Azerbaijan: Belt-Tightening and Balancing Foreign Policy

Vugar Bayramov, Center for Economic and Social Development

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2016 for Azerbaijan has been a year of new outburst in Nagorno-Karabakh conflict, oppression of civil society and long-lasting consequences of oil prices drop. Country manages to fulfill its obligations with Western partners and balances between the EU and Russia in its foreign policy.


 Domestic policy: Civil Society Meltdown Continues, Despite Some Improvements

The political arena in Azerbaijan was remarkable with stagnant civil activism on one hand and strong oppression of civil society members and organizations on the other. In the beginning of 2015, the government has launched a crackdown on civil society, limiting the activities of NGOs by freezing their bank accounts and arresting some activists. Later, the legislation for NGO’s was partly facilitated with the establishment of a single-window system for registration of donor organizations in October, 2016[1], which is in force starting from January 1st, 2017. However, the scope of implementation of this novelty is ambiguous; in the opinion of some experts, the system may leave the registration of human rights-related organizations outside the coverage.

Nagorno-Karabakh conflict remains one of the main factors shaping the political development and foreign policy of Azerbaijan. After a relatively stable period, the conflict witnessed two noticeable outbursts in August 2014 and April 2016. In-between, in November 2014, during the full-scale military drills in Nagorno-Karabakh, an Armenian Mi-24 army helicopter was downed by Azerbaijan. As a result of clashes in August 2014, more than 20 officers and soldiers from both sides have died according to official statistics – although the real number is assumed to be much higher. Reportedly, the death toll for the ‘Four Day War’ in April 2016, reached 200 people from both sides.

Economy: Recession Takes Toll

As an oil-exporting country, Azerbaijan was hardly hit by a recent sharp drop in oil prices starting from early 2014. In an attempt to maintain the fixed exchange rate of national currency manat, the country’s monetary authorities have carried out comprehensive interventions to foreign exchange market. However, these attempts were futile and not able to keep manat from falling. As a result, the Central Bank was forced to two sharp devaluations in 2015, resulting in more than 50% depreciation of manat in total. After the second devaluation, the Central Bank announced the shift to floating exchange rate, though the regime is not pure, but managed floating regime, which led to highly volatile exchange rate of manat throughout 2016. Towards the end of 2016, manat has reached its lowest level against currencies. It is expected that the national currency will continue to depreciate given that US Federal Reserve has increased the interest rates.

Declining oil revenues has also led to shrinking budget revenues and expenditure. The latter is introduced for discussions in the 2017 state budget proposal , where the government intends to pursue fiscal austerity.[2] On one hand, the recent increase of utility tariffs for electricity and natural gas consumption by the Tariff Council and on the other hand seriously surging prices of consumption goods mainly imported from abroad as a result of currency depreciation reduced the well-being of population.[3] The reduction in social spending is expected to aggravate this already complex situation.

Given that, Asian Development Bank has approved a 500 million dollars’ loan help to Azerbaijan, which will contribute to a 1.4 billion stimulus package for job creation, social assistance and economic diversification.[4]

Foreign Policy: Azerbaijan Remains a Reliable Partner for the West and Close Neighbours

Azerbaijan pursues a balanced foreign policy towards the European Union and United States on one hand, and Russia and its allies on the other. Due to its geographical position, Azerbaijan plays a role of a reliable partner of the West on the energy and military security including the participation in failed “Nabucco” project, US-led military operations in Afghanistan and logistical support for the military operations for International Security Assistance Force in Afghanistan.

However, human rights issues created complications for the relations between Western Countries and Azerbaijan. The United States Congress held hearings on the human rights issues in Azerbaijan, threatening to extend the Magnetsky Act to Azerbaijani officials also.[5] With the new adopted legislation, US and EU donor organisations activities, and local NGOs cooperating with them were put on hold.

Moreover, Azerbaijan has failed in signing Association Agreement with the European Union alongside Ukraine and Georgia. But recently the EU announced the launch of negotiations on a new comprehensive agreement with Azerbaijan.[6]

The relations with Russia and the close neighbours Turkey and Iran are developed at the new level of political-economic cooperation between this so called “security and economic cooperation” alliance. The Russia-Azerbaijan-Iran alliance tries to build a North-South Transport Corridor which may change the region’ geopolitical order, bringing Baku closer to Russia, and moving away from US and EU.