The economy of Azerbaijan continues to be fuelled by oil and gas, but booming Baku is branching out, reports Jenny Southan

Baku is burning. From the open-air terrace of the 29th-floor Opera Sky bar, three giant tongues of fire can be seen rising from the city centre. Located on the shores of the landlocked Caspian Sea, the oil-rich Azeri capital unveiled its dramatic Flame Towers in 2012, with a Fairmont hotel opening in the final one last summer.

Designed by HOK architects, at night the façades are ignited by thousands of LED lights – shifting minute by minute from the red, green and blue of the national flag to the orange and red of a blazing inferno.

Just north of the city limits, past fields of nodding pump jacks and lakes of murky oil, a natural furnace roars from the base of a dusty brown hillside. This is Azerbaijan, after all, the Land of Fire.

For hundreds of years, gas has streamed from the sandstone rockface of Yanar Dag, with plumes reaching heights of up to ten metres. The heat is intense, perfect for a barbecue, and, in winter, people come to sit and drink tea in the snow.

The largest of the three South Caucasus states, Azerbaijan is bordered by Russia and Georgia to the north, Armenia and Turkey to the west, and Iran to the south, affording it a strategic geographical location and a variety of cultural influences. The capital, Baku, resides on the claw-like Absheron Peninsula, which extends 60km into the sea. Over in the easterly suburb of Surakhani is Baku Ateshgah, a Zoroastrian temple that was built by fire worshippers in the 17th century, and where an eternal flame still burns on its altar.

The region attracted its first oil barons in the late 1800s. Robert and Ludvig Nobel, brothers of the better-known Alfred, set up one of the first oil companies, Branobel, in 1876. By the early 1900s, Branobel was the largest oil producer in Azerbaijan – a country that, at the time, was supplying more than half of the world’s black gold.

Today, Azerbaijan produces almost one million barrels of oil a day and 30 billion cubic metres of gas annually. Late last year, the European Commission confirmed Europe would receive ten billion cubic metres of gas a year from the offshore Shah Deniz II gas field via the Trans Adriatic Pipeline, which will run through the Southern Gas Corridor, from the end of 2019. It means Europe will rely less on Russia, with whom political relations have been frayed, for fuel – at the moment it supplies about 30 per cent of Europe’s oil and gas.

Since opening its first Baku office in 1992, BP has become the country’s biggest foreign investor, operating the Shah Deniz joint venture with SOCAR (State Oil Company of Azerbaijan Republic), among others. The Shah Deniz Stage Two project will see gas transported 3,500km from the Caspian Sea to Europe via the expanded South Caucasus pipeline running through Azerbaijan and Georgia, onwards through Turkey’s new Trans Anatolian Pipeline, and then Greece, Albania and Italy. Although investments will amount to US$28 billion, some US$100 billion of supply agreements have been made for a 25-year period.

It was Baku’s first oil barons that transformed the capital a century ago, bringing in Italian, French, German and Polish architects to build splendid Baroque, Eclectic Rococo and neo-Gothic mansions, palaces and casinos. Dubbed the “Paris of the East”, between 1850 and 1920 more than 300 European-style buildings were constructed and many, such as the Rothschild Brothers banking house and the State Philharmonic Concert Hall, remain. There’s even a Little Venice.

These are juxtaposed with the ancient mosques and minarets of the UNESCO-protected Old City, and the sweeping lines of the ultra-contemporary Flame Towers and Zaha Hadid-designed Heydar Aliyev Cultural Centre, which opened in 2012.

The highlight is probably the 3km-long Baku Boulevard, created in 1909 as a picturesque seafront promenade with pristine gardens, lawns and trees. Nowadays, it stretches from Freedom Square at one end to National Flag Square at the other – here stands the world’s second-tallest flagpole, with a 2,450 sqm Azeri banner billowing from it.

Not far from the flagpole is the glittering, waterside Crystal Hall. The 25,000-capacity stadium was built to host the 2012 Eurovision Song Contest, the staging of which was a source of great national pride and helped boost awareness of the capital among tourists and business people.

Jacqui Mullen, head of the commercial and energy section at the British Embassy Baku, says: “Eurovision was a major milestone for Azerbaijan – unless you were in the energy sector you probably hadn’t even heard of it. They expected a lot more people to visit, though. They weren’t really set up for tourism in terms of visas and hotels.”

In December 2012, it was announced that Baku had won its bid to host the inaugural European Games (baku2015.com). Some 5,000 athletes from 49 nations will compete, with projects including an Olympic village, a 65,000-seat stadium, a gymnastics arena and an aquatic centre. Following this, the city will also host the World Rhythmic Gymnastics Championships in 2019.

After successfully hosting the 2012 Olympics, the UK will be on hand to provide guidance to Baku in the run-up to the Games. But its interests in the country extend far beyond this. The UK is the largest investor in Azerbaijan, with more than 150 companies present including AMEC, AstraZeneca, Bentley, Burberry, Debenhams, GlaxoSmithKline and Rolls-Royce.

Azerbaijan has one of the fastest-growing economies in the world – last year, GDP growth was 5 per cent, while this year it is anticipated to be 6.7 per cent, driven by its expanding non-oil sector. Mullen says: “There are so many opportunities here. Baku is one of the best-kept secrets I have come across.”

Taking its lead from Arab states such as Abu Dhabi and Qatar, who know that their hydrocarbon resources aren’t going to last forever, Azerbaijan is diversifying its economy so that it is not so reliant on oil and gas. Emerging sectors include financial services, infrastructure, consumer goods, construction, agriculture, ICT, tourism and education – all providing new opportunities for overseas investors. During the first nine months of last year, the non-oil sector (now accounting for 53 per cent of the economy) grew by 10.4 per cent.

According to government report Azerbaijan 2020: A Look into the Future, the country aims to double per capita GDP by 2020, with an annual average growth rate of 7 per cent in the non-oil sector. It also intends to improve transport and logistic infrastructure, develop human capital, establish an effective social security system, support gender equality and protect cultural heritage.

The European Azerbaijan Society (TEAS) is a “UK-registered pan-European organisation dedicated to raising awareness of Azerbaijan and fostering closer economic, political and cultural links”. A spokesperson says: “Recent legislation has been passed to ensure that the tax and legal regime are business-friendly, and Azerbaijan has also started to play a significant regional and global role.” Last year Baku hosted the Davos World Economic Forum and completed its second one-month UN Security Council presidency.

Azerbaijan gained independence from Russia after the dissolution of the Soviet Union on October 18, 1991. Back then, everyone was forced to speak Russian, so most people today are fluent in the language, as well as their native Azeri and, increasingly, English.

While the Soviet influence is still apparent, the country is doing its best to eliminate it – new European-style fascias are being attached to buildings, old housing being replaced, and the boxy Lada and Volga Gaz cars supplied by Russia for decades can no longer be bought. In fact, you will see more London taxis (though purple instead of black) than vintage models on the roads.

Quality of life has also improved. In 2001, 49 per cent of Azeris were living in poverty, whereas today the figure is closer to just 6 per cent. Unemployment is at about 5 per cent. According to TEAS, salaries have increased almost six times and pensions nine times in the past decade.

You don’t have to spend long in Baku to witness signs of a wealthy elite. A new Four Seasons hotel (reviewed here) opened in September 2012 on Neftchilar Avenue, Baku’s equivalent to Paris’s Champs-Elysées. Here you will find glossy boutiques from the likes of Giorgio Armani, Jimmy Choo, Tiffany and Valentino. Beneath the road, separating the hotel from Baku Boulevard, is a polished marble underpass, and all along the waterfront are buzzing cafés and restaurants. There is not a beggar in sight.

On the same avenue is Pasha Construction’s Port Baku development (portbaku.az), which will incorporate Port Baku Towers – housing the HQ of BP – along with 900 luxury apartments and Port Baku Mall. Set to open this spring, the centre will have more than 300 designer brands. Ian Ferguson, director of shopping centres for Pasha, says: “The luxury market is well-established in Baku and has shown exceptional growth over the past few years, reinforced by an influx of affluent shoppers from the surrounding region, including southern Russia, Georgia and Iran.”

The hotel scene is similarly booming – the Jumeirah Bilgah Beach Club and the JW Marriott Absheron also opened in 2012, joining brands such as Hilton, Hyatt Regency, Kempinski, Park Hyatt, Sheraton, Staybridge Suites and Radisson Blu. A Swissotel is due to follow next year, with other projects under way including Pasha’s Amburan Marriott Beach Resort and the futuristic, disc-shaped Full Moon hotel.

Although the city centre looks clean, attractive and even glitzy in places, some changes to the skyline have proved controversial, with organisations such as Amnesty International reporting forced evictions and the moving in of bulldozers without giving people time to retrieve their possessions. Giorgi Gogia, senior South Caucasus researcher for Human Rights Watch, says: “Baku is a beautiful city but every time I arrive it’s shocking to see how many new buildings there are, how many new constructions are taking maturity. With all this money and new development, very often the fundamental human rights are not respected.

“In a couple of cases, police have detained families – after five hours in the police station they have come back to find their houses gone. Some people got compensation below the market level and moved out, some live with relatives, some were forced to take government protected houses way out of the city centre and some remain on the streets.”

Gogia acknowledges that in some ways progress is good as “it will attract more financial resources”. But he maintains that overseas nations have a responsibility to voice human rights concerns, especially with the European Games coming up. “It’s an opportunity for the international community to tell Baku that if it wants to be a credible player, it has to demonstrate that it respects the fundamental rights of its people,” he says.

The political system also has a dark side, with corruption a concern. Last October, long-standing president Ilham Aliyev was re-elected with 85 per cent of the vote, while opposition candidate Jamil Hasanli came second with only 5.5 per cent. Critics decried the result as fraudulent. Before the polls opened, the government accidentally released a mobile app displaying the “official” result that Aliyev had won with a 72 per cent majority.

The Organisation for Security and Co-operation in Europe described the election as “flawed”, citing intimidation of candidates, voters and journalists, though the European Parliament concluded it was “free, fair and transparent”.

Can Azerbaijan really be considered a democracy? Gogia says: “If you look at the European Games, it really tries to be a credible international player but there’s a disconnect between that and what’s happening internally. It’s hard to call a country with severe limits on freedom of expression, freedom of understanding and freedom of association [a democracy]. There’s not a single independent TV station. There are a few outlets that are able to criticise the government but they experience real financial and political pressure.”

In its 2013 Corruption Perceptions Index, Transparency International ranked the country 127 out of 177 (with one being the least corrupt). TEAS says the situation is getting better, though, and that the president has launched a drive against corruption, sacking and even imprisoning police and officials found guilty.

Still, even TEAS itself has come under scrutiny, being accused of “caviar diplomacy” by The Guardian last November, which said it gave lavish gifts of silk carpets, gold, silver, money and kilos of caviar to visiting members of the Council of Europe. The publication also pointed out that it is chaired by Tale Heydarov, son of Kamaladdin Heydarov, “one of President Aliyev’s inner circle and often described as the most powerful man in Azerbaijan”.

There is no doubt Baku is hot right now – just make sure you don’t get your fingers burnt. UK Trade and Investment’s Doing Business in Azerbaijan report says: “Azerbaijan is a difficult market, with a major corruption problem. It is essential to conduct proper research and establish exactly who you are doing business with. Azerbaijani companies often will not respond to emails or phone calls. Information on companies can be difficult to access, with few having comprehensive English language websites. Due diligence can be difficult as many companies will not have audited accounts.”

Mullen adds: “If you are looking to have a presence here, you would normally be in some kind of partnership or joint venture because even though there has been so much progress, there is still endemic corruption, powerful monopolies and conflicts of interest. Having said that, there are British and foreign legal firms here, and if you are working on a project that is government supported, you are going to have very few problems.”