CASPIAN BLOG: Grafting away in Azerbaijan

By bne IntelliNews August 20, 2008

bne -

Azerbaijan's economy, fuelled by massive oil revenues, has been growing at crazy rates over the last two years - and like many of the countries in the region, inflation has soared. But it is corruption, not petrodollars, that's driving this inflation. The capital Baku has always had a bad reputation for graft, but one highly placed foreign advisor says things are getting out of hand.

"Some people are getting so insanely rich - they make billions," the well-placed advisor who didn't want to be named recently told bne. "People are making millions a day in cash from corruption and the money goes straight back into the economy and fuels inflation."

Azerbaijan has gained international attention for its booming economy, which recorded GDP growth of some 34.5% in 2006, followed by 25% in 2007. High inflation and corruption are generally considered to be the inevitable flipside of such rapid growth. Officially, inflation topped 16% in 2007, yet unofficial estimates put the figure at around 30%.

The government and central bank have worked hard to curtail inflation and measures such as the launch at the start of 2008 of one-stop shops for business registration have been introduced to cut down on corruption. However, such anti-corruption measures are little more than cosmetic, according to the foreign advisor. "Petty corruption has indeed been reduced - you don't really see policemen hassling people for bribes anymore. But this is not the kind of corruption that anyone is worried about. We're talking about massive corruption on a scale that is unimaginable by Western standards."

Bribes required to import goods into the country are a common example. "Take for example a well-known international oil and gas company which has been working in Azerbaijan for many years. When they have to import a small, specialized part such as a pump, say, that is only worth some $500, they end up paying around $10,000 to get it across the border," claims the source.

"In the West, when people consider Azerbaijan, they expect corruption but they have no idea about the level it has reached. If someone were to say: 'give me 100% of the value of the goods', people would be like 'are you crazy?' But here 100% is nothing - 500%, 600% or 700% is completely normal. It's ridiculous, but that's the reality."

"It's human habit, you push things as far as they'll go. No one has done anything to stamp out corruption, so it's gone completely out of control and is killing the country."

As with other measures, such as the current attempts to diversify the country's economy away from oil and gas, the success or failure will only be felt several years down the line when the gigantic oil-windfalls dry up. "The problem is that with the current levels of oil money, the system still works despite the corruption. People can afford to pay. But once the oil money subsidies and you're just left with the corruption, then everything will collapse."

Shaky foundations

Another sector that's also plagued by corruption has already seen a collapse of sorts. In the centre of Baku, the top floors of a high-rise building recently collapsed while still under construction. All around, buildings continue to shoot up and while everyone comments on the construction boom, locals and government officials openly discourage foreign journalists from researching this sector and scratching beneath the gleaming surface.

Even once a buildings has been safely built or redeveloped, its ownership may rest on less-than-solid foundations. Talk around town has it that one prominent and well-connected Turkish-Azeri businessman was recently forced to hand over half of his stake in a prime office building in downtown Baku. The businessman's collection of redeveloped buildings account for some of the capital's most prestigious and expensive office space, and house many of the international financial institutions operating in Azerbaijan.

But a local employee of one of the IFIs explains that it's not as bad as it sounds. "Nowadays, they have money. So they might force you to sell, but you'll get a good price," said the local, before citing a personal story to illustrate her point. "My family used to own a house outside Baku. The house was near one of the president's residencies and one day two guys showed up in a big black car and asked to buy the property. My father pleaded that the house had sentimental value and convinced the guys that he could not sell it.

"However, several weeks later a big black car returned. This time the president, Ilham Aliyev, stepped out of the car and my father was so surprised that he just looked at him and before he could regain his composure, the president asked him: 'Do you have a cup of tea for me?'

"When talk got around to the issue of the house, my father, knowing that he could not refuse the president, began mumbling about the sentimental value of the house and suggested the equivalent of $60,000 or $70,000. The president offered the equivalent of $150,000 and that was it. Deal done."

All the way to the top

While overpaying for a house does not in itself constitute corruption, there's little doubt on the street that corruption goes all the way to the top. It's common knowledge that some 14 regional clans control the small country of some 8m inhabitants and that most businesses are strictly dominated by local monopolies.

"Importing bananas could seem like a great business opportunity and you'd have no problem getting them to the border. But that's where they'll stay and that's where they'll rot," warns Emil Majidov, president of Azpromo, the country's trade and investment promotion agency.

Majidov is open and pragmatic about corruption, pointing out that since it is structural and not sporadic, investors know what to reckon with and can factor corruption into their potential ventures while assessing their viability. "We work with foreign investors to find opportunities which are not dominated by local monopolies," says Majidov. "Russian-style mafia killings don't occur in Azerbaijan, but there's still no point treading on anybody's feet. There are plenty of opportunities for everyone."

That a handful of local families dominate the country and that corruption goes all the way to the top is hardly surprising, yet just where the top is, in a country that is infamous for its lack of political plurality, may come as a bit of a shock. The current president took over the reigns from his father and national hero Heydar Aliyev in 2003 and is widely expected to win re-election in this year's presidential elections in October. Even so, the general consensus is that Kamaladdin Heydarov, minister for emergency situations, is currently Azerbaijan's most powerful man.

Heydarov apparently has the fire brigade under his control and uses them to control the construction industry by way of fire inspections. Previously, he was in charge of customs and he allegedly still has a tight grip there, controlling everything that enters or leaves the country.

Meanwhile, one unconfirmed source claims that the president has just purchased an island in the Caribbean for $235m and is also gambling heavily. Despite an unusually diligent stint of investigative journalism taking in some of the world's most glamorous seaside gambling spots, bne has not yet managed to track down the president to confirm these rumours over a quick game of blackjack.

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CASPIAN BLOG: Grafting away in Azerbaijan

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