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Introduction

Advancement of free market and democratic reforms in Azerbaijan will improve economic, political, and social conditions in a country critical to the achievement of U.S. regional goals and objectives. Located in the Trans-Caspian energy corridor, Azerbaijan is a strategically important link in the region’s energy export system. Currently in the process of building up its oil and gas industries, Azerbaijan represents a growing market for American goods and services. Azerbaijan’s long-term stability and market growth, however, will be dependent not only on revenues from these fuel industries, and on the Government of Azerbaijan’s (GOAz’s) development of democratic principles of rule of law, freedom of expression and other basic human rights.

Section 907 of the Foreign Assistance Act prevents the U.S. Government or its contractors from providing most direct assistance to the GOAz and its officials. Promotion of U.S. interests of market reform and a democratic society is thus targeted to non-governmental organizations (NGOs) and direct humanitarian assistance. Following recent exemptions to Section 907 granted by Congress in annual appropriations legislation, program activities have been expanded in private sector development, humanitarian assistance and democracy building. USAID’s development assistance activities fully coincide with the Azerbaijan Mission Performance Plan, which identifies transition to a democratic society and an open market economy as basic tenets of U.S. Government efforts in Azerbaijan.

The Development Challenge

Eight years after the breakup of the Soviet Union, Azerbaijan continues to adjust to the new challenges and responsibilities of an independent state. The GOAz has been slow to embrace the principles of democracy and a market economy, while the society has been slow to demand them.

Billions of dollars resulting from signed oil contracts have had little trickle down effect on the general population. While growth is apparent in Baku as a result of oil industry development, the economy outside the capital remains in stasis. The agriculture industry has the potential to employ a large segment of the population, however, this sector lacks support from the central government. Agricultural regions in Azerbaijan are not adequately represented at the national level and state-funded credits and loan programs are insufficient.

With Soviet-era state industries nearly defunct, the fastest growing segment of the economy has been small and medium enterprises. Nonetheless, limited credit access and rampant corruption have hampered growth in this promising sector. Government reluctance to enact regulatory reform and privatization of state property has resulted in a cautious "wait and see" approach with potential investors.

Azerbaijan’s authoritarian government discourages dissent and does not support a free press. Despite government obstacles, NGOs -- with assistance from Western countries, including the United States, and international institutions -- have established a foundation for public advocacy and political reform. Moreover, the GOAz does recognize the important role NGOs play in delivering the bulk of the humanitarian assistance to those displaced by the Nagorno-Karabakh conflict.

With assistance from the international donor community, the GOAz has achieved a degree of macro-economic stability and growth. A nascent small business sector concentrated in Baku is taking root. The foundation for future political change is being put in place with the emergence of civil society. Opposition political forces are organizing, and an increasing number of citizens are participating in various types of political and social-service-delivery NGOs. These important steps, which have been supported by the U.S. assistance program, do not include the comprehensive economic or judicial reforms needed to create a fully democratic, market-based economy.

From the outset, U.S. assistance to Azerbaijan has primarily been for humanitarian relief to refugees and internally displaced persons. Those programs have been administered largely by NGOs and international organizations whose activities include: distribution of food, clothing and medicines; provision of basic medical services; construction of shelters; and rehabilitation of water supply and sanitation systems. Emergency relief has reduced human suffering, but cannot substitute for longer-term development assistance efforts. In recent years, humanitarian assistance has been augmented with U.S. support for grass roots democracy-building and small private enterprise development.

To take advantage of its vital link in the Trans-Caspian energy export system, it is essential that the GOAz develop a market-oriented, transparent and corruption-free economic, legal and regulatory system. Nevertheless, Section 907 still limits the U.S. Government's ability to assist Azerbaijan to achieve these economic restructuring goals, and the United States cannot rely on other donors to promote U.S. interests in Azerbaijan.

Other Donors

Major bilateral donors (France, Germany, Japan and the Netherlands) and multilateral lending institutions (the International Monetary Fund and World Bank) have approved tens of millions of dollars in credits to support critical reforms geared to restructuring the economy and stimulating small business development, as well as loans for rehabilitation of Baku's main power plant and water-supply system. Under an IMF Systematic Transformation Facility, the GOAz is committed to a comprehensive program of economic stabilization and structural reform. The UN High Commissioner for Refugees plays a prominent role in coordinating humanitarian assistance. Direct humanitarian aid in large quantities and dollar amounts is provided by the United Nations Development Program, United Nations Children Fund, World Food Program, World Health Organization, the International Federation of the Red Cross, and the International Rescue Committee.

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