Back in April, at the height of the Arab Spring, protesters and opposition activists took to the streets of Baku demanding free elections and an end to corruption. But Azerbaijan is not Egypt or Tunisia. As in Libya, Syria and Bahrain, their attempts to make their voices heard were firmly suppressed, as they have been many times in the past.

While President Ilham Aliyev is not a Gaddaf ior a Bashar Assad, and continues to enjoy widespread support in the oil-rich republic on the Caspian Sea, his authoritarian regime is coming under increased pressure to initiate long-overdue democratic reforms. In the coming months, with oil revenues dwindling and food prices rising dramatically, the Aliyev dynasty, in power since 1993, may be facing its most severe challenge yet as the bubble of prosperity brought by its vast hydrocarbon wealth starts to burst.

For most of the second half of the past decade, Azerbaijan led, or nearly led, the world in terms of economic growth and rising per-capita incomes. From 2006-10, its GDP soared by an average of 16.4% a year, way above most of its rivals except for the tiny gas-rich Arabian Gulf emirate of Qatar. Socar, the state oil and gas company, does not publish official figures on oil and gas revenues, but independent researchers in Azerbaijan suggest they may have reached $30bn last year in a country whose population totals less than 10 million.

“Infrastructure, construction, industry, manufacturing are booming,” notes Reza Vaziri, CEO of US firm, RV Investment Group Services, one of the country’s leading foreign investors. “The government is spending millions of dollars.”

This may also explain why the country’s huge potential for trade, as well as investment, is attracting rising interest from Europe, particularly in the non-oil sectors. British MP Robert Walter, who leads the UK’s delegation to the Council of Europe, was due to head a visit to Azerbaijan in late September by 21 British firms organised by the Middle East Association in London. Its senior consultant, Feride Alp, says that the sectors drawing the most interest are “asset management and investment, banking, insurance, capital goods, defence and security, ICT and telecoms”, along with education.

“Even in the 19th century, Baku’s intellectual culture made it a popular destination for the European and Russian elite,” observes Regine Spector, a visiting research scholar at the Kennan Institute in Washington. This, she adds, “reinforces the important priority that education reform represents for both the government and Azeri society as a whole.”

Last year, the UK invested almost £1bn in the country or 51.9% of total foreign investment in Azerbaijan; BP, the oil giant, accounted for the vast majority of this. The next biggest investor was the US (9%), with Turkey contributing 3.6%.

Noting that many Azeri students are currently studying in the UK, Alp adds that British universities are now “looking to form joint venture partnerships” with Azeri institutions to provide “world-class engineers, scientists and linguists.”

Signs of a decline, however, are already visible. Oil production in the first half of this year fell to 23.8 million tonnes, a 5.6% drop compared with the same period in 2010. The output of natural gas, pending the opening up of the second phase of the huge reserves in the Shah Deniz field in the Caspian, is also down, by 2.1% this year to 12.9 billion cubic metres, according to the Center for Economic and Social Development (CESD) in Baku. While high oil prices have underpinned the revenue stream, the CESD estimates that the country’s income from hydrocarbons, which account for more than 55% of GDP, could peak in 2012 and that its reserves will start to decrease in 2013. By 2030, Azerbaijan could become a net importer of oil.

Annual GDP growth is falling already. In the first half of 2011, according to official statistics, it amounted to 1.1%. From 2011-15, it is expected to average only 3.1%, according to the London-based Economist Intelligence Unit (EIU). More importantly, while GDP per-capita growth has soared since 2001, it could fall to just 1.7% by 2020, the EIU estimates.

Given that average incomes are still less than $5,000 a year, the potential for unrest is mounting, observers say, especially in rural areas where unemployment and poverty are rife. Add to that the existence of 800,000 refugees displaced by the 18-year-old conflict with Armenia over the disputed enclave of Nagorno-Karabakh and persistent inflation of more than 10%, and the potential for trouble is causing concern among allies in Europe and the US as well as in Azerbaijan itself.

While Aliyev’s government has shown itself determined to prevent an ‘Arab Spring’ and is intensifying its restrictions on journalists and the media, it has begun to recognise the need to tackle both the country’s image and its long- neglected non-oil economic sectors. Residents have been impressed with his recent success in tackling some petty bribery – in January, he launched a campaign to rein in the country’s traffic police, notorious for on-the-spot ‘fines’ – although systemic corruption by the authorities, particularly regarding customs fees, taxation and labour permits has gone unchallenged, according to human rights bodies and NGOs.

“Corruption is a serious impediment to the country’s economic development,” the US Department of State wrote in a report last year. “Lack of transparency, politically connected economic monopolies and cronyism hinder both domestic as well as foreign investment.” Although the watchdog Transparency International ranked Azerbaijan 134th in its 2010 Global Corruption Barometer, up from 143rd in 2009, the country is still near the bottom of the table, tied with countries such as Zimbabwe. Similarly, although the World Bank’s Doing Business report rated it 54th overall out of 183 countries in 2011, it ranked 103rd in relation to paying taxes, 160th for dealing with construction permits and 177th when it comes to “trading across borders” .

On a more positive note, the non-oil sector grew by 7.2% in the first six months of this year. Agricultural production rose by 6.2%, while manufacturing output was up by 7.3% for the period from January to May. One bright spot has been the growth in gold exports, thanks to a 25-year production- sharing agreement with RV Investment, and the success of its producing subsidiary, British Anglo-Asian Mining, which is listed on the London Stock Exchange. Output is expected to rise to 60,000oz by the middle of next year, according to Vaziri, up from some 53,000 in 2010.

Work is underway to complete the Kars-Tbilisi- Baku railway that will connect Turkey, Georgia and Azerbaijan by the end of 2012, along with the EU-funded Europe-Caucasus-Asia (TRACECA) intercontinental motorway. A huge international sea port is also being built on the Caspian to facilitate oil shipments from Kazakhstan. An international airport at Gabala is planned, while a terminal is being added to Heydar Aliyev International Airport in Baku. Tourism is expanding, thanks to the construction of several new hotels and resorts in Baku and along the coast.

“Azerbaijan presents many of the risks associated with a small, newly independent, rapidly developing state in a complex geopolitical environment,” cautions Professor Frederick Starr, chairman of the Central Asia-Caucasus Institute at Johns Hopkins University in the US. “At the same time, it has, through its own decision-making and planning processes, set itself on a path that will minimise such risks, and eventually overcome them.”

But with dwindling oil revenues and a severe lack of both foreign and private investment in the non-oil industries and agriculture, Azerbaijan’s hopes are pinned on its huge natural gas reserves and the opening up of additional offshore production facilities in the Caspian. Recoverable reserves are estimated at 2.2 trillion cubic metres, a figure which has prompted a line-up of would-be importers eager to tap into supplies that can be transported by pipeline across the Caucasus to Europe and the Mediterranean.

Competing bidders include the EU, which wants to build a 31-billion-cubic-metre pipeline – Nabucco – via Turkey to central Europe to loosen Europe’s dependence on Russia, and two private consortia seeking to build smaller links connecting Turkey, Greece and Italy by a landline or across the Adriatic. Turkey and BP, operator of the Shah Deniz II field, which holds one trillion cubic metres of reserves, are also discussing increased exports through the existing Baku- Tbilisi-Erzurum natural gas pipeline, which transported five billion cubic metres of gas to Europe last year. Socar is expected to announce a decision within weeks.

This potential also explains why Turkey is rapidly moving up the list of Azerbaijan’s key trading partners, led by Italy, France, Russia, the US and the Ukraine. Last year, Turkish exports to Azerbaijan rose to $600m and now nudge Russia’s at $776m. During Prime Minister Erdogan’s visit to Baku in July, Aliyev announced that Azeri companies planned to pump $6bn (€4bn) into Turkey’s petrochemical industries alone, on top of the $4bn they have already invested in the country.

Total bilateral trade is expected to rise to $3bn by the year- end, up from $2.5bn in 2010. That could see Turkey overtake second-placed France, whose trade with Azerbaijan in 2010 amounted to $2.2bn, behind Italy’s figure of $4.9bn.

Then there is China, which Azerbaijan has been wooing as oil sales have faltered in the US and Europe. Last month Chinese Vice-Premier Li Keqiang praised “the coordination that China and Azerbaijan have forged in dealing with international issues” and hinted at more bilateral trade emerging next year during the 20th anniversary of the establishment of China-Azerbaijan diplomatic relations.

What remains to be seen is whether the regime in Baku can weather the discontent at home. Opposition parties have formed an umbrella group, the ‘Public Chamber’, and are calling on the government to initiate urgent social reforms, as well as amendments to the constitution and electoral laws.

But it may be Baku’s legions of young socially networked activists who end up calling the shots. More may be clearer next May when Azerbaijan hosts the annual Eurovision Song Contest. Having won it this year, and thereby the right to host the 2012 event, Baku is anxious to present its best face to an audience of 160 million. But the activists are planning a counter campaign, Freedom Songs in a Non-Free Country, accompanied by a website and co-ordinated action on social networks. Which is why the contest’s audience in May is likely to include a host of apprehensive diplomats, officials and business leaders, as well as lovers of cheesy pop music.

BAKU: THE FUTURE

In the late 19th century, Western oil barons such as Alfred Nobel, John D Rockefeller and the Rothschilds flocked to Baku and built sumptuous Beaux Arts and other French-style holiday villas on the wooded hills cascading down to the Caspian Sea. By the beginning of the 20th century, when Azerbaijan was supplying around half the world’s oil, the capital had become known inevitably as ‘the Paris of the East’.

Today, 20 years after independence – and the end of seven decades of Soviet rule that saw the construction of soulless concrete apartment blocks, heavy industries and a notoriously polluted coastline – Baku is regaining its glory days. New parks, malls, art galleries and museums, a thriving nightlife and prosperous suburbs connected to the centre by multi-lane elevated motorways are now the hallmark of a cosmopolitan city that houses more than a fifth of the country’s population.

This year marks the arrival of the final global sign of approval: a spate of five-star hotels operated by the likes of Hilton, JW Marriott, Radisson and Dubai’s Jumeirah Group. Last month President Aliyev cut the ribbon at the opening of a new hotel owned by the German company Kempinski. This anchors the new Badamdar Complex, which also contains a conference centre, spa and serviced apartments. The complex's 5,000m2 entertainment and retail centre has three levels of shopping space and one devoted to leisure, with bowling alleys and an ice rink. Kempinski has already signed a deal to manage a second hotel in Baku, scheduled to open in 2015.

As well as creating a new exotic destination for those on expense accounts – 35 airlines fly to Baku, including ones from the US and China – Azerbaijan’s oil wealth has also created an elite, hungry for the likes of Versace, Armani, Cartier, Gucci, Dolce & Gabbana, Prada and Bulgari, some of which have opened their heavily polished doors in the capital's restored old stone and marble buildings. But it is the British brands – high-street mainstays such as Marks & Spencer, Debenhams and Mothercare, along with the more upscale Burberry, 'Hackney' cabs and many British-style pubs – that are really setting the scene in what some are even calling ‘London on the Caspian’.

“The pace of change, growth and internationalisation in Baku is astonishing to people who don’t know our city. What would a few years ago have seemed impossible now seems like business as usual,” says Javad Marandi, managing partner of Baku-based Pasha Construction, part of a major Azerbaijan conglomerate.

Marandi ought to know. Founded just five years ago, Pasha – which has close ties to the country's ruling powerbrokers –currently has more than a million square metres of projects underway in the capital,covering retail, residences, offices, hotels, restaurants and leisure. Glass and metal towers are rapidly shooting up, transforming the scale of the metropolis, once centred on the cobblestoned, walled Old City, where its most famous 12th-century buildings – the Maiden Tower and the Palace of the Shirvanshahs (built when the Persians were in power) – are listed as a World Heritage site.

Port Baku Towers and Port Baku Residence, both on the coast, will each have up to 32 storeys and are just two of Pasha’s latest contributions to this sea-change. Other projects include the 243-room JW Marriott Absheron Hotel and Residences in Azadlig (Freedom) Square which, when it opens in December, promises spectacular views of the Caspian.

Pasha is also completing the 171-room Four Seasons Hotel on the waterfront promenade, a short walk from the Old City. Designed by London architects ReardonSmith in a Beaux Arts style similar to the George V in Paris, the property's 29 luxury suites and illustrious banqueting hall are expected to make it a prominent focal point in Baku for diplomats and official functions.

One of Pasha’s latest ventures, the glass-fronted, club-like Chinar Restaurant, is spread over two floors with a triple-height ceiling, Frank Lloyd Wright furnishings and a pan-Asian design inspired by the popular old tea house, set in a garden of rare Oriental plane trees (‘chinars’ in the Azeri language) that it replaced. Fusion cuisine is overseen by a team from London’s pricey Chinese restaurant Hakkasan, while international DJs have been flown over to play in the ‘Dragon Lounge’, which features separate sushi and vodka bars.

It's fair to say, though, that very few local people get to sample the norimaki or Stolichnaya Elit. British diplomats in Baku, who speak continuously of Azerbaijan’s importance for UK exports and investment, are also concerned to point out their desire to try and spread some of the wealth from what one BBC correspondent calls the “super-elite” to a nascent middle class.

However, the situation be changing a little. Baku's most prestigious shopping mall, the six-storey, 17,000m2 waterfront Park Bulvar (‘Park Boulevard’), which opened late last year, is still considered expensive – but its tenants include Marks & Spencer, Debenhams and Mothercare, as well as Adidas, Nike and Benetton, rather than the blingier brands a short distance away.

The powers that be are encouraging more foreign visitors and a new bill will be introduced this autumn, under which subsidised loans may be granted to small and medium businesses in the tourism sector. The Old City is being restored and mayor Mikayil Jabbarov says he expects more than a million tourists this year, up from just under a million in 2010. The focus is on attracting ‘elite’ tourists from the West, rather than the Russians, Turks, Iranians and Georgians who have predominated in the past.

Part of these plans, which are actively supported by glamorous first lady Mehriban Aliyeva, include another JW Marriott property, a five-star luxury resort and spa complex (complete with yacht club) on the Caspian at Bilgah, north of the capital. Another project is the Heydar Aliyev Cultural Centre, named after the former president and father of the current head of state. It is designed by London- based architect Zaha Hadid and will house a museum, library, and conference space.

Meanwhile, the fleet of 100 London cabs, made by Manganese Bronze Holdings, will be swelled to 1,000 by year-end. The cabs, operated by Baku Taxi Company, part of a programme overseen by the transport ministry, have not been without controversy.

Many of Baku's smaller, independent operators say they are being excluded from this new era of wealth. One told the BBC recently: “The rich rule society and that means we don’t have access to the same parts of the city as they do. They drive 4x4 vehicles and have access to big social events. We don’t.”

‘London on the Caspian’ is also expensive. The city is listed 48th in the 2011 list of the most expensive cities in the world conducted by Mercer Human Resource Consulting. The problem is that this is in a country where, despite the huge gains in per-capita income in recent years, average pay is still so low. That means that outside central Baku, the poverty and unemployment can be just as striking as the city’s glittering new monuments.