Books
Law Reform in Azerbaijan:
Snapshot in a Time of Transition
by Scott Horton
Scott Horton is a partner with the firm Patterson, Belknap, Webb and Tyler in New York.
Summary
There are many grounds for optimism about Azerbaijan''s prospects for developing a rule-of-law state. However, these prospects are not currently being realized. The failure to adopt a new Civil Code is particularly troubling. Azerbaijan has adopted progressive production sharing legislation, which has attracted oil investors, but is lagging with respect to the implementation of bankruptcy and pledge legislation. Production sharing agreements are not a substitute for a broadly based legal regime which embraces market norms. The key question is not the quality of the laws on the books, but the quality of their implementation. While the judiciary has shown some signs of independence, the government''s recent efforts to block the formation of an independent college of advocates has been a disturbing development. The government''s ability to follow through with its privatization program will be an important test for Western investors.
* * *In his remarks opening the Kennedy School conference, Professor Ash Carter talked of a series of "legal technicalities" which matter, though perhaps are more on the periphery of our concerns about the Caspian area today. When we recognize the importance of such technicalities for the whole notion of rule of law and for the creation of enduring institutions, however, their fundamental role in building stability for the region may become more clear. I hope that my remarks can help refocus our discussion away from crude reserve estimates and geopolitical alliances of the moment and toward laying the founda-tion for peace, prosperity, and stability in the region. Establishing a rule of law environment is key to this process.
A lawyer graduating from Moscow State University in 1990 could have traveled to any corner of the Soviet Union and confidently commenced the practice of law. One who attempts such a thing today might be committing malpractice. The nations of the former Soviet Union are expressing their sovereignty through the legislative process. A series of different legal regimes are emerging. While we can speak of trends towards acceptance of German, Dutch, French, and on occasion, American or British, legal models, each state has its peculiar mix. Accordingly it is impossible even in the broadest of strokes to offer some remarks on law reform in the states of the Caspian Basin, so I will focus my insights on the path taken by the nation which is the focus of the current conference: Azerbaijan.
Azerbaijan is a fascinating place. It would be a mistake to lump it together with the Central Asian states of the Caspian littoral, as some have done. Azerbaijan has long had a level of sophistication, of scholarship, of professional life which the others lack. Baku''s intelligentsia has long had a orientation towards Europe which belies its geographical location. Let us keep in mind that this was home to Nobels, Siemenses, and Rothschilds; that at the turn of the century its streets bustled not only with Russians, Azeris, and Armenians, but also with Germans and Swedes. For a hundred years, it has been the scene of daring investments and sophisticated commercial transactions. Much of the expertise needed for these developments was certainly drawn from abroad, but Baku itself has retained a certain depth of experience and sophistication as a result. Azerbaijan resumes its independence after a long hiatus with a rich history, a well-educated populace and a determination to reestablish its reputation as the center of learning and commerce for the Caspian region. I believe Azerbaijan will succeed in this aspiration.
Practically, this also means that Azerbaijan is further along the road to building a rich civil society than many other nations of the region. We see this in the wealth of civic organizations, the depth of professional circles, the existence of organized political parties, and the independence and objectivity (relatively speaking) of the press, among other things.
In the area of law reform, Azerbaijan is generally accorded a middle position in the Caspian Region, behind the region''s vanguard consisting of Georgia, Kazakhstan, and Kyrgyz-stan, but also far in front of states like Turkmenistan which have yet to make a serious foray into reform. Azerbaijan has earned its share of praise from some studying its modern law-making efforts, but at the same time it lags behind many of its contemporaries in extremely important areas such as the civil code and natural resources legislation. Azerbaijan is also remarkable in that it has developed a thriving private sector through inducing and supporting investment even while its privatization program has stagnated. In these remarks I will attempt a brief assessment of the progress Azer-baijan has made, but to meet time constraints and because a view of the road ahead is generally more useful than a study of the distance trod, I will focus on shortcomings rather than accomplishments. This may make the assessment seem a bit more negative than it should on balance be, but that seems a risk that this conference calls for.
I will focus on five basic areas: first, the constitutional dimension, by which I mean not only the elaboration of a written constitution, but also of a social consensus legitimizing government and providing a means for peaceful transition between leadership groups; second, the basic infrastruc-ture of the civil law, reflected in the Civil Code; third, in the network of other legal acts needed to provide a platform for commercial life and to induce and sustain investment in Azerbaijan; fourth, the status of the legal profession and the judiciary as guarantors of a rule of law system; and fifth, Azerbaijan''s privatization program. There are a number of other factors which could be taken into account and there are laundry lists of laws which could be reviewed, but I believe this list will provide a meaningful quick biopsy and will strike a reasonable balance between form and substance, not to mention the spirit of the law.
Constitution
Azerbaijan adopted its current constitution by referendum in November 1995. As in most states in the region, Azerbaijan has adopted a strong presidential system, vesting the president with broad rights to rule by decree. A legislature and judiciary are contemplated as coequal branches of government. Observers of the political environment in Azerbaijan are quick to note, however, that the president is paramount in this system. The legislature, which exercised an important check on the executive under the earlier, ill-fated Azerbaijan Popular Front government, and which facilitated and legitimized a peaceful transition from that government to the current regime, has played a steadily diminishing role in Azerbaijani society. In discussions I have conducted with key figures, including committee chairs of the parliament, I am regularly told that key decisions on legal policy are reached in the president''s apparat and that their ability to influence the preparation of drafts submitted for consideration is limited. While the executive has granted legislators room to operate and express independent views on some issues, that territory has generally shrunk over the last few years. Leaders of the parliament are quick to acknow-ledge that no bill on an issue that really matters to the executive moves forward or is enacted without the explicit urging of the president.
The courts similarly remain under the strong influence of the executive. This is a point so fundamental to the construction of a rule of law environment that I will revisit it under a separate heading.
For all the disruption which attended the early years of President Aliyev''s administration, that period saw a greater promise of political consensus formation and constitutional legitimization than we can find in Baku today. For this reason, the current trends towards providing legitimiz-ing mechanisms for political succession must be viewed as negative. I concur with Professor Martha Olcott''s conclusion that Baku has made a conscious decision in favor of a sort of dynastic succession and against an institutional approach. Such an approach may reflect Azerbaijani cultural predilections, but it is inconsistent with the interest in building a Weberian Rechtsstaat.
Civil Code
Azerbaijan is one of the last successor states of the former Soviet Union to fail to adopt a Civil Code. This failure is troubling legal analysts. Virtually the entire edifice of the nation''s legal regime rests on the Civil Code. Since no new Civil Code exists, the old, Communist-era Civil Code remains in force. That Code in turns rests on a rejection, indeed a vilification of market concepts and a limitation of personal freedom. While much new legislation has been adopted to create a foundation for a market system in the country, the absence of a Civil Code subjects all this legislation to potential attack. Azerbaijani lawyers would certainly point to a series of legal "escape hatches" here. For instance, the constitution adopts a market economy as a fundamental right of the citizenry (art. 59); the Law on Normative Acts provides that newer legislation supersedes inconsistent prior legislation (art. 50); the Law on Entrepreneurial Activity confirms the right of the citizenry to engage in certain types of commerce without regulation and others subject to licensing (e.g., art. 3). However, the fundamental rule remains that civil legislation is to be construed consistently with the framework of the Civil Code.
Notwithstanding the country''s declared commitment to transition to market norms, application of the Soviet-era Civil Code will produce threatening results for investors and domestic entrepreneurs. The magazine Euromoney''s recent conclusion that Azerbaijan offers investors "significant legal risk" takes this matter into account.
There is certainly a timing issue here. Azerbaijan adopted a series of pro-market measures and seemed well at work on a Code. Years have now passed and Azerbaijan''s failure to adopt a Civil Code can not be explained easily. High quality drafts reflecting German and French models have been in circulation for some time. Azerbaijan clearly does not lack the scholarly resources to tackle the task; but there is some question as to the political will to proceed. This failure is therefore an important warning light to investors.
Commercial Legislation
Azerbaijan has adopted a substantial body of legislation in the general commercial area, notably including laws on bankruptcy, pledges, banking, foreign exchange, several companies laws, and a law on leasing. When coupled with legislation for the promotion of foreign investment, this legislation is thought to create a generally satisfactory basis for foreign investment. Of these laws, two generally provide a good quick measure of the evolution of legal norms for a market economy: bankruptcy and pledge.
Test 1: Bankruptcy. For the former, the key question I would raise is whether creditors have room to maneuver, to obtain recourse against assets in which they have an interest, and the ability to directly affect any restructuring? The temptation in a transitioning system will be to retain a strong measure of state control over the process and therefore to undermine a robust assertion of creditor rights. In such systems, bankruptcies will be relatively uncommon and when they occur, they will be driven by government ministries and commissions, not by the direct interface of debtor and private sector creditor interests. Azerbaijan''s bankruptcy experience is still too fresh to allow for conclusions.
Test 2: Pledge. A similar test can be presented in the area of liens or encumbrances. Does the law allow a creditor to take security, whether moveable or immovable property? Is there a successful track record of creditor enforcement of such interests? The Azerbaijani pledge law seems generally adequate on reading, following the trend which has emerged in the CIS countries, but there are serious questions as to follow through. The law says that a pledge must be registered with an authorized state agency to be valid, and this agency has not yet been created. Pledge provides the potential of monetizing fixed assets and is thus vital to propel Azerbaijan''s capital starved economy. This shortcoming is therefore not just something for theoreticians to be concerned about. Moreover, this suggests that Azerbaijan is also not yet in a position to take the second test which would show adoption to market norms, at a time when mortgage foreclosures have been successfully completed in many CIS states.
Oil and Gas Legislation. Given the dominant role of the energy sector in Azerbaijan, the country''s lethargy in providing legislation in this area is also noteworthy. Important strides have been taken through the recent adoption of laws on energy, electrical power, and the exploitation of subsoil resources. However, a law on the development of oil and gas resources, long awaited and long circulated in draft, remains outstanding. At present Azerbaijan enacts each individual produc-tion sharing agreement as a law, through presidential decree followed by ratification by the parliament. This may be a practical protection of the rights of the PSA participants, but it hardly seems a sensible way for such an important oil state as Azerbaijan to proceed indefinitely. Surely Azerbaijan should be adopting oil and gas legislation which normalizes procedures in this area. This step can also certainly be taken grandfathering in the rights of existing investors so that their interests need not be disturbed.
PSAs. Azerbaijan''s position on production-sharing agreements (PSAs) is rather paradoxical. From the perspective of the oil and gas industry, Azerbaijan has taken a flexible and progressive posture. Together with Kazakhstan, it was among the first states to adopt this approach, and this step was certainly key to Azerbaijan''s success to date in attracting highly desirable industry investors. They generally give not only PSA contractors, but also their sub-contractors, immunity from various taxes, including payment of VAT, use of a withholding tax rate rather than the corporate profits tax (for subs), waiver of import and customs duties and similar benefits. Considering the exigencies Azerbaijan faced earlier on, this was certainly a wise posture to have adopted. When we take into account the sagging posture of Azerbaijani law reform on other points, such as oil and gas legislation and the civil code, however, some measure of concern is also appropriate.
Does Azerbaijan''s success in attracting investments through PSAs make a broader law reform program unnecessary? Perhaps there is reason for concern that some of the country''s policy makers feel this way. That would be unfortunate. PSAs are not a substitute for a broadly based legal regime which embraces market norms. The oil industry certainly appreciates this.
Tax Issues.Azerbaijan''s commercial sector is plagued by a proliferation of taxes, levies, and assessments of all sorts, and Azerbaijan is now long past due in adopting a comprehensive tax code. Fortunately, a draft tax code is on the table and may soon be adopted. This will be important evidence of progress on one front.
Legal Profession and Judiciary
Let us now tackle the crux of the matter: is Azerbaijan moving towards a rule of law state? Whatever elegantly crafted legislation it may have authored, how is this legislation applied? Does it all boil down to the decision of an autocrat? Will legal rules be applied if they run counter to his will? Few assurances given an investor or a domestic entrepreneur will mean much if this is the case. Sadly, the recent history of Azerbaijan in this regard is rather like the march of the janis-saries: two steps forward and one back.
A critical indicator of the rule of law environment is the status of the legal profession itself. Are lawyers able to organize freely, to practice independently, to zealously defend the interests of their clients even when this conflicts with the interests of the executive? This issue is studied carefully in a recent report of the International League for Human Rights, Restrictions on the Independent Legal Profession in Azerbaijan (1999). This report convincingly docu-ments the government of Azerbaijan''s recent campaign to block the formation of an independ-ent bar, to curtail the rights of practicing attorneys and to retaliate against attorneys whose only offense is that they represent individuals the government sees as its political adversaries. These efforts must be viewed on balance as a conscious attempt to undermine the development of a rule of law environment in the country. My own discussions with attorneys in private practice and with government attorneys in Azerbaijan suggest that those who keep out of "political" matters continue to enjoy a greater measure of freedom, but even in such cases, the ministry of justice has been quick to suggest that licenses of those who displease it can be quickly revoked or curtailed.
Will Azerbaijan take a second step back? A long-awaited Law on the Advocates Profession was recently unveiled by the ministry of justice. This law seeks to reintroduce Soviet-era concepts surrounding the College of Advocates and its prerogatives, and would effectively advance the use of this institution as an instrument for the control and intimidation of lawyers. Opposition to this law from the legal community is likely to be strongly felt, and its treatment by the parliament will be a test for the nation''s democratic process.
The position of the judiciary itself is not much different. While formal efforts have been taken to reinforce the independence of the judiciary and to shore up the separation of powers declared in the constitution, the practical application of these concepts remains outstanding. The picture cannot be painted in only dark shades, however. The quality of the bench seems generally very good in its upper tiers. The courts have also been willing on important occasions to issue decisions which would not endear them to those in government. A Constitutional Court decision outlawing the regime of residence permits in the city of Baku is a good case in point. Conversely, the judiciary has shown great reticence to reverse government decisions in the most politically sensitive cases. There are some fairly dramatic proofs of this, including a Constitu-tional Court decision supporting the registration of an opposition political party, withdrawn after the court was publicly chided by the minister of justice.
Privatization
Azerbaijan has a strong market economy now largely thanks to foreign direct investment which has spawned a healthy middle tier of service and consumer-oriented businesses, especially in Baku. The nation''s diversified industrial base remains largely in state hands. A privatization plan has been loudly heralded and well supported - with advisors, technical assistance, web sites, and other modern tools. The program attracted strong attention from Western capital markets, and a large portion of the nation''s privatization securities are held by some of the most sophisti-cated investors on Wall Street and in the City of London - such investment was in fact specifi-cally authorized and supported by the government. However, notwithstanding the govern-ment''s suggestion of fast-track privatization in 1998 and 1999, few assets and no really significant assets have been offered up. The vouchers will expire in August 2000, which hardly leave adequate time for a meaningful program to be completed. Obviously Azerbaijan''s posture here: first loudly trumpeting its program, then failing to come through on schedule - has raised concerns in the capital markets, and a failure to come through would severely jeopardize the nation''s standing on those markets. Privatization must continue to stand as a major policy question for the government; one which fundamentally tests its commitment to transition to a market economy.
Conclusion
This brief review suggests that Azerbaijan''s record on law reform generally is mixed and ambiguous. To be sure, some significant legislation has been adopted and foreign investors have been attracted through an effective employment of PSAs. Many of those investors must be anxious today about the faltering path of reform in the country. Certainly there are a series of important steps the country must take if it is to make the case for reform more convincingly. Moreover, earlier positive trends on a series of rule of law issues have been reversed. Democratic institutions are consequently being undermined, rather than strengthened, and a reversal of this trend is an essential first step if any others are ultimately to matter.