Perspectives | Washington joins Azerbaijan to undercut a transparency initiative

Campaigners were joyous nine years ago when Azerbaijan became the first country to comply with strict new, voluntary standards for cutting corruption in its booming oil and gas sector. Yet last March, Baku withdrew from the Extractive Industry Transparency Initiative, with no apparent impact on foreign investments, raising questions about the initiative’s clout. Soon after, Washington followed.

Founded in 2002, the Oslo-based EITI is a voluntary organization uniting governments, firms, and civil society groups from its 51 member countries to oversee annual reports detailing revenue collection, contracts and licenses, social spending and civil society. The initiative’s philosophy is that natural resources are often mismanaged, and that greater transparency will lead to greater accountability. Proponents argue that accession can help attract investors.

Though the EITI boasts success stories, such as increased transparency in Peru and Nigeria, its voluntary nature and complex organization have bedeviled implementation. The organization “has a limited mandate and the quality of its reports are compromised by differing voluntary and data standards, lenient acceptance standards and weak dissemination,” said Kate Mallinson, a political risk expert on Eurasia.

Strengthening civil society has proved particularly difficult, especially in Azerbaijan. Lauded as the first EITI-compliant country in 2009, Baku soon became a headache for transparency advocates, as the government cracked down on rights activists and journalists investigating the president’s opaque business dealings.

In March 2017, when EITI decided to suspend Azerbaijan’s membership in response to the crackdown, Baku scorned the motion by exiting the group entirely. Many thought its sudden departure would damage Azerbaijan’s investment climate just as the country was soliciting loans for the $40-billi­on Southern Gas Corridor, a gas pipeline to transport Azerbaijani gas to Europe.

They were wrong. Six months later, in October, the European Bank for Reconstruction and Development (EBRD) offered $500 million for the project. And this February, the European Investment Bank (EIB) agreed to help bankroll the project as well, granting one of its largest-ever loans to the European section of the pipeline. While activists fear the Southern Gas Corridor will further enable human rights abuses and corruption in Azerbaijan, the U.S.’s recent withdrawal – the State Department ended its implementation of the EITI standard domestically in November 2017 – has clouded the discussion, sending mix signals over transparency promotion.

Indeed, Washington’s departure seems to have vindicated Azerbaijan.

Washington’s decision holds particular weight, signifying a retreat from its traditional role as a global anti-corruption advocate, said Michael Ross, professor of resource governance at UCLA. The move sent “a very negative signal overseas about the importance of transparency in resource-rich countries,” Mallinson told Eurasianet. “It is a worrying illustration of the non-norms based business environment that appears to be taking shape in some of the leading global economies.”

Though America’s energy sector is largely private, as opposed to state-owned, the industry maintains enormous influence on politics and legislation.

In December, Congress voted to repeal the section of a 2010 law requiring oil and gas companies to report payments to domestic and foreign governments when developing extractive projects. Former ExxonMobil CEO Rex Tillerson – at the time, Donald Trump’s secretary of state – and the American Petroleum Institute, an influential oil and gas lobby, worked to defeat the rule, claiming it hurt American firms abroad, where foreign companies operate without such disclosure requirements.

Even so, the rules were voluntary. Major American oil companies, such as Chevron and Exxon, have been unwilling to disclose tax payments in recent years. In 2015, only 12 of 41 eligible American companies made their payments public, with little change the following year.

While Washington’s withdrawal may legitimize Azerbaijan’s decision, Baku appears to have already lined up insurance in Europe.

The Azerbaijani Laundromat scandal – in which at least $2.9 billion was channeled into shell companies to bribe EU officials and launder money between 2012 and 2014 – speaks to the lengths Baku will go to influence European policy makers, experts note.

Simon Taylor, who participated in the formation of the EITI and is director of the anti-corruption watchdog Global Witness, believes Azerbaijani officials had already “bought themselves favorable decisions in high places” to ensure “political endorsement to bankroll their projects” in the West.

It “highlights how these illiberal resource-rich governments still call the shots,” said Mallinson.

Still, while the Trump administration sends mixed signals for the global dialogue on transparency, “other countries may be stepping up to fill the gap,” said Ross of UCLA. “The EITI board has adopted strong new transparency measures since Trump became president, which tells me that the transparency movement isn't reliant on U.S. leadership.”