Azerbaijan's key natural resources are petroleum and natural gas. Estimated oil production reached over one million bbl/day in 2007, but projections call for a decline from 2010 onward. Azerbaijan has seen enormous growth in its production of natural gas, with 2009 production estimated at 812 billion cubic feet.

The hydrocarbon and mineral sectors represent almost 37 percent of GDP and 92 percent of exports. Real GDP growth reached a record high of 29 percent in 2007 due to increases in oil production and international oil prices, but has contracted during the global economic downturn to five percent as of 2010.

Poverty rates have fallen from a high of 45 percent in 2003 to 11 percent in 2009, according to government figures. But Azerbaijan remains in the bottom fifth in corruption perception rankings, according to Transparency International.

Azerbaijan was among the first countries to endorse the Extractive Industries Transparency Initiative (EITI) and was the first country granted compliant status by the EITI International Board.

Revenue Transparency

Azerbaijan has led in several areas of the global transparency movement. In February 2008 the government presented a UN resolution advocating international endorsement of revenue transparency standards. Since 2004, a coalition of NGOs has pressed for improved disclosures and better collaboration between government and civil society in the management of petroleum and natural gas resources.

Oil and gas revenues flow to the State Oil Fund of Azerbaijan (SOFAZ) and the federal budget. Tax revenues from  the state oil company and foreign oil companies go directly into the budget, while state revenues from Production Sharing Agreements (PSAs), bonus payments and royalties are paid to SOFAZ. SOFAZ also receives the earnings from oil and gas transport through the Baku-Tbilisi-Ceyhan (BTC) pipeline. The fund publishes annual reports on its website that provide a breakdown of revenue sources.

Azerbaijan endorsed EITI in 2003 and was the first country to be ruled compliant, in 2009. To date, the government had published 14 EITI reports. But since EITI implementation began, local activists have voiced concerns over the process. There were delays in the creation of a fully functioning EITI working group, and although all 26 oil and gas companies in the country participate in the EITI process, only a handful of these have agreed to report their payments on a disaggregated basis.

In late 2010, responding to comments from the EITI International Board and to continuing local and international pressure, Azerbaijan's leaders indicated their support for more detailed reporting practices. They also agreed to consider including mining companies in the EITI process, and the possibility of creating federal EITI regulations, a step already taken in other countries. Some constituencies, however, remain resistant to EITI improvements.

Read the Revenue Watch analysis of Azerbaijan's EITI reports and download or compare country data.

Expenditure Transparency

According to the Open Budget Survey 2010, Azerbaijan's government provides "some" information to its citizens about the budget. The nation scored 43/100, an improvement from its 2008 score of 37/100. Recent progress in access to budget information includes enhancements to the Ministry of Finance website, which now offers access to semi-annual budget reports, receipts from large taxpayers, and more details on revenue sources.

State oil fund (SOFAZ) resources are used to finance investment projects by the fund, and for transfers to the state budget. SOFAZ has financed the relocation of refugees and other displaced persons (over $100 million per year), the construction of the Oguz-Gabala-Baku water pipeline ($903 million in 2011) and other activities. The fund's contributions to the state budget have increased over the past several years, from 32 percent of budget revenues in 2008, to 60 percent in 2012.

Although SOFAZ has also improved access to revenue information, there is little indication that the fund's design and management are tightly focused on expenditures that emphasize poverty reduction or public service delivery. The spending guidelines are extremely broad, and have no explicit requirement to support social development. The regulations call for a focus on "socioeconomic progress of the country" and "solving the most important national problems."

This is in part because the fund's governance structure is weak. Though its regulations hold that "The fund shall be accountable and responsible to the President of the Republic of Azerbaijan," there are no checks and balances to limit the president's discretion. Countries such as Norway and Kazakhstan mandate a parliamentary role in spending decisions for the national oil fund, but Azerbaijan has no such legislative safeguards.

The state oil company SOCAR notably adopted international financial reporting standards (IFRS) in 2008. The company's financial report for 2009 was released according to IFRS and also included official auditor comments from the firm of Ernst&Young.

Freedom of Expression

Press freedom and freedom of expression have deteriorated in recent years due to several worrisome trends: the imprisonment of journalists and bloggers who express critical opinions; low accountability for those committing violence against journalists; and restrictive criminal defamation rules that remain part of Azerbaijani law.

It is increasingly difficult for civil society groups to publish information that could hold public officials accountable. The government has pursued lawsuits against reporters and editors critical of official policies. Human Rights Watch cited declines in media freedom in a 2007 report, and as of 2010, Azerbaijan ranked 152 out the 178 countries in Reporters Without Borders' Press Freedom Index.