Oil Money vs. Economic Crisis: The Case of Azerbaijan
In Network E-Brief 6/2010 CASE Fellows Alexander Chubrik and Mateusz Walewski examine the effects of global financial crisis on Azerbaijan’s economy. As a small, CIS country dependent on oil exports, Azerbaijan is an interesting case study. The worst damage to its economy was not a direct result of the crisis, but of the drop in oil prices which led to a serious GDP reductions. In early 2010, oil prices and investment are on the rise and the outlook for Azerbaijan’s non-oil sector is improving, but the authors warn that inflation is becoming the main short-term challenge which may undermine recovery by offsetting rising non-oil exports and by contributing to both an increase of imports and a non-oil external trade deficit.
Oil Money vs. Economic Crisis: The Case of Azerbaijan
by Mateusz Walewski and Alexander Chubrik
The affect of the global financial crisis on Azerbaijan’s economy is an interesting case study, particularly because it is a small CIS (Commonwealth of Independent States) transition country strongly dependent on oil exports. In fact, oil constitutes about half of the country’s GDP. Therefore, the channels by which the recent economic crisis influenced the local economy are slightly different to those experienced by other economies in the region. For example, other transition economies were hit badly due to massive outflows of foreign capital, leading to serious currency depreciation. Additionally, decreasing demand and falling prices for export products, mostly raw and simple manufactured goods, accompanied by reduced investment demand led to serious GDP reductions.
Although Azerbaijan’s economy also experienced these negative trends they were not the most important factors. Instead, the economy was mostly affected by a drop in oil prices. As a result, there were three direct channels by which the global crises influenced the Azerbaijani economy:
• Fall in oil prices;
• Fall in external demand for Azeri non-oil products;
• Outflow of foreign capital.
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