The 2012 consolidated state budget sets spending at 17.1 billion AZN, an increase of about 5% over 2011. The budget funds an ambitious program of infrastructure investments, focusing on transportation and water and irrigation. About three-quarters of the budget is funded by transfers from SOFAZ and taxes on oil companies. This degree of reliance on hydrocarbon revenues has led the IMF to express concerns about the economy’s stability and vulnerability to inflationary pressures. While a significant drop in oil prices would likely require some curtailment of the government’s investment program, to date, inflationary pressures have been manageable.
Azerbaijan is considered one of the most important spots in the world for oil exploration and development. Proven oil reserves in the Caspian Basin, which Azerbaijan shares with Russia, Kazakhstan, Turkmenistan, and Iran, are comparable in size to North Sea reserves several decades ago. The Baku-Tbilisi-Ceyhan (BTC) pipeline, which opened in May 2005, has a maximum capacity of one million barrels per day. While oil and gas production in Azerbaijan has been steady for the past few years, imminent large-scale investments in the oil and gas sector (most notably, a $20 billion investment for the second stage of the Shah Deniz gas project) are likely to cause energy production to climb over the next decade. Negotiations are ongoing over different gas pipeline options for transporting Caspian gas to Southern Europe.
Azerbaijan faces serious environmental challenges. Soil throughout the region was contaminated by DDT and toxic defoliants used in cotton production during the Soviet era. Caspian petroleum and petrochemicals industries also have contributed to present air and water pollution problems. Several environmental organizations exist in Azerbaijan, yet few funds have been allocated to begin the necessary cleanup and prevention programs. Over-fishing by poachers is threatening the survival of Caspian sturgeon stocks, the source of most of the world's supply of caviar. The Convention on International Trade in Endangered Species (CITES) has listed as threatened all sturgeon species, including all commercial Caspian varieties. CITES imposed a ban on most Caspian caviar in January 2006, but lifted the ban a year later in favor of quotas. A March 2010 CITES conference labeled Caspian beluga sturgeon as 'critically endangered,' but as of yet no changes have been made to current sturgeon fishing quotas.
DEFENSE AND MILITARY ISSUES
In July 1992, Azerbaijan ratified the Treaty on Conventional Armed Forces in Europe (CFE), which establishes comprehensive limits on key categories of conventional military equipment and provides for the destruction of weaponry in excess of those limits. Although Azerbaijan did not provide all data required by the treaty on its conventional forces at that time, it has accepted on-site inspections of forces on its territory. Azerbaijan approved the CFE flank agreement in May 1997. It also has acceded to the nuclear Non-Proliferation Treaty as a non-nuclear weapons state. Azerbaijan participates in the North Atlantic Treaty Organization's (NATO) Partnership for Peace, and maintains a presence of over 90 troops in Afghanistan. Azerbaijan also maintained a peacekeeping deployment in Iraq until November 2008.
Azerbaijan is a member of the United Nations, the Organization for Security and Cooperation in Europe (OSCE), NATO's Partnership for Peace, the Euro-Atlantic Partnership, the World Health Organization, the GUAM (Georgia, Ukraine, Azerbaijan, and Moldova) Organization for Democracy and Economic Development, the European Bank for Reconstruction and Development, the Council of Europe, the International Monetary Fund, the Organization of the Islamic Conference, the Nonaligned Movement, and the World Bank. Azerbaijan is an observer at the Community of Democracies. In 2011, Azerbaijan was elected to the UN Security Council as a non-permanent member, representing the East Europe Group for the 2012-2013 term.
The major domestic and international issue affecting Azerbaijan is the dispute over Nagorno-Karabakh, a predominantly ethnic Armenian region within Azerbaijan. The current conflict over Nagorno-Karabakh began in 1988 when ethnic Armenian demonstrations against Azerbaijani rule broke out in both Nagorno-Karabakh and Armenia, and the Nagorno-Karabakh Supreme Soviet voted to secede from Azerbaijan. In 1990, after violent episodes in Nagorno-Karabakh, Baku, and Sumgait, the Soviet Union's Government in Moscow declared a state of emergency in Nagorno-Karabakh, sent troops to the region, and forcibly occupied Baku. In April 1991, Azerbaijani militia and Soviet forces targeted Armenian paramilitaries operating in Nagorno-Karabakh; Moscow also deployed troops to Yerevan. Azerbaijan declared its independence from the U.S.S.R. on August 30, 1991. In September 1991, Moscow declared it would no longer support Azerbaijani military action in Nagorno-Karabakh. Armenian militants then stepped up the violence. In October 1991, a referendum in Nagorno-Karabakh approved independence.
More than 30,000 people were killed in the fighting from 1992 to 1994. In May 1992, Armenian and Karabakhi forces seized Shusha (the historical Azerbaijani-populated capital of Nagorno-Karabakh) and Lachin (thereby linking Nagorno-Karabakh to Armenia). By October 1993, Armenian and Karabakhi forces controlled almost all of Nagorno-Karabakh, Lachin, and large adjacent areas in southwestern Azerbaijan. As Armenian and Karabakhi forces advanced, hundreds of thousands of Azerbaijani refugees fled to other parts of Azerbaijan. In 1993, the UN Security Council adopted resolutions calling for the cessation of hostilities, unimpeded access for international humanitarian relief efforts, and the eventual deployment of a peacekeeping force in the region. The UN also called for immediate withdrawal of all occupying forces from the occupied areas of Azerbaijan. Fighting continued, however, until May 1994 when Russia brokered a cease-fire.
Negotiations to resolve the conflict peacefully have been ongoing since 1992 under the aegis of the Minsk Group of the OSCE. The Minsk Group is currently co-chaired by Russia, France, and the U.S. and has representation from several European nations, Armenia, and Azerbaijan. Despite the 1994 cease-fire, sporadic violations, sniper fire, and landmine incidents continue to claim many lives each year.
Since 1997, the Minsk Group Co-Chairs have presented a number of proposals to serve as a framework for resolving the conflict. One side or the other rejected each of those proposals, but negotiations have continued at an intensified pace since 2004. In November 2007, on the margins of the OSCE Ministerial Council in Madrid, the ministerial-level representatives of the three Co-Chair countries presented the sides with a proposal on the “Basic Principles for the peaceful settlement of the Nagorno-Karabakh conflict.” In 2008, Azerbaijani President Aliyev and Armenian President Serzh Sargsian signed a declaration expressing their intent to seek a political settlement to the conflict, to resume confidence-building measures, and to intensify negotiations within the Minsk Group framework on the basis of the Madrid proposal.