While both Uzbekistan and the Russian Federation rebuffed prospective foreign investors (FIs) after the demise of the Soviet Union, Azerbaijan’s decision to involve FIs in the exploitation of its petroleum sector through state ownership without control (S2) in the early 1990s denoted a significant departure from the ownership structure it inherited from the Soviet Union – state ownership with control (S1) – that since the abolition of Lenin’s New Economic Policy in the 1920s shunned “foreign capitalists.” Azerbaijan’s decision to pursue S2 after achieving independence, furthermore, coincided with a worldwide resurgence in foreign investment in the exploration for and production of petroleum at the end of the twentieth century. According to our research, in the year 2000, approximately 75 percent of 47 petroleum-rich countries in the developing world had opted for direct foreign involvement in their petroleum sector either in the form of S2 (~38%) or P2 (~36%).

As we show in Chapter 6, ownership structures where FIs are actively involved do not operate in a historical vacuum but rather within a specific international context. Because Azerbaijan adopted S2 in the 1990s, it offers an opportunity to test its effects on fiscal outcomes during what we designate as the third time period (1990–2005), which commenced with the emergence of new norms regarding the way that businesses conduct their operations abroad, accompanied by new actors (INGOs and IFIs) seeking to diffuse these norms. This particular international context mediates the direct effects of S2 on our three causal mechanisms, generating negligible transaction costs (TCs), high societal expectations vis-à-vis both the FIs and governing elites, and power relations that can favor either the FIs or the host government. Although each of these three mechanisms is at work in promoting incentives for hybrid fiscal regimes – that is, fiscal regimes that are only partially constraining and enabling – due to the uncertainty surrounding which set of actors will ultimately enforce the model contract in the 1990s, coercion takes on greater significance in determining which of the four potential hybrid fiscal regimes depicted in Chapter 6 is most likely to emerge in Azerbaijan.