Azerbaijan

Public finances remain in surplus, buoyed by elevated oil revenues following the Hormuz-driven price spike. The fiscal surplus is expected to moderate toward +1.5-2% of GDP in 2026 as social spending rises, but remains comfortable. External debt is negligible (<10% of GDP), sovereign risk is contained and the State Oil Fund (SOFAZ) provides an additional fiscal buffer.

Corporate financing conditions are tighter. The banking sector is stable and well-capitalized, but credit growth has moderated as funding costs remain elevated and risk appetite narrows. Insolvency data remains limited, yet weaker investment volumes, reduced public procurement activity and the post-reconstruction slowdown create latent stress among smaller firms in construction and services. A sustained oil price correction below USD60/b – unlikely in the current Hormuz environment but structurally plausible once hostilities subside – would compress fiscal space rapidly and trigger delayed payments to energy-sector suppliers, potentially cascading to dependent SMEs. The current windfall is structural only insofar as the Middle East conflict endures, laying a fragile foundation for medium-term fiscal planning.

The political landscape is stable under President Aliyev's consolidated authority following his 2024 re-election to a seven-year term. The US-brokered peace framework with Armenia – initialed in August 2025 with the TRIPP corridor at its center – represents the most significant diplomatic achievement in the South Caucasus in decades. The deal reduces Russian influence in the region, strengthens Azerbaijan's alignment with Western interests and creates the institutional conditions for broader economic integration with Türkiye and Central Asia.

However, new risks emerge from this very realignment. Iran has explicitly condemned the TRIPP corridor as an attempt to "sever its link with the Caucasus." Given Azerbaijan's shared border with Iran and the ongoing US-Iran war, this hostility constitutes a tangible, structurally embedded security concern – particularly for infrastructure assets in southern Azerbaijan. Russia, meanwhile, has been sidelined but remains resentful; the closure of the OSCE Minsk Group in September 2025 formalized the end of its mediating role.

Domestically, political freedoms remain heavily restricted. The space for opposition, civil society and independent media is negligible. International criticism persists but has diminishing practical impact given Baku's strategic energy and connectivity relevance to both the EU and the US. External stability gains come paired with deepening authoritarianism at home and a newly adversarial southern neighbor whose capacity for disruption should not be underestimated.