BAKU—In a city preparing to host a Formula One race and a seaside pop music festival, it’s easy to forget that you’re sandwiched between the world’s two most destabilizing conflicts. But for the large pre-race fences and temporary race paddock being erected in the city center, life in Azerbaijan’s capital of Baku appears deceptively normal.
Azerbaijan is the only country to border both Russia and Iran and thus finds itself between two major wars. Things are quieter in Baku, where the country’s leadership has been busy working with neighboring Armenia to advance a peace process of their own to end a decades-long conflict. Even so, on my recent trip to Baku, it was clear that a low-humming anxiety about the future underpinned Azerbaijani elites’ discussions of war, peace, growth, and opportunity.
I traveled to Baku this month to participate in a conference on security and cooperation in the South Caucasus hosted by Switzerland’s University of St. Gallen and its local think tank partner the Center for Analysis of International Relations and Multiculturalism.* There, I heard presentations from American, European, and Azerbaijani academics and experts on how the region is working to make peace a reality, become more integrated with the global economy, and navigate highly complex relations with neighboring countries and great powers.
The picture presented by my fellow analysts was mostly positive. Several European experts noted that while Azerbaijan faces an array of security and diplomatic challenges presented by the Russia and Iran wars, both also provide openings for new partnerships. The near-peace with Armenia has seen Azerbaijan make small, but important oil and gas sales to Yerevan as the country tries to wean itself off Russian energy. Infrastructure development along the Trans-Caspian International Trade Route provides a tangible pretext for further integration with Central Asia. And the Trump Route for International Peace and Prosperity (TRIPP) in southern Armenia pledges further connectivity and Western investment in the region.
Azerbaijani think tankers were quick to point out their country’s common geopolitical ground with the West. For example, Baku has publicly supported Ukraine’s territorial integrity in the wake of Russia’s full-scale invasion; in July, President Ilham Aliyev encouraged Ukrainians to “never accept” occupation. The academics noted Azerbaijan’s robust defensive posture on its southern border with Iran, though they also acknowledged that their country remains a key waypoint for north-south trade between Tehran and Moscow.
Most interesting were Azerbaijani officials and experts’ veiled unhappiness about Russia’s treatment of their country. In December 2024, Russian air defense mistakenly shot down an Azerbaijan Airlines commercial airliner, killing thirty-eight people. Moscow did not immediately apologize, which set off a major diplomatic incident. The two sides have since mended fences, but Baku seems notably more wary of its large neighbor. In Armenia, Russia has supported an array of high-profile political figures who have sought to impede the peace process and stir up tensions again, efforts that have so far been unsuccessful. And Russia and Iran’s use of the Caspian Sea for military purposes threatens to securitize a maritime route that Azerbaijan and its Central Asian partners want to expand for commercial use.
This complicated diplomatic web has understandably led to uncertainty and caution in Baku. It remains unclear how or when the Russian or Iranian wars will end, with major implications for Azerbaijan’s security, economic, and foreign policies. Longer-duration conflicts mean greater security risks for Azerbaijan, but they could, paradoxically, make it more important as a trade and transport hub between Europe and Asia. A swifter end to one or both wars could mean greater geopolitical certainty, but it could also reduce the urgency of alternative trade routes through Azerbaijan if transit through Russia becomes unblocked or shipping through the Strait of Hormuz fully reopens. In a future scenario unburdened by war, Russia or Iran could potentially turn their energies toward pressuring Azerbaijan for their own ends.
Azerbaijan cannot meaningfully affect the outcome of either war, and it must plan for the tradeoffs inherent in a range of future scenarios. That realization has prompted the country to hedge, pursue narrow interests on the margins of the conflicts, and wait things out until a clearer strategic picture emerges.
It is possible that these geostrategic pressures, combined with economic uncertainty at home, have also contributed to the government applying further pressure on free speech and independent information, in an attempt to discourage an uptick in domestic dissent. In recent months, imprisoned Azerbaijani journalists and opposition figures—many with ties to the United States—have reported dire detention conditions, including inadequate access to water and medical services. US senators will likely continue to track their cases as Congress weighs closer ties with Azerbaijan.
Azerbaijan’s economy is in a state of cautious transition. The country has long relied on oil and gas revenues to support its economy and its military purchases from Israel and Turkey. But after decades of production, its oil and gas flows are starting to slow. Despite its hydrocarbon revenues, Azerbaijan’s 2025 gross domestic product (GDP) per capita and GDP growth ($7,411; 1.4 percent) trailed its smaller South Caucasus neighbors Armenia ($9,474; 7.2 percent) and Georgia ($9,692; 7.5 percent). Across the Caspian, hydrocarbon-rich Kazakhstan recorded $14,692 GDP per capita and 6.5 percent annual growth.
The Aliyev government knows it must develop other sectors of the economy to sustain and broaden its current level of development over the long term. Yet policymakers seem focused on managing current challenges rather than laying out a wider vision for the country. The government has introduced some customs and legal reforms to make it easier to do business in the country, yet it also wants to retain its significant influence over the economy. The administration is also leery about investment from multilateral banks or other actors in strategically important assets. Instead, Baku is looking to Beijing for cheap imports of electric cars and batteries to stimulate a green energy push at home.
But state investment and competitive Chinese imports can only support so much growth. To take full advantage of its strategically important position as an energy and transport bridge between Europe and Asia, Azerbaijan should look to grow its services sector, move up energy and logistics value chains, and pilot co-investment projects with the United States.
The impressive productivity of Azerbaijan’s oil and gas resources has until now crowded out additional development of its services sector. By prioritizing investment in services and knowledge industries, new analysis suggests that Baku can increase its workforce productivity closer to that of similarly sized European countries, boosting GDP per capita. In energy and transport, the government should deepen cooperation with international financial institutions to finance physical infrastructure projects while deploying its own cash on value-added projects like downstream oil refining and digitalized transport and customs platforms. Baku should actively engage US officials building out the Trans-Caspian Enterprise Fund with logistics projects that complement the TRIPP corridor itself.
The goal of these new priorities is twofold. Strategically, they can help diversify and grow Azerbaijan’s economy to make it more resilient against shocks over the long term; Baku cannot change its geography nor the destabilizing forces in Moscow and Tehran. In the short run, Azerbaijan can take advantage of specific opportunities like TRIPP and the growing Trans-Caspian route to secure its position as a transport hub. A wider range of higher-value products and easier logistics will help make the Europe-Asia route more economically viable and strengthen Baku’s position as a key connector.
The author’s participation in the conference was supported by the University of St. Gallen through a Swiss government grant and by the Center for Analysis of International Relations and Multiculturalism. This article was written and published in accordance with the Atlantic Council’s intellectual independence policy.
