The European Union and Azerbaijan signed a long-awaited agreement on natural gas supplies on January 13, 2011. The agreement requires Azerbaijan to make gas available to the EU's Southern Corridor energy-import route but is vague about which pipeline would carry the gas.

Azerbaijan was among the first countries to endorse the Extractive Industries Transparency Initiative and in 2009 became the first country to be granted Compliant status by the International EITI Board. Since 2004, a coalition of NGOs has pressed for improvements to EI transparency and collaboration between government and civil society in the management of the country's petroleum and natural gas resources.

The country's main natural resources are petroleum and natural gas. In 2007, estimated oil production rose to over 1 million bbl/d, but production is expected to decline from 2010 onward. Azerbaijan has seen enormous growth in its production of natural gas, with 2009 production estimated at 812 billion cubic feet.

Taken together, Azerbaijan's hydrocarbon and mineral economy represents roughly 53% of the country's GDP and 92% of merchandise exports. The remarkable growth in Azerbaijan's mineral economy raises the importance of continued EITI efforts. Real GDP growth reached a record high of 29% in 2007, due to increases in oil production and international oil prices, then contracted during the global economic downturn to 9.3% as of 2009 (a figure still strong enough to make Azerbaijan third in the world).

Despite its EITI successes, many economic modernization efforts in Azerbaijan have been hampered by increases in public spending and slowness to improve the business climate or deepen financial intermediation. Azerbaijan remains in the bottom fifth in corruption rankings by the World Bank and Transparency International and 20% of the population continues to live in poverty.¹

Unfortunately, the country's increasing oil revenues have not promoted greater efforts toward government transparency or reform. About 70% of the state budget is directly linked to oil and gas revenues and 53% of the state budget comes in direct transfers from the State Oil Fund. And while these new revenues have helped to fund thousands of investment projects, disclosure of expenditures has not increased, and these new projects are consequently difficult to monitor.

Revenue Transparency

Azerbaijan has been a leader in many areas of the international revenue transparency movement. In February 2008 the government presented a UN Resolution to the 62nd session of the general assembly advocating for the international community's endorsement of revenue transparency standards.

Oil and gas revenues currently flow directly to the State Oil Fund of Azerbaijan (SOFAZ) and to the federal budget. While taxes paid by the state oil company and foreign oil companies flow directly to the budget, SOFAZ's income is generated mainly by revenues from the state's share of oil and gas from PSAs, bonus payments, royalties and earnings from the transport of oil and gas through the Baku-Tbilsi-Ceyhan (BTC) pipeline.² SOFAZ publishes annual reports on its website that provide a breakdown of its revenue sources.

In June 2003 Azerbaijan became one of the first countries to endorse the EITI. It reached Candidate status in September 2007 and in 2009 became first country to be ruled Compliant by the EITI International Board. To date, the government had published thirteen EITI reports. All of the 26 oil and gas companies in Azerbaijan participate in the EITI process, according to Revenue Watch allies, however only a handful of companies have agreed to disaggregated reporting.

Since Azerbaijan began implementing the EITI, local activists have voiced concerns over the effectiveness of the process in promoting government accountability. Oil revenue data has been reported as an aggregate figure, which reduces its usefulness, and there has been debate and delay in the creation of a functioning EITI working group with robust representation from civil society. In its 2006 report, Eye on EITI, Revenue Watch offered more detail on the status of revenue transparency according to the members of Azerbaijan's PWYP coalition and others.

In late 2010, responding to comments from the EITI International Board and to continuing input from local and international civil society groups, Azerbaijan's leaders indicated their support for more detailed reporting practices and a range of other measures to improve extractive sector transparency, including the possibility of including mining companies in the national EITI process and the need for a law enshrining EITI principles into federal regulations, a step that has been taken by several other EITI countries.

Azerbaijan ranked 9th out of 41 countries in the Revenue Watch Index, which measures disclosure practices for oil and mining governance. This ranking indicates the country's substantial progress in transparency of oil revenues, but weak scores on certain of the Index's indicators point to the need for improvement in openness in licensing and industry contract negotiations, as well as in more disciplined division of policy, regulatory and commercial responsibilities across institutions such as Ministry of Industry and Energy, the Ministry of Finance, and the national oil company (SOCAR) and oil fund (SOFAZ).

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 in the current survey, an improvement from its 2008 score of 37/100. Recent progress in access to budget information and documentation has included enhancements to the Ministry of Finance website, where the public can access half-year budget reports, receipts from larger tax payers and more details on revenue sources.

Although the state oil fund SOFAZ has also increased access to information about oil and gas revenues, there is little evidence that the fund is designed, governed or managed in a way that ensures expenditures are geared towards poverty alleviation or the delivery of other public services.

One problem is that the spending guidelines for the fund are extremely general and do not specify that the fund be used for social development objectives. The fund's governing regulations call for uses that foster "socioeconomic progress of the country," for "solving the most important national problems." The fund is also supposed to "promote the development and increase the competitiveness of the non-oil sector of the national economy," according to Caspian Oil Windfalls.

Another problem is the fund's governance structure. One of the first provisions in the fund's regulations states that: "The fund shall be accountable and responsible to the President of the Republic of Azerbaijan." There are no institutional constraints-no checks and balances-to limit the president's discretion. In countries such as Norway and Kazakhstan, and in Alaska, the legislature plays some role in the fund's spending decisions, but in Azerbaijan the parliament plays no role.

SOFAZ uses its financial resources for investment projects and for transfer to the state budget. Investments include housing for refugees and internally displaced persons (over $100 million annually), the construction of the Oguz-Gabala-Baku water pipeline ($903 million, including projected 2011 expenses) and other smaller projects. Transfers from SOFAZ to the state budget have increased steadily since 2007, from 32% of total revenue in 2008 to 82% as of 2010.³

Freedom of Expression

Because of government repression of the media, it is increasingly difficult for civil society groups to publicize information to hold public officials accountable. TV and radio outlets are largely controlled by the state, and print journalists are subject to excessive self-censorship.
Freedom of expression in Azerbaijan has detoriated in recent years due to several worrisome trends. Authorities continue to imprisonjournalists and bloggers who publish opinions critical of the government, and acts of violence against journalists continue to go unpunished. In November 2010 bloggers Emin Milli and Adnan Hajizade were released after more than one year in jail.

Azerbaijan was near the bottom of the Reporters without Borders Press Freedom Index for 2010, ranking at 152 out of 178 countries. Despite pressure from the OSCE and others, improvements in freedom of the media and freedom of expression remain unlikely.

¹ http://go.worldbank.org/D4MLWKBDP0
² Caspian Oil Windfalls, by the Revenue Watch Institute and the Open Society Institute, 2003. See www.revenuewatch.org/publications.
³ Revenue Watch calculations based on figures from www.oilfund.az.