Azerbaijan: Energy, reforms, COVID-19 and optimism
When Azerbaijan became the elected member of the United Nations Security Council in 2012-2013 for the first time in its independent history the achievement may have seemed surreal for this small country in the South Caucasus region. However, it was a long road for Azerbaijan to having overcome many imponderables along its way to make it to the top. Today Azerbaijan has managed to establish itself as an energy state, but not only the mere exporter of the crude, but also as the exporter of energy security. Azerbaijan is active on many international fronts and its trust on multilateralism, balanced and pragmatist foreign policy has earned it many friends and strengthened its partnerships.This piece aims to explore some important aspects of Azerbaijan’s current development, focusing first and foremost on energy and navigating from there to touching upon the reforms, then covering the country’s battle with COVID-19, alongside offering optimism from the bleak picture created by the pandemics.
Since the inception of its independence Azerbaijan has built reliable partnerships not only within its neighbourhood, but also with the EU, the U.S. and other countries in the West as well as East. Azerbaijan’s multi-vectored and pragmatic foreign policy, which is also very well aligned with its national (including economic) interests enabled it to build equally strong, well-thought and balanced relations with all partners. The only exception from this list is the neighboring Armenia, with whom Azerbaijan has no relations due to the existence of unresolved conflict over Azerbaijan’s Nagorno-Karabakh region. Azerbaijan’ s successful model of collaboration with its western partners has begot its ever-evolving energy cooperation with Europe. Together with some large multinational corporations that are its international partners in the West, Azerbaijan has established a successful model of energy cooperation through the construction of the Baku-Tbilisi-Ceyhan and the Baku-Tbilisi-Erzurum oil and gas pipelines—both of which transport hydrocarbons extracted from the Caspian Sea to international markets. It is on the cusp of commencement of the multimillion megaproject – the Southern Gas Corridor that stands as a valuable contribution to Europe’s energy security by not only being a mere provider of crude energy, but also by ensuring diversification of sources and routes. Azerbaijan’s energy strategy thus, during the last 25 years aimed at contributing to stability, cooperation and mutually beneficial partnerships in its neighborhood and beyond.The revenues acquired from Azerbaijan’s hydrocarbon resources have been channeled to the socio-economic development of the country; as a result, every aspect of Azerbaijan’s statehood has flourished.
Azerbaijan’s trajectory of becoming an “energy state” could be considered to be rather natural and therefore linear. The country became the motherland of the first industrially drilled oil well in the world in 1846. In 1899Azerbaijanwas the world frontrunner in oil production and refining and provided the half of oil production volume. It provided 75% of all fuel for the tanks, aircrafts and all sorts of artillery of the Soviet Army during the World War II in the fight against fascism. Azerbaijan has managed to become self-sufficient and economically independent state by virtue of its oil and gas projects upon the signature of the “Contract of Century” in 1994, despite the fact that it also had to deal with the occupation of its territories and bear the socio-economic burden of large army of refugee and IDP population created in the consequence of Armenia-Azerbaijan conflict. Its reliance on oil should therefore come as natural escape to deal with variety of challenges to its statehood.
Beyond oil, the weight of natural gas, which is a low carbon energy source is lately increasing, including in Azerbaijan, in the overall global energy balance. The growing role of natural gas in the 21st century has increased the importance of issues related to diversification of sources and routes as well as energy security. Azerbaijan, which has made its name largely as an oil country, has been working intensively to build international partnerships towards exploration of the country’s gas resources.
The estimated gas reserves of the country are 2,6 trillion cubic meters. The existing Baku-Tbilisi-Erzurum gas pipeline did not suffice for the exploration of these fields and transportation of large production volumes. The necessity to explore these reserves and turn them into a strategic commodity for energy security of a broader region begot the strategic project such as the Southern Gas Corridor.
Thus, the Southern Gas Corridor project, initiated in 2013 and inaugurated in May, 2018, has become an important chain of energy security, economic development and global partnership. This Corridor of 3500 km length consists of four integral parts – “Shah Deniz-2” project, Southern Caucasus Pipeline Extension (SCPX), Trans Anatolian Pipeline (TANAP), Trans Adriatic Pipeline (TAP). The significance of this project is also enhanced due to fact that it is the first tangible megaproject existing in Europe that unites all components of energy security. It involves close cooperation of seven nations – Azerbaijan, Georgia, Turkey, Greece, Bulgaria, Albania and Italy, participation of numbers of international oil and gas companies as well as the support of major financial institutions, like the European Bank for Reconstruction and Development (EBRD), the European Investment Bank (EIB) and Asian Development Bank (ADB).Together with its partners and through the Southern Gas Corridor, Azerbaijan is working towards the creation of European gas market that envisages competitiveness and diversification of sources and routes. This project requires solid partnership, continuous political and donor support.
In the spirit of this cooperation and respect for its commitments, Azerbaijan’s priority is to deliver first gas to Europe in 2020. Strategic importance of the Southern Gas Corridor is not only confined to Azerbaijan and the countries involved. This megaproject has the potential to expand to Balkans, Central and Western Europe as well, to attract new supplier, transit and consumer countries. BRUA project (Bulgaria-Romania-Hungary-Austria gas pipeline), IGB (Interconnector Greece Bulgaria) and IAP pipeline (Ionian Adriatic Pipeline) are the potential interconnecting pipelines that could deliver Shah Deniz gas to other destinations through the Southern Gas Corridor. The completion of the TAP as expected in 2020, will enable the import of about 8,8 billion cubic meters of Azerbaijani gas to Italy, with potential growth capacity of more than 10 billion cubic meters per year.
The works on all four segments of the Southern Gas Corridor project are successfully implemented. The inauguration of TANAP became the bedrock of the Southern Gas Corridor. Turkey is already receiving volumes of gas since the formal inauguration of the Southern Gas Corridor and as the completion of the project as this fall as expected, Europe will also start receiving 10 billion cubic meters of Azerbaijani gas per year. As of June 2020 Turkey is set to receive 6 billion cubic meters of gas. With the onset of the final implementation stage of the Southern Gas Corridor, successful completion of works on TAP become ever more important, since it is an essential element to deliver gas to Europe. With the completion of TAP, Azerbaijan will contribute to the energy security of Italy as well as of the countries in South Eastern Europe and will ensure the diversification of routes and sources and contribute to the de-carbonization efforts of the continent.
The Corridor was built with the real vision so that the future opportunities can also be explored. This is an expandable diversification network with the capacity to expand up to 31 billion cubic meters in SCPX and TANAP and doubling up to 20 billion cubic meters for TAP. It is stated that market demand tests for the Corridor’s possible extension are already being carried out and if conditions are suitable additional gas volumes could reach the EU and South-East Europe already within this decade. Such plans could though be challenged by virtue of the fact that the EU’s energy policies maybe changing in a long-term future with the adoption of the “Green Deal” which sets the stage for Europe’s becoming carbon-neutral by 2050. With EBRD becoming a “climate bank” and mostly focusing on public and private “green” investments, it will therefore not invest in any future fossil fuel projects, including gas, starting from 2022. However, it is stated that the situation with already functional projects like the Southern Gas Corridor could be assessed differently. As was voiced by the EU officials themselves, becoming carbon-neutral in fact does not mean that the EU will no longer need natural gas. Natural gas is also said to be a significant back up commodity for the renewables for some time.
The Southern Gas Corridor project also brings social benefits, such as new employment opportunities in the countries through which the Corridor passes, which doubtlessly, has positive impact on the economy of these countries.
The latest, 6th meeting of the Advisory Council on the Southern Gas Corridor that took place on 28 February, 2020 in Baku, offered another valuable opportunity to review the achievements in this field. It was reported that works were progressing at a steady pace and TAP is almost complete (93,5%as of March 2020). Growing number of countries joining the Advisory Council each year also testifies to the increasing interest to the project. Azerbaijan is about to complete this megaproject, which is a great stride towards strengthening Azerbaijan’s regional and global stance as an energy exporter. However, Azerbaijan acts not only as a mere exporter of crude energy, but also as an exporter of energy security by providing alternatives and diversification of routes and sources of energy.As President Ilham Aliyev said during the opening ceremony of the Southern Gas Corridor on May 29, 2018: “We are implementing such giant projects together with our partners and redrawing the energy map of the world”.
Looking beyond oil and Reforms unleashed
Beyond energy, Azerbaijan’s economy has also been witnessing major transformations since 2014. They say global trends are called “global” because of their global ramifications. Azerbaijan had to suffer two currency devaluations in 2015, nevertheless, it was not something that happened only to Azerbaijan. It was the period of economic perturbations in many countries brought by fluctuating oil prices in global oil markets since 2014. However, the country adapted fast by undertaking necessary measures to adjust to the associated challenges. Putting more premium on the development of non-oil sector of the economy and embarking on the development of its renewable energy sector in order to increase the share of renewable energy in overall energy balance of the country are some, however very direct examples of how Azerbaijan manages the challenges associated with fluctuating oil prices.
Before the onset of COVID-19 pandemics and the worldwide lockdowns that negatively affected everyday and economic life, including in Azerbaijan, forecasts on Azerbaijan’s economy was very optimistic and positive. For instance, in October 2019 the then Minister of Economy Shahin Mustafayev declared that “In 2020, real growth in Azerbaijan’s GDP will be three percent, including 1.6. percent for the oil sector and 3.8 percent for the non-oil sector. The growth of the non-oil industry is projected at 8.8. percent, and agriculture – at 4.8 percent”. His successor, a young and western educated former Minister of Taxes Michael Jabbarov later also reiterated this objective with a new and steady commitment to achieve more. Azerbaijan’s unemployment rate has dwindled from 5,02 percent in 2018 to 4,99 percent in 2019 and was projected to further decrease in the years to come. On another front, Azerbaijan aims to increase the share of renewable energy resources in the overall energy consumption balance of the country by 30% till 2030, while currently this number is 18-19%, including hydropower stations. It aims to hold auctions in 2020 in order to attract the best business partners for the development of renewable energy projects (mostly solar and wind) at specifically allocated sites of the country. In January 2020 it has signed implementation agreements of pilot projects on renewable energy with two leading companies of Saudi Arabia and United Arab Amirates – “ACWA Power” and “Masdar”, respectively, and more such undertakings could come in future.
Azerbaijan’s relations with the European Union – one of the biggest economic actors – is also developing dynamically. EU-Azerbaijan Strategic Partnership Agreement, unlike the Association Agreements and Deep and Comprehensive Free Trade Agreements envisaged by the Eastern Partnership (EaP) is based on more equal conditions for partnerships that capitalizes on mutually beneficial partnership for both sides, having thus, eliminated the need for Azerbaijan to one-sidedly comply with EU standards and expectations. The successful conduct of the second round of EU-Azerbaijan Security Dialogue in Baku on 19 December 2019 once again underscored common positions on political, economic, security and energy related issues, while also stressing the importance of continuing to work towards the finalization of EU-Azerbaijan Strategic Partnership Agreement. The open chapters within the Agreement are currently being negotiated and there is a genuine interest on both sides to find a common denominator soon.
Moreover, the country is undergoing a comprehensive reform process in all areas of its statehood and the very nature of the current reforms in all political, economic, administrative strata of Azerbaijan implies the peaceful transition of state management to younger generation that carry more zest and energy alongside also being competent for such a leadership. This does not, however, obviate the fact that older generation are also given their due respect and recognition for their service and their experience are valued and kept at hand’s reach if needed. This evolutionary example of “rejuvenation” of state management while maintaining the synergy of “institutional memory and experience” with “youthfulness and energy” is thought to deliver the needed results in the overall scheme of things.
The reforms have brought number of palpable changes in the state administration, the results of which are already showing in terms of concrete achievements and progress attained in various areas. The leadership of the country has chosen the path of “evolution” in its efforts to adapt the country to ever changing nature of international relations and boost the country’s resilience in the face of evolving global political, socio-economic and other challenges. The snap parliamentary elections held on 9 February was therefore also an important achievement that reshaped the composition of the Parliament and attracted many young parliamentarians. 1314 candidates (independents and representatives of 19 parties) were registered in the race for 125 seats in the Azerbaijani Milli Maclis and 50 per cent of the candidates were under 40 years old. For the first time in the history of independent Azerbaijan a female speaker of the Parliament, Sahiba Gafarova was elected.
COVID-19 and Azerbaijan’s response
Despite the positive picture above, when the scales of global pandemics acquired bigger proportions, Azerbaijan did not also remain immune to the contagion. The news about the first infection case broke on 28 February and the government was swift to close down country’s borders, restrict international and domestic transportation, schools in early March, and all the shopping malls restaurants, etc. gradually. The entire country was put into the lockdown and quarantine was enhanced incrementally as the situation so demanded. From 5 April onwards, people are only allowed to leave their houses for basic needs, like grocery shopping, pharmacy needs, attending the funeral of the closest family member via the SMS permission system. As of this writing there were 1197 coronavirus patients in the country with 351 cured, 13 dead and 833 active patients.
The special Coronavirus Support Fund was established with 19 March 2020 Presidential Decree and the government, and other type of organizations, entrepreneurs were very swift to extend financial support to the Fund. Moreover, the government prepared 9 programs worth 2,5 billion manats – 3 % of the GDP to support the economy and the entrepreneurship as well as social benefits containing compensations for unemployed population as well as educational fee rescue package for socially vulnerable parts of the population in the aftermath of the total lockdown of the economy. The idea is to put the economy back on track as soon as possible and weather the COVID-19 storm with minimum losses.
Obviously, pandemics has affected not only global health but also global economy. Some even compare its magnitude and potential effects to those of the Second World War, while others predict severe economic crisis unseen since 1929-1930. Azerbaijan obviously is not immune to the consequences of the pandemic. Granted, the acute slump in oil prices as a consequence of worldwide lockdowns and therefore suppressed demand for crude, and the failed OPEC+ endeavor to find a common denominator on 6 March, put further strain on the economy, which otherwise was on an upswing before the COVID-19. Azerbaijan’s 2020 budget has envisaged 55 USD per barrel of oil. However, with oil prices in the first two months of the year being above 60 USD and budget proceeds surpassing the expenditures for about 400 million manats in January alone, plus the proceeds from tax and customs services testifies to the increasing income to the state budget. Azerbaijan’s strategic currency reserves are estimated to be over 50 billion USD, which provides extra fiscal security. The overview of the extra financial reserves acquired since beginning of the year in fact enables to compensate for the losses incurred due to the coronavirus induced decline in oil prices.
This is more so, in the light of the recent OPEC+ deal, which pledged to reduce oil production by 9,7 million barrels per day (bpd) in May and June of 2020 (plus 300 thousand barrels the US will cut instead of Mexico’s proposed share), plus voluntary reductions up of 2,7 million bpd by Saudi Arabia, Kuwait and United Arab Amirates planned for April. The US, Canada, Indonesia, Norway and Brazil are thought to also cut their output by 4-5 million bpd, while oil production in Iran, Venezuela and Libya is expected to drop by 2,8 million bpd. as well. In total, 20 million bpd. oil is expected to be withdrawn from the markets, which should help to stabilize the market and maintain balance between supply and demand. Further cuts will be 7,7, million bpd. from July till end 2020 and 5,8 million bpd from January 2021 till April 2022.It is yet to be seen how the deal will operate under the current conditions and in future, but early market reactions have been rather positive.
The ramifications of COVID-19 and its impact on world economy and everyday lives of citizens are yet to be seen as the debate is still ongoing. However, one thing is clear that there will be no winners and losers of this global calamity as everyone is affected. So is Azerbaijan. However, Azerbaijan’s strong standing before the outbreak as an energy and reformer state and swift measures to contain the virus as well as operationalization of state support mechanisms can offer the cause for optimism that the country could quickly return back to normal and continue the works interrupted with greater rigor. There definitely is a political will and hopefully the way will be unhindered soon too.