O n March 4, 2005, the Azerbaijan International Operating Company (AIOC), which coordinates the Azeri-Chirag-Guneshli contract, began exporting oil from the Azeri oilfields. The developmental stage of the project is complete, and now the implementing stage is beginning. Full-scale operation of all three oilfields and combined outputs will mean production of over 1 million barrels a day by the end of 2008. AIOC confirms that the Baku-Supsa pipeline requires (145,000 barrels a day). This amount crude is needed each day before any surplus is available for the Baku-Tbilisi-Ceyhan pipeline, and regardless, other amounts will be exported by AIOC through the Baku-Novorossiysk pipeline. 1,425 billion barrels of oil (193 million tons) will be extracted from the central Azeri oilfield. The maximum volume of oil extraction from the current oilfield will be 375,000 barrels a day (18.7 million tons annually).

However, extra resources will go into the State Oil Fund of the Azerbaijan Republic after production and transportation of natural gas from the Shahdeniz oilfield in 2006. By 2024, the income generated for the country from the realization of hydrocarbon resources in international markets could increase by 100 billion USD. Certainly, both internal and external powers in Azerbaijan are prepared to fight for what they perceive as their fair share of the proverbial pie.

This becomes not just a question of which countries or companies will receive contracts to build roads, hospitals, schools and housing in Azerbaijan, but also to which countries high-ranking officials will be inclined to act most sympathetically and receptively in awarding contracts, franchises, and other reimbursements.

External Threat

Recently, the political-economic situation was irritated by the renewed threat of conflict and hostilities between Azeri and Armenian armed forces. Any fighting between the two nations could have dire consequences, resulting in death and destruction on both sides, wounded soldiers, and collateral damage (civilian causalities). The uncertain conditions of the past decade has kept both states tense, and stalemate has caused substantial damage to the macroeconomic conditions for both sides, delaying regional economic expansion and development. The area of Azerbaijan illegally occupied by Armenia has become a subject of much haggling with the Azeri Government, and is also a matter of concern for the United States, Europe and the Russian Federation.
Things are further complicated by the unexpected visit of US Defense Secretary Donald Rumsfield to Baku in April, which could mean that the US hopes to use Azeri territory as a base of operation for possible operations or the basing of US troops in the region. Russian and international military analysts suspect that Washington wants to make a coalition of sorts in the region, which could involve Azerbaijan and Kazakhstan. It is even possible that the Bush White House would try to involve Turkey at a later date.
However, there is no agreement as to how the pie should be sliced, what deals might be necessary, or what the external factors will be, and Azerbaijan will have to do some soul searching to secure the right to develop its petroleum industry.

Based on statements from Russian politicians and members of the Duma, Armenia appears to be drawing closer to Russia, and thus the gravitation of Azerbaijan to Western states is a normal reaction to the movement of Armenian foreign and security policy, and the potential for regional destabilization and potential economic mayhem. This concerns not only billions of dollars in investment and the potential return that leading Western companies could earn from the development of Azerbaijani oil fields, but also income gained from construction projects and support services needed to create and sustain an oil producing infrastructure. The Azeri Caspian sea shelf now hosts the largest oil-producing platform in the world. The amount spent on construction of modern drilling rigs there, and on construction of the Baku-Supsa and Baku- Tbilisi-Ceyhan pipelines, as well as the southern Caucasus pipeline (from the oilfield "Shahdeniz" to the Turkish city, Erzurum) has already exceeded ten billions dollars in direct foreign investment, not to mention the impact on the local economy.

Certainly, Russia sees itself as a leader in the Caucasian and Caspian regions, and it does not want Russian companies to lose billions of dollars in business or more in the future. Consequently, malicious aggravation of the situation is predictable, especially as other outside forces have taken a more proactive interest in the internal affairs of Azerbaijan and want to use it as a staging area and base for foreign military forces from outside the sphere of the former Soviet Union. Now, with the present administration of the Kremlin under the leadership of President Vladimir Putin, all clearly realize how short-sighted the policy was during the presidency of Boris Yeltsin, who supported the activities of Armenian separatists in Nagorno-Karabakh region of Azerbaijan, and now all sides are reaping the bitter harvest of having stirred nationalism and ethnic flames in a zero-sum game planned from outside.

Russia now faces its uneasy fate of losing face with Armenia, its traditional ally in the Caucasus, and also of losing ground in the Azerbaijan market and political arena by admitting its mistakes in backing an unjust position in the Nagorno-Karabakh conflict. Certainly, the United States and its Western allies have tried to strengthen their positions in Azerbaijan in light of Russia's mistakes, looking for possibilities to expanding their sphere of influence, not only in the Caucasus, but also in all of Central Asia and its bordering nations.

Concerning aggravated interests between the West and Russia concerning Azerbaijan, there is always the temptation to interfere in the internal affairs of a sovereign and still fairly new state. At present, this concerns political and financial support for opposition powers against the current administration of Azerbaijan.

External Contentions

There isn't any serious discord among high-ranking officials in Azerbaijan's administrative structures at the moment. Apart from former Speaker Rasul Quliyev, who has clearly moved to the side of the opposition in the USA, other members of the ruling party, "Yeni Azerbaijan," are rather difficult to mention.

However, one bone of contention could be the use of the financial resources of Azerbaijan's State Oil Fund. Today many high-ranking officials are trying to cover themselves by citing shortcomings within their respective branches. In particular, high-ranking officials representing the interests of state companies in the spheres of energy and transport have been especially zealous recently, trying to prove that they are acting in the best interests of the country.

Nevertheless, what can Azerbaijan gain if its government approves investment projects for hundreds of billions of dollars? Will the welfare of the Azerbaijan population improve, or will it only deteriorate further?

In order not to exaggerate, let's examine a few of the projects submitted to the government for consideration. One of the biggest branches for which state resources will be used is energy. Credits worth 400 million USD have recently been attracted to restore and modernize the energy sector. Current funds have been used to complete construction of the "Yenikend" Hydroelectric Power Station, for Steam-Gas Installations at the "Northern" State District Power Station, for two power blocks in Baku Thermal Power Station No.1, for reconstruction of the Mingachevir Hydro Electric Station, for modernization of electrical power stations and substations, and so on. But these are minor in comparison with forthcoming work in this branch. So today, the Azerbaijan government continues to attract foreign credit for construction of new generating capacities. In forthcoming years, the construction of Steam-Gas Installations will begin in Sumgayit, and negotiations will start on the construction of Steam-Gas Installations in the "Northern" State District Power Station.

All of the above-mentioned projects would raise Azerbaijan's energy generating capacity to 6,000-6,500 megawatts, allowing it to approach electric power production indexes of 29-30 billion kilowatt hours by 2010. Another 1.5 billion USD would be needed to push these indexes to 37-38 billion kilowatt hours by 2015.

Recently, the appetite of Baku's underground office administration has been whetted. In order not to waste time on trifles, it has worked out two projects for more than 1 billion USD. Construction of a 25-kilometer underground line from the Azizbeyov metro station to the Heydar Aliyev International Airport is estimated at USD 400-500 million. Another unfortunate project to construct a branch line from Memar Adjami to Depot-2 is estimated at 600 million USD, while construction of three underground stations and a new depot have also been planned. However, workers on the underground may remember a construction project for an underground line to Yeni Guneshli planned during the Soviet period.

As we see, the question concerns a huge amount of money, and Azerbaijan's Ministers of Education and Health, looking at the dire condition of regional schools and hospitals, are prepared to struggle for additional funds. But this struggle involves some high-ranking officials who can easily "go too far" and then appear to be out of control, using the funds for their own interests, whether political or economic.

Destabilization or Co-operation

With Azeri parliamentary elections soon approaching, this could be considered one of the crucial factors in the struggle of the opposition against the acting structures of the current government. After Georgia, Ukraine, Kyrgyzstan, what country is next expected to be next in line for a revolution? With Azeri parliamentary elections soon approaching, this could be considered one of the crucial factors in the opposition's struggle against the current government. After Georgia, Ukraine, Kyrgyzstan, which country is next in line for a revolution?

Some experts predict that there will be revolutions in Byelorussia and Armenia, since both sides seem to be trusted allies of Russia as part of the Commonwealth of Independent States (CIS). For Azerbaijan, with its Western stance, this would not necessarily involve changing its political orientation. Additionally, at first sight, the United States and its Western allies should be especially interested in supporting the current government, considering the billions of dollars worth of direct foreign investment in the oil-gas producing sphere of Azerbaijan.

However, since President Ilham Aliyev joined the Administration, Azerbaijan has persistently demanded that its occupied territory be returned according to international law and its legal basis of territorial integrity, and the recently call to settle the conflict by military force has been supported in various spheres of Azerbaijan society. The threat of renewed military actions in the Transcaucasus could prove worrisome for both the United States and Russia, especially in light of the tension between Russia and the United States reminiscent of the cold war. The implications are far-reaching, involving countries of the oil rich states of the Persian Gulf

Some experts indicate that there will be a revolution in Byelorussia and Armenia. This is not accidental if we consider that, today, both sides appear to be trusted allies of Russia in the sphere of the Commonwealth of Independent States (CIS). For Azerbaijan, with its western stance, this does not necessarily involve changing its political orientation. In addition, from the first sight, the United States and its western allies should be especially interested in supporting the current government in power, taking into account the billions of direct foreign investment in the oil-gas producing sphere of Azerbaijan.

However, when President Ilham Aliyev joined the Administration, Azerbaijan persistently began demanding that its occupied territory be handed back according to international law and the legal basis of territorial integrity, and recently the call to settle the conflict by military force has been furthered strengthened among various segments Azerbaijan society. The shadow of a renewal of military actions in TransCaucasia could prove worrisome, not only United States, but for the Russia Federation as well. Moreover, this is made worst by the arrival of a new age of confrontation of Russian and the United States that is reminiscent of days of the cold war and the implication are far-reaching and involve countries of the oil rich states of the Persian Gulf

US Secretary of Defense

Rumsfeld's visit on April 12 is said to have been a last minute decision, and many have wondered if the absence of Aliyev was planned or not. Nevertheless, Rumsfeld met with Defense Minister Safar Abiyev and other high officials during his visit to Baku. It is clear that the US wants to move closer in terms of military cooperation, but many doubt that this is truly to defend, but rather potential offensive action against Iran.

But in terms of security of the BTC pipeline it may be something more as a ploy or cover where the US administration is prepared to provide financial support and training for development of the so-called Caspian Guard that would provide armed security to the pipeline. Closely connected with the visit of Donald Rumsfeld is the possible deployment of rapid reaction mobile operational teams that may be established in Azerbaijan. It is still uncertain as to how this would be organized and the way operations would be actually implemented. The US government is trying to make inroad in such an arrangement, but security experts consider that this may both internal and external problems for the government with a great toehold for the US in a region of the world that can be a potential flashpoint. In theory, Azerbaijan would welcome such an initiative but in reality, it would not be well received by either Iran or the Russian Federation (including Armenia) and could be destabilizing.

Striking a blow "from behind" to strengthen the national economy and the defense capacity of Azerbaijan can only be realized by engaging civil society and dealing with internal opposition in the country, especially if the largely impoverished population is viewed as part of the bigger picture. Over 40 % of Azerbaijan's population lives in poverty. Many say that this figure is steadily increasing, and that the chasm between rich and poor is becoming greater.

With this and the larger geopolitical situation in focus, the legitimate authority of the government under Aliyev will have to reflect rather seriously on a plan for the future, and how to make it socially sustainable. Politicians and policy makers will have to keep this in mind during the course of upcoming parliamentary elections. Azerbaijan entered into this phase of development and engagement when much money began flowing into the country, and it is quite clear that there are great expectations on many fronts in this high-stakes game.