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Anar Murado: Promoting sustainable development of Azerbaijan's oil industry

Anar Muradov, Assistant Professor at Fukuoka University, Japan

Anar Muradov is currently an assistant professor at Fukuoka University, Japan. His research interests focus on microeconomics, macroeconomics, political economy, and natural resources. His recent research includes "The Importance of Natural Resources to The Azerbaijani Economy" and "Oil-Rich Azerbaijan's Costly Independence: The Khojali Massacre. Why Is It Considered genocide?" Such as articles.

Promoting sustainable development of Azerbaijan's oil industry through institutional reform

1. At present, the oil industry plays a certain role in the economic development and national income of Azerbaijan. The article mentioned that this may also bring some negative effects in the long period. So is the current petroleum industry in Azerbaijan sustainable?

Natural resources have improved the economy of Azerbaijan since the independence years because it is the main driving force for almost all aspects of the economy. Due to the export of natural resources the GDP of Azerbaijan has increased dramatically since 1997. Moreover, Azerbaijan was successful in reducing poverty as well as unemployment rate which are the significant accomplishments in the last decade. However, country faced serious economic problems after plummeting oil prices in the years of 2014 and 2020. In 2014 and 2020, several companies and banks went bankrupt and some foreign branches were shut down due to the significant currency depreciation (2014) and due to the negative oil prices (2020). The dependency on natural resources threatened the economy's fiscal balance and stability. It also makes the country vulnerable to the external factors such as the changing global oil prices. One of the main reasons is related to slow of economic diversification in order to evade the long run stagnation. There is a gap between oil and non-oil sector which hinders the government to effectively the implement policies. Government’s regional socio-economic development program was also insufficient for the economic diversification.

2. What are the main policies adopted by the government in the petroleum industry?

“Contract of the 21st Century” (2013) will help Azerbaijan to be the important gas exporter as well. The government changes its strategies and policies in oil industry because of decreasing oil production along with volatile oil prices. Additionally, the government believes that gas industry also will be the new stage which will open chances for Azerbaijan to export its gas resources from “Shah Deniz 2” field to Europe through TANAP (Trans Anatolian Gas Pipeline) and TAP (Trans Adriatic Pipeline) projects. Thus, the projects will create new opportunities in terms of regional development, energy security and facilitation of relations with the European Union. Azerbaijan and Europe will both benefit from the projects. It is the new revenue source for boosting of the economy Azerbaijan which will enable to implement diversification policies in order to expand the share of non-oil sector such as agriculture, tourism and so forth. For Europe, the projects are important for increasing Europe’s energy security and expanding global markets. Azerbaijan needs to get out of the heritage and remnants of the transition economy and, therefore, speeding up the process of economic diversification and increasing the share of non-oil sector are the main policies for the government. The revenues from natural resources can be quite helpful financial source for implementing the above mentioned policies.

3. What policies do large companies investing in the oil industry in Azerbaijan have?

One of the largest companies in Azerbaijan is considered BP (British Petroleum) which played an important role in signing “Contract of the Century” (1994) as well as “Contract of the 21st Century” (2013). BP is a reliable partner for the country because of the policies they implemented. It made a significant contribution in terms of new revenue stream and commercial links with the rest of the world. Furthermore, it created modern natural resource processing plants along with high-tech resource production sector. BP’s policies also contribute to social development and educational development to thousands of employees. Hundreds of rural communities in Azerbaijan benefited from promoted sustainable development policies of BP.

4. What problems do you think the sustainable development of Azerbaijan’s petroleum industry will encounter? Do you have any advice?

Although the government plans long term policies in oil and non-oil sectors, the implementation of those policies is a challenge due to institutions. As it is mentioned above, Azerbaijan still suffers from the heritage of transition economy and it is hard to successfully implement policies without making significant institutional reforms. The natural resource industry dominates in the economic system due to the presence of large oil corporations. The non-oil sector does not play an influential role because it is not attractive for foreign investors under current institutions and transparency. In a short run, Azerbaijan will benefit from its natural resources but in a long run macroeconomic instability under the volatile prices will be of main concern. The implementation of new institutional reforms is necessary in order to achieve the economic diversification and evade the future stagnation.

Organizer: Yu Zhuohan



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