Azerbaijan must adjust to less oil at lower prices

Subject

Negative trends in Azerbaijan's economy.

Significance

Azerbaijan's economy is contracting under the impact of low oil prices, weaker purchasing power and reduced public spending. The external current account and fiscal balances are deteriorating. Two devaluations last year could help stabilise the manat, but have created more economic stress in the interim and exposed the fragility of the banking sector. Financial reserves, including the state oil fund, are large in relation to the size of the economy but are shrinking rapidly.

Impacts

• Months of recession will generate anger and potentially anti-government protests.
• The government may be tempted to use military action against Karabakh to distract attention from domestic problems.
• However, sustained low oil prices will reduce previously lavish spending on defence.
• Moves towards economic diversification and privatisation will be resisted by elite groups with vested interests.