Azerbaijan Navigates Economic Crossroads with Major Foreign Investments and Planned Domestic Tax Hikes

Azerbaijan is facing a complex economic landscape as falling export oil prices and declining domestic production challenge its budget. In response, the state oil company SOCAR is making significant international investments in Italy and Israel to secure new revenue streams, while the government is planning for a 2026 budget that relies on increased tax collection, potentially by ending a major tax break for private sector workers.

The export price for Azeri Light crude oil has seen a continued decline, with its price per barrel dropping by 1.8% to $70.68 on 17 September. This is only slightly above the $70 per barrel price set in the 2025 state budget. The average export price for oil during the reporting period was $70.7 per barrel. Independent economists warn that a continued fall in oil prices could create problems for the state budget, especially since oil and gas account for 90% of the country's exports. The decline in domestic oil production is also pushing SOCAR to seek new markets abroad.

In a major move to diversify, SOCAR acquired Italy’s “Italiana Petroli” (IP) refinery for €2.5 billion. The facility has a processing capacity of 200,000 barrels per day and a network of 4,500 fuel stations. The company has also entered Israel's energy market by acquiring a 10% stake in the Tamar gas field and partnering with BP and NewMed Energy for gas exploration. Energy expert Ilham Shaban considers the Italian acquisition a profitable investment, noting that building a similar refinery would cost 2-3 times more. He adds that SOCAR has successfully used loans to finance its foreign projects since 2008 and that its revenues from foreign operations now exceed its domestic earnings.

However, these ambitious projects are increasing the company's debt load. According to SOCAR's 2024 financial report, its short- and long-term debt obligations grew by 5.8 billion manats. Some experts express concern that these large investments could lead to future debts being covered by state funds, as the Azerbaijani state is the main guarantor for the oil company's foreign loans.

Domestically, the government is preparing for fiscal tightening. The draft 2026 state budget projects a 0.3% increase in spending to 41.5 billion manats and a 0.2% rise in revenues to 38.4 billion manats, resulting in a 2.4% larger budget deficit of 3.1 billion manats. Notably, defense and national security spending is set to increase by 3.8%. To fund this, the government plans a significant increase in tax revenues, with collections from personal income tax projected to rise by 22.5%.

This sharp increase in income tax revenue is widely believed to be linked to the potential expiration of a seven-year tax break for private sector employees, which is set to end on 1 January 2026. Since 2019, the portion of private sector salaries up to 8,000 manats has been exempt from income tax. If this exemption is not extended, employees will face a tax of 14% on income up to 2,500 manats and 25% on amounts above that, aligning their tax burden with the public sector. Experts warn this could force employers to either cut jobs or revert to unofficial salary payments ("black accounting") to manage the increased costs.

In parallel, Azerbaijan is strengthening its economic ties with the West. The country recently agreed with the European Union to establish a High-Level Economic Working Group to enhance partnership and explore new opportunities for trade and investment. The EU Commissioner for Enlargement, Marta Kos, stated that peace in the region opens up these possibilities.