The countries in the South Caucasus have shared the same fate. After gaining independence, Georgia, Armenia, and Azerbaijan have been plagued by wars and ethnic conflicts, they have lost transport links, and government agencies have collapsed. Yet the respective political regimes have had diverse fates: although the starting points and international situation were similar when they launched their policies, the outcome is fairly different.
After several years of uncertainty, Azerbaijan has actually returned to the Soviet-style system of patron-client networks as the basis for the political regime. An inflow of petrodollars masks the political system’s faults and helps settle potential conflicts within the elite. Armenia’s economy is relatively diversified; various groups rule the country, representing a conglomerate of interests bargaining with the government for privileges. In Georgia, hardline pro-Western liberals have come to power after years of disintegration. They have established a disciplined state system, which has become the mainstay and source of power for the regime, where bureaucracy serves personal rule.
It might seem as though the differences between these three countries do not depend on the level of democracy. Public criticism of the authorities in Azerbaijan may result in more problems for the critic than in Armenia or Georgia. Yet none of these countries has had any experience in legitimate government change through free and fair elections, thus there are no markers of democracy. The quality of governance might be a more significant indicator. However, Georgian reforms, lauded as exemplary by many in the region and the world, have not yet resulted in Georgia surpassing neighboring Armenia in terms of per capita GDP.
The vector of domestic political transformation in Azerbaijan, Armenia, and Georgia can be described and compared, if viewed in light of the following four factors:
- The country’s place in the global and regional division of labor;
- The outcome of a struggle between various groups within the elite for control over government institutions;
- The role of siloviki in the political system;
- The degree of the country’s dependence on the resources it takes away from the public.
The three South Caucasian republics never belonged to the developed part of the Soviet Union, but neither was it the poorest region. Azerbaijan and Armenia had gone through industrialization and industry prevailed in GDP by the time the Soviet Union collapsed. There are different estimates of this indicator for Georgia, but, in general, the country did not lag far behind its neighbors. High technologies accounted for a sizable portion of industry in the three republics: Georgia had a developed aircraft industry, while Armenia produced electronics. According to the Russian Institute for Strategic Studies, Azerbaijan’s machine-building industry in the last years of the Soviet Union provided 80 percent of the country’s demand for oil production equipment.
The collapse of the Soviet Union and the ensuing wars, together with disrupted transportation links and economic crisis, resulted in de-industrialization in the three countries. By the middle of the 1990s, the share of industry in Azerbaijan’s GDP plunged by half (from 60 percent to 30 percent). In Armenia, many branches of industry decreased noticeably. According to Iosif Archvadze, 400,000 people employed in industry lost their jobs in Georgia in the 1990s. According to the 1989 census, Georgia had a population of five million. In addition, the collapse of the Soviet system of trade restrictions sharply reduced the export potential of Transcaucasian agriculture, as products from the region lost their exclusive niches in the markets of Russia and other former Soviet republics. Consequently, artificial economic advantages largely disappeared and only natural advantages remained. The political development of the three countries depended on inherent advantages – if any – and on how the political elites used them.
IS OIL A SOLUTION?
For Azerbaijan, the only way to secure rapid economic growth and replenish the state budget was to boost oil and gas production and export. At some point Baku began to view the export of fuel to world markets along new routes and in cooperation with major Western companies as a panacea, which facilitated the country’s economic growth, strengthened its national sovereignty (after shaking off Russia’s influence), and gave it foreign policy advantages in the conflict with Armenia.
Soaring global oil prices and growing hydrocarbon production fueled an economic upswing in the country. According to the CIS International Statistics Committee, Azerbaijan increased oil production from 14 million tons to 50.4 million tons in 2000-2010. Azerbaijan also saw broader export opportunities through the Supsa and Ceyhan oil pipelines, and along a gas pipeline to Erzurum. The World Bank estimates that Azerbaijan’s GDP grew 34.5 percent in 2006, and 25 percent in 2007. Later, the growth rate slowed, but, compared with its neighbors in the region and a majority of world countries, Azerbaijan weathered the global economic crisis better. In 2008-2010, Azerbaijan’s annual average GDP growth stood at 8.4 percent, compared to the global average of 1.2 percent.
However, the economic success achieved thanks to an inflow of petrodollars consolidated the single-industry structure of Azerbaijan’s economy. In 2005, hydrocarbon fuel production accounted for about 40 percent of Azerbaijan’s GDP, while in 2008 this indicator jumped to 60 percent. Growth rates in industries not related to oil production have been far below overall economic growth in the past few years.
The inflow of petrodollars helps Baku sustain a semblance of prosperity, such as new skyscrapers in the capital or exorbitant defense spending, compared with that of its neighbors. However, Azerbaijan remains a relatively poor country. Per capita GDP by purchasing power parity in Azerbaijan stands at $10,200 (according to a September 2011 IMF report), which is twice as high as in neighboring Armenia or Georgia ($5,400 each), but lower than in Kazakhstan ($13,000) and Russia ($16,700).
The public’s perception of the economic boom is very indicative in this respect. According to public opinion polls by the Baku-based Puls-R polling organization, the percentage of Azerbaijanis who describe their financial position as “barely making ends meet” decreased from 50.8 percent in 2006 to 49 percent in 2010. Another 10.1 and 9.1 percent, respectively, live “in dire need,” despite government-sponsored welfare programs. The share of those who say they have no financial problems (Puls-R describes them as the middle class) increased from 28 percent to 32.5 percent. In other words, the economic spurt has not changed the social structure of the population.
This largely explains the inviolability of Azerbaijan’s political regime. The social groups that were the engine of changes at the end of the Soviet era have disappeared together with the old economic order that had brought them into existence. The increase in oil production has only brought benefits to the elites and the thin stratum of the middle class that depends on them. Society remains the same as it was in the 1990s, consisting of a large number of the poor, a narrow stratum of the rich elite, and a small middle class that serves the elite’s interests. There are no large groups in society whose interests need to be addressed, which narrows the social conditions for political competition.
The oil boom has had yet another consequence. Oil and gas production and oil exports dominate the national economy. Outside the hydrocarbon sector, the construction and real estate market have posted economic growth, the latter apparently speculative (similar to the pre-crisis Moscow real estate market, when apartments in the Russian capital were viewed as an investment opportunity). Azerbaijan has few production facilities of its own, and the national currency’s high exchange rate contributes to increased imports.
The political regime in Baku has placed restrictions on an active economic diversification policy. Even though the regime is “tough,” it suffers from conditions of post-Soviet statehood: the influence of autonomous centers of power represented by various bureaucratic groups, weak institutions, and corruption.
The enduring stability of Azerbaijan’s upper echelons of power indicates that the ruling bureaucratic clans have remained unchanged since the handover of power from father to son in 2003, although some of them, which directly confronted Ilham Aliyev, were suppressed. However, principles of governance have essentially remained the same.
An outside observer might associate the political situation in Azerbaijan with Middle Eastern oil monarchies, but it would be wrong to assume that the political regime in Baku is authoritarian. Its policy is built not so much on diktat from one center as on a complex polycentric balance of interests. The Azerbaijani political regime’s military power is actually split. In addition to the army, at least seven other agencies have armed units – the Interior Ministry, the Border Service, the National Security Ministry, the Justice Ministry, the State Special Guard Service, and the Emergency Situations Ministry. These security agencies are partly in the spheres of interest of various bureaucratic groups, which helps support the balance of power within the elite.
The future of Baku’s political regime presumably depends on how the ruling groups react to a slowdown in oil production to zero growth. The answer has to be found within a relatively short timeframe. In the past few years, the authorities apparently have deliberately held back oil production at 50 to 55 million tons per year. The purpose of such a policy is to extend the peak period of oil production over a longer period. According to some forecasts from five years ago, production was to have peaked at 71 million tons in 2010, to be followed by a slump to 20 million tons in 2020 (this equals oil production in Russia’s Tatarstan). The peak extension policy is intended to help keep current production level until 2020. According to other estimates, a decrease in oil production will begin after 2015, after which Baku will be unable to support its economic reforms with financial resources at a level comparable to that of today. In addition, economic reforms will have to be conducted in a less favorable social and political situation.
Diversification strategies discussed in Azerbaijan are not convincing. Firstly, debates are ongoing about making the State Oil Company of Azerbaijan Republic (SOCAR) a transnational player with a production and resource base abroad, selling not so much oil in tonnage as production competencies. However, SOCAR may fall short of resources for such a strategy. Acquiring production facilities abroad will require either large investment, which will likely be expatriated, or a merger with a large foreign player on the oil market, which may result in Azerbaijan losing control over the merged company. As regards oil production competencies, SOCAR, despite Azerbaijan’s hundred-year experience in the oil industry, will hardly be able to compete with world leaders as an equal in this area.
Secondly, in the economic diversification context Baku is discussing a standard choice of underdeveloped countries and regions – tourism and agriculture. However, there has been no precedent in the world where these two industries would help a country overcome poverty. A striking example is the deep economic and socio-political crisis in Greece, which once declared tourism as its core industry. In addition, Azerbaijan would have to compete with Turkey, which would be very disadvantageous for Azerbaijan. Finally, Iran is a natural market for Azerbaijani tourism services, but tourism and hotels in Azerbaijan are very expensive. Oil refining could be another area for diversification, since Azerbaijan has achieved significant progress in this field in the past few years.
However, pursuing a tougher and more dedicated economic policy aimed at fighting corruption and developing national production, import substitution, and effective protection of investors’ rights, may fuel opposition from part of the bureaucracy. This will undermine consensus within the elite.
Theoretically, there are two ways for Aliyev to overcome the “first-among-equals” position. One is to create a broad public and political coalition to replace the old elites, a sort of “Rose Revolution” from above. This path is very risky, since liberalizing the regime could destabilize the country before such a coalition appears. Weak political institutions could also prevent such a coalition from forming. Furthermore, this method implies a more populist presidential policy, and Azerbaijan seems to be running out of populist resources. The second way is a significant foreign-policy success that would make the president the undisputed leader of Azerbaijan’s elite. This may explain Aliyev’s tough stance on Nagorno-Karabakh.
The Islamization of Azerbaijan is unlikely right now since the country has largely remained secular. According to Puls-R, the percentage of Azerbaijanis who say they are very religious and perform religious rites is relatively small and continues to decrease. In 2006, there were 15.8 percent such respondents, but their number decreased to 9.5 percent in 2010. The number of people who want Islamic values to dominate in society is also shrinking – 14.5 percent in 2007 compared to 10.7 percent in 2010. Apparently the authorities have succeeded in stopping the drift towards Islamization experienced in the mid-2000s. This success rests on three factors. First, Islamic radicals came under heavy pressure from law-enforcement agencies and, unlike in Russia’s North Caucasus, human rights organizations were practically unable to moderate the situation. Second, rapid economic growth over the past four years has reduced the number of people who were discontented and, consequently, has sidelined radical ideology. Third, the authorities made certain concessions to “systemic” or moderate Islamic leaders, such as Sheikh-ul-Islam Allahshukur Pashazade, who seek a more active role in political and public life.
However, some Azerbaijani experts believe that a weakening of the ruling elite would result in the country’s Islamization, rather than democratization. Although there are few ardent supporters of political Islam, these people are united and prepared for action, while other political forces are not. A Baku-based expert contends that, whereas Islamists make up 10 percent of the population, they could receive up to 30 percent of the votes in a free election if they draw on grass-roots social protests against attempts to infringe upon the economic interests of the public.
WHEN THERE IS NO NATURAL MONOPOLY
Unlike its neighbors, Armenia has no natural monopolies. Moreover, the country has not yet restored its former industrial potential. Many kinds of industrial production are unprofitable due to high transportation costs, since previous delivery routes have been blockaded. Companies that survive maintain moderate expenses for transportation and energy consumption. In different periods these included jewelry-making or electronics companies, depending on the situation on foreign markets. Construction grew rapidly in the pre-crisis years, but was scaled back once the financial crisis began in 2008.
Weak industry, subsistence farming, and a considerable amount of remittances from abroad have created a situation where imports are an economic advantage. In 2007, Armenian imports were worth 39 percent of GDP. The majority of consumer markets have a high level of monopolization. The relatively high exchange rate of the dram, the national currency, together with monopolized markets, has resulted in soaring profits for importers. However, despite a considerable monopoly on some markets there are no dominant economic players in Armenia. Large industrial companies, on which the government could rest its economic policy, or which could become “the point of crystallization” for the stable interests of powerful business groups, are under foreign control. For example, Russian companies own Armenia’s largest aluminum producer, gas distribution networks, up to 80 percent of electricity generating facilities, and a large part of the banking and telecommunications sectors.
Therefore, Yerevan does not have a universal instrument for control over the economy and the country at large, unlike its “potential enemy.” This factor allows some room for political competition. However, Armenia’s example proves that competition per se does not generate democracy. The struggle for access to resources provided by political power is taking place between business groups and clans, rather than between programs or citizen associations.
Monoethnic Armenia is not faced with separatism, something that Georgia and Azerbaijan know quite well. The problem of enforcing control over its territory has never been critical for Armenia’s ruling groups. The war in Nagorno-Karabakh, in which Armenia was involved by the time it gained independence, provided broad opportunities for ousting armed groups that could aspire to power. One of the first directives issued by Levon Ter-Petrosyan after he came to power was to disband these groups, which helped the authorities keep a monopoly on power.
Armenia’s victory in Nagorno-Karabakh changed the situation. People associated with the war became popular politicians. They demanded – and received – a share of the economic pie. “Civilian” politicians relied on their own popularity and ties with the elite, but their persuasiveness was limited, especially after Ter-Petrosyan enlisted Nagorno-Karabakh natives as senior security officials. The most famous of these were Robert Kocharyan and Serzh Sargsyan.
An inflow of politicians from Nagorno-Karabakh created a situation where old Soviet bureaucrats were unable to regain power, which is what happened in Azerbaijan (Heydar Aliyev) and Georgia (Eduard Shevardnadze). Former First Secretary of the Armenian Communist Party Karen Demirchyan’s return to politics in the late 1990s outlined such a prospect for Armenia. However, Demirchyan’s assassination in October 1999 blocked the way to power for the elite group to which he belonged. Along with Demirchyan, terrorists killed Armenia’s Defense Minister Vazgen Sarkisyan, who had entered politics during the perestroika years. In fact, politicians from Nagorno-Karabakh had no rivals left.
Nevertheless, Armenia’s political arena was not monopolized. Supposedly, the reasons why the country has retained relative pluralism are as follows:
First, the government did not have the resources to ensure full control over the economy and society. Like its neighbors in the region, Armenia traditionally had problems collecting taxes. Azerbaijan compensated for this shortfall with oil export revenues, Georgia built an effective and disciplined government machine, but Yerevan’s ruling group had no such instruments at its disposal. The share of state revenues in Armenia’s GDP is still far below that of Georgia or Azerbaijan.
Second, the state has never gained full control over the country. There are organizations of Nagorno-Karabakh war veterans that are more or less institutionalized. Armenian scholar and public figure Suren Zolyan writes about khmbapets (chieftains) – people who control local coercive and economic resources, and who are actually beyond the government’s control.
Third, economic growth in Armenia in the pre-crisis years depended on the inflow of foreign investment and loans. This is why the government had to follow the recommendations of European organizations on domestic policy issues.
The main challenge for Armenia’s political system in the next few years will be to strengthen the state as a legitimate institution and to improve the quality of government. This could be problematic if the share of state revenues in GDP does not increase. The key problem is that resolving the situation is actually tantamount to the self-taxation of the country’s political elite.
MUSCULAR LIBERALISM
Georgia’s geographical position has become its natural advantage after the collapse of its tourism industry and agriculture. The Nagorno-Karabakh conflict has disrupted transport links between Armenia and Azerbaijan, and between Armenia and Turkey. Georgia has become the main gateway to the outside world for Armenia, and a link with friendly Turkey for Azerbaijan. The status of a transit country has also become a geopolitical resource for Georgia. The interest displayed by the U.S. and other Western countries in building transport corridors bypassing Russia to link the Caspian and Central Asian regions with Europe has given birth to the TRACECA (Transport Corridor Europe-Caucasus-Asia) project, where Georgia plays the key role. Although the new Silk Road project has not materialized as an alternative to other routes connecting Europe and East Asia, Georgia has succeeded in attracting new transport flows from Caspian countries over the last two decades.
According to the transit development logic, several pipeline projects have been conceived and implemented: Baku-Tbilisi-Supsa, Baku-Tbilisi-Ceyhan, and Baku-Tbilisi-Erzurum, as well as the Baku-Tbilisi-Kars railway.
Georgia’s revenues from oil and gas transit are relatively small. However, it can derive profit from the transit or re-export of other goods, and from its status as a de facto monopoly servicing freight transportation by land between Armenia and the rest of the world.
In the past few years Georgia has become the main transit point for used cars in the South Caucasus. According to Eurasia.net, Georgia re-exported $197 million worth of cars in the first five months of 2011. There are not many jobs in this business, but amid high unemployment (Georgia recorded 16.3 percent of registered unemployed workers in late 2010) it is a source of income for many, and a factor that eases social tension. Little state interference and easy transaction procedures in this sector are justified thanks to Tbilisi’s liberal economic policy. “Shipments and storage services” accounted for 12 percent of GDP in 2009, which indicates the importance of transit for the Georgian economy.
Before Georgian President Mikheil Saakashvili came to power, the country’s inability to collect taxes and customs dues had been a persistent problem. According to the budget office of the Georgian parliament, the legalization of petrol and fuel supplies to the country could have increased budget revenues three-fold, compared with legal revenues derived from supplies of all petroleum products. Economist Vadim Teperman says half of Georgia’s demand for wheat in 1999 was met by smuggling, while the consumption of imported cigarettes exceeded registered imports four-fold. The contraband came through the regions of Abkhazia, South Ossetia, and Adzharia, as well as through Sadakhlo, the largest wholesale market in the region and which borders Armenia and Azerbaijan.
Saakashvili’s first moves after taking power were aimed at returning control over the state borders or, at least, control over cross-border commodity flows. To this end, the authorities carried out a large and risky operation to oust the Adzharian government and its leader Aslan Abashidze. Next, Georgia shut down a market in Ergneti, a Georgian village near Tskhinvali, the administrative center of South Ossetia (this move served as a prologue to the armed confrontation in South Ossetia in the summer of 2004). The Georgian economy predictably responded with consumer price hikes, but the central authorities became the masters in their own country for the first time since gaining independence.
On the one hand, large-scale privatization, together with drastic cuts in regulating state functions, helped transfer key assets to people loyal to the authorities and, on the other, eliminated potential “points of crystallization” among new bureaucratic clans. Opportunities for bureaucratic interference in the economy, without sanctions from the higher authorities, are minimal, because in Georgia there are no mechanisms for such interference (excessive government functions) characteristic of a majority of post-Soviet countries. This has created a basis for overcoming grassroots corruption in the country and building disciplined state machinery.
Radical economic reforms have not yet resulted in a significant increase in production in Georgia. Although 40 percent of Georgia’s able-bodied population is employed in agriculture, this sector’s contribution to GDP amounts to a mere eight percent and Georgia imports more than 80 percent of its foodstuffs. In 2009, the trade deficit reached $3.2 billion. In such a situation, control over imports is tantamount to control over the whole economy. Nodar Javakhishvili, former head of the National Bank of Georgia, noted a curious pattern: prices for basic Georgian imports on the world market fell dramatically during the crisis, while prices for the same goods in the domestic market increased slightly. At the very least, this is an indication of a monopoly over the import of certain groups of commodities. Incidentally, profit tax revenues decreased during the crisis, which means that importers did not pay their dues to the budget from their high margin earnings.
In contrast to its neighbors in the region, state spending on governance is high – about 25 percent of GDP. In fact, the state is the largest economic player in the country. Its role increased during the crisis, when the authorities supported the economy with large-scale infrastructure projects. The state is also the largest and most reliable employer. With the exception of a relatively small group employed at prosperous private companies, including affiliates of foreign companies operating in Georgia, a Georgian voter is either poor or his welfare directly depends on the state budget. This is not the best groundwork for the birth of a competitive democratic policy. The person who controls the state machinery controls the country. Therefore, Saakashvili’s reforms were dictated not only by liberal views, but also by political pragmatism. The “revolutionary onslaught” helped the incumbent Georgian authorities to achieve these results, as they did not have to coordinate their actions with the former elite.
Unlike the majority of liberal reformers in the territory of the former Soviet Union, Georgia’s rulers have a deeper understanding of the significance of violence in political struggle and state construction. Immediately after coming to power they did everything possible to eliminate independent armed groups across the country. As part of this policy, Georgia’s leaders put an end to the rule of crime bosses. The number of inmates in Georgian prisons has increased several times under Saakashvili, but now there are no areas beyond the control of the president and his team.
Saakashvili’s non-compromising and non-negotiable attitudes have cost him in foreign policy, yet they have proved advantageous in domestic policy. If faced with a choice between conflict and negotiations, the ruling group invariably opts for conflict, and thus it is not obliged to coordinate its actions with anyone in the country. The group involved in decision-making is small enough to sit at one table. Even the ruling party – the United National Movement – is not an independent political institution, but rather an instrument to control the parliament.
The main challenge for the incumbent political regime is the economy. Georgia is suffering from a considerable trade deficit. Economic reforms have not yet ensured an increase in national production and there is not much hope for an inflow of foreign investments in the post-crisis period.
Nevertheless, the momentum is strong enough to keep the regime intact for a long period, especially after the approval of several constitutional amendments, which have made it possible for Saakashvili to remain in office for more than two terms. Georgia is not threatened with a debt crisis; rather, in a crisis, Georgia will likely have its debt rescheduled for political reasons. Opportunities for outside interference are limited. Tbilisi may ignore recommendations from European organizations to change the institutional framework of the political system, or comply with them formally, as they wind up twisted in law-enforcement practices. As for more substantive interference, such as direct support for one or another group of forces in domestic policy, the United States – the only player that can interfere in Georgian affairs at this level – will be guided not by considerations of values, but by geopolitical pragmatism. There is a risk of chaos in Georgia if the Saakashvili regime collapses, because it is unclear whether the police would continue to be as disciplined in a more pluralistic political system.
CONFLICTS AS INCENTIVES
In his book Bourdieur’s Secret Admirer in the Caucasus, Georgi Derluguian devotes several dramatic passages to what might be called a plunge of post-Soviet countries into the third world. A weak economy, corrupt and inefficient officials, and a lack of democracy are the sad reality in which a majority of the former Soviet republics have existed in the past two decades. A global system analysis tends to focus on the reproduction, at each new stage in the history of world capitalism, of the world’s division into the center and the ‘provinces.’ It is a rather hopeless logic in the belief that “nothing will ever change and there is no way out.”
Derluguian notes that modern third world countries do not need to maintain their sovereignty. Moreover, they simply do not need to be strong. The international order itself practically rules out their conquest by a stronger neighbor, but it makes resistance useless if confronted by the only superpower or a unified West. The development incentive that created the new European states is missing today.
From this viewpoint, the three South Caucasian countries find themselves in conflicting circumstances. Armenia and Azerbaijan are involved in the Nagorno-Karabakh conflict. Georgia has not abandoned its plans to reclaim its former autonomies Abkhazia and South Ossetia, but they are backed by Russia, which is too powerful an enemy for Georgia to realistically consider using force to reclaim all its territories. In any case, the political elites and regimes of the three countries have certain incentives to build up their power.
Further scenarios for domestic political transformation in Azerbaijan, Armenia, and Georgia depend on what paths they will choose in order to build up power. The traditional sources of power are exhausted or are nearing exhaustion. Growth rates in Azerbaijan’s oil production are slowing. It is doubtful that Armenia will be able to restore its pre-crisis development rates without creating better state institutions. Furthermore, its economic loss to Azerbaijan is critical for the political regime. Georgia, with its hypertrophied state machinery, does not need reform, but strengthening of the national economy, although the liberal dogmatism of the ruling group may prevent such a reappraisal of values. In other words, the South Caucasus should not seek extensive development, which relies on natural advantages and the international balance of power, but rather engage in intensive development. A relative weakening of global centers of power will make this agenda particularly pressing, because each country in the South Caucasus risks being left one-on-one with its neighbors in the new world.
Intensive development implies a different level of relations between government and society. One of the reasons why the three political regimes are so closed is because the governments do not have to ask society for resources to maintain and strengthen their statehood. From this viewpoint, Georgia and Armenia, which do not have extensive natural resources that could make a large profit, have a better chance for change. However, these countries will have to overcome opposite situations – a state machinery in Georgia that is too strong and one in Armenia that is too weak.
