IV.

Economy

The collapse of the Soviet Union had a devastating impact on Azerbaijan’s trade-dependent economy. As traditional markets and trading links were severed, Azerbaijan’s economy fell into severe decline. The Nagorno-Karabakh conflict, which imposed an economic burden of providing for approximately 1 million refugees, compounded the economic crisis. Skyrocketing inflation caused consumer prices to rise by 1,664 percent in 1994, while also making the country’s new currency, the manat, practically worthless. As a consequence, living standards deteriorated for the majority of the population.

The economy began to recover after the government of Azerbaijan introduced an economic stabilization program in 1995 with the support of the International Monetary Fund (IMF). Also that year, the government launched a program to transfer state-owned enterprises to the public sector. Azerbaijan’s gross domestic product (GDP), which measures the value of goods and services produced, began to show growth in 1996. In 2006 GDP was $19.9 billion.

Azerbaijan is one of the world’s oldest oil exporters, and development of the country’s extensive petroleum reserves remains central to its economic future. Foreign investment is focused almost exclusively in the petroleum industry. Other sectors have received relatively little development since independence.

A.

Agriculture

Agriculture produced 7 percent of GDP in 2006. About 40 percent of the workforce is employed in agriculture. Cotton is the leading export crop. Fruits, vegetables, grains (primarily wheat), wine grapes, tea, and tobacco are also grown. Most crops are cultivated in lowland areas and require extensive irrigation. Some of Azerbaijan’s best farmland is located in Nagorno-Karabakh and along the Kura and Aras rivers. Livestock raising is also important, and extensive pastures provide grazing lands for sheep, cattle, and goats.

Agricultural production declined during the 1990s. The conflict involving Nagorno-Karabakh contributed to the decline, in part because transportation links were disrupted. Production was also adversely affected by the breaking up of large state-owned and collective farms that had been established during the Soviet period. Those farms were replaced by smaller, privately owned farms, which for lack of machinery and fertilizers have tended to focus on subsistence agriculture (the cultivation of crops for personal consumption). In addition, the ability to bring agricultural products to market is hindered by the country’s underdeveloped distribution routes.

B.

Mining and Manufacturing

The extraction of petroleum is the country’s largest industry, and it supports a number of other industries, including petroleum refining, petrochemicals processing, and equipment manufacturing. Other factories produce glass, ceramics, textiles, and clothing.

Most of Azerbaijan’s oil is found in fields under the Caspian Sea. Reserves of natural gas are also located in offshore fields. Azerbaijan also possesses deposits of iron ore, aluminum, copper, and zinc; industrial minerals, such as iodine and bromine; precious and semiprecious gems; and marble.

In the early 1990s Azerbaijan opened its oil industry to foreign investment as a way to fund development, both for the exploration of new offshore fields in the Caspian and for the construction of new export pipelines. The subsequent discovery of massive offshore oil and gas fields, the Azeri-Chirag-Guneshli oil field and the Shah Deniz gas field, significantly improved Azerbaijan’s export prospects.

The establishment of new, commercially viable oil and gas pipelines was critical to growth in exports. Initially, petroleum was exported solely via a pipeline to the Russian Black Sea port of Novorossiysk. In 1999 a new pipeline opened between Baku and the Black Sea port of Supsa, Georgia, to facilitate the export of oil to Europe.

Another new pipeline opened in May 2005 linking Azerbaijan with Turkey, providing the first direct route between Caspian oil fields and the Mediterranean Sea. This pipeline was especially significant for reaching markets beyond Europe, as the Mediterranean is accessible to large oil tankers. The 1,770-km (1,100-mi) pipeline carries crude oil from Baku, through central Georgia via Tbilisi, to the port of Ceyhan in Turkey. Known as the Baku-Tbilisi-Ceyhan (BTC) pipeline, it will carry about 1 million barrels of oil a day once it reaches full capacity later in the decade. The pipeline was primarily developed as a conduit for Azerbaijan’s new Azeri-Chirag-Guneshli oil field, but at full capacity it will take oil from Kazakhstan’s offshore fields as well. Meanwhile, construction began on a new gas pipeline following the discovery of massive reserves of natural gas in 1999. Scheduled to open in 2006, this pipeline will carry natural gas along a route roughly parallel to the BTC oil pipeline.

C.

Energy

About 88 percent of Azerbaijan’s electricity comes from thermal power stations fueled by oil and natural gas. Hydroelectric facilities produce the remainder of the country’s electricity.

D.

Currency and Trade

Since gaining independence, Azerbaijan has worked to develop new trading relationships with countries outside the former Soviet Union. Its leading markets for exports are Italy, France, Israel, Russia, and Turkey. Its main sources of imports are Russia, Turkey, Kazakhstan, the United States, and the United Kingdom. Oil and oil products are leading exports. Machinery and equipment are leading imports.

Until 1994 Azerbaijan used the Russian ruble as its currency. That year, the Azerbaijani manat became the sole legal tender (1 manats equal U.S.$1; 2006 average).

E.

Transportation

The transportation system in Azerbaijan is considered inadequate for the country’s long-term needs. Paved roads extend along the Caspian Sea north to Russia and south to Iran. Other paved roads connect Baku with Tbilisi in Georgia. During the Soviet era, a rail line extending north was the country’s principal route for transporting goods; regional disputes have since occasionally closed the railroad. Azerbaijan now depends on a railroad through Georgia to ports on the Black Sea for much of its imports.