Price hikes: Azerbaijan’s dual-speed economy

Article published in caucaz.com, 27/02/2007 Issue
By Nicolas Landru in Baku, translated by Kathryn Gaylord-Miles and Christian Nils LARSON

© Nicolas Landru (The Teze Market in Baku)

Baku, early 2007. The economic and real estate booms that the Azerbaijani capital has experienced for the past three years are at their heights. Downtown, as in the suburbs, the office towers are multiplying. Gigantic auto bridges appear over the course of a couple of months. The city’s parking lot is overflowing; traffic jams now occur daily on the main thoroughfares. But this aspect of Azerbaijani oil capitalism has its pitfalls. On January 6th, the government, which controls the whole economy, decided to double the price of domestic energy. This will have a domino effect on the whole interior market and it will be a rude shock for a majority of the Azerbaijani population, which has an increasingly difficult time surviving.

During the first months of 2007, Azerbaijani media heavily publicized a multitude of records broken by the national economy. The list is long. According to Today.az, the country’s commercial surplus was 650% in 2006; the assets of Azerdemiryolbank rose 79%, those of Azerneqliyyatbank, 46%, and those of Azerbaijan Industry Bank, 60%. The nominal capital of insurance companies progressed by 22.4%; loans invested in the Azerbaijani economy increased 64%. Agricultural production broke all records with a value of 1,894,731,200 manats.

On a base of record foreign investment and oil and gas exportation, real-estate prices in Baku have risen exponentially. In two years, this favored domain of Azeri investors has reached levels on par with large European cities. For comparison, while a rental in Baku can hardly be had for less than 600 manats per month, the minimum salary set by the government on February 1 is 50 manats. This booming market has developed on the margins of the country’s social reality by targeting the international community working in Azerbaijan.

The January 6 price increase does not come from market fluctuations. Domestic energy prices in Azerbaijan are set by the Tariff Council, a government organ dependant on the Ministry of Economic Development. Currently, tariffs are subsidized by the state, keeping prices low and preventing market liberalization that could escape government control. This system has drawn criticism from international economic organizations because it isolates Azerbaijan from the world economy.

A November 2004 declaration from Basil B. Zavoico, head of the Baku branch of the International Monetary Fund (IMF), summarizes the organization’s policies with regards to the country: “After the euro and the dollar rose, the price of a Mercedes went up. Even so, Azerbaijani consumers continue to buy them. No one has complained. Why should it be different for energy?”

In June 2006, the representative of the mission of the World Bank in Baku, Viktor Kramarenko, pressed the administration to reduce its subsidies to “increase social spending.”

In accordance with international demand, the Tariff Council therefore decided to raise the prices of domestic natural gas and oil. The cost of gasoline rose 50%, becoming higher in Azerbaijan (around $0.65 per liter) than in the United States ($0.62). Diesel prices rose 25%. Kerosene multiplied by a factor of 2.3; heating oil by 3.3. Electricity saw a record increase of 650%.

This decision led to a cascade of increases in the services sector and the entire domestic market. The price of public transportation in Baku rose 33%. On January 31, the decision was made to raise the price of water 40%.

Although the government has declared that these price increases will not spread to the economy as a whole, the first shocks are being felt. On the heels of the energy price increases, the price of certain products that use those sources is increasing. On February 1st, after the costs of publication doubled, with the price of newspapers also rose. Naturally, the most variable areas of the economy are experiencing a shock: the price of bread has doubled, and that of cars is climbing steadily. In general, all market sectors sensitive to the costs of energy will inevitably see their own prices align with the new economic order.

The government’s argument that an alignment with the world economy, an augmentation of state revenues and a strong fight against smuggling Azerbaijani products will hardly convince independent experts who have denounced the risks and social costs of galloping inflation.

Apathy?

Although taken by the unexpected, Azeri society has not budged. If considered in terms of bad humor, Azeri society has not moved beyond altercations between shared taxi drivers and their passengers. It does not seem to be the hour of popular protest. Of course, certain opposition parties, such as Musavat, have expressed their indignation and fear of seeing the country driven to bankruptcy. But despite their threat to organize demonstrations, apart from declarations, nothing has occurred.

To contain the discontent, the government has taken action to redistribute some of the revenue. On February 1 public employee salaries, minimum salaries and pensions were increased by at least 25%. But because the January price hike, the fourth such hike since 1991, averaged an actual 50% increase while the last hike in 2004 was only 10-12%, these measures may appear insufficient to the Azerbaijani consumer. They also make more unclear the aim of the whole operation. In these conditions, the international press speculated about a possible explosion of widespread anger.

But the iron fist of the Aliyev regime seems to have things under control. Several days after the price hike, a man in front of the presidential palace set himself on fire in protest. The information was initially relayed in the media, but by evening, the news was no longer mentioned and had disappeared from online sources as well.

Journalist Bakhtiyar Hadjiev, who had campaigned against the price hikes, spent 12 days in prison, a punishment which would dissuade other protesters.

A member of a student NGO, Etimad, is irritated by the passivity of his compatriots. “The government can do whatever it wants. No one will react in Azerbaijan. There is no need to worry, the ‘pomegranate revolution’ won’t be tomorrow.”