In last month’s issue of Caspian Focus we voiced concerns about Azerbaijan’s continued non-compliance with the human rights chapter of the Extractive Industries Transparency Initiative (EITI). This month Baku decided to leave the transparency coalition altogether. The announcement was made by the State Oil Fund (Sofaz), which called the EITI’s assessment of Azerbaijan ‘unfair’, leading to the voluntary withdrawal.

Sofaz was established in December 1999 to accumulate income from the sale of oil and gas for future generations. It belongs to the international family of sovereign wealth funds, which have developed from local piggybanks into diversified investment funds scouring the globe for attractive investment opportunities.

In October 2016, the Extractive Industries Transparency Initiative board gave Azerbaijan an additional four months to implement recommended reforms in human rights and civil society. Yet repression of the domestic political opposition and human rights activists has intensified since autumn 2016, when Azerbaijan held a controversial constitutional referendum that significantly extended the President Ilham Aliev’s powers.

In February 2017, the authorities resumed their crackdown on dissenters, fearing a backlash against the appointment of First Lady Mehriban Alieva as the country’s 1st Vice President (see this month’s Caspian Focus). Several prominent journalists and civil society leaders have recently been jailed on orders from the presidential administration. Investigative journalists writing stories about corruption within the president’s inner circle are particularly unwelcome in Azerbaijan.

The decision to leave the Extractive Industries Transparency Initiative may have yet-unfathomable legal consequences. The EITI — a free coalition of states, IOCs and NGOs —  aims to improve transparency in the corruption-prone oil, gas and minerals sectors. Its recommendations are not binding and it cannot compel a member state to follow a given course of action. However, international financial entities — such as the World Bank and the European Bank for Reconstruction and Development (EBRD) — follow the EITI’s reporting closely to evaluate grantees and borrowers. Non-compliance with Extractive Industries Transparency Initiative requirements by a participating country is usually considered as a negative development.

Expert opinions are divided over the implications for Azerbaijan. The Aliev administration has been heavily reliant on external funding for the construction of the Southern Gas Corridor (SGC). The multi-billion-dollar project will start supplying first commercial gas from the Shah Deniz Stage 2 project to Turkey in late 2018, and then to southern Europe from late 2019. Despite its relatively modest throughput capacity, the SGC is a key element of Azerbaijan’s energy diplomacy and is often used in state propaganda to talk up the importance of the South Caucasus as an alternative source of gas supplies for the EU.

In December, the Asian Infrastructure Investment Bank (AIIB) — the brainchild of Chinese President Xi Jinping — pledged US$600 million of lending to the Azeri government as the SGC administrator. The World Bank promised a further US$800 million. China is unlikely to pay much attention to the Extractive Industries Transparency Initiative controversy over the heavy-handed Aliev regime, but the World Bank may think differently. The EBRD could also decide to limit its exposure to Azerbaijan by scaling back on socially important projects, with the end losers being the Azeri population.