New inflows of petrodollars are altering the landscape in the Azeri capital of Baku.

owards the end of the Bronze Age, a land emerged from the contest between the forces of light and darkness. Its name, Adar-Bad-Agan, meant “the country protected by fire”. The Zoroastrians, who came to populate this littoral part of the Caspian Sea in the sixth century BC, worshipped fire (known as Adar) as one of the four cosmic elements. At the time, the coastline was ablaze with gas flares from the prodigious hydrocarbon reserves in the seabed. Today, the country is known as Azerbaijan.

Azeri history is rich in legend. As a transit point along the Silk Road, it was prized for the purity of its saffron, gold and silver. Marco Polo observed the first oil exports from the Absheron Peninsula in the 13th century. Back then, petroleum was used for lighting and medicinal purposes.
Natural resources have always included oil and gas. Also, iron ores from the mountains were behind the early metallurgical furnaces and rapid industrialization in the 19th century.

Today, Azeris are proud that their small country of eight million people is making true economic headway.

Independent from the Soviet Union since 1991, Azerbaijan is not just another emerging market. It is about to become a key player in the global energy exchange.

With the Baku-Tbilisi-Ceyhan (BTC) pipeline, the décor is set for a new economic bonanza. Its offshore oil and gas fields pumped up nominal GDP by 11.5 percent in 2005 to $11.3 billion. In the first half of 2006, GDP grew a whopping 30 percent. With oil prices even higher in 2006, the inflows of petrodollars are altering the landscape. New office towers and residential buildings grace the skyline. Baku is again a cosmopolitan Riviera town, just like it was in the days of John D. Rockefeller.
Former president Heydar Aliyev deserves much of the credit for setting up the State Oil Fund in 1999, which helps sterilize inflows of capital, thus preventing distortions in the national accounts. It is not only a unique macroeconomic tool, but also a guarantee that money is allocated to value-creating enterprises.

The nation’s position as a key strategic ally of the U.S. and EU is firmly based on mutual accord

Mr. Aliyev backed a wide-ranging reform program, supported by the IMF/World Bank, that brought the economy back on its feet after 1995. Policymakers here are realists. They see oil and gas exports as a way to inject the domestic economy with long-term potential. Non-oil sectors such as banking, telecommunications, cotton, food-processing, construction and agriculture have been the first to kick back.

Squeezed between Russia and Iran, locals are adept at maximizing geography. Azerbaijan is a key strategic ally of the U.S. and EU. As an emerging democracy, it is also a member of the Council of Europe. Since the “contract of the century” was signed with foreign oil companies, the production sharing agreements have generated $7.5 billion.

The current president, Ilham Aliyev, has opened the BTC to exports of other Caspian nations. Thus, the BTC brings additional oil to Mediterranean markets and helps keep prices in check. Now the challenge is to use these tremendous oil revenues to properly develop the nation’s infrastructure, education and training, as well as diversify the economy and avoid the Dutch syndrome.