Future Azerbaijani growth will be lower than before

Subject

Azerbaijan's January-June contraction.

Significance

Azerbaijan's economy contracted in the first half of 2016 owing to the effects of low oil prices and currency devaluation. Banking assets have been damaged by the manat's weakened exchange rate, and the authorities have taken remedial action including the creation of a new financial regulator. Government efforts to raise budget revenues and cut spending are constrained by the desire to build hydrocarbon export facilities and maintain social provision.

Impacts

• The government will ring-fence social support spending to ward off protests.
• A serious focus on economic diversification is likely to clash with vested political and business interests.
• Azerbaijan is hoping to become a trade transit hub for Russia and Iran, despite difficult past relations with both.