Country profile: Azerbaijan

Bordering the Caspian Sea Azerbaijan is capitalizing upon the Sea's sizeable, but still mostly untapped, hydrocarbon resources. Azerbaijan's real gross domestic product (GDP) grew by an impressive 31 percent in 2006, driven by growth in oil production and the beginning of natural gas production. In the next couple years favorable real GDP growth is expected, but maintaining low inflation rates as energy and transit revenues flow into the country represents a major challenge. Azerbaijan's hope for sustained economic growth rests in large part with its management of sizeable oil and natural gas resources in the Caspian Sea region, through effective management of the resulting revenue stream, and non-oil sector diversification.

After the first commercial oil flows through the Baku-T’bilisi-Ceyhan pipeline (BTC) during summer 2006 and the increasing oil production from the Azeri-Chirag-Guneshli (ACG) project, oil revenues are expected to contribute to a doubling of Azerbaijan’s GDP by 2008. Although the oil sector represented around 10 percent of Azerbaijan’s GDP in 2005, it is already projected to double to almost 20% of GDP in 2007. To manage the revenues, former president President Heydar Aliyev created a State Oil Fund in 1999, which is designed to use money obtained from oil-related foreign investment for education, poverty reduction, and efforts aimed at raising rural living standards. As of the end of 2006, the State Oil Fund reported assets of almost $2 billion, but the fund’s assets are expected to increase exponentially to $36 billion by 2010. See a recent paper in Geopolitics of Energyfor more information on the effects of energy revenues on Azerbaijan.