An Economy Transformed Over the Centuries: Azerbaijan’s Past, Present and Future

It is not possible to associate the emergence of Azerbaijan’s economy with a specific year. Economic activity began in ancient times, when people first settled in the territory of present-day Azerbaijan. Initially, hunting, gathering and farming were the main activities. Later, livestock breeding, handicrafts, trade and the oil industry developed.

The history of Azerbaijan’s economy can be divided into several main periods: ancient times, the Middle Ages, the nineteenth century, the Soviet period and the period of independence beginning in 1991.

1. Ancient Times — The Early Formation of the Economy

From the seventh and sixth millennia BC, and even earlier, people in the territory of present-day Azerbaijan engaged in various economic activities. Archaeological discoveries indicate that agriculture, livestock breeding and handicrafts developed in different parts of the region.

The main economic activities during this period included:

· Agriculture and grain production;

· Livestock breeding;

· Hunting and fishing;

· The production of stone, clay and metal objects;

· The exchange of goods between local communities.

Over time, production capabilities increased, settlements expanded and trade relations developed.

2. Antiquity and the Middle Ages — The Development of Trade and Handicrafts

From the fourth century BC through the early centuries AD, political entities such as Caucasian Albania existed in the territory of present-day Azerbaijan and played an important role in organizing economic life.

During this period, handicrafts and trade developed alongside agriculture. In the Middle Ages, Azerbaijan gained economic importance because it was located along trade routes connecting East and West.

The main economic activities included:

· Silk production and textile manufacturing;

· Carpet weaving;

· Pottery and metalworking;

· Agriculture and horticulture;

· Domestic and international trade.

Shamakhi, Tabriz, Ganja, Barda and other cities were known as centers of trade and craftsmanship during different historical periods. Silk, carpets, agricultural products and handicrafts played an important role in trade.

3. The Nineteenth and Early Twentieth Centuries: The Rise of the Oil Industry

One of the most significant turning points in Azerbaijan’s economic development was the rapid expansion of the oil industry in the nineteenth century.

In 1846, oil was extracted using industrial methods at the Bibi-Heybat oil field in Baku. In the following decades, the number of oil wells increased, oil-processing facilities were established and foreign investment was attracted to the country.

The main stages of development included:

· 1859: An oil refinery was established in Baku.

· The 1870s: Entrepreneurship and foreign investment in the oil industry expanded.

· 1878: An oil pipeline was built to connect the Balakhani oil fields with oil-processing facilities in Baku.

· 1883: The Baku–Batumi railway was put into operation, making oil transportation easier.

· 1901: Azerbaijan’s oil production reached approximately 11 million tonnes, accounting for more than half of global oil production.

During this period, Baku became a major industrial center. Alongside the oil industry, banking, transportation, trade, construction and processing industries also developed. Local entrepreneurs, including Haji Zeynalabdin Taghiyev and Murtuza Mukhtarov, played an important role in shaping economic life.

Nevertheless, the benefits of economic development were not distributed equally. Much of the wealth was concentrated in the hands of certain entrepreneurs and companies, while some workers faced harsh working conditions.

4. 1918–1920: The Azerbaijan Democratic Republic

The Azerbaijan Democratic Republic was established on 28 May 1918. One of the main tasks facing the newly independent state was to restore an economy weakened by wars and political changes.

During this period:

· Public finances and budget management were being organized.

· Attention was focused on restoring oil production and exports.

· Steps were being taken to improve railway operations and trade relations.

· A national economic management system was being developed.

However, political instability, transportation difficulties and export challenges limited economic development. In April 1920, Soviet rule was established in Azerbaijan, and the country’s economic system was gradually adapted to the Soviet model.

5. 1920–1991: The Soviet Economy

During the Soviet period, Azerbaijan’s economy was managed according to the principles of a centrally planned economy. The main production priorities and the allocation of resources were largely determined at the Union level.

Several major sectors of the economy developed during this period.

Oil and gas industry: The oil fields of Baku and the Absheron Peninsula played an important role in supplying energy to the Soviet Union. The development of offshore oil extraction technologies was also significant.

Industry: The chemical industry, oil refining, machine building, metallurgy and electricity generation expanded.

Agriculture: Cotton growing, viticulture, vegetable farming, grain production and livestock breeding developed.

Infrastructure: Roads, railways, power stations, residential buildings and social facilities were constructed.

At the same time, enterprises had limited independence under the planned economy. Since several industries depended on demand across the Soviet Union, its collapse led to serious economic problems.

6. 1991–1995: Economic Crisis in the Early Years of Independence

On 18 October 1991, the Constitutional Act on the State Independence of the Republic of Azerbaijan was adopted. The first years of independence were economically difficult.

The main problems included:

· The breakdown of established production and trade relations following the collapse of the Soviet Union;

· Humanitarian and economic difficulties caused by the conflict with Armenia;

· Declining industrial production and interruptions in the operations of enterprises;

· High inflation and the depreciation of the national currency;

· Unemployment and declining living standards.

According to the World Bank, Azerbaijan’s real gross domestic product (GDP) declined by approximately 63% between 1989 and 1995.

This period is considered one of the most difficult stages in the country’s transition to a market economy.

7. 1994–2000: The Oil Strategy and Economic Stabilization

On 20 September 1994, the “Contract of the Century” was signed. Azerbaijan expanded its cooperation with international energy companies to develop oil fields in the Caspian Sea.

The agreement marked an important milestone in the country’s economic history. It laid the groundwork for attracting foreign investment into the oil sector, increasing production and developing export infrastructure.

During these years:

· Measures to transition to a market economy continued.

· Conditions for the development of private entrepreneurship and the banking system improved.

· Opportunities for attracting foreign investment expanded.

· In 1999, a decision was made to establish the State Oil Fund of Azerbaijan to manage oil revenues for the benefit of future generations.

The oil sector began to become a major driver of economic growth. Nevertheless, developing the non-oil sector and diversifying the economy remained important priorities.

8. 2000–2014: Oil Revenues and Rapid Economic Growth

Azerbaijan’s economic development accelerated during the 2000s. Rising oil production, the commissioning of international pipelines and increases in global energy prices brought substantial revenues to the country.

The main developments included:

· 2006: The Baku–Tbilisi–Ceyhan oil pipeline became fully operational.

· 2007: Gas exports expanded through the Baku–Tbilisi–Erzurum gas pipeline.

· Government revenues and investment opportunities increased.

· Roads, bridges, schools, hospitals and other infrastructure facilities were built.

· The banking, construction, trade and service sectors expanded.

In 2006, Azerbaijan’s real GDP growth reached 31%. According to the International Monetary Fund, this rapid growth was mainly associated with increases in oil production and transportation.

However, dependence on oil revenues remained one of the economy’s main weaknesses. Fluctuations in oil prices directly affected government revenues and economic growth.

9. 2014–2020: Economic Diversification

During this period, Azerbaijan’s economy faced fluctuations in oil prices and external economic challenges. The decline in global oil prices in 2014–2015 put pressure on the national currency, and the manat was devalued twice in 2015.

As a result, economic policy placed greater emphasis on developing the non-oil sector.

The main areas of focus included:

· Agriculture and food production;

· Tourism and hotel services;

· Transportation and logistics;

· Industrial parks and manufacturing facilities;

· Small and medium-sized enterprises;

· Expanding exports beyond the oil sector.

In 2020, the COVID-19 pandemic negatively affected economic activity, tourism and the service sector. The war with Armenia that year also created additional economic and social challenges for the country.

10. 2021–2025: Recovery, Reconstruction and New Economic Priorities

Economic activity recovered after the pandemic. Reconstruction work, infrastructure projects and resettlement in the Karabakh and East Zangezur economic regions became important parts of the country’s economic agenda.

At the same time, Azerbaijan began placing greater emphasis on developing the following sectors:

· Renewable energy and green energy projects;

· Digitalization and information technology;

· Transportation and international transit;

· Tourism and agriculture;

· The non-oil industrial sector.

Although the non-oil and gas sector recorded growth, oil and gas exports continued to play an important role in the country’s foreign trade.

11. 2026: The State of Azerbaijan’s Economy

Full-year results for 2026 are not yet available. Therefore, the current state of the economy can be assessed using the State Statistical Committee’s figures for January–August.

January–August 2026

Indicator

Result

Gross domestic product (GDP)

1.2% real year-on-year growth

Non-oil and gas sector

2.1% real year-on-year growth

Information and communications

10.7% real growth

Transportation and storage

8.7% real growth

State Statistical Committee of the Republic of Azerbaijan, 11 September 2026.

During the same period, value added in the oil and gas sector declined by 0.8% compared with the corresponding period of the previous year. Total industrial output amounted to 44.6 billion manats. Real growth in the non-oil and gas industrial sector reached 5.4%.

These figures indicate that information technology, transportation and non-oil manufacturing are among the sectors showing growth in 2026. At the same time, growth rates and performance vary across sectors.

Overview of Azerbaijan’s Economic Development

Period

Main economic characteristics

Ancient times

Agriculture, livestock breeding and early forms of exchange

Antiquity and the Middle Ages

Handicrafts, silk production and trade

Nineteenth century–1918

Rise of the oil industry and industrialization

1918–1920

Formation of a national economic management system

1920–1991

Planned economy, industrial development and agriculture

1991–1995

Economic crisis and transition to a market economy

1994–2000

Oil strategy and foreign investment

2000–2014

Rapid economic growth driven by oil revenues

2014–2020

Impact of oil price fluctuations and diversification efforts

2021–2025

Recovery, reconstruction and development of the non-oil sector

2026

Expansion of non-oil industries and continued economic growth

Azerbaijan’s economy has undergone a long historical process of development, beginning in ancient times. Agriculture and handicrafts initially played the leading roles, while the development of the oil industry in the nineteenth century gave the country an important position in the international economic system.

Although industry and infrastructure expanded during the Soviet period, Azerbaijan faced difficulties in transitioning to a market economy after gaining independence in 1991. Since 1994, the country’s oil strategy has become one of the main sources of foreign investment and economic growth.

In 2026, Azerbaijan’s main economic challenges include using oil and gas revenues efficiently, strengthening the non-oil sector, increasing productivity, creating new jobs and ensuring long-term economic sustainability. In other words, the next stage of the country’s economic development will depend not only on exporting natural resources but also on expanding competitive manufacturing and service industries.