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The desire of petroleum-rich leaders to remain in power creates incentives to pursue close relations with other authoritarian states that do not meddle in domestic affairs. Rulers of hybrid regimes may find themselves chal- lenged by popular protest. In turn, this choice will have impli-cations for which other countries the ruler can partner with.
The slippery slopes framework opens up the possibility of several interesting conclusions. First, it brings out the consequences of domestic policy choices for the trajectory of a state towards increased democracy or hardening authoritarianism. This then has implications for which partner-countries it can seek. Second, if the Caspian oil exporters shift their orientation towards more like-minded countries such as Russia and China, the uneven pressure and support for the growth of civil society and democratization provided by their current relations with the West, how-ever erratic in the first place, may become even less significant.
A reduction in Western influence may in turn affect the development trajectory of these countries, making it more difficult to escape the resource curse. The slippery slopes framework suggests there is an authoritarian feedback loop between the domestic and international policy levels of petro-states cf. Gourevitch ; Putnam ; Risse et al. The importance of both the domestic and international levels of analysis for understanding the persistence of authoritarian-ism in the Caspian region is one of the main conclusions of this book, and one that we believe represents a contribution to the literature on the resource curse.
Most previous research on the relationship between petroleum income and regime type has offered explanations of the negative effects of oil and gas on democracy and the durability of petroleum-rich regimes based entirely on domestic factors. The insights provided in this book suggest that international relations also play a role in this complex question. If this scenario comes to fruition, the West would lose out, at least in the short run.
In a longer-term perspective, the Caspian petro-states might eventually succumb to the various challenges they encounter, such as the tumbling oil prices of —9. Some commentators are already predicting such an outcome for such major petro-states as Iran, Russia and Venezuela e. Baev a, b. One important test of this line of thought will be how the global financial crisis ulti-mately plays out.
Although the big petroleum exporters are obviously hard-hit by the loss of short-term income, some other non-democratic states do not yet seem to be subscribing to the thesis that authoritarianism must be associated with a lack of governance capacity.
Caveat on authoritarianism in non-Western states In order to avoid misunderstandings, it is worth clarifying our view of authoritari-anism in the Caspian petro-states, China and Russia relative to the West. The general perspective we wish to underline here is one in which there is a continuum between fully authoritarian systems and ideal democratic systems. Different states can be placed at different locations on this continuum, and few states are located at either extreme.
For example, Azerbaijan has been ruled by one family for all but six years since , but compare this to the home countries of the editors of this volume — the USA and Norway — and family affiliation appears to be a factor also in these established democracies. Norway has a state- owned broadcasting corporation, with directors appointed by the government: throughout the period —, all directors of the Norwegian Broadcasting Corporation were affiliated with the Labour Party. This goes to show that also established democracies struggle with issues concerning a level playing field and may have elements of nepotism and dynastic rule.
That said, however, we also believe that there are significant differences between the more and the less democratic systems. Despite all their flaws, the polit-ical systems of Western countries are fundamentally defined by a greater degree of openness and rule of law than those of China, Russia or the Caspian petro-states. And, despite their lengthy political dominance in their countries, the Bush and Stoltenberg families have respected the electoral process and its results, and unquestioningly stepped down at the end of their term limits.
Without wanting to exaggerate this difference between Western countries and the other states covered in this book, we do want to harness it and use it as a driver for our analysis. It also includes other researchers and institutions as participants. Michelsen Institute. Factors of production are drawn out of non-oil tradable goods production and into the resource sector.
Bibliography Allison, R. Auty, R. Baev, P. Barro, R. Chaudhry, K. Corden, W. Diamond, L. Gassebner, M. Washington, DC. Gourevitch, P. Jensen, N. Karl, T. Kekic, L. Lipset, S. Lo, B. Przeworski, A. Putnam, R. Risse, T. Ross, M.
Rowe, E. Sachs, J. Schedler, A. Tsui, K. Wantchekon, L. Wilson, D. Zolberg, A. Sachs and Warner Petroleum wealth also tends to be associated with high levels of corruption, low transparency and limited democratic freedoms Ross , A handful of countries — among them Botswana, Malaysia and Norway — have used their resources to foster prosperity.
When well managed, petroleum revenues can provide a springboard for development. It is the lead-ers of petroleum-rich countries, and the policies they pursue, that are largely responsible for the impact of resource wealth on the political and economic devel-opment of such countries.
In theory, governments that receive more revenues are able to provide their citizens with more public goods, boosting private investment and promoting sustainable growth. Yet, given the short-term motivations to use resource earnings to secure power, governments typically find it difficult to use their resource wealth appropriately, often making oil and gas a curse for political and economic development.
As the following chapters in Part I illustrate, the governments of the three Caspian states studied here appear to have found a precarious balance so far. The balancing acts of the Caspian petro-states Even before petroleum fields are developed, a government must determine the extent of its participation and ownership of the hydrocarbon sector. On the one hand, governments have incentives to increase their sovereignty over natural resources, so as to maximize their share of the revenue generated by oil and gas production.
Greater sovereignty provides a government with the option to use its increased revenue for patronage in the short term or to invest in the development of the country. On the other hand, governments must weigh the incentive to collect a greater share of revenue against the negative repercussions this may have for the growth of both the petroleum and non-petroleum sectors of the economy. In the case of the petroleum sector, national companies often lack the capital and expertise that inter- national private oil companies can bring to the table.
In addition, governments fre- quently pressure national oil companies to spend profits on public projects as a way of generating social and political support without expending resources from the national budget. For example, national oil companies are frequently asked to invest in the construction of schools and hospitals in local communities. Since stable property rights are a prerequisite for foreign investment, a gov- ernment that decides to increase ownership by expropriation or by opportunistically renegotiating contracts risks deterring investment and future economic growth in the non-petroleum sectors of the economy Murphy et al.
The fact that the government did not take full con-trol over PetroKazakhstan, Karazhanbas, MangistauMunaiGaz and Kashagan pro-vides evidence that the national petroleum company, Kazmunaigaz, is still unable to maintain adequate output and investment due to lack of technology and capital. Some may see this progression as bad news not only for the private oil companies involved, but for the development of Kazakhstan as well.
Providing the government can meet these challenges, however, it will have the opportunity to realize the benefits of its resource wealth in initiating sustainable development. Once hydrocarbons have been produced and sold, a government must then decide how best to utilize the revenue. Because oil and gas are non-renewable resources, a government must consider how to distribute the revenues generated from this sector across generations.
Aside from saving a portion of petroleum earn-ings for future use, governments can invest their oil and gas revenues into other more sustainable assets in order to maintain fiscal policy once the oil and gas run out. By investing petroleum earnings in non-hydrocarbon sectors of the economy, a government can establish an economic base that will help the country to grow richer over time, even as it depletes its natural capital.
In other words, if properly invested as part of a national development strategy, petroleum revenue can lead to future sustainable development Sachs Governments are often tempted to award contracts to well-connected insiders or elites in order to generate immediate sources of legitimacy and support. Furthermore, increases in investment made at the height of a resource boom are often difficult to scale back once resource prices decline. Expenditure booms tend to lock in high spending levels that can set the stage for serious macroeconomic imbalances marked by inflation and sharp reductions in growth Auty and Gelb During the period —, the government increased public invest- ment by 65 per cent, with investment in the non-oil sectors of the economy increas- ing by approximately 32 per cent.
However, Maharramov finds that much of the investment has done little to stimulate growth in the non-oil sectors of the economy, providing evidence that short-term considerations continue to affect policy deci- sions. Such high rates of investment have probably exceeded government implementation and management capacity, result-ing in a significant amount of wasteful spending that may prove difficult to contain in the face of declining oil prices. In addition to concerns over inter-generational equity and appropriate levels of expenditure, governments must be aware of how resource wealth can affect the cur-rent well-being of their populations.
Governments must confront the potential impact of petrodollars on the distribution of income between rich and poor. Due to the potential for Dutch Disease, which can cause non-oil tradable sectors such as agriculture and manufacturing to contract, workers in these sectors may experience a dramatic rise in unemployment. Given the potential impact of petroleum wealth on the distribution of income and the fact that inequality can fuel social discontent and reduce economic growth Alesina and Perotti ; Persson and Tabellini ; Barro , governments can ill-afford to ignore this dynamic.
The estimated , individuals initially displaced in the —94 conflict with Armenia over Nagorno-Karabakh are espe-cially vulnerable to the negative implications of oil and gas for income distribution. Many of these internally displaced persons IDPs have been relocated into gov-ernment-sponsored housing projects built in isolated areas largely devoid of employment opportunities. For this reason, IDPs are excluded from shifting into booming sectors such as construction or services.
On the one hand, the government has sought to imple- ment policies aimed specifically at aiding the IDP population. For example, grow- ing hydrocarbon earnings have enabled the government to become the largest donor for IDP-related development projects. Such policies have helped the gov-ernment to avoid some of the political instability that can result from growing income disparities.
However, as Kjaernet explains, short-term considerations have limited the measures the government has been willing to take to assist the IDP pop-ulation. The Azerbaijani authorities have been motivated to keep the IDPs isolated from the rest of society and to use their continuing plight to legitimize an uncom-promising stance in the negotiations over Karabakh. Although Kjaernet finds that the government has successfully balanced these competing considerations for the time being, its inability to address the sources of petroleum-fuelled inequality is a continuous threat to stability.
In the final chapter of Part I, Gregory Gleason examines the impact of nat- ural gas on the political development of Turkmenistan. Notes 1 However, this growing inequality may not always occur. In theory, the impact of resource revenues on employment, and therefore income inequality, should be neutral.
However, when there are limits on labour mobility from one sector to another, increasing petroleum production will cause a rise in unemployment and a shift in income distribution. Bibliography Alesina, A. Auty ed. Baland, J. Barnett, S. Davis, R. Ossowski and A. Beblawi, H. Murphy, K. North, D. Persson, T. Robinson, J. Humphreys, J. Sachs and J. Adil Nurmakov Kazakhstan has become the undisputed economic leader in Central Asia. Although official estimates of recoverable reserves stand at 4.
During the first decade of the new millennium, many hydrocarbon-exporting countries, including Kazakhstan, sought to take advantage of the upward trend in energy prices to strengthen their national oil companies, boost government rev-enues and act to promote what they saw as their national interests. These trends gave rise to concerns about a worsening business climate, diminished predictabil-ity and sanctity of contracts, and restricted access to energy resources.
The concern in the short to medium term has not been that the world is running out of oil, but rather that it is running out of oil production capacity Financial Times State companies are expanding their control over reserves, but remain unable — in tech-nological, managerial and investment terms — to increase production capacity. Two case studies highlight con- crete examples of how the state has employed juridical novelties and political pressure to expand its role in the Kazakhstan hydrocarbon industry.
In economic terms, the concen- tration of energy resources in state hands can strengthen the competitive advan-tages of national companies and make it appear as if the companies are developing positively. In most cases, however, state ownership of energy resources has been shown to end up weakening the development of non-oil sectors of the economy Razumnova , especially in states lacking established institutions and capable bureaucracies.
This is because the lucrative extractive sectors, which enjoy the largest share of foreign direct investments FDI , are isolated and operate as eco- nomic enclaves with few growth-generating linkages with the rest of the transition economy. This limits the spillover potential for FDI to generate growth outside of the extractive industries Gallagher and Zarsky The concentration of resource income in the hands of authoritarian or semi-authoritarian governments is also problematic, as such governments tend to spend in inefficient ways.
The authorities naturally resort to covering the costs of inefficient internal markets through measures such as price regulation, salary increases and expansion of the welfare system — actions that invariably provoke additional inflationary pressure. Although there are some economic arguments for resource nationalism including the acquisition of easy liquidity by the state that could be used to subsidize devel-opment opportunities and poverty reduction , broader control over extractive reserves and export revenues generally entails further risks of de-industrialization and a higher probability of the country evolving into a raw materials appendage.
Such a scenario is a particular risk in petro-states with weak state institutions and civil societies. In political terms, resource nationalism has already become a significant propa- ganda tool, both internally and externally, in many countries that have now become influential players in ensuring global energy security.
As the state gains greater oil revenues, the government becomes less dependent on the taxation of its citizens. According to rentier-state arguments, the less dependent the state is on the taxation of its people, the less those citizens will demand accountable and responsible governance. Rent-seeking regimes are frequently uninterested in forg- ing accountable relationships with their citizens because of guaranteed revenues from the export of commodities and because they see a strong, vigilant civil society and private enterprises as threats to the benefits enjoyed by narrow elite groupings Smith This model stifles the emergence of a middle class, generally consid- ered to be an important precondition for a healthy civil society to flourish.
Resource nationalism also increases the income from the sale of natural resources that can be used by governments to buy off prospective opposition movements and to enforce police and military structures to maintain the apparatus of coercion Friedman It has therefore been argued that rich rentier-states inherently pose a direct challenge to the development of civil society and democratization Beblawi Alex Gorbansky divides the policies of resource nationalism into four types, each with different key drivers and risks.
In contrast to Russia, where resource nationalism is driven primarily by a populist political and economic agenda and the presence of strong state-owned champions, resource nationalism in Kazakhstan is combined with balanced state participation: the government exerts control over the petroleum sector, but allows foreign partic- ipation. This type of resource nationalism is driven by the desire to use resources to build foreign alliances and to capture greater economic benefits for the nation from its resources.
This means that the threat of expropriation and licence revocation that investors are facing in Russia is not felt as strongly in Kazakhstan, although threats to contracts and stability still exist. Concern is rising about the diminishing predictability and inviolability of con-tracts, today and in the future. Similarly, contractual revisions could seriously dam-age the already poor investment climate in the non-oil sector. The first phase was characterized by a legally expressed desire to increase tax revenues from subsurface users.
In the third phase, which has continued into the time of this writing , the state assumed the right to cancel contracts unilaterally. Furthermore, a new taxation framework was applied to subsurface users. Each of the three phases has been accompanied, to a greater or lesser extent, by the rhetoric of national sovereignty and arguments of economic expediency. Phase 1 took place against the background of rising world prices for petroleum resources.
On 1 January , amendments and addenda to the Tax Code of the Republic of Kazakhstan took effect, amendments that excluded compensation to investors for certain costs related to production expenditure — namely, those costs resulting from non-fulfil-ment or improper fulfilment of contract commitments due to violations of Kazakhstani legislation Tax Code, Article —2. This helped to simplify rela-tionships with subsurface users and ensure the observation of reasonable sovereign interests.
The amendment was similar to another amendment Article —1. The amendments also included a further step towards maximization of ben- efits from increasing world oil prices. Phase 2 was marked by several developments that took place in These included additional taxation, such as the increase of royalty payments by 0.
The aim was to support domestic enterprises and local employment. A ban on flaring of associated gas was introduced for environmental reasons, although most analysts saw this particular ban as a way of imposing additional fines on companies. Utilizing this gas has been complicated, for various reasons. The right of the state is to prevail over those of other stake- holders and participants of legal entities owning stakes in oil development projects in Kazakhstan. This alteration is believed to have been tailor-made to enable the state to acquire stakes in PetroKazakhstan, a case which will be examined below.
Under Article 14 of the same law, all transactions of stakes in extractive projects began to require mandatory government approval. The authorities thereby legislatively formalized control over the ownership of prospec-tive and existing projects, reserving the right of intervention and exclusive privi-lege of redemption.
At the same time, this new legislation consolidated the position of the national oil and gas firm Kazmunaigaz KMG by guaranteeing its right to a minimum 50 per cent stake, in the capacity of contractor, in all subse- quent PSAs. Shortly afterwards, in January , KMG entered Samruk, the integrated holding com-pany for the management of state assets. Samruk, whose board chairman is appointed by government decree, was designed to consolidate and optimize the use of state assets in a range of industrial sectors.
The creation of state-owned Samruk Holding and the Kazyna Development Fund, and their eventual merger into the Sovereign Wealth Fund Samruk-Kazyna in October , reflect a more general pattern of state expansion into the economy. The beginning of Phase 3 was marked in by government efforts to make a new legal framework for the corporate tax regime and adjust it to current economic realities.
The new Tax Code, which was adopted in December and came into force in January , was intended to ease the tax burden on small and medium-sized enterprises and non-extractive sectors, while increasing state revenues from extractive industries. However, the lack of openness in the elaboration of draft leg-islation has given rise to concern among the business community over the law-making process. Since the end of , with the onset of the credit crunch in Kazakhstan which partly set in before the global financial crisis , the authorities have proposed vari-ous approaches to increase state revenues from the extractive sector.
The government also expressed willingness to establish links with other states in order to ally against tax evasion via offshore trade by subsurface contractors work-ing in Kazakhstan, and the Environmental Protection Ministry initiated the imposi-tion of a fixed green tax on subsurface users to replace comparatively minor fines for pollution.
This legislative move, leaving ample scope for arbitrary interpretations and alterations, came at the peak of the standoff between the government and investors over delays in commercial produc- tion and repeated cost increases on the giant Kashagan project.
It could therefore be interpreted as a clear signal to members of the Agip KCO consortium, showing that the state was resolved to go to all lengths in pursuing its interests in negotiations. The details of this case will be discussed at greater length below. In February , the authorities suspended all negotiations concerning the use of subsurface reserves until 1 January , when the new Tax Code was expected to enter into force. Concessions would be employed instead.
Unlike earlier phases, Phase 3 was marked by a united and openly negative reac- tion from industry representatives and international bodies. That anxiety was sparked by the possi- bility that new legislation might be given retroactive force, potentially threatening existing agreements. However, as pointed out by some experts interviewed including persons from the Kazakhstani government , key legislative changes have often been deliberately introduced to address state goals in specific contracts and assets — including partial nationaliza-tion and change of ownership or assertion of governmental interests.
The govern-ment has utilized the full arsenal of administrative pressure, including checks on supervisory bodies, tax probes, environmental scrutiny and even in some cases criminal prosecution — usually set against the backdrop of nationalist rhetoric — to support campaigns of state repossession.
The following two case studies demonstrate how the Kazakhstani state, under the guise of resource nationalism, has exercised various means of control or influence on the situation around subsoil users. The first case represents the first major instance of the government putting pressure to bear on a foreign oil company in this context.
The second case describes the most significant contract revision in the history of Kazakhstan, involving diplomatic manoeuvring, administrative pressure and months of negoti-ations over the largest oil discovery of the decade. It saw the introduction of legis-lation enabling the state to abrogate contracts and revoke the licences of subsurface users — unilaterally. This legislation provided grounds for various deals that have expanded state participa-tion in the oil sector, including the acquisition of substantial stakes in PetroKazakhstan and KarazhanbasMunai.
From to , PetroKazakhstan made a number of deals and came to hold signifi- cant shares in several key projects and assets. The first signs of conflict between PetroKazakhstan and the government emerged in February , after the com-pany had refused to provide discounted oil products for the agricultural sector dur-ing the sowing campaign.
PetroKazakhstan accused the state of infringing on business interests protected by the Law on Private Entrepreneurship Kazakhstan Today a. In the worst case, this rebellion might have resulted in the disruption of the sowing campaign and a subsequent food deficit. In an attempt to make this Canadian-registered company give in, the Kazakhstani authorities engaged the services of a range of state agencies, starting with environmental bodies.
In March , the southern Kazakhstan office of the Prosecutor for Environmental Issues filed a lawsuit against PetroKazakhstan for flaring of associated gas, and in April launched a criminal case against the com- pany. Other oil producers guilty of committing the same violation were not charged. In late March, the Ministry of Energy and Mineral Resources threatened to halt work at the Kumkol oilfield due to flaring of associated gas.
In April, the Ministerial Commission on Oil and Gas Development ordered production at Kumkol restricted to a level that would not necessitate flaring. There is no public evidence of whether the com-pany stuck to its confrontational position, but at a certain stage the government had apparently resolved to squeeze out PetroKazakhstan.
By July the company had decided to leave Kazakhstan, and announced that it was considering offers for a potential sale or merger of its assets. At that time, the Kazakhstani government did not have the legal instruments to block the deal, but parliamentary deputies were voicing various suggestions on how to manage the issue.
On the same day, parliament adopted the bill, and on 15 October President Nazarbayev signed the amendment into force. The government employed a similar scheme to acquire Karazhanbas, a company with an output of 50, barrels per day and million barrels of proven reserves.
Triton-Vuko Energy Group Ltd. In April , Nations Energy Company acquired The announcement followed rumours of such a sale that had been circulat-ing since December Kashagan contract revision The first oil at Kashagan in the northern Caspian Sea was found in Kashagan is situated in an ecologically vulnerable area with difficult climatic conditions. With estimated commercial reserves of between 9 and 16 billion barrels of oil, this is one of the largest discoveries in the world in the past 30 years.
In , Kazakhstan officially removed a ban on drilling activities in the Caspian. These changes increased the cost of investments, postponed the start of commercial extraction from to later further postponed to Eventually, on 25 February , the government and the consortium signed an agreement on new terms of development, including increased costs and delayed start of production. Under the agreement, BG should first offer its stake to the government of Kazakhstan and consortium members.
In , the authorities started active negotiations with BG in London, with the purpose of regaining a stake in Kashagan and re-entering one of the largest oil proj-ects of the new century. In October , Petrina Fahey, a spokesperson for BG, reiterated that the company planned to wrap up the sale of the The deal was closed on 30 March , with the government regaining control of approximately 60 per cent of the stake it had owned in — for almost six times the price.
The government proved far less lenient when it came to the next delay in the start of commercial output at Kashagan. In February , reports on repeated increases of capital expenditures and extraction delays began to emerge. Uncertainty coupled with skyrocketing costs of the project caused irritation in government circles.
On 23 July, Eni presented the revised project budget and schedule to the Kazakhstan government. On 30 July , Massimov voiced the official position that the government saw the change in the project schedule as an alteration of the PSA that upset the balance of interests. The complicated tangle of problems around Kashagan caused justifiable discontent in the government, which publicly expressed doubts that investors could meet the requirements of the PSA.
In August , Massimov instructed the cabinet to pursue measures within the framework of Kazakhstani legislation to address the significant deficiency of pay-ments to the National Fund caused by the Kashagan delays. The campaign waged against the consortium was supported by various controlling bodies, with numerous charges brought against consortium members. Investigations were initiated into alleged customs regulation violations.
The consortium was also fined for failure to comply with fire safety requirements. Talks were held between Eni and the government. Interestingly, from a political point of view, unlike the BG stake negotiations held in London, these meetings were conducted in Astana. On 1 December, another memorandum was finalized, in which all consortium members — except ExxonMobil — agreed to redistribute their stakes in favour of KMG, which would thus gain equal shareholder footing with the major participants ExxonMobil took a firm stand and even attacked the government, saying that its actions were slowing down project implementation.
Tense negotia-tions continued until mid-January , when the state again resorted to political methods. On 11 January, a government source informed the media that the Kashagan PSA might be cancelled and that appropriate agencies were being com-missioned to prepare procedures. In May , the consortium again approached the government with a request to delay the start date of commercial extraction to Under the new terms of the PSA, investments are to be compensated from extracted oil, but if extraction begins after October , all further costs will be dead losses for the international companies.
It is expected that Eni will quit operatorship upon completion of the experimental stage in , and the consortium will revert to a joint operating model that will include KMG, ExxonMobil and Shell, and be regis-tered in Kazakhstan. This case study of Kashagan reveals how the government sees the project as a strategic component of the economic development of Kazakhstan. The government combined justified claims to the consortium with coercive methods in order to obtain a considerable share in the project.
Here, however, it should be noted that this was achieved primarily through negotiations, and not by measures forcibly imposed. In the case of Kashagan, repeated breaches of contractual commitments on the part of Eni helped to motivate the government to demonstrate its willingness and capacity to implement harsh measures to protect national interests. State- owned companies are still unable to maintain adequate output and invest-ments, due to the lack of technology and capital.
In general, it seems that international oil companies are ready to make conces-sions to national interests and assume further political risks, as long as a reasonable coefficient of profitability can be observed. While Kazakhstan has demonstrated that it needs international participation in its extractive sectors, the developments described in this chapter create serious challenges for the operations of international oil companies in the country.
The state has increasingly demonstrated dissatisfaction with the performance of sub- surface users. The Ministry of Energy and Mineral Resources cancelled 20 sub-surface contracts in the first half of for failure to meet agreed conditions Interfax Kazakhstan Private companies were charged some The authorities also plan to increase the oil export duty, citing the need to stabilize domestic fuel prices.
The new Tax Code, which took effect in January , provides for substitution of royalties with the natural resources extraction tax NRET , to be calculated on the basis of a progressive scale, depending on the amount of recoverable reserves and world oil prices. According to the government, after the introduction of the new Tax Code, oil company profitability will be at the level of 20 to 25 per cent and the tax burden at 35 to 40 per cent.
In comparison, many other oil-producing countries tax up to 70 per cent of profits from the oil companies. However, the process through which the state can cancel contracts provides opportunities for oil companies to remedy the situation or to agree to new conditions put forward by the government. The government also reserves the right to annul agreements if irregularities in the privatization process are revealed or if contract commitments are not observed by the investor.
According to the new law, new contracts are to be drawn up separately for exploration and production, and the bidding procedure is to be based on the size of the bonus and social deduc-tions. Although officials publicly claim that Kazakhstan is immune to resource nation- alism and deny tightening their grip on foreign investors, the tendencies outlined in this chapter remain worrying for international capital, especially considering the abrupt and rapid sequence of legislative changes.
It can be expected that during the period —11 both sides will be adjusting to the new rules of the game. This process will probably include court examinations and international arbitrations, which are more likely to favour private interests than the Kazakhstani government. It remains unclear whether the state will continue its screw-tightening after the adoption of the new Tax Code or whether the pendulum in relations between the oil industry and the government will bring fixed taxation, stable contracts and mutually settled free market interaction.
In the event of a continued slump in oil prices which began in late and problems with liquidity, the government may seek to derive more revenues from the extractive industries as the main source of income for the national economy. On the other hand, the government will also have to recognize that it is more difficult to put pressure on oil companies during periods of low oil prices. At the same time, the recent arbitrary introduction of the oil export duty on companies enjoying a taxa-tion stability regime represents a worrying development.
The authorities insist that political risks, which had been compensated for in contracts with the foreign investors in the s in the form of tax benefits and other preferences , are no longer present, and therefore no longer need compensation. However, for foreign investors, the alteration of contracts is precisely one of the risks they have feared. Conclusions In economic terms, improved transparency and predictability of state policies in the energy sector could significantly contribute to market stability and cross- border investment.
Failure to diversify the economy could impact on the labour market, as the hydrocarbon sector is not able to generate enough employ-ment opportunities for the growing population, despite its capital- intensiveness. Recent developments, even if eventually replaced by a more stable energy policy direction, could give rise to anxiety among current and prospective foreign compa-nies over the projected returns on investment. Since the first cases of government attacks on the petroleum sector, the annual physical volume of oil production growth in Kazakhstan has frozen at the level of 3.
The output of renationalized enterprises PetroKazakhstan Kumkol and Karazhanbas has decreased by 5 and 16 per cent respectively. Although experts cite stricter rules regarding subsurface use and toughened envi-ronmental regulations as the main reasons for production declines, the lack of investments in field development by state-owned companies might also be an issue.
The ambitious goal of reaching million tonnes of annual production by seems impossible before , due to the altered licensing, taxation and customs policies and in view of the many transport, environmental and technological challenges. The economy was hard-hit by the global liquidity crunch, which the state has had to mitigate, especially in terms of budget revenues. In polit- ical terms, oil contracts tailored to maximize the income of private-sector parties run counter to national interests Humphreys et al.
As the government seeks to increase its share of assets, institutions will have to be strengthened in order to avoid the mistakes of the past and to ensure transparency, ownership and fairness. In the absence of strong institutions, resource nationalism and the rents it generates will primarily serve the dominant bureaucratic elites that are tightly meshed with the oil and gas business, creating a vast potential field for official corruption.
Luciani ed. The Arab State, London: Routledge, pp. Daumov, A. Friedman, T. Gallagher, K. Gorbansky, A. Humphreys, M. Ikonnikov, A. Konirova, K. Nazarbayev, N. Annual State of the Nation Address, 6 February. Prokhorov, I. Razumnova, L. Shirinskikh, N. Smirnov, S. Smith, B. Public-sector investments, if well targeted, can increase and improve the stock of capital employed in the production of public goods and services. The capital expenses of the government in Azerbaijan can be used, for example, for construction or reno-vation of public assets, acquisition of equipment and machinery, preparation of fea-sibility studies and as wage expenditures for implementation of public investment projects.
This figure is three to four times larger than the EU equivalent EC One of the goals of this expansion in public investment has been to boost employment rates throughout the country. The latest Labour Force Survey indicates that the standard unemployment rate in accordance with the ILO definition had declined to 6. In order to understand the effects of the oil boom on employment, thorough analysis is needed of the relationship between investment and the performance of labour markets. This chapter looks at the causal relationship between public invest-ments and employment in Azerbaijan.
It discusses the performance of investments and the labour market in Azerbaijan over the period —7, analyses the impact of investments on labour markets in general and examines the effectiveness of public investments. The first section of this chapter provides a discussion of the definition of public investments and the research methodology employed. The second section exam-ines the dynamics of public investments in Azerbaijan and the relationship between investments and economic growth.
The third section presents an analysis of the per- formance of labour markets in recent years, focusing on the living standards of workers and labour intensity. This is followed by an analysis of the employment elasticity of public investments and the effects of investments on employment and living standards of workers. The chapter ends with a discussion of available statistics and the findings of qualitative studies to determine the impact of public investments on the economy of a particular rural region.
Research methodology and data This section analyses the relationship between economic growth, employment and public investments in Azerbaijan. Due to the lack of long-term time-series data, problems with the reliability and quality of available statistics and breaks in trends, it was not feasible to apply regression analysis.
In addition to quantitative data, the policy-relevant portions of this study draw extensively upon numerous sources of academic and policy research on labour markets, public investments and macroeconomic policy. Data on public investments have been estimated from special ordinances of the Cabinet of Ministers of the Republic of Azerbaijan. Early transition period As with most post-Soviet states, the transition period proved painful for large parts of the population in Azerbaijan.
The initial phase —95 witnessed large-scale job destruction, decline in real wages, a significant fall in government spending, an increase in poverty, hyperinflation and depletion of foreign exchange reserves. GDP in was only 44 per cent of its level in Aggregate demand declined substantially, and household consumption decreased by 50 per cent from its level MoED Two major factors have added to the socio-economic challenges of Azerbaijan. First, Azerbaijan performed rather poorly on several economic indicators in the final years of the Soviet Union, and ranked 10th in terms of living standards among the 15 Soviet Republics.
In , average monthly wages in Azerbaijan were 30 per cent lower than the Soviet average MoED This resulted in the internal displacement of approxi- mately , persons, as well as the loss of valuable production factors and land. This included 17, km2 of productive land, which had provided 35—40 per cent of the national agricultural output MoED Resumption of economic growth: and onward Beginning in , Azerbaijan managed to halt the further decline of its socio- eco-nomic indicators.
Several factors, including a phenomenal level of foreign invest-ment in petroleum exploration and development operations and sustained macroeconomic and political stability, enabled the economy to grow at an average of Because of its petroleum-related investments, Azerbaijan leads all 26 former Soviet bloc and Yugoslav countries in terms of the growth rate in gross fixed capital formation.
Note: Created using data from MoED Communications and transportation The oil and gas production boom, with the expansion of government expendi- tures and banking credits, has had favourable ramifications for the whole economy. From to , non-petroleum per capita income grew by more than 2. Growing current and capital expenses of the government have substantially increased aggregate demand through the rise in public-sector wages, job creation in public investment projects, expansion of retail trade turnover and overall economic activity.
Government expenditures increased 8. The growth in government expenditures was financed mainly by income and profit taxes, revenues from oil and gas production and trans-fers from the State Oil Fund. Current expenses made up the largest share of the budget until The gov- ernment argued that this reflected a desire to increase wages, pensions and other social spending. Thus, the share of current expenses in the state budget declined to 67 per cent in , from 97 per cent in , while capital expenses increased to 33 per cent MoED According to official data, the poverty rate has declined by 19 per cent since At the end of , the official poverty rate stood at 16 per cent Azertaj News Agency The standard unemployment rate has also declined, falling to 6.
Growth has not been distributed evenly, and income and wage inequality has risen. According to a World Bank study, in Azerbaijan had the highest wage inequality among all transition countries World Bank In , oil and gas production accounted for 56 per cent of GDP, compared to roughly 30 per cent during — see Figure 2. Growing foreign investment has fuelled growth in the oil and gas sector. Of the foreign investment, 90 per cent went to the petroleum industry EIA However, this sector is one of the least labour-intensive, employing less than 1 per cent of the total labour force SSC d.
Given the dependence of the petroleum sector on external actors, both as a mar- ket for oil and gas and as a source of investments, the petroleum industry extent functions largely as a separate world within Azerbaijan. The growth of the petro- leum sector has had favourable effects on sectors serving the petroleum industry, including the service sector and real estate services, but links with much of the rest 54 54 44 31 31 31 30 30 Figure 2.
Dynamic economic growth: to present Growth in labour productivity, as opposed to employment, became the main driver of economic growth after , especially in the period —7. The main factors driving double-digit economic growth have been the household consumption, pub-lic investment, rising bank credits and rapid expansion in the non-tradable sectors. Until , the existing productive capacity of the economy aggregate supply and private and public spending aggregate demand contributed roughly equally to economic growth.
But during —7, demand factors like investments and expan-sionary fiscal policy became major sources of non- petroleum economic growth see Table 2. The mismatch between the growth rates of domestic demand and supply led to inflationary pressures. The average annual Consumer Price Index jumped by 14 per cent from its level, reaching 16 per cent in Aggregate supply The main driver of aggregate supply in Azerbaijan has been the petroleum sector, which accounted for 56 per cent of GDP in Foreign petroleum consortia accounted for Growth in the non-petroleum sector has been robust for several years see Table 2.
However, because of the rising share of the petroleum sector, its contri-bution to GDP has declined. In , the non-petroleum sector accounted for 44 per cent of GDP. In general, the growth rate of service sectors has outpaced that of the production sector. However, the growth performance and competitiveness of the tradable non- petroleum sector seem to have deteriorated over time. In , the tradable non- petroleum sector, which includes non-petroleum manufacturing and agriculture, grew by 5.
Within the tradable non-petroleum sector, non-petroleum manufacturing grew by 7. In contrast, the rapid growth in domestic demand has favourably affected the non-tradable sectors that cater to this demand see Table 2. Transport, communica-tions and construction were the three main sectors contributing to the growth of the non-tradable sectors, accounting for 44 per cent, However, output growth and exports will level off by , at which point the growth of exports and the economy will have to be driven by the non-petroleum sectors.
In the long term, the economy of Azerbaijan remains vulnerable to external shocks and falling oil prices. That in turn would lead to con-traction of public investments and greater unemployment. As yet, how-ever, the government has adopted a wait-and-see strategy before making any fundamental revisions to its spending plans. Dynamics of public investments Public investments in Azerbaijan grew by 64 per cent between and They constituted 21 per cent of non-petroleum GDP in , up from 12 per cent in Garland, Youngstown.
Mae Effie Bradbury, Miles Ave. Edward A. Bradley, Russell Ave. Bradt, W. Marie J. Brady, Cleveland Ave. Anna Branch, Watson St. Mattie Brandenburg, 30 Miami Ave. Eileen S. Brane, N. Moreland Blvd. Robert C. Bratten, Sr. George Braun, Rt.
Mary Goodrich Satterfield, 94 Rhodes Ave. Gladys Brene- man, Box , Grand Rapids. Sylvia Irene Holmes, Rt. Ralph J. Brengartner, Cen- tral Ave. Otto Karl Brent, Lexington Ave. Michael Bresko, Wellington Ave. Laurence Breslin, Mt. Vernon St. Joseph Carl Breunig, Glenmont Ave. Arthur E.
Gertrude S. Clark, Colbert St. Bertha Brewer, Reading Rd. Nellie Brewer, Harlan Ave. Adam Ebenezer Bridge, Elm St. Joseph P. Brincko, Lowell Ave. Henry L. Britton, E. Ethel C. Brock, Rt. Sister, Cecile Hazelton, Park Ave. John Broedel, Rt. Charles B. Brookhart, Eden- dale Rd. Fathr, Mr. Frank M. Fannie Brooks, E.
Anna Mae Brooks, Charles St. Gertrude Brophy, Rt. James Osborn Brown, Kirby Ave. Harry Clif- ford Brown, Rt. Ernest A. Brown, Bartran Ave. Doris Alberta Brown, Waterloo St. Ernest R. Brown, Rt. Margaret Brown, Lorain St. Oscar Russell Brown, McDermott. Ethel Woods, E. Liberty St. William Sherman Brown, Latourette St. Woodsen P. Brown, Palm wood Ave. William Watson Brown- field, Frank Rd. Grace Martin Browning, S.
Bes- sie Carr Brownlee, N. Clarence L. Broyles, Sherman St. Mayme Bruce Hetzler, Anderson St. Joseph Brudz, Parkview Ave. Arthur D. Grafton, Dan St. William A. Brumm, E. Charles Brunner, Marmion Ave. Lucile Brunson, 11 Union St. Dorothy C. Brusman, 37 E. Norman Ave. Jack Brustoski, Rt. Clyde D. Bryan, Rt. Edward L. Bryan, N. West St. Albert Buckingham, Box Edgerton Rd. Mar- garet T.
Buckley, Corydon Rd. Catherine Grafton, N. Forge St. Wil- liam B. Budd, Howard St. Constance Louise Buderus, Rt. Joseph Budinski, Box , Amsterdam. Ber- nard Roy Buhren, Segur Ave. Peter Buk- vic, E. Ellen Frances Bullock, Sut- ton St. Herman Bumiller, Maple Ave. Harry Hamilton Bundy, Shadyside Ave. Dewey W. Bunnell, Sr. Garfield Abram Burcher, Box , Somerton.
Elizabeth Burden, Yale St. Guardian, Mr. Samuel Arthur Bobb, Murray St. Nelson O. Burdett, Thompson St. Gladys Patter- son, Beekman St. William Burill, New Bavaria. Dennis W. Burke, E. William Joseph Burke, Erie St. Frank L. Burk- holtz, Rt. Burkley, Sr. Burns, Rt. Virgil Burns, Rt. Charles Burns, Rt. Smrley Burriss, Cedar St.
Steve F. Buschur, Rt. Ernest F. Bush, Doyle St. Marion Francis Spohn, Briarwood Ave. Mary Bushta, Brown Ave. Clarence Lewis Busick, Rt. Harold P. Bussard, S. Joseph Butara, Columbia Ave. John N. Butcher, Rt. Butler, Front St. Earl B. But- ler, Sinking Spring. Ann Turk But- ler, Connecticut Ave. Hazel L. Butterfield, Dresden Rd. Joseph Matthew Buzek, Harrison St. Rose C. Byerley, W. John W. Byers, Rt.
Daughter, Virginia Lee Byers, N. Elva Byers, Erie St, Youngstown. Mamie Byrd, Wade St. E, Canton. Genevive Rose, Summit St, Toledo. Anna Lauretta Cadman, W. Delason Ave, Youngstown. Concetta Calabrese, Paul Ave, Cleve- land. Erlyn L. Smith, Louisiana Ave, N. W, Canton. Bessie Cali- petis, Highland Ave, S.
W, Warren. Aunt, Dorothy Call, Rt. Clyde Callihan, Sr, Box Walbridge. Cleo Calvin, Rt. Frank Campana, Broadway, Bedford. Harry Campau, Knower St, Toledo. Robert K. Campbell, Rob- bins Ave, Niles. Thomas H. Campbell, Schuyler Rd, Toledo. Almost Nolan Campbell, Rt. Mat- thew 7 Campbell. Robert Ross, Jr. Robert Ross Candor. James D. Canode, Rt.
LeRoy Cantrell, Pritz Ave. Paul J. Martha Capes, Rt. Eva Inez Caplinger, Rt. Arthur Edward Capple, E. Wilbeth Rd. Silver S. Moir Howard Cardwell, Sr. Emmett C. Carey, Rt. Mary Carl Barr, N. Arthur W. Carley, Jr. Mary Carl- son. Samuel R. Carnahan, Rt. Frank Carnahan, Maxwell Ave. Emma Caracciolo, St. Fred R. Carpenter, Rt. George F. Carpenter, Clay St. Charlie Carr, Rt. William Doy Carr, S. John F. Wil Mrs. Carr, Elmwot Rd. Aunt, Mrs. Neville, Wager Rd. Margaret Elizabeth Carroll, E.
Harry Simeon Carroll, 18 N. Murray St. Samuel Carson, Penn St. Joyce Faye Carson, 8th St. Mildred Louise Carson, Rt. John E. Carson, High St. Lilia Mae Carson, Rt. Clarence Carter, Jr. William Carter, Sheridan Ave. Wanda Carter, Euclid Ave. Lena B. Carter, W. Center St. Eleanor Francis Kushen, Oakdale Rd. Robertson, Beecham St. Earl D. Case, Rt. William Case, Sr. Marion St. William M. Casey, Oak Park Ave.
James Castellucci, P. Box , Malvern. Anthony Castellucio, S. Clubcrest Ave. Sanford S. Castle, W. Auburn St. David Gay Casto, Walnut St. Bryan Castor, Rt. Joseph Cata- logno, E. Rich St. John David Catching, Logan Ave. Mary Cath- erine Cechal, Thornhill Dr. James Robert Cecil, Sr. Mary Cekada, Reno Ave. Frances Mary Centner, Hill- side Ave.
John Centofanti, E. Angelo J. Centorbi, Storer Ave. Mary Anna Cercone, Gibson St. Helen Cerveny, Rt. Wallace E. Chaffee, 2d St. William J. Chalfant, Stone St. James K. Chalmers, Lamparter St. Gussie Chambers, E. Margaret Hen- nessy, Clifton St. Leslie M. Chambers, Sr. Broad St. Henry H. Chambers, Rt. Uncle, Mr. Chaney, Rt. John Foster Chapman, Sr.
Waterloo Rd. Willie T. Chapman, Kitts Hill. Eliza Chapman, Rt. Mar- garet Jane Chappell, Mary- land Ave. Dmytro Chay, W. Andrew Chernay, Woodland Ave. Jacob Chernak, John St. John Ne- met, Franklin Ave. Leva Myrtle Childers, Spencer Ave. Elsie Child- ers, Pittsburgh St. Bernice Celia Chodzin, Hampden Ave. Esther Pauline Chris- tiansen, Ardendale Ave.
John Chombor, W. Homer D. Clapper, The American Legion, W. Dwain D. Clapper, Woodward Ave. Mary Wescott Dittman, W. Charles E. Clark, 47 Oberlin Ave. William Luther Clark, j Madison Ave. James E. Clark, Dayton PI. Seaman 2c, USNR. Lawrence Edgar Clark, Rt. William Clark, N. Orville D. Clark, Madison Ave. Devoe H. Clark, E.
Carrien F. Clark, Budd St. William W. Clark, W. North St. Clawson, W. Massie P. Claytor, Forbes Ave. Lois Ruth Cleary, Lawrence St. Mary Elizabeth Clemens, Rt. Later Add. Malden, Mass. Avery B. Clemons, Grove City. Catherine Mary Cliff el, E. Rose Clifton, Tremainsville Rd. Earl Cline- smith, Rt. William Fay Cling- erman, E. Lincoln St. Daisy M. Cloman, Rt. Birdie May Clotfelter, Taylor St. Charles R. Cloud, Rear 35 Xenia Ave. Margaret Coats, W. Wilamina Cobb, Eastern Ave. Loman Littlen Cochran, Shelby.
Clara Gladys Cochran, N. Buena Vista St. Eliza- beth Rosey Coci, Michi- gan St. Paul Codrea, E. Nell Foley, Radcliffe, Toledo. Mary Cojocar, Gen. Marguerite Coatoam, W. Marjorie A. Cole, Rt. Harry F. Cole, W. Lillian Ar- lene Cole, Rt. Charles L. Cole, Carbon St. Floyd Wilbur Coleman, Rt. Lafayette Holman, Pogue Ave. Fred Howard Collins, Chestnut Ave. Frank G. Collins, Rt. Robert Emmit Colopy, 16th St. Store- keeper 3c, USNR.
Norma Jean Colopy, Danville. Col- son, Pullman Bay Park, Celina. Cora Colyer, Race St. Doris Vir- ginia Combs, Hegner Ave. Rachel Combs, W. Jeanette Con- nell, Lock St. Nellie Connelly, Burwood Ave. Martin J. Connors, Tampa Ave. Mary Flo- rence Conrad, Silver St. Homer Milton Conrad, Sr. Benjamin G. Conrath, 33 Point- view Ave.
Joseph Francis Conroy, W. Carl R. Cook, E. Edger- ton, Hicksville. Goldie Cook, Michigan St. Estella B. Cook, Hemlock Grove. William Clyde Cooke, W. Harry James Coome, Sr. Allen Coon, Rt. Leona Cooper, Friendship.
Ollie Cooper, Sciotoville, Portsmouth. Nora M. Cooper, Rt. Myrtle Lykins, 8 th St. Mary Coots, Hillside Ave. Clement C. Copas, W. Harry Cop- fer, Herschel Ave. Charles M. Corbett, Sr. Grandmother, Mrs. Roy Lee Corbin, E. Mount St. Dorothy Strunak, E. Nellie Frances Cordray, Gar- field Dr. Marie A. Cordy, Ann Ave. Edgar E.
Betty M. Corey, Box 22, Roots- town. William Perry, W. Vine St. Benson Cornell, Harter Ave. Harry Go Corp, Hough Ave. Father, Andrew Corrao, E. Cor- rell, 17th St. Mary Cor- rigan, W st St. Carl Cor- riggio. Addie May Corzatt, W. Kathleen Kinser Cosgrave, Holmden Ave. Ranee S. Cottrill, Rt. Charles Robert Cottrill, Rowland Ave.
Helen M. Curtis E. Countryman, Rt. Joseph Covella, Rt. John Cowie, Box 11, Syra- cuse. Bertha Cox, Coyne Ave. John Sumner Cox, Rt. COX, Raymond J. Raymond Cox, Rt. Henry Crabtree, Benfield Ave. Flora M. Hazel Flor- ence Gallagher, Underwood St. Elizabeth Ann Cram, E. Percy L. Cramblett, Orange St. Tony Cramer, Brent- wood Ave. Helen Crandall, Prospect Rd. Rose Crawford, Allen Ave.
John Crawford, Walnut St. Helena Crislip, Rt. Mildred J. Johnson, Rt. Helen L. Cromling, Lodi St. Elea- nor Cross, Lawnview Ave. Earlene Baker Crow, Watson St. Margaret Ann Crown, W. Frank J. Crum, Rt. Crum, N. Court St. Parents, Mr, and Mrs. Jerry Cry- sel, Rt. Harrison Culp, Rt. Florence K. Cummings, Broadway, To- ledo.
John Cunningham, Kenil- worth Rd. Emma Cunningham, Gallia St. Margaret A. Curley, Rt. Ulysess Samuel Curnutt, Wayne Ave. Thomas Wil- liam Curran, Mears Ave. Harry H. Curtis, Richard Rd. Clyde Cus- ter, S. Jackson St. Mary Rahel, Prince Ave. Bertha Czarnecki, Fullerton Ave. Joseph Czim- balmos, Jr. George Czirr, Pemberville. GER, Noble W.
Noble W. Dager, Sycamore St. Anthony Daiuto, W. Ralph V. Dale, E. Fay F. Dalrymple, Lander Rd. Carmen Damiani, Box 83, Jacobsburg. Anne M. Milea, Herman Ave. Harry Dando, 16th St. Leon V. Dan- doy, W. John Danik, Amherest St. Lawrence Daugherty, E. Tiffin St. Peter J, Daugherty, Elsinore Ave. Cath- erine Davidson, Sloane Ave. Kenneth J. Davidson, Rt. Helen J. Davies, E. King St. Ora S. Davis, Arch St. Bertha Davis, Reed Ave. Bernard Brown Davis, New Bremen.
Hazel I. Davis, Lindenwood Ave. Earl Davis, Rt. Mary Davis, Nokomis Ave. Karl Davis, Central Ave. Mary Beatrice Davis, Sherman Ave. Helen Davis, Main St. Bessie Alta Davis, East St. Harry Wil- lard Davis, Empire. Elden Davis, McConnell Ave. Mary Stump Davis, W. Lela Davis, Cutter St, Cincinnati. Wilson Howard Davis, Sr. Marie Max- ine Davison, N. Franklin, Mansfield. Mary Louise Dawson, E. Elizabeth Day, Maryland Ave.
Day, Rt. Carol D. Dean, Beach Ave,, Lakewood, Cleve- land. Rita Dean, Hopkins Ave. Ollie Jane Dear, N. De- bord, Maud. Dwight W. Deeds, Rawson. Effie Lenore Deeds, W. Lil- lian Hurlbut, Louisiana Ave. Evelyn Ruth Deetz, Sherman St.
Joseph DeFabio, Silsby Rd. John De Fluiter, N.
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