Azerbaijan's Transition After the Collapse of the USSR
The collapse of the Communist regime in Russia in 1991 had a profound economic and social affect, not only on the motherland, but also on its many republics and puppet states. Soviet governments created in the former Socialist Republics were dependent on the leadership from the Russian central authority; and when that system collapsed, so did their smaller governments. These states were forced to integrate into "capitalist" market economies established many years prior. The degree of difficulty experienced by the republics differed, partly based around the level of Soviet influence, and their degree of industrialization. Azerbaijan is an example of a former republic that experienced a great degree of difficulty trying to convert their economy into a market-oriented one.
Around the time of the transition, Azerbaijan's economy was based on fertile agricultural lands, rich industrial resources (including considerable oil reserves), and a relatively developed industry (Lib. of Congress). In the early 1990's, the country's economic output declined drastically (see table at end). This was resultant of the secondary consequences of the fall of Russia. First, trade relations with the other soviet republics fell almost immediately. An erosion of consumer buying power followed, which was not helped by the retention of the ruble along-side the national currency (Virtual Azer.). The conflict with Armenia over the Nagorno-Karabakh region was also taking its toll.
Yet, the "prospects for movement toward a market economy are enhanced by a fairly well-developed infrastructure, an educated labor force, diversity in both agriculture and industry production, and yet-untapped oil resources (Lib. of Congress.)." This proved to be a challenge more difficult than previously believed.
One of the first objects to overcome in the transition was price liberalization. In January of 1992, seventy to eighty percent of producer/consumer prices became decontrolled (Virtual Azer.). One exception to this rule was the price of gasoline, which was artificially increased by the government. Yet, because of the "lower" industrial development (as compared to European market counterparts), most of the industries were still monopolies. The state established the Anti-Monopoly Committee in response. Their job was to approve all requests for price increases (Lib. of Congress)
Agriculture was the main exception to the privatization. The state still procured much of the production therefore it was necessary to negotiate prices between the government and the farms.
One of the immediate and long-lasting consequences of this price liberalization is inflation. In January of '92, the inflation surged, as to be expected. It settled at about the rate of twenty-four percent a month for the rest of the year. By October, inflation reached 735 percent, and by November it was 1,200 percent. By 1993, the average living expenses exceeded income by 50 percent (Lib. of Congress). This was a serious problem, and would be for any country. Later that year, the government had to artificially raise prices to promote competition with the foreign black market.
Agriculture was one of the chief factors contributing to the GNP in Azerbaijan. After the fall of Communism, the country's agricultural sector required some major restructuring. Privatization of formerly collective agricultural assets caused some major problems. The main problem, economically, was that the agricultural prices did not rise as much as the cost of inputs in the new economy. This helped cause sharp decline in output and forced the government to raise prices artificially. The original government programs proved to be ineffective though (Lib. of Congress).
The Armenian conflict also cause major agricultural hang-ups. The Nagorno-Karabakh region in dispute is the site of roughly one-third of Azerbaijan's croplands. As early as 1989, the agriculture of this region, as concerned with Azerbaijan, suffered. The government's answer, which is still seen today, involves action not-so-far from their socialist upbringing. The Azerbaijan Ministry of Agriculture and Food, and the Azerbaijan Ministry of Grain and Bread Products set up procurement centers throughout the country and are responsible for the purchase of the majority of agricultural production (Lib. of Congress).
The fall of the Soviet system allowed the central banks of Russia to cede authority to the Azerbaijani banks. These became the basis for the central bank of the new capital banking system. However, problems had surfaced as early as 1993. Technology shortcomings, as well as large unresolved debts (by state-owned firms) and bank delays for fund transfers, further plunged the Azerbaijan economy into problems (Virtual Azer.).
Industry suffered just as the other factors of the economy. In the Soviet-era, the Azerbaijan Oil Machinery Co. controlled virtually all of the country's oil equipment industry. They were major exports both to Russia, and other Soviet republics. Because trade fell drastically after the fall, found itself depending heavily on imports from other former Soviet republics. These imports fell and cause an estimated output reduction of 27 percent.
Azerbaijan faced, and is still facing many problems with the Soviet collapse. Their transition to market economy has not been a smooth one. Another example, all retail establishments were to be completely privatized by 1993, but it didn't happen. Even by 1995, state-ownership of the means of production and the direction of the economy dominated (Virtual Azer.).
Table: (taken from Library of Congress web page)