Azerbaijan's during 30 years of independence: quantitative and qualitative

assessment of institutional aspects of transition process

Gubad Ibadoghlu, senior policy expert of Economic Research Center

Assessments of the social, economic, and political achievements of the Republic of

Azerbaijan, which regained its independence on October 18, 1991, over the past 30 years
requires a retrospective approach. Over the past 30 years, our country has taken steps
from administrative management to a market economy in the economy, from a one-party
system to a multi-party system in politics, from social security to social solidarity in the
sphere of social protection of the population. We will make separate assessments in the
areas listed in this article. First of all, let's look at the changes in the political sphere on
the basis of the formation of institutions.

Transition process in the political sphere

The Republic of Azerbaijan, ruled by the Kremlin for 70 years in a one-party and
authoritarian political system within the USSR, launched reforms in all areas after
regaining its independence. However, the June 4, 1993, uprising put an end to a policy
based on the separation of powers between the executive, the legislature, and the
judiciary, which played an important role in the formation of governance institutions.

The Constitution of independent Azerbaijan, adopted in 1995, – the first such a document
for independent Azerbaijan. This Constitution has been amended three times by national
referendums in 20021, 20092, and 2016.3 All three times, Azerbaijan has held a
controversial referendum on constitutional amendments that are expected to strengthen
the grip on power of President Ilham Aliyev and his family.
Earlier, by the end of 1991, a permanent body of the Supreme Soviet of 360 people - the
50-member National Council - was established.4 Since 1995, this function has been
performed by the Milli Majlis, and since then, non-free and non-transparent elections to
the Milli Majlis for 125 seats have been held every five years. During this period, for the
first and last time, members of the Milli Majlis were elected in a mixed format in the

1 https://www.legislationline.org/documents/id/15022
2 https://www.venice.coe.int/webforms/documents/default.aspx?pdffile=CDL-AD(2009)010-e
3 http://www.e-qanun.az/framework/897

4 http://www.msk.gov.az/az/elections/milli-meclise-seckiler/

Electronic copy available at: https://ssrn.com/abstract=3953713

parliamentary election - 100 MPs with a majority vote and 25 MPs with a proportional
voting system. Proportional voting was abolished in a referendum in 2002, and this
amendment had a negative impact on the activities of political parties. Over the past
period, the monopoly on supreme decisions, the dominance of the ruling party in the
political arena, the growing dependence of parliament and courts on the central
executive, the establishment of the ruling family and family dictatorship over capital have
led to a concentration of political power in one hand in Azerbaijan. During this period,
due to the lack of free, fair, and transparent electoral institutions, the presidential5,
parliamentary6, and municipal elections were rigged, and violations were reflected in the
reports7 of international observers.

Despite the fact that 30 years have passed since the restoration of independence, so far, a
parliament to control the executive branch, an independent judiciary to administer justice
and repeal unconstitutional laws, a free press and non-governmental organizations to
exercise public control over the activities of the government have not yet been established
in Azerbaijan. Neither active citizens, who support the independence of these
institutions, nor the state of law, which ensures the rule of law and equality before the
law, have been formed. At present, there are a police regime8 that does not respect human
rights and an authoritarian governance system that violates political rights but partially
guarantees economic rights in Azerbaijan. It is also clear from international experience
that even full economic freedoms cannot last long and be sustainable without political
guarantees.9 Therefore, economic and political institutions must operate simultaneously,
they must support each other, they must be developed through civic participation, public
control, and accountability.

Despite the fact that 30 years have passed since the restoration of independence,
administrative and fiscal decentralization reforms have not been carried out in
Azerbaijan. In the local administration of the administrative territories of the regions
inherited from the Soviet era, the secretaries of the district party committees of the
Communist Party are currently replaced by the ruling party's corrupt chief executives,
and the local councils operating in settlements and villages are currently replaced by

5 https://assembly.coe.int/nw/xml/XRef/Xref-XML2HTML-en.asp?fileid=24781&lang=en
6 https://www.osce.org/files/f/documents/7/e/457585_0.pdf
7 https://www.osce.org/odihr/elections/azerbaijan

8 https://www.hrw.org/az/report/2016/10/20/302161

9 https://musavat.com/mobile/news/demokratiyasiz-inkisaf-hikmet-hacizadenin-yazisi_496982.html

Electronic copy available at: https://ssrn.com/abstract=3953713

territorial executive offices. Although the municipal elections, held for the first time in
1999, are repeated every five years, they have lost their meaning. Because municipalities
do not have the functions and responsibilities of local government. 10 The financial
independence of municipalities with limited powers and self-government has not been
ensured. Municipalities with limited financial resources are dependent on state budget
subsidies. Since the main taxes in Azerbaijan are state taxes, payments are directed to the
republican budget, there are no shared taxes, and local taxes are gradually depleted.11

During this period, despite the ratification of the European Charter of Local Self-
Government12 by Azerbaijan in 2002, the transition from a system of appointment of the
mayors of the cities of republican subordination and the capital Baku to an elected system
has not been ensured over the past 30 years. At present, Azerbaijan is the only member
state of the Council of Europe without a mayoral institution. However, the establishment
of a mayoral institution representing the population in Baku is an effective, transparent,
and opinion-oriented governance mechanism, as well as a commitment of the
Government of Azerbaijan to the Council of Europe. Such that Recommendation No. 126
of the Congress of Local and Regional Authorities of Europe on Local and Regional
Democracy in Azerbaijan13, adopted in 2003, recommends that the competent authorities
of the Republic of Azerbaijan adopt a law relating to the capital city as soon as possible,
and this law should provide for setting up a local public administration acting at overall
city level run by a council directly elected by the citizens. Although the next document of
the Council of Europe, Recommendation 326 on Local and Regional Democracy in
Azerbaijan14, adopted in 2012, reiterated the need for the capital city of Azerbaijan to be
governed by an elected municipality, this important institution of local governance has
not been formed in the last 30 years. This problem was also identified in the monitoring
reports15 of the rapporteurs of the Council of Europe, who visited Baku on February 23-
25, 2021, on the preparation of a report on local and regional democracy in Azerbaijan.

As for regional governance in Azerbaijan, in this area, too, Azerbaijan has preferred the
approach that existed in the former USSR. The republic was divided into 14 economic

10 http://www.erc.az/files/reports/ERC_Municipialities%20in%20Azerbaijan.pdf
11 https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3109999
12 https://rm.coe.int/168007a088

13 https://rm.coe.int/local-and-regional-democracy-in-azerbaidjan-rapporteurs-mr-a-lloyd-mr-/168071a39d

14 https://rm.coe.int/local-and-regional-democracy-in-azerbaijan-rapporteurs-j-wienen-nether/168071aa18

15 https://rm.coe.int/monitoring-of-the-application-of-the-european-charter-of-local-self-go/1680a2a356

Electronic copy available at: https://ssrn.com/abstract=3953713

regions. 16 As the division into economic regions was based on geographical principles, it
did not play an important role in the formation of competitive relations between the
regions, nor in the management of the regions. For this reason, the disproportion between
the development of the regions and the development of Baku has increased. As a result,
the country is divided into two completely different poles in terms of socio-economic
development. Baku and Absheron peninsula, which geographically cover only 5% of the
country's territory but have at least 75-80% of the country's economic potential are at one
pole, and the provinces that cover 95% of the country's geography but have only 20-25%
of the country's economic potential are at the other pole.17

During this period, structural reforms in central government did not lead to significant
changes. Such that despite the fact that the number of public legal entities 18 established
in Azerbaijan after 2015 exceeded 50, the number of ministries currently performing the
functions of central executive power in Azerbaijan is 17, the number of state committees
is 7, and the number of state services and agencies is 7. 19 It cannot be considered an
optimal management structure for a population of 10 million, up to 3 million of which
are living abroad. Furthermore, in some central government agencies that still pursue
public policy (eg, Ministry of Agriculture20, Ministry of Transport, Communications, and
High Technologies21, etc.), policy-making and regulatory functions are not separated, and
there are still parallel structures in the central executive (for example, the Presidential
Administration22 operates between the Secretariat of the First Vice President23 and the
Office of the Cabinet of Ministers24).

In the last 30 years, the staffing policy has not been adapted to modern requirements. The
only change was that the communist nomenklatura was preferred in the first decade of

16 https://apa.az/az/xeber/resmi-xeber/azerbaycanin-iqtisadi-rayonlarinin-yeni-bolgusu-tesdiqlenib-
ferman-651583
17 https://bakuresearchinstitute.org/az/paytaxt-v%C9%99-%C9%99yal%C9%99tl%C9%99r-%C9%99sas-

sosial-iqtisadi-f%C9%99rql%C9%99r/
18 Azərbaycanda devalvasiyadan sonra yaradılan publik hüquqi şəxslərin siyahısı,

https://banker.az/az%C9%99rbaycanda-devalvasiyadan-sonra-yaradilan-publik-huquqi-
s%C9%99xsl%C9%99rin-siyahisi/
19 Mərkəzi icra hakimiyyəti orqanları, https://nk.gov.az/az/page/57/

20 https://www.agro.gov.az/az

21 https://mincom.gov.az/az/

22 https://president.az/administration/structure

23 https://president.az/first-vice-president/services

24 https://nk.gov.az/az/page/59/

Electronic copy available at: https://ssrn.com/abstract=3953713

public administration, the oligarchs in the second decade, and the managers in the third
decade. However, their appointment was not transparent, their activities did not take into
account the requirements of rotation and accountability standards, which is why the
negative aspects of public administration in Azerbaijan, such as nepotism, corruption,
and regionalism, have been existing for 30 years since independence.

Transition process in the economic sphere

In the first decade of the 30 years since the collapse of the USSR, post-Soviet countries
have taken a similar course of transition from command economy to market economy.
Azerbaijan, like other socialist countries, has launched reforms to liberalize prices,
liberalize trade, and denationalize property on the basis of the Washington Consensus25,
which is considered a political recipe for development and transition. Although the first
decade created differences between post-Soviet countries in the pace (shock therapy and
gradual) of transition to a market economy, in the second and third decades, the
differences became more pronounced in political governance (democratic and
authoritarian). Although Azerbaijan began the transition to a market economy late in the
first decade, its pace was high; however, the authoritarian rule, which was formed mainly
in the second decade and strengthened in the third decade, overshadowed reforms in
both the political and economic spheres, slowed down the transition period, and reduced
its scope.

Prior to the start of the transition process, Azerbaijan's performance was lagging behind
that of neighboring Armenia and Georgia. Such that in 1989, the GDP per capita on
purchasing power parities was $ 5,530 in Armenia, and $ 5,590 in Georgia. In 1985-1989,
the average annual growth was 2.7 percent in Armenia and 2.4 percent in Georgia.
Although the level of industrialization in Georgia (43 percent) was lower than in
Azerbaijan, the corresponding figure in Armenia (55 percent) was higher than in
Azerbaijan.

The GDP per capita of Azerbaijan, which was part of the Soviet Union for 70 years, on
purchasing power parities was $ 4,620 in 1989, the average annual growth was 0.8 percent
in 1985-1989, and the share of industry in GDP was 44 percent at that period.26

25 https://www.piie.com/publications/papers/williamson0204.pdf
26 De Melo et al (2011)

Electronic copy available at: https://ssrn.com/abstract=3953713

After collapce of Soviet Union, the first decade of Azerbaijan's 30-year independence was
characterized by a transition economy, during this period, GDP declined, then revived;
prices rose sharply, then stabilized; fundamental changes took place in the structure of
GDP due to the increase in the share of services; the share of the private sector in GDP
increased; investment initially declined, then rose; unemployment and poverty rose.
Azerbaijan was not a unique country by these characteristics, and similar processes were
recorded in other post-Soviet countries as well. However, these countries differed in the
speed and format of transition to a market economy. Such that while the initial share of
the private sector in GDP was 10 percent in Azerbaijan, 15 percent in Georgia, 30 percent
in Armenia in 1991, this figure was 70 percent in Georgia, 75 percent in Azerbaijan and
Armenia in 2007.27 While the figures for Azerbaijan, Georgia, and Armenia remained
unchanged in 2008, the share of the private sector in GDP in Belarus increased by 5
percent compared to the previous year and amounted to 30 percent. As can be seen, in
terms of quantity, Azerbaijan does not differ from other post-Soviet countries in the
transition economy. As for the main feature that distinguishes Azerbaijan from other
post-Soviet countries, this can be explained primarily by the country's rich natural
resources and the fact that the main oil and gas fields were put into operation jointly with
foreign companies on September 20, 1994. In this regard, the 1st Production Sharing
Agreement (PSA)28 signed for the development of the Azeri-Chirag-Gunashli (ACG) field
for 30 years has played an invaluable role in attracting foreign investment, increasing
production, and increasing export earnings. Such that from the date of signing of the PSA
until January 1, 2021, more than $ 95.1 billion has been invested in Azerbaijan's oil
industry.29 At the same time, from the beginning of industrial oil production in
Azerbaijan until January 1, 2021, more than 2.11 billion tons of oil and more than 900
billion cubic meters of gas have been produced 30 such that about 40 percent of oil
production and more than half of gas production fall to the share of the period of
independence. The total revenues from the ACG field from 2001 to September 1, 2021,
amounted to $ 152,893 million.31 Oil revenues in Azerbaijan are divided into three parts.

27 https://www.ebrd.com/transition-report
28 https://www.bp.com/az_az/azerbaijan/home/who-we-are/operationsprojects/acg2/_srin-mueqavil_si---
milli-uur-strategiyas.html
29 https://socar.az/socar/assets/documents/az/socar-financial-reports/Maliyye%20hesabatlari%202020.pdf

30 https://apa.az/az/xeber/senaye-ve-energetika/azerbaycanda-indiyedek-2-mlrd-tondan-cox-neft-hasil-

edilib-664817
31 https://oilfund.az/fund/press-room/news-archive/1502

Electronic copy available at: https://ssrn.com/abstract=3953713

1) SOFAZ’s direct revenues, 2) revenues from foreign oil companies to the state budget
in the form of profit tax, 3) SOCAR’s revenues for share participation.

Electronic copy available at: https://ssrn.com/abstract=3953713

The inflow of oil revenues to SOFAZ mainly occurred in 2008-2014. Such that in 2001-
2020, SOFAZ's direct oil revenues amounted to more than $ 165 billion, of which more
than two-thirds, $ 112 billion, fell to those years.32 (See Figure 1)

Figure 1. SOFAZ’s oil revenues, in millions of US dollars.

2020 5510
2019 11190
2018 10360
2017 7070
2016 5900
2015 7670
2014 16230
2013 17330
2012 17410
2011 19800
2010 16310
2009 10172
2008 14532
2007 2185
2006 1107
2005 705
2004 323
2003 355
2002 289
2001 221
0 5000 10000 15000 20000 25000

Source: State Oil Fund of Azerbaijan

2008-2014, when the bulk of oil revenues was generated, is also characterized by a
slowdown in Azerbaijan's transition to a market economy. Such that the trend of
transition indicators of the European Bank for Reconstruction and Development (EBRD)
presented in Table 1 shows that Azerbaijan's position has deteriorated in dynamics and
compared to the Eastern Partnership (EaP) countries (except Belarus). This situation can
be seen in Table 1.

TI 199033 TI 199534 TI 200035 TI 200536 TI, 200937 TI 201438

33 https://www.ebrd.com/publications/transition-report-archive
34 www.ebrd.com/documents/comms-and-bis/pdf-transition-report-1995-english.pdf?blobnocache=true
35 www.ebrd.com/documents/comms-and-bis/pdf-transition-report-2000-english.pdf?blobnocache=true

Electronic copy available at: https://ssrn.com/abstract=3953713

 Armenia 1.0 2.1 2.6 3.2 3.18 3.44
Azerbaijan 1.0 1.6 2.4 2.8 2.63 2.89
Belarus 1.0 2.1 1.5 1.9 2.07 2,2
Georgia 1.0 2.0 2.9 3.1 3.11 3,5
Moldova 1.0 2.6 2.7 2.9 3.00 3,3
Ukraine 1.0 2.2 2.5 3.0 3.09 3,3
Table 1. EBRD Generalized Transition Indicator39 (TI)

Source: EBRD reports on transition economy for different years

As can be seen from Figure 1 and the dynamics of the EBRD's generalized transition
indicator presented in the table, during the peak period of oil revenues (2008-2014), the
pace of Azerbaijan's transition to a market economy slowed down. To find out how and
why all this happened, let's look at the structure of transition indicators40 for 1989-2014
prepared by the EBRD. According to the EBRD's latest six-component transition
assessment indicators41 published in 2014, Azerbaijan's position compared to the Eastern
Partnership countries is presented in Table 2.

Table 2. EBRD Component Assessment of Transition Indicators in 201442

Large- Small- Governance Price Trade and Competit

scale scale and liberalizati forex ion policy
privatizati privatizati enterprise on
on on

35 www.ebrd.com/documents/comms-and-bis/pdf-transition-report-2000-english.pdf?blobnocache=true
36 www.ebrd.com/documents/comms-and-bis/pdf-transition-report-2005-english.pdf?blobnocache=true
37 https://www.ebrd.com/publications/transition-report-archive

38 https://www.ebrd.com/publications/transition-report-archive

39 According to the EBRD methodology, the indicator is rated between 1 and 4, and 1 is the starting point

for all countries.

40 https://www.ebrd.com/transition-indicators-history

41 https://www.ebrd.com/news/publications/transition-report/transition-report-2014.html

42 According to the EBRD methodology, indicator 1 is considered low, and indicator 5 is considered high.

Electronic copy available at: https://ssrn.com/abstract=3953713

 restructurin
g
Armenia 3.7 4.0 2.3 4.0 4.3 2.3
Azerbaijan 2.0 3.7 2.0 4.0 4.0 1.7
Belarus 1.7 2.3 1.7 2.7 2.3 2,0
Georgia 4.0 4.0 2.3 4.3 4.3 2.0
Moldova 3.0 4.0 2.0 4.0 4.3 2.3
Ukraine 3.0 4.0 2.3 4.0 4.0 2.3

Source: EBRD

As can be seen from Table 2, the worst situation in Azerbaijan in terms of the components
of the transition to a market economy is related to competition policy. In this area,
Azerbaijan ranks last compared to the EaP countries. For Azerbaijan, the next weak links
in the transition to a market economy are large-scale privatization and governance and
enterprise restructuring, on which the Azerbaijan Investment Holding (AIH) is currently
working. This suggests that the work in this area has been significantly delayed. The
situation with the transition to a market economy in Azerbaijan through small-scale
privatization, price liberalization, and trade and foreign exchange system is satisfactory.
Compared to the EaP member states, Azerbaijan is ahead of only Belarus in terms of both
large-scale and small-scale privatization, price liberalization, trade and foreign exchange
system, and governance and enterprise restructuring, and has reached the same level as
Moldova in the transition to a market economy on the last three components.

Although significant steps have been taken in Georgia to move from an administrative-
command system to a market economy after the collapse of the USSR, the country has
not implemented an adequate competition policy on the first five components. In the field
of competition, along with Azerbaijan, there is still work to be done in Belarus and
Georgia as well, which makes it necessary to strengthen antitrust policy in the country.

Finally, in terms of the quality of the transition, Azerbaijan's position in this indicator,
calculated by the EBRD for 2017-2019 on 6 components, is not bad compared to the EaP
member countries. The latest situation in 2019 can be seen in Table 3.

Electronic copy available at: https://ssrn.com/abstract=3953713

Table 3. Quality of transition to market economy in 201943

Competitive Well- Green Inclusive Resilient Integrated

governed

Armenia 4.97 5.78 5.72 5.97 6.40 5.45

Azerbaijan 4.39 5.79 5.35 4.94 3.97 5.59

Belarus 5.17 5.15 6.22 6.63 4.16 5.43

Georgia 4.98 6.40 5.32 5.14 6.19 6.35

Moldova 4.36 4.81 4.68 5.58 5.82 4.94

Ukraine 4.77 4.78 5.87 6.21 5.67 4.75

Source: EBRD

As can be seen from the table, Belarus is the leader in terms of competitive, inclusive, and
green development components in the quality of the transition among EaP countries,
Georgia is the leader in well-governed and integrated development components, and
Armenia is the leader in the resilient development component. Although Azerbaijan's
position is relatively high in integrated and well-governed development components, it
is unsatisfactory in terms of other components, especially the resilient development
component. One of the main reasons why the situation with the resilient development
component is worse than others can be explained by the dependence of the Azerbaijani
economy on oil and gas-related indicators and the fact that the expected results have not
been achieved in 30 years due to the lack of diversification of the national economy. Such
that during the reporting period, the share of the oil sector in GDP in 2019 was 38.3
percent.44

Thus, the quantitative and qualitative assessment of the transition to a market economy
during the 30 years of Azerbaijan's independence shows that the transition period is not
over yet. In particular, there is a need for comprehensive reforms to address the
challenges of large-scale privatization, governance and enterprise restructuring, and
most importantly, competition policy.

43 According to the EBRD methodology, indicator 1 is considered low, and indicator 7 is considered high.
44 https://oilfund.az/report-and-statistics/report-archive

Electronic copy available at: https://ssrn.com/abstract=3953713

During the period re-independence, the Azerbaijani economy is going through a long
and various stages of transition from administrative management to market economy.
During this period, economic development went through several cycles: first, the crisis
(1992-1995), then, the revival (1996-2004), the rise (2005-2006), the stagnation (2006-2010),
the decline ( 2011, 2015, and 2020), and again the stagnation (2012-2014, 2016-2019) and
the decline (2020).45 This situation can be seen in Figure 2.

40 34.4
27.9
30 25.5

20
10 11.1 9.9 9.4 10.2 9.2 10.6 9.4
10 5.8 7.4 5.8
4.8 2.8 1
2.2 2.5
1.3 0.1 1.5
0

2012

2016

2019
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011

2014
2015

2017
2018

2020
-10
-0.7 -1.5 -3 -4.3
-11.8
-20
-22.6 -23.1
-30

Figure 2. GDP growth in Azerbaijan in 1991-2020, in percent

Source: World Bank

Calculations show that between 1995 and 2003, the gross domestic product was 90.1
percent, and excluding the impact of the pandemic on the economy, real GDP growth in
2019 was 3.4 times higher than in 2003. Thus, the period as a whole was characterized by
positive results as a result of the rapid average annual growth observed in the economy
of Azerbaijan for the last 30 years of independence, especially in the second decade, when
exports began through the main oil pipeline. Although the country has shown positive
growth due to sustainable oil revenues, the national economy failed to ensure
institutional development.
Looking at the development trajectory of the Azerbaijani economy over the past 30 years,
it can be observed that it has gone through five cycles (crisis, revival, rise, stagnation, and
decline) in two stages. Based on the analysis of macroeconomic indicators of Azerbaijan,
which had a less oil-dependent economy in the first decade of independence and a highly

https://datacommons.org/place/country/AZE?utm_medium=explore&mprop=amount&popt=Economic
45

Activity&cpv=activitySource%2CGrossDomesticProduction&hl=en

Electronic copy available at: https://ssrn.com/abstract=3953713

oil-dependent economy for the next two decades, forecasts show that the national
economy will not be able to get rid of this dependence in the fourth decade. Such that the
Production Sharing Agreement (PSA) signed on September 20, 1994, for the 30-year
operation of the Azeri-Chirag-Guneshli (ACG) fields was extended on September 14,
2017, until 2049.46 According to the Ministry of Energy, 541.2 million tons of oil had been
produced from ACG by July 1, 2020, of which 541.1 million tons of oil (including
condensate) was exported for the same period.47 Currently, the main buyer of Azerbaijani
oil is Italy.48

Under the second PSA, a new $ 6 billion platform with a daily production capacity of
100,000 barrels is expected to be launched in 2023.49 The platform is expected to produce
300 million barrels of oil during the operation period. This will ensure the long-term
leading role of oil in the Azerbaijani economy.

More than $ 36 billion had been invested in the development of the ACG field in the first
25 years, and the total revenues from the ACG field alone amounted to $ 152 billion 893
million in the last 20 years, from 2001 to September 1, 2021. Furthermore, total revenues
from the sale of gas and condensate from the Shah Deniz field since 2007 amounted to $
3 billion 797 million.50 Thus, as of September 1, 2021, the State Oil Fund of Azerbaijan
received $ 156.690 billion in revenues from the ACG and Shah Deniz fields together.
Moreover, by September 2020, payments to the state budget from the corporate income
tax of foreign companies amounted to $ 17 billion, and SOCAR's earnings from
shareholding in ACG amounted to $ 14 billion.51 Thus, Azerbaijan's total oil and gas
revenues from the development of the ACG and Shah Deniz oil and gas fields alone over
the past 20 years amounted to $ 187 billion 690 million. As of July 1, 2021, $ 44 billion 104
million 900 thousand of these funds have been directed as SOFAZ assets.52 Taking this
into account, it can be said that over the past two decades, an average of $ 7 billion of oil

46 https://www.bp.com/az_az/azerbaijan/home/who-we-are/operationsprojects/acg2/_srin-mueqavil_si---
milli-uur-strategiyas.html
47 https://az.trend.az/business/3266899.html

48 https://www.yeniavaz.com/az/news/170233/azerbaycan-hansi-olkelere-neft-ve-qazi-neceye-satir-tam-

siyahi
49 https://www.bp.com/az_az/azerbaijan/home/who-we-are/operationsprojects/acg2/azeri-central-east-

development-project.html
50 https://oilfund.az/fund/press-room/news-archive/1502

51 https://musavat.com/news/esrin-muqavilesi-bize-ne-verdi-ekspert-reqemleri-aciqladi_736333.html

52 https://oilfund.az/report-and-statistics/recent-figures

Electronic copy available at: https://ssrn.com/abstract=3953713

revenues has been invested in the Azerbaijani economy. As these funds were mainly
directed to the national economy in 2005-2014, the annual GDP growth rate in those years
was high.

Looking at the development trajectory of the Azerbaijani economy over the past 30 years,
it can be divided into 5 cycles. The main indicators characterizing the economy for these
cycles are presented in Table 4.

Table 4. Macro-indicators characterizing the Azerbaijani economy for 1991-2020

Indicators 1991-1994 1995-1999 2000-2006 2007-2014 2015-2020

(recession) (recover) (pick) (stagnation) (recession)
Real GDP growth rate -14.55 7.12 18.1 4.87 -0.36
Oil GDP growth rate - - 24.7 5.3 - 1.8
Non-oil GDP growth - - 11.8 9.3 0.5
rate
Inflation 1,052.8 85.2 4.7 7.2 6.2
Investments - 57.5553 34.27 13.15 -10.96
Source: The indicators were calculated by the author based on the statistics of the SSC
and the Central Bank.

Although the first production at the ACG field was recorded in 1997, as can be seen from
the table data, based on the growing role of oil in the economy of Azerbaijan, GDP has
been calculated separately for the oil and non-sector sectors since 2000. Although oil
revenues accounted for more than half of GDP after 2006, this ratio has changed since
2013 with a decline in the percentage of oil in GDP. Along with the decline in oil
production since 2012 and the fall in oil prices since 2014, the increase in economic growth
in the non-oil sector also played an important role in this change.

While the inflation figures officially announced during the 30 years of independence do
not fully reflect the real situation, they allow us to assess the dynamics. Such that the
hyperinflation recorded during the crisis years was replaced by double-digit inflation
during the revival period, and prices stabilized in the following periods. As for
investment, its growth rate continues to decline compared to previous periods, and

53 The calculation for this group characterizes the years 1996-1999.

Electronic copy available at: https://ssrn.com/abstract=3953713

preventing its decline by increasing investment in the economy is one of the most
important tasks facing the government today.

One of the key obstacle of the transition to a market economy were denationalization
of property, as well as the liberalization of prices, trade, and markets.

Although Azerbaijan has taken rapid and comprehensive steps in the transition to a
market economy in the first decade, the transition in the next two decades has not been
sustainable, and sometimes even backward steps have been taken. Such that although
most prices have been liberalized, there is still administrative control over some prices.
At present, the prices (tariffs) of goods (works, services) are regulated by the Resolution
of the Cabinet of Ministers of the Republic of Azerbaijan No. 178 dated September 28,
2005, through the Tariff Council, and their number has been expanded to 49 in the last 15
years.54

Since a number of steps have been taken to denationalize property, which is one of the
most important reforms of the transition period, during the 30 years of independence,
according to official data for 2020, the share of the private sector in GDP was 81 percent.
However, in 2019, 85% of the value-added was created in the private sector. As the
COVID-19 pandemic limited the activities of the private sector, the share of the public
sector increased again last year. In 1995, when privatization began in Azerbaijan, the
share of the private sector was 34 percent. As privatization in agriculture, trade, and
catering was completed by 2000, the dominance of the private sector in the formation of
GDP emerged here. In the same year, the share of the private sector in GDP increased by
70.8%, while 99% was recorded in agriculture and 98.3% in trade and services. In the first
decade of independence, the private sector had the largest share in agriculture and trade
due to the fact that the process of privatization of state property more covered small and
medium enterprises.

The increase in oil exports allowed the share of the private sector to increase and reach a
maximum by 2008. As most of the companies operating in Azerbaijan are private under
international agreements, this factor has also had an impact.

The share of the private sector in the industry, which is the leading sector of GDP, is 85.6
percent. This figure is 84.6 percent in construction, 80.8 percent in communications, 80

54 http://www.tariffcouncil.gov.az/documents/NK-1.pdf

Electronic copy available at: https://ssrn.com/abstract=3953713

percent in transport, 53.2 percent in social and other services. The share of the private
sector in GDP in these areas lags behind the national average due to the fact that state-
owned companies (SOCs) continue to operate in the last 30 years through subsidies, as in
the Soviet era. Such that during the period, the level of abandonment of credit and
subsidy policies, which weakened the financial discipline at the level of these enterprises,
and efforts to develop corporate governance were weak. One of the reasons for this is the
poor implementation of bankruptcy legislation and the lack of measures to strengthen
competition and corporate governance. No significant and sustained measures have been
taken in SOCs to tighten budget constraints and effectively promote corporate
governance.55 Due to the lack of corporate governance in SOCs, these companies have not
been able to make progress in accessing significant new investments at the enterprise
level, as well as in increasing transparency and accountability, as they face a shortage of
financial investors. Thus, due to the increase in losses in the activities of the SOCs and the
continuation of their debt obligations at the expense of the state budget, by the Decree56
of the President of the Republic of Azerbaijan dated November 5, 2020, the list of state-
owned companies and enterprises, as well as economic societies with state share, to be
transferred to the management of the Azerbaijan Investment Holding (AIH) was
approved. The main task of the AIH is to improve the management system of these
companies and restructure them. The list consisting of the companies under the
management of the AIH includes the State Oil Company of the Republic of Azerbaijan,
Azerbaijan Airlines CJSC, Azerbaijan Railways CJSC, Azerbaijan Caspian Shipping
Company CJSC, Baku Metro CJSC, AzerGold CJSC, Azerenergy OJSC, Azersu OJSC,
Azerishig OJSC, Azerbaijan Amelioration and Water Management OJSC, Azercosmos
OJSC, International Bank of Azerbaijan OJSC, Azer-Turk Bank OJSC, State Insurance
Commerce Company of the Republic of Azerbaijan, Azeristiliktechizat OJSC, Tamiz
Shahar OJSC, and companies subordinated to the Ministry of Transport,
Communications, and High Technologies of the Republic of Azerbaijan (Baku
International Sea Trade Port CJSC, Aztelekom LLC, Azerbaijan International Telecom
(AzInTelecom) LLC, Azerpocht LLC, Baku Telephone Communication LLC). The
activities of the AIH so far have been the establishment of Supervisory Boards in the
above-mentioned SOCs.

55 https://documents1.worldbank.org/curated/ru/741211532553730650/pdf/AUS0000257-Ajarb-PUBLIC-
2018-JUNE-AZE-Final-Technical-Note-AZ-SOEs-FINAL.pdf
56 https://president.az/articles/45523

Electronic copy available at: https://ssrn.com/abstract=3953713

Currently, 70 percent of employment is provided by the private sector. The share of the
private sector in total tax revenues exceeded 72 percent. Most of the new jobs are created
in the private sector. In 2020 alone, 96.3 percent of new jobs created in the country were
in the private sector. All this confirms that the expected results of the activities of the
SOCs have not been achieved in Azerbaijan during the 30 years of independence.

Although the state control over exports and imports in the field of foreign trade
regulation has been largely eliminated, the policy of export subsidies by the state has
recently become more widespread. On January 18, 2016, the Presidential Order57 on
Additional Measures to Stimulate the Export of Non-Oil Products and the Presidential
Decree58 on Additional Measures to Promote Investments were signed. The Rules59 for
Issuing Investment Promotion Documents were approved by the Presidential Decree.
According to the statement of AZPROMO60, 27 million manats of export incentives have
been paid by 2021.

According to the State Customs Committee on the results of 2020 61, Azerbaijan exchanges
goods and services with 183 countries. During this period, the number of foreign trade
participants was 45,462, of which 81.8% were natural persons and 11.2% were legal
entities. Only 3.23% of legal entities fell to the public sector.

Although the application for Azerbaijan's accession to the World Trade Organization
(WTO) was submitted to the WTO Secretariat on June 23, 1997, and the Commission on
Preparations for WTO Membership was established by the Order the Cabinet of Ministers
No. 175s dated August 22, 2003, the country is not yet a member of the leading institute
for foreign trade liberalization, which includes 164 countries.62

The national currency, which has an important position in foreign trade, has a stable
exchange rate and is regulated by the state. Although the Azerbaijani manat, which has
been in circulation since August 15, 1992, and which has been the sole means of payment

57 https://president.az/articles/17535
58 http://www.e-qanun.az/framework/31870
59 https://www.azerbaijan-news.az/posts/detail/investisiya-tesviqi-senedinin-verilmesi-qaydasi-88439

60 https://azertag.az/xeber/AZPROMO_Indiyedek_sahibkarlara_27_milyon_manat_ixrac_tesviqi_odenilib-

1698859
61 https://customs.gov.az/modules/pdf/pdffolder/93/FILE_E7B3B9-B46FB9-AA0331-12CB1C-A0451C-

E46BD4.pdf
62 https://wto.az/azerbaycan-ve-utt/muraciet-ve-uzvolma-xronologiyasi/

Electronic copy available at: https://ssrn.com/abstract=3953713

since January 1, 1994, was denominated63 since 2006 and was devaluated twice in 2015
after sharp depreciations in 1995 and 1999, the exchange rate of the national currency in
Azerbaijan is still not determined in a floating currency regime.

The strengthening of monopolistic tendencies in Azerbaijan since the second decade of

independence and the strengthening of dominant positions in the third decade have led
to the creation of barriers to entry with a number of markets. The lack of an effective
competition policy strengthens the dominance of monopolistic companies in the markets.

The Competition Code64 submitted by the President to the Milli Majlis in 2006 has not
been adopted, and the State Service for Antimonopoly and Consumer Market Control65,
a state body specializing in the fight against monopolies, has not been able to get rid of
the dependence of the central executive power during this period.

The delay in Azerbaijan's accession to the WTO has had a negative impact on the
development and liberalization of the financial market. The banking and insurance
markets have suffered the most. During the independence period, the number of banks
decreased. The number of banks has dropped from 250 in the early 1990s to 46 in 2003
and 44 in 201166, and is currently 2667. Before the devaluation, the number of banks was
reduced by the decisions of liquidation commissions due to the increase in the mandatory
requirement for minimum capital, and after the devaluation, due to increased losses and
non-fulfillment of obligations to customers. As for the participation of foreign capital in
the banking market, although the Baku branch of the British Bank of the Middle East
(HSBC) was opened in Baku on August 15, 1996, its activity in Azerbaijan was short. Since
then, as unofficial barriers have been created to the entry of world-renowned banks into
the Azerbaijani banking market, currently, there are 7 banks with more than 50 percent
of the authorized capital in the market68, including the National Bank of Iran, the National
Bank of Pakistan, Turkey’s Ziraat Bank and Yapi Kredi Bank, Russia’s VTB Bank, and
others.

63 http://www.e-qanun.az/framework/7363
64 https://meclis.gov.az/news-cari.php?id=100&lang=az
65 http://www.consumer.gov.az/

66 https://www.adb.org/sites/default/files/linked-documents/cps-aze-2014-2018-sd-05-az.pdf

67 https://aba.az/banklar/banklarin-siyahisi/

68 https://aba.az/wp-content/uploads/2021/06/Makromaliyy%C9%99-hesabat%C4%B1-2020.pdf

Electronic copy available at: https://ssrn.com/abstract=3953713

As for the insurance market, there are 15 companies operating in the insurance market,
where the participation of more than 50 percent of foreign capital is prohibited by law.

Over the past 30 years, Azerbaijan has not established an independent Central Bank and
an independent anti-corruption body that do not allow the government and parliament
to bankrupt the state treasury and to transfer dirty money stolen from the budget and
collected through corruption to offshore zones, an anti-monopoly body that prevents
unfair competition and does not depend on any branch of government, and a free
judiciary that guarantees the inviolability of property rights. If an independent Central
Bank and the Ministry of Finance, which exercises state financial control, had performed
their duties properly in Azerbaijan, it would not have been possible to steal 6 billion
manats69 from the International Bank of Azerbaijan (IBA), 51.07 percent share of which in
the authorized capital is the state’s share, in 2009-2014. Or if the state's share in the IBA
had been privatized in time in accordance with the Decree70 of the President of the
Republic of Azerbaijan dated November 23, 1998, on privatization of the state-owned
share envelope in the authorized capital of the International Bank of the Republic of
Azerbaijan Joint-Stock Commercial Bank, there would have been no large-scale theft from
the IBA.

At the same time, if an independent Central Bank and an anti-corruption body had been
formed in the last 30 years, it would not have been possible to transfer $ 48 billion from
Azerbaijan to offshore zones, as shown in the report of the Tax Justice Network, the non-
profit monitoring organization, entitled “The Price of Offshore Revisited”71; furthermore,
information on corruption and money laundering in Azerbaijan would not be included
in the Panama72, Paradise73, and Pandora74 papers.

One of the institutions that play an important role in the transition of the economy to a
market system is the securities market. The Baku Stock Exchange75, a leading institution

69 https://musavat.com/news/beynelxalq-bankdan-ogurlanan-6-milyard-manat-kimlerin-cibinde-
eriyir_369337.html
70 http://www.e-qanun.az/framework/3250

71 https://www.taxjustice.net/wp-content/uploads/2014/04/Price_of_Offshore_Revisited_120722.pdf

72 https://www.icij.org/investigations/panama-papers/

73 https://www.icij.org/investigations/paradise-papers/

74 https://www.icij.org/investigations/pandora-papers/

75 https://www.bfb.az/az

Electronic copy available at: https://ssrn.com/abstract=3953713

in this market, has not been able to play a role in the transition. Such that at present, the
list76 of securities subject to market-making activities on the Baku Stock Exchange
includes the names of 11 companies, and the membership of the Baku Stock Exchange
includes 9 investment companies77. In 2020, the share of government securities in the
primary and secondary markets in the total volume of securities transactions on the Baku
Stock Exchange was 66.8%, the share of corporate securities in the primary and secondary
markets was 16.5%, and the rest was repo transactions. As can be seen, the state has a
monopolistic role in the securities market. By the way, it should be noted that Pasha
Capital also has a dominant position in the corporate securities market.78 The lack of
development of the securities market during Azerbaijan's 30 years of independence has
led to a decline in standards of transparency and accountability in the activities of
corporations, as well as a negative impact on the emergence of a new class of owners and
shareholders in the country.

Despite the fact that the share of the private sector in the formation of GDP in Azerbaijan
exceeds 85%79, government intervention in the economy remains high. One of the main
reasons for this is that the oil and gas sector, which is the leading sector of the Azerbaijani
economy, is now state-owned. Activities in this area are concentrated in the hands of
SOCAR80, the country's leading company established in 1992. However, over the past 28
years, SOCAR has not become a competitive, accountable, corporate governance model
in the region and has not been able to transition to commercialization and privatization.
On November 5, 2020, a Presidential Decree81 was signed to transfer 22 state-owned
companies and enterprises, as well as economic societies with state share, to the
management of the Azerbaijan Investment Holding (AIH). After that, on January 23,
2021, the President of the Republic of Azerbaijan signed the Decree82 on Measures to
Improve the Management of the State Oil Company of the Republic of Azerbaijan. At
present, the AIH is working to improve the management system of each of the other large
state-owned taxpayers, along with SOCAR. However, this work had to be completed

76 https://www.bfb.az/az/baki-fond-birjasinin-kotirovkalari
77 https://www.bfb.az/az/baku-fond-birjasinin-uzvlerinin-siyahisi
78 https://www.bfb.az/az/view-file/illik-hesabat.pdf

79 https://apa.az/az/xeber/maliyye/Deputat-Azrbaycanda-ozl-sektorun-UDM-d-payi-85percent-i-kecib-

625428
80 https://socar.az/socar/az/company/about-socar/history-of-socar

81 https://president.az/articles/45523

82 https://president.az/articles/50344

Electronic copy available at: https://ssrn.com/abstract=3953713

within 30 years. One of the areas of institutional concern during the 30 years of
independence is the application of standards of transparency and accountability in the
budget process, ensuring public participation. Adoption of the Budget Code83 has not
been possible for 30 years. This indicates that the legal framework for transparent budget
systems in the country has not been fully formed for 30 years. Although the State Oil
Fund of Azerbaijan84 was established by the Decree85 of the President of the Republic of
Azerbaijan dated December 29, 1999, and has been operating since 2000, it lags behind
international standards in terms of transparency and accountability. According to the
Open Budget Index prepared by the International Budget Partnership, out of 100 possible
points, Azerbaijan scored 30 in 2006, 36 in 2008, 43 in 2010, 42 in 2012, 51 in 2015, 34 in
2017, 35 in 2019.86 According to the Natural Resource Management Index, out of 100
possible points, Azerbaijan scored 48 and ranked 28th out of 58 countries in 201387 and
scored 47 and ranked 47th out of 89 countries in 2017.88

Azerbaijan, which joined the international initiative named Extractive Industries

Transparency Initiative in 2004, left the initiative in 2017.89 Although it became a member
of the Open Government Partnership in 2012, Azerbaijan's membership in this
international initiative has been reduced to inactive status since 2016.90

As can be seen, over the past 30 years, the trend of initiatives towards the transition to a
market economy, institutionalization, transparency and accountability standards in
Azerbaijan has been negative, and as a result, corruption and monopolies in the national
economy have intensified.

Finally, the current state of the development of the economy can present in Table 5. This
table shows the leading indicators characterizing the state of the Azerbaijani economy
over the past six years.

Table 5. Main macroeconomic indicators of Azerbaijan in 2015-2020

83 https://banker.az/az%C9%99rbaycanda-budc%C9%99-m%C9%99c%C9%99ll%C9%99si-q%C9%99bul-
edil%C9%99-bil%C9%99/
84 https://oilfund.az/fund/about/history

85 https://oilfund.az/storage/images/qqh59kviix.pdf

86 https://bakuresearchinstitute.org/az/budget-transparency-and-new-challenges-for-azerbaijan/

87 https://eiti.org/files/migrated_files/RGI%2520report.pdf

88 https://resourcegovernanceindex.org/country-profiles/AZE/oil-gas?years=2017

89 https://eiti.org/azerbaijan

90 https://www.opengovpartnership.org/members/azerbaijan/

Electronic copy available at: https://ssrn.com/abstract=3953713

 Indicators 2015 2016 2017 2018 2019 2020

Nominal GDP (in billion dollars) 53.0 37.8 40.8 46.9 48.1 42.6

GDP growth (in %) 1.1 3.1 0.1 1.4 2.5 -4.3

Total investments (in % of GDP) 29.3 26.1 24.9 21.6 21.0 23.5

Total credit investments in the economy 40.0 27.2 16.8 16.3 18.7 20.1
(in % of GDP)

Budget deficit (-) / surplus (+) (in % of -4.8 -1.2 -1.7 -0.4 -0.3 -2.4
GDP)

Current account balance (in % of GDP) -0.4 -3.6 4.1 12.9 9.1 3.3

Foreign government debts (in % of GDP) 19.8 20.3 22.7 19.0 17.4 20.7

CPI annual (in average %) 4.0 12.3 12.9 2.3 2.6 2.8

Poverty level (in % of population) 4.9 5.9 5.4 5.1 4.8 6.2

Number of unemployed population (in

thousand people) 243.7 252.8 251.7 253.8 251.6 375.9

Source: The indicators were calculated by the author based on the statistics of the SSC
and the Central Bank.

In the table, the table data is compared with the data of the devaluation year, which was
taken as the base year. Compared to 2015, nominal GDP in dollar terms, the share of total
loans and total investments in the economy in GDP, inflation, and budget deficit have
decreased, the current account balance has had a positive balance, the share of foreign
debt in GDP, unemployment and poverty, which are the main social consequences of the
economy, have increased.

Transition process in the social sphere

Although official figures on inflation, unemployment, and poverty do not fully

characterize the real situation, the dynamics show that even official data confirm a sharp
deterioration in unemployment and poverty last year. Such that the number of

Electronic copy available at: https://ssrn.com/abstract=3953713

unemployed in Azerbaijan in 2020 was recorded91 as 376,000, which is 125,000 or 50
percent more than in 2019. Thus, the unemployment rate reached its highest level since
2003.

As for poverty, according to official data, while 4.8 percent of the population lived below
the poverty line in 2019, this figure rose to 6.2 percent92 and worsened in 2020. This means
that in 2020, the number of poor people increased by about 30 percent. Thus, the poverty
rate in Azerbaijan has reached its highest level since 2011.

Apparently, 30 years after independence, poverty and unemployment have become a

major social problem in the country. Even according to a recent study of the World Bank,
the poverty rate in Azerbaijan in 2016 was 30 percent among those living in rural areas,
16 percent among those living in Baku, and the national average was 16 percent.93
Independent experts claim that the unemployment rate for 2020 was 16.51 percent,
instead of the official 4.86 percent.94

Although 30 years have been enough time for Azerbaijan to become a prosperous state
and Azerbaijan's economy has been secure in terms of special and attractive resources
over the past two decades, expectations to reduce poverty and unemployment have not
materialized. Although Paragraph 1 of Article 15 of the Constitution of the Republic of
Azerbaijan95 states that “the development of economy in the Republic of Azerbaijan based
on various forms of property serves to improve the well-being of people”, after the
amendments made during the referendum in 2009, Paragraph 2 states that “the State of
Azerbaijan, on the basis of market relationships, creates conditions for the development
of a socially oriented economy, guarantees free enterprise, and prevents monopolies and
unfair competition in economic relations” (the words "socially oriented" were added to
this paragraph96).

91 https://www.stat.gov.az/source/labour/
92 https://www.stat.gov.az/source/budget_households/
93 https://documents1.worldbank.org/curated/en/614351556553124178/pdf/South-Caucasus-in-Motion.pdf

94 Togrul Mashalli, Unemployment in Azerbaijan: official statistics and reality. https://jam-

news.net/unemployment-in-azerbaijan-official-statistics-and-reality/
95 http://www.e-qanun.az/framework/897#_edn3

96 http://e-qanun.az/framework/16448

Electronic copy available at: https://ssrn.com/abstract=3953713

Azerbaijan, which has been governed by decentralized social security for 70 years, has
not been able to complete the implementation of the pension-insurance97 and compulsory
health insurance98 systems based on solidarity during the 30 years of independence after
the collapse of the USSR. There are serious problems in the state pension system, which
is planned to be built on the basis of solidarity. The lack of reforms in this area, as well as
the lack of a legal framework for the operation of private pension funds for 30 years, has
led to the financial burden and social responsibility on the state. Currently, the
government considers the unsatisfactory ratio (1.5 people in 2020) of the number of
insured and pensioners (at least 3/1 is considered acceptable in terms of the sustainability
of the pension system), the increase in the share of the elderly population in the long run
and the expected life expectancy, as well as the fact that the current pension conditions
do not allow for an effective replacement rate and a proportional increase in the amount
of salary increase, as the main challenges facing the pension system.99

Conclusion

The sustainable transition from the socialist system to capitalism, from a command
economy to a market economy, from administrative regulation to social security systems
based on solidarity depends on the establishment and operation of modern institutions
in the political, economic, and social spheres. Although steps have been taken towards
institutionalization in Azerbaijan for 30 years of independence, most of them, including
parliaments and courts, have played the role of pseudo-institutions, serving to centralize
public administration and concentrate absolute power in one hand.

Against the background of increasing oil revenues in Azerbaijan, a "democratic"

dictatorship of criminal capital will continue to prevail, and corruption will continue to
flourish, human rights will continue to be violated, freedoms will continue to be
restricted. Therefore, the main challenges for the Azerbaijani state short and medium-
term should be the formation of democratic governance institutions formed from below
through reforms, public participation, and the will of the people.

97 https://www.research-
collection.ethz.ch/bitstream/handle/20.500.11850/391399/CAD113.pdf?sequence=3&isAllowed=y
98 https://its.gov.az/page/xidmetler-zerfi-2

99 http://maliyye.gov.az/scripts/pdfjs/web/viewer.html?file=/uploads/news_files/6138cbdb2ca14.pdf

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