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Country Risk Report

Azerbaijan

Last update – January 2026

Country rating 


MEDIUM RISK FOR ENTERPRISE
Economic risk

Slight risk of payments disruption
Business environment risk
Serious risk of payments disruption
Political risk

Serious risk of payments disruption
Commercial risk
Low risk of payments disruption
Financing risk
Moderate risk of payments disruption
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Form of state
 Presidential republic
Head of state
 Ilham Aliyev (President)
Next elections
 2028, parliamentary

Strengths & weaknesses

  • Recent diplomatic progress with Armenia has improved regional stability and opened new avenues for economic cooperation 
  • Manat stability underpinned by robust FX reserves and prudent central bank policy 
  • Ongoing diversification efforts, with renewable energy projects and regional connectivity initiatives gaining traction to the benefit of construction, ICT and tourism sectors 
  • High vulnerability to oil and gas price fluctuations, with hydrocarbons still over 40% of fiscal revenues 
  • Investment growth remains subdued amid global uncertainty and post-reconstruction slowdown 
  • Persistent governance challenges: regulatory quality, rule of law and corruption control lag regional peers 

Economic overview

Cyclical risks

Azerbaijan’s economic momentum slowed in 2025, with GDP growth decelerating from +4.1% in 2024 to around +1.6% in 2025, but it is projected to recover to +2.6% in 2026 as natural gas exports and non-oil sectors expand. Inflation rose to 5.6% in 2025, driven by food and services, but remains within the central bank’s 4% ±2pps target. The manat remains stable, supported by strong reserves. However, external risks persist: global energy price volatility, trade disruptions and regional geopolitical tensions could dampen recovery. Domestic demand is constrained by slower wage growth and cautious consumer sentiment, while investment remains tepid, especially in hydrocarbons. The outlook for 2026-2027 hinges on the pace of diversification, resilience of non-oil sectors and stability in global commodity markets. 

Financing risks

Public and external finances remain broadly comfortable, with fiscal and current account surpluses narrowing but still positive. The fiscal surplus is expected to moderate to around 2% of GDP in 2026, as oil revenues soften and social spending rises. The banking sector is stable, with credit growth supporting business activity, though profitability is pressured by higher funding costs. Insolvency data remains limited, but no major uptick is reported; however, weaker investment and tighter global financial conditions could elevate corporate default risks, especially among smaller firms, while an oil price level of around 60 USD/b could result in delayed payments to suppliers in the energy sector. External debt is low (below 10% of GDP) and sovereign risk is contained, but reliance on hydrocarbons for fiscal and export revenues remains a structural vulnerability.

Structural business environment risks

Azerbaijan’s business environment is gradually improving, with reforms in SOE governance, beneficial ownership transparency and digitalization. However, regulatory quality, rule of law and corruption control still lag behind regional peers, deterring foreign investment and private sector growth. The state’s large economic footprint and shallow financial markets limit competition and innovation. Progress in renewable energy and infrastructure is notable, with several wind and solar projects reaching commissioning stage and upgrades to the transmission grid underway. Yet, environmental sustainability remains a challenge, with low scores in water management and recycling. Continued focus on green energy, regional connectivity and human capital development is essential for long-term competitiveness.

Political risks

Political stability is anchored by President Aliyev’s administration, which retained a strong mandate in the 2024 elections for another seven-year term. However, the political landscape remains tightly controlled, with limited opposition participation and the institution of presidential special representatives in geopolitically-delicate areas, such as Karabakh and Eastern Zangezur. Regional risks persist, particularly regarding relations with Armenia and the unresolved status of the Zangezur corridor. While international mediation efforts continue, a comprehensive peace deal remains elusive. While formally allied and sharing Soviet history, Azerbaijan balances its relationship with Russia by fostering ties with the West. Relationship with the US has improved noticeably with Washington brokering initiatives potentially conducive to a broader peace agreement between Baku and Armenia. Azerbaijan is also deepening ties with the EU (energy cooperation), Türkiye (connectivity) and other regional players, but the broader South Caucasus remains exposed to geopolitical shocks. Domestic governance reforms are ongoing but face implementation challenges, and the risk of renewed tensions cannot be ruled out.

Trade structure by destination/origin

(% of total, 2024)

Trade structure by product

(% of total, 2024)

Contact 

Luca Moneta
Allianz Trade
+33 (0) 6 70 27 40 16
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