This section contains several articles:

1. Political Environment: Risk Analysis, 2001
Stanley Escudero, former US Ambassador in Azerbaijan

To obtain the following articles, please contact USACC
E-mail: chamber@usacc.org

Political Environment: Risk Analysis, 2000
Peter Rutland, Executive Director, Caspian Studies Program and Azerbaijan Initiative, Harvard University

Political Environment: Risk Analysis, 1999
Ambassador Richard Armitage
President, Armitage Associates LLC
 

Political Environment: Risk Analysis
Ambassador (ret) Stanley T. Escudero

Any prudent investor is concerned about stability. This is more than ever true for those considering investments in nations of the former Soviet Union, such as Azerbaijan, which experienced considerable economic and political turbulence during the first three years of its independence. Yet any dispassionate analysis of present-day Azerbaijan would have to conclude that, over the past eight years, the leadership in Baku has successfully taken steps to stabilize the political environment and dramatically improve the climate for investment. In short, compared to conditions in the first years of independence, the environment in Azerbaijan is much improved and is getting better.

To recap briefly: Former ComParty First Secretary and now twice-elected President Heydar Aliyev was recalled to power by the Azerbaijan National Parliament in 1993. At that point Azerbaijan was losing territory daily to the occupying forces of Armenia. There were three separate civil insurrections, one of which had mounted an armed force marching on the capital. GDP had fallen by some 40% since 1991 and inflation was running in excess of 1640 percent. No contracts had been signed with foreign oil companies - contracts, which were vital to develop the nation's hydrocarbon resources and provide the financial base, needed to resurrect Azerbaijan's economy. At that point much of the world had written Azerbaijan off - Western pundits were writing of it as a "failed state" and were predicting its division between its three allied neighbors, Russia, Iran and Armenia. But the return to power of Heydar Aliyev changed all that. Within little more than a year President Aliyev had negotiated a cease-fire with Armenia that holds to this day; put down the insurrections; signed the so-called "Contract of the Century " with a consortium of foreign oil firms and; within three years and in close cooperation with the World Bank and IMF, implemented a program which ended inflation and instituted real growth.

Today Azerbaijan describes itself as "a nation in transition to democracy" and this is a fair description. Inevitably, after only ten years of independence, much of the Soviet-era legal base and mindset remain, but much has been stripped away and that stripping process continues, with the full support of the government, in both the political and the economic arenas. This has not been a seamless process. I can think of no instance in which this sort of fundamental national transition has gone completely smoothly. But, in Azerbaijan, much that is positive has been done. A few of the highlights: A western-style liberal constitution was developed in close cooperation with the Europeans (the US was prohibited from helping by Section 907 of the Freedom Support Act) and put in place. Under this constitution the President was re-elected, Parliamentary elections were held and, for the first time in Azerbaijan, elections were held for local and regional officials. Press censorship, another Soviet-era relic, has been lifted and, in the lively, if not always accurate, opposition media spirited criticism can be found of government policies and even of the President and his family. In another telling instance, the President summarily and publicly dismissed police officers, including field grade personnel, who reacted too slowly to a mob of villagers attacking an opposition newspaper in outrage at an article criticizing their hometown. Last year, Azerbaijan achieved full membership in the Council of Europe.

Now this process of transition is not perfect - international observers have attested that the elections were not wholly free and fair, human rights advocates argue that the authorities should have prevented the assault on the newspaper altogether, and so on. But that is not the point. The evolution of a controlled state into a modern democratic/free market nation requires a generation or more just to get to the level where the national commitment to democracy is so great that it cannot be easily reversed. To ensure the stability, without which the transitional process cannot succeed, change cannot take place at a pace greater than the society as a whole can accept. The task, which the Azerbaijani leadership has undertaken, is that of maintaining the positive momentum of the process it has established. In so doing, it is building the bones of the structure of national stability.

But if democratic reforms are the bones of a stable nation, then economic reforms are its sinews. And here too the Azerbaijani government is taking effective reform measures. At the heart of these steps are the twin realizations that Azerbaijan cannot develop its energy resources on its own and that an indigenous middle class, which can evolve quickly only as a side effect of foreign investment, is a powerful and necessary bulwark against the dislocating effects of the massive development of petroleum resources.

Beginning with the Contract of the Century, the Azerbaijani Government has negotiated a series of 20 production sharing agreements (PSAs) with consortia of international oil companies, many of them American, for the exploration and development of the country's onshore and offshore hydrocarbon resources. Once signed, these PSAs were approved by Parliament and thus given the force of law. Significantly, in several court cases the Azerbaijani judicial system has held that the terms of the PSAs take precedence even over contrary Azerbaijani law. In so doing, this former Soviet state, in its own interest, began the rational subordination of select elements of its sovereignty to the requirements of the international marketplace - a necessary step if it is to become a player in the broad international economic system and at the same time an important internal sinew builder.

Normally far smaller than the massive investments entailed in hydrocarbon development, non-energy sector investments do not receive legal protection similar to that of PSAs and investors have found themselves subject to a variety of license, tax, and other requirements which the oil companies avoid. These and other non-transparent holdovers from the Soviet period increase risk and reduce predictability. In the past, they had the effect of limiting investment in the Azerbaijani non-energy sector only to the savviest, most persistent and best-financed. Happily, that has begun to change.

About three years ago the US Embassy and the American Chamber of Commerce in Baku initiated a continuing series of discussions with the Azerbaijan Customs Department regarding recurring problems experienced by foreign businessmen. In most cases we found that we were pushing on an open door. We received an enthusiastic hearing, changes were made and both sides benefited. The process expanded to include what is now the Ministry of Taxation, the Ministry of Agriculture and culminated earlier this summer in the public, televised presentation by the Board of the Chamber to President Aliyev of an ambitious white paper proposing specific reforms in several key areas. Aliyev approved the paper, commended the Chamber and ordered changes made. He expects to meet with the Chamber again in several months to review the progress of these reforms and to ensure that they continue.

To consolidate and make more efficient the development of the non-energy economy and to more effectively attract foreign investment to it, earlier this year the President consolidated the ministries of economy, trade and privatization and several related state committees under the newly-created Ministry of Economic Development. At its head he placed a dynamic, enthusiastic and reform-oriented minister, Farhad Aliyev and gave him a broad mandate to take the steps necessary to bring in foreign non-energy investment. Minister Aliyev believes not only in the need to create an investor-friendly climate but also that, properly encouraged, Baku can and should play the role of communications, administration, transport, storage and light manufacturing hub for the development of the entire Caspian Basin. I agree.

Recent economic reform measures include legislation enabling enforcement of foreign arbitrage awards and many others, often in cooperation with international institutions such as the World Bank and the International Monetary Fund. And Baku has conducted extensive discussions pursuant to membership for Azerbaijan in the World Trade Organization. The point is not to compile a list of Azerbaijani reforms, but to underscore the assertion that the Aliyev government is well along on a conscious process of economic/free market reform, which will make life in Azerbaijan more attractive to foreign investors. And in the process, sinews and tendons are being created and attached to the bones of that stable state structure.

The common thread running through this consideration of Azerbaijan's fortunate, if incomplete, trend toward democratic and free market reform is Heydar Aliyev. He resurrected the nation from the chaos of 1993. His policies enabled the rapid political and economic development, which has characterized the country, especially in the past six years. He initiated the reforms, which are the best guarantee of the continuation of the stability, which he brought to Azerbaijan. And he is 78 years old and had a triple heart bypass operation in 1999. President Aliyev is a man of indomitable will and extraordinary physical capacity but he is not, much as one might have it otherwise, immortal. Will the stability, which he gave to Azerbaijan survive his passing?

President Aliyev's current term, his second, expires in 2003. The Azerbaijani Constitution limits presidential terms to two, of five years each, But, because his first term as President had already begun before the Constitution was approved, President Aliyev alone may serve a third term. He has said publicly that he will run for a third term, by the end of which he would be 85. Health permitting I believe that he will run and, if he does, I am confident that he will win.

That said, it seems evident that, sometime between now and 2008, President Aliyev will exit the stage of Azerbaijani politics. The Constitution does not designate an individual successor but rather describes a process of election of a successor. Recently at least one prominent leader of the Azerbaijani opposition, which has long opposed the Constitution as a creation of the Aliyev Government, has begun to describe it as a guide to succession and a protector of the rights of the people during that process. Nothing is certain in politics, but at this point there seems no reason to assume that the constitutional process will not be followed and many reasons to believe that the interests of the majority, including the majority of the country's Establishment, will be best served by a stable constitutional succession.

As an interested and, I hope, informed observer, it is my strong belief that the best successor to President Aliyev, the one most likely to preserve stability, would be the candidate most familiar with his policies and most committed to their continuation, with special emphasis on the continuation of democratic and free market reforms. In short, a conservative reformer. Of course this is a choice which the Azerbaijani people will make. But they are justly famed as commercants and deal-makers and, when the time does come, I am confident that they will make the right decision for their country.    

*Source: Investment Guide 2001