Oil-dependent Baku seemed like an odd choice to host COP29. But the economy is betting heavily on developing a renewables sector.

Ilham Aliyev, the 62-year-old president of Azerbaijan, should be feeling pretty content. Being chosen to head the COP29 Summit in Baku, attended by over 190 countries, is a big honor.

It is also controversial; Azerbaijan is the second petrostate in a row to host COP following Dubai in the United Arab Emirates last year, and the summit president will be Aliyev’s natural resources minister, Mukhtar Babayev, who has spent 26 years of his career at the State Oil Company of the Republic of Azerbaijan (SOCAR). The event nevertheless gives this country of 10.3 million—the world’s first major energy producer, whose iconic Flame Towers in Baku symbolize the “Land of Fire’s” huge natural gas wealth—an impressive 12 days in the international spotlight.

COP29 follows a spell of good economic news for Azerbaijan. GDP growth has been picking up from 2023’s sluggish 1.1% pace thanks to a boost in demand for energy exports among consuming countries keen to diversify away from Russia and a stronger than expected non-oil economy. Growth increased by 4.3% year-on-year in the first half, leading forecasters to raise their full-year projections. 

“We are currently expecting 3.2% for 2024, but with the likelihood of an upside,” says Erich Arispe, senior director and the head of Emerging Europe Sovereigns at Fitch Ratings. “Growth is taking place against a background of falling average inflation—from 2022’s 13.9% and 2023’s 9% to around 3.5% this year—and a strengthening external balance sheet.”

Azerbaijan’s net sovereign asset position, at 71% of GDP in 2024, puts it among the highest of its BBB-rated and A-rated peers, as does government debt, at just 21.5% of GDP in 2024. Fitch upgraded the country’s sovereign rating to investment grade in July, to BBB- from BB+, with a stable outlook, and upgraded several Azeri commercial and banking entities, including SOCAR and ABB, the International Bank of Azerbaijan.

Aliyev is hosting COP29 at a time when most world leaders see his country as “relevant and useful,” says Tinatin Japaridze, South Caucasus analyst with the Eurasia Group: an alternative energy source to Russia, a possible bringer of stability in the notoriously unstable Caucasus, and an attractive destination for foreign direct investment not only in oil and gas but in the non-oil economy, given Aliyev’s promise to diversify.

“He’s gotten away with a lot, and I expect this to continue,” she adds. “He really is in a very comfortable place right now.” 

Azerbaijan has, in fact, long been committed to boosting its non-oil economy and diversifying away from fossil fuels, which account for almost 48% of GDP and 92.5% of export earnings. The government aims to lure foreign direct investment (FDI) into such sectors as tourism, information and communication technology, logistics and transport, and agribusiness.

But progress has been slow. Poor corporate governance, corruption, high levels of state capture, and lack of transparency are all problems, according to Transparency International, which ranks Azerbaijan 154 out of 180 countries, alongside Tajikistan and Turkmenistan, in its Corruption Perceptions Index (CPI).

“All these sectors have potential,” says Fitch’s Arispe, “but because of domestic business environment factors have seen little in the way of FDI, while domestic investment has been partly held back due to constraints on access to financing. If Azerbaijan is to boost long-term growth away from the 2%-to-3% a year long-term trend, development of the non-oil economy is essential.”

Investment zones may be part of the answer; the Alat Free Zone south of Baku offers a range of incentives, including independent dispute resolution procedures in accordance with international standards.

A Greener Future

An area receiving special attention—despite Azerbaijan’s image as an oil-dependent economy—is renewables and sustainable projects. The government is committed to reducing greenhouse gas emissions by 40% by 2050 and increasing renewable power capacity to 30% from today’s 7%—mainly accounted for by three hydro projects—by 2030. Boosting green energy is seen as not only good for the environment but, with much of it to be used domestically, a way to free up gas that can then be exported to Europe via various pipelines.

The multinational development banks are encouraging the shift. The European Bank for Reconstruction and Development has allocated €3.7 billion ($4 billion) to various projects, including, in April, Azerbaijan’s first renewables auction, for a 100-megawatt solar power development in Garadakh, and has been working closely with the Ministry for Energy to develop a new legal and regulatory framework for renewables, including a new Renewables Energy Law.

A series of major private-sector initiatives are underway as well, including Masdar, a huge solar energy project with UAE participation, and ACWA Power, a wind power project signed with Saudi Arabia that, when completed, will generate one billion kilowatt-hours, enough to power 300,000 homes.

Azerbaijan will be keen to use its role as COP29 chair to initiate more renewable and sustainable projects and speed existing ones, even as it maintains its lucrative role as a fossil-fuel exporter.

“Azerbaijan is in the active phase of green transition,” Aliyev said in a TV interview earlier this year, “but at the same time, no one can ignore the fact that without fossil fuel, the world cannot develop, at least in the foreseeable future.” Gas exports will remain a key source of foreign earnings, underscored by the European Commission’s agreement to double energy imports from Azerbaijan by 2027 in order to further reduce its dependence on Russian gas.

Renewables investments are expected to contribute to the $10 billion that Aliyev plans to invest in Nagorno-Karabakh, the mountainous region that Azerbaijan wrested control from Armenia last year, alongside major infrastructure investments.

“The government’s fiscal consolidation strategy has been adjusted to enable the government to meet its reconstruction and development commitments in Karabakh, but it will be also keen to attract foreign investment,” says Arispe.

Turkish and Russian companies will probably be among the more active investors, but Azerbaijan will be eager to lure Western companies, their presence further conferring international recognition of the region as a part of Azerbaijan. But some observers warn that improving the investment environment and tackling corruption and poor governance will be critical, both in Karabakh and more widely in the non-oil economy.

“Sustainable partnerships in green energy will be key going forward,” says Japaridze. “Although it may be increasing gas exports now, Azerbaijan must be realistic about how long this can be maintained, especially with the economy probably underperforming over the longer term.”

Surveys suggest production is poised to decline in another five to eight years, she notes. “Like every other country, it really has no real alternative to looking seriously towards a greener, more sustainable future.”