Flame Towers in Baku ID 40323940 © Alexander Melnikov | Dreamstime.com Night Baku Azerbaijan caspian sea
The oil boom that turned Baku, the Azerbaijan capital, into a kind of Dubai on the Caspian has ended © Dreamstime

If any world leader has surfed the wave of the oil boom, it is Ilham Aliyev.

In 2003, just as oil prices began to soar, Mr Aliyev succeeded his father as president of Azerbaijan. Over the next decade he presided over an era of rising prosperity that transformed Baku into a kind of Dubai on the Caspian and imbued the country with the newfound confidence to project itself on the world stage.

But Azerbaijan’s oil boom has come to a juddering halt. After months of denial about the impact of plunging oil prices the central bank abandoned its dollar peg in late December, sending the manat down more than a third. This prompted the bank to restrict foreign exchange transactions and then last week to impose capital controls in the form of a tax on exporting currency.

The rapid change in Azerbaijan’s fortunes poses the greatest challenge Mr Aliyev has yet faced.

Protests over rising prices and unemployment have broken out across the regions — a rare display of public discontent in an autocracy where dissent is rarely tolerated. The government is rattled.

“It’s a new phase for Azerbaijan. They don’t seem to be prepared for what happens next,” says Thomas de Waal, a senior associate at the Carnegie Endowment for International Peace. “That’s partly a phenomenon of a leader for whom life got better and better, living in a bubble surrounded by people who confirmed his narrative.”

In contrast with his father Heydar Aliyev, a former KGB chief whose strongman style was credited with restoring stability to his conflict-wracked nation when he became president in 1993, Mr Aliyev has ruled largely through patronage to appease the various interest groups he depends on for support.

With oil revenues high, Azerbaijan has seen its poverty rate fall from 49 per cent to 5 per cent in little over a decade, but the majority of wealth has accrued to a small but powerful cadre of businessmen and politicians. Observers say the president has maintained stability by balancing the competing interests of this elite.

Describing him as the “keystone in the arch” of Azerbaijani politics, Audrey Altstadt, professor at the University of Massachusetts and author of a history of post-Soviet Azerbaijan, says: “It’s not so much that he is the great genius national leader like his father, but he keeps the balance.”

This cadre includes Kamaladdin Heydarov, minister for emergency situations, who has close ties to the notoriously corrupt customs service and controls a business empire stretching from construction to caviar, and the Pashayevs, the family of Mr Aliyev’s wife, who own the largest private-sector bank in the country and many of its top hotels.

But growing unrest in Azerbaijan’s poorer regions may force a change of tack. “Stability is a function of keeping various power groups happy. One of those power groups is now the people of the country,” one banker says. “I think the oligarchs are all worried.”

Chart: Azerbaijan manat

The past year has seen a shake-up among the Azerbaijani elite that analysts say is unprecedented under Mr Aliyev as tensions rise amid diminishing resources.Last spring, dozens of businessmen were arrested over alleged fraud at the International Bank of Azerbaijan. In October, Eldar Mahmudov, who for a decade headed Azerbaijan’s ministry of national security — successor to the KGB — was dismissed, along with most of his subordinates.

“The money from the crude that flew into the country helped to close a lot of gaps, a lot of deficiencies. All of that is now out there on the surface,” says one Azerbaijani businessman.

Chart: Azerbaijan growth and oil price

Meanwhile, the government has put the elite in its sights as it seeks to make up for a revenue squeeze that has forced it to cut spending by 15 per cent this year.

Businesspeople and their advisers say they have come under pressure to sell assets abroad and to contribute more to Azerbaijan. Mr Aliyev has also announced a push for greater transparency in the customs service and called on his government to “fight monopolistic trends” — a reference to niches of the economy controlled by oligarchs.

One Baku-based banker says that while Azerbaijani companies still have to make hefty payments before they can import what they need, the payments are now in the form of feesthat go to the government rather than brown-envelope bribes to corrupt officials.

Chart: Azerbaijan foreign reserves

Last week the president also announced a series of measures aimed at appeasing the public, including cutting taxes on bread and flour and raising pensions and salaries for civil servants.

The stakes are high. The country’s crisis will be closely watched by oil-rich neighbours keen to maintain stability amid falling living standards. Any destabilisation of Azerbaijan could also threaten a key source of Europe’s energy supplies and have unpredictable consequences for Baku’s smouldering conflict with Armenia over the Nagorno-Karabakh enclave.

However, in the short term few observers expect unrest to spread to relatively prosperous Baku. Mr Aliyev and his government, long paranoid about the possibility of a popular uprising, have largely squashed the formal opposition, and prominent activists and journalists have been jailed.

But if the president’s efforts to boost the economy do not soon bear fruit, Azerbaijanis may lose patience with their government, analysts warn.

Mr Aliyev struck an optimistic note last week at the World Economic Forum in Davos, promising that the manat would not “suffer” any more even if oil prices fell further.

But “if after saying the manat has stabilised, if he’s forced in a month or two to change it, people will not forget that he assured them that all was good,” says Ms Altstadt. “That might really increase the risks to Aliyev and his oligarchs.”

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