Azerbaijan's Economy: Exploring Revenue Streams And Strategies

Azerbaijan's economy is largely dependent on its oil and gas industry, which accounts for around 90% of its exports and over 40% of its GDP. However, the country has recognised the need to diversify its economy and is seeking to develop its agriculture, tourism, information and communications technology (ICT), and transportation/logistics sectors. Azerbaijan's government has also introduced reforms to attract foreign investment and improve the business environment.

Oil and gas exports

Azerbaijan's economy is heavily reliant on its oil and gas industry, which has been the main driver of its economic growth and accounts for 90% of its exports. Oil and gas exports provide the majority of the country's government revenue, contributing to a sharp rise in living standards since the late 1990s. In 2022, the industry accounted for 47.8% of Azerbaijan's GDP and over 92% of its export revenue.

The Southern Gas Corridor (SGC) pipeline, completed in 2022, delivered 11.4 billion cubic meters of Azeri gas to Turkey and onwards to European markets. This has given Azerbaijan a new source of gas export revenue while helping Europe diversify its gas supply routes and improve gas security. The country also has an important and reliable oil export industry, with the State Oil Company of the Azerbaijan Republic (SOCAR) working to eliminate gas flaring and reduce methane emissions.

However, the long-term outlook for Azerbaijan's oil and gas-dependent economy is uncertain. Oil production has been in decline since 2010, and major importing countries have pledged to reduce greenhouse gas emissions to net-zero by 2050. This implies a decrease in demand for oil and gas in the coming decades unless carbon capture and storage technologies are employed.

Recognising this challenge, the Azerbaijani government is working to diversify its economy and develop its renewable energy sector. By 2030, the country plans to install 1500 MW in renewable energy capacity, with the aim of exporting green electricity and hydrogen to Europe. The government is also promoting investment in agriculture, tourism, information and communications technology (ICT), and transportation/logistics to reduce its economic dependence on oil and gas.

Agriculture

Azerbaijan's agricultural sector includes both state and cooperative farms, as well as small private farms. The country has about 1 million hectares of cultivated land, with 21.78% of its total land area being arable. Additionally, 16.45% of the total land area is irrigated, which is crucial for crop production. The primary crops grown in Azerbaijan include cash crops, grapes, cotton, tobacco, citrus fruits, rice, tea, and vegetables. Livestock, dairy products, and wine and spirits are also significant agricultural products.

The government actively supports the development of agriculture through various measures such as import substitution, tax exemptions, grants, and subsidies for machinery, pesticides, and fertilizers. The agricultural sector faces challenges such as outdated equipment, inadequate infrastructure, and a lack of trained specialists. There is a growing demand for modern food processing and packaging equipment, particularly for meat, dairy, and fruit and vegetable processing. The government is also focusing on improving irrigation systems and addressing water resource management due to the country's diminishing water resources.

Azerbaijan's produce is well-known in post-Soviet markets and often commands a premium. The country has been working to improve its agricultural practices and increase production. In 2019, the government provided loans worth 10 million AZN to farmers through the State Service on Management of Agricultural Projects and Credits under the Ministry of Agriculture.

Tourism

Azerbaijan's tourism industry is one of the priority sectors selected by the government, second only to oil and gas production. In 2017, the country welcomed 2.4 million tourists, generating $3 billion in revenue. This amount increased to $3.2 billion in 2018, with 2.8 million tourists, but dropped to $2.6 billion in 2019 with 2.9 million tourists.

Azerbaijan's tourism revenue experienced a sharp decline of about 13% in 2018, in contrast to Georgia, a regional competitor, which saw an 18% increase in tourism revenue. The number of tourists visiting Azerbaijan in 2018 was just over half of those who visited Georgia. Additionally, Azerbaijan's tourism sector contributed 2.8% to its GDP, while Georgia's tourism sector contributed 7% to its GDP.

To promote tourism, the Azerbaijan Tourism Board and the State Tourism Agency launched a rebranding campaign in 2018, aiming to position the country as a top international destination. As part of this campaign, the country unveiled a new logo and the slogan "Take Another Look." The marketing plan also included establishing tourism representative offices in key markets such as Germany, the United Arab Emirates, Saudi Arabia, China, India, and Russia.

Azerbaijan offers a range of tourism experiences, including history, archaeology, shopping, health, adventure, nature, and gastronomy. The country's diverse landscape features spectacular mountains in the north, curious mud volcanoes in the south, and unique geographical locations like the Naftalan region, known for its oil-rich environment with health benefits, and the Duzdag salt caves in the Nakhchivan Autonomous Republic.

To facilitate tourism, the Azerbaijani government has waived visa requirements for several countries and simplified the application process for US citizens, who can now obtain an e-visa online within three hours by paying an expedited fee.

Foreign investment

Azerbaijan has been actively seeking to attract foreign investment in recent years. The country's economy is heavily reliant on oil and gas output, which accounts for about 90% of export revenue and more than half of the state budget. While the oil and gas sector has historically attracted the most foreign investment, the Azerbaijani government has identified four non-oil sectors to diversify the economy: agriculture, tourism, information and communications technology (ICT), and transportation.

Azerbaijan has implemented several measures to improve the business climate and attract foreign investment. These include eliminating redundant business license categories, simplifying customs procedures, suspending certain business inspections, and reforming the tax regime. The government has also established the Azerbaijan Export and Investment Promotion Agency (AzPromo) to foster economic development and diversification by attracting foreign investment into the non-oil sector.

Foreigners are allowed to register business entities in Azerbaijan by opening fully owned subsidiaries, acquiring shares in existing companies, or creating joint ventures with local partners. Foreign companies can also operate in the country without creating a local legal entity by registering a representative or branch office with the tax authorities. However, foreigners are not permitted to own land in Azerbaijan but can lease land and own real estate.

The country has signed 51 Bilateral Investment Treaties (BIT) and has free trade agreements (FTAs) with several countries, including Russia, Ukraine, Georgia, and Kazakhstan. Azerbaijan is also a member of the International Convention on the Settlement of Investment Disputes (ICSID) and the New York Convention of 1958 on the Recognition and Enforcement of Foreign Arbitral Awards. These agreements provide a stable and predictable environment for foreign investors, protecting their investments and providing mechanisms for dispute resolution.

In conclusion, Azerbaijan has made significant efforts to attract foreign investment, particularly in non-oil sectors, by improving the business climate, offering legal protections, and providing incentives. These initiatives contribute to the country's overall economic growth and diversification.

Energy efficiency

Azerbaijan's economy is heavily reliant on its energy sector, particularly oil and natural gas production, which accounts for a significant portion of its exports and GDP. However, the country has recognized the importance of diversifying its energy sources and increasing energy efficiency to ensure long-term energy independence and meet its commitments under the Paris Agreement to reduce greenhouse gas (GHG) emissions.

In recent years, Azerbaijan has made efforts to improve its energy efficiency and tap into its significant renewable energy potential. The country has abundant wind and solar resources, as well as hydro, biomass, and geothermal energy sources. In 2020, major contracts were signed to develop wind and solar power capacity, and in 2021, the Parliament approved the Law on the Use of Renewable Energy Resources in Electricity Production, providing a legal framework for renewable energy projects.

The Ministry of Energy is the state body responsible for Azerbaijan's energy policy and the implementation of energy efficiency measures. The ministry aims to improve efficiency in all economic areas to increase the country's energy exports and meet its emissions reduction targets. The Law on Efficient Use of Energy Resources and Energy Efficiency, enacted in 2021, establishes rules for energy audits, management, and services, as well as production, transmission, distribution, and storage efficiency.

Azerbaijan has set ambitious targets for renewable energy and energy efficiency. By 2030, the country plans to install 1500 MW in renewable energy capacity, including wind, solar, and hydropower. This transition to renewable energy sources will help Azerbaijan conserve natural gas and oil for exports, while also reducing its environmental footprint and meeting its international climate commitments.

To achieve these goals, Azerbaijan needs to attract more private sector investments in modern equipment and energy-efficient technologies. Pricing energy at a competitive level is critical to encouraging investments and promoting efficient energy use among citizens. Additionally, stringent energy efficiency standards should be introduced across sectors, including buildings, vehicles, appliances, and equipment, along with a mechanism for energy efficiency audits.

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