Financing for landmark gas project at risk after Azerbaijan quits EITI

Financing for landmark gas project at risk after Azerbaijan quits EITI
By Carmen Valache in Lund March 10, 2017

The government of Azerbaijan has decided to withdraw from the Extractive Industries Transparency Initiative (EITI) after the EITI board suspended its membership at its quarterly meeting in Bogota, the transparency watchdog reported on March 10.

A voluntary organisation comprising 50 energy- and mineral-rich countries from around the world, the EITI has become an informal compass for financing decisions by multilateral banks like the European Bank for Reconstruction and Development (EBRD) and the European Investment Bank (EIB). 

The two lenders are mulling up to €4.5bn in lending to the government of Azerbaijan and its partners for the construction of two interconnected gas pipelines - the Trans Anatolian (TANAP) and Trans Adriatic (TAP) Pipelines - that together make up the Southern Gas Corridor. They will deliver some 16bn cubic metres of gas from Azerbaijan to Turkey and Europe starting in 2019. The gas transport project costs approximately $40bn, including developments at the offshore Shah Deniz II gas field in the Caspian Sea.

The EITI's decision to drop Azerbaijan from amongst its members because of its continued crackdown on human rights thus endangers Baku's ability to complete its landmark project on time.

In a statement issued on March 10, Shahmar Movsumov, executive director of Azerbaijan's sovereign wealth fund Sofaz, decried the EITI board's decision to suspend his country as "unfair". "The mandate of the EITI has been significantly shifted far from transparency and accountability in extractive industries. The irrelevant facts introduced by different advocacy groups on various occasions show that the initiative failed to stick to its original mission and objectives," he said, according to APA news agency.

Baku is among the EITI’s founding signatories and became a full member in 2009. Its membership, however, was downgraded to the status of candidacy in April 2015 due to the government's treatment of civil society, which precluded the latter from "engaging critically in the EITI process in Azerbaijan". EITI rules require that the government communicate its energy revenues, that extracting companies communicate their taxes separately, that the two amounts are in line and that the public be offered access to this information. In Azerbaijan's case, the continued crackdown on civil society meant that it was unable to participate in the effective monitoring of energy revenues, the EITI contends.

The human rights situation in Azerbaijan has deteriorated in the last three years, together with the country’s worsening economic performance. Baku has proceeded to jail or harass critics including journalists, opposition politicians and activists in order to intimidate them. The regime has jailed over 100 political prisoners in the last three years, human rights organisations claim.

Meanwhile, the ruling Aliyev family and a related family - the Pashayev family, into which the first lady was born - have been consolidating their grip on the country’s economy and political sphere.

In February, President Ilham Aliyev appointed his wife Mehriban Aliyeva (nee Pashayeva) his vice president and direct successor, in a move that critics have denounced as enshrining hereditary rule.

The Southern Gas Corridor is an essential part of Azerbaijan's growth strategy, and economic recovery - the country's GDP contracted by 3.8% y/y in 2016 - is contingent upon its timely completion.