Publication: Eurasia Daily Monitor Volume: 3 Issue: 131

After months of mutual accusations, arrests, investigations, and political statements, the Turkish electricity company Barmek has broken its contract with the Azerbaijani government to manage electricity supplies for Baku, the capital, and the northern regions of the country. “I did not want to do it,” said Barmek president Huseyn Arabul at a press conference on July 3, “but the other side has forced me to with their constant pressures and monitoring” (Day.az, July 4).

The contract between Barmek and the Azerbaijani government was signed in 2002 for a period of 25 years. It was widely reported at the time that former Turkish President Suleiman Demirel has personally lobbied on behalf of Barmek, which defeated its German competitor Siemens in the bidding process. Barmek’s arrival in Azerbaijan was portrayed as another important step for Turkish-Azerbaijani economic partnership and integration.

Since then, Barmek’s relations with its Azerbaijani counterpart, Azerenergy, has passed through many ups-and-downs until finally in 2006 Azerenergy concretely accused Barmek of mismanagement and asked the president of Azerbaijan, Ilham Aliyev, to break the contract. This was followed by the arrest of several high-ranking Barmek officials, and the launch of an investigation by the Ministry of Taxes and the prosecutor general’s office. Last month Barmek’s bank assets in Azerbaijan were frozen.

“It is impossible to work under these conditions. I broke the contract unilaterally. And now I will demand compensation for all the investment [$67.45 million] I have made in Azerbaijan,” Arabul told journalists at the press conference (Sharg, July 4). The Azerbaijani government, on the other hand, accuses Barmek of evading taxes, violating the terms of the contract regarding investment volumes, and falsifying invoices. “We have studied the lawsuit that Barmek has filed in the International Court on the Protection of Investments. He demands $300 million from us. It is nothing more than blackmail. The Court will decide,” said Minister of Economic Development Heydar Babayev after freezing Barmek’s assets and bank accounts.

In May ministry officials had stated that Barmek has invested only $3 million toward improving Azerbaijan’s electricity-distribution network, which constitutes only 10% of the investment required by the contract ($27.8 million). Furthermore, Barmek took out loans from the International Bank of Azerbaijan to purchase transformers and allegedly misappropriated those funds. Finally, the ministry argued that invoices for work subcontracted to outside companies have been inflated and falsified. These serious accusations have been backed by evidence discovered as a result of the investigation by the prosecutor general’s office.

Yet despite these problems, Barmek’s departure will still hurt Azerbaijan in the long run. Foremost, Barmek brought Western-style practices and consumer relations to Azerbaijan’s electricity system, which was notorious for its mismanagement during Soviet times. Income from electricity payments has been always low in the former Soviet republic, as many citizens and businesses either secretly steal electric power or refuse to pay, citing poverty. Barmek has fought this “free-lunch” mentality through a series of public-service announcements and has markedly improved the rate of payment for electricity among ordinary citizens. People have finally begun to understand their responsibilities related to electricity usage, and Barmek made it easy for them to pay the bills at banks and many customer service centers.

However, Barmek’s expulsion brings opportunities for regional utilities to compete for the right to manage Azerbaijan’s electricity-distribution network. Russia’s electricity monopoly Unified Energy Systems (UES) appears to be the front-runner, as its officials have frequently visited Azerbaijan in the past and cooperation between the two sides has increased over the past few years. Having already taken control over Armenia and Georgia’s electricity assets, UES is eager to complete the deal with Azerbaijan for total control over the South Caucasus. This, in turn, could have very negative political and security implications for the Azerbaijani people and government.

Minister of Economic Development Heydar Babayev has denied that any company has yet made any offers. Local experts, however, have no doubt that some Russian company will soon be knocking on their door. Some even believe that opening the market to Russia is Aliyev’s way of repaying Russian President Vladimir Putin for the political support Moscow provided during last year’s disputed parliamentary elections.

It is also possible that Azerbaijan will manage the distribution network itself, as occurred when another private company, Bayva, had its contract to manage the electricity-distribution network in western regions cancelled last year. Rising oil revenues now allow the Azerbaijani government to invest in infrastructure and thus reduce the dependence on a foreign company. In any case, the end of Barmek’s era in Azerbaijan promises uncertainties for the country.