Azerbaijan's economy: an oil fund worth a year of output

What Azerbaijan produced and earned in a year

The State Statistical Committee put gross domestic product for 2025 at 129.1 billion manats, 1.4% more in real terms than in 2024, or 12,602.2 manats a head. The World Bank converts the same year to 75.9 billion United States dollars, which is 7,411 dollars a head, or 26,113 dollars a head once prices are adjusted to purchasing power parity. Consumer prices rose 5.6% on the year's average in 2025 and unemployment stood at 5.5% of the labour force.

The two halves of the economy moved in opposite directions that year. In the Committee's figures, value added in the oil and gas sector fell by 1.6% in 2025 and value added outside it rose by 2.7%. The International Monetary Fund gives the same pair and adds the year before: hydrocarbon output was flat in 2024 while everything else grew by 6.5%, which is how total growth reached 4.2% in 2024 and fell back to 1.4% a year later. The World Bank puts the 2025 hydrocarbon contraction at 2%, a steeper figure than the Committee's, and attributes it to lower crude output.

Industry, which in the Committee's classification includes the extraction of oil and gas, produced 33.0% of GDP in 2025.

The IMF splits the same output another way. Of the 129.1 billion manats produced in 2025, 92.3 billion came from outside oil and gas, so the hydrocarbon sector accounted for a little under three tenths of GDP in 2025. That is a smaller share than the Wikipedia summary of the economy gives, which puts oil and gas at two thirds of GDP, 90% of export revenue and 60% of public finances without dating any of the three.

The Gini coefficient in the country's record is 26.6, measured in 2005. The record carries no later figure, so the spread of income across two decades of oil revenue is a question the World Bank series behind it does not answer. Life expectancy was 74.6 years in 2024 and 58.6% of the population lived in towns and cities in 2025.

How the Contract of the Century reopened the Caspian

Soviet production from Azerbaijan peaked in 1967 at 414,000 barrels a day, once the development of the Oil Rocks field was complete, and declined from then on. Exploration carried on offshore. Four multi-reservoir fields were found in the Caspian at a water depth of about 200 metres: Gunashli in 1979, Chirag in 1985, Azeri in 1988 and Kapaz in 1989. The Azeri-Chirag-Gunashli complex holds more than 16 billion barrels of oil in place. The Soviet industry drilled at Chirag from a semi-submersible rig, at a depth that was an offshore record for the Soviet Union. Only the shallow part of Gunashli, where the water depth allowed development, was in production by 1989.

That was the asset the independent state had to offer. On 20 September 1994 the State Oil Company of the Azerbaijan Republic, SOCAR, signed a production-sharing agreement for the three fields with a group of foreign companies. Parliament ratified it on 2 December and it took effect on 12 December. Its estimated reserves of 6 billion barrels gave it the name Contract of the Century, and its projected investment was 13 billion dollars.

The operating consortium, the Azerbaijan International Operating Company, was formed in 1995 with eleven members. BP of the United Kingdom took the role of operator, running the offshore platforms and the onshore terminal at Sangachal, and the other founding members included Amoco, Unocal and Pennzoil from the United States, Lukoil from Russia, Statoil from Norway, TPAO from Turkey and SOCAR itself. Exxon and the Japanese companies Itochu and Inpex joined later, and McDermott, Ramco and Lukoil sold their shares. Production under the agreement began in November 1997 and was running at about 500,000 barrels a day in 2006.

The contract was extended on 14 September 2017 to run until 2050. On 19 April 2019 SOCAR and BP signed a 6 billion dollar contract for a new platform on the same block, Azeri Central East.

How gas joined the oil

Gas came second and from a different field. Shah Deniz was discovered in 1999, and its gas plant at Sangachal started up in 2007. Its first stage supplies Georgia and Turkey with 8 billion cubic metres of gas a year through the South Caucasus Pipeline. A second stage was approved in December 2013 to send gas on to Turkey and Europe through the Trans-Anatolian and Trans Adriatic pipelines. Total announced a further discovery on 9 September 2011 at the Absheron field, about 100 kilometres south-east of Baku, estimated at around 300 billion cubic metres, which raised the country's gas reserves from 2.2 to 2.5 trillion cubic metres.

Which pipelines carry Azerbaijani oil and gas west

Every route that carries the oil and gas of the post-1994 fields to market runs west across Georgia. Azerbaijan, Georgia and Turkey agreed in 1998 to build the Baku to Tbilisi to Ceyhan pipeline, which pumps crude from Sangachal through Tbilisi to the Turkish port of Ceyhan on the Mediterranean. Wikipedia's petroleum article dates its official opening to 13 July 2006 and its length to 1,760 kilometres; the country article gives more than 1,774 kilometres and May 2006, and Britannica places the opening in 2005. The line was designed to carry up to 50 million tonnes of crude a year and cost 3 billion dollars to build, with around 15,000 people employed during construction.

The pipeline carried 344,133,525 tonnes of Azerbaijani oil between June 2006 and 1 November 2017. In October 2017 alone it carried 2,268,672 tonnes. During the war of October 2020 Azerbaijan claimed that the pipeline had been targeted, and Armenia rejected the accusation.

The South Caucasus Pipeline follows the same corridor for gas and began operating at the end of 2006. Rail freight to Turkey uses the Baku to Tbilisi to Kars railway, which, like the oil pipeline, was financed in part by the State Oil Fund. The World Bank's partnership framework discussed in January 2025 names the Middle Corridor for trade and transit among the four areas it supports.

Why Azerbaijani oil output has been falling

Output from the fields developed after 1994 has been falling since 2010. Britannica records production above 1,000,000 barrels a day at the peak in 2010, falling steadily to slightly more than 600,000 barrels a day in 2025, and says the decline was offset by gains in gas. In 2022 the industry produced about 33 million tonnes of oil and 35 billion cubic metres of gas.

For a period the decline was also a matter of agreement. In April 2020 Azerbaijan joined the production cut agreed between OPEC and other producers, and its energy ministry said it would reduce output by 164,000 barrels a day for two months and keep average crude production at no more than 554,000 barrels a day. The ceiling rose to 587,000 barrels a day for July to December 2020 and to 620,000 barrels a day from January 2021 to April 2022.

The IMF treats the decline as lasting. Technical problems cut oil production in 2025, and hydrocarbon GDP contracted by 1.6%. The Fund projects a further fall of 2.0% in 2026 and of 0.5% a year after that, driven by what it calls binding production constraints, and it names declining hydrocarbon reserves as the reason diversification is the policy priority.

Prices fell over the same years. The IMF's assumed oil price fell from 85.9 dollars a barrel in 2023 to 69.7 in 2025, and export earnings fell with it.

The war in the Middle East reversed the price trend in 2026. The IMF expects higher oil and gas prices to lift exports by 15.9% and the current account surplus to 9.7% of GDP in 2026, and it expects the oil fund to keep growing for as long as prices stay high. It still expects the volumes to fall.

Where Azerbaijan saves its oil revenue

The State Oil Fund of Azerbaijan, SOFAZ, was founded by presidential decree on 29 December 1999 and began operating in 2001. It receives the surplus revenue of the oil industry, mainly from SOCAR. Its stated purposes are to keep the economy stable, to reduce dependence on oil and gas revenue, to develop the non-oil sector and to save for future generations. Its assets may be spent on infrastructure projects the state designates as strategically important, and may not be used for government borrowing. The oil pipeline to Ceyhan and the Baku to Tbilisi to Kars railway are two of the projects it financed.

The fund's assets stood at 56.1 billion dollars in 2023 and 60.0 billion in 2024, in the IMF's figures, and reached 73.5 billion at the end of 2025. The World Bank puts the 2025 total at 97% of GDP and says the increase was supported by a revaluation of the fund's gold. Together with the Central Bank's own reserves of 11.5 billion dollars, official savings came to 85 billion dollars at the end of 2025, and the liquid part alone covered more than 38 months of imports, in the IMF's estimate.

The IMF does not read that figure as enough. Weighing it against the need for equity between generations, the Fund assessed the external position in April 2026 as substantially weaker than the level consistent with medium-term fundamentals. The fund is large against a single year's output and still, on the IMF's reading, short of what equity between generations requires.

The fund's governance is contested. Wikipedia records that SOFAZ lacks transparency in its finances and contracting, that critics have described some of the projects it paid for as useless, and that contracts went to companies owned by members of the country's ruling family. SOCAR, which supplies most of the fund's money, is described by non-government watchdogs as run through complex webs of contracts and middlemen that have channelled revenue to ruling elites. The fund itself states its purpose as macroeconomic stability and transparency in the management of oil revenue.

How the budget leans on the oil fund

The IMF reports public finances on a consolidated basis that includes the state budget, SOFAZ, the Nakhchivan Autonomous Republic and the State Social Protection Fund. On that basis revenue came to 37.1% of GDP in 2025 and spending to 34.6%, leaving a surplus of 2.6% of GDP. The surplus has been narrowing, from 7.9% in 2023 and 4.1% in 2024.

Outside oil the balance is a deficit. The non-oil primary balance, which measures what the state spends against what it collects outside hydrocarbons, was a deficit of 22.2% of non-oil GDP in 2023, 20.0% in 2024 and 18.6% in 2025. The fiscal rule targets 13% of non-oil GDP in 2029. The IMF describes that target as consistent with a constant real annuity across generations over the next decade, and says it requires saving any windfall from high hydrocarbon prices, including the one the war in the Middle East produced in 2026.

Borrowing is small. General government debt was 20.1% of GDP in 2025, and 28.2% once government guarantees are counted. The consolidated government invested 11.1% of GDP in 2025, more than twice the 4.5% the private sector invested, and the fall in public capital spending that year is what the World Bank identifies behind a real drop of 4.9% in total investment.

The IMF's recommendations for closing the gap are specific: cut subsidies to state-owned enterprises, rationalise tax incentives, strengthen tax administration and write narrower escape clauses and an automatic correction mechanism into the fiscal rule.

What Azerbaijan grows and makes outside oil

Agriculture, forestry and fishing produced 5.9% of GDP in 2025. About 54.9% of the country is classed as agricultural land, and 4,755,100 hectares were in agricultural use at the beginning of 2007. Britannica names grain and raw cotton as the main crops and adds that most grapes grown in Azerbaijan go into wine and almost all of the wine is exported. Walnuts, hazelnuts, vegetables and fruit are grown as well, and the districts around Şäki, Zaqatala and Göyçay breed silkworms, as they traditionally have.

Farming on the plains runs on canals. A network of canals between the Kura and the Aras irrigates a major part of the Kura-Aras Lowland, and the Upper Karabakh Canal, 172 kilometres long, links the Aras to the Mingäçevir Reservoir on the Kura. The Caspian fishery rests on sturgeon, whose roe becomes caviar, and Britannica records stocks being depleted by pollution of the sea.

Heavy industry outside extraction grew up around the oil. Sumqayıt, an industrial town on the Absheron Peninsula, became the centre of chemical production, making mineral fertilisers, herbicides, synthetic rubber and plastics, and of ferrous metallurgy. Equipment for the oil and gas industry is made in Baku, Gäncä and Mingäçevir, and textiles, knitwear and footwear in Şäki, Xankändi, Gäncä, Mingäçevir and Baku. Britannica records that all of the country's electricity is generated at thermal power stations burning fossil fuels.

The private sector is small. Wikipedia describes an economy dominated by state-owned enterprises in which more than half of the formal labour force works for the government. The IMF's 2026 consultation asks for the diversification to be led by private business and foreign investment, which in its account means deeper capital markets, investment in skills, action on informal employment, independent board members for state companies and their gradual sale to private owners. Non-oil growth slowed from 6.5% in 2024 to 2.7% in 2025 as construction, transport and agriculture all slowed, and the IMF projects 3.7% for 2026.

How the manat has held against the dollar

The National Bank, now the Central Bank of Azerbaijan, was created in 1992 from the local affiliate of the Soviet State Savings Bank. Chronically high inflation was brought under control in the early 2000s, and on 1 January 2006 a new manat replaced the old one at a rate of 4,500 to 1.

Inflation returned within a year. Spending and demand pushed inflation to 16.6% in the first quarter of 2007, when nominal incomes rose 29% and monthly wages 25%, and the Wikipedia account of the period records signs of Dutch disease, with a fast-growing energy sector raising prices and making non-energy exports more expensive. The manat floats in name and is managed mainly against the United States dollar. It stood at 1.60 to the dollar on 28 January 2016 and at 1.7 at the end of 2023, 2024 and 2025.

The Central Bank targets inflation of 4% with a band of 2 points either side. Headline inflation broke the upper edge of the band in April and May 2025 and then moved between 4.9 and 6% for the rest of the year, driven by food prices, which were 8.2% higher in October 2025 than a year earlier. The Bank cut its policy rate from 7.25% to 6.75% as pressure eased towards the end of 2025. Increases in regulated prices lifted inflation to 5.7% in January 2026, and the IMF expects 6.0% by the end of 2026 as the war in the Middle East raises the price of imported food.

The IMF names what limits the Bank's grip on the economy: widespread use of the dollar in place of the manat, high operating costs and low competition among banks, and a yield curve too thin to carry interest rate changes through to borrowers.