Azerbaijan economy

As Azerbaijan had been the colony of Russia for a long period, the economy of the country was formed as part of the united natural economy complex of the former USSR, the structure of the economy was completely adapted to the demands of that country’s economy. 

However, in 1918-1920, oil sector had the leading role in Azerbaijan economy. Unfortunately, among the extensive research themes on the 23-months period of governing of Azerbaijan Democratic Republic (ADR), there are no materials that deeply study the economic, historical, foreign-trade relations, budget policy of the country. However, it is possible to get some materials on the economic potential and activities of the Republic. These materials allow getting some idea on the economic activities of ADR.

The economic activities of ADR were more important in 1919. As this year completely falls to the Republican period and governmental structures were completely formed, it was possible to realize some reforms. In 1919, the budget of Azerbaijan Democratic Republic was equal to 665 million manats. The profits gained from oil sales and the income tax comprised the majority of this amount. The main source to form budget was income tax. In 1919, the degree of the income tax was equal to 30%. The second main source of budget contributions was the excise tax imposed on wine, tobacco, and especially oil products. 100 million manats of the budget came from the duty collected in the customs, 15 million manats from the duty received from free trade, cargo and passenger transportations. The majority of the limited budget was allocated to the payment of wages. Though little, the Government managed to allocate 30 million manats for education and 80 million manats for military expenditures. Many settlements were destroyed in the conflicts that happened until ADR was established. Approximately 130 million manats were used to eliminate these gaps. If oil industry is not taken into consideration, Azerbaijan has been mainly an agrarian country. There were 1 million large-horned cattle, 150 000 horses, 300 000 buffaloes, 12 000 camels, 1.5 million sheep and goats in the country during that period.  

One of the main attributes of every country is, of course, its national currency. The national currency of Azerbaijan was put into circulation in early 1919. The first bank-notes were 25, 50, 100, and 250 manats. After a while bank-notes of 500 manats were issued. While reviewing the price of money in the exchanges, it becomes clear that the manat’s rate was quite lower than other leading currencies. For instance, “Romanovs” worth 100 rubles was 350 manats, 1 England pound sterling was 315 manats, 1 USD was 280 manats, 1 Italian lira was 7 manats, 1 Iranian Tyumen was 125-230 manats, and ecimal gold currency of Russia was 420 rubles manta, etc.

On September 10, 1919, Azerbaijan State Bank was established in Baku to strengthen financial-monetary policy. On October 25, 1919 several credit banks and savings banks began operating in the cities. 

Though being an agrarian country in those years, Azerbaijan met the demand for strategic products by imports. In order to meet the demand to grains Azerbaijan imported 7 million poods (112 000 tons). Nearly 16 000 tons of sugar were imported. 

In its economic and trade relations with the foreign countries, Azerbaijan used barter, and gave petroleum for the goods and natural resources bought from abroad.

Azerbaijan paid for the military weapons, telephone apparatus, cars, 100 steam vessels, 2 000 tanks, 500 closed carriages, and food stuff exported from America, France, Italy, and other countries with petroleum, cotton, wool, silk, animal skin and leather. 

In those years, customs service was founded to put in order the economic relations. Baku-Batumi oil pipeline was restored, a bridge was built on the River Kura, Baku-Ceyhan railway was constructed, and Caspian Shipping was reconstructed. 

In the period of Republic, in 1918 185.6 million poods of oil (2.96 million tons) from 3287 wells, in 1919 225.1 million poods (3.6 million tons) from 2066 wells, in 1920 175.1 million poods of oil (2.8 million tons) from 2037 wells were extracted in Azerbaijan. 

The main purchaser of Azerbaijan oil was first Russia, later the European countries thanks to the taken measures.  

In 1919, oil export in Azerbaijan seriously decreased because of the revolution in Russia. This factor caused a serious recession in Azerbaijan economy. As the Northern market was closed, only 600 000 tons of oil out of 3.6 million was exported in 1919. 

After 500 km long Baku-Bakumi oil pipeline with the capacity of carrying 3 million tons of oil was reconstructed in March 1919, it became possible to export oil to Europe.  

The increase in the oil export stimulated the development of all production sectors. 

The capacity of power stations reached 63.700 kVt and 56 000 kVt of this was produced in “Ag sheher” and “Bibiheybet” stations. 

Finally, all structures of economic management were established in those years. 

Within 23 months the government consisted of the following persons: Ministers of Economy- Nasib bekh Yusifbekhli, R.Kaplanov, Abduleli bekh Amirjanov, I.Protasov, A.Hasanov (Minister of Finance and People Education), Mammad Yusif Jafarov, A.Aminov (Minister of Trade and Industry), Akber aga Sheykhulislamov, Xosrov bekh Sultanov, A.Gardashov, Ehmedbekh Pepinov (Minister of Planting, Property and Labor), Khudadat bekh Malikaslanov, Cemobekh Hajinski (Minister of Roads, Post, and Telegraph), Mammad Hasan Hajinki, Narimanbekh Narimanbekhli, Heybetqulu bekh Mammadbekhov (state inspector), A.Ashurov, Mirza Asadullayev (Minister of Trade and Industry), G.Lizqarin (Minister of Foodstuff). 

In 1918-1920, ADR government took a number of measures for the restoration of economy. The administrative-territorial structure of the country was changed and finance was put in order. Moreover, Baku-Batumi oil pipeline was restored and the construction works in the construction of Baku-Culfa railway were accelerated. 

On February 21, 1920, a law of 29 articles on providing the peasants with land and putting the field cropping in order, was published for popular discussion. In accordance with that law, the unused lands were to be bought by the government and given to the peasants provided that the property right would be preserved. On the other hand, it was planned to give these lands to the peasants with credits on concessional terms. But due to the known reasons they did not manage to approve the law.

In the 1920-1939, the formation process of Azerbaijan economic network continued, though slowly. The greatest campaign that characterizes this period was agricultural collectivization. 

During the first years after the World War II, like other fields of economy, industry was also adapted to the demands of peaceful life and gradually developed. In 1948, the republic economy achieved production that exceeded the production level before the war, and within the 5 years and 7 months following the war, Azerbaijan economy was completely adapted to the demands of peaceful construction period and developed. In 1950, the industrial products increased 39% in comparison with 1940 in Azerbaijan. 

In the 50-60s of the XX century, important achievements were gained in the development of industry, the improvement of territorial structure. Product manufacturing in the Republic industry increased 5.5 times in comparison with 1940 and in 1946-1970, 146 large industrial objects were built and put into operation and that was nearly 60% of the industrial enterprises built in the 1920-1970 in general. Sumgait pipe laying, aluminum, and synthetic rubber plants, Gandja Aluminum plant, Dashkesen Ore Refinery, Mingechevir Hydroelectric Station and other large enterprises that played an important role in the development of Azerbaijan industry, were constructed and put into operation. These measures laid the foundation of the rapid development of power engineering, chemistry and petro-chemistry, oil production, black and non-ferrous metallurgy, instrument-making, electro technology, and other fields of heavy industry. 

In those years, significant work had been done in the field of effective placement of industrial enterprises and objects, more rapid development of less-developed regions, the increase of use level of labor resources of small and medium-sized cities. New industrial cities were built, including Sumgait, Mingechevir, Ali-Bayramli (now Shirvan), Dashkesen, and the favourable conditions were formed for the rapid development of cities, such as Nakhchivan, Khankendi, Quba, Qazakh, Neftchala, etc. As a result, the placement of productive forces was improved in the Republic. 

The special weight of Baku city reduced from 91.4% to 72.8% in the total industrial production. Some gaps and negative tendencies emerged in Azerbaijan economy in the late 1960s. Until late 1950s Azerbaijan was the main region of the USSR that produced raw hydrocarbon materials and maintained this position till the late 1950s when extensive use of rich oil resources of Western Siberia was started. In accordance with its duty of meeting great demands of the whole country, the development of Azerbaijan oil industry effected the formation directions and nature of the economic situation. On the basis of growing increase of extracted raw material, the extension of the processing of crude oil (oil refinery, petro-chemistry, and chemistry), and the formation power engineering and various connected production fields (petroleum machine-building, instrument engineering, black metallurgy, and first of all, the production of pipelines for oil extraction) that directly serve the development of the that field, the petroleum industry ensured the formation of industrial complex in the Republic. 

The oil-gas industry, which was the leading branch of Azerbaijan economy for a long time, affected the general development level of the economy in a different way. Due to the discovery and development of oil deposits in other regions of Soviet Republic, interest to Azerbaijan petroleum decreased considerably in the 50-60s. The efforts for the development of oil industry and the related fields slowed down and the decrease in the development of those fields affected negatively the growth rate of the whole economy. Though new oil fields in the Kura-Aras lowlands were put into operation to increase oil production in the 50-60s, it could not raise oil production to the pre-war level. Several measures were taken to involve rich mineral raw materials, power engineering, and ore resources to the production turnover, to establish important industrial fields, such as black metallurgy, petro-chemistry, chemistry, and electro-technology, machine-building in the Republic. However, this process was conducted very slowly; the agricultural, favorable resort and tourism potential of the country were not used enough. To note, Azerbaijan industry was mainly characterized with the development of fields that required much capital for less production (for example, fuel, power engineering, etc).  In 1970, 70% of main production funds of industry and 40% of the manufactured products was obtained from the fuel, power engineering, metallurgy, and chemical industry and other fields in Azerbaijan SSR. The fuel industry, which provided only 22% of industrial production, took more than 50% of total capital allocated to the industry. The progress in the placement of productive forces was not satisfying; in general, there were serious mistakes in the placement of productive forces. As a rule, the majority of great enterprises were built in Baku and Sumgait, thus limiting their construction in other city and regions, which decreased the level of using labor resources in the small and medium-sized cities, and caused the flow of population to the capital. It is not coincidence that till the 1970s of the Soviet government, for the growth rate of urban population Baku was in the first place among the capital cities of the former Union. In 1970, 63% of the urban population lived in four cities (Baku, Sumgait, Gandja, and Mingechevir) out of the 70 cities and 37% in the other cities in Azerbaijan. This fact created difficulties in meeting the demand to accommodation and other social objects in Baku.  

In the 1970s and first half of the 80s, production, scientific-technical, and personnel potential was formed in Azerbaijan that could not only meet the demands of the Republic economy but could ensure the rapid future development of the regions as well. Azerbaijan, where only 2.5% of the former USSR population lived, hold a high place in the Union economy in manufacturing the main industrial products. Thus, in the mid-80s, 70% of the oil field units production, as well as in 1970-1985, all the depth pumps, 10.5% of the electrical welding equipments, 7.8% of the rubber soda, more than 1/3 of the wine and wine products, all the household air conditionings, 5.7% of refrigerators, 9.6% of cotton yarns, 11.7% of silk raw materials were produced in Azerbaijan. As the process of constructing new industrial enterprises and the purchase of new units and equipments were conducted  in Azerbaijan faster than in the whole Union in the 1970s and I half of the 80s, the main capital increased here in greater amounts than the USSR and the provision level of the employees with funds was higher. The value of main funds per employee was 13.300 rubles in the USSR in 1980, 17.800 and 24.200 rubles in 1985 and 1990 respectively; however these indicators were quite high in Azerbaijan: 19.500 rubles in 1980, 24.500 and 33.400 rubles in the following years. A number of enterprises in the Ukraine, Russia, etc were operating with the resources and the raw materials the country sent. There are some other facts that prove the formation of strong production potential in Azerbaijan in the mid-80s. For instance, the products allocated to the Union funds from Azerbaijan were about 2.0 billion rubles more than the products brought to Azerbaijan in the mid-80s, and even more in separate years. 

As Azerbaijan had been member of the former Soviet Union for a long period, the economy of the country was established as part of the natural economy complex of the former USSR and the structure of the economy was completely adapted to the demands of the Union’s economy. 

After Azerbaijan gained independence, one of the main tasks of Azerbaijan Republic was to establish national economy on the market principles, which met the demands of the independent country, effectively integrated to the modern world economy. 

In Azerbaijan, rich hydrocarbon resources and long-term practice on their extraction and development served as the foundation for the development of oil production, oil refinery, and petro-chemical industry, the favorable natural climate and soil resources allowed for the development of agriculture and tourism, and favorable geographic position helped to join to the international transit transport system. The economy of independent Azerbaijan Republic changed and was formed on these bases. 

In 1990, in order to form legal basis for the economic reforms, main urgent normative and legislative acts were adopted. State orders, quoting, licensing were abolished, foreign trade and process were completely liberalized, the demand of obligatory sale of the capitals gained by the enterprises was cancelled, currency budget was abolished, the limitations on the wages were eliminated, serious finance and monetary-credit policy was conducted, customs and tax policy was improved, appropriate legal conditions for the foreign and special investments were established. Azerbaijan State Statistics Committee report that there were already more than  10.000 small enterprises, up to 80.000 private commercial structures, more than 100 commercial banks, 3.500 cooperatives, 850 farms, and joint enterprises with the foreign investors participation in 1995.

At that period, first of all, the rich oil deposits of the country were brought into attention for the foreign investor: In September 1994, the production share agreement- “Contract of the Century” was signed on the exploration and development of “Azeri-Chirag-Guneshli” fields. Within a short period till 2000, 29 large energy companies from 12 countries were involved to the exploration and development of Azerbaijan oil and gas deposits, more than 30 agreements (production sharing agreements) were signed with their participation on the exploration and development of oil and gas deposits. Exploration and drilling operation on the important part of these agreements continue up to this day and oil and gas production and exportation is conducted on several agreements. Especially the volume of oil and gas production and exportation on the “Azeri-Chirag-Guneshli” and “Shahdeniz” agreements increases every year. 

Currently, the basis of state economy is oil and gas sector. In 2010, 50.8 million tons of oil was produced in the country and this is 3.3 times more than the production (15.4 million tons) in 2003. 8.5 million tons of oil (16.7%) has been produced by State Oil Company of Azerbaijan Republic, the rest has been produced on the basis of oil contracts (mainly “Azeri-Chirag-Guneshli”). Generally, in recent years, oil and gas production in Azerbaijan has been increasing on the basis consortiums that function within the framework of oil and gas contracts.  

Currently Azerbaijan oil is exported to 22 countries. Crude oil comprises 86.5% and oil products 6.0% of the exportation. In 2010, Azerbaijan took 71% of the oil extracted by the consortiums.

In 2010, gas production in the country reached 26.3 billion cubic meters and 7.1 billion cubic meters (27.4%) of this were produced by State Oil Company of Azerbaijan Republic and the rest 19.2 billion cubic meters were produced by the “Azeri-Chirag-Guneshli” and “Shahdeniz” consortiums. As a result of the increase in the volume of oil-gas production and exportation, and in the international market prices of oil, the country gained great profits and became one of the leading states for the growth rate of GDP in 2005-2007: the GDP growth in the country was 26.4% in 2005, 34.5% in 2006, and 25.0% in 2007. Despite the financial-economic recession in the world in 2008, GDP growth in Azerbaijan was quite high- 10.8%. The GDP of that year was 48.85 billion USD, which was by 5.6 times higher than that of 2004. In 2008, GDP per capita was 5600 USD. It is officially reported that oil-gas sector comprise 55-60% of GDP in 2005-2008. In 2009-2010, the decrease in the share of the oil sector and increase in the share of non-oil sector has been observed. Now more than 4 million people are employed in the state economy. More than 1.560.000 or 38.4% of the employed people work in the agriculture or the forestry, but this field forms 5% of the annual GDP of the country. Both planting (fruit and vegetable production, vine-growing, garden products, technical plants, etc) and animal husbandry fields (diary and beef husbandry, sheep-breeding, poultry, etc) are developing in the country.

In recent years, as the number of newly established processing enterprises increase, the number of their employees increases as well: in 2000, 170.000 people were employed in the enterprises of this field, but in 2009, their number nearly reached 200.000, which is 5.0% of the employed people. As the construction works are getting a wide scope in the country, the number of their employees also increases: 5.5% or 225.000 employed people work in this sector and the share of this sector in the GDP varies between 6-8% in recent years. About 1% (40.500 people) of the employed people is employed in the production and distribution fields of electrical energy, gas, and water. Thus, more than 2.0 million people (nearly half of the employed people) work in various production fields of the state economy.

The rest of the employed people work in the service sector. More than 660.000 people (about 16-17%) are engaged in wholesale and retail trade, as well as the maintenance of automobiles and household equipments, 347.000 (8.5%) employed people work in the education sector, up to 280.000 (7%) in the state governing and defense, as well as social welfare, 210.000 (5%) in the fields of transport, storage, and communication, more than 180.000 (4.5%) in the health-care and other social service spheres, up to 140.000 (3-4%) in the operations on real estate and leasing, up to 135.000 (3%) in the communal and private services, 18-19.000 in the financial field.

In 2010, 52.6% of the GDP of the country was formed in industry, 5.4% in agriculture, forestry, and hunting, 7.5% in the construction field, 7.6% in the trade and paid services, 6.0% in the transport and cargo transportation, 1.9% in the communication and information field, 11.9% in the social services sector. 7.1% of the GDP is gained from the taxes imposed on products and importing. 

In 2010, 75.7% of the industrial products were manufactured in the extraction field (the production of oil, gas and other mineral resources), 19.2% in the processing field, 4.5% in the production and distribution of electrical energy, gas, and water, 0.6% in the fields of water supply, treatment of waste waters. The number of employees in the industrial fields has been equal to 165.400 people, and 21.1% of them were employed in the enterprises dealing with extraction sphere, 48.2% in processing, 17.5% in the production and distribution of electrical energy, gas, and water, 13.2% in the fields of water supply, treatment of waste waters. 

In 2010, consumption products in broad variety worth 18404 million AZN or 9.4% more in comparison with 2009 were sold and paid services were provided to the population. In the report period commodity turnover and scale of paid services increased 9 and 10.8% respectively in comparison with 2009. 

The country population purchased food stuff of 8796.1 million AZN and non-foodstuff of 4883.4 million AZN from the trade network and the real volume of these figures increased 7.5% and 13.8% respectively in comparison with the same period of 2009.

The average monthly wages of employees of the state economy incresed by 9.1% in comparison with the ame period of the last year and became 325 AZN. The income of the population per capita increased by 11.9% and reached 2866 AZN. 

In the report period, positive trade balance of 14.4 billion USD was formed with 27.1 billion USD foreign trade turnover, 21.8 billion USD export, and 6.4 billion USD import. 

The average annual inflation was 5.7% in 2010.

In compliance with the laws of Azerbaijan Republic on “Living minimum” and “Targeted state social support”, the need criterion was to be lowered to the level of living minimums. The amount of need criterion applied in the calculation of targeted social support that ensured the social security of low-nicome families was increased to 65 AZN in 2010, and targeted social support involved 110.600 families, or 500.000 low-income people. In 2011, the amount of need criterion was taken as 78.9% of the living minimum and was defined 75 AZN. This has been one of the definite measures taken by the government for the improvement of social conditions of the citizens living in difficult situation. 

The number of economically active population in the country has been 4.346.300 on January 1, 2011, and 4.088.000 people (94.1%) were the people employed in various fields of economy and social sphere. The measures taken by the state ensured considerable positive changes in the social life. Thus, the nominal income of the population increased by 13.3% and reached 25.6 billion AZN and the amount per capita was 2866 AZN, or 238.8 AZN on average in a month. The average monthly wage of the employees during the report period reached 325 AZN with 9.1% increase.

The modern essence of the internationalization and integration of national economy in Azerbaijan Republic is defined by the International Division of Labor (IDL). Thus, the total indicator of world countries’ production volume in the world market is defined on the IDL level. The international economic integration means the free motion of production factors and goods among countries. With the international integration, Azerbaijan Republic becomes potitically independent and mutually dependent by economy. The regional economic connections of Azerbaijan Republic reveal the importance of geographic position.

To note, the main feature of foreign economic relations of Azerbaijan Republic is admission to the international, regional, and local economic organizations, and being integrated to these organizations in all fields of social life. 

After Azerbaijan regained independence (on October 18, 1991), the international economic organizations, with which the first cooperative relations were established, may be classified in the following way: