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Re: Nagorno-Karabagh: Military Balance Between Armenia & Azerbaijan
The real reason behind azeri aggressiveness and war rhetoric for the past few months...
Azerbaijani Economy in Tatters
The West’s economic sanctions over the Ukraine crisis and the low price of oil have hurt the Russian economy. It is well known that the sanctions and lower than anticipated oil prices have caused the ruble to lose half its value against the dollar. An additional side effect is the deteriorating financial condition for millions of migrant workers in Russia, primarily from Central Asia and other former Soviet states, many of whom have had to return to their native countries. One important component of this fact is the national security dimension, or more specifically, how the autocratic regimes of Central Asia will cope with the return of hundreds of thousands of jobless and penniless men to states that remain politically repressive and economically stagnant.
A case in point is Azerbaijan, which not only has seen an influx of returning migrant workers but last week devalued its currency against the U.S. dollar and the euro. The Azerbaijani manat lost 33.5% and 30% of its value against the American and European currencies, respectively. This followed on the heels of the Central Bank of Azerbaijan’s (CBA) abandonment of the manat’s dollar peg on February 16th, when it began using a dollar-euro basket to manage the exchange rate instead. Although the CBA claimed that the devaluation was aimed at ‘stimulating the diversification of Azerbaijan’s economy, strengthening the international competitiveness of the economy and its export potential and guaranteeing stability in the balance of payments’, the fact of the matter is that the Azerbaijani economy is sorely dependent on the sale of hydrocarbons, specifically oil, to generate income for the state coffer. A near decade of high oil prices has led to Dutch disease taking root within Azerbaijan’s economy. To truly put things into perspective it is enough to know that the energy sector makes up 40% of GDP with the sale of oil and natural gas accounting for 95% of Azerbaijan’s exports and more than 70% of government revenues; an unsustainable model. Moreover, Azerbaijan hit peak oil 5 years ago and has yet to find a fresh field to tap. As a result Baku finds itself in a precarious situation that is made worse by the drop in petroleum prices.
The devaluation came just ten days after Ali Hasanov, the spokesman for Azerbaijani despot Ilham Aliyev, told the Financial Times in an interview that no abrupt devaluation of the manat would take place. He further stressed that Azerbaijan could ride out the effect of low oil prices on its state budget and development plans. And in late January Aliyev claimed that the falling price of oil had zero negative impact on the manat, insisting that the national currency was even stronger than before. It should be noted that official Baku had forecasted the price of oil at $90 per barrel or higher for 2015 and planned accordingly. At that level state spending was envisaged at $15 billion. If however oil prices remain near $50 per barrel then the state budget is lowered to $4.7 billion. Baku had hoped that it could ride out the low oil prices by dipping into its foreign reserve fund. In the last two months alone they spent $2 billion, or 15% of the money in the fund to prop up the manat. It would seem that someone in the Azerbaijani hierarchy realized that this was not a tenable solution – hence the devaluation.
On the economic side observers can expect to see and indeed are already seeing a rise in inflation because imports of basic goods are now more expensive. Simply put, one manat does not buy as much as it did a few weeks ago. The CBA’s decision also sharply increased the domestic demand for dollars, euros and other hard currencies, a trend that will continue as depositors convert their manat deposits into foreign currency. Some exchange offices in Baku have stopped selling dollars and euros in the wake of the devaluation. Already the prices for a number of products have increased by 20-25%. Before even the CBA’s devaluation Standard & Poor’s rating agency had lowered the outlook on Azerbaijan’s BBB- credit rating to negative on January 30th. S&P cited the oil-price decline and pressure on the manat from ‘weaker terms of trade’ as reasons for reducing the rating.
Azerbaijan’s economic woes are compounded by its rapidly deteriorating human rights condition, which in the last year alone has seen the arrest of hundreds of political dissidents on various trumped up charges. The returning workers from Russia may not have been able to demand respect for their civil rights in Russia, where many of them were illegal and all were non-citizens, but in Azerbaijan they at least have a de jure right to voice their displeasure with the state of things even if de facto they will be silenced. This is the crux of the national security problem that Aliyev and his cronies are about to encounter. The regime will face calls for reform or revolution if it fails to find adequate work for the newly arrived Azerbaijanis or if they do not halt the crackdown on civil society activists. How the authorities in Baku respond to these demands will dictate the people’s actions. The citizenry can only be manipulated, marginalized, and mistreated for so long before they decide to channel their pent up anger into political action. Indeed, reports of demonstrations in regions, including Lankaran have recently surfaced. The manat’s devaluation has already caused food prices to rise sharply, which should not be taken lightly in lieu of the fact that the Arab Spring was partially ignited by an increase in the cost of basic foodstuffs. Already in some Baku supermarkets the price of bread has doubled. Since Azerbaijan imports most of its retail food items consumers will pay higher prices and have less disposable income, which in turn will exasperate the economic problems.
Aliyev can continue to rule with an iron fist if he delivers economic growth and jobs for the majority of his subjects. But he cannot remain a despot if he fails to provide these things. It is improbable that a state which is so highly dependent on one industry for growth can in the short or medium term develop other sectors of the economy. Even if officials in Baku decided to promote the non-hydrocarbon portions of the economy they would have to commit for the long-haul. Time is not on their side. Unlike North Koreans who are virtually cut off from the rest of the world, Azerbaijanis are well aware that their country is ruled by a clan which does not have the state’s best interests at heart. At this point one of the few tricks remaining for the regime to utilize in their efforts to pacify and distract the people is war-mongering vis-à-vis the Artsakh Republic (Nagorno-Karabakh Republic) and Armenia. Rallying people around the flag of patriotism and national defense is a tried and true tactic. However, as Aliyev is well aware, if a renewed conflict with Artsakh and Armenia does not result in a total victory for him, not only will his rule over Azerbaijan come to an end but so will the statehood of Azerbaijan. Regardless, the possibility of an Azerbaijani provocation that quickly spirals out of control and ignites a war should not be discounted. History has shown that wars can and do begin as a consequence of strategic miscalculation.
The deplorable state of Azerbaijan’s human rights situation, a tanking economy, and hundreds of thousands of unemployed individuals hardly affirm Aliyev’s twitter rants that his country is advancing every year in all spheres. Perhaps what he meant to say was that his family’s secret bank accounts and overseas possessions keep growing each year. The falling oil prices may very well be a precursor to the demise of the Aliyev clan
The real reason behind azeri aggressiveness and war rhetoric for the past few months...
Azerbaijani Economy in Tatters
The West’s economic sanctions over the Ukraine crisis and the low price of oil have hurt the Russian economy. It is well known that the sanctions and lower than anticipated oil prices have caused the ruble to lose half its value against the dollar. An additional side effect is the deteriorating financial condition for millions of migrant workers in Russia, primarily from Central Asia and other former Soviet states, many of whom have had to return to their native countries. One important component of this fact is the national security dimension, or more specifically, how the autocratic regimes of Central Asia will cope with the return of hundreds of thousands of jobless and penniless men to states that remain politically repressive and economically stagnant.
A case in point is Azerbaijan, which not only has seen an influx of returning migrant workers but last week devalued its currency against the U.S. dollar and the euro. The Azerbaijani manat lost 33.5% and 30% of its value against the American and European currencies, respectively. This followed on the heels of the Central Bank of Azerbaijan’s (CBA) abandonment of the manat’s dollar peg on February 16th, when it began using a dollar-euro basket to manage the exchange rate instead. Although the CBA claimed that the devaluation was aimed at ‘stimulating the diversification of Azerbaijan’s economy, strengthening the international competitiveness of the economy and its export potential and guaranteeing stability in the balance of payments’, the fact of the matter is that the Azerbaijani economy is sorely dependent on the sale of hydrocarbons, specifically oil, to generate income for the state coffer. A near decade of high oil prices has led to Dutch disease taking root within Azerbaijan’s economy. To truly put things into perspective it is enough to know that the energy sector makes up 40% of GDP with the sale of oil and natural gas accounting for 95% of Azerbaijan’s exports and more than 70% of government revenues; an unsustainable model. Moreover, Azerbaijan hit peak oil 5 years ago and has yet to find a fresh field to tap. As a result Baku finds itself in a precarious situation that is made worse by the drop in petroleum prices.
The devaluation came just ten days after Ali Hasanov, the spokesman for Azerbaijani despot Ilham Aliyev, told the Financial Times in an interview that no abrupt devaluation of the manat would take place. He further stressed that Azerbaijan could ride out the effect of low oil prices on its state budget and development plans. And in late January Aliyev claimed that the falling price of oil had zero negative impact on the manat, insisting that the national currency was even stronger than before. It should be noted that official Baku had forecasted the price of oil at $90 per barrel or higher for 2015 and planned accordingly. At that level state spending was envisaged at $15 billion. If however oil prices remain near $50 per barrel then the state budget is lowered to $4.7 billion. Baku had hoped that it could ride out the low oil prices by dipping into its foreign reserve fund. In the last two months alone they spent $2 billion, or 15% of the money in the fund to prop up the manat. It would seem that someone in the Azerbaijani hierarchy realized that this was not a tenable solution – hence the devaluation.
On the economic side observers can expect to see and indeed are already seeing a rise in inflation because imports of basic goods are now more expensive. Simply put, one manat does not buy as much as it did a few weeks ago. The CBA’s decision also sharply increased the domestic demand for dollars, euros and other hard currencies, a trend that will continue as depositors convert their manat deposits into foreign currency. Some exchange offices in Baku have stopped selling dollars and euros in the wake of the devaluation. Already the prices for a number of products have increased by 20-25%. Before even the CBA’s devaluation Standard & Poor’s rating agency had lowered the outlook on Azerbaijan’s BBB- credit rating to negative on January 30th. S&P cited the oil-price decline and pressure on the manat from ‘weaker terms of trade’ as reasons for reducing the rating.
Azerbaijan’s economic woes are compounded by its rapidly deteriorating human rights condition, which in the last year alone has seen the arrest of hundreds of political dissidents on various trumped up charges. The returning workers from Russia may not have been able to demand respect for their civil rights in Russia, where many of them were illegal and all were non-citizens, but in Azerbaijan they at least have a de jure right to voice their displeasure with the state of things even if de facto they will be silenced. This is the crux of the national security problem that Aliyev and his cronies are about to encounter. The regime will face calls for reform or revolution if it fails to find adequate work for the newly arrived Azerbaijanis or if they do not halt the crackdown on civil society activists. How the authorities in Baku respond to these demands will dictate the people’s actions. The citizenry can only be manipulated, marginalized, and mistreated for so long before they decide to channel their pent up anger into political action. Indeed, reports of demonstrations in regions, including Lankaran have recently surfaced. The manat’s devaluation has already caused food prices to rise sharply, which should not be taken lightly in lieu of the fact that the Arab Spring was partially ignited by an increase in the cost of basic foodstuffs. Already in some Baku supermarkets the price of bread has doubled. Since Azerbaijan imports most of its retail food items consumers will pay higher prices and have less disposable income, which in turn will exasperate the economic problems.
Aliyev can continue to rule with an iron fist if he delivers economic growth and jobs for the majority of his subjects. But he cannot remain a despot if he fails to provide these things. It is improbable that a state which is so highly dependent on one industry for growth can in the short or medium term develop other sectors of the economy. Even if officials in Baku decided to promote the non-hydrocarbon portions of the economy they would have to commit for the long-haul. Time is not on their side. Unlike North Koreans who are virtually cut off from the rest of the world, Azerbaijanis are well aware that their country is ruled by a clan which does not have the state’s best interests at heart. At this point one of the few tricks remaining for the regime to utilize in their efforts to pacify and distract the people is war-mongering vis-à-vis the Artsakh Republic (Nagorno-Karabakh Republic) and Armenia. Rallying people around the flag of patriotism and national defense is a tried and true tactic. However, as Aliyev is well aware, if a renewed conflict with Artsakh and Armenia does not result in a total victory for him, not only will his rule over Azerbaijan come to an end but so will the statehood of Azerbaijan. Regardless, the possibility of an Azerbaijani provocation that quickly spirals out of control and ignites a war should not be discounted. History has shown that wars can and do begin as a consequence of strategic miscalculation.
The deplorable state of Azerbaijan’s human rights situation, a tanking economy, and hundreds of thousands of unemployed individuals hardly affirm Aliyev’s twitter rants that his country is advancing every year in all spheres. Perhaps what he meant to say was that his family’s secret bank accounts and overseas possessions keep growing each year. The falling oil prices may very well be a precursor to the demise of the Aliyev clan
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