Oil dependency and growth instability in Azerbaijan

THE MINISTRY OF EDUCATION AND SCIENCE OF

THE KYRGYZ REPUBLIC

ALA-TOO INTERNATIONAL UNIVERSITY

ECONOMICS AND ADMINISTRATIVE SCIENCES FACULTY

ECONOMICS DEPARTMENT

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Oil dependency and growth instability in Azerbaijan

Research paper in Macroeconomics

By: Aikanysh Zheteshikova

Instructor: Wajeeha Batool

Bishkek 2026

Table of contents:

Abstract        3

1.  Introduction        3

1.1  Overview and question        3

2.  Literature review        5

2.1  Dutch Disease Theory        5

2.2  Rentier State Theory and SOFAZ Dependency        6

2.2  Classical and Keynesian        6

3.  Data and Methodology        7

3.1  Overview and Research Design        7

3.2  Variable Definitions Five variables are selected in this study.        8

3.3  Analytical Methods        10

4.  Empirical Analysis        10

4.1  Phase 1 (2005–2013): The Boom and Its Structural Consequences        10

4.2  Phase 2 (2014–2016) - The Oil Price Collapse: A Keynesian Contraction        13

4.3  Phase 3 (2020–2024) - COVID-19 demand shock and Recovery        14

4.4  Pearson Correlation        15

5.  Discussion        16

5.1  Discussion        16

6.  Conclusion        17

6.1  Conclusion        17

6.2  Policy Recommendations        17

7.  References        18

OIL DEPENDENCY AND GROWTH INSTABILITY IN AZERBAIJAN

A Macroeconomic Analysis of Azerbaijan (2005-2024)

Abstract

This research examines oil dependency and instability in economic growth. The study evaluates how natural resources affect GDP development and volatility. Using a time period trend analysis, and Pearson correlation. This research finds that oil has a positive moderate association with GDP growth and the coefficient of determination (R²) was measured to find the proportion of variation in the dependent variable explained by the independent variable.

Keywords: Oil dependency, GDP growth, Dutch disease, Classical and Keynesian theories, Azerbaijan.

1.  Introduction

1.1  Overview and question

In many developing countries, natural resources create both fiscal and long-term macroeconomic risks. This is not about being rich by selling natural resources but rather the opposite, meaning converting one asset to another asset. While commodity exports give financial governmental opportunities for investments, economic growth. Also exposed to price shocks. Price shocks tell about instability in global prices, which can cause GDP deterioration, inflation, and dependence on the hydrocarbon sector. This tension between resource-rich economies and macroeconomic volatility has continued to be the major economic debate.

Azerbaijan is one of the countries, providing case study for analysing this major concern. Following the completion of the Baku Tbilisi Ceyhan pipeline in 2006, the country experienced immediate expansion in oil export, leading to the rapid GDP growth approximately 28% in 2005 and 34,5% by the year of 2006 (World Bank, 2005; World Bank, 2006). Oil and gas revenues rapidly emerged as the dominant component of both government fiscal revenues and total export earnings with oil rents (% of GDP) which explains the economic profit generated from crude oil production at global prices after subtracting the total cost of production. Oil rents estimated 37.45-39.58% of GDP during the peak years especially in 2006. (World Bank, 2005; World Bank, 2006).The State Oil Fund of Azerbaijan (SOFAZ), established in 1999, came to account primary accumulation of revenues from petroleum production and subsequent transfer into government receipt, leaving the government’s fiscal position acutely exposed to oil price shocks.

We are going to look thoroughly on how external shocks such as change in global price and others affected the economy during 2014-2016 oil price decline and the 2020 COVID-19. The reasons why prices fell from $115 to below $35 in 2014-2016 are due to OPEC’s market decision, oversupply, and weaker demand. (EIA, 2024). As prices declined, GDP slowdown occured. Annual GDP growth witnessed sharp economic decline from 2.8% to -3.1% in 2014 and 2016 respectively (World Bank, 2014; World Bank, 2016). The second external shock happened in 2020 during COVID-19 pandemic when transports were less than usual and there was no need for oil consumption. The value of oil fell approximately by 42 dollars per barrel for one year, which caused a downturn in Real GDP by 4,3%. The main indicator of Real GDP contraction was the oil sector which decreased by 7,2%, while non-oil GDP dropped by 2,6% (IMF, 2021). These two precise figures question that Azerbaijan is capable of controlling its own nation.

All in one this paper analyses the  relationship between oil dependence and GDP instability within a period of 2005 to 2024. To economic schools one is classical and the other Keynesian would be given in this case. From a Classical perspective, an oil dependent economy should at least be able to adjust its own economy. Their main insight is  self regulation is the best way to reallocate economic activity. But in reality it cannot be too smooth to solve issues especially when the state is  tied so heavily to a single oil sector.

The Keynesian view is pessimistic. In Azerbaijan’s case, oil revenues do not just sit in the background but it directly feeds government spending,  investment, wages and consumption. When the price of oil falls the spending would also fall . At that point waiting for markets’ self regulation can look less attractive and more like delay.

The core question, to what extent Azerbaijan's reliance on oil revenues actually contributed to instability in GDP growth between 2005 and 2024, and which frameworks explain this relationship.