Trade Over Tensions: Azerbaijan’s Balancing Act with Russia

Hikmat Gafarzada via Unsplash and IGORN via Pixabay

Introduction

Following the outbreak of war in Ukraine, bilateral trade between Russia and Azerbaijan skyrocketed as Moscow attempted to ease the blow of Western sanctions. Between 2021 and 2023, the total trade turnover between the two neighbours increased by 47%, from $3 billion to $4.4 billion annually (Ibadoghlu, 2024). For Russia, the increase in trade proved crucial for its war effort in Ukraine, as it heavily relied on Iranian-made drones and missiles on the battlefield (Hinz, 2024). Additionally, via the International North-South Trade Corridor (INSTC) passing through Azerbaijan, it also retained a trade route to India, which emerged as its second biggest trade partner following the invasion (Jayaprakash, 2024). Meanwhile, Azerbaijan has benefited from increased transit fees and investments into its infrastructure (Kucera, 2024). 

However, relations seemingly soured last December after Russian armed forces shot down an Azerbaijan Airlines flight over Kazakhstan while trying to repel Ukrainian drone attacks, leading to the deaths of 38 passengers (Bagirova and Stolyarov, 2024). In the aftermath of the incident, Baku wielded a sharp rhetoric towards Russia, threatening to appeal to the International Court of Justice (ICJ) and closing the “Russian House”, a Russian cultural and developmental institution in Baku (Teslova, 2025), among others. Despite these diplomatic measures, the country has so far refrained from implementing economic sanctions on its northern neighbour, even going as far as confirming a joint freight agreement the two sides reached in December. This begs the question:

Why is Azerbaijan shying away from implementing economic measures in its reaction to the plane crash?

This article argues that, while Azerbaijan can allow itself to use harsher rhetoric towards Russia given the latter’s diminished role in the South Caucasus, the regime’s need for economic growth and attempts to diversify its economy force it to stay clear of any steps that would significantly harm its relation to its major trade partners, including Russia.

Shift of power

While the geopolitical paradigm shift in the South Caucasus predates Russia’s invasion of Ukraine, the war has nevertheless accelerated the region’s strategic recalibration and redistribution of power. Following a sweeping Azerbaijani victory during the 2020 Second Karabakh War, Armenia’s relations with its traditional ally and protecting power, Russia, steadily deteriorated due to squabbles over a lack of support and Russian arms sales to Baku during the conflict. 

When Azerbaijan subsequently reconquered the remaining territories under Armenian separatist control in a blitz attack in September 2023, Russia’s passiveness exemplified its shifting priorities and loss of influence in the region. Being too caught up in Ukraine and given its strained relations with Armenia, it proved more beneficial for Russia to let Azerbaijani forces proceed and not risk damaging its ties with Baku (Herzog, 2023). 

Following Azerbaijan’s conquest of Nagorno-Karabakh, the Russian peacekeeping force lost its purpose and was eventually withdrawn at the request of Baku in April 2024, roughly 19 months earlier than originally planned (Krivosheev, 2024). With the momentum shifting in its favour, Azerbaijan enjoys a fair amount of leeway regarding its political rhetoric towards its northern neighbour. Besides the threat of an ICJ lawsuit and the closing of the Russian house, Baku has also banned Russian lawmaker Nikolai Valuev, who is affiliated with the ruling United Russia party, from entering the country after he made derogatory remarks regarding the Azerbaijani diaspora in Russia.

Domestic concerns also play a large role in the regime’s backlash. Even before the plane crash, Russia’s image had taken a hit among the general population and the ruling elite as a result of its invasion of Ukraine (Nazamova & Valiyev, 2024). However, Azerbaijani citizens’ perception of Russia differs vastly depending on the specific policy area, especially among younger and more urban parts of the population: as such, while merely 29% of 14 – 29-year-olds from the capital believed in 2023 that Russia would contribute to national security, 84% stated their conviction that it would prove beneficial to Azerbaijan’s economic growth (Shubladze, 2024). In a country with a relatively young population (the 14 - 29 age bracket makes up 22.7% of the population (Nazamova & Valiyev, 2024)) and where power is heavily centralized in the capital, policymakers will certainly keep these disparities in consideration.

Economic legitimization

Despite the absence of a genuine electoral process and democratic institutions, authoritarian regimes nevertheless need to legitimize themselves in some way or form in order to maintain their grip on power (Nathan, 2020). Often, they tend to base their legitimation on economic performance factors, with steady economic growth leading citizens to accept a curb in civil liberties and democratic participation.  

Azerbaijan is no exception to this rule. The resource-rich country, which has been ruled by members of the Aliyev family for over 30 years, relies on its extensive oil and gas supplies to fuel its economy and reinforce public acceptance of its institutional legitimacy (O’Lear, 2007). In 2022, oil and gas production accounted for roughly 47.8% of the country’s total GDP and a whopping 92.5% of export revenue (International Trade Administration, 2023). Meanwhile, the country consistently ranks among the lowest-scoring countries in the Freedom In The World index (Freedom House, 2025), an annual report on political rights and civil liberties published by the US think tank Freedom House.

Despite its economic growth since regaining independence, Azerbaijan’s reliance on energy exports makes it vulnerable to external shocks. This became visible in 2016 and 2020, when a global oil glut and the COVID pandemic, respectively, led to a sharp decline in year-to-year GDP growth (World Bank, n.d.). This vulnerability, paired with oncoming symptoms of the middle-income trap, has led Azerbaijani officials to ponder strategies on how to diversify the country’s economy and increase investment in non-energy sectors (Akhundov, 2025).

Economic diversification

Russia’s economic reorientation away from the West following its invasion of Ukraine gave new impetus to Baku’s own diversification attempts. Having been cut off from most European markets, Russia significantly increased its oil and gas exports towards its southern neighbour (O’Byrne, 2022). This move helped Russia recuperate some of the losses it incurred by losing most of its European customers, while Azerbaijan was able to sell its own resources at higher prices to Europe. 

Baku also helped facilitate trade between Russia, India and Iran via the INSTC, proving vital for Russia’s supply of Iranian-made drones (Krivosheev, 2024) and as an export route towards India. As a result, it has benefited from increased transit fees and investments into its infrastructure, particularly from Russia (JAMnews, 2025). As a major hub both along the INSTC and the Middle Corridor connecting China with Europe, Azerbaijan projects to become a vital link along competing international trade routes, raising its strategic importance in the process.

However, potentially the most important sector in bilateral trade between the two states is the non-oil sector, which Azerbaijan is actively trying to expand. Russia is by far the country’s largest market for non-oil products, with imports totalling $1.162 billion in 2024 - more than double that of 2nd place Turkey ($542.3 million) (Hasanova, 2025). The agricultural sector specifically plays a magnified role in this regard, as roughly 90% of Azerbaijan’s agricultural exports are destined for Russia (JAMnews, 2025). Meanwhile, the country also heavily relies on Russian grain and fertilizer for its own production. As such, the introduction of economic sanctions against Russia would not only lead to a steep decline in agricultural trade, given that export to alternative markets is logistically unfeasible, but also increase the country’s dependence on energy exports. 

Conclusion

While Azerbaijan has demonstrated a willingness to assert its political independence from Russia through rhetoric and symbolic actions, its economic realities dictate a more cautious approach.

The country’s strategic positioning as a trade hub, its dependence on Russian markets for agricultural exports, and its broader economic diversification efforts make severing economic ties with Moscow a risky proposition. While domestic concerns necessitate a strong response to last December’s plane crash, those same concerns also push Azerbaijan to refrain from implementing stark economic measures. Despite the geopolitical shifts that have weakened Russia’s influence in the South Caucasus, Azerbaijan remains bound by economic pragmatism, prioritizing growth and stability over punitive measures. Ultimately, Baku's reluctance to impose economic sanctions reflects a balancing act—one that seeks to preserve both its political autonomy and its economic trajectory in an increasingly multipolar world.

This article represents the views of contributors to STEAR's online digital publication, 

and not those of STEAR, which takes no institutional positions.

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