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CRUDE POWER: How Oil Affects Military Capacity and Institutions
The Korean Journal of International Studies 21-2 (August 2023), 189-218
Published online August 31, 2023
© 2023 The Korean Association of International Studies.

Inwook Kim  [Bio-Data]
Received May 24, 2023; Revised June 13, 2023; Accepted June 28, 2023.
This is an Open Access article distributed under the terms of the Creative Commons Attribution Non-Commercial License (http://creativecommons.org/licenses/by-nc/3.0) which permits unrestricted non-commercial use, distribution, and reproduction in any medium, provided the original work is properly cited.
Abstract
Does oil hinder or improve military power? How are oil states’ search for a capable and effective military conditioned by the nature, dynamics, and consequences of their political economies of oil? Despite paramount policy implications and theoretical relevance, specific conditions and causal mechanisms of this relationship remain poorly understood. Two factors are central in making sense of oil states’ military capability and institutions. The geological endowment of oil determines the material potential, and the management structure of oil revenue informs the state’s long-term developmental capacity, as well as the professionalization and institutionalization of its military. Accordingly, oil becomes either ‘a mixed blessing’ or ‘a power booster’ for oil states’ pursuit for military power. The theory is supported by plausibility probes on two carefully selected cases?Norway and Azerbaijan. The findings reveal previously neglected paths for oil to influence the states’ politics and national security.
Keywords : military power, oil curse, petrostates; Norway, Azerbaijan
INTRODUCTION

Does oil hinder or improve military power? This paper is concerned with the political economy of oil and how it shapes the abilities of oil-rich states to build a powerful and effective military. Despite its intuitively robust linkages, few theoretical guidance is available about how oil—often the most politically consequential commodity in its host states—affects a states’ core function of providing national security. This neglect is particularly glaring given the sheer enormity of ‘resource curse’ literature amassed during the past decades (Ross 2015).

The absence of study on ‘crude power’ is problematic from both policy and theoretical points of view. Above all, the military power and strategic behavior of oil states matter considerably in world politics. They are among top arms buyers in the world and have been involved in as many as nine of the twenty-one interstate wars since 1973 either as victims or aggressors (Colgan 2013). What drives their military power and policy therefore holds the key to comprehending some of the most violent and volatile regions in the world. Historically, the national security of oil states also has been a policy concern for the security of global oil supply, global macroeconomic stability, and great powers’ grand strategies (Yergin 2008; Painter 2012; Glaser 2013; Kim 2019; Kelanic 2020). On the other hand, what makes oil beneficial or detrimental to military power is an important policy consideration for oil states themselves. Oil is deeply intertwined with the oil states’ well-being, and military power is no exception. Both military hardware oil states acquire and a type of military institutions they build are heavily bounded by the political economy of oil. Understanding this linkage accordingly can serve as a benchmark for the oil states’ military policy.

Despite its immense policy relevance, the literature has been guilty of not only neglecting but misrepresenting oil’s diverse and complex qualitative properties in international security. Instead, oil’s significance has been reduced to one dimension of interstate relations—whether, how, and when oil causes war. Whether oil creates states’ revisionist intent, or exacerbates existing conflicts, scholarly endeavors to make sense of oil’s consequences on international security never left the domain of competition and conflict (Klare 2002; Colgan 2013; Hughes and Long 2015). While plausible, wars are by no means the only logical outcome of oil. Even worse, the long-held preoccupation with war has slighted oil’s other roles, including one on military capacity and institutions, thereby severely limiting our understanding about oil’s place in international security.

Amid the dominance of wars, oil state agency has also been missing in the literature. Without much justification, oil states are treated as little more than ill-fated tempting targets, or “gazelles in a world of lions” (Mangold 1978). Recent scholarship, however, shows that oil-states are no more vulnerable to being targets of revisionist attacks than non-oil states (Colgan 2010; Meierding 2020). Instead, the history of oil states shows that they have actively engaged in empowerment strategies and often been successful security seekers. The victimization narrative is increasingly untenable, while its legacy left important questions about oil states unanswered such as what types of national security strategies oil states pursue, when those strategies succeed, and why they sometimes fail. For both policy relevance and theoretical gap, the resource literature now must shift its focus to uncover the conditions and causal mechanisms with which oil defines opportunities and constraints for states’ pursuit for military power and national security (Colgan 2010; Kim and Woods 2016; Rubinovitz and Rettig 2018).

I posit that two factors are central in making sense of oil states’ military capacity and institutions, two central pillars of military power. First, other conditions being equal, geological endowment of oil determines the extent to which the oil industry can provide the financial capital to run, equip, and train the military. The Oil industry is characterized by huge rents generated, and the wealth accrued by the states historically provided immense arms purchasing power. Due to an unequal distribution of oil deposits, a degree to which oil wealth benefits the military’s financing power varies across oil states. Despite the variation, I note that oil states usually accumulate wealth and arms purchasing power more quickly and in larger sums than similarly situated rival non-oil states.

Second, the state management structure of oil revenues affects states’ long-run economic developmental capacity and civil-military relations. In line with the resource curse literature, I expect that the politicized management utilizes its oil revenue to serve immediate parochial interests rather than long-run societal needs. Such spending patterns undermine states’ macroeconomic fundamentals and hinders the professionalization and institutionalization of the military. Under the ‘technocratic’ management, in contrast, managers of oil revenue are institutionally and legally separated from the political and military elite. The division then allows the oil revenue to promote fiscal stability and support societal needs. Oil states with technocratic management therefore tend to be better insulated from the structural malfunctioning of the economy or narrow political interests interfering with setting military objectives, allocating military expenditure, and planning military policy.

In combination, this paper argues that oil’s effects on a state’s pursuit for military power are contingent and divergent. On the one hand, oil wealth is likely to offer relative advantages in arms purchasing power to its regional non-oil rival states. However, oil ultimately functions either as a ‘power booster’ or ‘a mixed blessing’, depending on the level of politicization in the management of oil wealth —measured in terms of independence, transparency and expertise. The former follows from the technocratic management of oil wealth, while the latter from politicized management.

To illustrate my argument in a rigorous manner, I take the following two steps in research design. First, I embed the analysis in the mainstream security literature to define the research scope and structure of the overall research. Military power is accordingly defined as a combination of material potential and institutional effectiveness. The paper is then firmly grounded in elaborating how the two explanatory variables—geological endowment and state management structure of oil revenue—affect the two components of military power. Second, I conduct in-depth plausibility probes on the carefully selected cases Norway and Azerbaijan. One methodological weakness in oil and international security literature is the dominance of the Persian Gulf as empirical cases, which consequently undermined the generalizability of findings. I seek to remedy the selection bias problem by undertaking cross-regional comparative case studies with non-Persian Gulf states. I briefly discuss policy and theoretical implications in the conclusion.

DEFINING MILITARY POWER

What is military power? The term is more elusive than it first looks, and accordingly recently sparked a renewed debate as to what really constitutes a state’s military power. Traditional realists tend to emphasize material and human resources as its key components. Military power is therefore estimated by comparing the capabilities and aggregate resources that a state possesses and can mobilize (Waltz 2010), compositely measured by indicators such as “GDP, population, and the size of the army”(Mearsheimer 2014), or “wealth, population, and level of technological development” (Glaser 2010).

Recently however, scholars began to doubt the utility of material-centered proxies. They contend that a process of translating material and human resources into military power is neither automatic nor seamless, but complicated by a state’s ability to use them effectively. Indeed, states with similar aggregate resources may differ significantly in military planning, force employment resource extraction, and ultimately battle performance (Biddle 2004; Brooks and Stanley 2007). Scholars accounted for this variation by non-material factors including organization (Posen 1986), regime type(Reiter and Stam 2002), civil-military relations (Feaver 2005; Brooks 2008), social structures (Rosen 1996), leader’s threat perception (Talmadge 2013), and adoption of effective doctrine (Biddle 2004).

This paper defines military power as a combined product of material potential and institutional effectiveness. The vague definition is far from satisfactory. For instance, it implicitly, but without justification, assumes that each component carries equal weight. And yet, while avoiding a detailed discussion about the relationship between the two, it usefully captures that militaries need both sufficient material resources and effective institutions, and that a military that lacks either component will not be able to perform to its fullest potential.

THEORY OF CRUDE POWER: OIL AND MILITARY POWER

State’s military power is not isolated, but embedded in the broader context of state’s finance and institutional arrangement. Though the sources of oil’s influence on military power are diverse, as far as a state’s material and institutional aspects are concerned, the major sources of oil’s role in building a state’s military can be reduced to two factors—the geological endowment of oil and management structure of oil revenue.

Geological Endowment of Oil

Geological endowment of oil affects oil-states' military power for one simple and straightforward reason – its effect on wealth. One of the key characteristics associated with oil-abundance is the huge revenue the oil industry generates and the political temptation to capture it. For instance, the average extraction cost per barrel in Saudi Arabia runs about \$9, while the market price was as high as \$140 per barrel (Wall Street Journal 2016). This difference is captured as revenue by the industry, and the extraordinary level of profit flows into the state’s finances in various forms such as taxes, dividends from its shares in NOCs, and fees that private companies pay to perform exploration and production activities in contracted oil fields.

Ceteris paribus, these added financial resources are military assets because they give a state greater ability to afford military personnel and organizational expenses and to purchase additional military hardware that was not previously available. Though a state’s military expenditures vary due to several factors, such as the level of perceived threat, the severity of the guns versus butter dilemma, the credibility of alliances, and many others, every state ultimately faces some level of challenge in securing sufficient and consistent sources of income to financially support its military needs. Therefore, a state with a larger economy and/or a greater source of income benefits from greater material potential, as military expenditure can increase without necessarily straining government spending in other areas.

Oil states indeed rank high in terms of total military expenditure. In 2021, seven out of the top ten states by military expenditure per capita were oil producers (SIPRI 2022). Furthermore, because of data availability issues, the list excludes the UAE that could comfortably make the list given the trend of their lavish military spending in the past decade. Furthermore, some of the biggest increases in military budget in the 2000s also came from small, oil-rich countries such as Chad, Equatorial Guinea, Azerbaijan, or Kazakhstan.

It is worth noting that the geological endowment of oil is not the only determinant for the volume of oil produced. Variations in other factors such as regime stability, business environment, technological requirements, trade and investment openness, and the prospects of the global oil market all determine the desirability and attractiveness of producing oil. These factors are, however, intervening and secondary to geological endowment, as most states attempt to produce at their optimal production capacity.1 Overall, randomly distributed geological endowment is still what fundamentally determines a state’s production capacity, and its oil revenue.

Management Structure of Oil Revenue

Who manages oil revenues and how and where these vast revenues are spent is just as important as the amount of oil wealth itself in understanding oil’s domestic and international consequences (Dunning 2005). While management structures are diverse across oil states, for simplicity of analysis, they are categorized to being either ‘technocratic’, or ‘politicized’. The distinction is based on the three principles; independence, transparency, and expertise. Independence refers to a state where political elites are de facto prevented from having preferential access to oil revenue, influencing executive-level decisions, or directly or indirectly assuming managerial roles. Transparency concerns the level of outside monitoring. Transparent management ensures that the funds' managers cannot appropriate the funds to serve their self-interest, and vice versa. Lastly, expertise is necessary to handle the complex operations of fund management and to make sound investment decisions. Politicized promotion based on loyalty rather than merit undermines expertise.

Whether the oil fund is run in a politicized or technocratic way deeply shapes and informs the states’ broader political and economic setting, and therefore a statés military potential and effectiveness. It does so via two causal routes— shaping oil state’s developmental capacity and its military’s institutional effectiveness.

A large body of literature suggests that the developmental capacities of oil-producing economies are highly susceptible to Dutch disease (Corden 1984). In short, the enormity of oil revenues makes manufacturing sectors less competitive by altering the terms of trade unfavorably for non-oil industries and eventually tends to ‘crowd them out’ of the economy. As a result, the developmental capacities of oil states declines, as is often manifested in the shrinking size of an economy after the discovery of oil, which is caused by the entire economy’s overreliance on the volatile global oil market(Gylfason, Herbertsson, and Zoega 1997; Frankel 2010).

Not all oil states are equally vulnerable, however. On the one hand, politicized management tends to accelerate the arrival of Dutch disease (Sachs and Warner 1995; Sala-i-Martin and Subramanian 2003; Smith 2004). Here, oil revenues are likely allocated to narrowly-defined regime interests such as buying and maintaining cliental support or paying for internal security apparatuses. As a result, politically oriented spending often leads to insufficient education, training, economic infrastructure, and financial savings for possible stabilization intervention in the future, all of which are necessary components of building a statés resilience against Dutch disease. Against this backdrop, these states are more likely to struggle to sustain economic growth and to shield themselves from macroeconomic challenges. Militarily, a shrinking economy and greater uncertainty surrounding future state income diminishes state’s ability to finance military expenses and purchases and to formulate long-term military plans, respectively.

On the other hand, states with technocratic management of oil funds are more likely to build a healthier level of developmental potential. The performances of these oil funds are measured by whether it maximizes profits and spends the funds to serve societal rather than partisan interests. These revenues then are often mobilized for promoting diversification of domestic industries, building stabilization funds against possible fall or the eventual depletion of oil revenue, and other infrastructural projects to complement broader economic development.

Such measures are conducive for oil states to better sustain economic growth and, consequently, long-term financial resources for building military power. Technocratic oil wealth management is rare, but there are growing efforts among oil-rich states to establish independently managed funds in countries such as Azerbaijan, Ecuador, Saudi Arabia, UAE, and others.

Second, the management structure of oil funds significantly shapes the institutional effectiveness of a state’s military. On the one hand, technocratic management– independent, transparent, and expert management of oil revenue –helps to decouple military institutions from parochial interests. The key here is that in technocratic management, by definition of being independent, political elites have no direct or preferential access to oil wealth. Furthermore, transparency ensures that the group of experts responsible for fund management cannot abuse their authority, and their power is strictly limited to the management of wealth, accordingly. Oil wealth that is separated from political interests cannot interfere with the military’s pursuit of its professional goals such as timely adoption and development of a rational military doctrine, or coherent alignment between military policy behavior with its stated objectives of national security.

Under a politicized setting on the other hand, political elites control oil revenue and seek to utilize these financial resources to control the military as part of a political survival strategy (Snyder 2006). They have two available strategies for controlling the military – cooptation and marginalization. Under cooptation, oil wealth enables political leaders essentially to “buy the military’s support and lower the risk of coups,” (Wright, Frantz, and Geddes 2015) as oil income allows them to “buy new weapons, raise military wages, and provide other benefits” (Wright, Frantz, and Geddes 2015). Likewise, political elites can selectively sponsor military officers loyal to the regime and use their influence to promote officers based on non-meritorious criteria such as ethnicity, school-ties, or political orientation, thereby making the military loyal to and supportive of the regime. By contrast, under a strategy of marginalization political leadership uses oil income to subordinate the military by creating and strengthening paramilitary organizations or internal security apparatuses that have overlapping functions and objectives with the military. By materially privileging and politically favoring these groups, military institutions suffer from organizational confusion and eroded organizational integrity. Overall, the politicized management of oil wealth provides the leadership the necessary resources either to co-opt or marginalize the military. As a result of these political manipulations the military itself becomes a politicized entity, making the prospect of attaining military autonomy and professionalization even more remote.

Figure 1 summarizes the causal mechanisms described in this section. Geological endowment of oil determines the absolute level of oil-revenue available. Management of oil revenue alters a state’s military power by shaping both the long-run developmental capacity and the prospect to for building professionalized or politicized military institutions.

Oil and Military Power

Two factors–geological endowment of oil and the structure of oil wealth management—were posited as key factors in determining the magnitude and direction of oil’s effects on oil states’ ability to build a powerful and effective military.

A combination of the two generates two types of oil’s’ consequences on military power. First, if oil states rely on the technocratic management of oil income, the political economy of oil becomes a ‘power booster’. On the one hand, the oil states utilize the added financial advantage for their military potential, which I seek to establish with higher military expenditure per capita compared to its strategic adversaries or rivals-if present- or the region’s average. On the other, these benefits come without harming the fundamentals of the economy as is expected with the professional and depoliticized management of oil wealth. It follows that regarding institutional features of the military, I expect to see military professionalization and autonomy and institutional coherence toward the protection of the state’s national security interests.

Second, in the case of oil states that rely on the politicized management of oil wealth, oil is likely to drive inefficient mobilization in the form of extravagant spending on arms (Karl 2004). In terms of military potential, oil is a mixed blessing, in that the oil states have unparalleled opportunities to quickly outspend the rivals and adversaries in times of oil price boom or the discovery of new oil fields. However, macroeconomic conditions surrounding the state’s developmental capacity deteriorate as a result of the growing dominance of the oil industry. This puts a state’s long-term development prospect in question and exposes the oil state to the volatile global oil market. Regarding institutional effectiveness, the military is likely to be subordinate to domestic political interests that commands oil revenues, and distinctly lacks necessary professionalization and autonomy. These institutional defects disrupt the optimal exercise of increased purchasing power.

I limit the analysis to cases where oil wealth is considerable, while excluding oil states with low oil income per capita. The left-out cases are states with some production capacity such as Australia, Ecuador, Gabon, Yemen, or Vietnam that technically qualify as oil states. However, their meager annual production volumes dilute linkages between oil wealth and state pursuit for military power. For instance, Australia and Gabon are technically oil producers but with insignificant volumes of 0.44 mb/d and 0.18 mb/d, and therefore their wealth effects on military power are proportionally low. If oil forms only a fraction of the oil state’s political economy, then oil is unlikely to have a meaningful impact on the military. This selection criteria necessarily compromises the comprehensiveness of the theory, but allows me to concentrate on the cases where the political economy of oil is deeply relevant to domestic politics and military potential.

CASE STUDIES

To probe plausibility of the theory, I conduct a cross-regional comparative in-depth study on post-Cold War Norway and Azerbaijan. The selection is based on the following criteria. First, I limit the period to post-1990 to isolate the effects of the Cold War that potentially confounds the linkage between oil and a state’s military power. Second, they offer relatively accessible sources to conduct meaningful case studies. Third, these oil states have a strategic rival or face significant and constant external threat, Russia and Armenia, respectively. The presence of security competitor(s) forces the oil states not to neglect military policies. Also, the dyad of security competitors allows a cross comparison of military expenditure as well as qualitative assessment of their forces over a sustained period of time. Lastly, both states are located outside the Persian Gulf. Qualitative studies on the oil’s political consequences have been dominated by the politics of Middle East, raising concerns for the skewed representativeness of the case studies. This study seeks to remedy the deficit by intentionally selecting non-Persian Gulf case studies and thereby contribute to the expansion of oil politics literature.

Norway

Geological Endowment: Norway discovered its first oil field in 1969 and began commercial production in the early 1970s. Its oil production volume rapidly increased in the 1980s, following major discoveries of the Statfjord, Gullfaks, and Oseberg oil fields, and eventually reaching its peak, producing 3.4 mbd, in 2001 (Thurber and Istad 2010). Due to the maturing fields, however, the volume gradually decreased in the 2000s, steadily dropping to approximately 2.0 mbd by 2021(British Petroleum Company (BP) 2022).

A high volume of oil production puts Norway comfortably in the ‘high oil income’ category, which is often ranked as one of the highest in oil income per capita (Ross 2013). The high figure is partly a function of Norway’s relatively low population (4-4.5 million). In terms of absolute volume, Norway consistently ranked as one of the top ten producers since 1990, pumping 3-5% of global oil production.

Management Structure: Norway’s oil wealth management is highly ‘technocratic’. Norway scored 86 out of 100 in the resource governance index (RGI) in 2017 that tops the list of resource-rich countries investigated in the RGI (Resource Governance Index 2017). Established in 1990, the Petroleum Fund (better known as State Pension Fund-Global) manages the oil revenue, most of which comes from its national oil company, Equinor, of which the Norwegian government holds 67% of the share. It commands a colossal sum of near \$1 trillion, cumulatively deposited from royalty and area taxes, petroleum taxes, dividends from Equinor, and State’s Direct Financial Interest (SDFI) surplus.

The high RGI score is based on the fact that, while granting the authority of managing the oil revenue, the organization of the Petroleum Fund is designed to ensure that the fund does not become a source of “cheap money” for politicians.2 First, the Pension Fund is independently run as politicians are effectively barred from spending and operational practices of the oil revenue, and professionals are granted legal authority to run the fund: The Ministry of Finance is granted authority to monitor an operational manager; the Norges Bank is the operational manager, which implements the investment strategy, exercises the Fund’s ownership rights, and runs an active management program (Fearnley 2012; Thurber and Istad 2010). The performance of the oil income managers is evaluated based upon the profitability of their investment decisions, not political interests potentially served, discouraging the alignment between the managers and politicians.

Second, the fund is run under a strict legal mandate that direct investment can only be made internationally and cannot be spent on domestic projects (Fearnley 2012). This is due, in part, to the macroeconomic and political ramifications that government’s direct access and potentially politically-driven, short-sighted spending of oil wealth entailed, but it also reduces the rationale for politicians to interfere with investment decisions. Instead, an average of 4% of the Fund value is to be contributed to the national budget, and the transferred income is subject to the same parliamentary procedure as other sources of government income (Fearnley 2012; Velculescu 2008).

Third, the authority of technocrats who run the fund is not limitless, either, but subject to close and regularized external monitoring by the Storting (the Norwegian Parliament). For instance, prior to the 1990s, although the Norwegian oil fund was managed by the Central Bank without a formal structure (Lie 2018), both transparency and accountability were retained through publishing annual reports and parliamentary papers and being subject to a well-functioning parliamentary system (Lie 2018). When the Petroleum Fund finally came into being in 1990, it was based on the principle of institutionalizing the transparency and accountability of the Fund management. The role and power of the Ministry of Finance is managerial and financial only, and the strict separation of their authority from political interests makes it virtually impossible for them to accrue political capital in any legally or normatively acceptable ways.

Oil and Military Power

Material Potential: Oil revenue had complemented Norwegian military material potential in the 1990s, and with the price boom, became a strong asset for the military’s purchasing power in the 2000s. This is manifested in Fig 2 as Norway consistently spent higher military expenditure per capita in comparison to its neighbors in Scandinavia. Furthermore, Norway’s high military expenditure came without putting an extra burden on the economy, as Norway managed to keep the ratio of military budget in GDP to 1.5% - 3%, which parallels other Scandinavian countries (Fig 3). Lastly, Norway was one of few states that managed to actually increase its military spending in the late 2000s when most of the developed countries were forced to cut it due to the global economic recession (SIPRI 2022). Ceteris paribus , the sustained pattern of outspending neighboring states makes the defense of Norwegian territorial sovereignty more solid, and allows Norwegian forces to conduct overseas operations in a timelier manner at a larger scale.

The combination of Fig 2 and Fig 3 points to a fairly self-evident evaluation of the pattern and nature of Norwegian military spending. Norway outspends its neighbors but does not overspend the money.

At the same time, the Norwegian economy has been a textbook example of avoiding oil’s curse on the domestic economy. Its inflation rate is kept low around 2%, unemployment rate at 3.5% and its macroeconomic policies are generally considered sound (Gylfason 2001). The oil industry is the largest sector in the Norwegian economy, but other industries fare well, too (The Economist 2013). Norway still maintains sizeable ship-building, pulp and paper products, timber, and fishing industries, successfully averting the oil industry’s unhealthy domination of the economy.

Behind this success lies the technocratic management of oil revenues (Thurber and Istad 2010). The Norwegian economy is minimizing the inflationary pressure created by influx of oil revenues by mandating all the oil revenues to be deposited to the Fund and directing the investment abroad and not toward domestic projects. Also under the technocratic management, the Pension Fund has accumulated sufficient wealth to act as a stabilizer against boom and bust cycles of the volatile global oil market. Overall, the macroeconomic environment is strengthened rather than undermined by its oil wealth in the case of Norway, and under the steady GDP growth of Norway, the state’s budget available for military has been stable, predictable, and growing.

Institutional Effectiveness: Independently managed oil wealth meant that Norwegian military institutions were minimally vulnerable to oil-triggered institutional decay, as qualitatively illustrated in the way the Norwegian military was organized and run in the post-1990 period. The clear division of labor between politicians, oil fund managers, and military officers ensured that no one can empower themselves through its wealth or arms under the Norwegian political system.

First, the most immediate consequence of denying civilian leadership private access to the fund was that no partisan group could acquire oil-wealth-funded political clout over the military. The intrusion of political interests into the military is often the very root of institutional disintegration of militaries–either through creating paramilitary groups, instituting loyalty-based promotion systems, or deliberate marginalization of the military–none of these symptoms were observed in Norway. Civilian control over the military was instead exercised through the “cooperation and the division of power between the Storting and the government” (Norwegian Ministry of Defence 2013). The Storting has the monitoring power over all activities of the Norwegian Armed Forces and the Ministry of Defense, and controls the budgetary power. The de facto authority to formulate and implement military policy, on the other hand, lies in the Ministry of Defense, headed by a civilian.3 Since neither the Storting nor the parliament has direct access to the oil revenue, civil-military interaction is conducted purely based on the parliamentary check-and-balance system, entirely independent of its oil wealth.

Second, the Norwegian military is also totally detached from the oil fund, as the Ministry of Finance is formally responsible for the fund, and the two ministries are entirely separate, both organizationally and functionally. The presence of a legal barrier means that the annual military budget is entirely dependent on the transparent budgetary process in the Storting, which also oversees the organization. There are no routes available for the military to accumulate private wealth, which is, in many oil-rich states, a source of military’s involvement in politics.

Hence, by insulating military policy from oil politics, the Norwegian military has been geared away from acting as a forefront guard of ruling elites or becoming a well-funded politicized organization itself, but incentivized to loyally serving its security and foreign policy. Indeed, the dominant theme of Norwegian military policy since 1990 has been how best to respond to the new strategic landscape that emerged with the demise of the Cold War in 1990.

Most significantly, with decline of immediate and intense Russian threats, Norway embarked on the restructuring of its large land-based forces. Most of its land forces were stationed in the High North, the defense of which was a central pillar of Norway’s defense policy during the Cold War (Petersson 2011; Holst 1981). As a majority of its land forces deemed obsolete now, a drastic reduction of a fully mobilized army followed, dropping from 180,000 in 1990 to less than 10,000 in 2010 (Bjerga and Haaland 2010). The reduced tension also allowed civilians to assume greater authority in military policy, which eventually materialized in an integration of civilian and military leadership under the Ministry of Defence in 2003 (Fottland 2011). Another driver behind the transformation of Norwegian military came with the growing expectation for Norway to contribute more to the international peacekeeping operations in the 1990s (Ingebritsen 1997; Petersson 2011). The watershed of this change was a self-criticism about its slow deployment and disappointing performance in the Balkans, which lead to a variety of measures to improve its ability to conduct multilateral operations (Græger and Leira 2005). Since then, Norwegian Armed Forces have contributed to various multilateral operations in Afghanistan, Iraq, the Mediterranean (Operation Active Endeavor), Libya, and the Indian Ocean (Operation Ocean Shield), as well as policing the airspace over the Baltic states and Iceland (Ulriksen 2013).

Overall, modified strategic imperatives and not domestic partisan interests drove the transition of Norwegian forces from large, threat- and conscript-based, territory-focused defense, toward a small, capabilities-based, semiprofessional defense, focused on operations worldwide since 1990 (Petersson 2011). During this process, military professionalism remained robust as manifested in continued improvement in training and equipment or in the sustained emphasis on merit-based promotion (Bjerga and Haaland 2010; Græger and Leira 2005). More broadly, at no point has any evidence been found of reforms taking place in non-democratic or highly politicized ways. The bulk of discussion was instead dominated exclusively by foreign and security requirements.

Some caveats are in order, chiefly that the separation of oil from the military does not guarantee optimal military policy. Military effectiveness is subject to a myriad of non-oil factors, and the analysis here says little about how the Norwegian military would actually fare on the battleground. It does show, however, that oil wealth was institutionally segregated from formulation, implementation, and evaluation of the military policy in Norway, avoiding the possible onset of the ‘oil curse’ on military professionalization or autonomy.

Azerbaijan

Geological Endowments: As home to some of the oldest oil fields in the world, oil has been an integral part of Azerbaijan’s political economy well over a century. Since its independence, Azerbaijan aggressively worked to develop and modernize its obsolete, struggling, and paltry oil industry that it inherited from the Soviet Union. Most significant was the “Contract of the Century” in 1994 from which international investments poured in and led to the discovery of new oil fields including the Azeri-Chirag-Guneshli field in 1997, and improvements in the old industrial infrastructures.

Azerbaijan transitioned from a low to high oil-income state around the early 2000s, thanks to the expansion of production capacity and sharp price surge. The completion of the controversial Baku-Tbilisi-Ceyhan (BTC) pipeline in 2005 further boosted production, allowing transportation of Azerbaijani oil to the European market.

Management Structure of Oil Revenue: Azerbaijan’s oil-industry management remains highly politicized, lacking much independence and transparency. On RGI, it scored 47/100 in 2017 and 56/100 in 2021, representing “weak” resource governance (Resource Governance Index 2022). Its oil revenue is generated by the State Oil Company of the Republic of Azerbaijan (SOCAR) through income taxes and collects dividends from the government’s shares in the Production Sharing Agreements (PSAs) (Gojayev 2010; Wakeman-Linn 2004), and the State Oil Fund of the Republic of Azerbaijan (SOFAZ), set up in 1999, is responsible for running its oil wealth.

The two state entities are far from independent. In fact, the president enjoys near complete control over the management and operation of the two through the legal authority to appoint the board of directors for SOCAR and even power to “reorganize and terminate” the company at his will (Kalyuzhnova 2006). Similarly, the president retains the authority to appoint the head and advisory council for SOFAZ, while the fund itself is accountable only to the president (Gojayev 2010). Unsurprisingly, the political appointees traditionally consisted of the president’s family members, loyal subordinates, or members of the Nakhichevan clan, a key constituent for ruling elites in Azerbaijan from the days of Heydar Aliyev (Guliyev 2009).

In addition to the low level of independence, the fund’s management is far from transparent, a result of oversight capacity being virtually absent. The parliament has neither the legal authority nor the willingness to monitor how these funds are spent(Hoffman 1999; Sumerinli 2010; Kaldor, Karl, and Said 2007; International Crisis Group 2008). Internal and external agencies to monitor financial activities have been occasionally set up, but none enjoyed credible organizational independence, as most of their members were appointed by the president himself (Jones and Weinthal 2010; Makhmutova 2007). The oil wealth management has been accused of being plagued with “extreme instability and non-transparency” (Jones and Weinthal 2010). In 2015, Azerbaijan’s Extractive Industries Transparency Initiative (EITI) status was downgraded from ‘compliant’ to ‘candidate’ for the absence of civic groups in resource governance(Extractive Industries Transparency Initiative 2015).

Oil and Military Power

Material Potential: In terms of military expenditure, the rapid accumulation of oil revenue presented an unparalleled opportunity to outspend Armenia, its major rival, in a speedy and overwhelming way. This achievement stemmed from the double blessing of the aforementioned combination of production capacity expansion and price boom, under which its GDP increased more than thirteen times, from approximately \$4 billion in 1997 to \$75.2 billion in 2014 (World Bank 2023).4 This windfall of financial capital to the government was quickly transformed into a corresponding increase in military expenditure. The rate at which military expenditure increased in the last decade is nothing short of staggering. In 2000, Azerbaijan allocated \$338 million for military spending, a figure that would rise almost tenfold to \$3.08 billion by 2010. It is important to note that such an increase appears to be a function of its rapidly expanding GDP, since the ratio of military expenditure remained consistently at a level around 3% throughout the 2000s (SIPRI 2022). The gap between the two regional rivals would considerably shrink following the oil price collapse in the mid-2010s. However, as Figure 4 demonstrates, the gap had remained robust and significant despite the fall and began to rebound in the late 2010s with the recovery of oil prices.

The rapid outspending contributed to Azerbaijan’s relative military power in two ways. First, the gap in military expenditure between Azerbaijani and Armenian armed forces has rapidly widened (Figure 4) (Jones and Weinthal 2010). The gap is filled with Azerbaijan’s aggressive purchase of arms that quickly and substantively boosted Azerbaijani military hardware in both quantitative and qualitative terms. Second, the widening divergence in raw military capability increasingly put financial and military stress on Armenia, which, with no comparable source of a financial bonanza, struggled to keep up with Azerbaijan’s unprecedented increase in military investment. By 2007, the gap became so large that Azerbaijan’s military budget in 2014, \$4.8 billion, reportedly exceeded the entire state budget of Armenia by more than \$1.5 billion (SIPRI 2022).

However, the politicized management of the oil industry cast doubts on the Azerbaijan’s long-term developmental capacity and thereby the long-run sustainability of its military power. Azerbaijani economy already began to exhibit symptoms of Dutch disease, most notably by a rise of inflation (Hasanov 2013) and a sharp appreciation of the exchange rate (IMF 2012). Nor have there been many state-level initiatives to promote diversification of the economy, making the rapidly growing dominance of the oil industry probably irreversible (Jones and Weinthal 2010). The oil sector comprised 61.8% of its export in 2007, up from 31.7% in 2000 (Hasanov 2013), having crowded out the export of non-oil commodities.

In terms of military potential, the prospect of a decline in developmental capacity is not good news. The dominance of the oil industry chain-gangs military expenditures to the highly volatile oil market which, in turn, generates highly unstable trajectory of its military expenditure. Figure 4 shows a wide range of fluctuation in Azerbaijan’s military expenditure, which is tightly correlated to the oil price movement. Such a large fluctuation is harder to avoid where oil wealth is a major source of state’s finance, rendering sound long-term military planning very hard to achieve.

Overall, oil has been a mixed blessing for Azerbaijan’s material military capability. On the one hand, oil wealth has been the single most important asset in the transformation of the previously impoverished, under-resourced, and internationally isolated Azerbaijani military. And yet, this improved military capability must be considered in the context of the growing evidence of Dutch disease, which unmistakably increases Azerbaijan’s vulnerability to the fragile global oil market and increasingly likely to diminish the long-term development capacity.

Institution Effectiveness: Oil’s effects on Azerbaijani military institutions further discount the impact of the ostensibly overwhelming military expenditures. In fact, despite its unmistakable outspending over a decade, military assessments are generally unfavorable to Azerbaijan. For instance, the International Crisis Group (ICG) reports that Azerbaijan “has not so far gained clear superiority over Armenian forces,” (International Crisis Group 2008) and is accused of being a “fragmented, divided, accountable-to-no-one-but-the-president, un-transparent, corrupt and internally feuding armed forces.” (International Crisis Group 2008) A former US ambassador, Anne Derse, similarly noted that Azerbaijan is “unlikely to structure a force large or well-equipped.” (Kucera 2011).

Clearly, the problem does not lie in the lack of resources. Rather, it is the institutional defects that originate from the politicized management of the vast oil revenues accumulated. The president exerts complete control over domestic oil organizations via legal provisions and informal networks. Together with the lack of extra-presidential oversight capacity, Azerbaijan’s president increasingly, arbitrarily, and surreptitiously utilizes funds for special pet projects and to achieve certain political ends (Jones and Weinthal 2010). The current President Aliyev enjoys an unusual degree of political autonomy and economic resources at his disposal to ensure the support of domestic allies based on his kinship and regional affiliations (Hoffman 1999; Guliyev 2009; Gojayev 2010).

In a bid to centralize and consolidate the president’s power, eliminating potential threats from armed forces constituted a key requirement for the regime’s endeavor to survive.5 In accomplishing this critical task, the elder Heydar Aliyev chose to leave the military under-resourced and institutionally divided and confused (International Crisis Group 2008), thereby making it weak and unable to challenge the leadership. Ilham Aliyev, the son, took a slightly different approach. In contrast to his father, Ilham Aliyev began to allocate more funds to national defense forces in an effort to win over the support of the military for the regime. The underlying continuity still remains, however, in his persistent embrace of the “divide-and-rule” approach under which “numerous” factions within the military compete against each other, thereby denying the emergence of a coherent and powerful military structure.

Azerbaijani forces, consequently, have suffered from weak professionalization and a lack of autonomy. The problem deepens with the lack of parliamentary oversight (Sumerinli 2010). First, military spending is not being directed to areas where it is most needed. Instead of improving military capability, the money is often spent to serve Baku’s internal political interests. One such destination of the government’s heavy spending is the welfare provision, such as salaries and housing for 300,000 troops and their families who can be counted on to support the ruling New Azerbaijan Party (Sultanova 2012). Indeed, considering how the government directs and spends military expenditures, Azerbaijan’s government has been accused of being more focused on maintaining its political establishment than defending national sovereignty or even regaining the Nagorno-Karabakh region, which is deeply entrenched in the public consciousness in Azerbaijan (Sultanova 2012).

With military expenditure being diverted to serve political objectives of the president and his associates, it was not hard to observe various problems typically associated with ineffectual military institutions. For instance, promotion is rarely merit-based, but rather based on personal loyalty to the leadership (International Crisis Group 2008), and training has been criticized for having deteriorated as more-professional Turkish instructors were replaced by Soviet-educated Azerbaijani officers who resorted to using an outdated training syllabus, again reflecting the shift in the political climate in Baku rather than military considerations (International Crisis Group 2008). Other symptoms of ill governance also have been, albeit sporadically, documented and publicized, including hazing, nepotism, corruption, and insufficient social protection, among others (Sumerinli 2010; International Crisis Group 2008).

In combination, Azerbaijan’s pursuit for military power in the last three decades produced mixed records. On the one hand, reflecting the politicized nature of its defense policy, Azerbaijan’s military had been expected not to perform effectively in conflicts against Armenia. Back in 2000, as many as four Azeri divisions were reportedly only at 40% strength, while in 2002 it was projected that Azerbaijan was incapable of launching a war to recapture Nagorno-Karabakh for 5 to 10 years (De Waal 2013). Their operational capability with newly acquired modern systems such as S-300 SAM is doubtful, and its military, especially its air force, is far from adequately trained and sufficiently supplied as a result of corruption, misdirected spending, and lack of professionalization (International Institute for Strategic Studies 2014). On the other hand, with oil wealth, Azerbaijan recovered from its humiliating defeat in 1994 and enjoyed quickly outspending its bitter rival.

Ultimately, it was Armenia’s failure, not Azerbaijan’s mixed success, that proved decisive for the fate of the Nagorno-Karabakh region in the 2022 war. For instance, it was reported that the Armenian forces lacked tactical competence— their defensive positions and assets, for instance, were without adequate camouflage which exposed them to Azerbaijan’s air campaigns, or the mass movement of troops under-covered and under-protected that attracted the Azeri air power (Andrews 2021; Calcara et al. 2022). Furthermore, the deficiencies in Armenia’s air defense system, which manifested in the absence of a layered air defense system, obsolete surface-to-air missile batteries, and limited electronic warfare capabilities, opened opportunities for Azerbaijan to deploy the Turkish drones successfully for their military campaigns (Calcara et al. 2022).

While more careful analysis of military campaigns on the war is necessary, the available studies strongly point that both Azerbaijan’s advantages in the weapons systems, enabled by oil-funded arms purchasing power, and the Armenian’s poor military preparation, which failed to exploit the vulnerabilities of Azeri military power, proved significant factors in the Azeri’s victory in 2022. After all, battles and wars are determined by relative not absolute levels of military effectiveness.

CONCLUSION

Unpacking ‘crude power’ offers nuanced and subtle interpretations of oil’s military consequences. It first challenges the conventional portrayal that oil states are little more than helpless prey for oil-hungry great powers to exploit, manipulate, and control. Furthermore, it shows that oil’s effects are contingent and multifaceted; subject to its size and management, the political economy of oil was shown to be capable of significantly weakening or bolstering the host states’ military power. For instance, oil abundance, if used and managed properly, proved to be a unique and powerful security asset, as the case study on Norway or the history of early twentieth century America illustrates. The drastic change of strategic environment in favor of Azerbaijan similarly cannot be explained without the sudden influx of oil revenue to Azerbaijan in the 1990s. Oil was essentially what enabled the previously impoverished Baku to outspend and materially overwhelm its major rival, Armenia, in just a matter of several years. In contrast, politicized management or low endowment of oil can hamper oil states’ quest for military power via diverse routes. In short, this article shares and supports the widely-held view that oil’s effects are generally conditional, not deterministic (M. Ross 2015).

Furthermore, knowledge about oil states’ military policy has been mostly impressionistic and simplistic, as what is reported in the media or written in policy analysis has been limited to high-profile, lucrative arms purchases that selective oil states made at selective points in time. In fact, only a handful such as Qatar, Kuwait, Norway, or Saudi Arabia could consistently purchase such advanced weapons systems in large quantities, while a majority of oil states faced an acute guns-and-butter dilemma, a problem worsened with the presence of economic curse, and struggled to maintain a stable and sufficient amount of military expenditures. A lack of attention paid to these majority cases often distorts our understanding of oil’s role in military expenditure and power, warns against equating oil wealth with enhanced purchasing power, and compels us to acknowledge the huge variation in oil’s ability to finance military power.

More troublingly, much of the studies on oil states’ military power generally suffer from its almost exclusive reliance on military expenditure without questioning underlying factors germane to military power—who sets military objectives, allocates military expenditure, and decides military policy, all of which fall under the institutional and political setting of oil states’ civil-military relations. Studies on the inner-workings of oil states’ military policy is almost entirely absent from the literature, although the political economy of oil rents deeply alters civil-military relations. It reminds the literature that the way oil wealth is accumulated, collected, managed, and distributed tightly embed the potential and effectiveness of state’s military policy in a more complex and competing way. In that sense, oil is not an independent and exogenous factor, but who and how its industry and revenue is managed is an integral part of oil states’ military policy, organizational behavior, and overall ability to deter and defeat military aggressions.

Ultimately, it speaks to a larger issue within the scholarship by suggesting how flawed and untenable a deeply entrenched divide is that pervades the literature between the realms of political economy and national security (Kirshner 1998; Keohane 2009). At a minimum, it clearly shows that how causes, conditions, and mechanisms by which oil states are capable of or fail to build and maintain military power cannot be understood without appreciating the diverse roles that political economy of oil rents plays. More broadly, it supports and continues to recent efforts to re-bridge the studies of political economy and national security into a single framework.

Oil’s role is complex, diverse, and consequential in domestic civil-military relations, regional strategic landscape, and international relations. In that regard, the study of ‘crude power’ expands the research scope of the highly successful and fruitful program on oil curse, emphasizes the importance of long-neglected oil state agency, speaks to important debates about military power and its roots in states’ political economy, and is sharply policy-relevant to some of the most violent and militarized regions in the world.

Footnote

1 Saudi Arabia is an exception—it retains a sizeable spare production capacity, but this is a decision based on the market and strategic considerations.

2 It is worth noting that such a design did not emerge unchallenged. In the 1980s, the Ministry of Finance successfully sustained a forceful argument against the Tempo Committee’s proposal to grant the legal authority to the government to spend the money where it deemed desirable and necessary. The Petroleum Fund established in 1990 is based on the principle of strict separation between ownership (government) and management (technocrats). See Lie 2013; Thurber and Istad 2010.

3 The official Commander in Chief is the King, according to the Norwegian Constitution. His power is more nominal than real. For more detail about Norwegian the structure of civil-military relations, see Saxi 2010; Norwegian Ministry of Defence 2009

4 It fell to \$38.8 billion in 2016 following the price collapse in 2015 but would recover to \$54.7 billion in 2021.

5 Indeed, there was a coup attempt in 1995, which the elder Aliyev was eventually able to squash.

Figures
Fig. 1. Causal Mechanisms from Oil to Military Power
Fig. 2. Military expenditure per capita, 1988-2022 ($ per capita)
Fig. 3. A share of military expenditure in GDP, 1988-2012 (%)
Fig. 4. Military expenditure of Armenia and Azerbaijan with the oil price, 1991-2021 (military expenditure figures are in US$, at constant 2021 prices and exchange rate)
Tables
Table. 1. Oil’s Effects on a State’s Military Power
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