Azerbaijan

Reduced hydrocarbon revenues slow growth

In 2025, growth will remain largely driven by hydrocarbon exports (oil and gas), with the trend extending into 2026. However, growth will slow due to falling oil prices and increased European purchases of natural gas from the US. The European Union has committed to buying USD 750 billion worth of American energy over the next three years (2026–2028). Moreover, oil production has been on a downward trend since 2010 (-5.0% year-on-year in the first half of 2025) due to the depletion of fields located in the southern Caspian Sea. Nevertheless, the launch of production from a new offshore oil platform in April 2025, combined with rising gas output, will temporarily curb the slowdown in growth caused by the structural decline in oil production.

Outside the oil and gas sector, trade along the Middle Corridor linking China to Europe—via Azerbaijan, Georgia and Turkey—is expected to boost transport and logistics services. At the same time, Russian incursions by drone flights over European territory in September 2025 (notably in Poland, Estonia and Romania) are likely to reduce the use of the Northern Corridor, which passes through Russia. This situation is expected to stimulate the development of the Middle Corridor and continue increasing the volume of goods transiting through this strategic route in 2026.

Resilience in domestic demand will once again support economic activity. Rising wages and social spending, combined with inflation sitting just below the upper end of the target range, will sustain robust private consumption. Although the government supports agriculture through subsidies and tax exemptions, the sector’s productivity continues to be low – representing 10% of GDP but accounting for one-third of household income – mainly due to underinvestment and the degradation of natural resources. In July 2025, Parliament authorised casinos on artificial islands in the Caspian Sea near Baku, known as the Khazars. This will boost tourism and employment opportunities in 2026 (the unemployment rate stood at 5.6% in Q2 2025) amid low labour costs. At the same time, public investment in the Nagorno-Karabakh region is also expected to continue supporting growth, albeit at a more moderate level than in 2024.

Revenues eroded by defence spending

The public deficit is expected to remain low in 2025–2026, but is likely to deepen slightly due to declining oil revenues that will not be fully offset by rising gas revenues. Oil and gas together account for around 60% of budget revenues. The sustained increase in defence and security spending—representing 20% of the total budget—will also weigh on public finances, while investments in health and education will continue to grow. To meet these financing needs, the government will continue to rely heavily on the SOFAZ sovereign wealth fund whose assets exceed 50% of GDP, which ensures comfortable fiscal headroom. As a result, the public debt ratio remains low, thereby limiting fiscal risk. At the same time, the expansion of the non-hydrocarbon tax base driven by the growth of tourism, logistics, and services, whose revenues tripled between 2024 and 2025, will help partially reduce dependence on the energy sector.

On the external front, the trade balance will remain largely in surplus due to the share of hydrocarbon exports. However, the non-hydrocarbon trade balance will remain deeply in deficit, reflecting the low competitiveness of the domestic industry and the reliance on imports of manufactured goods. The trade surplus is expected to gradually narrow in line with falling energy prices and slowing European demand for gas. Despite some diversification, non-hydrocarbon exports will continue to be very limited and could be negatively affected by new US tariffs; for example, aluminum is now being taxed at 50% compared to the usual 10%.

Consolidation of full presidential power through victory over Armenia

The regime will remain heavily centralised around President Ilham Aliyev, who has been in power since 2003. His re-election in February 2024 (with 92% of the vote) and the swift military victory in Nagorno-Karabakh in 2023 have further strengthened his legitimacy. The executive branch wields all political levers, with Parliament playing a secondary role: in the snap legislative elections of September 2024, the “New Azerbaijan” presidential party won 68 out of 125 seats. The majority was reinforced by independent MPs loyal to the regime. Voter turnout at below 40% reflected citizens’ disenchantment, which was exacerbated by the opposition’s boycott (APFP). The removal of presidential term limits and the weakness of institutions lock the political system and discourage reform. The regime’s stability relies not only on energy rents but also on the integration of Nagorno-Karabakh, which has become a symbolic pillar of presidential power. The government plans to resettle 150,000 people there by 2027, compared to a mere 5,400 in 2024, through financial incentives and infrastructure investments. This massive project serves both as a political tool and a redistribution mechanism that is reinforcing the regime’s legitimacy.

The integration of Nagorno-Karabakh also carries geopolitical implications. The preliminary peace treaty signed with Armenia in August 2025 under US mediation paved the way for the creation of the Zangezur TRIPP (Trump Route for International Peace and Prosperity) corridor which is managed by the United States. The route will connect Azerbaijan to its exclave of Nakhchivan. This corridor—combining roads, railways, telecommunications, and energy infrastructure—will strengthen the country’s role as a strategic hub between Europe and Asia. Meanwhile, the government is continuing its multi-vector diplomacy policy to deepen energy ties with the EU, strengthen partnerships with Washington and Israel, expand cooperation with China with projects under the Belt and Road Initiative and joint ventures in renewables and transport, and increase economic collaboration with the United Arab Emirates. In contrast, relations with Moscow are deteriorating, notably after a Russian missile destroyed an Azerbaijani aircraft over Kazakhstan in December 2024, and Russian strikes targeted a SOCAR gas infrastructure in Ukraine. The alliance with Ankara remains crucial both militarily and regionally, while rising tensions with Russia could become a growing concern.

Last updated: October 2025