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.”