Enforcing Oil and Gas Contracts Without Courts: Reputational Constraints on Resource Nationalism in Russia and Azerbaijan

Amidst the recent record-breaking spike in oil prices, many resource-rich countries have moved aggressively to increase national control over large, internationally-financed hydrocarbon projects. Commentators have sensationalized these breaches as politically-motivated moves toward resource nationalism and a reflection of a weak rule of law. This commentary, however, oversimplifies a complex phenomenon. Many countries accused of resource nationalism have selectively renegotiated contracts and have stopped far short of full-scale nationalization. Furthermore, other resource-rich countries — often with weaker systems of legal enforcement and similar political incentives to renegotiate — have reacted to the oil boom by respecting long-term contracts and encouraging additional foreign investment. Russia and Azerbaijan can help us understand the forces driving these recent developments in the hydrocarbon industry: while Russia has renegotiated long-term contracts and partially re-nationalized its hydrocarbon industry, Azerbaijan has done the opposite. Comparing these two countries, this article will propose that these differing responses are strategic reactions to the oil boom. Both countries still require access to the technology, capital, and political connections of international oil companies to pursue their interests; thus, the ex post reputational costs of contractual breach have helped insulate long-term contracts from expropriation in the absence of a strong rule of law. Thus, like in other business communities that do not have access to impartial court systems to enforce contracts, maintaining a good reputation has emerged as a key factor in ensuring the stability of existing long-term hydrocarbon contracts.