LinkedIn tracking pixel

Azerbaijani Economy in Tatters

The following article by IWP alumnus Vilen Khlgatyan was published by the Political Developments Research Center.

The West’s economic sanctions over the Ukraine crisis and the low price of oil have hurt the Russian economy. It is well known that the sanctions and lower than anticipated oil prices have caused the ruble to lose half its value against the dollar.  An additional side effect is the deteriorating financial condition for millions of migrant workers in Russia, primarily from Central Asia and other former Soviet states, many of whom have had to return to their native countries. One important component of this fact is the national security dimension, or more specifically, how the autocratic regimes of Central Asia will cope with the return of hundreds of thousands of jobless and penniless men to states that remain politically repressive and economically stagnant.

A case in point is Azerbaijan, which not only has seen an influx of returning migrant workers but last week devalued its currency against the U.S. dollar and the euro. The Azerbaijani manat lost 33.5% and 30% of its value against the American and European currencies, respectively. This followed on the heels of the Central Bank of Azerbaijan’s (CBA) abandonment of the manat’s dollar peg on February 16th, when it began using a dollar-euro basket to manage the exchange rate instead. Although the CBA claimed that the devaluation was aimed at ‘stimulating the diversification of Azerbaijan’s economy, strengthening the international competitiveness of the economy and its export potential and guaranteeing stability in the balance of payments’, the fact of the matter is that the Azerbaijani economy is sorely dependent on the sale of hydrocarbons, specifically oil, to generate income for the state coffer. A near decade of high oil prices has led to Dutch disease taking root within Azerbaijan’s economy. To truly put things into perspective it is enough to know that the energy sector makes up 40% of GDP with the sale of oil and natural gas accounting for 95% of Azerbaijan’s exports and more than 70% of government revenues; an unsustainable model.  Moreover, Azerbaijan hit peak oil 5 years ago and has yet to find a fresh field to tap. As a result Baku finds itself in a precarious situation that is made worse by the drop in petroleum prices.

Read more