Economic development in Azerbaijan

The history of the oil industry in Azerbaijan dates back to 1847, when the first oil well was drilled using a primitive percussion drilling mechanism, eleven years prior to the first oil well rilled in the US, Pennsylvania. Baku became a hub for world-scale industrial investment towards the end of the 19th century.[3]

During the Soviet period, Baku oil was the main source for WWII and for other industries, providing 75%[3] of the whole consumption. Oil tankers were filled and transported to their destinations through the Caspian Sea, which no doubt, had a vital role in WWII. However, wide-scale exploitation of the oil reserves for industrial reasons came only in the late 20th century.

Following the collapse of the Soviet Union, the oil production dropped dramatically mainly because of the conflict over Nagorno Karabakh with Armenia, out-of-date equipment and machinery. As a result of the successful oil and gas strategy implemented by the government, the fall of the oil industry was followed by a number of fruitful oil contracts. With the "Contract of the Century” signed in 1994, and the deal on Shah Deniz gas field in 1996 initiated an exceptional amount of international investment flowing into the oil-gas sector. $60 billion foreign investment flew into the oil and gas sector of Azerbaijan from 1994 to 2010. While the oil and gas revenues were anticipated to reach $200 billion by 2024, with the current economic crisis, oil prices, and the devaluation of manat (currency of Azerbaijan), the expectations seem to be difficult to implement.[1][8]

As mentioned above, during the first years of independence when the new oil reservoirs were uncovered, foreign companies were interested in signing contracts to their benefit.[9] In fact, almost all of them were not in favor of Azerbaijani people. In 1993, with the return of Heydar Aliyev to power, the talks that were going on since 1980s resumed and finally after long talks and negotiations Azerbaijan agreed to the terms of oil exploitation that actually reflected the nation's interests.

The biggest oil contract[10] signed in Gulustan palace in Baku with the Western companies on September 20, 1994, was a turning point in the history of oil industry of Azerbaijan. One of the key objectives of the oil strategy was to establish petro-chemical and oil refineries, the building block of the national economy which were founded not long after the “Contract of the Century”.[10]

First economic reforms started in the early stage of independence, namely 1991–1993 with the liberalization of price policy and foreign economic activities.[11] About 70–80% of consumer and producer prices were already deregulated by January, 1992 following further price liberalization rounds in April, September, and December in the same year.[12]

The price liberalization resulted in sudden inflation in living expenses, important consumer goods and commodities. Official records show that average living expenses surpassed average income by approximately 50%.

1. The price of consumer goods increased in 1991 by 2.07 times against figures of 1990, and was growing in several times every year (10.12% times in 1992, 12.3 times in 1993, 17.63 times in 1994).
2. By the end of 1993, it was reported that the minimum weekly wage would not even buy one loaf of bread and that hundreds of thousands of refugees in Azerbaijan "simply face starvation," a situation that heightened social and political instability.[12]

Second most important step was the privatization law that was passed in January 1993 to support the exuberant small-scale private economy which was in a desperate need of legitimizing its business ventures and operations. The policy was designed to encourage privatization of small bulk-sale business establishments, as well as large-scale and medium companies by auctions and joint stock procedures. Retail businesses were planned to be fully privatized by the end of 199, although the process prolonged. Privatization of housing was planned to be implemented by transferring the property ownership to the current residences.[3][12][13][14]

After the collapse of the Soviet Union, Azerbaijan, as all the other post-Soviet countries, started to experience the burden of losing government subsidies. So in an effort to aid the budget the government introduced excise taxes and value-added tax (VAT) as alternatives to sales and turnover taxes in early 1992.[15]

The main sources of the budget deficit were from pay rises (increases in wages) and from military and social expenses related to the conflict in Nagorno Karabakh, mainly its defense and increasing refugee expenses. Large increases in defense and wartime expenditures (from 1.3 percent of GDP in 1991 to 7.6 percent in 1992) considerably reduced expenditures for government subsidies for consumer goods, especially in bread and fuels, as well as government investment and supplementary funding for organizations. Increasing wages of civil servants was one of the reasons of the budget deficit in 1992.[15][16]

Azerbaijan introduced manat - its own currency in mid-1992. In 1994 the currency was classified as a “soft currency” and therefore non-convertible at that time.[15]