Having enjoyed a decade of energy-fueled prosperity, the leaders of Azerbaijan must now learn to survive in an era of cheap oil. 

The state in the South Caucasus is a prime example of what political scientist Andreas Schedler calls “electoral authoritarianism.” In other words, it is a political system that has the outward attributes of democracy but lacks genuine political competition or any public oversight of its government.

Oil and gas revenues have sustained this system for many years, and they still allow the current regime room for maneuver in both foreign and domestic policy. When oil prices were high, the huge profits from hydrocarbon export preserved stability in the country. They allowed the government to make a big impression by staging massive prestige events such as the Eurovision Song Contest and the European Games, and carrying out colossal construction projects.

But it is revealing that when oil prices were high, the lion’s share of Azerbaijan’s oil revenues was invested in physical capital, while human capital (educational and cultural projects) was neglected. For example, education spending totaled only 2.8 percent of GDP in 2008—2012. This is lower than in almost all of Azerbaijan’s post-Soviet neighbors. (In Moldova, the corresponding figure is 8.6 percent.) 

The economic situation in Azerbaijan is currently far from catastrophic. Inflation is under control and GDP growth is expected to clock in at 3.3 percent for 2015. However, growth forecasts had been much higher, and this is a big fall from the double-digit annual growth rates the country experienced during the 2000s. 

Azerbaijani Finance Minister Samir Sharifov recently presented gloomy budget forecasts for 2016, based on a projected oil price of $50 per barrel. They show that the government expects budget revenues to be down 25.1 percent compared to 2015 and oil revenues to account for only 53.5 percent of total revenues (compared to 65.3 percent in 2015 and 66 percent in 2014). 

The first serious casualty of the falling oil price was Azerbaijan’s hitherto strong currency, the manat, which was devalued in February 2015. The currency lost 33.5 percent of its value against the dollar in just one day, briefly causing panic among the population. 

The devaluation exposed the lamentable financial position of many Azerbaijani banks. Several banks were revealed to have been involved in large-scale credit schemes, having handed out bad loans worth millions of dollars, and participated in other financial malpractice.

The country’s largest bank, the International Bank of Azerbaijan, was especially hard hit and its chairman Jahangir Hajiyev had to “voluntarily” resign. An investigation showed that the bank had amassed close to 6 billion manats in unrecovered loans (worth more than $7.5 billion at the pre-devaluation exchange rate). Over several years these loans had been handed out to various businessmen linked with Hajiyev or invested in dubious business projects.

The economic woes of another oil-dependent state, Russia, present Azerbaijan with an additional challenge. 

More than 1 million Azerbaijani citizens work in Russia, and in 2014 their remittances were worth $1.2 billion even based on official figures. That contributed to Azerbaijan’s stability in many ways. Much of this money was used to purchase real estate in Azerbaijan. Now this source of cash from abroad is drying up and the purchasing power of Azerbaijanis is declining, as is clearly indicated by the shrinking number of sales in the local real estate market.

For now the Azerbaijani regime has sufficient resources to maintain the status quo. The question is how long it can protect itself against negative trends.

Thus far, the economic turbulence in Azerbaijan has not translated into political instability—although one long-serving minister, national security chief Eldar Mahmudov, was sacked on October 17.

On the whole, there has been almost no turnover in the Azerbaijani ruling elite since President Ilham Aliev came to power twelve years ago. The leadership has maintained stability through (sometimes preventive) repression and exploiting the political passivity of the population. 

Azerbaijan currently has no strong or organized opposition. Many of its former or potential leaders are now in jail. 

It is obvious that the system needs to undergo some kind of political change in order to survive, but it is unclear whether the political leadership has the political will to make meaningful reforms, rather than the 
superficial adjustments we have seen in the past.

Although political turmoil is unlikely at the moment, the prospect of it grows stronger as long as the economic situation continues to deteriorate. A major economic downturn could trigger public protests, especially in Baku. The unresolved Nagorny Karabakh conflict with Armenia is also an important variable and may promise new upheavals.

The state of the economy will be the key test. If oil prices continue to decline or remain at current levels, the economic welfare of the majority of the population will deteriorate. It will become much harder to predict the response of the population to rising prices, systemic corruption, nepotism, and job losses. 

Another negative scenario will play out if the business activities of Azerbaijani citizens in Russia are curtailed. If these businessmen cannot continue to support their families in Azerbaijan, they will come back home and most likely join the ranks of the unhappy and unemployed.

Azerbaijan—like Russia, Kazakhstan, and other post-Soviet states—is entering yet a new period of instability. It is difficult to predict the outcome. But it looks as though its rulers like their counterparts in neighboring petro-states, have been unable to take advantage of their windfall of energy revenues and cushion the country against future shocks.

Farhad Aliyev is an independent political analyst based in Baku.

  • Farhad Aliyev