9.3 Visions of Baku - Future Hub of the Caspian

Autumn 2001 (9.3)
Pages 50-53

Visions of Baku
Future Hub of the Caspian

by Stanley Escudero

Stanley Escudero served as U.S. Ambassador to Azerbaijan from 1997 to 2000. Before coming to Azerbaijan, he had assignments in Tajikistan, Uzbekistan, India and Pakistan. He worked for the U.S. Embassy in Iran from 1971 to 1975 as well as during the Revolution in 1978 and 1979. After he retired from the State Department in 2000, he and his wife, Jaye, decided to return and work in the private sector in Baku. Here Escudero reveals his hopes for Azerbaijan's future: prosperity, stability and opportunities for foreign investment, both inside and outside the energy sector.

This is a seminal moment in the development of Azerbaijan. I'm convinced that this country is standing on the edge of the greatest boom that it has ever known. I don't see how it can fail to be successful, if the right kinds of decisions are made, and the right steps are taken-now.

Azerbaijan, unlike Armenia, can prosper, maintain stability, become wealthy and benefit from its oil money even without the return of Nagorno-Karabakh or its additional occupied territory. Armenia, on the other hand, cannot develop unless it cooperates with Azerbaijan.

I certainly wouldn't be coming back to Baku if I didn't believe that Azerbaijan didn't have a prosperous, bright future and that it is going to become what the President has always stated - a stable country in which there will be many opportunities for foreign investment, both inside and outside the energy sector. I hope that the Azerbaijani people will benefit from this process and from the prosperity that will come. Naturally, I hope, myself, to be able to contribute to this process and to benefit from it as well, since I am now in the private sector.

But my vision for the future of Azerbaijan, as you might suspect, is really rather similar to that of President Aliyev's. I've reached the conclusion over the years that the President is right about a great many things, and certainly he's right about the way he sees the future of this country.

Left: One of the most dramatic changes in Baku during the past ten years has been the massive construction and renovation projects. Here note that the profile of Lenin's portrait has been scraped off the mosaic tile wall. The white building in the background (left) is the President's Office. Photo: Elman Gurbanov

First of all, Azerbaijan is blessed with large quantities of oil and gas. AIOC [Azerbaijan International Operating Company] will be producing in excess of a million barrels a day at peak.

And we haven't even heard yet from a large number of the other big offshore structures here in Azerbaijan. There are 112 structures offshore that I know about. How many of them have been drilled? Eight? Ten? Obviously, the best prospects are being drilled first, but I recall that the enormous North Sea find was not made until about the 24th well was drilled. There is still much more exploration to come in Azerbaijani waters, despite the recent setbacks.

Azerbaijan has a great deal of oil onshore as well. The Soviets weren't very good oil drillers. As we examine more and more of their wells, we find that they weren't drilled properly. Among other things, the cement wasn't poured in correctly, the wrong kinds of mud were used, and wells were perforated at the wrong levels. Basically, when they thought they had taken most of the oil from an onshore field, they were wrong. I believe that there's a lot more oil onshore in Azerbaijan than people realize.

Multiple Pipelines
Azerbaijan also has the advantage of geography, since East-West trade routes pass right through it. The possibilities for transportation of oil and gas out of the Caspian region are staggering. Five to six million barrels a day at peak, whenever that peak comes, is not an unrealistic estimate.

There's so much oil in the Kashagan structure (Kazakhstan) that it will not all be able to flow via the Caspian Pipeline Consortium [CPC] complex. It will go in many directions. And one of those directions ultimately will take it to the Sangachal Terminal (Azerbaijan), where it will join the other pipelines heading west.

New pipelines will be built and others will be enlarged. The CPC line, which goes from the giant Tengiz field in Kazakhstan to the Russian Black Sea port of Novorossiysk, will be enlarged. The northern system that goes from Baku through Dagestan and other parts of Russia to Novorossiysk will probably be enlarged. And the western line that goes from Baku via Tbilisi and down to the Turkish port of Ceyhan (pronounced "Jeyhan"), will be enlarged.

Take a pipeline that's built for a million barrels a day: it's possible to enlarge it somewhat simply by adding more pumping stations, although eventually the companies may want to build another line; one Baku-Tbilisi-Jeyhan pipeline won't be enough.

Neighboring Iran
Looking south, no strategic plan for the export of Caspian basin oil and gas can ignore Iran. This country requires at least 400,000 barrels of oil a day to satisfy its own requirements for its northern refineries. Iran also has a need for gas, again in the northern part of the country, as most of the country's oil and gas sources are located in the south.

It would be cheaper for Iran to bring oil and gas south from the Caspian region than to build pipelines to move its own oil and gas north. They could market the oil and gas in northern Iran and process the oil at large refineries in Rey (near Tehran), Araz, Tabriz and Isfahan. Iran doesn't actually have to buy the gas or oil; they could swap it for their own oil or gas in the Persian Gulf. It would just be a question of negotiating the relative value of Caspian oil in relation to Iranian oil.

Current U.S. policy opposes the sale of oil and gas to Iran. But that's not necessarily the best thing for the countries of the Caspian, which need to decide for themselves whether or not it's in their own best interests to trade with this large, powerful and very important southern neighbor.

Of course, the United States has no control over what these nations do, but it does have some control over the oil companies that are based in the United States or have large financial exposures there. International oil companies that have extensive holdings in the U.S., such as retail gasoline outlets, would naturally weigh carefully whether or not to be involved with Iran under these circumstances.

Baku: The Next Dubai?
Geography is of particular advantage to Baku. In ancient times, the Silk Road was not just a single route; it was like a mountain river with many courses that wove in and out together. And Baku was a nexus for that Silk Road. Most of the routes that crossed the mountains north of Iran linked in Baku and then branched out again.

If you think of the Caspian basin as a whole, you see that the oil and gas reserves are spread around the entire basin, and that there will need to be some kind of central hub - a center for the administration of businesses that will establish themselves in the Caspian. The area will require a center of communication, banking services, transportation, storage of various types, light manufacturing and a variety of other services - rather like Dubai.

The city of Baku is uniquely fitted to play all of these roles. And when you look around the Caspian Sea, what other city is there - with the possible exception of Astrakhan - that could take on this role? Baku has the infrastructure, the opportunities and mindset for change and ideal geography. I think that within a generation, Baku will develop into a center much like what Dubai is now.

Dubai is so much more than just a big oil town. It generates economic development in the non-energy sector and guarantees economic and political stability for a broad segment of the population. Dubai is an engine for the development of an indigenous middle class. And ultimately that is what Azerbaijan needs most.

Growing Prosperity
We're already starting to see signs of economic development in Azerbaijan. If you travel outside of Baku to the towns and villages scattered throughout the country, you'll see two, three, sometimes 10 or 20 large residential buildings being constructed on the outskirts. Azerbaijanis are obviously building these places for themselves, either because they have family residing in the area or because they want a country dacha.

This tells us several things. First of all, it's a sign that there is a lot of new disposable income in this country. It also shows that Azerbaijanis have enough confidence in the economy to put their money in non-liquid assets.

It also shows that by building something large, people are no longer afraid to call attention to themselves. They are confident that the authorities are not going to take their property away. It also indicates that there is money outside of Baku, although some of it might be from Baku residents who are investing and building outside the capital. In any case, the benefits of economic development are gradually beginning to spread and manifest themselves.

Oil Revenues
It's extremely dangerous for any country to completely rely on a single product for the development of its economy - especially oil and gas. To do so virtually guarantees that nation's eventual economic collapse. Just look at countries that became rich petrol states in the 1970s: Nigeria, Venezuela, Algeria, Iran, Angola, and even more recently, Indonesia.

When a small percentage of the population has a great deal more money than the majority, their demand for goods pushes the prices up. The majority can't keep up with inflation and can't afford the things that they need: food, gasoline, cars, spare parts, clothes, all kinds of things. They suffer.

It's not just oil. Just take a look at the economy of Imperial Spain in the 1500s and 1600s, when it was conquering the New World and bringing large amounts of gold and silver back to Spain. The economy of Spain inflated to an extraordinary extent on the basis of this influx of gold and silver. Many Spanish artisans and workers had to go to other parts of Europe to work because they could no longer afford to live in Spain. Eventually, the Spanish citizens drowned in their gold, just as the petrol states of the 1970s drowned in their oil. And Azerbaijan must not do that.

Norway is the only country that seems to have escaped this problem. First of all, the Norwegians already had a vibrant non-energy sector before oil was discovered, which they made even stronger so that they would have an offset to the oil income and maintain a more balanced economy. Second, they created an Offshore Oil Fund, which enabled them to bring the oil money into the country only as fast as the economy could absorb it.

You can't simply take oil money and bury it in the ground or put in under a mattress. You must take it and invest it in safe, secure investments outside of the country. Kuwait, for example, has made more money from its offshore investments than it has from the sale of its oil virtually every year since the mid-1980s.

Preparing for the Future
Azerbaijan is aware of the risk of being inundated with oil money and knows that it can't be dependent on only one product. The government here understands this phenomenon and knows that it needs to prevent the oil money from inflating the economy. The Azerbaijani leaders have consulted with the Norwegians and others and have attended international conferences seeking solutions to this problem.

The fact that they have created an Oil Fund is an indication that they know perfectly well what the risks are. They also understand the need for the creation of a non-energy sector, which hopefully will be strong enough to deal with the oil money when it arrives, or even to function if there is no oil.

It will be a few years yet before we find out if this government will succeed in insulating the country's economy from the pernicious effects of oil money and use the money to develop projects that bring it along at just the right pace. It's a very thin, fine line and not easy to do.

It's very tempting for any government to want to respond immediately and fully to the needs of its people when it has the capacity to do so. When a government looks out and sees that its people need new roads, more electricity, better healthcare, improved education, cheaper food, and it has the ability to provide many of these things, the temptation will be to do so.

But in a developing country that's becoming more democratic and just beginning to develop a real free market-based non-energy sector, you can't just spread the money around willy-nilly. You need a strategy. You need to understand where you're putting the money, what its impact will be, how it will be absorbed, how the people will benefit and what the economic consequences will be.

This is difficult because it often means telling the people: "Yes, we could help you now, but it's better for the country to wait until next year or the year after that." That means the people won't always have what they need right away. But if the government doesn't plan wisely and doesn't introduce money in at the pace and in the areas where it can best be supported by the rest of the economy, the long-term effects can be detrimental.

Not everyone will benefit from the oil immediately. Not until 2005 or so will the first large returns of oil development begin. And it will take several years after that before the people benefit in a significant way.

A Long Wait
Ideally, as Azerbaijan's investor-friendly climate develops, more money will be coming here and there will be the creation of new wealth, the resurrection of many types of industry and the development of a service economy. This has enormous benefits in terms of employment and higher standards of living for many Azerbaijanis. A lot of these people will themselves become entrepreneurs and start their own companies. Such is the beginning of an indigenous middle class.

In the meantime, it's difficult to tell the young people: "Listen, I know that you don't have enough now. And I know that you can see that some are benefiting and you aren't. But the only thing you can do is wait and study and prepare yourself for opportunities that will come. But it will take a few years. You may suffer during these few years, but compare yourselves to others in the former Soviet Union who don't have this kind of opportunity."

There are other former Soviet countries that are in great economic difficulty and have little hope. All they see is more of a long road, which is as bleak as the section of the road they're standing on right now. Numerous countries don't enjoy the same sort of stability that Azerbaijan does. Nor do they have the same prospects for economic development.

This country has both stability and good prospects. If its people, who are very clever, will look to the future and analyze the opportunities and prepare themselves to take advantage of them when they come, they'll benefit greatly.

I see several positive trends continuing that had already come into existence when I was here as Ambassador - changes that have been underway for some time. If they continue in this direction, there will be a certain self-perpetuating momentum, which over time will ensure the development and expansion of an indigenous middle class via a more investor-friendly climate in the non-energy sector in Azerbaijan.

For example, the manufacturing of oil-related equipment could be resurrected. During the Soviet period, Azerbaijan produced nearly 80 percent of all oil-related equipment in the entire Soviet Union. The factories in Sumgayit (north of Baku) and elsewhere in the country are still there, although many of them have deteriorated.

But more importantly, the knowledge base is still here. The same people who worked at those factories are still in their prime; they are trained and experienced. And with additional training and the import of modern equipment, these very same workers could, very inexpensively, produce simple items like sucker rods (a device used in the drilling of oil wells), simple valves, pipe or other products that are not very high-tech.

As they begin to produce these items to international specifications, such as those of API (American Petroleum Institute), they would be able to compete very successfully with international producers of the same things. Their largest market would be here in the Caspian basin, because the labor and transportation costs would be much lower. But ultimately, Azerbaijan could become a major exporter of oil-related equipment.

Regional Stability
I believe that Azerbaijan will be the economic engine for the development of the three Caucasus countries. First will come Azerbaijan, and then because of the enmity between Azerbaijan and Armenia and the agreement already signed related to oil and gas routes, Georgia will be second. Armenia will be last.

Georgia has very few natural economic resources. Its internal political situation is even worse than Armenia's. If Armenia is to survive, it must partner with Azerbaijan to benefit from regional development schemes.

Nor are such strategies going to be funded entirely from abroad. The nations of the Caucasus will have to help pay their own way. The basic economic development costs will be borne in part by foreign investors and, in part, by investments from money generated in Azerbaijan. But if Azerbaijan does not succeed, Armenia will fail completely. Regional stability is likely to follow, rather than precede,
Azerbaijan's development. It has to be difficult for the Armenians to internalize this reality.

Azerbaijan can prosper, maintain stability, become wealthy and benefit from its oil money even without the return of Nagorno-Karabakh or its additional occupied territory. It would be a great shame if such were to happen because it would preclude Armenian participation in regional development fueled by Azerbaijan. But such a scenario could occur.

Armenia, on the other hand, cannot develop unless it cooperates with Azerbaijan. Armenia has very few natural resources. Half of its population has already left the country since independence [1991]. Although the Armenian Diaspora has worked hard and enjoys economic and political success in the West, they lack the collective resources to enable the Armenian nation to develop on its own. Armenia enjoys enormous amounts of foreign aid per capita, but countries don't develop on the basis of foreign aid. They develop on the basis of hard work. If Armenia is to survive, it will have to do so on the coattails of development related to Azerbaijan.

Azerbaijani Identity
With the exception of that one brief, flickering moment of independence between 1918 and 1920, Azerbaijanis have always been forced to see themselves as an extension of somebody else. That was certainly true during the Cold War and the period of Soviet domination [1920-1991].

Having served as U.S. Ambassador in Uzbekistan and Tajikistan before coming to Azerbaijan, I thought there would be many more similarities between these countries than I found. I thought the languages, the culture and attitudes of the people would be more alike, especially between Uzbekistan and Azerbaijan. But Azerbaijan is very much its own country, even though it is located at a crossroads. In Azerbaijan, you sense a great respect for ancient Persian poets. At the same time, the Shiite Islam has had a different impact than it has in Iran. Turkic influence is widespread, particularly from the Western Ottoman Turks, not so much the Eastern Turkic groups like the Uzbeks. It was the Ottoman Turks who controlled the area during the wars between the Persians and the Turks. The impact of the Russian influence, of course, is still very strong.

You see all of these influences mixed together in one very spicy and wholesome stew in which the basic stock is fundamentally Azerbaijani. The resulting melting pot is neither Persian, nor Turkic, nor Russian, but Azerbaijani at its core.

The Azerbaijani people are by nature very warm and hospitable and welcoming of foreigners. They have benefited by the diversity of nations and cultures that have passed through their territory. They have suffered as well from the domination of races like the Albans, the Arabs, the Persians, the Turks of various descriptions, the Mongols and most recently, the Russians. But through the centuries, they have basically kept their Azerbaijani-ness. I think only just now have they been given an opportunity to truly express themselves.

Now that the country has an opportunity to be what it really is, and can do so openly, you are beginning to see a welling up of Azerbaijani culture and a growing awareness of the richness of that culture by others, even outside of the country itself. I think it's a very impressive cultural accomplishment and something that Azerbaijan as a nation should be extremely proud of.

Being an ambassador is definitely a learning experience. You don't come to a country knowing everything about it. You try to learn from your studies and briefings. You read back files, you read books and articles. You talk to people who know the country. But to truly understand any country, you have to live there and let the reality of that country penetrate your pores. And as that begins to happen - and it's not an instant process - you then begin to have the depth of understanding and perception that you need as an ambassador. While I was Ambassador in Azerbaijan, I discovered so much that's admirable about the Azerbaijani character.

Azerbaijanis have succeeded in keeping their identity throughout these centuries. You see people who are very much interested in economics and culture, but less interested in conflict. There are people who believe in getting along with their neighbors, but at the same time they're prepared to stand up for themselves if it is necessary. Modern-day Azerbaijanis have a greater sense of realism about their position in the world, about their relationship to the West. They realize the need for change, within certain limits, if they are to be successful in the emerging modern world. This is what I think tipped the scales, more than anything else, and led me back to Azerbaijan.

This country is not going to suddenly cease being Azerbaijan and try to become Europe or America. Azerbaijanis are always going to pick and choose what they feel is best for them. They will not try to emulate some other culture, and that's exactly as it should be.

Stanley Escudero, former American Ambassador to Azerbaijan, was interviewed by AI Editor Betty Blair in Baku in June 2001.

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From Azerbaijan International (9.3) Autumn 2001.
© Azerbaijan International 2001. All rights reserved.