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CAUC ASUS ANA LYTI CAL DIGES T No . 47, 18 Febr uar y 2013 9
Oil and Political Stability in Azerbaijan: e Role of Policy Learning
By Farid Guliyev, Bremen, Germany
Abstract
is article discusses several mechanisms by which oil wealth has sustained authoritarian rule in Azerbaijan.
While the prevailing focus on patronage spending and repression is undoubtedly accurate, it is neverthe-
less incomplete because it does not account for oil’s adverse effects that can potentially destabilize a coun-
try’s political-economic system. e article argues that the Azerbaijani leaders’ ability to draw lessons from
the past experiences of other oil-rich countries and to borrow successful policy models helped the govern-
ment to mitigate the adverse effects of economic petro-dependence. e example of the State Oil Fund of
the Republic of Azerbaijan (SOFAZ) illustrates the role that policy learning played in the regime’s survival.
Public Spending and Repression
Oil and politics in Azerbaijan are inextricably con-
nected. Over the past two decades oil wealth has sus-
tained the autocratic rule in Azerbaijan. e question
is: how? Many observers believe that the main trans-
mission mechanism is greater state spending on patron-
age and the infrastructure of repression. In other words,
oil-fueled state expenditures nurture the patronage net-
work on which the regime is based, while tamping down
potential opposition. After the peaceful hereditary trans-
fer of power in 2003, Ilham Aliyev found himself in a
situation in which he was less secure and more depen-
dent than his father on the support of the ruling coali-
tion. In order to assert his authority, he had to offer
more patronage resources to the entrenched elite and
to punish would-be plotters from among the elite. e
purging of presumably disloyal members from the elite
occurred in 2005, when Aliyev dismissed several min-
isters he suspected of plotting a coup. In order to secure
the support of the remaining elites, oil revenues provided
much-needed patronage in the form of government pro-
curement contracts, public sector jobs, subsidies and
other state expenditures. Resources distributed through
the state bureaucracy based on patron-client relations
with low transparency and weak legal oversight pro-
vided fertile ground for the proliferation of corruption.
More specifically, the new oil boom beginning in
the early 2000s generated large rents that Aliyev used
to increase public expenditures. Following the oil boom,
total government revenue increased from 2 billion Azer-
baijani manats (AZN) in 2004 to more than 19 billion
in 2008, according to the IMF. At the same time, total
expenditure increased six-fold, from 2 billion AZN in
2004 to almost 12 billion AZN in 2008. Of more than
$80 billion in oil revenues accumulated in the state oil
fund, 60 percent (about $50 billion) was transferred to
the state budget and from there directed to finance vari-
ous projects (see Caspianbarrel, January 20, 2013,
http://
bit.ly/VGk tb9). e reserves of the fund currently stand at
$34 billion. Its budget approved for this year estimates
the revenue to be $14.6 billion and the expenses—$17.1
billion (see Trend.az, January 2, 2013,
http://bit.ly/VykDo5
).
If the current spending pattern continues, a new World
Bank study estimates that the oil fund’s assets will drop
to only $1 billion as early as 2016 (see
http://bit.ly/YQu5DW
).
e government also took measures to strengthen
the defense and security establishments, with some of
this funding allocated to the internal security forces.
e defense budget is expected to rise from $3 billion
in 2012 to $3.7 billion this year (Fox News, January 16,
2013, http: //fxn.ws/SIGLe9). e Azerbaijan security and
police forces are well-paid by average salary standards
and enjoy a somewhat privileged status. Well equipped
and loyal, these forces are used to curb opposition in
society. As the awareness of corrupt transactions in Azer-
baijan has risen, societal groups began to demand more
transparency and accountability from the government.
e government’s reaction was to restrict access to free
media and to crack down on activists. Journalists, youth
bloggers, political and civil society activists have come to
be perceived by the government as a threat. ese groups
are the main target of state repression today (Human
Rights Watch, 2010, http://bit.ly/LlWjMR). is focus may
be related to the state elites’ fear that more transparency
and greater openness may reveal corruption and under-
mine regime legitimacy in the public’s eye.
In short, the regime’s ability to remain in power to
a large extent depends on Aliyev’s ability to provide
patronage to his elites and to counter the opposition to
his rule, which in turn is a function of the amount and
stability of oil revenue. e less oil revenues there are,
the smaller the chances that the ruler will be capable
of retaining his grip on power. Yet, this explanation is
insufficient, as it does not account for the fact that oil
is a notoriously unstable source of fiscal revenue for the
state. Price hikes and fiscal volatility can potentially lead
to economic crises, as during the collapse of oil prices
in 2008, which, if not properly managed, can lead to
regime breakdown. erefore, to gain a more complete
understanding of oil’s impact on domestic political sta-
CAUC ASUS ANA LYTI CAL DIGES T No . 47, 18 Febr uar y 2013 10
bility we need to explain how the Azerbaijani regime
was able to withstand the harmful effects of oil reve-
nue volatility.
Policy Learning
Just as ideas spread around the world, so do policy mod-
els. In designing solutions, policy makers in one country
look for successful models from other countries and draw
lessons from their experiences. is process is known
as lesson drawing, policy diffusion or policy learning.
Taking advantage of knowledge about how to deal
with the problems of natural wealth management, the
Azerbaijani regime borrowed policy solutions and inno-
vations drawn from the experiences of other “resource
cursed” countries. is useful knowledge about policies
was transferred via international organizations (and their
economic expert communities), especially the IMF and
the World Bank. e most crucial of these was the pol-
icy model of an oil fund.
So how did Azerbaijan adopt an oil revenue manage-
ment fund? As early as 1998, the IMF recommended that
the Azerbaijani government create an oil fund to man-
age the effects of Dutch disease and adverse exogenous
shocks. According to the economists at the IMF, the cre-
ation of an oil fund helped a number of resource-rich
countries to solve problems associated with oil booms,
like exchange rate appreciation and inflation, and to
shield their economies from potential external supply
shocks. Norway’s State Petroleum Fund (established in
1990) and Kuwait’s Future Generations Fund (set up in
1976), were presented as successful examples. Earlier in
the 1980s, Norway and Oman were victims of oil price
shocks. is negative experience stimulated the search
for a mechanism to protect the domestic economy of
oil-rich states and the solution was found in creating oil
funds, which, although different in their institutional
structure and operational modes, have the same pur-
pose of stabilizing fiscal revenue.
On the IMF’s advice, in January/February 2000 the
Azerbaijani government sent a high-ranking delegation
to Norway to learn from the “Norwegian model.” Dur-
ing the trip, the delegation met with Norwegian offi-
cials and familiarized themselves with the legal frame-
work and operational mechanisms of the Norwegian oil
fund. SOCAR’s president, who led the delegation, said
after the mission returned to Baku: “We acquainted
ourselves with the functions and mission of the Nor-
wegian oil fund, with the goals toward which funds are
disbursed, and the sources of replenishment,” but added
that, “careful study of the Norwegian experience does
not mean our fund will use the same scheme. Azerbai-
jan will work out its own mechanism for administer-
ing the Oil Fund.”
In a similar vein, the Fund’s webpage acknowledges
that the experience of other countries was used as “the
reference point,” but a model that fit local specifici-
ties and needs was chosen (see ht tp://bit.ly/XkJl6g). One
of the Azerbaijani government’s long-standing oil con-
tract partners, Norwegian Statoil, proudly declares its
role in transferring the Norwegian model to Azerbaijan:
“Together with Norwegian authorities, we pro-
moted experience transfer from the Norwegian model
for administering the petroleum industry to the Azer-
baijani authorities and its state oil company SOCAR.
We also helped to facilitate substantial assistance from
Norwegian governmental bodies, such as the Norwe-
gian Central Bank and the Ministry of Finance, which
culminated in 1999 in the establishment of the State Oil
Fund of the Republic of Azerbaijan (SOFAZ), based on
Norway’s own oil fund experience, to avoid overheating
the economy and to safeguard the prosperity of future
generations.” (see http://bit. ly/W5sSTf)
ere were three reasons why the Azerbaijani gov-
ernment decided to create an oil fund through policy
transfer. First, the government realized that effective
revenue management was instrumental to maintaining
economic stability. Second, creation of an oil fund was
a good way to demonstrate to Western governments
and investors, as well as domestic civil society groups,
its commitment to transparency. ird, the govern-
ment wanted to keep good relations with the interna-
tional financial institutions (IFIs), which provided finan-
cial support and policy advice in many other policy
areas. e IFIs demanded that the Azerbaijani author-
ities adopt a set of rules for proper management of oil
wealth. In other words, external “conditionality” also
played a role.
e Azerbaijani oil fund is held to be transparent. It
received the UN Public Service Award in the category
of “Improving transparency, accountability and respon-
siveness in the public service” and was certified as com-
pliant by the Extractive Industries Transparency Initia-
tive (EITI) in 2009. In 2007, the Fund won the highest
score for transparency among sovereign wealth funds,
setting it on a par with Norway. e Fund’s staff is about
70 professional cadres, many of whom were educated
or trained abroad.
e oil fund has become a crucial instrument of fiscal
policy in Azerbaijan. Consider the impact of the 2008
economic crisis on Azerbaijan. Following the drop in oil
prices to around $30 a barrel in 2008, Azerbaijan’s fis-
cal revenues fell by 35 percent in 2009. To cover for the
fiscal shortage, the government increased the amount of
the annual transfer from the oil fund to the state bud-
get from about $4.8 billion in 2008 to $6.3 billion in
2009. is measure was important to maintain fiscal
CAUC ASUS ANA LYTI CAL DIGES T No . 47, 18 Febr uar y 2013 11
stability during the crisis years. As a result, in the words
of the IMF advisers, although the Azerbaijani economy
“was not immune” to the global economic crisis, it with-
stood its impact “relatively well” (see IMF, May 2010,
http://bit.ly/Xq9d0J).
Conclusion
As has been shown in the analysis above, oil rents pro-
vided a valuable source of patronage for the regime. Oil
revenues allowed the president to increase public spend-
ing and to expand the patronage network, which lim-
ited the space for political opposition groups. Increased
spending on coercive structures as well as an increased
use of repression against political activists helped keep
societal opposition weak. By keeping monopoly control
over the media and restricting access to public informa-
tion, the regime effectively denied citizens the right to
scrutinize government expenditure projects.
But oil was also the source of instability as during
the world economic crisis in 2008–2009. In effect, oil-
induced external shocks tested the ability of the regime
to meet and overcome potential crises. e government
managed to respond to oil’s adverse effects by setting up
a savings fund in anticipation of the oil boom. More-
over, it developed limited capacity (with insulated tech-
nocratic staff ) in the selected key policy area of oil reve-
nue management, which helped the regime to manage
revenue volatility and other adverse consequences of its
petro-dependence. Policy transfer was essential for the
government’s ability to mitigate the pernicious effects
of oil volatility.
e challenge ahead for the Azerbaijani elites is
to transition to a life after petroleum. Oil production
already has started to decline. In 2012, the amount of
oil produced was 43 million tons, which is 2.4 million
tons less than in the previous year (see CESD, Janu-
ary 18, 2013, http://bit.ly/XT BuOE). e key question now,
as Revenue Watch Institute economic analyst Andrew
Bauer put it, is: “Once these resources [government oil
and gas revenues] dry up and there is no other source
of revenue to replace them, how will political stability
be maintained?” (see http://bit.ly/QUcKqt).
About the Author
Farid Guliyev is a PhD candidate in the School of Humanities and Social Sciences, Jacobs University Bremen, Germany.
is essay draws on the author’s article: Farid Guliyev, “Oil and Regime Stability in Azerbaijan,” Demokratizatsiya
21:1 (2013): 113–147. For further information on Demokratizatsiya, please visit http://www.gwu.edu/~ieresgwu/programs/
demokratizatsiya.cfm
