Economy in focus: Azerbaijan Review by Emerging Europe

The Emerging Europe website has published an article by Marek Grzegorczyk on Azerbaijan's economic prospects. Caliber.Az presents excerpts from this article.

Azerbaijan needs to diversify its economy away from fossil fuels. One of the ways this can be achieved is by investing in human capital in rural areas.

A transit hub since Silk Road times, Azerbaijan’s strategic location on the Caspian Sea between Russia, Iran, Armenia, and Georgia rewarded it with easy trade access to China, Central Asia, and Europe even before the discovery of its vast fossil fuel reserves.  

Marco Polo wrote that oil from the Absheron peninsula was burned for heat and exported to the Middle East, and the world’s first industrial exaction of oil from a drilled well took place in Azerbaijan in 1846.  

After the First Karabakh War, which ended in 1994, fossil fuel exports boomed, sustaining growth at 11 per cent from 2000 to 2015, before experiencing a slowdown. Since then, Azerbaijan has attempted to diversify its economy away from fossil fuels.  

“Global transition towards a low-emissions economic model offers opportunities for Azerbaijan to be globally and regionally competitive,” said Sarah Michael, World Bank Country Manager for Azerbaijan. “To make the best of it, Azerbaijan needs to focus on decarbonising and diversifying the economy, bolstering innovation, and natural and human capital development.” 

Poverty declined from 49 per cent in 2004 to 4.9 per cent in 2014.

Higher household income boosted private consumption by 5.1 per cent in the first half of 2023 but continued double-digit inflation may curb real incomes and consumption. 

Although the war in Ukraine has increased Western interest in Azerbaijan as a source of energy and as a key link in the Middle Corridor to circumvent Russia, there are still serious logistics and capacity concerns to address before that route will be ready to handle the same volume of trade as Russia’s trans-Siberian networks. 

Since Azerbaijan regained control over areas of Nagorno-Karabakh and its surroundings in the Second Karabakh War in 2020, there have been extensive efforts to rebuild areas damaged by the conflict ahead of the return of hundreds of thousands of internally displaced Azerbaijanis. High government investment—including in pipelines, hydropower plants, and the restoration of historical structures in Karabakh—boosted growth in construction from 8.7 per cent in the first seven months of 2022 to 13.2 per cent a year later. 

Baku’s September measures put an end to a conflict that has been a source of geopolitical instability for three and a half decades. All of the territory de jure recognised as Azerbaijan has returned to Baku’s de facto control.

Prioritising diversification and tourism, investing in human capital in rural areas, re-opening its land borders (closed since the Covid-19 pandemic), ensuring a meaningful improvement in the quality of life of its internally displaced persons, and finalising a long-sought peace agreement with Armenia would allow Azerbaijan to remedy its structural challenges while guaranteeing peace and cooperation for future generations of Caucasians.