From government reshuffle to snap parliamentary elections: Political renewal in Azerbaijan?

Building of the National Assembly of Azerbaijan in Baku. Photo: shankar s. (cc) flickr.com

In a surprising move last December, Azerbaijan’s parliament voted to dissolve itself for presumably not living up to the president’s ambitious reform agenda. President Ilham Aliyev approved the deputies’ self-dissolution will and called for a snap election for February 9, 2020. Two months earlier, the head of presidential administration and Soviet-era apparatchik Ramiz Mehdiyev had been dismissed amid a government reshuffle under the slogan of attracting young people to accelerate economic reforms.

The Mehdiyev-linked group (also known as “old guard”) dominated by descendants from the Nakhchivan region comprised the former minister of internal affairs Ramil Usubov and ex-advisor Ali Hasanov, all appointed by Aliyev’s father. “Old guard” was considered one of the key factions in Aliyev’s ruling coalition. Its power could only be rivaled by the rising influence of the first lady Mehriban Aliyeva’s Pashayev group. The first lady-linked Pashayev group and its business conglomerate Pasha Holding have grown stronger over the past decade. Popular views are that Aliyeva holds ambitions to become the nation’s first woman president. In 2016, the constitution was amended to establish the post of vice presidency and the following year she was appointed as the first vice president.

As “old guard” officials were dismissed, they were immediately replaced by younger, seemingly technocratic cadres. For example, Mehdiyev was replaced in his post by a 44-year-old Duke graduate named Samir Nuriyev. Another American-educated official Mikail Jabbarov was appointed as the new Minister of Economy, having previously held other ministerial posts.

Some country observers interpreted these changes as a gathering momentum for reform, a shift of power from the “old guard” to the emerging group of young cadres (dubbed “technocratic reformers”). Some pundits evoked the model of “authoritarian modernisation”.

However, while several key individuals from the “old guard” lost their positions, their sidelining does not mean their disappearance from the power game. Through past appointments, informal patron-client networks, economic resources and media control these “grey cardinals” may still exert considerable influence over national politics. Official position in an environment where informal institutions are strong is not always a good indicator of one’s power. Mehdiyev himself continues to pull strings after being dismissed. In a new article published in his new capacity as the head of the national academy of sciences, he identifies keeping in line with the “Heydar Aliyev’s course” as crucial criteria for elite selection. He also insists that “whoever becomes a new president, his fortune will depend on his/her relationship with the cadres appointed by the previous president [Heydar Aliyev]”.

In sum, elite reshuffling can be interpreted as a move to consolidate the regime’s power around a smaller circle of close and personally trusted people in response to shrinking oil revenues and as a preemptive safeguard against potential elite infighting in near future.

Oil slump necessitates change, but vested interests likely to resist liberal reform

For decades, regime stability has been tacitly maintained by an informal compromise among key elite groupings that ensured access to the spoils of the oil boom. Domineering over the system, the president maintained a network of supportive elites by pumping petrodollars into the public sector and the national oil company. During his incumbency, the president consolidated power by appeasing these groups’ voracious appetites through allocation of procurement contracts, subsidies and public sector jobs.

However, the mid-2014 oil price crisis hit the economy hard, shaking the fiscal foundations of this elite compact. The oligarchs who fed on the petrodollars influx still dominate various sectors through monopolistic control. Despite government reshuffles, these entrenched groups are likely to continue blocking reform out of fear of losing their economic wealth and privileges.

The country’s heavy dependence on oil makes it vulnerable to shifts in the international energy order. Azerbaijan has proved oil reserves of seven billion barrels. Its oil production peaked at around one million barrels per day (bbl/d) in 2010 and with current crude output (at 776,000 bbl/d), it is expected to be depleted around the year 2042. Its gas reserves are estimated at 1.2 trillion cubic meters (about 1.1 per cent of total world reserves). In 2017, Azerbaijan and BP extended the ACG contract through 2049, and the Azerbaijani state oil company (SOCAR) increased its share from 11 to 25 per cent. BP and partners agreed to commit billions of dollars of investment to develop the project in the next decades. Apart from that, Azerbaijan’s state oil fund (SOFAZ) will receive a bonus payment in the amount of 3.6 billion US dollars.

The combined impacts of the shale revolution and renewables policy in advanced industrialised economies have had a wide-ranging and profoundly negative impact on fossil fuel exports from the broader Caspian region and Azerbaijan in particular. More concretely:

The oil price slump dampened fiscal revenue causing recurrent budget deficits. In the 2020 budget, Azerbaijan is expected to run a budget deficit of 3.3 per cent of GDP (1.6 billion US dollars) compared to 2.5 per cent of GDP (1.2 billion US dollars) last year.

From 2004 to 2014 and except for a brief oil price collapse in the second half of 2008, growth in oil production has coincided with high oil prices to stimulate high oil-GDP growth rates. Nevertheless, the petrodollar bubble burst in mid-2014 sent the Azerbaijani economy into a deep recession with significant losses in government fiscal and export revenues. The Brent crude prices that averaged 111 US dollars per barrel (bbl) in 2011-2012 fell to as low as 52 US dollars per bbl in 2015 and hovered between 44-71 US dollars per bbl in the following three years. Unable to cope with falling oil revenues, the government increased borrowing and undertook two rounds of devaluation of the Azerbaijani manat (AZN) in 2015, reducing the value of the manat by half of its previous value against the US dollar. The banking sector was hit hard, and several banks went bankrupt. Total GDP fell back to 38 billion US dollars in 2016, which is half of its total value during the peak year of 2014.

Oil company divestments: Chevron sold its 9.6 per cent stake in the BP-operated Azeri-Chirag-Guneshli (ACG) field to Hungary’s MOL. Exxon was reportedly interested in selling its 6.8 per cent share in the ACG as the company focused on developing shale gas fields in the US. Norwegian Statoil exited from the Shah Deniz gas project in October 2014.

From oil to gas without FDI: Declining oil production and the shift to gas requires additional investments to build new pipeline infrastructure. According to a recent OECD report, Azerbaijan has committed (or is willing to commit) 131.4 billion US dollars to current and under-construction investments, 48 per cent (63.4 billion US dollars) of which are in energy-related projects.

In contrast to the US-backed Baku-Tbilisi-Ceyhan oil pipeline constructed in the early 2000s, the initial western interest in new gas infrastructure has evaporated, reducing the project to the downscaled Southern Gas Corridor (SGC) promoted by Azerbaijan and Turkey with money borrowed from international bank lenders. Unlike the original SGC idea with links to Iran and Central Asia, the modified SGC is limited in scale and ambition. It envisages, at the current stage, gas supplies from only one deposit – Shah Deniz 2 (with 1.2 trillion cubic metres of gas) in the Azerbaijani section of the Caspian. It will link Azerbaijan with southern Europe through Georgia and Turkey with the help of the TANAP (Trans Anatolian Pipeline, completed) and the TAP (Trans Adriatic Pipeline, to be completed next year). The idea of constructing a seabed Trans Caspian Pipeline (TCP) to connect Central Asia to Azerbaijan has not materialised, and Kazakhstan and Turkmenistan are turning to China for investment and export markets.

What to expect from the snap election? Not much.

Candidates are typically pre-selected by the presidential administration and then electoral district committees make sure these candidates receive enough votes to pass to the parliament. The Azerbaijani parliament has no power to check other branches. In fact, the division of power does not exist in the Azerbaijani hyper-presidential system. It is no surprise then that the former speaker once proclaimed that the national parliament “is not a place for debate or discussion”.

By holding an early election and appointing a few young cadres, the Azerbaijani regime seeks to project the image of a reform-oriented government. This seems rational from the logic of power preservation and a desperate attempt to attract foreign investments. Yet, the powerful vested interests with considerable informal power and wealth, will subvert market-oriented policies that carry the risk of undermining their privilege and market control.

Finally, serious reform is unlikely because Azerbaijan does not have the sufficient capacity to implement structural reform that requires technical knowledge and skills. There is a shortage of skilled cadres in all areas from public policy analysis to agricultural management. Azerbaijan is ranked consistently low on various international educational rankings. If attempts to reform the educational sector in the past provide any lesson, it is that talk is not enough.

Farid Guliyev is a postdoctoral fellow at Justus Liebig University Giessen, Germany.

Azerbaijan, elections, oil and gas, South Caucasus