OUTLOOK 2021 Azerbaijan

OUTLOOK 2021 Azerbaijan
Imamzadeh Mausoleum in Ganja, western Azerbaijan, which dates back to the 8th century.
By bne IntelIiNews January 25, 2021


Azerbaijan and Armenia remain in talks with Russia to find a lasting solution to the status of the Nagorno-Karabakh enclave following the former’s victory over the latter in the autumn 2020 six-week war over the territory. Both Russia and Iran will be anxious to ensure the difficulty in their backyard will be resolved to their satisfaction, while Turkey may tone down its aggressive backing of Azerbaijan now that the Biden administration is in power in the US. The Trump administration remained largely disengaged from the issue of Turkey’s regional aggression. Azerbaijan has quickly moved forward with plans to stamp its economic imprint on the territories it gained as a result of the conflict.

Big oil exporter Azerbaijan seems to have suffered an economic output contraction of around 5% in 2020 but it is likely, as things stand, to see a GDP expansion of 2% in 2021. Any big setbacks with the oil price or coronavirus crisis, or the failure of the Nagorno-Karabakh peace, could quickly see analysts revising that forecast.

Baku will this year attempt to build its gas exports to Europe. Azerbaijan became able to transit gas to Europe thanks to the recent launch of the Southern Gas Corridor (SGC) that stretches to Italy.


With Donald Trump almost entirely disengaged from world affairs and happy for authoritarians everywhere to go about their business with no US interference (excepting his occasional lashing out at chosen bogeymen such as Iran, China, Cuba and Venezuela), 2020 was a great year for strongmen. Azerbaijan’s Ilham Aliyev and Turkey’s Recep Tayyip Erdogan duly took their cue and gave Armenia a severe beating as Turkish-armed Azerbaijani forces (backed, if Armenia is to be believed, by hundreds of Turkish military advisers and Syrian mercenaries deployed by Ankara) fought a bloody 44-day campaign to regain the Nagorno-Karabakh enclave controlled by ethnic Armenians for more than three decades in a breach of international law.

On January 11, Armenian Prime Minister Nikol Pashinian (l) and Azerbaijani President Ilham Aliyev jointly met with Russian President Vladimir Putin at the Kremlin as part of initial renewed efforts to find a lasting solution to the Nagorno-Karabakh question (Source: Kremlin.ru). 

Both Azerbaijan and Armenia lost towards 3,000 soldiers in the conflict, while the deaths of scores of Armenian and Azerbaijani civilians were also sadly recorded amid indiscriminate bombing, but Baku emerged the clear victor, forcing Yerevan into a Russian-brokered ceasefire that left Azerbaijan with swathes of Nagorno-Karabakh and liberated buffer territories that were strategically held by Armenians along the self-proclaimed republic’s borders.

Aliyev and Erdogan promptly attended a big victory parade in Baku, with all pomp and circumstance, displays of captured Armenian military equipment and a celebration of the Turkish armed drones widely seen as the decisive factor in Azerbaijan’s triumph. But where do the two presidents take their South Caucasus alliance from here?

As things now stand, the parts of Nagorno-Karabakh still controlled by ethnic Armenians rely on the Lachin Corridor, a mountain pass under the guard of Russian peacekeeping troops, for access to Armenia (Image: Russian Min. of Defence map, CuriousGolden, cc-by-sa-4.0).

Russia, viewing the region as its backyard, has long pursued a strategy in which it attempts to maintain good relations and a strong influence with both Yerevan and Baku. Moscow has military bases in Armenia and, since last November, given the provisions of the ceasefire agreement, 2,000 peacekeeping troops placed in and around Nagorno-Karabakh. To the Kremlin, the new status quo in the region likely looks more than tolerable, and it’s not likely to nod to the Azerbaijani-Turkish adventure going any further.

Besides, autocrats everywhere now have the US Biden administration, which took office on January 20, to deal with. In his push to reinvigorate democracy, American President Joe Biden will want to get regional bully Erdogan back into his box and such is the precarious state of the foreign capital-reliant Turkish economy, and the damage Biden could inflict on it, Turkey’s president may have little option but to, for the most part, comply.

Thus, provided the peace holds—and there is always the possibility of at least a serious flare-up prompted by the wounded, disgruntled Armenians who say Nagorno-Karabakh (“Mountainous black garden”) has been integral to their national “story” for more than two millennia—Azerbaijan and Turkey are likely to turn to the economic gains that can be made from the military victory. And even Armenia might want a piece of those should it be able to come to terms with a new chapter dawning in the South Caucasus (though Erdogan has said the Armenians should elect themselves a new government to clear their way to achieving this).

A highly sensitive aspect here is a land corridor that Baku claims it is entitled, as part of the ceasefire arrangement, to lay from Azerbaijan via Armenian territory to its exclave of 500mn people, Nakhchivan, bordering Turkey. The route would run parallel with the nearby Iranian border and Tehran—which during the war was unsettled by the Middle East mercenaries said to be involved on the battlefront and warned that it would not tolerate a border zone becoming a Syria-style hotbed of terrorism—is keeping a wary eye on matters.

On January 11, Aliyev and Armenian Prime Minister Nikol Pashinian jointly met with Russian President Vladimir Putin at the Kremlin. Pashinian warned that the Nagorno-Karabakh dispute was not over as, for instance, the enclave’s final status, has not been determined, while Aliyev, who is clearly thrilled that he seems to have secured his legacy with Azerbaijanis by liberating so much Azerbaijani territory in the war, spoke of the conflict as something in the past. In a sign of progress in firming the peace, both Aliyev and Pashinian, along with Putin, agreed to the creation of a trilateral working group to oversee the "unblocking of all economic and transport links" between Azerbaijan, Armenia and Nagorno-Karabakh.

The trilateral working group will be jointly chaired by deputy prime ministers from the three countries and will hold its first meeting before January 30, a joint statement said. It will no doubt deal with the tricky issue of the land corridor reaching to Nakhchivan and Turkey. As things stand, Armenia says the ceasefire deal does not specifically provide for this land link, while Azerbaijan says it does and that it would be Russian-guarded.

In the months prior to the hostilities, all the political stories coming out of Azerbaijan were of what appeared to be a rather irate Aliyev cracking down on what counts for an opposition in his regime with an uncompromising aggression. But right from the outbreak of the war, there was little evidence of Aliyev’s adversaries expressing any dissatisfaction with the hostilities, with almost all Azerbaijanis appearing to unite around a popular cause (though there is the possibility that some dissent was never heard because of a big round-up of dissident figures that took place weeks before the war began in earnest).

Whether a victorious Aliyev ruling over a buoyed country will now be more relaxed about the opposition’s activities remains to be seen. The feelgood factor can only last so long.

On July 31, 2020, bne IntelliNews’ headline was “With Aliyev on the rampage, flickering hopes of democracy in Azerbaijan could sputter out”. Two days earlier, an editorial published by The Washington Post observed that Aliyev has “blown a gasket” with a “tantrum” that is “threatening to obliterate what remains of independent political forces in Azerbaijan”. It added: “Mr. Aliyev's use of the iron fist to destroy his critics is the opposite of democracy and why everyone should worry about this intemperate tyrant."

Still a matter of conjecture is whether Aliyev has any intention to eventually retire from ruling Azerbaijan’s ‘clanocracy’. By the end of 2019, shifting sands were seen in the country’s government architecture. When it came to the two most powerful ruling clans, the Nakhichevan (to which Aliyev belongs) and the Pashayev (to which Aliyev's wife Mehriban Aliyeva belongs), the balance was tilting towards the Pashayev. The first clear signs of this were visible years ago when Aliyeva became the second most important political figure after Aliyev after being given the first vice-presidency. The jury is out on whether the Pashayev are still in the ascendancy, but they are regarded as having amid their ranks the people most capable of effective, modern governance that will appeal to young people amid the economic strife, thus it remains a fair bet that this clan will have increasing power in the years ahead, though in early September last year there was evidence of the Old Guard fighting tooth and nail with a cadre that clearly want to see the first lady promoted to the presidency in the not-too-distant future.

As for opposition to Aliyev that could grow in Washington, the Azerbaijanis will be keeping tabs on what members of the large Armenian diaspora in the US are getting up to.

As the war drew near its conclusion in late October 2020, lobbying firm Mercury Public Affairs announced that it was ending its relationship with the government of Turkey, with the decision revealed in a press release from the Armenian National Committee of America’s (ANCA’s) Western Region in California. Prior to the decision, in Los Angeles, the city council had called on Mercury to withdraw from its lobbying arrangement with Turkey or the city would withdraw from any business with the firm. Just before the Mercury move, DLA Piper, a white-shoe law firm headquartered in London, said that it was no longer working on behalf of Azerbaijan Railways and the Livingston Group, founded by former US Republican congressman Bob Livingston, withdrew from working for Azerbaijan. BGR Group, meanwhile, said it was ending its contract with the Azerbaijani national oil company SOCAR.

Aliyev remains under pressure to sell a peace that works for everybody.


The January 2021 edition of the World Bank’s Global Economic Prospects report forecast a 2020 GDP contraction of 5% for the Republic of Azerbaijan (the June 2020 edition of the report was reckoning with a 2.6% contraction) followed by an expansion of 1.9% in 2021 (the June forecast was for 2.2%).


The World Bank sees a 5% GDP contraction in Azerbaijan in 2020 followed by a 1.9% expansion in 2021.

The World Bank noted that an unravelling of the Nagorno-Karabakh peace would expose Azerbaijan, a country of 10.1mn with an annual economic output of around $45mn, to a worse outcome in 2021 than presently anticipated. It also stated: “Growth in the South Caucasus subregion is projected to rise to 2.5 percent in 2021, as the shocks related to the pandemic and conflict dissipate, and as tourism recovers alongside improving consumer and business confidence. Activity is expected to expand in Azerbaijan over the forecast horizon as oil prices stabilize and the economy benefits from investment and reconstruction spending. The peace statement between Armenia and Azerbaijan is expected to help alleviate geopolitical tensions in the region.”

The World Bank observed that the Azerbaijani central bank was among those in 2020 that stabilised the local currency (the Azerbaijani manat is currency pegged) by tapping their country’s sovereign wealth fund (SWF), adding: “Recent currency depreciation has put further upward pressure on inflation and reduced the scope for additional policy rate cuts, especially for countries with inflation near or above target ranges.”

At the end of September 2020, hydrocarbon-rich Azerbaijan’s SWF, Sofaz, said it expected that its assets would hold steady at around $43bn by the end of 2020, as its diversified investments, including in gold, offset the downward economic pressure from the coronavirus pandemic and cheaper oil.

Azerbaijan’s annual inflation rate crept up from 2.7% to 3% in 2020 and is set to edge up to 3.1% in 2021, according to the International Monetary Fund (IMF), which also gives GDP projections of minus 4% and 2% growth for 2020 and 2021, respectively. Also for GDP, the Asian Development Bank (ADB) sees a 5% decline in 2020 and a recovery of 1.5% in 2021.

Economic woes have taken Azerbaijan's current account balance back into deficit, with the IMF expecting it to hit minus 4.4% of GDP in 2021 (Graph: IMF DataMapper).

The IMF calculates that Azerbaijan, with its exports dominated by oil and gas, recorded a current account deficit of 3.6% of GDP in 2020 (the ADB calculates 5.1%), with the deficit forecast to expand to 4.4% of GDP in 2021 (ADB: 4.5%). In 2019, there was a surplus equivalent to 9.1% of GDP. Azerbaijan’s net lending/borrowing (overall balance) would likely register at minus 5.79% of GDP in 2021 from minus 6.31% in 2020, the Fund added.

In its latest posted Azerbaijan overview, the European Bank for Reconstruction and Development (EBRD) assessed: “The oil price shock on top of the Covid-19 pandemic is taking a toll on Azerbaijan’s economy. Following robust growth at the beginning of 2020, growth in the non-oil sector turned negative with the introduction of public health measures in March. Containment measures were extended multiple times and limitations on regular business activities remain, particularly in the service sector, though they have been loosened.

“Output in the non-oil and gas sector reached a trough in June before it started slowly recovering. In total, non-oil GDP contracted by 1.7 per cent year-on-year in the first eight months, while total GDP fell by 3.0 per cent year-on-year in the same period.

“External and fiscal surpluses have turned into deficits on the back of significantly lower oil revenues and rising expenditures aimed at supporting the economy.”

The hit to Azerbaijan’s public finances from lower oil prices and the pandemic was highlighted by Fitch Ratings in late August 26 when it noted that the government’s planned budget deficit for 2020 had been raised to 12.4% of GDP from 2.3%.


Azerbaijan has moved fast to stamp its economic imprint on the Nagorno-Karabakh lands and surrounding territories it took back from Armenia in the autumn war.

In November 2020, two weeks after the ceasefire declaration, Azerbaijan started the construction of a four-lane bypass to the Nagorno-Karabakh mountain fortress city of Shusha, a place with much religious and cultural significance to both Azerbaijanis and Armenians.

Celebrations in Baku following Azerbaijan's capture of the symbolic city of Shusha at the end of the autumn war (Image: Akykhan Zayedzadeh, cc-by-sa-4.0).

In early January 2021, Baku said it would construct an international airport in Fuzuli, a district adjacent to the Nagorno-Karabakh enclave.

Mid-January 2021 brought a $434mn cost estimate from an Azerbaijani official for constructing a railway between Azerbaijan and Turkey that would take a route across Armenian territory and the Azerbaijani exclave of Nakhchivan.

In early December 2020, Azerbaijan Railways announced it had begun the reconstruction of the 104-kilometre Barda-Aghdam section of the Yevlakh-Khankendi (known to Armenians as Stepanakert) railway.

Hungary’s state-owned Magyar Eximbank lately opened a $100m credit line for Hungarian companies that want to help rebuild in Azerbaijan in the aftermath of the conflict, but of foreign countries it is Azerbaijan’s big ally Turkey that stands to claim the biggest dividend from the military victory, with more arms sales and a variety of business, trade and investment gains. 

In mid-January 2021, Turkish contracting firm Tekfen Insaat, a subsidiary of Turkey’s conglomerate Tekfen Holding, signed a €218mn deal to build a new headquarters for Azerbaijan’s central bank. Days later, the YMT Sans BV unit of Demiroren Holding—a Turkish conglomerate seen as having an affiliation to Turkey's president, Recep Tayyip Erdogan—was selected by Baku to take over the operating rights of Azerbaijan’s state lottery company Azerlotereya within the next five months under a public-private partnership model. The move was outlined in a presidential decree.

In terms of building up the economic standing, security and utility of the Azerbaijani exclave Nakhchivan, which if Baku gets its way will not too long from now be linked to Azerbaijan proper by a land corridor running across Armenia, the energy ministers of Turkey and Azerbaijan in mid-December 2020 signed a memorandum of understanding for the construction of a natural gas pipeline from Turkey to the territory, which is located on the Turkish border.

The security of Nakhchivan’s energy supply would be secured by the pipeline, Turkish Energy Minister Fatih Donmez said on December 15 at the MoU signing ceremony also attended by Azerbaijani counterpart Parviz Shahbazov.

Building a pipeline directly from Azerbaijan to Nakhchivan is out of the question as it would have to go via Armenian territory, and Baku and Yerevan do not have diplomatic relations.

The planned pipeline would be linked to the Igdir Natural Gas Pipeline located in the easternmost Turkish province of Igdir and would likely be filled with gas obtained from Azerbaijan, according to Donmez.


The first few days of 2021 brought news of how Azerbaijan’s long-held ambition to supply Caspian Sea gas to Europe has become a reality, with the launch of Shah Deniz field gas supplies to southern Italy via the $40bn and 3,500-km Southern Gas Corridor (SGC) route of interconnected pipelines running via Georgia (fears that Armenia could attack the Georgian part of the pipeline infrastructure would re-emerge if the Nagorno-Karabakh conflict started up again), Turkey, Greece, Albania and a link laid on the seabed of the Adriatic. The SGC launch means Azerbaijan became a competitor to Russia in supplying EU states with gas. Baku presently plans to build up to 10 bcm of supplied gas a year to European markets, with 8 bcm arriving in Italy and 2 bcm in Greece and Bulgaria via pipeline spurs.

Map of the Southern Gas Corridor (SGC), consisting of the Southern Caucasus Pipeline (SCP), the Trans-Anatolian Pipeline (TANAP) and the Trans-Adriatic pipeline (TAP) (Image: CuriousGolden, cc-by-sa-4.0).

In early August, President Aliyev criticised national oil company Socar as wasteful and said it should feature in a mass privatisation drive, though no privatisation plans have since emerged. He slammed Socar for tapping the state budget rather than its own revenues to implement projects. Prior to taking over from his father as president in 2003, Aliyev was vice president of Socar for almost 10 years.

Until April 2020, Azerbaijan had never imposed production cuts on an energy major operating a big production sharing deal in its Caspian Sea oil fields, but with world oil prices plunging amid the coronavirus crisis, a pressured Baku told the BP-led Azeri-Chirag-Guneshli (ACG) project to cut production sharply. Three weeks ago, Azerbaijan’s Minister of Energy Parviz Shahbazov said the country’s oil production decreased by 8.2% in 2020 due to the OPEC+ (Organisation of Petroleum Exporting Countries+) deal to reduce oil production in the face of collapsed demand sparked by impacts of the pandemic. 

On the last day of 2020, it was reported that Belarus had clinched a new deal to obtain oil supplies from Azerbaijan.


Azerbaijan’s banking industry has long carried some suspect players and 2020 brought a limited shake-out as coronavirus crisis and oil price slump effects proved too much for a handful of lenders. In April, Azerbaijan's central bank placed four of the country's top banks under temporary administration. Temporary administrators were appointed for Atabank, AGBank, NBCBank and Amrah Bank, each of which were among Azerbaijan’s 15 largest financial institutions. Come May, the regulator confirmed the revocation of the licences held by AGBank and NBCBank due to financial problems.

Azerbaijan has a relatively small banking sector, now down to 26 lenders in all. The bailout three years ago of its largest bank, the state-run International Bank of Azerbaijan (IBA), cost the state budget billions of dollars. In October 2019, IBA said it was embarking on a three-year development strategy that would prepare the lender for its delayed privatisation. It also said it planned to set up its own investment company. There was little news of either move during the second half of 2020.

In May, Fitch Ratings affirmed IBA’s long-term issuer default rating (IDR) at 'B-' with a stable outlook. Fitch said that it believed "that some aspects of IBA's credit profile are consistent with a higher rating (in particular, asset quality, franchise and funding and liquidity), but IBA's unhedged open currency position constrains the ratings at 'B-'." It noted that the bank's reliance on sovereign-related customer deposits (51% of total liabilities) supported the stability of the IBA funding base.

Since 1999, the Asian Development Bank (ADB) has allocated funds amounting to $4.4bn to Azerbaijan. It is set to allocate credit resources to Azerbaijan in the amount of $780mn in the 2021-2023 period. In 2021, the ADB will loan Azerbaijan $85mn, in 2022 $370mn and in 2023 $325mn.

The European Bank for Reconstruction and Development (EBRD) in 2020 agreed a deal to offer companies in Azerbaijan loans denominated in Azerbaijani manat (AZN) thanks to a deal with the country’s central bank. The EBRD said that under the arrangement it secured reliable access to AZN liquidity in the form of swap transactions worth a total of $200mn.


Water shortages in Azerbaijan have become so acute that they have started to receive high-level attention.

Top gold miner in Azerbaijan Anglo Asian Mining (LON:AAZ) has reported record revenues for 2020 thanks to higher gold prices that offset disruption from the coronavirus crisis and Nagorno-Karabakh war.

Azerbaijan increased its tomato exports by 13.3% to $190mn during January to November, according to official data. Tomatoes are the country’s second largest export. Lately, however, Russian and Kazakhstan have blocked shipments citing pesticide and phytosanitary issue. There is some speculation that Moscow is using its export ban as leverage in its effort to push the Nagorno-Karabakh post-ceasefire talks in a favourable direction.

Georgia’s Communications Commission (GNCC), a market regulator, wants to reverse the 2019 deal that gave 49% in Caucasus Online to Azerbaijan’s NEQSOL. It contends that prior consent for the agreement was not requested. It has appointed a special manager to Caucasus Online, one of the largest Georgian internet service providers—it controls the 1,200-kilometre submarine fibre-optic cable that links the South Caucasus and Caspian Region to Europe.

Azerbaijan and Turkmenistan are working on a project to install fibre-optic cables linking the two countries under the Caspian Sea.

Azerbaijan’s Azercosmos in September 2020 signed a cooperation agreement that means Globecast, an African media giant, can use Baku’s satellites in broadcasting TV programmes.

A new free trade zone, Alat Free Economic Zone, part of an emerging trade and logistics hub on the Caspian Sea coast, is being developed by Azerbaijan.

Anti-corruption watchdog Transparency International (TI) in December 2020 warned of the “critical” level of risk of corruption in Azerbaijan’s defence sector that has increased in line with increased government defence spending.