Oil-rich Azerbaijan, which borders Iran, Turkey and Russia and is still scarred from its defeat by Armenia ten years ago, gives cause for both hope and concern. The October 2003 election of Ilham Aliyev to the presidency that his late-father, Heydar, had held almost from independence, highlighted the stark choices which now face the country. Its government is a carefully designed autocratic system, which the father and former Soviet-era politburo member began to construct in the late 1960s, with heavy reliance on family and clan members, oil revenues and patronage.

While the new President Aliyev, and indeed many in the international community, have stressed continuity and stability with this changing of the guard, fundamental challenges with broad regional implications are now front and centre. First and foremost, Azerbaijan's young and largely untested leader will need to decide whether to embrace the democratic process or try to maintain autocratic rule with just the thinnest of veneers of legitimate political competition. While it has been tempting to sweep international concerns about democracy under the carpet because of strategic concerns related to oil reserves and simmering regional disputes, such an approach would likely exacerbate instability and have high long-term costs.

The presidential election fell well below international standards. There was no genuine campaign, opposition parties were harassed and intimidated, and key opposition candidates were prevented from registering. The media was biased, and there was little opportunity for any party or group to express dissent. Opposition parties were also poorly organised and failed to back a common candidate. Immediately after the badly-flawed elections, violence erupted between the security services and opposition groups calling for a second round of balloting. Several hundred individuals were arrested, and there is today no visible political opposition in the country.

Foreign criticism was decidedly muted, and it is difficult to escape the conclusion that this was largely due to commercial energy interests and jockeying for strategic advantage in the region. While there was some U.S. and European Union (EU) criticism after the election, it was obviously too little, too late. The U.S. and EU will need to be much more vocal in their commitment to the democratic process if they hope to bolster the young reformers within both the government and the opposition.

Azerbaijan's ruling elite is increasingly divided, with several clans (largely organised along regional and patronage relationships) competing for control of a pyramidal distribution structure that allows substantial funds to be skimmed from the oil business. President Aliyev will also have to address sharp generational cleavages within the government, private sector and even his own family. Anticipating some of these struggles, his father had already started appointing younger officials to key positions. However, some of these may emerge as direct challengers to the new leader if his rule falters.

The importance of encouraging democratisation and combating corruption becomes clear when considering the challenges that Aliyev faces. Cracking down on the opposition and harshly repressing religious groups could boomerang and, combined with general socio-economic discontent, fuel a more radical political and religious opposition and unrest in the northern regions. The new president needs to place high priority on economic development beyond the petroleum sector and outside Baku. His government should consider introducing moderate religious education in schools and allow religious organisations to register. Aliyev's best hope of fulfilling Azerbaijan's commitments to the Council of Europe is to nurture a new generation of technocratic professionals while steadily dismantling the corrupt patronage network that drives the economy and political system. A credible investigation of the violence surrounding the 2003 election would be a welcome step.

Azerbaijan has a century-long secular tradition in which religion has not had a major role in political life. However, events in 2002 around a mosque in the normally sedate town of Nardaran, just north of Baku, revealed new tensions. The case showed that Azerbaijan's leaders are quick to blame almost any political disturbance on radical Islam, rather than trace their roots back to difficult social and economic conditions driven by corrupt and incompetent governance.

Despite frequent efforts by the government to manipulate religious issues, there were some genuine signs that more radical strains of Islam were developing until 2002. Since then, the security services appear to have extensively penetrated most of the radical networks.

Developing Azerbaijan as a more modern, open, democratic and less corrupt state could help facilitate resolution of the long festering conflict with Armenia over the Nagorno-Karabakh territory. A durable settlement would also be significantly advanced by closer coordination between the U.S., the EU and Russia. France, in particular, should more closely incorporate its negotiating role within EU policy toward the region.

Baku/Brussels, 13 May 2004