The Economy Azerbaijan

The EconomyAzerbaijan 
 

Azerbaijan possesses fertile agricultural lands, rich industrial resources, including considerable oil reserves, and a relatively developed industrial sector. Utilization of those resources in the Soviet period, however, was subject to the usual distortions of centralized planning. In the early 1990s, economic output declined drastically. The major factors in that decline were the deterioration of trade relations with the other former Soviet republics, the conflict in Nagorno-Karabakh, erosion of consumer buying power, and retention of the ruble alongside the national currency. In 1994 the economy remained heavily dependent on the other former republics of the Soviet Union, especially Russia.

The Work Force 

According to Azerbaijani statistics, the work force numbered 2.7 million individuals in 1992. Agriculture was the largest area of employment (34 percent), followed by industry (16 percent) and education and culture (12 percent). In the industrial sector, the oil, chemical, and textile industries were major employers. In spite of the standard communist proclamation that employment was a right and employment was virtually full, large-scale, chronic unemployment had already emerged in the late 1980s, especially among youth and the growing ranks of refugees and displaced people. In 1992 unemployment was still officially characterized as a minor problem, affecting some 200,000 people, but in fact the Azerbaijani government vastly underreported this statistic. Underreporting was facilitated by the practice of keeping workers listed as employees in idled industries. Funds set aside by the government to deal with unemployment proved woefully inadequate. One Western economic agency estimated the 1992 gross national product as US$18.6 billion and the average per capita GNP as US$2,480, placing Azerbaijan sixth and eighth in those respective categories among the former Soviet republics.

Economic Dislocations 

The general economic dislocations within the Soviet Union in the late Gorbachev period hurt Azerbaijan by weakening interrepublic trade links. After the breakup of the Soviet Union, trade links among the former republics weakened further. Azerbaijani enterprises responded by establishing many new trade ties on an ad hoc basis. Although some moves were made toward a market economy, state ownership of the means of production and state direction of the economy still dominated in early 1994.  

Despite the economic turmoil caused in 1992 and 1993 by the demise of the Soviet Union and the conflict in Nagorno-Karabakh, the Azerbaijani economy remained in better condition than those of its neighbors Armenia and Georgia and some of the Central Asian states. According to estimates by Western economists, gross industrial production plunged at least 26 percent in 1992 and 10 percent in 1993.  

In 1992 poor weather contributed to a decline in production of important cash crops. Crude oil and refinery production continued a recent downward spiral, reflecting a lack of infrastructure maintenance and other inputs. Inflation took off in early 1992, when many prices were decontrolled, and accelerated throughout the year, reaching an annual rate of 735 percent by October. Inflation for 1993 was estimated at 1,200 percent, a figure exceeded only by rates for Russia and a few other CIS states. Officials tried unsuccessfully to protect the standard of living from inflation by periodically increasing wage payments and taking other measures. In his New Year's message in January 1994, Aliyev acknowledged that during 1993 Azerbaijan had faced a serious economic crisis that led to further declines in the standard of living, but he promised that 1994 would witness positive changes.

Agriculture 

The major agricultural cash crops are grapes, cotton, tobacco, citrus fruits, and vegetables. The first three crops account for over half of all production, and the last two together account for an additional 30 percent. Livestock, dairy products, and wine and spirits are also important farm products.  

In the early 1990s, Azerbaijan's agricultural sector required substantial restructuring if it was to realize its vast potential. Prices for agricultural products did not rise as fast as the cost of inputs; the Soviet-era collective farm system discouraged private initiative; equipment in general and the irrigation system in particular were outdated; modern technology had not been introduced widely; and administration of agricultural programs was ineffective.  

Most of Azerbaijan's cultivated lands, which total over 1 million hectares, are irrigated by more than 40,000 kilometers of canals and pipelines. The varied climate allows cultivation of a wide variety of crops, ranging from peaches to almonds and from rice to cotton. In the early 1990s, agricultural production contributed about 30 to 40 percent of Azerbaijan's net material product, while directly employing about onethird of the labor force and providing a livelihood to about half the country's population. In the early postwar decades, Azerbaijan's major cash crops were cotton and tobacco, but in the 1970s grapes became the most productive crop. An anti-alcohol campaign by Moscow in the mid-1980s contributed to a sharp decline in grape production in the late 1980s. In 1991 grapes accounted for over 20 percent of agricultural production, followed closely by cotton.  

Production of virtually all crops declined in the early 1990s. In 1990 work stoppages and anti-Soviet demonstrations contributed to declines in agricultural production. The conflict in Nagorno-Karabakh, the site of about one-third of Azerbaijan's croplands, substantially reduced agricultural production beginning in 1989. In 1992 agriculture's contribution to NMP declined by 22 percent. This drop was attributed mainly to cool weather, which reduced cotton and grape harvests, and to the continuation of the Nagorno-Karabakh conflict. The conflictinduced blockade of the Nakhichevan Autonomous Republic also disrupted agriculture there.  

An estimated 1,200 state and cooperative farms are in operation in Azerbaijan, with little actual difference between the rights and privileges of state and cooperative holdings. Small private garden plots, constituting only a fraction of total cultivated land, contribute as much as 20 percent of agricultural production and more than half of livestock production. Private landholders do not have equal access, however, to the inputs, services, and financing that would maximize their output.  

The Azerbaijani Ministry of Agriculture and Food runs procurement centers dispersed throughout the country for government purchase of most of the tobacco, cotton, tea, silk, and grapes that are produced. The Ministry of Grain and Bread Products runs similar operations that buy a major portion of grain production. Remaining crops are sold in the private sector.

Industry 

During World War II, relocated and expanded factories in Azerbaijan produced steel, electrical motors, and finished weaponry for the Soviet Union's war effort. The canning and textile industries were expanded to process foodstuffs and cotton from Azerbaijan's fields. Azerbaijan's postwar industrial economy was based on those wartime activities. Among the key elements of that base were petrochemical-derived products such as plastics and tires, oil-drilling equipment, and processed foods and textiles. In 1991 the largest share of Azerbaijan's industrial output was contributed by the food industry, followed by light industry (defined to include synthetic and natural textiles, leather goods, carpets, and furniture), fuels, and machine building. Significant food processing and cotton textile operations are located in Gyandzha in western Azerbaijan, and petrochemical-based industries are clustered near Baku. The city of Sumgait, just north of Baku, is the nation's center for steel, iron, and other metallurgical industries.  

The Soviet-era Azerbaijan Oil Machinery Company (Azneftemash) company controls virtually all of Azerbaijan's oil equipment industry. Once a major exporter of equipment to the rest of the Soviet Union, Azneftemash has remained dependent since 1991 on imports of parts from the other former Soviet republics. The economic decline and the breakup of the union has disrupted imports and caused an estimated output reduction of 27 percent in the Azerbaijani oil equipment industry in 1992.

Energy 

Azerbaijan has ample energy resources, including major hydroelectric generating capacity and offshore oil reserves in the Caspian Sea. Despite what amounts to an overall excess of production capacity, fuel shortages and transport problems disrupted generation in the early 1990s. In 1991 Azerbaijan produced 23 billion kilowatt-hours, but near the end of 1992 the country had produced only 16 billion kilowatt-hours. Electricity is generated at major hydroelectric plants on the Kura, Terter (in western Azerbaijan), and Aras rivers (the last a joint project with Iran). A larger share of power comes from oil-fired electric power plants, however. In the late Soviet period, Azerbaijan's power plants were part of the Joint Transcaucasian Power Grid shared with Armenia and Georgia, but Azerbaijan cut off power to Armenia as a result of the conflict over NagornoKarabakh .  

Azerbaijan has exported oil and gas to Russia since the late nineteenth century. The birthplace of the oil-refining industry at the beginning of the twentieth century, Azerbaijan was the world's leading producer of petroleum. During World War II, about 70 percent of the Soviet Union's petroleum output came from the small republic. After World War II, when oil output from the Volga-Ural oil fields in Russia increased, Azerbaijan lost its position as a dominant producer of Soviet oil. When the Soviet Union disintegrated, Azerbaijan was producing 60 percent of Soviet oil extraction machinery and spare parts but less than 2 percent of the union's oil.  

Azerbaijan's four major offshore oil fields in the Caspian Sea are Gunesli, Cirak, Azeri, and Kepez. In 1992 the Gunesli field accounted for about 60 percent of Azerbaijani oil production. Crude oil production has decreased in recent years, mainly because of a weak global market, well maturity, inadequate investment, and outdated equipment. According to Azerbaijani estimates, for the first seven months of 1993 compared with the same period in 1992, crude oil production declined 7.1 percent, gasoline refining 2.8 percent, and diesel fuel production 19.9 percent. These rates of decline compare favorably, however, with those experienced in the oil production and refining industries of Russia, Turkmenistan, and other former Soviet republics in the early 1990s.  
 

Some oil is shipped by train to Black Sea ports in Russia and Ukraine, and some is shipped by tanker to northern Iran. Pipeline shipment has been slowed by infrastructure problems. One old oil pipeline from Azerbaijan to the Georgian port of Batumi on the Black Sea is inoperable, and the Russian pipeline is unavailable because that line is already at capacity. Azerbaijan's oil production is processed at two refineries near Baku. Because domestic oil production has not matched refining capacity in recent years, the refineries also process Kazakh and Russian oil.  

Russia, Ukraine, and other former Soviet republics have been involved in contentious negotiations with Azerbaijan over oil payment. Azerbaijan has sought prices close to world market rates for its oil as large payment arrearages have developed with several customer states. Azerbaijanis seek "fair payment" for their oil from Russia, pointing out that during the Soviet period Azerbaijani oil was sold far below market prices to support the Soviet economy.  

Azerbaijan has encouraged joint ventures and other agreements with foreign oil firms, and a consortium has been formed with Russia, Kazakhstan, and Oman to build an oil pipeline to Mediterranean, Persian Gulf, or Black Sea ports. In the planning stage, Russia advocated a Black Sea route, whereas Western oil companies, also interested in Azerbaijan's oil, preferred a Mediterranean terminus for a pipeline used in common. In March 1993, Turkey and Azerbaijan agreed on a pipeline traversing Iran, the Nakhichevan Autonomous Republic, and southern Turkey to reach the Mediterranean. In 1993 other negotiations defined terms of exploitation by eight Western oil companies in two Caspian oil fields and established a profit-sharing ratio between Azerbaijan and its partners. In late 1993, Russia's role in the oil industry also increased with the signing of new bilateral agreements.  

Azerbaijan has proven natural gas reserves of 2 trillion cubic meters, and a much larger amount is present in association with offshore oil deposits. Although the price of natural gas in Azerbaijan has remained low compared with world prices, in 1991 about half the gas brought to the surface was burned off or vented, while consumption of fuel oil increased. Since 1991 Azerbaijan's production has declined to a level that meets only about 35 percent of domestic needs, which amounted to 17 billion cubic meters per year in 1993. The major sources of natural gas imports are Turkmenistan, Kazakhstan, and Iran. Experts consider that exploitation of untapped natural gas deposits would enhance Azerbaijan's domestic fuel balance and provide substantial export income.