AZERBAIJAN - Oil Wealth Or Curse.

The Christian Science Monitor said in a piece on Azerbaijan published on Dec. 20, 2005: "On the outskirts of the Azeri capital [Baku], one can find the starting point of the $4 billion Baku-Tbilisi-Ceyhan (BTC) pipeline, a marvel of 21st-century construction and engineering...[which in late 2005] began to pump [crude] oil on a 1,093-mile journey from the Caspian Sea to the Turkish Mediterranean port of Ceyhan. The Monitor then focused on the other end of Baku, where it found "Veli Garacayli's crumbling cement apartment building, the product of 1960s-era Soviet construction and engineering".

The Monitor said hot water there had not flowed through the radiators in a decade, after the boiler which served the building and several others nearby had broken down, and water for bathing and drinking was available only two or three hours a day. Mr. Garacayli, a radio and TV repairman who had been "unemployed for the past five years", said "the sorry state of his building and the ones around it made him question whether any of the growing oil revenues in Azerbaijan - one of the world's most corrupt countries - will make their way to his neighborhood". The Monitor quoted him as saying: "If Azeris don't show their concern, the officials who control the oil money will split it among themselves. The problem isn't only that these people will pocket the money, but they also won't invest it in the country".

With oil revenues set to reach $160 bn over the next 20 years, the question of where the money will go and how it will be spent is one which seems to be on everyone's mind in Azerbaijan. But economists inside and outside the country are warning that, based on the problems Azerbaijan has had in fighting large-scale corruption and in building solid democratic institutions, the oil revenue could end up being as much of a curse as a blessing.

The Monitor quoted Ingilab Ahmadov, an economist who is the director of the Baku-based Public Finance Monitoring Centre, as saying: "If you have this money coming in and you don't have a clear and transparent government system, you will have corruption. It means you will have a very unstable social situation".

The crude oil being pumped in Azerbaijan (most of which will be shipped through the 1m b/d BTC pipeline) came on stream at a time when the country of 8.5m was struggling economically. Some 40% of the population lives below the poverty line. Teachers earn only about US$50/month. And while the impact of the oil money can be seen in Baku - where new high-rises dot the skyline and shiny German sedans compete for road space with rusting Russian Ladas - the areas outside the capital suffer from neglect and their decaying infrastructure.

For years Azerbaijan has been ranked among the world's most corrupt countries. But the government has recently taken some steps to change that, including raising the salaries of public servants and setting up an anti-corruption unit within the state prosecutor's office. In May 2005 the government signed on to the British-sponsored Extractive Industries Transparency Initiative, which obligates it to publicly declare its oil revenues and submit to independent audits.

But the Monitor quoted Rena Safaraliyeva, executive director of the Azerbaijan office of the corruption watchdog group Transparency International, as saying the country still had a long way to go, explaining: "Corruption is widespread and not very much concealed. My view is that the government is trying to eliminate petty corruption but they are not serious about going after grand corruption".

The potential for that kind of corruption could be great. While in 2005, $150m were transferred to the State Oil Fund (SOF), that figure will reach $650m in 2006. Eventually, it is expected to yield $15 bn per year. And while the revenues going into the SOF are being dealt with in a transparent manner, observers warn the fund's expenditures are not.

The Monitor quoted Galib Efendiyev, who directs an oil revenue monitoring at the Open Society Institute office in Baku, as saying: "There's no clear strategy right now for the money in the State Oil Fund and there's no democratic way for deciding how this money will be used. There's no input from the society on how the money will be used.

One person, the president of the fund, controls how it is used". Efendiyev and others in Azerbaijan had been hoping the country's November 2005 parliamentary elections would loosen the grip of the ruling Yeni Azerbaijan Party (YAP) on the institution and allow it to become an independent voice on the question of how the oil revenue will be spent. But Western observers criticised the election as having been deeply flawed. Only a handful of candidates from the political opposition were elected.

The Monitor quoted a source as saying: "If the parliament could gain people who are really into developing legislation, then a lot of legislative acts could be broadened and mechanisms of controlling the execution of laws could be made stronger".

The way to make oil revenues better a country's situation, experts say, is through reform and the establishment of democratic and transparent government. But some warn that the outlook for Azerbaijan succeeding in doing that - particularly in view of the country's November elections - could be bleak.

Stanford University Prof. Terry Karl in a 2003 article for Transparency International wrote: "Only those countries enjoying an efficient, accountable and democratic state prior to the exploitation of oil for export (e.g. Norway) have been able to manage oil revenues and produce better development outcomes. This is the crux of the oil trap".

Since becoming independent in 1991, Azerbaijan has attracted significant international interest in its substantial oil and natural gas reserves. Foreign investors are helping the country to develop its rich oil and natural gas reserves in the Caspian Sea basin, and completion and expansion of new pipelines will allow Azerbaijan to become a significant energy exporter over the next decade.