AZERBAIJAN - The Political Background.

Heidar Aliyev became president of the republic in June 1993. He was re-elected to a second five-year term on Oct. 11, 1998. Soon thereafter Elgar Kerimov, head of the new AzerShah political party, told reporters in Baku that Aliyev was so vital to Azerbaijan's stability that he should be made monarch under the constitution.

Aliyev then concentrated on grooming his first son, Ilham, to succeed him. Ilham was the first vice president of Socar and deputy chairman of the ruling Yeni Azerbaijan party. On Aug. 24, 2002, the Azeris voted on changes to the constitution which smoothed the way for Ilham to become ruler. In announcing the vote in June, the elder Aliyev said the alterations were aimed to bring the country in line with European standards.

The main change made the prime minister the second ranking person in the republic to take charge should the president be unable to govern. So it was easy for parliament on Aug. 4, 2003, to elect Ilham as prime minister, after Artur Rasizadeh resigned.

This change was significant because until then the speaker of parliament, who was elected by deputies, was to assume power if the ruler stepped down or died. In contrast, the prime minister used to be appointed by the president.

When the elder Aliyev announced in mid-2002 that he was running for a third five-year term in October 2003, it was widely assumed that eventually Ilham was also to become a candidate to the presidency. That was because many people knew that the elder Aliyev was not likely to last another term. He had undergone extensive surgery, including a multiple heart-bypass operation. At times he appeared frail in public. He collapsed twice in April 2003.

The elderAliyev used tactics he applied as KGB chief of Baku in the 1970s. While harsh, these tactics managed to create some degree of stability - the last failed coup attempt was in March 1995 - compared to the chaotic situation before. Between 1991 and June 1993, the country had four changes of government amid much bloodshed.

Azerbaijan fought a war with Armenia sporadically from 1989, ending in a ceasefire on May 12, 1994. The conflict still causes Baku big problems because of a related US congressional ban on American aid to Azerbaijan. Pro-Armenia activists in Washington have since 1992 kept Baku on a US government blacklist - the only former Soviet republic to be punished in this way.

The elderAliyev proposed that "a peace treaty can only be concluded after Armenia frees occupied territories and recognises Azerbaijan's borders". Armenia still occupies about 20% of Azerbaijan's territory, in a predominantly Armenian enclave called Nagorno-Karabakh.

In Soviet times this area, in south-western Azerbaijan, was 75% ethnic Armenian. In 1988 its local assembly voted to secede from Baku and join Armenia proper. Fighting between the two ethnic groups broke out which, with the collapse of the Soviet Union at the end of 1991, escalated into full-scale war. About 25,000 people were killed, and close to a million from both sides were driven from their homes (see background in Vol. 59, No. 6).

In his hard bargaining, meanwhile, the elder Aliyev even urged the US to have military base facilities in Azerbaijan, to tilt the balance in favour of Baku as well as keep Russia and Iran on their guard. But the request was turned down. Instead, the US now maintains some military presence in neighbouring Georgia, as well as base facilities in Uzbekistan, Kazakhstan, Kyrghystan, Turkmenistan, Afghanistan and Pakistan. Since its invasion in March 2003, the US has established a strong presence in Iraq.

Before he collapsed in April 2003, the elderAliyev had consolidated his hold on power since the 1994 ceasefire with Armenia. The key opposition figures now are either in exile or in prison. Demonstrations by the tolerated opposition in May 2000 were broken up and were followed by a systematic crack down on their leaders. The demonstrators wanted electoral reforms and better human rights policy.

The elderAliyev's focus was to turn Azerbaijan into a wealthy country rivalling the Persian Gulf oil states. Under him, and now under his son Ilham, Azerbaijan has the greatest number of E&P deals of any Caspian country. On July 3, 2000, Fitch IBCA gave Azerbaijan its first international credit rating, B+, two notches higher than Russia's B-. It said it had good economic prospects. The elder Aliyev kept pledging that, as a result of "our oil strategy, in the coming year Azerbaijan will experience a new dawn".

In dealing with the big powers, companies and the country's neighbours, the elder Aliyev kept in mind that petroleum and geo-politics were always inter-related in Azerbaijan. Petroleum has been produced since 1870, with Baku then known as "the world's oil capital".

Oil consortia lined up in Baku, which is isolated from the major markets, reflect a balance between two blocs competing for influence in the Caspian: the US/Europe and Turkey on one hand, and Russia and Iran on the other. The elder Aliyev tried to maintain good relations with all sides, while the Baku governments between 1991 and June 1993 were viewed as being either pro-US/Turkey or pro-Russia/Iran. The elder Aliyev had mixed success in trying to please everybody.

The biggest consortium groups companies from several countries, including the US, called Azerbaijan International Operating Co. (AIOC) and led by BP. AIOC has had the blessings of Washington, the West European powers, Ankara and Moscow. But Moscow is opposed to AIOC's BTC pipeline project (see OMT).

Initially, the elderly Aliyev had intended to give Iran a 5% share out of Socar's 20% stake in AIOC. But US pressure forced Baku to abandon that plan, according to the elderly Aliyev in an interview with London's 'Financial Times' of June 8, 1995. He added in the interview that "the Iranians were very offended...but we do not want to complicate our relations with Iran, because we have a common border and we are joint users of the Caspian".

The second biggest consortium in Azerbaijan, for Shah Deniz, excludes US companies because it has an Iranian partner - NaftIran (Nico) - which is vetoed by Washington (see brief profiles of the main E&P consortia in Gas Market Trends Nos. 1 & 2).

A border conflict broke out between Azerbaijan and Iran on July 23, 2001, when an Iranian gunboat forced two BP-operated survey vessels on the Alov offshore block to leave the area. The confrontation came just days after Iran warned it would prevent foreign companies working with Azerbaijan from developing offshore regions Tehran claims as it own. There is also a conflict between Azerbaijan and Turkmenistan over offshore fields claimed by both sides (see background in Vol. 59, No. 6).