In a new outlook, Fitch Solutions projects that Azerbaijan’s economic growth is set to strengthen in 2026, driven by expanding non-oil sectors, rising investment activity, and improved external demand. The report highlights accelerating momentum in infrastructure, transport, and renewable energy, as well as steady gains in private consumption. While hydrocarbon revenues remain a key pillar, analysts point to ongoing diversification efforts as critical to sustaining medium-term stability and boosting resilience against global market volatility.

Azerbaijan’s economic outlook for 2026 points to a moderate recovery, following the slowdown observed in 2025. Real GDP growth is forecast to rise from an estimated 1.4% in 2025 to 2.5% in 2026, supported primarily by domestic consumption and a gradual stabilisation in global oil prices. Although oil remains the dominant export sector, diversification efforts have continued to gain traction, offering some resilience against external price shocks. As of December 2025 (latest available data), Azeri oil GDP accounted for 47.4% of the total, while non-oil GDP was at 52.7%; still output fell by 2.6% y-o-y following a 7.3% contraction in oil output even as non-oil GDP rose by 8.6%, The Caspian Post republishes the article.

In our view, growth in 2026 will be driven largely by household consumption, which will benefits from a stable labour market, historically low unemployment at around 5.2%, and robust real wage gains. Private consumption is expected to contribute roughly 2.5 percentage points (pp) to growth in 2026, reflecting stronger consumer confidence and easing inflation compared to 2025. At the same time, the non‑oil sector will continue to expand as a result of targeted policy measures and recent trade and investment agreements, including new deals with Mainland China, Germany, Türkiye and several European partners.

We expect inflation to ease modestly in 2026. End‑year inflation is projected to ease to 5.0%, down from 5.6% in 2025, placing it within the Central Bank of Azerbaijan’s 2-6% target range. However, risks remain tilted to the upside due to geopolitical tensions and supply chain disruptions, particularly linked to sanctions affecting Russia’s food export flows. Azerbaijan continues to import between 20%-30% of its cereals, dairy and meat from Russia, making it sensitive to elevated transport and transaction costs. In response to these pressures, the central bank is expected to maintain a cautious policy stance, gradually lowering its benchmark policy rate to 6.00% by the end of 2026, from 6.50% currently. The exchange rate will remain tightly managed, with the manat held at AZN1.70 per USD through intervention, reflecting the authorities’ longstanding commitment to currency stability.

Fiscal policy in 2026 will be guided by a conservative approach designed to gradually reduce reliance on oil revenues. The government expects a budget deficit of around 1.9% of GDP, broadly in line with 2025. Revenues and expenditures will both rise only marginally, by about 0.7% y-o-y, reflecting deliberate restraint amid uncertain oil market conditions. A notable development is the increasing share of non‑oil revenues, which are projected to grow by double digits in 2026 and exceed 57% of total revenues. This will be accompanied by an 11% reduction in transfers from the State Oil Fund (SOFAZ), signalling a gradual shift towards long‑term fiscal sustainability. Defence spending will remain elevated despite peace efforts with neighbouring Armenia. Some observers have suggested that the country's continued efforts to boost defense spending (rising by 4.0% to 21.0% 2026 and is already the highest in the region), comes due to geopolitical tensions with Russia. Azerbaijan-Russia ties reached a new low in 2025 following the crash of an Azeri airline flight in Russia at the end of 2024. Though some improvement was seen in October 2025 after Russia's President Vladimir Putin apologised for the incident, ties remain strained with Azerbaijan looking instead to improve its relationship with Western partners such as the EU and the US.

Indeed, with it emerging as an alternative source of oil and natural gas to Russia, the country has benefited from the relative geopolitical distancing from the formerly sanctioned nation. However, Azerbaijan’s energy sector remains intertwined with Russia’s, creating a form of structural dependence despite Baku’s efforts to position itself as an alternative supplier to Europe. The SOCAR‑owned STAR refinery in Türkiye relies on Russian crude for around 98% of its feedstock, with 73% supplied directly by Russia-based Lukoil, a company already under US sanctions. This arrangement means a significant share of STAR’s refined products, 87% of which are exported to Europe, ultimately channels revenue back to Russia, reinforcing Moscow’s role in Azerbaijan’s downstream operations.

In late 2025, the STAR refinery reportedly began reducing its purchases of Russian crude oil, reflecting a gradual geopolitical retreat. According to Reuters sources, the refinery has started sourcing alternative supplies, recently buying four cargoes from Kazakhstan, Iraq and other non‑Russian producers. This marks a shift from previous years, when Russian crude made up the bulk of STAR’s feedstock. Indeed, monthly import data also shows that Azeri imports from Russia fell on a year-to-date basis as of October 2025 (latest available data); 12.5% of imports came from Russia, compared to over 17.0% at the beginning of the year.

Despite growing energy exports to Europe, we expect Azerbaijan's current account surplus to narrow substantially, from 5.0% in 2024 to 2.6% in 2025 and 2.5% in 2026. Oil and gas exports will continue to dominate, accounting for more than 80% of export earnings. To an extent, Azerbaijan faces growing sanctions exposure due to its state‑owned enterprises’ documented involvement in transporting and refining large volumes of Russian crude for export, placing Baku at risk of being viewed as a facilitator of sanctions evasion. The UK has already sanctioned Azerbaijani‑flagged vessels such as the Zangezur, owned by the state shipping company ASCO, after repeated calls at Russia’s Primorsk port and deliveries to the SOCAR‑owned STAR refinery in Türkiye, which in 2024 relied on Russian crude for the vast majority of its feedstock.

Nevertheless, we remain less concerned about broad secondary sanctions being placed on Azerbaijan, particularly as the US expands its geostrategic position in the region. US engagement in the region began with a summit in Washington DC in August 2025, when the leaders of Armenia and Azerbaijan initialled a peace deal. Part of these talks included the US commitment to support Armenia in building a transit corridor through its territory that will connect Azerbaijan to its Nakhchivan enclave bordering Türkiye. The so-called Trump Route for International Peace and Prosperity (TRIPP) will be mostly owned (74.0%) by the US according to a agreement signed by Armenia in January 2026, with a joint venture entity working on the development and operations of the tolled zone. In February, US Vice President JD Vance made a visit to the region to continue supporting the growing strategic partnership with both capitals. During this visit several other deals were signalled, with the US expressing readiness to support critical minerals cooperation, transport and customs modernisation, and advanced technology exports, while offering Armenia assistance in replacing its ageing Metsamor nuclear plant with US small modular reactors in an attempt to rely less on Russia. In Azerbaijan, commitments on energy security, maritime infrastructure and logistics upgrades are expected to boost its role as a regional transit hub, while investors have already shown strong interest in the TRIPP corridor, with Vance noting that 'billions of US dollars' could flow into related projects. Even as the US has proven to be a less reliable partner for Europeans, for both Armenia and Azerbaijan, it acts as a significant alternative in terms of strategic partnership to Russia. Therefore, it is likely that, both in terms of economic and geopolitical partnership, efforts to deepen ties with the US will continue in full force throughout 2026.