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. By 1995, however, the gradual return of political stability and a cease-fire with Armenia ended the general economic decline. The GDP showed a modest growth (the first since 1988) and inflation was contained to less than 7 percent. In 2000 GDP was $5.3 billion.
Agriculture produced 19 percent of GDP in 2000. Cotton is the leading cash crop, followed by wine grapes, fruits, vegetables, and tobacco. Wheat and barley are the principal grains harvested. Mountain pastures are used for sheep grazing. Tea, citrus fruits, and olives are grown in the subtropical Lankaran Lowland in the southeast. However, the country's ability to bring its agricultural products to market is limited by disrupted transportation routes and outdated packaging methods. In 1994, agriculture, including forestry and fishing, employed 38 percent of the workforce.
The importance of the industrial sector to Azerbaijan's economy is due to the country's extensive mineral wealth, particularly petroleum. Most of the oil is found offshore below the Caspian Sea, with the largest field located about 100 km (about 60 mi) from the coast. Associated industries include refining, the manufacture of petroleum-related equipment, and chemical processing. Azerbaijan has opened its oil industry to foreign participation as a way to fund its development and, through agreements with nearby countries, to promote regional stability. A pipeline from Baku to Supsa, Georgia (on the coast of the Black Sea), built to transport oil from Azerbaijan westward to Turkey and Europe, opened in 1999. Azerbaijan is also a producer of iron ore, aluminum, copper, and zinc; industrial minerals, such as iodine and bromine; precious and semi-precious gems; and marble.
Azerbaijan's system for generating electricity suffers from lack of money for repairs and new investment. In 1999 some 86 percent of the electricity came from thermal plants fueled by by-products of the country's refineries and natural gas. Hydroelectric facilities produced the remaining 14 percent of the country's electricity.
Republics of the former Soviet Union are Azerbaijan's main trading partners. Russia, Ukraine, and Turkmenistan purchase the bulk of exports as well as supply most imported goods. Azerbaijan also has developing trading relationships with Iraq, Turkey, and the United Kingdom. In 1994 the leading exports were machinery, food products, and metals. Until 1994 Azerbaijan used the Russian ruble as its currency. That year, the Azerbaijani manat became the sole legal tender (4,474 > manats equal U.S.$1; 2000 average).
The transportation system in Azerbaijan is considered inadequate for the country's long-term needs. Paved roads extend along the Caspian Sea north to Russia and South to Iran. Other paved roads connect Baku with Tbilisi in Georgia. During the Soviet era, a rail line extending north was the country's principal route for transporting goods; regional disputes have since occasionally closed the railroad. Azerbaijan now depends on a railroad through Georgia to ports on the Black Sea for much of its imports.