Exploring Azerbaijan's Economic Backbone: Oil And Gas Wealth

Azerbaijan's economy is heavily reliant on oil and gas production, which accounts for a large proportion of the country's GDP and export revenue. The country has large oil reserves and is one of the top ten most fossil fuel-dependent economies globally. While the transition to oil production in the 1990s led to rapid economic growth, GDP growth has slowed down since 2014. Azerbaijan's economy is also characterised by corruption and inequality, with the country's oil wealth strengthening the stability of the current regime. The country is working to diversify its economy away from hydrocarbons and towards sectors such as green energy, agriculture, logistics, tourism, and information/communication technology (ICT).

Oil and gas exports

Azerbaijan's oil wealth has had a significant impact on its politics and society. It has strengthened the stability of the current regime and enriched the ruling elites, enabling the country to host lavish international events and engage in extensive lobbying efforts abroad. However, it has also led to corruption and inequality, with a small group of government-connected holding companies dominating the economy.

The country's oil and gas reserves are a major factor in its economic growth and development. In 2022, Azerbaijan's GDP totalled $78.7 billion, with the industry sector, including oil and gas production, accounting for 51.1% of GDP. While the non-oil GDP increased by 9.1% in 2022, oil GDP decreased by 2.7%. Overall, Azerbaijan's economy grew by 4.6% in 2022, a slight decrease from the previous year's growth rate of 5.6%.

The country's oil and gas sector has also attracted significant foreign investment, with international oil companies investing in the exploration and development of new oil fields. In addition to oil and gas production, Azerbaijan is also focused on the export of these resources. The completion of the Baku-Tbilisi-Ceyhan Pipeline has further bolstered the country's oil and gas exports, and the pipeline is expected to generate up to $160 billion in revenue over the next 30 years. Azerbaijan has also signed agreements to increase its gas exports to Europe, with the Southern Gas Corridor pipeline delivering 11.4 billion cubic meters of Azeri gas to Turkey and European markets in 2022.

While Azerbaijan's economy is heavily dependent on oil and gas exports, the country has recognised the need for economic diversification. The government has introduced reforms and sought to attract foreign investment in non-oil sectors such as agriculture, tourism, information and communications technology (ICT), and transportation/logistics. In addition, Azerbaijan has significant wind and solar potential and is working to expand its renewables sector, with plans to install 1500 MW in renewable energy capacity by 2030.

Economic growth and poverty reduction

Azerbaijan's economy is heavily dependent on oil and gas exports, which has led to rapid economic growth over the period 1995–2014. However, since 2014, GDP growth has slowed down. 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.

Azerbaijan's economic growth has significantly reduced poverty over two decades. Despite the setbacks of the COVID-19 pandemic and the Russia-Ukraine war, poverty levels appear to have stabilised. Azerbaijan's medium-term growth is projected at 2.5%.

Azerbaijan's economy is 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 private sector is weak in Azerbaijan, as the economy is dominated by state-owned enterprises. More than half of the formal labour force works for the government.

Azerbaijan has introduced reforms to diversify its economy and attract foreign investment. The government has identified four non-oil sectors to target for economic diversification: agriculture, tourism, information and communications technology (ICT), and transportation/logistics.

Azerbaijan has also increased investment in education and healthcare. In 2019, the budget allocations for education and healthcare were increased by 13% and 44.5% respectively. However, further efforts are needed to align budget spending with development needs, including strengthening medium-term budgeting and the public investment management system.

The World Bank's Country Partnership Framework (CPF) 2016-2020 aims to support Azerbaijan's path towards sustainable, inclusive, and private sector-led growth. The CPF focuses on public sector management, service delivery, and economic competitiveness.

Transition from command to market economy

Azerbaijan's economy is heavily dependent on oil and gas exports. The transition to oil production in the late 1990s led to rapid economic growth from 1995 to 2014. Since 2014, however, GDP growth has slowed down significantly. Oil and gas make up two-thirds of Azerbaijan's GDP, making the country one of the top ten most fossil fuel-dependent economies in the world.

Azerbaijan gained independence from the Soviet Union in 1991 and began its transition to a market-based economy and integration into the global economy. The country's oil and natural gas reserves have been used to finance government reform programs, but the transition has not been without its challenges.

One of the main issues has been the disruption of economic ties between the former Soviet republics, which resulted in a decline in production, high unemployment, and increased prices, leading to an economic recession. Additionally, there was a lack of sufficient institutional foundations to support the transition to a market economy, and internal conflicts between political parties and groups further complicated the process. The ongoing conflict with Armenia over the Nagorno-Karabakh region has also been an obstacle to economic progress, particularly in terms of foreign investment.

Despite these challenges, Azerbaijan has made progress in economic reforms, and old economic ties and structures are slowly being replaced. The country's energy resources, particularly its large oil reserves, brighten its long-term economic prospects. In 1994, Azerbaijan signed the "Contract of the Century," a significant oil contract with 13 major oil companies representing eight countries. This agreement, along with other oil and gas contracts, has attracted substantial foreign investment to the country.

The first period of Azerbaijan's economic development after independence (from 1991 to 1995) was marked by economic recession. However, the period after 1996 can be characterized by dynamic economic development, with the country becoming one of the fastest-growing economies in the world.

The transition to a market economy has been a key objective of Azerbaijan's economic policy, and the country has implemented relevant reforms to achieve this goal. The exploitation of hydrocarbon resources has been pivotal in this process, and the number of agreements with foreign companies and foreign investments have contributed significantly to the country's economy.

Azerbaijan has also joined various international institutions, such as the IMF, World Bank, EBRD, Islam Development Bank, and Asian Development Bank, which have supported its economic growth and development. The country has made progress in reducing poverty, with the poverty rate decreasing from 68% in 1995 to 29% in 2005 and further down to 5% in 2013.

While the economy of Azerbaijan is primarily based on the oil and gas industry, there is a growing recognition of the need for diversification. The fall in petroleum prices since 2010 has highlighted the urgency of this issue, and the government has implemented programs aimed at economic diversification.

Foreign investment

Azerbaijan has implemented economic reforms to attract foreign investment, including eliminating redundant business licenses, simplifying customs procedures, and reforming the tax regime. Foreign investments in Azerbaijan are protected under the Law on the Protection of Foreign Investment, the Law on Investment Activity, and various international agreements and treaties. These laws guarantee that foreign investors will be treated in a manner no less favourable than national investors and protect against nationalisation and requisition, except under specific circumstances.

Despite these challenges, Azerbaijan has been successful in attracting foreign investment, particularly in the energy sector. The country has signed numerous bilateral investment treaties and free trade agreements, and its ranking in the World Bank's "Doing Business" report has improved. The government has also established free economic zones, such as the Alat Free Economic Zone, to attract foreign investment in non-oil sectors.

Overall, Azerbaijan's investment climate continues to improve, and the country remains committed to diversifying its economy and attracting foreign investment in key sectors.

Corruption and inequality

Azerbaijan's economy is characterised by corruption and inequality. The country's wealth of natural resources, particularly oil and gas, has significantly strengthened the stability of the regime of Ilham Aliyev, enriched ruling elites, and enabled the state to host lavish international events and engage in extensive lobbying efforts abroad.

The private sector is weak in Azerbaijan, with the economy dominated by state-owned enterprises. More than half of the formal labour force works for the government, and the country's telecommunications sector is also embroiled in corruption. Aliyev and his family own two of the country's largest mobile providers (Azerfon and Azercell) through offshore companies and 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 mobile market is highly consolidated, with high call rates due to a lack of competition.

The country's transition from a command to a market economy has been challenging, and economic reform is needed to boost private sector investment, reduce the state footprint, tackle competitiveness issues, and develop human capital. The government has recognised the need for reforms and has taken steps to improve the business environment, reduce the regulatory burden on the private sector, and support economic diversification away from oil and gas.

Azerbaijan's GDP is heavily dependent on oil and gas, which accounted for roughly 47.8% of the country's GDP and over 92.5% of export revenue in 2022. The country has significant wind and solar potential and is working to expand its renewable energy sector, with plans to install 1500 MW in renewable capacity by 2030. Azerbaijan is also investing in other sectors such as agriculture, logistics, tourism, and information and communication technology (ICT) to reduce its economic dependence on oil and gas.

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