Country Risk Profile - Azerbaijan
Overview
Azerbaijan is located in the South Caucasus region, bordered by Russia and Georgia in the north, Armenia in the west, and Iran in the south, with the Caspian Sea to its east. Its victory over the territory of Nagorno-Karabakh in September 2023 also expanded its western border towards Türkiye. The population of approximately 10.3 million resides mostly in the capital Baku, its largest metropole.
Azerbaijan declared its independence from the Soviet Union in 1991, with the territory of Nagorno-Karabakh in dispute with its neighbouring Armenia. The territory was part of Azerbaijan under Soviet rule, although the majority of its population was ethnically Armenian. Following a long-standing conflict, that started in 1988, Azerbaijan achieved a decisive victory in Nagorno-Karabakh in September 2023. The breakaway territory’s de facto administrative body, the Republic of Artsakh, was dissolved, and the territory was officially incorporated into Azerbaijan on 1st January 2024. Its reconstruction and demographics, however, remain a source of domestic and regional tension.
Azerbaijan’s economy experienced rapid growth following its independence and throughout the 2000s, driven by energy resources. The country remains heavily dependent on the export of fossil fuels, although attempts at diversification are on the rise. Volatility in global oil markets and certain domestic conditions continue to create a moderately risky environment for businesses and foreign investment.
Several risks are present in terms of security, including financial crime by state-connected organised groups, the presence of domestic and foreign terrorist groups, and leftover tensions from the Nagorno-Karabakh conflict. The government is working to address these issues, but a system of patronage and corruption creates impediments to effective counter-action. In the meantime, Baku is engaged in strategic geopolitical balancing between its regional allies, historical partners, and new trade opportunities.
Political risk
Azerbaijan’s leadership has seen little change in recent years, a trend that was confirmed after a snap presidential election in early February 2024. Classified as an ‘unfree’ democratic regime, political power is concentrated in the executive branch, namely the presidency of Ilham Aliyev. Serving since 2003, he won 92% of the vote in the latest snap election, which is believed to have been called as a result of Aliyev’s surge in popularity following Azerbaijan’s victory in Nagorno-Karabakh. The election was originally scheduled for 2025. Under the original constitutional arrangement, the president’s mandate was limited to two terms, until this rule was abolished in a 2009 constitutional amendment. The unicameral legislative branch consists of the dominant New Azerbaijan Party and several other parties, which can however be considered opposition in name only. Following years of censorship, the main rival parties ended up boycotting the latest election in protest. The same gesture could be observed during the 2020 legislative elections, where the New Azerbaijan Party emerged victorious with a majority. The election was criticised for irregularities and a restricted political environment.
Civil liberties
Leading up to the election, authorities intensified their crackdown on dissenting voices, exemplified by their repression of religious Shia Muslim groups, academics, independent media outlets, and organised democratic movements. Despite relatively high numbers in terms of electoral turnout in the snap election, voter disengagement was apparent. As Azerbaijan seeks to reassert control over the majority-Armenian territory of Nagorno-Karabakh, these elections were also the first to be held there since the formal end of the conflict, although the extent to which future plans for the territory affected voter turnout is unclear.
Political activism is heavily suppressed, with numerous dissidents jailed on dubious charges over the past couple of decades. The work of non-governmental organisations (NGOs) is also legally restricted, preventing most from operating independently. Media freedom is restricted by laws that require foreign platforms to register locally. This regulation of media freedom furthermore keeps widespread corruption, abuses of power, and ill-treatment of political prisoners out of sight, especially disguising the latter under specific criminal charges.
Corruption
According to the Corruption Perceptions Index, Azerbaijan has the highest level of corruption in the Caucasus region, and third highest when Central Asian countries are included. Furthermore, the level of corruption has been on the rise, increasing by seven points between 2021 and 2022. Entrenched deeply into elite politics, corruption has been used to sustain power without accountability, undermining civic and political rights in the process. Despite a comprehensive anti-corruption legal framework through the Criminal Code, implementation and effective oversight are lacking. Closely tied to the running of Azerbaijan’s economy, corruption and patronage furthermore pose significant risks to business, increasing costs, especially for foreign companies. Other significant areas of corruption include the nominally politically independent judiciary, tax administration, and law enforcement. The latter is thus often at the centre of prevalent human rights violations.
Economic risk
Azerbaijan’s economic growth has been fluctuating in recent years, with overall GDP growth dropping to 1.1% in 2023, from 4.0% the previous year. This relative instability is largely caused by the vulnerability of fossil fuel markets to external shocks and declining demand in the face of global climate goals. Azerbaijan’s economy is among the least diversified in the region, and heavily dependent on oil exports, which account for 90% of all exports, and 40-50% of the country’s GDP. The rest of the non-oil economy is concentrated in the agricultural sector, which employs 36% of the working population despite accounting for only 8% of GDP. Another notable contribution comes from personal remittances, which made up 3.9% of GDP in 2023.
The World Bank and the Asian Development Bank both estimate Azerbaijan’s GDP to grow by 1.2% in 2024, with per capita growth at 0.4%. Both of these represent the lowest growth figures in the Central Asia and Caucasus regions. In light of the 29th United Nations Climate Change Conference (known as COP29), taking place in Azerbaijan in November 2024, the central government has been working to step up economic diversification focused on sustainability, energy transition, and emergent technologies. The move is also made necessary by Azerbaijan’s increasing trade reliance on Europe (61% of exports in 2024), which has prompted demands for climate and energy policy change. The success of this shift remains unpredictable - while stimulating interest and securing non-binding agreements for new renewable energy ventures, the country has grappled with obstacles in implementation.
Although the World Bank estimates that the country is currently not on track to achieve its Nationally Determined Contribution (NDC) targets, effective and immediate transition policy change focused on renewable energy use across all sectors may set the economy back on track. Challenges remain mainly in the form of external shocks. In addition to the instability of the oil market, recent security developments, notably Azerbaijan’s victory in Nagorno-Karabakh, have put greater pressure on agriculture as food security and reconstruction in the territory are prioritised.
Business climate
Azerbaijan’s ambition of diversification despite economic concentration in the energy sector has made it a moderate business and investment risk location. The International Trade Administration (ITA) considers informal economy, corruption, unpredictable taxing, lack of judicial independence, and lack of regulatory transparency as the main concerns for businesses. Aside from the need for significant structural changes, low demographic growth is also posing a potential threat to the development of Azerbaijan’s non-oil economy.
While the energy sector remains the most promising, the government’s nominal push for transition has made several other key industries more promising, including emergent technologies, construction, and transportation. The state is also interested in these areas as potential sources of foreign direct investment (FDI), a necessary pursuit alongside diversification goals.
Security risk
Azerbaijan has seen a gradual decline in crime in the past two years. Nevertheless, organised crime, the threat of terrorism, and leftover tensions from the Nagorno-Karabakh conflict persist. Political unrest is generally low, but demonstrations are illegal and incur a swift response from authorities.
Organised crime
Organised crime and political patronage are present in the state’s governing structures, with state-embedded actors prominent. Some groups also have foreign connections, especially in countries like Russia. A Global Organized Crime Index report suggests that these state-connected groups are largely involved in financial crime, embezzlement of oil revenues and tax evasion, all of which are exacerbated by broader-scale corruption.
Human trafficking
Certain parts of Azerbaijan are the source and transit point for human and sex trafficking of both domestic and foreign nationals, with the usual destinations of Türkiye, Iran, Russia, and Central Asia. Men and young boys tend to be targeted for forced labour, with women targeted for sex trafficking and sometimes forced marriages. It is not uncommon for migrants to use smuggling services en route to Russia or the EU, the former made easier by visa-free access of Azerbaijani citizens. Criminal activity is difficult to regulate due to the difficulty of identifying victims and cooperation between domestic and international actors.
Terrorism
With the incidence of terrorist attacks fluctuating between 2000 and 2020, the government of Azerbaijan committed substantial resources to counter-terrorism. Designated terrorist groups present in the country tend to be religiously motivated, and some areas of the country continue to serve as hubs for foreign terrorist groups, including Al-Qaeda, Jeyshullah, and the Türkiye-based Gülen movement.
The foundation for Azerbaijan’s struggle against terrorism is the 1999 anti-terrorism law, which stipulates coordination tactics, and rights and responsibilities of citizens and the authorities. The country has also engaged in international cooperation on anti-terrorism, working through bilateral and multilateral agreements, including with the United Nations (UN) and North Atlantic Treaty Organization (NATO).
Nagorno-Karabakh
Although the situation has calmed since September 2023, local tensions and fallout from the conflict continue to plague the territory. Following a mass exodus of ethnic Armenians from Nagorno-Karabakh, the government pledged to secure the group’s rights and work towards reconciliation.
Other consequences of the conflict for domestic and regional security include high volume of arms traded through the territory, which increases the likelihood of illegal arms trafficking at the local level, and the smuggling of counterfeit goods, which is prominent due to weak enforcement of intellectual property laws. Furthermore, the government has been working to clear the territory of landmines, which makes it difficult for some 7000 sq km to begin reconstruction.
Geopolitical risk
Azerbaijan is experiencing a rise in prominence in the South Caucasus region, standing at a crossroads of multiple geopolitical interests. Its historical and regime proximity to globally important states, Russia, Türkiye and Iran, continuously strained relations with neighbouring Armenia, and deepening relations with the European Union at the institutional and state level create many opportunities for strategic manoeuvring. At the same time, spreading oneself too thin may pose challenges for the long-term stability of such relations.
Russia
As a post-Soviet state, Azerbaijan maintains a continuous relationship with the Russian state, one brought to new heights since the start of the war in Ukraine and Azerbaijan’s victory in Nagorno-Karabakh. While the two are not exactly close, both regimes recognize the importance of maintaining a working relationship. Azerbaijan signed a declaration of Allied Relations with Russia in February 2022, just two days before the latter’s incursion into Ukraine. These relations have since deepened, with an exchange of presidential visits in the past year. The Russian President visited Baku in August 2024, signalling a potential shift in its policy towards the South Caucasus - Russia’s passivity towards Armenia in the face of the Nagorno-Karabakh offensive in September 2023, and Georgia’s continued hostility expedited this move.
Additionally, Azerbaijan maintains extensive trade relations with Russia, especially in the area of energy production and transit. It has been suspected of helping Russia circumvent EU sanctions on Russian oil and gas exports, by trading the resources through its territory. It also allowed Russian peacekeepers into the Nagorno-Karabakh territory after September 2023, while rejecting those sent by Western institutions, including the EU.
Yet despite such mutual benefits, Baku seems wary of allowing Russia to gain too much influence, keeping its options open, and often preferring to deal with its regional ally, Türkiye.
Türkiye
Azerbaijan’s relations with Türkiye are among the closest in the region, with many colloquially using the “one nation, two states” slogan. Comprising mainly trade and military exchange, the countries engage heavily in energy supply and transit, and boast close cultural ties. Azerbaijan was also the first post-Soviet state in the region to enjoy a defence treaty with a NATO member. Türkiye’s President also showed firm support for Azerbaijan’s victory in Nagorno-Karabakh, offering to contribute to reconstruction efforts.
Despite the close ties of the two, Azerbaijan’s stance on the Israel-Palestine conflict has caused some tension in recent months. Azerbaijan maintains relatively friendly ties with Israel, playing a crucial role in the latter’s energy supply. Israel’s support was also important in helping Azerbaijan’s takeover of Nagorno-Karabakh, mainly through military technology exchange. Türkiye’s administration, on the other hand, has made its strong pro-Palestinian stance very clear from the start, giving rise to negative sentiment in the population against Azeri companies that maintain ties with Israel. Demonstrations against the Azeri state oil company, SOCAR, have taken place in Istanbul, with the authorities showing unusual leniency towards the protesters. Türkiye’s domestic politics is greatly impacted by strong pro-Palestinian sentiment, making Azerbaijan’s stance difficult for Ankara. While bilateral relations are unlikely to suffer substantially, with Baku expressing verbal support for Palestine, the tension may create an incentive for Azerbaijan to continue deepening ties with other strategic neighbours and partners.
European Union
The EU has turned to Azerbaijan as one of the crucial sources of energy supply since its sanctioning of Russian oil and gas. Over the course of 2023, the bloc has been deepening trade ties with Azerbaijan, most recently signing a Memorandum of Understanding (MoU) with the Azeri Renewable Energy Agency. The collaboration is crucial for Azerbaijan as well, given its organisation of the UN COP29 and national energy transition goals.
Nevertheless, the EU’s dependence on Azeri energy resources has come up against its condemnation of the offensive in Nagorno-Karabakh, the warning against which was largely ignored by Baku. Following the takeover of the territory and the beginning of the mass exodus of ethnic Armenians, several MEPs called for a review of the EU’s relations with Baku, some even suggesting the use of sanctions on the very energy resources supplied to its member states.
Despite these reservations, EU demand for energy is only projected to rise, especially with its goal to completely cut off Russian supply by 2027. As such, actors like Azerbaijan and Türkiye will likely continue to fill the void.
Conclusion and forecast
Although relative political stability is given with the continuation of the Aliyev presidency, its economic, security and geopolitical environment is undergoing more change than usual. As the Aliyev regime continues to consolidate power, including through the suppression of dissent, opposition, and media freedom, the threat of domestic unrest moves further away from the realm of possibility.
Economically, Baku is constantly staking out foreign investment for the country’s budding energy transition, although diversifying an export portfolio so heavily dependent on oil production will require more long-term strategies. Additionally, without addressing the issues of corruption, organised and financial crime, and state connections to informal trade networks, businesses face the risk of unstable investment conditions and operational environment. Innovation is welcome, but limited to actors with strong connections to the state or existing networks.
At the same time, Azerbaijan faces an increasingly complex geopolitical situation, regionally and internationally, even as its domestic security risk decreases. Its central location among major players, including Russia, Türkiye, and Iran, creates opportunities and challenges alike. The need for strategic balancing is exacerbated by the country’s increasing importance in energy trade, including as a transit point from Russia, to Türkiye and the EU, and its uniquely closer ties to Israel. Azerbaijan’s prominence in the region is thus projected to grow, likely creating further incentives for diversification and foreign business opportunities in the long run.