New era for Azerbaijan as it builds bridges with Gulf

New era for Azerbaijan as it builds bridges with Gulf

A short drive from the glitz of downtown Baku, the capital of Azerbaijan, through some Soviet-era housing estates and market towns, you can simply drive off the main road at Zabrat into the heart of the economy of this Caspian nation of 10 million people.
There, as far as the eye can see, are hundreds of old-fashioned “nodding donkey”-style oil rigs, each rising and falling gently in a steady rhythm with little mechanical clicks and purrs. Some are decades old, from a time long before independence from the crumbling Soviet Union in 1991. Others are much newer, showing that the old technology still works, keeping the crude flowing, which maintains
Azerbaijan’s relatively high standard of living compared to some of its neighbors in the Caucasus.
Other parts of the Azerbaijan oil industry are state-of-the-art, especially in the offshore fields in the Caspian. But the nodding donkeys are a metaphor for the Azerbaijan economy, demonstrating that, even as Azeri policymakers push through ambitious plans to diversify away from energy dependency, the traditional money-earners remain the core of economic activity.
They will also bring the familiar challenges associated with an oil-driven economy: Dependence on the swings and roundabouts of the global oil markets.
For a time after the collapse in the oil price in 2014, the Azerbaijan economy teetered on the brink. The currency, the manat, went into free fall, and there were at least two bone-jarring devaluations against the dollar. Emergency funds were taken out of the main sovereign wealth depository, the State Oil Fund of Azerbaijan (SOFAZ), to prop up the currency, but even that was not enough to halt the run, and the effects it had on standards of living.

Serious trade relations between Azerbaijan and Gulf countries have followed the growth in tourism numbers. 

Frank Kane

Now the manat has come to rest at a level roughly half the pre-2014 rate, which could be good news for exporters of anything other than oil. Importers, on the other hand, have had to get used to paying a lot more for the manufactured goods and consumer items bought from Europe, Russia and Asia.
The economy has learned to live with this state of affairs. After a sharp contraction in GDP after the oil shock, the International Monetary Fund is now forecasting a resumption of growth, by around 2 percentage points, this year. The recovery in the global oil price has helped a lot, of course. Current account surpluses are predicted this year and next.
Economists also say that the non-oil economy gathered strength in the first half of this year, with accelerated industrial production a highlight, as well as increased demand by domestic consumers.
That increased demand reflects a rather profound development: Azerbaijan, especially Baku and its surrounding area, has become a rather pleasant place to live, and to visit. A lot of money has been spent making the capital’s downtown district a glamorous center, belying the old image of Soviet dourness.
International sporting events — the annual Formula 1 Azerbaijan Grand Prix, international athletic competitions and football tournaments — provided the opportunity for a major makeover, and now the Old City district is a tourist trap to rival any in the region. Visitors from the Arabian Gulf and other Islamic countries seem to be in the majority, followed by Russians, with Asians also looking to see one of the historic stops on the old Silk Road.
The Azerbaijan government obviously thinks it is on to a winner here, especially in the Middle East tourism market. Visa restrictions on GCC residents have been significantly relaxed recently, with citizens and residents of most Gulf counties able to purchase visas on arrival.
Serious trade relations between Azerbaijan and Gulf countries have followed the growth in tourism numbers. Earlier this year, the governor of the Saudi Arabian General Investment Authority (SAGIA), Abdullatif bin Ahmed Al-Othman, led a delegation of businessmen from the Kingdom on a visit to promote bilateral trade and stimulate foreign direct investment. The UAE has also been ramping up its trade relations with Azerbaijan.
It is not all downtown glamor, however. Azerbaijan, like most of the post-Soviet republics, has a legacy of corruption and lack of transparency that does nothing for its rankings on the global “ease of doing business” charts. But the country has weathered the global financial crisis and the oil shock of 2014, and — global upsets apart — could be on the cusp of an era of economic transformation.

  • Frank Kane is an award-winning business journalist based in Dubai. Twitter: @frankkanedubai
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