Previous Quarterly Editions
Expropriation Risk: 56 56 56 54 ▼Political Violence Risk:59 60 60 60 ►Terrorism Risk:45 40 40 40 ►Exchange Transfer and Trade Sanction Risk: 63 64 63 73 ▲Sovereign Default Risk:46 46 55 55 ►
TREND ▲
Protest intensity to date* 2022 2023 Very-High MediumUnrest risk in 2024**Cost of living: MediumAnti-austerity: Medium
With a 21% public debt-to-GDP ratio, Azerbaijan is not suffering from excess debt (and is also not a lender). The country has reduced its debt-to-GDP ratio from 26% in 2021 — its highest in recent years due to the consequences of the global COVID-19 pandemic and the collapse in oil prices.
As a producer and exporter of hydrocarbons, Azerbaijan has benefited from the inflow of financial resources since 2022. This has enabled the government to maintain public spending and stave off public discontent. Skyrocketing oil and gas prices, which followed Russia’s invasion of Ukraine in February 2022, coupled with the European Union’s increased imports of Azerbaijani gas via
*Note: Protest intensity is calculated based on ACLED. **Risk levels are calculated by WTW. Where data are missing no risk level will be displayed. For details of 'anti-austerity' calculations, see the essays in the introduction; for details of 'cost-of-living' calculations, see the previous edition of the Index.
the Southern Gas Corridor later that year, boosted the country’s foreign exchange earnings, generated a large current account surplus and supported government fiscal spending.
Azerbaijan has so far avoided — and is unlikely to experience in the short to medium term — the public debt crisis that has afflicted many emerging markets. While the debt-to-GDP ratio is expected to increase slightly — to 22.1% this year and 23.8% in 2024, according to International Monetary Fund data — the government is keen to adhere to its revised debt management strategy, which stipulates the requirement of keeping public debt below 20% of GDP after 2025.
Azerbaijan has been grappling with high inflation, which rose from 6.7% in 2021 to 13.8% in 2022 but abated to 11% by September 2023. It is expected to hover at this level through the rest of the year and fall to 8% in 2024. The COVID-19 pandemic and the war in Ukraine were the key drivers exercising upward pressure on prices — the first through border closures, which affected the flow of commodities and resulted in “sticky” inflation even after the easing of border restrictions, and the second through the disruption of the established supply chains, which has forced companies to ship goods around Russia, making imports more expensive.
Rising global grain and energy prices have contributed to the double-digit increases in food and utility prices. The government sought to ease the crisis by supporting domestic grain producers through subsidies and consumers through value-added tax exemptions on wheat, flour and bread. As a result, Azerbaijan’s agricultural output in 2022 increased by 3.4% year on year (to US$6.5 billion), while exports of agricultural and agro-industrial products rose by 12% (to US$D912 million), with fruit and vegetables accounting for 93% of this export volume.
To reduce the impact of accelerating inflation on vulnerable groups, the government has introduced a series of fiscal policy measures, including rises in the minimum wage, pensions and social assistance packages. However, official statistics reveal that in the period 2016 – 2022, the living wage went up from 146 manats to 220 manats (an increase of 51%), while the prices of the 20 most essential commodities and three types of utilities (electricity, gas, and water) over the same period increased by over 75%. Furthermore, in the working-age population of 4.9 million, only 1.7 million have official employment contracts, illuminating the extent of the shadow economy and reducing the impact of the government’s fiscal measures.
Crucially, the inflow of foreign exchange earnings led to a steady rise in military expenditure: from US$1.7 billion in 2018 to US$2.7 billion in 2021 and US$2.9 billion in 2022. In an indication of government priorities, the spending continued to rise throughout the pandemic and in the aftermath of the 44-day war, placing Azerbaijan fifth on the Stockholm International Peace Research Institute’s list of the world’s highest military spenders as a share of GDP (5.3% in 2021).
The victory in the Second Karabakh War emboldened Baku to seek a military solution to the decades-old problem of the breakaway Nagorno-Karabakh enclave. The surrender of Armenian separatist forces 24 hours after the start of Baku’s battle in September highlighted both Azerbaijan’s military preparedness and its ability to work with its paramount regional ally, Turkey, to choose an opportune moment for the offensive while the world’s — and most importantly, Russia’s — attention was distracted elsewhere.
TREND ▼
By law, foreign citizens and organizations may lease, but not own, land. Expropriation risk for companies already operating in Azerbaijan remains low, and there is no pattern of illegal expropriation from foreign investors. This contrasts with cases in which property — both homes and businesses — has been illegally expropriated from Azerbaijani citizens either by the authorities or by individuals close to the ruling elites, leaving the affected persons with little legal recourse due to high levels of corruption and the general distrust of the court system.
The government is actively seeking investments in the territories around and in Nagorno-Karabakh. Reconstructing and resettling these territories will remain a top government priority over the coming years. The government has been outspoken about its intention to reward “friendly” countries with contracts. In line with these proclamations, investment contracts in construction, mining and energy have been awarded predominantly to Turkish firms, seen to represent the “brotherly nation”. This trend will continue given Ankara’s military and diplomatic support in the September offensive.
TREND ►
Although issues related to living standards, the administration of justice and property have caused some citizen resentment, the authorities have been largely successful at alleviating public expressions of social discontent.
The victory in the Second Karabakh War in 2020, after nearly three decades of stalemate, swept Armenian forces out of all the occupied territories except Nagorno-Karabakh, while the successful action launched in September resulted in the Azerbaijani military seizing Karabakh and triggering a mass exodus of Armenians from the area.
The government’s actions and victorious outcomes have conferred vast political capital on the Aliyev regime at home. In the longer term, generating new lines of income will determine President Ilham Aliyev’s ability to continue to exercise power without encountering any serious political opposition or social upheaval. For now, however, the president’s significant popularity boost means that the risk of political violence remains low.
Air-based entry has returned to pre-COVID-19 levels, with more direct flights opening to and from Baku. However, land borders have remained sealed since mid-March 2020, partially alleviating terrorism concerns. In Baku and other major cities, the authorities continue to control the situation by precluding mass gatherings.
The September offensive was described by presidential foreign affairs advisor Hikmet Hajiyev as Azerbaijan’s “counterterrorism action” against Nagorno-Karabakh’s Defence Army. The official narrative highlighted the “unlimited but local” nature of the operation, which would only be completed once military forces inside Nagorno-Karabakh disarmed and raised “a white flag”.
The immediate trigger for the operation was the death of six people in land mine explosions inside Azerbaijan, which illuminated Baku’s acute concerns about the terrorist threat emanating from the separatist forces within the enclave not only to border guards, soldiers and military infrastructure, but also to the civilian population inside Azerbaijan.
At the same time, the meticulously planned nature of the operation revealed the long-standing determination of the Aliyev government to put an end to the stalemate, using all means necessary, including military force.
The manat remains firmly pegged at 1.7 to the U.S. dollar. The pressure to support the manat disappeared in 2022 with the rapidly rising prices of Brent and Azeri Light. Having peaked in June at US$122 per barrel, Brent prices fell to around US$72 per barrel in March but rose subsequently to over US$90 per barrel in September, thus remaining within Azerbaijan’s comfort zone.
Azerbaijan’s strategic foreign exchange reserves (formed from central bank reserves, the assets of state oil fund SOFAZ and treasury funds of the finance ministry) have continued on their rapidly rising trajectory, increasing in January to September by 14.9%, to US$67.5 billion. Risks of a disorderly devaluation remain low.
Baku is well -placed to balance its budget, as it needs an oil price of around US$53 per barrel. The additional revenue that Azerbaijan earns from high oil prices, resulting from Russia’s invasion of Ukraine and the efforts by Western states to sanction Russian hydrocarbons, and the gas revenue that Azerbaijan receives from gas exports, will continue to contribute to economic stability.
Azerbaijan remains capable of borrowing externally, but its international financing has been increasingly concentrated in institutions that are not Western- led. Structural weaknesses in the economy persist, and the financial system will remain fragile. However, given the shift in the geopolitical situation and increased demand for Azerbaijani gas and renewable energy, the country will benefit from investments in the energy sector as the European Union intensifies its efforts to diversify away from Russian gas.
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