1.1. Gross Domestic Product
     After the restoration of its independence in 1991 the Republic of Azerbaijan faced numerous and new problems regarding the establishment of a market economy. Transition to free market principles in parallel with an ailing centrally planned economy management structure weakened the economy of Azerbaijan, especially during the early years of independence up to 1994. In this period GDP decreased every year by between 13 to 20% and was 1,873 billion manats in 1994. Azerbaijan’s economy was on the verge of total collapse. GDP increased to a level of 23.6 trillion manats during 1996 to 2000, rising 39% over the period.

     

      1.2 Industry
      The period from 1990 to 1995 can be considered as one when the economy of the country was at the stage of adaptation to market principals. The deep and long-lasting decline of economy seriously affected industry. The severing of traditional economic and trading ties and the loss of export markets in former socialist countries was one of the main factors that caused the sharp reduction in industrial output. As a result, industrial production had decreased 70 % by 1995 in comparison with 1990 figures.
      The years of 1996 to 1997 are characterized as a period of stabilization of the economy of the country. In 1997 not only was the decline of production output stemmed but, in comparison with the previous year, there was growth of 0.3 percent. During the following years the trend in production volumes continued with growth during the five year period from 1996 to 2000 reaching 5.9%.
      Production growth was achieved as a result of the successful work of state owned electric power, fuel, chemistry and oil chemistry enterprises, as well as enterprises in the private sector. However, decline continued in the machine-building, light industry, food industry, construction materials and several other sectors.
      From 1996 to 2000, some 2,103 new industrial enterprises were started and by January 1, 2001 this number had reached 4,835. About 90 percent of these newly opened small enterprises were in the private sector. The number of joint ventures and foreign owned enterprises increased more than threefold during this period.
      At present 381 enterprises with foreign investment, representing 37 countries, are functioning in the industrial sector; accordingly, thousands of new work places have been created.
      Oil is the main national wealth of the country. The oil industry was, and still is, the leading sector of the country’s economy. The most important event of the previous decade is the “Contract of the Century” signed in September 1994 with the leading foreign companies.
      The first oil was extracted from the Chirag oil field in November 1997 and from then until the end of 2000, 12.2 million tons of crude oil and 1.8 billion cubic meters of natural gas had been extracted. In 2000, the total volume of oil produced in Azerbaijan was 14 million tons, it was 12 percent more than the level of 1990 and 1.5 times that of 1995, with electricity production 10 percent up in comparison with 1995.
      The increase of per capita national production is an obvious example of the continued growth of industrial output. In comparison with 1995, in 1999, the per capita oil extraction increased 1.5 times with production of electricity up only 2.5 percent.
      There is also an increase in the production of oil products (petrol, kerosene, diesel fuel, fuel oil, etc.), oil-well equipment, and cement and construction materials.
      In recent years the domestic production of cash registers, micro calculators, telephones, and household appliances has begun.
      The production of certain types of products previously imported into the country has been initiated. In addition, Teksun Oil Industry (vegetable oil), Coca-Cola (soft drinks), BM-SUN (packed tea), Azeri-Castel (beer), European Tobacco (cigarettes), Nehir (parquet), Sickendick (sausage products), DAD, Barakat (skimmed milk products), Azeri Pen, Turk-Baycan (plastic doors and windows) and other foreign enterprises and joint ventures now manufacture products to international standards and supply the domestic market with their products, so allowing for import substitution. This assists the balance of trade and has a good influence on the balance of payments.
      There have been many private company formations and a considerable expansion of small entrepreneurship, leading to dynamic development in the size and the role of the private sector. This has increased the share of the private sector in the total industrial production increased from 5.5% in 1995 to 26.4% in 1998 and to 43.7% in 2000.
      In 2000 there were 1,414 small enterprises in the industrial sector, 1.7 times more than the figure in 1995.
      Together with an increase in new private enterprises, the privatization process, as part of the country’s broad economic reforms, has given a strong impetus to the growth of private sector. Since the beginning of the privatization process until January 1, 2001 some 605 industrial enterprises with a value of 47.7 billion manats were privatized.
      Increasing the scale and scope of private ownership brought about a shift of importance towards the non-governmental sector. Of the total industrial production, the proportion within the private sector increased from 5.5 % in 1995 to 46.7% in 2001.

      

      1.3 Oil Industry
      On September 20, 1994 the contract on joint exploration of Azeri, Chirag, Guneshli fields (ACG), located in the Azerbaijani sector of the Caspian Sea was signed between the State Oil Company of the Republic of Azerbaijan (SOCAR) and 11 foreign oil companies. This was termed the Contract of the Century. While concluding this contract the parties planned to get from ACG more than 50 millions tons of oil. The Azerbaijan International Operation Company was established, which consists of SOCAR, BP, Unocal, Statoil, Lukoil, Exxon, Mobil, Itochu, Delta Hess, TPAO and other companies. Azerbaijan has signed 21 oil contracts with foreign oil companies since the Contract of a Century was concluded. Some 6 billion dollars have been invested in the development of these projects, $4 billion for ACG. In February 1996 the decision was taken on the development of early oil from Chirag field, and it was successfully implemented.
      In 1997 Azerbaijan acquired early oil from the Chirag field. Initially it was transported through the Baku-Novorossiysk pipeline. At the same time Azerbaijan was constructing the Baku–Supsa pipeline in the western direction and this came into use on April 17, 1999. To date, 22.6 million tons of oil has been produced, 3.8 millions of which were transported to international markets via the Baku–Novorossiysk pipeline and 18.6 million tons via the Baku–Supsa pipeline.
      However, these two pipelines are insufficient for the export of anticipated oil volumes. On September 5, 1997 President Heydar Aliyev founded a working group on the main exportation pipeline. At the OSCE Istanbul Summit in November 1999, Turkey, Georgia and Azerbaijan signed an agreement to start building a main exportation pipeline Baku–Tbilisi–Ceyhan (BTC). Meanwhile, the three countries adopted a common declaration, which was also signed by the President of the United States of America, Bill Clinton.
      BTC Company was founded to implement the construction of the main pipeline. The partner companies involved in the construction are SOCAR, BP, Unocal, STATOIL, TPAO, ENI, Itochu, Delta Hess, TFE and INPEKS. Azerbaijan has undertaken 25% of the project financing.
      The ACG fields hold considerable unexploited reserves. Recent exploration works have allowed for upward revision of estimates of developable reserves located in these fields, up from 4.2 billion barrels to 5.4 billion barrels or from 511 million tons to 730 million tons. For the rational use of these resources, a plan for full-scale development was prepared and in August 30, 2001 the decision was taken to sanction Phase 1 of the development. This project focuses on the exploitation of central part of the Azeri field. The oil and associated gas from this platform will be transported to shore to the Sangachal terminal. The oil will flow through a 187 km long seabed pipeline. To receive such a huge quantity of oil and gas the enlargement of Sangachal terminal is of crucial importance. As a result, the terminal at Sangachal is being upgraded and to handle some 360,000 barrels (48.6 thousand tons) of oil per day as part of the Phase 1 project. It is expected that early oil from Phase 1 will arrive in the first quarter of 2005 from the Chirag-1 and Markazi Azeri platforms that will be producing 250,000 barrels a day. In 2008 this figure will reach 500,000 barrels a day (25 million tons a year) only from these two platforms.
      The project Phase 2 focuses on the development of the eastern and western parts of the Azeri field, which, together with Phase 1, will complete the exploitation of the Azeri field. The rate of exploitation from platforms in the western part of the Azeri field will be 340,000 barrels a day (17 million tons a year), and in the eastern part 260,000 barrels a day (13 million tons a year). As a result of this, production of oil from the Azeri field will increase to not less than 800,000 barrels a day (40 million tons a year). Sangachal terminal will be further upgraded in stages to 2007 when it will have a handling capacity of 1.2 million barrels a day (60 million tons a year). This will make the Sangachal terminal one of the biggest terminals of the world. Thereafter, according to current schedules, Phase 2 early development of the eastern and western parts of Azeri field will start in 2006-2007, and by that time production from the Azeri field will have reached 615,000 barrels a day (30 million tons a year).
      Phase 3, the final phase of development of the ACG fields, will be completed in 2007 by which time production from these fields will exceed one million barrels a day.
      On September 18, 2002 a ceremony was held in Baku on the occasion of the laying of a foundation for the main BTC exportation pipeline Baku. At that event Azerbaijan International Operation Company and SOCAR signed a document sanctioning Phase 2 of the ACG development.
      Construction of the 1,760 km main export pipeline is a huge project, involving an investment of some 2.95 billion dollars. This project will open a new East-West energy corridor and take Azerbaijan from having medium-class oil production facilities to being a world class producer with world class operational facilities.
      The part of the pipeline going through Turkey will be constructed according to the agreement between the government of Turkey and shareholders of BTC Company. This company sent notification about the beginning of works to Botash Company, which is in responsible for the construction of 1,070 km long section on Turkish territory, and this agreement came into force on the September 10, 2002. In order to undertake construction works in Azerbaijan and in Georgia, preparatory measures were taken concerning landowners along the BTC pipeline route and necessary documents drawn up, related permissions obtained and licenses acquired. BTC construction work is planned to be completed in 2005.
      The Azerbaijani side intends to build the second pipeline, this one for the export of gas. The Baku–Tbilisi–Erzurum gas pipeline will begin at the Shahdeniz field, where deposits of gas are assessed to be one trillion cubic meters.
      The main producers of energy and fuel in the country are the State Oil Company and Azerenergy. These enterprises extracted 63.3 million tons of fuel in 1990, 35.4 million tons in 1995, and 40.4 million tons in 2000. Three quarters of the extracted natural fuel in 2000 was oil. The oil extraction was 12.5 million tons in 1990 and 9.1 million tons in 2000. The extraction of natural gas was 9.9 billion cubic meters in 1990, 6.6 billion cubic meters in 1995 and 5.6 billion in 2000. The production of electricity in 2000 was down 19% in comparison with 1990, at 18.7 billion kW hours. Of this, 17.1 billion kW hours (91%) of electricity was produced at thermal power stations, and 1.5 billion kW hours (9%) in hydroelectric power stations. The production of thermal energy for heating systems decreased three times to 6.7 million Gcal.

      

      1.4 Natural Gas
      Currently, Azerbaijan is a net importer of natural gas. In 2001, Azerbaijan imported 125 billion cubic feet of Russian natural gas, of which 109 billion cubic feet were supplied by Itera and the rest was supplied by TransNafta. 2002 imports from Russia were some 141 billion cubic feet. SOCAR has an exclusive contract with Itera to purchase gas supplied through the Shirvanovka-Hajigabul pipeline for $52 per 1,000 cubic meters.
      It is expected that Azerbaijan will become a net exporter of natural gas in the future as the Shah Deniz field is developed. Azerbaijan has signed agreements with Statoil and BP to develop and export natural gas. Azerbaijan could have an annual natural gas production of 400-500 billion cubic feet by 2010.
      Azerbaijan signed an agreement with Turkey in March 2001, under which it will supply 3.1 trillion cubic feet of natural gas over a 15-year period, starting from 2004. The current schedule, which might be delayed, calls for 70.6 billion cubic feet in 2004, 106 billion cubic feet in 2005, 177 billion cubic feet in 2006, and 233 billion cubic feet each year from 2007 to 2018.

      

      1.5 Agriculture, Forestry and Fishery
      During the 1990s the agricultural sector in Azerbaijan was in a state of rapid transition in line with the country’s changing socio–economic system following independence on October 18, 1991. A move to free market principles involved agricultural reforms especially of collective and state farms, the privatization of agricultural land plots, cattle and other state-owned agricultural assets, liquidation of centralized planning and control structures related to agricultural production and the purchasing of products, and the liberalization of product pricing controls. New economic units were created to replace collective and state farms, the role of newly independent farmers took shape and the number of farms sharply increased as did the volume of agricultural output.
      From 1992 to 1995 the total volume of agricultural output decreased by 12% on average year on year. However, in 1996 this indicator began to increase every year (except in 1997) and in the years 1999 and 2000 it increased by 7.1% and 12% respectively. A record volume of grain production was achieved in 2000, at 1.54 million tons, which in comparison with 1991 is 14.4% higher. The increase of grain productivity per hectare over the two years was 15%.
      The production of vegetables reached 780,800 tons in 2000, 3.1% down on the 1999 figure.
      Manufacture of fruits and berries in 2000 compared to 1991 had decreased by 4.3% but from 1995 production began to rise and has increased year on year thereafter (except 1996). The production of fruits and berries was 477,000 tons in 2000, up 48.5% on the 1996 figure, and 9.3% more than in 1999.
      The period of transition and restructuring of the agricultural sector took its toll on the production of cotton, grapes and tea, all of which were significantly reduced. The production of tobacco in 2000 was up 47.9% compared with 1995, and twice the figure for 1999. Stock-breeding also developed dynamically over the period, stimulated by the distribution of cattle among the rural population and the farm privatization program. Meat production (in slaughtered weight) and production of eggs has been increasingly annually since 1996, and the wool and milk production figures have been rising steadily since 1995. In 2000 Azerbaijan produced 108,700 tons of meat, 1,031,100 tons of milk, 542.6 million eggs and 10,900 ton of wool. These are increases of 32.6%, 24.8%, 19% and 21.1% respectively on 1995. In the silk weaving sector the volume of cocoons produced decreased from 5,900 tons in 1991 to only 100 tons in 2000 due to the lack of ready market and prevailing prices. The number of cattle in the years 1994 to 2000 dynamically increased in comparison with 1991-1993. By the end of 2000 there were 2,021,600 head of livestock, with 24.7% more horned cattle than in 1993, of which 958,900 were cows and water buffaloes, up 34.7% on 1993. Azerbaijan also had 6.1 million sheep and goats, 34.1% more than 1993. The numbers of pigs decreased from 137,300 in 1991 to 18,600 in 2000, poultry also declined from 27.7 million to 14.7 million. By the end of 2001 there were 2.09 million head of livestock.