Azerbaijan is one of the world’s oldest oil exporters, and development of the country’s extensive petroleum reserves remains central to its economic future. Agriculture is also important, with the country benefiting from fertile farmland and a diverse climate that allows the raising of a wide range of crops.
Two years of political instability following independence, warfare with Armenia, and fighting in other neighboring countries, which blocked trade routes, led to the collapse of Azerbaijan’s economy in the early 1990s. The gross domestic product (GDP), which measures the value of goods and services produced, fell to $3.5 billion in 1995—about one-third of its former size. The country was burdened by a flood of refugees from neighboring states and those displaced internally by separatist movements. Inflation was rampant, with the price of goods increasing 16 fold in 1994 alone.
At the beginning of the 20th century Azerbaijan was the world's leading petroleum producer, and it was also the birthplace of the oil-refining industry. In 1901, for example, Azerbaijan produced 11.4 million tons of oil, more than the United States; it accounted for more than half of world production. As the 20th century progressed, however, Azerbaijan's role in oil production decreased as the industry developed in other regions of the U.S.S.R. and elsewhere in the world.
During the 1990s exploitation of the vast oil fields under the Caspian Sea was complicated by political instability in Azerbaijan, ethnic conflict throughout the region, Russian claims on the Caspian fields, and disputes over the location of new pipelines.
Azerbaijan's most prominent products are oil, cotton, and natural gas. Azerbaijan's oil production declined through 1997 but has registered an increase every year since. Negotiation of 19 production-sharing arrangements (PSAs) with foreign firms, which have thus far committed $60 billion to oil field development, should generate the funds needed to spur future industrial development. Oil production under the first of these PSAs, with the Azerbaijan International Operating Company, began in November 1997. Azerbaijan shares all the formidable problems of the former Soviet republics in making the transition from a command to a market economy, but its considerable energy resources brighten its long-term prospects. Baku has only recently begun making progress on economic reform, and old economic ties and structures are slowly being replaced. An obstacle to economic progress, including stepped up foreign investment, is the continuing conflict with Armenia over the Nagorno-Karabakh region. Trade with Russia and the other former Soviet republics is declining in importance while trade is building up with Turkey, Iran, UAE, and the nations of Europe. Long-term prospects will depend on world oil prices, the location of new pipelines in the region, and Azerbaijan's ability to manage its oil wealth.
