South Caucasus and the Caspian: A View from Baku

A summary of SOCAR first-vice president Ilham Aliyev's remarks at the School for Advanced International Studies (SAIS) in Washington DC on October 22, 2002

South Caucasus and the Caspian: A View from Baku

The Honorable Ilham Aliyev

October 22, 2002

On October 22, Ilham Aliyev, first vice-president of the State Oil Company of Azerbaijan (SOCAR) and vice-chairman of the New Azerbaijan Party, spoke at the School for Advanced International Studies (SAIS) in Washington D.C. Aliyev is also a member of the Azerbaijani parliament and head of the country's delegation to the Parliamentary Assembly of the Council of Europe (PACE). His address was sponsored by the SAIS Central Asia-Caucasus Institute, the United States-Azerbaijan Chamber of Commerce, and Harvard University's Caspian Studies Program.

At the beginning of his remarks, Aliyev expressed his appreciation for the attention that the U.S. policymaking community has devoted to Azerbaijan. During his brief stay in the United States, he met with Vice President Dick Cheney, Secretary of Energy Spencer Abraham, Deputy Secretary of State Richard Armitage, and other leading members of the Bush administration— which Aliyev believes helped to demonstrate the importance that the U.S. places on Azerbaijan as a partner in promoting peace and prosperity in the Caucasus and Caspian region.

Aliyev reminded his audience that even though Azerbaijan has a very rich history and culture, it has only been an independent state for the last eleven years. According to Aliyev, the country has demonstrated remarkable progress during the last decade, especially considering Azerbaijan's situation during its first few years of independence— when the country faced an uncertain economic future, domestic political divisions, and Armenian aggression towards Azerbaijan.

After this introduction, Aliyev briefly talked about Azerbaijan's cooperation with U.S. energy companies, its participation in anti-terrorism operations, its accession into the Council of Europe, and its attempts to integrate into the international community. The rest of his remarks focused on two themes: (1) the Azerbaijani energy industry and the role it has played and will continue to play in advancing the country's overall economic development; and (2) The continuing conflict between Azerbaijan and Armenia over Nagorno-Karabagh and its impact on the stability of Azerbaijan and the region as a whole.

Azerbaijan's Energy Sector and National Economic Development

Despite the unresolved status of the Nagorno-Karabagh dispute, Ilham Aliyev explained that when President Heydar Aliyev came to power in 1993, the Azerbaijani government disarmed paramilitary groups that were trying to seize control of the country and negotiated a cease-fire with Armenia. This stabilization has helped the country's economic development.

While Azerbaijan's industrial oil production began at the end of the nineteenth century, it has made its most significant advances during the post-Soviet period. During the mid-1990s, the Azerbaijani government— realizing that it would not be able to achieve satisfactory results based solely on the country's own energy development experience— began a concerted effort to attract foreign investment. These efforts have been successful— foreign oil companies have already invested $6 billion on projects in the Azerbaijani energy industry and have committed to invest more than $10 billion over the next three years.

According to Aliyev, Azerbaijan has been very forward-looking in developing positive relationships with international energy companies, foreign governments, and international lending organizations— all of which have helped the government in Baku to establish the basis for a long-term plan of energy-driven economic development and diversification. Already, Azerbaijan's gross domestic product has grown by an average of 10 percent per year over the last several years, while inflation has remained stable at less than 2 percent. Over 70 percent of the country's growth has been created by the private sector, and Azerbaijan has taken measures— such as implementing land reform and establishing laws to protect foreign investment— to ensure that this growth can continue.

The commencement of Baku-Tbilisi-Ceyhan (BTC) Pipeline construction in September 2002 represented a major step in addressing one of Azerbaijan's most serious economic issues— transporting oil and gas from the Caspian Sea to the international market. This pipeline, which will cost $3 billion and will be capable of transporting 1 million barrels a day to the Turkish port of Ceyhan, will serve as Azerbaijan's "main export pipeline"— augmenting already-existing pipelines from the Caspian to Russian ports.

Perhaps most importantly, Azerbaijan has begun to use its oil revenues from the past decade to promote a stronger and more diversified domestic economy over the long term. Similar to Norway's strategy following the discovery of oil in the North Sea in the 1960s, Azerbaijan has created a state oil fund where it deposits its energy revenues. This fund— a transparent financial mechanism that has received much support and praise from international financial organizations— currently holds over $1.3 billion.

The government in Baku intends to use these funds to promote the development of new non-energy-related industries in Azerbaijan. Unlike other countries that have only used their oil revenues to plunge themselves deeper into the unpredictable international energy market, Azerbaijan is investing its oil revenues in fields like agriculture and financial services— which should help sustain the country's economy even after the current oil boom begins to decline.

Aliyev concluded his remarks about the Azerbaijani economy by indicating that he recognized that his country still faces considerable obstacles to progress— including high levels of unemployment, archaic infrastructure and businesses practices inherited from the Soviet period, and the need for greater privatization. At the same time, Aliyev said, it is important to recognize how far Azerbaijan has advanced over the last several years and to acknowledge its substantial potential for future economic development in both the energy and non-energy sectors.

Nagorno-Karabagh: Attempts at Moving Forward

In addition to the economic problems that plague most developing countries, Azerbaijan, Aliyev noted, has also had to deal with the painful reality that Armenia occupies 20 percent of Azerbaijani territory and that there are more than one million Azerbaijani refugees and displaced persons as a result of the Nagorno-Karabagh conflict of 1988-1994.

It is Aliyev's opinion that the international community is not very well informed about the specifics of the Nagorno-Karabagh conflict— a conflict in which he identifies Armenia as the aggressor violating Azerbaijan's territorial integrity. Aliyev reported that he made some progress on Nagorno-Karabagh issues during his meeting with the Parliamentary Assembly of the Council of Europe (PACE) earlier this year, but says that Nagorno-Karabagh continues to pose a serious threat to regional security because it is the "only place in Europe where the norms of international law do not work." It is Aliyev's view that in order to solve the conflict, Armenia will need to withdraw from the regions of Azerbaijan it has occupied and allow Azerbaijani refugees to return to these areas.

Aliyev noted that Nagorno-Karabagh, as an unstable region that is not under any effective state control, is the type of "black hole" that international criminal and terrorist organizations use as a base for their operations. He believes that Armenian terrorist groups are active in Nagorno-Karabagh and their actions have led to the deaths of over 2,000 people.

In his conclusion, Aliyev said that three emerging trends— the strengthening of U.S.-Azerbaijani relations, Azerbaijan's responsible strategies of development in its energy sector, and increased regional and international attention toward the specifics of the Nagorno-Karabagh conflict— will help Azerbaijan continue its progress toward political stability and economic modernization.

Question and Answer Session

During the question-and-answer session, Aliyev gave some short comments on his views of certain policy issues Azerbaijan faces at the moment. Some of the highlights included:

Azerbaijan's relationship with Russia— originally tense because of Russia's position on the Nagorno-Karabagh conflict— has improved substantially since Vladimir Putin became president of Russia in 1999. Azerbaijan and Russia have begun to cooperate on a wide array of economic and security issues.

The State Oil Company of Azerbaijan (SOCAR) will have a 25 percent share of the $3 billion BTC pipeline project and is in good shape to fulfill its financial commitments to this important energy transportation project.

Azerbaijan needs to exhaust all peaceful and diplomatic means available in trying to resolve the Nagorno-Karabagh conflict. However, this peaceful approach will require the United States to be more active in its foreign policy toward the Caucasus. Aliyev identified the repeal of the Section 907 sanctions of the United States' 1992 Freedom Support Act as an important priority for the Azerbaijani government.

Azerbaijan and Iran have agreed not to interfere with each other's internal affairs, but Azerbaijan remains very concerned about (and in close contact with) the more than 20 million Azerbaijanis who currently live in the Islamic Republic of Iran.

Summary by John Grennan, Caspian Studies Program