Historical background

Azerbaijan - a nation with a majority-Turkic and majority-Muslim population - was briefly independent from 1918 to 1920; it regained its independence after the collapse of the Soviet Union in 1991. Despite a 1994 cease-fire, Azerbaijan has yet to resolve its conflict with Armenia over the Azerbaijani Nagorno-Karabakh region (largely Armenian populated). Azerbaijan has lost 16% of its territory and must support some 600,000 internally displaced persons as a result of the conflict. Corruption is ubiquitous, and the government has been accused of authoritarianism. Although the poverty rate has been reduced in recent years, the promise of widespread wealth from development of Azerbaijan's energy sector remains largely unfulfilled.

Economic overview

Azerbaijan's high economic growth during 2006-08 is attributable to large and growing oil exports, but the non-energy sector also featured double-digit growth in 2008, spurred by growth in the construction, banking, and real estate sectors. However, the current global economic slowdown presents some challenges for the Azerbaijani economy as oil prices have plummeted since mid-2008 and local banks face a more uncertain international financial environment. Azerbaijan's oil production declined through 1997, but has registered an increase every year since. Negotiation of production-sharing arrangements (PSAs) with foreign firms, which have committed $60 billion to long-term oilfield development, should generate the funds needed to spur future industrial development. Oil production under the first of these PSAs, with the Azerbaijan International Operating Company, began in November 1997. A consortium of Western oil companies built a $4 billion pipeline from Baku to Turkey's Mediterranean port of Ceyhan which will pump 1.2 million barrels a day from a large offshore field when at full capacity. Azerbaijan shares all the formidable problems of the former Soviet republics in making the transition from a command to a market economy, but its considerable energy resources brighten its medium-term prospects. Baku has only recently begun making progress on economic reform, and old economic ties and structures are slowly being replaced. Several other obstacles impede Azerbaijan's economic progress: the need for stepped up foreign investment in the non-energy sector, the continuing conflict with Armenia over the Nagorno-Karabakh region, pervasive corruption, and potential for a sharp downturn in the construction and real estate sectors. Trade with Russia and the other former Soviet republics is declining in importance, while trade is building with Turkey and the nations of Europe. Long-term prospects will depend on world oil prices, the location of new oil and gas pipelines in the region, and Azerbaijan's ability to manage its energy wealth to promote sustainable growth in non-energy sectors of the economy and spur employment.