ISSUE 2-2017
INTERVIEW
Роман Темников
STUDIES
Denys Reva Roman Temnikov Aндрей Костырев Vyacheslav Rodionov
OUR ANALYSES
Ahmad Alili  & Victoria Bittner
REVIEW
Дмитрий Дубов
APROPOS
Alžběta Chmelařová


Disclaimer: The views and opinions expressed in the articles and/or discussions are those of the respective authors and do not necessarily reflect the official views or positions of the publisher.

TOPlist
OUR ANALYSES
LEAVING THE EXTRACTIVE INDUSTRIES TRANSPARENCY INITIATIVE (EITI)
By Ahmad Alili | Researcher, Center for Economic and Social Development, Azerbaijan | Victoria Bittner | Researcher, Center for Economic and Social Development, Azerbaijan | Issue 2, 2017
THE COST TO AZERBAIJAN’S ECONOMY AND CIVIL SOCIETY

Introduction

During the 36th EITI Board Meeting, held on March 9th in Bogota, Colombia, Azerbaijan’s membership in the Extractive Industries Transparency Initiative (EITI) was suspended.

Riding on the suspension, Mr. Shahmar Movsumov, the executive director of the State Oil Fund of Azerbaijan (SOFAZ), Chairman of the Government Commission on EITI and Chairman of the EITI Multi-Stakeholder Group, made an official statement on behalf of Azerbaijan, in response to the aforementioned developments, saying: “I kindly ask the International Secretariat to remove Azerbaijan from the list of countries implementing the EITI immediately” (Contact.az, 2017).

There had been several disagreements between the EITI Board, the main governing body of the Initiative, and the government of Azerbaijan over perceived discrepancies between domestic legislature and EITI policies, particularly regarding NGO registration and funding. Mr. Movsumov, on the part of the Azerbiajani government, outlined the steps taken by the government in its attempts to placate the EITI Board and bring domestic legislature closer to expected standards. In his opinion, there had been significant changes to ameliorate the position of NGOs in the country after the initial changes to legislation in 2013, and the government had therefore implemented all of the corrective actions required by the EITI Board. Mr. Movsumov commented further on the Board’s decision, stating: “We consider the Board’s decision on the suspension of Azerbaijan as an unfair one. The mandate of the EITI has been shifted significantly far from transparency and accountability in extractive sectors. The irrelevant facts introduced by different advocacy groups on various occasions show that the Initiative failed to stick to its original mission and objectives”. (Azernews.az, 2017)

While Azerbaijan’s economy is largely dependent on the export of its abundant fossil fuels, membership in the EITI had always been considered a key asset for the country in projecting the image of a stable place for large-scale investment. Many international financial institutions, such as the World Bank, are members of the Initiative in order to ensure that the governments they do business with use the profits from the sale of resources in way which benefits the entirety of the population and therefore preserves domestic stability. In this vein, now that Azerbaijan has left the Initiative, it may be regarded in the future as ineligible for loans from such institutions as are part of the Initiative. This development may be harmful for the country, while there are several important projects, including the Southern Gas Corridor (TANAP & TAP), which Azerbaijan had been seeking funding for.

Azerbaijan was a founding member of the Initiative, so the decision to leave it did not come lightly. Additionally, it may have considerable effects on civil society and the economy, while there will be less external pressure to strive for greater transparency and civil society involvement in the oil and gas industries.

This article aims to explore possible domestic consequences of Azerbaijan’s suspension from and leaving of the EITI.

At first, background information regarding the Extractive Industries Transparency Initiative (EITI) and its role in Azerbaijan’s economy will be presented. Next, the article will outline the history of Azerbaijani-EITI relations. After revealing the tensions and departure points between the two parties, the article will move on to possible impacts of the decision to leave the EITI on the Azerbaijani economy and civil society. In the final section, concluding thoughts will be provided.

1. The Extractive Industries Transparency Initiative (EITI): about the Brand

The Extractive Industries Transparency Initiative (EITI) was founded in 2003, after a coalition of representatives from civil society organizations (SCOs), governments and energy and mining companies agreed on a set of principles relating to increased transparency and accountability in resource rich countries. The EITI is seen as establishing a global standard to promote the open and accountable management of oil, gas and mineral resources (EITI). Not only developing countries are part of the Initiative, but it has a wide membership including 51 implementing countries with members spanning Africa, Asia, Latin America, North America and Europe.

The basic premise is that companies operating in the extractive industries sector report their payments to the host government and governments separately report all revenues received from industries. The two figures are then compared by an independent administrator and the findings, including any gaps, are published openly so that civil society has access to the results. This process encourages accurate reporting on the parts of government and industries, as well as involving civil society in instituting greater accountability in their countries.

The EITI creates an alliance among the multiple stakeholders of a country’s extractive industries sector, including businesses, civil society and the government, by bringing them together in a Multi-Stakeholder Group (MSG), which functions as an oversight mechanism for the entire process. SCOs such as NGOs and others must be able to actively and freely participate in the process, while they ensure that the revenues gained from selling resources belonging to the country as a whole are fairly shared and used for the greater development of the entire population.

The EITI therefore encourages the institution of public access to information in order to increase the accountability of governments in the management of resource revenues, lowers the opportunities for corruption and better mobilizes funds for the provision of various public services and country-wide development. As evidence of the success of EITI methods, there have been several cases where EITI reports have uncovered financial irregularities, which led to the improvement of accounting practices and provided insights for reform efforts in extractive sectors (World Bank, 2013).

Companies see value in the EITI because it creates a more broadly supportive and secure operating environment for businesses (Forbes, 2014). Implementing the EITI is a process involving several sectors of government and society, increasing transparency and government accountability. This process bolsters a country’s reputation as a stable destination for foreign direct investment (FDI), allowing international donor organizations to build trust in local stakeholders, including the government officials with whom they interact directly. Simultaneously, with greater public access to information, international companies can be recognized for their contributions to the local population’s development (Forbes, 2014), distinguishing their efforts to expand corporate-social responsibility practices. Extractive industries can be large generators of foreign exchange and government revenues for developing countries’ authorities, making it not only lucrative but also necessary for governments to seek to become ever more stable and trustworthy partners.

2. History of Azerbaijan-EITI Relations and Recent Tensions

Azerbaijan was a founding member of the initiative, joining at its inception in 2003 and avidly participating in the process. Azerbaijan was the first country to complete the Validation process, the independent mechanism used by the EITI to establish a country’s adherence to its principles, in order to became the first country to be designated as an EITI Compliant Country. Azerbaijan was a model participant, its laudable performance awarded it the “2009 EITI Award” for its commitment to EITI principles and achievements in EITI implementation (EITI-Azerbaijan, 2009).

The source of current tensions can be traced to 2013, when the Azerbaijani government made several changes to its legislation relating to SCOs, with additional changes following in 2014. In total, 26 changes were made, including those pertaining to the registration and foreign funding of SCOs (Contact.az, 2016). In Fall 2014, following such widespread changes and due to reports of curtailment of SCOs’ activities in Azerbaijan, the EITI Board sent a fact-finding mission to the country in order to independently assess the situation and ascertain that its standards were still able to be maintained. It was deemed that conditions for activists were “clearly problematic” and reason for concern; they did not have the appropriate atmosphere to allow for their active participation in overseeing government and industry revenues (Sherpa, 2015).

To add to the issue, in December 2014, the International Board of EITI approved a new Civil Society Protocol, which was added to the initiative’s rules for membership, referred to as the EITI Standard. In view of the aforementioned change in standards and the known problematic situation of SCOs in Azerbaijan, the EITI Board called for an early Validation of Azerbaijan’s status relative to the new rules. As such, during this process and on account of concerns that Azerbaijan was violating EITI rules, its status was downgraded from ‘compliant’ to ‘candidate’ in April 2015. The Board conceded that there had been some progress in addressing the initiative’s concerns, but insisted that it still felt that civil society was not able to engage critically in the country’s EITI process (EITI, 2015). Along with its downgraded status, a list was given to the Azerbaijani government detailing the corrective actions it needed to take in order to restore its EITI ‘compliant’ status.

In October 2016, the EITI Board released its long-awaited reassessment of Azerbaijan’s Validation. It found that, compared to the first Validation in 2015, there were considerable improvements in several areas of concern, enough that Azerbaijan would be allowed to keep its ‘candidate’ status, but changes were still needed to regain the coveted ‘compliant’ epithet (EITI, 2015). The Board agreed that several requirements, including those relating to civil society engagement, had not been satisfactorily addressed and would need to be corrected within 4 months, or else the country would be suspended (EITI, 2015).

In response, a decision was reached in Baku on March 10, 2017, to announce Azerbaijan’s withdrawal from the EITI. The decision came almost simultaneously to that of the Board, which was about to announce Azerbaijan’s suspension in the Initiative (Financial Times, 2017).

3. EITI in Azerbaijan: What Will the Future Hold?

Several organizations which have large stakes in fossil fuel projects in Azerbaijan, both current and planned for the future, are part of the EITI, including British Petroleum (BP), the World Bank (WB) and the European Bank for Reconstruction and Development (EBRD). It is questionable whether these organizations will want to continue to invest in a country which has withdrawn (or been suspended) from the Initiative, while it will bring less accountability and therefore greater unpredictability to the entire process. This uncertainty throws into doubt the status of several loan agreements, including $46 bn for the construction of the Southern Gas Corridor pipeline (Financial Times, 2017).

Nevertheless, a possible loss of investors is not the only result of leaving the EITI. Azerbaijan’s  withdrawal may have direct effects on domestic developments, several areas of which are outlined below.

3.1.The Relationship between EITI Membership and International Financial Institutions

A general trend exists, where the fossil fuel and other extractive industry sectors are oftentimes suspected of being strongly interlinked with illegitimate financial flows. The famed paradox of the ‘resource curse’ has detailed how developing countries with an abundance of natural resources have a broad range of the problems, almost all of which could be solved solely with the better management of revenues from extractive industries.

Along these lines, one of the goals of the EITI is to encourage governments, in cooperation with business and civil society, to establish transparent means to earn legitimate financial sources from the country’s extractive industries and to channel these towards creating sustainable economic development for all its citizens. Altogether, the EITI process should ensure a corruption-free society with good governance.

Through being part of the EITI and engaging in the entire process, SCOs, the government, and companies engaged in the extractive industries of Azerbaijan have all indicated their commitment to working together for transparency and sustainable development. The projection of this well-functioning cooperation has made Azerbaijan attractive for foreign investment and granted it quick approval by international financial institutions. EITI membership was one of the cornerstones of the relationship between Azerbaijan and the WB and EBRD.

Azerbaijan’s abandonment of the EITI, therefore, will harm the country’s image, especially in the context of attracting foreign investment to the fossil fuel sectors of the economy. EITI membership made it is easier for transnational companies such as British Petroleum (BP) to operate and invest in Azerbaijan, while it suggested the upholding of minimum standards which comforted international constituencies. Most international publics do not look into the issue deeply, and the EITI ‘implementing’ stamp was a quick reference point to abate hesitation. The growing concerns of everyday people about their governments support for kleptocratic regimes and their organization into strong, domestic pressure groups is going to make it hard for transnational companies, such as those from the United Kingdom, to operate in Azerbaijan without the EITI seal of approval. BP has already expressed its disappointment with the “decision to suspend Azerbaijan, despite the progress that has been made and highlighted by the EITI Board statement” (Financial Times, 2017). BP highlighted its belief that “the Board’s decision and consequences are not in anyone’s interests.” (Financial Times, 2017)

Another prominent international financial institution on the Azerbaijani scene, the WB, took a different approach and declared the continuation of its support for Azerbaijan, “in its on-going effort to develop a clear, inclusive and transparent framework for revenue management and overall transparency in the extractives industry” (Financial Times, 2017). This declaration has made it unclear whether the WB will continue its financial assistance to projects it has agreed to contribute funds to, such as the Southern Gas Corridor Project.

The Southern Gas Corridor Project includes a 3,500 km pipeline system meant to expand the existing South Caucasus Pipeline (SCP), currently running from Azerbaijan to Georgia and Turkey, and extend it to Greece, Albania and Italy. The project has been termed the “global oil and gas industry’s most significant and ambitious undertaking yet,” by BP (BP-Azerbaijan). The extended pipeline will carry natural gas from the Shah Deniz field to Southern Europe, eventually creating competition with Russian gas supplies in the region.

Initially, gas flows along this route are expected to be a modest 10 bcm, but within a few years they are expected to expand to 80 or even 100 bcm (European Commission). International businesses and financial institutions are not the only investors in the project, as the government of Azerbaijan itself has been investing heavily in the infrastructure project. The State Oil Fund of Azerbaijan (SOFAZ) has allocated more than $1.23 billion for the project between the years 2014 and 2016 (Azvision.az, 2017).

The project is an important opportunity for Azerbaijan to amplify its energy exports to the EU and Southern Europe. Not only the countries currently part of the pipeline consortium, but also Croatia, Bosnia and Herzegovina, Bulgaria and others, have voiced their desire to join this project. It has such strong demand, while it will allow European energy markets to diversify away from Russian dependence, and provides Azerbaijan with a stable export path. At present, many stakeholders involved in the Southern Gas Corridor have voiced their dismay at the EITI Board’s decision and Azerbaijan’s withdrawal from the initiative, but they have stressed their continued support for the country and belief it continues to surpass the organizations’ own internal principles (Financial Times, 2016).

The project has been considered strategically important for authorities in Baku, so even if international financers would withdraw their funding from the project, it is likely that Baku would still go ahead with the project with SOFAZ footing the bill. The lack of foreign investment, however, would lead to a serious depletion of SOFAZ assets, which were meant to be accumulated for the use of future generations.

Looking past the Southern Gas Corridor Project itself, a lack of foreign direct investment would affect the economy overall. As a result of the fall in global oil prices, Azerbaijan critically needs investment in the economy; a lack of interest on the part of international donors could lead to greater disturbances in the economy and, hence, in the public agenda of the country. This development would significantly slow down the pace of the country’s current economic reforms.

3.2.Azerbaijan’s EITI NGO Coalition and What Went Wrong

Tensions were raised especially high following the last elections in Azerbaijan’s EITI NGO Coalition, held in April 2016. The Coalition has been viewed as a well-structured and democratic one, with a wide representation of the country’s SCOs, for the last 10+ years of its experience; however, recently the rising influences of different interest groups within the Coalition have been questioned.

The NGO-landscape in Azerbaijan is quite diverse; it includes such groupings as:

  1. Ones, which are camped around governmental institutions
  2. Ones, which are camped around oppositional institutions
  3. Independent NGOs.

Each of the aforementioned groups are represented in the EITI NGO Coalition, which has led to ongoing clashes. The low representation of independent NGOs on Azerbaijan’s EITI Coalition Board, which has been the case in previous years, has been one of the main reasons precipitating the dysfunction of the entire EITI NGO Coalition.

The trends within Azerbaijan’s EITI NGO Coalition had been causing concern even before the Azerbaijani government decided to leave the Initiative. Independent NGOs had been more and more shut out from important Coalition processes at the detriment of the overall functioning of the Coalition. Many of the new members of the Coalition’s Board, who rose to their positions in the last election, did not have adequate experience or qualifications in the extractive industries and the overall economy. Many independent experts were expecting the crisis to deepen and the Coalition to become completely crippled, stopping its function altogether. The Azerbaijani case clearly demonstrates how the lack of a strong voice for independent and qualified civil society members can lead to the disruption of the entire Coalition process.

3.3. The Role of the EITI Board in the Relationship between Azerbaijan’s Government and Civil Society

Following Azerbaijan’s April 2015 Validation and its downgrade in status, from ‘compliant’ to ‘candidate’, the Azerbaijani government took several steps in an attempt to win favour among EITI Board members and regain its status.

The EITI Board, however, did not find the developments within the country satisfactory, and in its October 2016 Validation recalled its requirement of full freedom for civil society, so that NGOs could be fully functional and properly keep the government accountable for its fossil fuel revenues and expenditures. The EITI Board issued an ultimatum, that if the Azerbaijani government did not amend its restrictions on NGOs before the next meeting in March 2017, Azerbaijan’s EITI membership would be suspended.

The speed of reforms in Azerbaijan, however, did not match the expectations of the EITI Board; Azerbaijan’s membership was suspended on March 9th, 2017. The following day, Shahmar Movsumov, the Executive Director of SOFAZ, Chairman of the Government Commission on EITI and Chairman of the EITI Multi-stakeholder Group, announced the cessation of Azerbaijan’s activities in the initiative.

The EITI Board had sufficient knowledge of the situation of SCOs in Azerbaijan, due to its 2014 fact-finding mission and ensuing Validations. With sufficient support, or ‘carrots and sticks’, the EITI could have encouraged changes to the trends in government-civil society relations in Azerbaijan. Presently, there lies concern whether Azerbaijan is capable of making a ‘U-turn’ in civil society freedoms without external motivations, such as retaining membership in international initiatives such as the EITI.

Not expecting a ‘U-turn’ in the short term, the current EU-Azerbaijan rapprochement is going to be decisive for shaping long-term relations between the government and SCOs. President Ilham Aliyev’s visit to Brussels in February 2017, and subsequent meetings with high-ranking officials of the EU together have demonstrated the willingness of both parties to bridge the distance between them. The EU’s continued engagement and active guidance in this area, therefore, can have positive effects on the situation of civil society in the country.

3.4. Reputational Costs for Azerbaijan

Membership in the EITI had a positive effect on the reputation of Azerbaijan as a whole and on its members of government. The label of EITI provided the image of being a sustainable and trustworthy partner, and was a powerful asset to avoid accusations of corruption and the mismanagement of fossil fuel revenues. Azerbaijan’s achievements through the revenue-management of SOFAZ were recognized and celebrated by being granted the 2009 ‘EITI Award’ for its commitment to EITI principles and achievements in implementation of the Initiative’s goals.

Through leaving the EITI’s circle of membership, Azerbaijan loses its protective shield against accusations of corruption and bribery. Now, the international business activities of members of government will be greater scrutinized and may be viewed more suspiciously. They may be more quickly accused of money laundering or the general mismanagement of fossil fuel revenues, even if they are embarking on legitimate financial activities. This development may also harm the standing of Azerbaijan in the “Corruption Perceptions Index of Azerbaijan” by Transparency International and the “Civil Society Index of Azerbaijan” by CIVICUS.

Conclusion

As a founding member of the EITI, Azerbaijan has enjoyed many benefits of membership, including a reputation boost; however, the changes to legislature pertaining to NGOs in Azerbaijan have strained relations between the parties. In order to salvage the relationship, the EITI demanded the reversal of changes to the NGO legislation, which would lead to the restoration of a fully-functional, local NGO community. Due to the perceived lack of adequate developments in this field relative to EITI standards, the EITI Board suspended Azerbaijan’s membership. Concurrent to this decision, Azerbaijan announced its intention to leave the Initiative.

Azerbaijan’s exit from the EITI is expected to have a negative repercussions for the economy. It will make the domestic economy less attractive for foreign investment, while it will throw into question the trustworthiness of Azerbaijani officials. This development may slow the pace of economic reforms in Azerbaijan. Losing partners offering foreign direct investment will also limit the government’s options for advancing ambitious infrastructure plans, such as the Southern Gas Corridor Project (TANAP & TAP).

Nevertheless, considering the importance of the Southern Gas Corridor Project for the European gas market, it may be expected that European and other international investments in this project will remain actual.

Leaving the EITI may also have negative effects on civil society’s operating environment in the country. In this regard, the current positive development in EU-Azerbaijani relations raises hopes that the relationship can counter any negative trends which could result from a lack of external pressure. It is possible that the EU will fill the gap left by rejecting the EITI and become a credible external pressure motivating positive domestic reforms.

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Bibliography

Azernews.az. (2017, March 10). Azerbaijan leaving EITI. Retrieved from Azernews.az:http://www.azernews.az/business/110036.html

Azvision.az. (2017, March 09). SOFAZ allocated over $1B for Southern Gas Corridor. Retrieved from Azvision.az: http://en.azvision.az/news/60675/sofaz-allocated-over-$1b-for-southern- gas-corridor.html

BP-Azerbaijan. (n.d.). The Southern Gas Corridor. Retrieved March 13, 2017, from BP- Azerbaijan: http://www.bp.com/en_az/caspian/operationsprojects/Shahdeniz/SouthernCorridor.html Contact.az. (2017, March 10). Azerbaijan Announces Withdrawal from EITI. Retrieved from Contact.az: http://www.contact.az/docs/2017/Politics/031000185275en.htm

Contact.az. (2016, April 22). Azerbaijan Establishes Total Control over NGOs. Retrieved from Contact.az: http://www.contact.az/docs/2016/Chetin sual/042200153777en.htm

EITI. (2015, April 15). Azerbaijan downgraded to candidate country. Retrieved from EITI: https://eiti.org/news/azerbaijan-downgraded-to-candidate-country

EITI. (n.d.). Who we are. Retrieved March 14, 2017, from EITI: https://eiti.org/who-we- are#implementing-countries

EITI-Azerbaijan. (2009). AZERBAIJAN IS A LEADER IN EITI IMPLEMENTATION . Retrieved from EITI-Azerbaijan: http://www.eiti.az/index.php/en/2009-2/354-2009-azerbaycan-lider- olkedir

European Comission. (n.d.). Gas and oil supply routes. Retrieved March 14, 2017, from European Comission. Energy: https://ec.europa.eu/energy/en/topics/imports-and-secure- supplies/gas-and-oil-supply-routes

Financial Times. (2017, March 10). Azerbaijan risks gas pipeline loans by quitting transparency monitor. Retrieved from Financial Times: https://www.ft.com/content/4fad74e8-056c-11e7- ace0-1ce02ef0def9

Financial Times. (2016, October 26). Ultimatum on NGOs threatens Azerbaijan gas loans. Retrieved from Financial Times: https://www.ft.com/content/23fba937-f1d4-3b64-85f1- 18e363503c8b

Forbes. (2014, October 03). EITI's Silent Revolution. Retrieved from Forbes: https://www.forbes.com/sites/danielrunde/2014/10/03/eitis-silent-revolution/

Sherpa. (2015, April 15). Azerbaijan: EITI Board should sanction government for civil society crackdown. Retrieved from Sherpa: https://www.asso-sherpa.org/azerbaijan-eiti-board- sanction-government-civil-society-crackdown

World Bank. (2013, April 15). Extractive Industries Transparency Initiative: Results Profile. Retrieved from World Bank: http://www.worldbank.org/en/results/2013/04/15/extractive-industries-transparency-initiative-results-profile

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