Azerbaijan Sets Record $5 Billion Military Budget Amid Looming Economic Hurdles

By Vahram Revazyan

Civilnet

Azerbaijan’s decision to allocate a record $5 billion to military spending in its 2025 budget underscores a risky gamble amid economic uncertainties. This increase comes as the country grapples with declining oil revenues and the deterioration of fiscal buffers in the budget to sustain government spending.

The 2025 budget projects oil prices at $70 per barrel, significantly higher than the conservative benchmarks used in recent years. This assumption leaves little room to absorb shocks, especially given global market forecasts that suggest potential oversupply in the oil market. Should oil prices fall below the anticipated level, Azerbaijan’s budgetary stability will rely even more heavily on its State Oil Fund (SOFAZ), which already faces financial strain. Notably, international forecasts for oil prices 2025 hover around $75 per barrel, indicating that the budget includes almost no buffer. If oil prices dip below $70 per barrel, Azerbaijan may be forced further to increase transfers from SOFAZ to the state budget.

Military Spending at a Record High

In October 2025, Azerbaijani President Ilham Aliyev submitted a state budget proposal to parliament that allocated $4.9 billion to military expenditures—an increase of $1 billion from the finance ministry’s earlier draft. This additional burden is entirely placed on Azerbaijan’s State Oil Fund (SOFAZ), raising its contribution to the state budget from $7.5 billion to $8.5 billion. According to the finance ministry, this increase was ordered by the president, citing the need to respond to “Armenia’s accelerating militarization.”

During parliamentary discussions, Finance Minister Samir Sharifov forecasted a decline in oil and gas revenues due to depleting reserves. He also noted that the military budget increase originated from Aliyev himself, subtly implying concerns about the sustainability of this move. The chairman of Azerbaijan’s Accounts Chamber expressed similar worries, highlighting the unprecedented assumption of $70 per barrel oil prices underlying the budget—a stark increase from the $50 and $60 benchmarks used in previous years. This optimistic projection leaves little buffer for economic shocks if oil prices drop below expectations.

Economic Risks and Oil Dependency

The Azerbaijani government’s reliance on high oil prices to balance its budget underscores the structural vulnerabilities of its economy and heavy dependence on hydrocarbon exports. While oil and gas revenues currently account for nearly half of the state budget, the projected reduction to 40% by 2028 is unlikely to materialize as anticipated. Instead, the expected decrease in oil revenue transfers to the state budget will be offset by the manat’s devaluation, ensuring that oil-related income continues to constitute roughly 50% of budget revenues, albeit at adjusted exchange rates.

Compounding these challenges is the lack of a financial buffer in the 2025 budget. In previous years, conservative oil price assumptions allowed the government to allocate additional funds when market prices exceeded expectations. The 2025 budget, however, narrows this margin, increasing the risk of fiscal instability if oil prices drop below the projected $70 per barrel.

Around 90% of SOFAZ’s oil and gas revenues come from the Azeri-Chirag-Gunashli (ACG) oilfield, with an expected production decline. Despite a new platform aimed at stabilizing extraction, output from the ACG field is falling faster than anticipated. Revenues from this field are forecasted at $4.5 billion in 2025, with an additional $0.5 billion in bonus payments, marking the final year of such payments under existing contracts. From 2026 onward, SOFAZ will face an even steeper revenue decline because of an accelerated production decline in ACG.

SOFAZ’s official 2025 budget reflects only a $100 million deficit, which appears to be based on overly optimistic assumptions. Supporting this view is the fact that Azerbaijan’s Accounts Chamber has not released its usual detailed analysis of SOFAZ’s budget assumptions, such as projected oil and gas prices, which have been publicly disclosed in previous years.

Mounting Socio-Economic Challenges

The combination of declining oil revenues, increasing reliance on SOFAZ, and a growing government expenditure presents a precarious economic situation for Azerbaijan. The government’s strategy to increase military spending amid these challenges echoes the mismanagement that led to economic turmoil during the 2014-2016 crisis, followed by military aggression against Nagorno-Karabakh in April 2016. With deteriorating financial buffers, the country risks significant socio-economic shocks in the coming years.

Beyond economic challenges, several geopolitical factors may embolden Azerbaijan to act aggressively against Armenia. The Trump presidency might reduce U.S. engagement in the South Caucasus as domestic issues take priority. Expected tighter U.S. sanctions may weaken Iran’s regional influence and ability to maintain proactive policies. Turkey continues to support Azerbaijan’s military operations as part of its strategy to counterbalance Russian and Iranian influence. Additionally, Russia’s ongoing focus on Ukraine limits its capacity to assert influence in the South Caucasus, potentially creating an opportunity for Azerbaijan to pursue its objectives.

Implications for Armenia

Azerbaijan’s growing military budget and economic vulnerabilities, coupled with the outlined geopolitical factors, create a volatile mix that could increase the likelihood of renewed conflict with Armenia. While the scale and scope of such a conflict remain speculative, even limited clashes could escalate beyond previous skirmishes, such as those seen in September 2022. Importantly, the cost of launching an attack and achieving success has risen since those clashes, making future military actions potentially more challenging.

Azerbaijan’s 2025 budget, much like its fiscal policies in 2014, signals a peak in the economic cycle. Following the economic downturn after 2014, Azerbaijan resorted to escalating tensions, a pattern that may repeat if the vicious cycle repeats itself. The intensifying militarization since 2020 suggests a longer-term strategic calculus, indicating that Azerbaijan may once again use conflict as a tool to navigate internal economic and political pressures.