Contract of the Century: Myths and Reality

25 years have passed since the signing of the "Contract of the Century" (1), concluded by Azerbaijan with foreign companies for a period of 30 years with the aim of joint exploitation of the oil resources of the Caspian Sea. This is a sufficient time to evaluate from different points of view and in different aspects everything that the "Contract of the Century" gave to Azerbaijan. Despite the fact that such an assessment is carried out periodically, in this case, when the contract is close to completion, it acquires great importance. Because it provides a good opportunity for a retrospective as well as a perspective look at a contract (2) signed for a period of 30 years.

Although economic and social approaches have always been in the front row among different views on the gains and losses associated with the Contract of the Century, the past period provides many reasons for evaluating the contract in the geostrategic, political and environmental dimensions.

So, the main argument from the number put forward even during the discussion related to the signing of the contract was that it is wrong to evaluate this contract only in economic terms; over time the "Contract of the Century" will become the best way to strengthen Azerbaijan"s fair position on Karabakh and resolve this topical problem, therefore, to approach this issue only from the point of view of economic profit and social benefits would be wrong. This argument, which at one time seemed strong and created people's faith in addressing the Karabakh problem now does not require any refutation, as it already seems to bubble. Apparently, on the eve of the signing of the treaty, it served to divert attention from its economic and social conditions and, in fact, for some time fulfilled its disinformation function.

Thus, the past 25 years have been able to bring greater clarity to assessments, especially in the political context, and at the same time, have created a benchmark for a comprehensive review of economic and social outcomes. Since both the past and the future are equally distant from this point, let's first look at the past period.

First myth: In 1994, with the signing of the "Contract of the Century", a large-cale oil policy began to be implemented in Azerbaijan. The signing of this contract took place during the difficult economic and political period in Azerbaijan, therefore, great wisdom was required in order to convince and attract foreign investors to the country.

Reality: Indeed, the signing of the "Contract of the Century" in Azerbaijan began a new political and economic stage; as a result of work carried out under this contract, in 1997 the first oil was produced and, starting in 1999, profitable oil began to be exported. We can also agree that the signing of the contract coincided with the difficult economic and political period of the country's development.

So, at that time Azerbaijan needed investments, modern management and advanced technologies for managing the country's oil industry. For these reasons, and also without free financial resources, in the broad sense of the word, it was impossible to exploit oil fields at the expense of local resources. However, it cannot be considered that the arrival of authoritative foreign companies in Azerbaijan at that time was the result of someone"s wise policy.

Firstly, the companies that came to Azerbaijan made such a decision, following their corporate interests, after a prospective assessment of the possibilities of making a profit. Secondly, the fact that Azerbaijan, which recently regained its independence, has rich oil resources, has long been known in the world. The particularly promising Azeri-Chirag-Gunashli field, the richest reserves of which were confirmed during the Soviet era, was quite attractive and did not conceal risks for cooperation on the oil deposit. Thirdly, as the favorable geographical position of Azerbaijan, located between Iran and Russia, strengthens its strategic importance, Western states were also interested in removing our country from the supervision of Russia. Therefore, the arrival of influential transnational corporations in Azerbaijan was also a political decision of the individual states they represent.

Listing all this, we do not at all strive to belittle the significance of the political decision adopted 25 years ago, but we also do not want to put up with its significant exaggeration. Naturally, the recent separation of the state power from the economy in 1994, and the lack of sufficient investment and the necessary technology for Azerbaijan, which had just restored independence, made it possible for multinational oil companies to find a way to our country.

The second myth: Azerbaijan became known as an oil country. The "Contract of the Century", becoming a touchstone of Azerbaijan"s economic independence, ensuring the application of free economic mechanisms and dynamic integration into the world economy, played an important role in the development of our country.

Reality: Azerbaijan"s fame as an oil country also has a long history. For example, the Arab historian Masudi in 300 Hijri (922 AD) visited Baku and wrote about the Baku oil fields: "There were sources of white oil, in Baku the never-extinguishing "eternal flame" constantly burns."

Baku oil, produced for centuries in a primitive, and in the last century, industrial way, even a hundred years ago was in the center of attention of the world's most famous companies. Since 1859, America has been considered the world's largest oil producing country. However, when oil production in Baku increased significantly in 1898-1901, Azerbaijan took the leading position in the world in oil production at that time and overtook the United States.

The first oil well in Baku was drilled in 1871 (12 years after the United States), while the first oil well in a place called Suleyman Mosque in southern Iran began to produce oil since 1908, in Iraq - since 1923, in Bahrain - since 1932, in Saudi Arabia - since 1935, in Kuwait - since 1937, and in Qatar - since 1938. Meanwhile, in 1901, oil production in Baku reached 12 million poods, which amounted to half of world oil production at that time.

Of course, the fact that in the Soviet period, during the Second World War, 75% of the oil production of the USSR was concentrated in Baku is an irrefutable and memorable fact. In fact, in the current political and economic conditions, in the age of specialization, of professionals, when the value of intellectual products grows faster than oil, the recognition of Azerbaijan as an oil country is not the result to be proud of.

The oil factor is the main foundation of the economic revival, and you should not deceive yourself with such primitive slogans as "the phenomenal and unprecedented implementation of oil contracts in Azerbaijan." Today, Azerbaijan should boast of its non-oil products on the world market. However, customs statistics for the first half of 2019 show that this period the share of oil and oil products in the total export of Azerbaijan amounted to 91%. And this is also one of the main problems generated by the "Contract of the Century".

Of course, we are completely far from ignoring the role of this contract in economic growth and the expansion of the economy, in increasing the aggregate supply. Large-scale government expenditures, investments in the oil sector, which were carried out at the expense of precisely increasing oil exports and the income received from this, became the main factor that played a significant role in ensuring the country's GDP growth.

If these growth indicators were sustainable and long-lasting, they really would be worth boasting. However, according to the State Statistics Committee, in the first half of this year, GDP growth was only 2.4%. Given that such a growth rate was recorded in the history of Azerbaijan"s oil in the fiscal year, which is expected to drop oil production by 14 million tons compared to its volume in 2010, it is very difficult to predict what the indicators will be in the coming years, during which production will be less than this year.

The third myth: the production of high-quality, competitive products due to the attraction of foreign investment in the country's economy, modern technologies and equipment, management experience has become an important component of the economic development strategy developed by the state of Azerbaijan. To achieve these successes in the non-oil sector of the country, the implementation of the oil strategy, starting in 1994, was of great importance.

Reality: There is nothing wrong with investing in Azerbaijan thanks to the "Contract of the Century". Indeed, the "Contract of the Century" has contributed to the fact that in the past 25 years the economy of Azerbaijan, especially the oil sector, has not lacked investment.

According to calculations made on the basis of data from the State Statistics Committee, a total of AZN 78.2 billion was invested in the main capital in the period from 1995 to 2018 in the country's oil and gas sector. The vast majority of these funds are actually foreign investments. According to the President of SOCAR, "from 1995 to the beginning of 2019, more than $ 80 billion was invested in the oil and gas sector of Azerbaijan." And this amounts to 60% of the total foreign investment in the country's economy from 1995 to the end of 2018. According to calculations made on the basis of other data from the State Statistics Committee, out of $ 81.9 billion of direct foreign investments directed to the country's economy in the period 2000-2018, $ 70.0 billion or 85.5% came from the oil and gas sector (3).

As for direct investments in the "Contract of the Century", while for the implementation of the agreement, according to preliminary calculations, $ 14 billion was required, then by the end of 2018 more than $ 36 billion was invested in the development of the ACG block of fields (4), which means that between the preliminary and final the value of the "Contract of the Century" there is a difference of $ 22 billion. Naturally, rising prices in the world market should have led to an increase in the cost of the project. At the same time, an increase in its final cost by 2.6 times relative to the initial one, in any case, does not correspond to the interests of Azerbaijan. For, under the terms of the contract, 80% of the direct and indirect costs associated with the operation and management of the ACG field should be financed by companies, and all this should be paid for from the income from export of profitable Azerbaijani oil. This means that the "Contract of the Century" cost Azerbaijan neither more or less approximately 100 million tons of oil. So, from November 7, 1997 to June 31, 2009, 143 million tons or 1 billion 60 million barrels of oil were produced from the ACG, of which almost 100 million tons were produced until the date declared by AIOC as zero.

On the other hand, although the "Contract of the Century" for a certain period provides for the growth of investments for Azerbaijan, the changes taking place in this area at present indicate a reverse trend. Thus, in recent years, the decrease in investment in the economy has taken on the character of trends. According to the State Statistics Committee, in 2018 there was recorded a decrease of 4.4% compared with 2017, and in January-August 2019 - by 5.4% compared with their volume in January-August 2018. In fact, the large investments of large oil companies in the Azerbaijani economy should have led to a significant improvement in the business environment and the development of entrepreneurship in the country, because in general this process not only strengthened Azerbaijan"s investment attractiveness, but also reduced its investment risk, which promised good prospects for production high quality, competitive products.

However, as a result of pursuing an unreasonable economic policy in the republic and choosing the wrong economic course, problems such as the creation of monopoly and certain barriers in the country, a decrease in the diversification coefficient of the economy, a loss of comparative advantages in international trade, a violation of the balance of trade and non-trade sectors in the non-oil sector, and rapid inflation did not allow these promises to be fulfilled.

On the contrary, the government, which uses the opportunities created by oil only in the framework of short-term interests, accelerating the adoption of populist and unjustified decisions in the non-profit sector, has further strengthened the corrupt relations between government and business. As a result, in the distribution of revenues from oil exports, the construction and transport sectors, which are a classic source of corruption, have become priorities for government spending.

Although the picture created by the implementation of expensive projects in these sectors, on the one hand, has become the leitmotif of the government"s economic propaganda, on the other hand, this has led to a deterioration in the country's rating of corruption perception, weakening the international competitiveness of the economy, and unilateral development of the non-trade sector only. At a time when, against the backdrop of ever-increasing incomes in the economy, there was a need for institutional changes, the reforms receded into the background and pseudo-institutes were created under the name of reforms.

The fourth myth: hundreds of thousands of new jobs are created, balanced economic development is ensured due to the growth of domestic investments financed thanks to oil revenues, which make up Azerbaijan"s share under the "Contract of the Century".

Reality: Actually, in Azerbaijan, thanks to rising oil revenues, domestic sources of financing are increasing, due to which the volume of state investments is increasing. Although capital investment is not attractive to private business, the infrastructure is seen as a factor that reduces the cost of goods and services, the opacity of its implementation, expanding the scale of corruption, and reduces the coefficient of productivity and the positive effect of these investments.

On the other hand, high prices, caused by an increase in aggregate demand in the non-profit sector, increased profitability and, ultimately, the sector, along with the additional capital created by the oil boom, also attracted private sector resources. Thus, the problem of economic diversification has become even more acute. So, if in 2000 the share of the oil sector in GDP was 27.7%, then the share of agriculture, hunting, forestry and fisheries was 16.1%, and transport, storage and communications were 12%.

The growth in oil production in Azerbaijan since 2005 has brought the share of the extractive sector in GDP closer to 50%. In turn, in 2000-2010 the share of agriculture, hunting, forestry and fisheries in GDP, having decreased by almost 3 times, fell to 5.4%, and the share of transport, storage and communications fell to the level of 7.9%. Also, during the noted period, other important changes took place in the structure of GDP.

So, in 2018, 44.2% of the value added was produced in industry, 9.6% in trade, in the field of vehicle repair 8.0% in construction, 6.3% in transport and storage, 5, 3% - in agriculture, forestry and fishing, 2.2% - in tourist accommodation and catering, 1.6% - in the field of information and communication, and 15.0% - in other sectors. Net taxes on products and imports accounted for 7.8% of GDP.

As for industrial production, 73.0% of it was produced in the mining sector, 22.2% in the manufacturing sector, 4.1% in the sector of generation, distribution and supply of electricity, gas and steam, and 0.7% in water supply, waste treatment and recycling.

So it"s not yet possible to talk about balanced economic development in Azerbaijan. The trend shows that a decline in recent years in oil production annually increases the share of the non-oil sector in GDP.

The decline, to which the non-oil sector came, especially agriculture and the processing sector of the Azerbaijani economy, is easily explained by the "de-industrialization effect" established by academician Rybchinsky. The scientist noted that under the influence of the "Dutch disease", the newly created sector attracts industry resources and attracts them to the oil and non-profit sectors, which are considered more profitable.

Turning to the statistics of last year, one can see how the scientific and theoretical postulate of academician Rybchinsky is clearly traced in the economy of Azerbaijan. By the end of 2018, only 4.5% of investments attracted to the economy of Azerbaijan from all sources accounted for agriculture, which accounted for 38% of employment and 5.3% of GDP. As a result, in that period, agricultural growth was 4.6%.

Thus, in Azerbaijan, the state of agriculture - the traditional sector of employment in the country - and the processing industry is becoming increasingly deplorable. At the same time, in recent years, the reduction of up to 30 thousand skilled workers in the areas adjacent to the Contract of the Century has increased the tension in the labor market of Azerbaijan not only among unskilled and young personnel, but even qualified and experienced specialists.

Given that most of the newly created jobs are temporary, related to self-employment and individual activity, it becomes clear that allegations of the creation of hundreds of thousands of jobs are nothing more than official statements serving political purposes and not withstanding serious economic arguments.

Fifth myth: Our goal in signing the "Contract of the Century" is not only to extract oil, transport it and earn income. Our goal is to direct all the benefits derived from our oil - political, economic and any other - to serve the future welfare and prosperity of the Azerbaijani people.

Reality: After signing the contract, it became clear that the main goal of both parties (the government of Azerbaijan and companies) in implementing this contract was to make a profit. It is no coincidence that the construction of the BTC pipeline took place after lengthy political discussions, only after the price of oil on world markets began to rise, and this can be explained by the fact that the main interest of the consortium members was to make a profit. In fact, from a corporate, economic point of view, this does not require a detailed explanation.

As for the other side of the issue - spending all the profits for the benefit of people, although there is disagreement here, the simple truth is still clear to the majority: as a result of the direct influence of the income coming to Azerbaijan from the implementation of the "Contract of the Century", the country's social inequality is still more deepened.

Because from the very beginning it was not ruled out that the flow of investments for high returns would accelerate polarization, contrast wealth and poverty, aggravate the conflict between the poles and opposite sides. In anticipation of all this, the transition from a "totalitarian" socialist economy to a "democratic" market economy has created a new social base, an ideological superstructure. Society has broken into poles, which are sharply different from each other in their image and living conditions, in social needs, behavior, and even in their morality and culture.

Under the circumstances, the criminal proceeds obtained under the pretext of primary accumulation of capital, and private property and rights formed through illegal privatization were protected not by improving the rule of law, but by strengthening the police regime. In this situation, investing in the development of institutions not of the market, but of authoritarian rule, did not allow Azerbaijan to differ in the best sense of the word from other oil-rich countries.

Empirical studies conducted in oil-rich countries of the world show that in countries that do not have good management based on the rule of law, transparency and accountability, an increase in oil production can lead to serious difficulties such as achieving uncontrollability in the national economy.

Under these conditions, "light oil money" received from oil exports in the country, creating self-confidence among government officials, first of all, directs attention to balanced and sustainable development, and to the struggle for the speedy distribution of oil revenues and as if turn them into competition. In the context of this competition, which leads to increased tension between power groups, it is impossible to achieve a permanent and long-term improvement in the well-being of the population.

This is confirmed by official statistics. In all countries, the average monthly wage is considered a general indicator of the well-being of the population. According to the CIS Statistical Committee, as of July 1, 2019, this figure in Azerbaijan amounted to 593 manats. While, if expressed in manats, the corresponding figure in Russia will be 1,266 manats, in Belarus - 881 manats, in Kazakhstan - 742 manats, in Ukraine - 729 manats, in Moldova - 699 manats, in Georgia - 648 manats, in Armenia - 646 manats. Azerbaijan in terms of average nominal wages was able to get ahead only of such countries as Uzbekistan, Kyrgyzstan and Tajikistan, which do not show sharp differences in living standards in the start-up period and have the same political past as we do.

In this regard, one of the comparisons is noteworthy: although even in 2005 the average monthly salary ($ 114) in Armenia was $ 17 less than in Azerbaijan, as of April 1 of this year, the average monthly salary in Armenia reached $ 364, which is $ 26 more than in Azerbaijan. In addition, at present, in our country this figure is, respectively, $ 52, $ 60, $ 106, $ 133 and $ 357 less than in Ukraine, Georgia, Kazakhstan, Belarus and Russia.

In this case, it is hardly possible to speak of an equal and fair distribution of oil revenues received under the "Contract of the Century" among the citizens of Azerbaijan and its intended purpose to increase the well-being of the population in the future.

In the absence of effective cost management and a liberal economy, the expansion of expenses in line with the growth of oil revenues, the spending of "easy" money without observing the principles of responsibility, effectiveness, efficiency and transparency in the non-productive sectors, leads to the expansion of corruption, which is a serious problem in the national economy to develop and ensure the prosperity of the country, and accelerates inflation. And all this together increases the expenses of the population, depreciates its income and distorts the general indicators of its well-being.

Summing up, I would like to note that the bulk of the confirmed 5.4 billion barrels of oil on ACG have already been produced. According to data as of July 31, 2019, Azerbaijan"s total income received since 2001 from PSA for the development of the ACG field amounted to $ 143,366 million. The PSA signed for this field has not yet lost productivity. So, in the first 7 months of this year, the State Oil Fund of the Azerbaijan Republic (SOFAZ) received $ 5 160 million from the ACG field (5).

On September 14, 2017, shareholders decided to extend the extension of the development of ACG fields until 2050, which led to some changes in the PSA. SOCAR"s share in ACG in the renewed contract increased from 11.6% to 25%, while the Azerbaijani government"s share in profitable oil was fixed at a stable level of 75% (6). According to estimates, by 2050 an additional $ 40 billion will be invested in ACG (7).

However, with regard to the well-being of the people, even though the proportion of future generations has already been spent, some of the population of Azerbaijan still suffers from poverty, while the majority are still longing and longing for modern achievements of socio-economic progress introduced in developed countries.

Thus, amid growing oil revenues in Azerbaijan, the domination of the "democratic" dictatorship of criminal capital, the flowering of corruption, human rights violations and restrictions on freedoms continue.

1) "Contract of the Century", providing for the joint use of oil fields (Azeri, Chirag, Gunashli) in the Azerbaijani sector of the Caspian Sea, was signed on September 20, 1994 for a period of 30 years by 12 companies from 8 countries: Amoco (USA) - 17.01%; BP (G. Britain) -17.13%; Lukoil (Russia) - 10%; Statoil (Norway) - 8.56%; Turkish Petroleum (Turkey) - 6.75%; Unocal (USA) - 9.52%; Itochu Co (Japan) - 7.45% (McDermott sold its shares to Itochu Co in 1996); Ramco (G. Britain) -2.08%; Delta (South Arabia) - 1.68%; Pennzoil (USA) - 4.81%; Exxon (USA) -5% and SOCAR (Azerbaijan) -10%.

2) This contract was extended until 2050 with a number of amendments to the agreement signed on September 14, 2017.

3) http://nhmt-az.org/frontend/pages/oil-income-inner.php?id=170

4) http://www.socar.az/socar/az/news-and-media/news-archives/news-archives/2019/04

5) https://oilfund.az/en/fund/press-room/news-archive/1411

6) https://www.bp.com/content/dam/bp-country/az_az/PDFs/legalagreements/PSAs/EN-AZ-Restated-ACG-PSA.pdf

7) https://www.oilfund.az/report-and-statistics/report-archive