SONG OF CHANGE

Azerbaijan 2012 | DIPLOMACY | YEAR IN REVIEW

Azerbaijan continued on its path to diversification in 2011, with the non-prime sectors demonstrating their ability to support the economy for the first time. With nominal GDP reaching $55 billion in 2011, Azerbaijan represents some 83% of the South Caucasus economy. Regional interconnectivity is also developing, with major infrastructure projects to upgrade Azerbaijan's air and maritime facilitates set to make the country a key point on the resurgent Silk Road. The Baku-Tbilisi-Kars railway is also nearing completion, and negotiations over the best export route for Azerbaijani gas to Europe seem to be coming to a conclusion. In a year when Azerbaijan hosts the Eurovision Song Contest and also becomes a non-permanent member of the UN Security Council, the government is looking to showcase the Caspian nation's achievements to the world.

Azerbaijan continued on its path to diversification in 2011, with the non-prime sectors demonstrating their ability to support the economy for the first time. With nominal GDP reaching $55 billion in 2011, Azerbaijan represents some 83% of the South Caucasus economy. Regional interconnectivity is also developing, with major infrastructure projects to upgrade Azerbaijan's air and maritime facilitates set to make the country a key point on the resurgent Silk Road. The Baku-Tbilisi-Kars railway is also nearing completion, and negotiations over the best export route for Azerbaijani gas to Europe seem to be coming to a conclusion. In a year when Azerbaijan hosts the Eurovision Song Contest and also becomes a non-permanent member of the UN Security Council, the government is looking to showcase the Caspian nation's achievements to the world.

As the next logical step in Azerbaijan's story, efforts to promote diversification have seen significant growth in the ICT, agriculture, construction, and transport sectors. The non-oil and gas sector grew by 9.4% in 2011, as the overall economy grew by 0.1%, due to lower oil exports caused by planned infrastructure upgrades. ICT, heralded as the country's prime growth sector, grew at 11.8% in 2011, as Azerbaijan prepares to hook itself up to the Europe-Persia Express Gateway (EPEG) project to boost internet speed and international connectivity. The agriculture sector also expanded by 5.8%, helped along by a booming aquaculture industry. The expansion of these non-prime sectors also sparked the creation of more than 90,000 jobs and increased foreign investment, taking the country's overall FDI stock to around $50 billion. Baku is investing heavily in the renovation of its main airport and the relocation of the seaport as part of its commitments to the Transport Corridor Europe-Caucasus-Asia (TRACECA). In the regions, efforts have been focused on building new infrastructure to attract tourism, especially as Azerbaijan anticipates increased tourist inflows following the Eurovision Song Contest in May 2012.

Although diversification is firmly on the lips of policymakers, the country's oil and gas sector continues to be the country's main source of revenue, especially as oil prices ran at well over $100 a barrel throughout 2011. While the Shah Deniz gas field moves into its second phase of development, new discoveries by Total and the State Oil Company of Azerbaijan Republic (SOCAR) will further boost natural gas yields that may eventually flow into the European market. To make that happen, Azerbaijan signed a preliminary deal with Turkey in 2011 on the construction of the Trans-Anatolian gas Pipeline (TANAP), which would carry gas into Turkey for domestic distribution and then serve as a starting point for any future pipeline to carry gas onward to Europe. Another facet of Azerbaijan's industrial production is the rapidly expanding mining activity. Gold, steel, and aluminum are the country's main outputs in the strategically important sector. Additionally, Azerbaijan has reserves of iron, lead, zinc, molybdenum, and zeolite. In 2012, new gold production from the Gosha mine will begin, and plans are in place to explore the extraction capacity of newly discovered sites such as Ordubad. The gold industry is becoming more and more attractive for investment as companies forecast the annual production of 300,000 ounces of gold by 2015.

Azerbaijan's capacity to host international events is being put to the test in 2012. After winning the 2011 Eurovision Song Contest, Azerbaijan began improving transport infrastructure and building the necessary facilities to host the 2012 event, including the Baku Crystal Hall. Furthermore, the U-17 FIFA Women's World Cup will be hosted in 2012, which requires the revamping of many local stadiums and the construction of a number of new sporting complexes. Construction is also underway for an Olympic-sized stadium, which is planned to support Baku's bid for the Summer Olympic Games 2020, and is sure to keep the construction sector busy over 2012 and beyond.

Politically, Azerbaijan has stepped up its efforts to solve regional conflict and play a large part in international affairs. Most notably, the UN's General Assembly awarded Azerbaijan a seat on the Security Council, a measure that went into effect on January 1, 2012. Azerbaijan is hoping to use the role to further its goals of settling regional conflicts, including the return of the occupied Nagorno-Karabakh region.

The country's strategic location will play an increasingly important role in the years to come, as key connections to Russia, Europe, the Middle East, and Central Asia are strengthened and developed. The tertiary education system is being overhauled and internationalized, a factor the Ministry of Education has identified as key if the country hopes to develop its young population—the median age is only 28.2 years—to be the leaders of a diverse economy capable of attracting multinationals to use Azerbaijan as a base for regional operations.

As the country moves into its third decade, hopes are high that international exposure will showcase not only it achievements, but its potential for the future. As a potentially key part of Europe's energy security, Azerbaijan can expect its hydrocarbon revenues to keep the economy running apace, while efforts at diversification begin to bear fruit.