$85bn despite falling oil revenues: how will Baku manage its growing foreign currency reserves?
Azerbaijan’s foreign currency reserves
Azerbaijan’s foreign currency reserves reached another record level in the first quarter of 2026. According to the State Statistics Committee, the country’s strategic foreign currency reserves rose to $85.15bn as of 1 April.
This marks an increase of 15.9% compared with the same period last year. But it is not only the figure itself that stands out. The growth came against the backdrop of a weakening oil and gas sector, falling exports and declining direct oil and gas revenues of the State Oil Fund of Azerbaijan (SOFAZ).
What are strategic reserves and how are they formed?
In Azerbaijan, “strategic foreign currency reserves” generally refer to the combined total of two key components: the assets of the State Oil Fund and the official foreign exchange reserves of the Central Bank.
As of 1 April, SOFAZ assets stood at $73.5bn, while the Central Bank’s official reserves totalled $11.66bn at the end of March. Combined, this amounts to $85.15bn. The bulk of the reserves therefore remains concentrated in the oil fund.
To understand this trend, it is important to look at the figures for 2025. SOFAZ assets increased from $60bn at the start of the year to $73.54bn by year-end. Meanwhile, the Central Bank’s reserves rose from $10.99bn at the end of January to $11.51bn at the end of December.
According to estimates by the International Monetary Fund, the combined reserves of SOFAZ and the Central Bank increased from around $71bn at the end of 2024 to $85bn by the end of 2025. The liquid portion of these reserves — assets that can be quickly converted into cash without major losses — is sufficient to cover around 38 months of Azerbaijan’s imports.
Under IMF standards, the minimum safe level of foreign currency reserves for a country is roughly ten times lower than this figure. This gives Baku considerable financial capacity to support the manat and protect against external economic shocks.
SOFAZ’s role is not only to accumulate revenues, but also to manage them on global markets. The Central Bank, meanwhile, focuses on ensuring short-term liquidity, currency stability and financial resilience.
In SOFAZ’s 2025 self-assessment under the Santiago Principles, the fund emphasised that it is a separate legal entity, independent from both the government and the Central Bank, while its spending is planned within the consolidated state budget. In other words, one institution acts as a long-term manager of national wealth, while the other serves as an instrument of day-to-day macroeconomic protection.
What is driving the growth?
The data suggest that the main driver of growth was not crude oil sales, but asset management. SOFAZ’s total revenues in January-March 2026 amounted to 3.18bn manats (around $1.8bn), of which only 1.80bn manats (around $1bn) came from oil and gas agreements. For comparison, during the same period in 2025, this figure reached 3.02bn manats (around $1.78bn). Revenues from hydrocarbons therefore declined significantly.
At the same time, income from asset management totalled 1.38bn manats (around $810m). An additional 2.12bn manats (around $1.25bn) generated through rising gold prices and foreign exchange revaluations offset a 741m manat ($435.9m) decline in the market value of the portfolio. This clearly illustrates the mechanism behind the growth in reserves.
SOFAZ’s investment activity played the decisive role. By the end of 2025, 38.2% of the fund’s portfolio consisted of gold, 29.8% of fixed-income instruments and money markets, 25.6% of equities and 6.4% of real estate and infrastructure. In the first quarter of 2026, the share of gold fell to 35.6% following portfolio rebalancing, though it remained the largest component. Gold holdings declined from 200 tonnes at the start of the year to 178.1 tonnes.
For 2025 as a whole, the fund achieved an investment return of 6.2%, generating profits of 6.9bn manats. In other words, the $85bn “buffer” is driven less by direct oil revenues than by portfolio returns, rising gold prices and asset revaluation.
The non-oil economy is also present within this structure, though its contribution should not be overstated. In January-March this year, non-oil industry grew by 7.2%, while non-oil exports rose by 19.7%. At the same time, non-oil GDP growth stood at just 0.2%, and overall exports fell by 9.6%. This suggests that structural changes have begun, but at this stage it is financial income — rather than the real economy — that is driving reserve growth.
What is Baku’s management strategy?
Baku’s strategy is not based on a “spend everything” model. SOFAZ’s investment policy for 2026 is aimed at maximising returns while minimising the risk of major losses. According to the document, the fund’s projected average investment portfolio for 2026 stands at $64.8bn. At least 85% of the portfolio must be held in US dollars, euros and pounds sterling.
The strategic allocation is structured as follows: up to 30% in fixed-income instruments and money markets, up to 25% in equities, up to 10% in real assets and up to 35% in gold. At least $100m must remain in highly liquid short-term instruments, while the share managed by external asset managers cannot exceed 60% of the total portfolio.
The second key pillar of the model is budgetary discipline. In 2025, SOFAZ transferred 14.48bn manats to the state budget, followed by another 3.2bn manats in the first quarter of 2026. At the same time, the fund continues financing its traditional priorities: improving social conditions for internally displaced persons, higher education programmes, the Baku–Tbilisi–Kars railway, the Southern Gas Corridor and other strategic projects.
In practice, the “unexpected income” is distributed in two directions: one part is channelled into the budget and socio-political priorities, while the other is preserved in reserves and invested in global assets.
Particular attention should also be paid to the energy transition and global diversification. In 2026, SOFAZ agreed to acquire a 49% stake in a portfolio of solar power plants in Italy with a combined capacity of 402MW. This suggests the fund is no longer limited to the traditional mix of bonds and equities, but is actively investing in renewable energy and infrastructure.
For Turkey and Europe, this means the presence of a financial resource supporting transport and energy corridors. In the Chinese direction, holdings in yuan-denominated assets and broader Asian exposure within the portfolio point to a cautious but noticeable expansion of the investment strategy.
Risks and critical perspective
Record-high figures do not eliminate all concerns. Among the positive factors is the fact that SOFAZ undergoes audits under IFRS standards, publishes quarterly and annual reports and, in its 2025 self-assessment under the Santiago Principles, disclosed in detail its legal framework, mandate and accountability mechanisms.
At the same time, the broader system governing the energy sector remains more ambiguous. In the 2021 Resource Governance Index by the Natural Resource Governance Institute, Azerbaijan’s oil and gas sector scored 56 out of 100. Problematic areas were identified, including licensing practices and local impact management. Following the country’s withdrawal from the Extractive Industries Transparency Initiative (EITI), experts have also recommended strengthening transparency practices.
In other words, SOFAZ as an institution appears to be a relatively more resilient element, while the wider governance system does not reach the same standard.
The second risk remains a familiar one: the continued dependence between oil prices and reserve volumes. In January-March this year, oil and gas GDP contracted by 1.2%, while overall exports and foreign trade volumes also declined.
According to the International Monetary Fund, the key challenge for Baku remains reducing dependence on oil and developing the non-oil sector of the economy. The IMF expects oil and gas production in the country to gradually decline in the coming years.
As of 1 April, Azerbaijan’s external public debt stood at $4.69bn, while the country’s strategic reserves exceeded that figure by roughly 18 times. However, the existence of a substantial financial “buffer” does not in itself eliminate structural dependence.
Regional context
Within the South Caucasus, Azerbaijan’s figures stand out sharply compared with its neighbours. According to official data from the Central Bank of Armenia, the country’s total international reserves stood at $5.54bn in March 2026. Meanwhile, the National Bank of Georgia reported that international reserves reached a historic high of around $6.65bn in February 2026.
Azerbaijan’s strategic reserves of $85.15bn exceed these figures many times over. At the same time, the comparison is not entirely equivalent: in the cases of Armenia and Georgia, the figures mainly refer to central bank reserves, whereas Azerbaijan’s calculation also includes its large sovereign oil fund.
Nevertheless, the political and economic significance of this gap remains substantial. Such a scale of reserves allows Baku to maintain exchange rate stability, cushion external shocks while keeping external debt low, and independently finance regional projects.
SOFAZ financing for projects such as the Baku–Tbilisi–Kars railway and the Southern Gas Corridor demonstrates that these reserves are not merely a financial statistic, but also a strategic instrument for engagement with Turkey, Europe and broader Western markets. The Chinese direction remains less significant for now, but the presence of yuan-denominated and Asian assets in the portfolio points to growing room for manoeuvre in Baku’s strategy.
Expert opinions
Following the IMF’s February mission, mission chief Anna Bordon said that “sustained fiscal consolidation and private sector-led diversification remain key economic policy priorities for Azerbaijan”.
The essence of her position is that rapid reserve growth is a positive signal, but its long-term sustainability will only be possible through higher productivity in the non-oil sector, deeper financial markets and improved efficiency of state-owned enterprises.
Economist Natig Jafarli told local media that the “main reason” for the increase was the rise in gold prices and the expansion of the fund’s gold purchases over the past two years. At the same time, he warned that there is a “saturation limit” to rising gold prices, and that if geopolitical tensions ease, the impact of this factor could weaken.
This conclusion is supported by official statistics: in 2025, a significant share of SOFAZ’s off-budget income came from foreign exchange revaluations and higher gold prices.
Economist and MP Vugar Bayramov, commenting on investments in the Italian solar energy portfolio, highlighted another side of the issue. In his view, such deals represent an important step in diversifying the fund’s portfolio.
If this course continues, SOFAZ could evolve from a mechanism for “accumulating oil revenues” into a fully fledged international investor capable of generating income in a post-oil era.
Conclusion and outlook
At present, the picture looks as follows: Azerbaijan’s foreign currency reserves reached a record level in 2026. This was not so much a случайный surge as the result of a combination of factors: strong investment returns in 2025, steadily rising gold prices, flexible portfolio management, low external debt and coordination between the state budget and the fund. However, this does not mean the country has definitively broken its dependence on oil. Going forward, the success of the strategy will depend not so much on the size of the reserves as on how effectively these resources are used.
According to the latest forecast by the International Monetary Fund, Azerbaijan’s economy is expected to grow by 2.1% in 2026 and around 2.5% in 2027. Inflation is forecast to reach 6.0% by the end of 2026 before easing to 4.2% by the end of 2027.
The World Bank offers a more cautious outlook, projecting growth of 2.0% in 2026 and 1.8% in 2027, with inflation at 5.8% and 4.6% respectively. The Asian Development Bank has also noted that the recovery in 2026 is likely to remain limited and could slow again in 2027 due to declining oil production.
In this sense, the $85bn reserve gives Baku time — but only time. The central question remains unchanged: will Azerbaijan be able to use this period to strengthen the non-oil sector of its economy sufficiently?
