequality, and the need to diversify its industrial base.

The country's political system

Azerbaijan is a unitary semi-presidential republic. It is one of six independent Turkic states and an active member of the Organization of Turkic States and the TÜRKSOY community. Azerbaijan has diplomatic relations with 182 countries and holds membership in 38 international organizations, including the United Nations, the Council of Europe, the Non-Aligned Movement, the OSCE, and the NATO PfP program. It is one of the founding members of GUAM, the Commonwealth of Independent States, and the OPCW. Azerbaijan is also an observer state of the World Trade Organization.

The Constitution of Azerbaijan states that it is a presidential republic with three branches of power – executive, legislative, and judicial. The legislative power is held by the unicameral National Assembly and the Supreme National Assembly in the Nakhchivan Autonomous Republic. The Parliament of Azerbaijan, called Milli Majlis, consists of 125 deputies elected based on majority vote, with a term of five years for each elected member. The executive power is held by the president, who is elected for a seven-year term by direct elections, and the prime minister. The president does not have the right to dissolve the National Assembly but has the right to veto its decisions. The judicial power is vested in the Constitutional Court, Supreme Court, and the Economic Court. The president nominates the judges in these courts.

Azerbaijan's government functions as an authoritarian regime in practice. It is categorised as "not free" by Freedom House, who ranked it 7/100 on the Global Freedom Score in 2024, calling its regime authoritarian. The ruling New Azerbaijan Party, in power since 1993, has been accused of authoritarianism under president Heydar Aliyev and his son Ilham Aliyev, and worsening the country's human rights record, including increasing restrictions on civil liberties, particularly on press freedom and political repression.

Azerbaijan's human rights record

Azerbaijan's transition to a free-market economy has been challenging due to its previous command economic system and the lingering influence of the USSR on its bureaucratic administration. While the country has experienced various capital accumulation processes, it has not fully transitioned to an open market economy.

Violations of International Humanitarian Law

Azerbaijan's blockade of the Lachin corridor, connecting Nagorno-Karabakh to Armenia, caused critical shortages of essential supplies and a humanitarian crisis in the breakaway region. Despite orders from the International Court of Justice for "unimpeded movement," Azerbaijani authorities refused, contributing to the humanitarian crisis. There has been a lack of progress in investigating alleged war crimes and violations of international humanitarian law by Azerbaijani military forces, including disproportionate attacks, violence, and killings of civilians and prisoners of war.

Freedom of Expression and Association

Restrictive NGO legislation and media laws impose barriers and restrictions on human rights groups and independent media outlets. Government critics, journalists, media representatives, and human rights defenders face violence, harassment, and arbitrary arrests. The number of individuals jailed under politically motivated charges has increased, with Azerbaijani human rights organizations reporting over 230 such cases.

Freedom of Peaceful Assembly

The authorities often arbitrarily restrict the right to peaceful assembly, using violence to disperse protests. For example, in June 2023, police violently broke up an environmental protest in the village of Söyüdlü, Gadabay district, with footage showing police beating protesters with truncheons and chemical irritants.

Gender-Based Violence

Women and girls in Azerbaijan continue to face gender-based harassment and violence. There are also concerns about the safety and security of women whose intimate photographs and messages were leaked from the private accounts of arrested opposition activist Bakhtiyar Hajiyev. Local activists accused the government of being behind the leaks, endangering these women and making them targets of violence.

Torture and Ill-Treatment

Torture and ill-treatment in police custody and detention facilities remain prevalent in Azerbaijan, with impunity for perpetrators. For example, in February 2023, Jeyhun Balashov, a religious activist, was arrested on what he claims are bogus drug possession charges. His father observed visible bruises on his arms when they met in prison.

Sexual Orientation and Gender Identity

Lesbian, gay, bisexual, and transgender (LGBT) individuals in Azerbaijan continue to face ill-treatment, extortion, arbitrary detention, and discrimination by state and non-state actors. For example, in May 2023, at least two transgender women were detained in Baku after a confrontation with police. The following day, several LGBT rights activists who gathered to protest their arrest were also detained, with at least two sentenced to 15 days' detention.

Frequently asked questions