BAKU, Azerbaijan, May 4. The State Oil Fund of Azerbaijan (SOFAZ) remains a key mechanism for mitigating the negative effects of high oil prices on the country’s domestic economy, Azerbaijani economist Inglab Ahmadov told Trend.
According to Ahmadov, if the government maintains its policy of limited transfers to the state budget and continues gradually reducing them through 2030, part of oil revenues could be sterilized and managed abroad, easing pressure on the domestic economy.
“The current rise in oil prices is driven more by geopolitical factors than by the global energy transition,” Ahmadov said. “The key question is whether this factor is short-, medium-, or long-term, as that determines its impact on economies like Azerbaijan’s, where dependence on oil remains significant. For now, it appears that at least this year could see a shift in trends. Oil prices above $100 are likely to persist for several months, potentially longer, including due to tensions around the Strait of Hormuz.”
Ahmadov noted that in recent years Azerbaijan had seen a decline in the oil sector’s share of macroeconomic indicators and growth in the non-oil sector, both in GDP and exports. “This was less visible in budget revenues due to stable transfers from the Oil Fund, but the overall trend was clear. Now, however, there is a high probability that this trend could reverse,” he said.
In the short term, the impact is expected to be positive, with GDP growth likely to increase due to the strong link between economic activity and the oil sector.
“Even growth in the non-oil economy largely reflects oil revenues, given the interconnected nature of all sectors,” he said. “Additionally, high oil prices could lead to increased government spending, including possible revisions to budget parameters during the year, which would further stimulate economic growth.”
However, Ahmadov warned that the medium- and long-term consequences could be negative. When oil revenues decline, governments are typically forced to accelerate diversification and improve the business climate. High oil income, by contrast, tends to reduce incentives for diversification, allowing oil to dominate again and slowing non-oil sector development.
“A similar situation was observed after the 2015 devaluations,” he said. “Diversification efforts intensified in 2016–2017, but as oil revenues recovered, priorities shifted again. There is a risk this scenario could repeat: macroeconomic indicators may improve in the short term, but over time dependence on oil could deepen and sustainable development could slow.”
He added that historically, high oil prices rarely push governments toward diversification. “On the contrary, especially in oil-producing countries, meaningful steps toward diversification are usually taken when prices fall and oil revenues can no longer sustain the economy. In such periods, macroeconomic conditions themselves begin to drive reforms.”
At the same time, Ahmadov emphasized that Azerbaijan has a unique advantage in the form of its Oil Fund. Most oil revenues are accumulated there rather than directly in the state budget, with funds transferred as needed.
“If the government maintains its current policy, avoids increasing transfers beyond planned levels, and continues gradually reducing them through 2030, this could have a positive effect,” he said. “In that case, part of the oil revenues would be sterilized and managed abroad, reducing pressure on the domestic economy. However, there is also a risk that rising oil revenues could lead to higher-than-planned government spending.”
Ahmadov concluded that a general rule applies: if high oil revenues are temporary, they should not be injected directly into the economy but saved or managed abroad. If high prices are expected to persist in the medium term, governments typically increase spending, wages, and social programs, boosting economic activity.
“Since the current price surge is largely driven by geopolitical factors, its duration is highly unpredictable,” he said. “Under these conditions, the most rational approach is to pursue a conservative policy based on the assumption that high prices are temporary—avoiding increased dependence on oil while maintaining the course toward diversification.”