Azerbaijan Country Risk Rating

Azerbaijan remains medium-high overall, despite further progress in reducing tensions with Armenia. Political violence and legal & regulatory risk are rated high, while political interference is medium-high. President Ilham Aliyev retains dominant control over the political system, with limited opposition space, weak judicial independence and significant state influence over major sectors. The most important positive development is the continued improvement in relations with Armenia. By July, both governments were describing the peace process as substantive, with direct trade and political contacts resuming and work progressing on transport links. However, Azerbaijan continues to demand constitutional changes in Armenia before a final peace treaty is fully implemented, and unresolved border or domestic political issues could still create setbacks. Political violence remains high despite the reduction in direct interstate fighting.

The IMF expects GDP growth of 2.2% in 2026. Hydrocarbon output is likely to contract, while the non-oil economy is projected to expand by around 3.7%. Higher oil and gas prices generated by the Middle East conflict improve export receipts and the current account, while Azerbaijan’s combined foreign-exchange and sovereign-wealth assets provide a very large external buffer. Inflation is expected to average around 6% in 2026, reflecting imported price pressure and domestic demand. Supply-chain disruption and the risk of doing business are rated medium. The country is investing heavily in its role as a transit corridor between Central Asia, the Caucasus and Europe, including the U.S.-supported transport corridor linked to Armenia, but state dominance and regulatory opacity remain obstacles for private firms. Sovereign non-payment risk is medium, exchange transfer risk is medium-low, banking-sector vulnerability is medium-low and the government’s inability to provide stimulus is medium-low. Public debt is modest and the State Oil Fund provides substantial fiscal capacity. The key longer-term weakness is economic concentration: declining mature oil production and dependence on hydrocarbons make diversification essential. Peace with Armenia and greater regional connectivity could materially reduce risk, but institutional reform and a broader private sector will be necessary for a sustained improvement.