BAKU, Azerbaijan, September 18. Azerbaijan is gradually reshaping an economic model in which oil and gas have played a major role for decades, supporting the country’s budget, export revenues and investment capacity.
The shift does not mean abandoning the oil and gas sector. Rather, the goal is to use the capital accumulated through the energy sector to develop industries capable of generating additional sources of growth beyond the resource-based economy.
That approach is already reflected in the country’s long-term policy priorities. In 2021, Azerbaijan approved five national priorities under the “Azerbaijan 2030” agenda, focusing on a competitive economy, an inclusive society, human capital and innovation, the Great Return program, and a clean environment and green growth.
In May 2025, the government also ordered the preparation of Azerbaijan’s Socio-Economic Development Strategy for 2027–2030, which is expected to define the next stage in implementing those priorities.
The key question today, therefore, is not so much whether to set new goals, but how effectively existing priorities can translate into higher productivity, investment, exports and new sources of employment.
From energy capital to technology exports
Diversification is one of the central challenges of Azerbaijan’s economic transformation.
For Azerbaijan, this means gradually increasing the role of the non-oil sector not only in GDP but also in exports. Potential growth areas include traditional industries and agriculture, as well as sectors that can scale beyond the domestic market.
The digital economy is one such area.
A significant part of the necessary digital infrastructure has been developed in recent years. In December 2025, Azerbaijan approved its Digital Economy Development Strategy for 2026–2029, followed on Feb. 27, 2026, by an Action Plan to Accelerate Digital Development for 2026–2028. The action plan covers digitalization, e-government, artificial intelligence, innovation and the development of national technological capabilities.
The technology sector, however, remains relatively small. According to data published by Reuters in August 2026, the sector accounted for about 2.1% of GDP in 2025. That year, 22 startups raised $2.62 million, while three venture funds had combined capital of about $11 million.
These figures suggest that the potential of Azerbaijan’s digital economy remains significantly larger than its current scale.
One potential avenue for further development is attracting international capital and creating conditions for regional technology and research centers to establish operations in Azerbaijan.
The opportunity is not necessarily to build a traditional IT outsourcing hub, but rather to develop a regional technology and R&D hub. International companies could use Azerbaijan as a base for engineering teams, software development, research activities and exports of digital services.
The effectiveness of any incentives should be measured not only by the number of companies registered, but also by broader indicators such as jobs created, export revenues, research and development spending, training of local specialists and investment volumes.
Such an approach could gradually shift the focus from the mere presence of international businesses to their contribution to Azerbaijan’s long-term technological capabilities.
Helping promising technologies scale
Another element of the ecosystem is the gradual development of alternative financing mechanisms.
Azerbaijan already has a legal framework for crowdfunding, and the Central Bank includes the relevant legislation among the country’s existing financial-market regulations.
Government support for innovative entrepreneurship is also expanding. As of Aug. 19, 2026, 292 small and micro businesses had received a “Start-up Certificate,” which provides a three-year exemption from profit or income tax on income derived from innovative activities.
The next challenge could be not only creating new startups but also helping them scale.
One potential tool would be greater participation by private venture capital. For example, co-financing mechanisms involving private investors or venture funds could increase the resources available to startups while preserving a significant role for the private sector in selecting projects.
Another potential instrument is pilot government procurement of innovative solutions. For young technology companies, one of the most difficult stages is often moving from product development to the first major commercial deployment.
Government institutions and other public-sector organizations could test solutions through pilot projects in areas such as artificial intelligence, transportation, energy, cybersecurity, water-resource management and smart-city technologies.
If successfully implemented, such projects could serve not only to digitalize public services but also as a first real market for domestic technology companies.
Human capital as the foundation of the new economy
Technological transformation will inevitably change the structure of the labor market.
Artificial intelligence, automation and digitalization can create new occupations while changing the nature of existing ones. As a result, increasing importance is being placed not only on supporting people who change or lose their jobs, but also on giving workers opportunities to regularly update their skills.
Potential tools include individual mechanisms for financing education, such as training vouchers or programs in which funding is partly linked to learning outcomes, certification and subsequent employment.
Areas likely to remain in demand include artificial intelligence, data analytics, cybersecurity, engineering, automation, energy, water-resource management and modern agricultural technologies.
Such programs could gradually evolve beyond retraining into a broader lifelong-learning system. As technology changes rapidly, workers may increasingly need opportunities to update their skills throughout their careers rather than rely on a single profession for life.
At the same time, cooperation among schools, universities and businesses remains important. Existing initiatives, including STEAM Azerbaijan, could provide a foundation for further development of such a system.
Another potential resource is the pool of Azerbaijani specialists working abroad. Their participation in research projects, technology entrepreneurship and educational programs could provide an additional channel for transferring knowledge and expertise to Azerbaijan.
International experience, however, shows that bringing specialists back does not by itself create an innovation ecosystem. Research teams, laboratories, funding sources and mechanisms for commercializing developments are also needed.
One possible approach, therefore, is to develop mechanisms for so-called “brain circulation,” allowing specialists working abroad to participate in projects in Azerbaijan without necessarily returning permanently.
More broadly, economic transformation can be viewed as a gradual shift from one form of capital to another: from natural capital to human capital, from human capital to technological capital, and from technology to higher-value products and services.
From this perspective, reducing dependence on resource revenues does not mean abandoning oil and gas. It means expanding the number of sources of future economic growth.
Karabakh as a platform for new technologies
The reconstruction of Karabakh and Eastern Zangazur creates an opportunity to introduce modern solutions as new infrastructure is being built.
Smart cities, digital infrastructure-management systems, modern energy networks and renewable energy are already being considered as elements of development in these territories. The Great Return is also one of Azerbaijan’s five national priorities.
Digitalization of agriculture could offer particular potential.
Satellite monitoring, unmanned systems, soil-moisture sensors and automated irrigation can improve the efficiency of resource use. For a country facing growing water-supply risks, agricultural efficiency could increasingly be measured not only by crop yields but also by the amount of output generated per unit of water used.
Karabakh and Eastern Zangazur could provide a platform for testing modern agricultural technologies, water-management systems and other digital solutions that could later be scaled up in other parts of Azerbaijan.
Digital and green economies can develop together
Another area likely to gain importance in the coming years is the intersection of digital and green technologies.
The expansion of renewable energy creates demand not only for new generation capacity but also for systems that forecast electricity production, manage energy consumption, store power and improve grid efficiency.
In the first half of 2026, electricity generation from renewable sources, including hydropower, totaled 2.7937 billion kWh in Azerbaijan. During the same period, wind power generation reached 475.7 million kWh, while solar generation totaled 282.7 million kWh.
Azerbaijan is also continuing to develop wind and solar projects as well as regional energy links.
This creates a potential niche for energy technology, or energy-tech — digital solutions linked to the power system, including smart-grid management, supply-and-demand forecasting and energy-efficiency technologies.
A similar approach could be applied to water resources.
Water management is becoming increasingly important at the national level. In 2026, government agencies highlighted the need to improve the resilience of water supply and resource management, while water-supply issues in Baku and the Absheron Peninsula became the subject of a separate state program.
Under these conditions, digital monitoring, automated irrigation, soil-moisture sensors, reductions in water-network losses, the reuse of treated wastewater and, where economically viable, desalination technologies could address environmental challenges while creating demand for new technological solutions.
In January 2026, Azerbaijan approved a State Program for Improving Water Supply, Stormwater and Wastewater Systems in Baku and the Absheron Peninsula for 2026–2035. The program provides for infrastructure modernization, greater resilience of water supplies and reduced risks associated with heavy rainfall and flooding.
The water sector could therefore become an example of how an environmental challenge can simultaneously create a technological and economic opportunity.
From energy capital to new forms of capital
Ultimately, Azerbaijan’s economic transformation does not necessarily have to mean replacing one economic model with another.
A more gradual approach could involve using the strengths of the oil and gas sector — financial resources, infrastructure, energy expertise and accumulated human capital — to develop new sources of growth.
In this sense, the oil and gas sector can remain an important part of the economy while providing a resource base for developing human capital, technology, infrastructure and new export-oriented industries.
The next stage could involve strengthening the link between public investment, private capital and measurable outcomes, including higher productivity, exports of digital and technology services, skilled job creation and the development of local capabilities.
For the digital economy, this means gradually moving from support for individual projects toward creating conditions for them to scale. For the green economy, it means not only expanding renewable energy but also developing new technology industries around it. For human capital, it means creating opportunities for workers to continuously update their skills and apply them in the real economy.
Ultimately, the goal is not to replace oil with technology. It is to transform the energy capital accumulated over previous decades into human, technological and export capital for the next stage of development.
The success of that transition will be an important factor in Azerbaijan’s ability to build a more diversified and resilient growth model.
