Azerbaijan's Economy: Size And Scope Explored

Azerbaijan's economy is heavily dependent on oil and gas exports, with two-thirds of its GDP coming from gas and oil alone. The country has directed revenues from its energy production towards developing its infrastructure, and it has succeeded in significantly reducing poverty rates over the last two decades. However, Azerbaijan's economy is also characterised by corruption and inequality, with the country's oil wealth strengthening the regime of President Ilham Aliyev, who has been accused of authoritarianism.

Azerbaijan's economy is heavily dependent on oil and gas exports

Azerbaijan's large oil reserves have significantly contributed to its economy, with oil and gas providing most of its export and government revenue. The country's oil wealth has strengthened the stability of the current regime and enriched the ruling elites. The completion of the Baku-Tbilisi-Ceyhan Pipeline further solidified the country's reliance on oil and gas exports.

While oil and gas exports have sharply raised living standards in Azerbaijan since the late 1990s, the long-term outlook for this economic model is uncertain. Oil production has been in decline since 2010, and the global push for clean energy and net-zero emissions targets will likely affect future oil and gas demand. The country's economic prospects will largely rely on increasing gas exports, and reforms are needed to boost private sector investment and reduce the state's dominance.

Azerbaijan has recognised the need to reduce its economic dependence on oil and gas exports and is working to modernise and increase oil refining and petrochemical production. The country also has considerable renewable energy development potential, with excellent solar and wind resources, as well as significant biomass, geothermal, and hydropower prospects. However, practical deployment of renewable energy sources has been limited.

The country's economy is characterised by corruption and inequality

Azerbaijan's economy is characterised by corruption and inequality. The country's oil wealth has significantly strengthened the regime of Ilham Aliyev, who succeeded his father Heydar Aliyev as president in 2003, and enriched the ruling elites. Aliyev has been accused of authoritarianism, and international observers have noted serious shortcomings in the country's elections.

Azerbaijan's telecommunications sector is a prime example of the corruption that pervades the country. Aliyev and his family own two of the country's largest mobile providers, Azerfon and Azercell, through offshore companies, and potentially control three-quarters of the mobile market. Investigative reporting has revealed that the Aliyev family made over $1 billion when state shares of mobile operators were transferred to a purportedly "local partner" that was, in reality, owned by their offshore companies.

Azerbaijan's economy is heavily dependent on oil and gas exports, which make up two-thirds of the country's GDP. The transition to oil production in the late 1990s led to rapid economic growth from 1995 to 2014. However, since 2014, GDP growth has slowed down significantly. Azerbaijan has yet to successfully diversify its economy, and reforms remain dependent on subsidies from oil and gas revenues.

The country's private sector is weak, as the economy is dominated by state-owned enterprises. More than half of the formal labour force works for the government. Efforts are being made to boost investment in the private sector and reduce the state footprint.

Azerbaijan has directed revenues from its oil and gas production towards developing the country's infrastructure. In the 25 years following its independence, Azerbaijan significantly reduced its poverty rate. However, the war in Ukraine and high food inflation could increase poverty and inequality, as a larger share of household budgets is spent on food among the less well-off.

Azerbaijan's economic growth is projected at 2.5% in the medium term, supported by stable oil production and a modest acceleration in domestic demand. The non-energy economy expanded by 1.8% in 2018, reflecting greater dynamism in most economic sectors.

While Azerbaijan has made some efforts to combat corruption, particularly in customs and with the "ASAN" one-stop window concept for government services, it remains a significant drag on long-term growth, especially in non-energy sectors. The country also faces obstacles to economic progress due to the continuing conflict with Armenia over the Nagorno-Karabakh region.

Azerbaijan's economy is dominated by state-owned enterprises

Azerbaijan's economy is heavily dependent on oil and gas exports, with gas and oil comprising two-thirds of the country's GDP. The country's economy is also characterised by corruption and inequality, with the country's oil wealth strengthening the stability of the current regime and enriching the ruling elites.

The state-owned enterprises play a significant role in the country's economy, with 14 large state-owned enterprises providing a quarter of all tax revenues to the state budget and ensuring a 25% share in employment in the country. The State Oil Company of Azerbaijan (SOCAR) is the largest taxpayer in the country.

However, many state-owned enterprises are suffering losses and receiving significant subsidies from the state budget. To address this issue, the government launched a reform program in 2019 to improve the performance of these enterprises and reduce the state's footprint in the economy. The Azerbaijan Investment Holding (AIH) was established in 2020 to improve the management and performance of the 14 largest state-owned enterprises, which were transferred under its management.

The initial reforms have addressed key issues such as the introduction of selected corporate rules and standards, and the government plans to continue with further reforms to bring about long-term change. The success of these reforms lies in four critical areas:

• Adopting an explicit SOE policy and supporting sector reforms to push SOEs to become efficient business entities with a clear division between commercial and non-commercial functions.
• Establishing key targets and performance indicators for SOEs, including oversight, performance monitoring, and risk management procedures.
• Strengthening the corporate governance structure in SOEs, including the establishment of Supervisory Boards, to ensure transparency and oversight in decision-making.
• Ensuring that SOEs disclose detailed financial and operating information by tightening legal loopholes that currently allow them to avoid their disclosure obligations.

Azerbaijan's economy has been transitioning from a command economy to a market economy

Azerbaijan's economy is heavily reliant on oil and gas exports, which account for roughly two-thirds of its GDP and over 92.5% of its export revenue. In 2022, Azerbaijan's GDP totalled $78.7 billion, with the industry sector contributing 51.1% of this. The country has been transitioning from a command economy to a market economy since its independence in 1991, and this transition has been characterised by two distinct periods. From 1991 to 1995, the country experienced economic chaos and regression, but from 1996 onwards, there was an increase in macroeconomic stability and dynamic economic development.

The transition to oil production in the late 1990s was a significant turning point for Azerbaijan's economy, leading to rapid economic growth between 1995 and 2014. During this period, more than $60 billion was invested in Azerbaijan's oil industry by international oil companies, and oil exports became a major contributor to the country's GDP. The completion of the Baku-Tbilisi-Ceyhan Pipeline further solidified the country's position as a top fossil fuel exporter.

However, since 2014, GDP growth has slowed down significantly. Azerbaijan has begun making progress on economic reforms, and old economic ties and structures are slowly being replaced. The country's economic growth has also helped reduce poverty levels significantly over two decades. The government has recognised the need to diversify the economy away from a dependence on hydrocarbons, and is working to expand the renewables, agriculture, logistics, tourism, and information/communication technology (ICT) sectors.

Azerbaijan's economy faces challenges such as corruption and inequality, with the country's oil wealth enriching ruling elites. Additionally, the conflict with Armenia over the Nagorno-Karabakh region has been an obstacle to economic progress, particularly in attracting foreign investment. Nevertheless, the country's energy resources brighten its long-term economic prospects, and the government is taking steps towards more sustainable energy production and economic diversification.

The country's economic growth has been fuelled by non-energy sectors

Azerbaijan's economy is heavily dependent on its oil and gas exports, with two-thirds of its GDP coming from the energy sector. However, the country's economic growth has been fuelled by non-energy sectors as well.

In recent years, Azerbaijan has made efforts to boost its gas production and develop its non-oil economy. While oil exports remain the main economic driver, some non-export sectors have also experienced double-digit growth. The non-energy sector expanded by 1.8% in 2018, reflecting greater dynamism in most economic sectors. Azerbaijan has the largest agricultural basin in its region, with about 54.9% of the country dedicated to agricultural lands. The agricultural sector produces fruit, vegetables, grain, rice, grapes, tea, cotton, tobacco, cattle, pigs, sheep, and goats. In addition, some products that were previously imported are now being produced locally, such as Coca-Cola and beer.

The country has also seen growth in its defence industry, with Azerbaijan emerging as an autonomous entity with a growing defence production capability. The ministry is cooperating with the defence sectors of Ukraine, Belarus, and Pakistan. Additionally, the country has seen a rebound in economic activity fuelled by strong activity in non-energy sectors, with recovering domestic demand supporting growth.

Azerbaijan has recognised the need to diversify its economy away from oil and gas. In late 2016, the President approved a strategic roadmap that identified key non-energy segments of the economy for development, such as agriculture, logistics, and tourism. While the non-energy sectors have shown promise, the country still relies heavily on its oil and gas revenues to fund reforms and development.

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