Exploring Azerbaijan's Wealth: A Rich Country?

Azerbaijan, officially the Republic of Azerbaijan, is a transcontinental country located at the boundary of Eastern Europe and Western Asia. It has a population of over 10 million people and is rich in oil and natural gas resources. In fact, oil and gas make up two-thirds of Azerbaijan's GDP, making it one of the top ten most fossil fuel-dependent economies in the world. The country has redefined itself over the past two decades, transitioning from a struggling newly independent state to a major regional energy player. However, despite its wealth and increased influence, poverty and corruption continue to hinder its development.

Azerbaijan's oil and gas wealth

Azerbaijan's wealth is highly dependent on its oil and gas exports. In 2022, the petroleum industry in Azerbaijan produced about 33 million tonnes of oil and 35 billion cubic meters of gas. Oil and gas make up two-thirds of Azerbaijan's GDP, making it one of the top ten most fossil fuel-dependent economies in the world.

The State Oil Company of the Republic of Azerbaijan (SOCAR) is a major source of income for the Azerbaijani government. It is a fully state-owned national oil and gas company headquartered in Baku. SOCAR has a complex web of contracts and middlemen that has led to the enrichment of the country's ruling elites.

The transition to oil production in the late 1990s led to rapid economic growth over the period 1995-2014. Since 2014, GDP growth has slowed down substantially. Azerbaijan has concluded 21 production-sharing agreements with various oil companies.

The Baku-Tbilisi-Ceyhan Pipeline, which became operational in 2006, is particularly important for Azerbaijan's oil and gas exports. This pipeline transports Caspian oil to the Mediterranean from Baku through Tbilisi, Georgia, to Ceyhan, Turkey. The pipeline is expected to generate as much as $160 billion in revenue for the country over the next 30 years.

Azerbaijan has the largest agricultural basin in the region, with about 54.9% of its land being agricultural. However, the backbone of the Azerbaijani economy has been petroleum, which represented 50% of its GDP in 2005 and is projected to increase.

Azerbaijan is considered one of the most important areas in the world for oil exploration and development. Western oil companies can now tap into deep-water oil fields that were previously untouched by the Soviets due to poor technology. The proven oil reserves in the Caspian Basin, which Azerbaijan shares with Russia, Kazakhstan, Iran, and Turkmenistan, are comparable in size to the North Sea.

The country is also a member of the Economic Cooperation Organization and has concluded a natural gas agreement with Turkey, providing a future export market. Azerbaijan has attracted major international oil companies to invest in its oil industry, with more than $60 billion invested by companies in the AIOC consortium operated by BP.

The country's oil wealth has significantly strengthened the stability of President Ilham Aliyev's regime and enriched the ruling elites. It has enabled the state to host lavish international events and engage in extensive lobbying efforts abroad.

The country's economic growth

Azerbaijan's economy is heavily dependent on oil and gas exports, with two-thirds of the country's GDP coming from gas and oil alone. This makes Azerbaijan one of the top ten most fossil fuel-dependent economies in the world.

The transition to oil production in the late 1990s led to rapid economic growth over the period 1995-2014. Since 2014, however, GDP growth has slowed down substantially.

Azerbaijan has the largest agricultural basin in the region, with about 54.9% of the country being agricultural land. The country has also begun to produce locally some products that were previously imported, such as Coca-Cola, beer, parquet, and oil pipes.

Azerbaijan's economy is also characterised by corruption and inequality. The country's oil wealth has significantly strengthened the stability of the current regime and enriched the ruling elites.

The country has taken steps towards economic reform and old economic ties and structures are slowly being replaced. However, the continuing conflict with Armenia over the Nagorno-Karabakh region remains an obstacle to economic progress and increased foreign investment.

Azerbaijan has invested heavily in modernising its energy infrastructure, including electricity generation. The country has also diversified its export routes and import sources, mitigating the risk of supply or demand shocks.

In recent years, the tourism industry has also experienced a high rate of growth in the number of tourist visits and overnight stays. The government has set the development of Azerbaijan as an elite tourist destination as a top priority, aiming to make tourism a major contributor to the country's economy.

The Aliyev family's rule

Azerbaijan's ruling Aliyev family has been in power since Heydar Aliyev, the former president, took control of the country in 1993, two years after it gained independence from the Soviet Union. The Aliyev family's rule has been characterised by corruption, human rights abuses, rigged elections, and the suppression of opposition parties and a free press.

Heydar Aliyev was an authoritarian leader, and under his watch, Azerbaijan became a corrupt petro-state. However, his regime was considered less blatant in its corruption compared to that of his son, Ilham Aliyev, who became president in 2003. Ilham Aliyev's regime is marked by neopatrimonialism, where economic and political power is concentrated in the hands of the ruling family. This has inhibited foreign investment and small business growth, with the country remaining largely dependent on the oil and gas sector.

The Aliyev family has enriched themselves through their ties to state-run businesses and by leveraging Azerbaijan's oil wealth. They own significant parts of major banks, construction firms, and telecommunications firms, and have partial ownership of the country's oil and gas industries. Much of their wealth is hidden through an elaborate network of offshore companies, as revealed by the Pandora Papers. These companies have been used to secretly acquire luxurious properties in London, including penthouses, commercial office spaces, and historical buildings, worth nearly $700 million.

Ilham Aliyev was allowed to run for an indefinite number of terms as president due to a 2009 constitutional referendum that removed term limits. He has won five consecutive terms, with the most recent election in February 2024, where he secured 92% of the vote. However, international observers noted that he had no meaningful challenger, and the election was "devoid of genuine pluralism".

Under Ilham Aliyev's presidency, Azerbaijan has also been criticised for human rights violations, including torture, arbitrary arrests, and the harassment of journalists and non-governmental organisations. The country's conflict with Armenia over the Nagorno-Karabakh region has also continued during his rule, devolving into a full-scale war in 2020 and resulting in mass displacement of ethnic Armenians.

Azerbaijan's tourism industry

In the 2000s, the industry began to recover, and Azerbaijan has since experienced a high growth rate in tourist visits and overnight stays. In 2017, a record-breaking 2,691,998 foreign citizens visited Azerbaijan, with the majority coming from Russia, Georgia, Iran, Turkey, and the UAE. In 2018, a new tourism brand and slogan, "Take Another Look", were introduced.

Azerbaijan's tourism sector strategy emphasizes event tourism, such as hosting business conferences and international sporting events. The country has hosted several notable events, including the Eurovision Song Contest, FIFA's U-17 Women's World Cup, the European Games, the Islamic Solidarity Games, and the Formula One Grand Prix. The government has also invested in new ski resorts and facilities in the Gusar and Gabala regions.

The country has a variety of tourist attractions, including historic and architectural monuments, natural parks, and resort areas with varied climates and diverse flora and fauna. The Walled City of Baku, a UNESCO World Heritage Site, hosts over 50 historic and architectural monuments, including the Palace of the Shirvanshahs and the Maiden Tower. Other notable areas include the cities of Ganja, Nakhchivan, Gabala, and Shaki, known for its architectural heritage.

Azerbaijan has also introduced initiatives to promote and develop its tourism industry. In 2016, a tax-free shopping system was introduced to attract foreign shoppers, and the country sponsored Atlético Madrid jerseys with the slogan "Azerbaijan – Land of Fire". The government has also simplified the visa regime, creating the "ASAN" Visa System for eligible countries, and introducing an electronic visa for tourists from 93 countries.

The Azerbaijan Tourism Board actively participates in global tourism events and has joined the Global Tourism Plastics Initiative, demonstrating its commitment to building sustainable tourism in the country.

The country's energy security and diversification

Azerbaijan's economy is heavily dependent on its oil and gas sector, which accounts for 90% of the country's exports and between 30% and 50% of its GDP. The country has large oil and natural gas reserves, with oil and gas making up two-thirds of Azerbaijan's GDP.

While Azerbaijan's energy mix is heavily concentrated in fossil fuels, the country has recognised the need to diversify its energy sources and is seeking to increase its renewable energy capacity. In 2021, the Parliament approved several laws to promote the development of renewable energy sources, including solar, wind, hydropower, biomass, and geothermal energy. The country aims to have renewable energy provide 30% of its electricity-generating capacity by 2030, up from 16% in 2018.

Azerbaijan has also invested in modernising its energy infrastructure, including electricity generation. The country has a high-voltage network of around 7,800 km, and efforts to reduce network losses have been successful, with transmission losses falling from 2.1% to 1.5% and distribution losses from 9.6% to 7.5% between 2015 and 2019.

The country's energy security is further enhanced by its cross-border interconnections, with oil and gas pipelines connecting Azerbaijan to its neighbours and European markets. The Baku-Tbilisi-Ceyhan (BTC) pipeline, for example, transports crude oil from Azerbaijan to the Mediterranean port of Ceyhan in Türkiye, where it is shipped to world markets.

Azerbaijan has also mitigated the risk of supply or demand shocks by diversifying its export routes and oil product import sources. The country became a net exporter of natural gas in 2007 with the start-up of the Shah Deniz natural gas and condensate field. It has two main gas export pipelines, the South Caucasus Pipeline (SCP) and the Hajigabul-Mozdok pipeline, which allow it to export natural gas to Türkiye, Greece, and Italy.

Overall, Azerbaijan's energy security and diversification efforts have positioned it as a major regional energy player, with a stable and secure energy supply and a growing focus on renewable energy sources.

Frequently asked questions