By Lydia Sawatsky

Azerbaijan is increasingly stepping away from Russian influence as Russia’s military dominance in the Caucasus slips due to its involvement in the war in Ukraine. Baku has responded to these changing dynamics through a series of policy measures, including border closures, restrictions on Russian soft power, and surveillance of Russian-aligned organizations.  This shift has only grown more visible in recent weeks as Vice President JD Vance made a historic visit to Armenia and Azerbaijan, and President Aliyev met Ukrainian President Zelensky for the third time at the Munich Security Conference. At Munich, Aliyev publicly accused Russia of deliberately striking the Embassy of Azerbaijan in Kyiv on three separate occasions, underscoring just how strained the Baku/Moscow relationship has become. 

BACKGROUND:

Historical episodes of Soviet and Russian military intervention in Azerbaijan, including the Soviet Union’s crackdown on Azerbaijani protesters in Baku in January 1990 and Moscow’s long-standing support for Armenia, have reinforced Azerbaijan’s efforts to safeguard its sovereignty. Azerbaijan has often maneuvered around the consequences of openly opposing Kremlin positions by maintaining a cautious and cordial relationship with Moscow despite recurring tensions. Even when differences emerged over regional conflicts or broader geopolitical alignments, Baku prioritized diplomatic stability within the structural constraints imposed by Russia’s dominant role in the South Caucasus. 

Azerbaijan gained regional confidence as Turkey stepped into the role of security guarantor. The alliance with Turkey signaled to Baku that it would not face regional threats alone. The Shusha Declaration promised military support against any foreign aggression. Military cooperation with Turkey intensified after Iran’s direct provocation of Azerbaijan by conducting a military exercise on the border simulating a military crossing of the Araz River. In response, Turkish troops, along with the Turkish Chief of the General Staff, participated in a similar joint drill to cross the river. Turkey’s promise of military aid and quick responses to military provocations reinforced Azerbaijan’s sense of security and showed Russia’s declining role as the primary regional power in the Caucasus. 

Despite diverging interests, Baku largely accommodated Moscow’s continued involvement in regional security affairs to preserve stability. Following Azerbaijan’s victory in the Second Karabakh War in 2020, Russia rapidly deployed “peacekeeping” forces to the region. Similarly, the 2022 Declaration of Allied Cooperation with Russia, signed two days before the Ukraine war, is most revealing for the reaction it provoked rather than its substance, as it sparked concerns that Azerbaijan was drifting back into Moscow’s sphere of influence. In practice, however, Baku’s foreign policy remained largely unchanged, showing how Azerbaijan used symbolic accommodation to create misleading perceptions of alignment. 

Russia’s withdrawal of its peacekeeping forces from Karabakh in 2024, largely driven by mounting military demands in Ukraine, marked a critical turning point in Azerbaijan’s assessment of its regional environment. The redeployment signaled a reduced Russian capacity to sustain its military presence in the region, giving Baku a window to increase its autonomy. While Azerbaijan did not pursue openly anti-Russian policies, Moscow’s growing preoccupation elsewhere encouraged a more assertive approach to Azerbaijani national sovereignty. 

Beyond the military realm, Russia’s persecution of ethnic minorities has grown more visible due to widespread social media use, as reports of unlawful arrests of Azerbaijani citizens, beatings across Russia, and Chechnya’s deportation of Azerbaijani nationals to forcibly fight in Ukraine have become increasingly more common. Azerbaijanis have become more vocal in voicing their anger, with one journalist going so far as to call for the destruction of the Embassy of Russia in Baku. 

Azerbaijan’s frustration with Russia intensified significantly after Russia shot down Azerbaijan Airlines Flight 8243 over Grozny, the capital of Chechnya, in December 2024, allegedly mistaking the passenger aircraft for a Ukrainian drone. After the plane was hit, Russian authorities denied it permission to land and redirected it to the Kazakh city of Aktau, an action analysts suggest was meant to cover up the incident, possibly hoping the plane would crash into the Caspian Sea. The previously maintained cordial and diplomatic relationship between Chechnya and Azerbaijan devolved so rapidly that when Chechen leader Ramzan Kadyrov tried to call Azerbaijani president Ilham Aliyev on December 30, Aliyev refused his call. 

The crash of the Azerbaijani airline and the diplomatic fallout underscore why this matters for Azerbaijan. The incident exposed the risks of non-transparent and highly centralized security structures operating near its border. Azerbaijan’s refusal to allow the issue to be dismissed and its insistence on formal acknowledgment and compensation reinforced Baku’s insistence on formal state accountability rather than relying on informal crisis management.

As Azerbaijani-Russian relations were slowly returning to normal, Azerbaijan agreed to the US-backed TRIPP plan, moving towards closer economic ties with the U.S. and the West. Aliyev further raised the stakes at the February 2026 Munich Security Conference, publicly accusing Russia of deliberately striking Azerbaijan's Kyiv embassy three times in 2025, even after Baku had provided the coordinates of its diplomatic missions. Azerbaijan again directly and publicly criticized Russia, with little of the political cordiality that Azerbaijan has extended towards Russia in the past.

IMPLICATIONS:

These developments have coincided with a broader set of Azerbaijani policy adjustments. Azerbaijan's government is clearly considering the potential instability caused by its policies toward Russia. To mitigate the fallout, Azerbaijan is heavily restricting contact and influence with Russia in numerous ways. 

Despite its geographic proximity to Russia, Azerbaijan has separated itself significantly from its neighbor in the last few years. Azerbaijan closed its borders with all neighbors in 2020 during the COVID pandemic and has kept each of them closed for political reasons, severing many regional ties. Citizens who once crossed the border regularly to shop or visit relatives now face near-total separation. There are no longer direct flights from Baku International Airport to the Dagestani cities of Grozny, Makhachkala, or Derbent, forcing travelers to travel instead through Moscow, often with long layovers. This not only makes it more difficult to travel but also significantly raises the financial burden, with an average ticket costing around $500, which is more than the average monthly salary for most Azerbaijanis, especially outside the capital. This means that there is much less flexibility in migration across the border. 

Azerbaijani attitudes toward Russification and Kremlin narratives have also shifted dramatically.  Leaked Kremlin documents dated to December 2025 acknowledge this reality, noting that Russian-speaking Azerbaijani citizens now face increased security surveillance and that organizations protecting Russian minority interests have been eliminated or restricted to the purpose of promoting interethnic harmony between Russians and Azerbaijanis. 

Russia’s inability to pivot away from Ukraine or divert resources to the Caucasus has driven Azerbaijan’s move away from its neighbor and toward greater independence. This strategy will protect Azerbaijan from potential unrest in Russia spilling over into its borders and accelerate Azerbaijan's pivot away from Russian soft power toward diverse global partnerships. The border closures, flight cancellations, and restrictions on Russian influence are more than temporary precautions: they reflect a permanent change.

Azerbaijan has already structurally insulated itself from Russia’s northern periphery, and recent shocks have only revealed how far that decoupling has gone. Recent tensions did not create Azerbaijan’s distancing, but exposed Azerbaijan’s preexisting insulation strategy as it enacted restrictions on cross-border movement, limited soft power influence, and asserted itself diplomatically. Russia is an increasingly unpredictable and unstable partner, and though Azerbaijan remains economically and geographically tied to Russia, it can now better pursue multi-vector diplomacy and diversification. Azerbaijan’s recent actions and diplomatic posture suggest not a geopolitical realignment, but a calculated effort to reduce exposure to instability stemming from Russia while preserving functional interstate relations.

CONCLUSIONS:

Ultimately, Azerbaijan’s response to Russia’s declining power is a policy of calculated insulation. This shift is structural rather than merely reactionary, as the permanent closure of land borders and the dismantling of transport links to the North Caucasus serve as a physical barrier against potential Russian instability and soft power.

Measures such as increased surveillance of Russian-speaking citizens and the removal of pro-Kremlin interest groups indicate a shift away from Russian soft power toward a new era of regional cooperation with Central Asia and Turkey, as well as Western-led global partnerships. Vice President J.D. Vance's February 2026 visit to the South Caucasus signals the kind of high-level Western engagement that Azerbaijan and its neighbors are now actively courting. While the fundamental, pragmatic ties between Baku and Moscow are unlikely to fully rupture, Azerbaijan is working harder than ever to decouple its security from Russia’s influence. While Azerbaijan is unlikely to fully sever its ties with Russia, given enduring geographic and economic constraints, its current diplomatic trajectory marks an unprecedented departure from decades of accommodating Russian regional dominance, opening a timely window for deeper Western engagement and the advancement of a more durable strategic partnership in the South Caucasus.

AUTHOR’S BIO: 

Lydia Sawatsky is a researcher with American Foreign Policy Council’s Central Asia-Caucasus Institute. A recent graduate of Wheaton College, she grew up in Sumqayit, Azerbaijan, and has spent extensive time in the Caucasus and Central Asia. She previously worked with International Literacy and Development (ILAD) in Baku, Azerbaijan, researching access to education for Afghan and Pakistani refugees residing in the country.

By Laura Thornton

Armenians head to the polls on June 7 to elect all 101 members of parliament at a time of critical regional and geopolitical consequences. Following the 2018 Velvet Revolution and Nagorno-Karabakh war, the country has embarked on a new path of democratic reform and foreign policy alignments. Previously dependent on Russia for security guarantees and economic stability, the government of Prime Minister Nikol Pashinyan is now forging new ties with the European Union (EU) and United States, while redefining the country’s relationship with both Azerbaijan and Turkey. The election presents a choice beyond minor policy options but a vision for the country’s governance and geopolitical alignment. Given the stakes, both domestic and foreign actors have intensified their tactics, manipulating existing vulnerabilities, and present serious threats to the election process.

BACKGROUND:

The election is taking place at a historic pivot point for Armenia’s positioning in the region and beyond. Since the fall of the Soviet Union, Armenia has tied to Russia militarily, economically, and ideologically. Armenia has been part of the Eurasian Economic Union, a Russian initiative to ensure economic integration, and the Collective Security Treaty Organization (CSTO), a Russian-led security alliance. Russia has been Armenia’s largest supplier of military aid and key trading partner. Russia also owns key infrastructure in Armenia, including railways and telecommunications. However, Russia’s failure to defend Armenia during the 2020 and 2023 Nagorno-Karabakh conflicts damaged ties between the two states, with Yerevan suspending its participation in the CSTO and demanding the removal of Russian border troops. 

While turning away from Russia, the government has pursued European Union (EU) accession and signed a framework to implement the Trump Route for International Peace and Prosperity (TRIPP), which aims to establish a transit route in the south Caucasus. Further, regional calculations have dramatically changed, paving the way for a redefined relationship with both Azerbaijan and Turkey, with a peace agreement being formed with the former and new border and trade discussions with the latter. 

Two main opposition blocs, which are closely tied to Russia, are challenging the ruling Civil Contract party of Pashinyan. The ruling party is running on “peace,” which it defines as continuing the negotiations with Azerbaijan and building closer ties with the EU and U.S. The opposition blocs oppose the government’s peace agreement, accuse the government of being under Azerbaijani and Turkish control, and say EU goals are unrealistic.

While the political contest does not fall along neat “pro-West vs. pro-Russian” divides as in some frontline democracies, and none of the viable parties embraces a full break from Russia (mindful that the plurality of Armenians believe Russia is the country’s most important political partner), the parties do differ significantly on the nature of the relationship. The Kremlin has taken note and activated its hybrid warfare playbook, employed in Georgia, Moldova, and other democracies, to defeat the ruling party.  

The political landscape is also shaped by a fierce conflict between the government and Church leaders. Church leaders – headed by Karekin II, the Supreme Patriarch and Catholicos of All Armenians – accuse the Pashinyan government of “losing” the war in Nagorno-Karabakh and have called for the Prime Minister’s resignation. In turn, the government has prosecuted several bishops on charges ranging from “calling for a coup” to drug charges, prosecutions which many independent groups believe lack strong evidence. Opposition parties have seized on this issue, criticizing the government and defending the Church.

IMPLICATIONS:

Given the partisan divergence on the country’s foreign policy orientation, the geopolitical stakes in the election are high, activating malign actors. The Kremlin sees clearly the threat of the ruling Civil Contract, which has pledged more decoupling from Russia and greater alignment with Europe and the U.S. While recently on a pre-election assessment mission to Yerevan, government officials, civil society representatives, diplomats, and observers described Russia’s hybrid warfare in the country as “unprecedented.” There was also widespread agreement that the country was not adequately prepared for the threat, made worse by the elimination of USAID and its support in bolstering the country’s defenses.

Information is central to the Kremlin’s strategy. Russia dominates the airwaves, with Russian channels freely broadcast on national television, and social media, where there are few regulations. Narratives focus on Armenia’s need for Russian security, and how the Pashinyan government has ceded sovereignty to Azerbaijan, and for the Russian market. Emphasis is on Armenia as part of Russia’s sphere of influence. Disinformation about elections, institutions, and democracy is prevalent, particularly sowing distrust in the integrity of the upcoming election. Russian information campaigns bolster opposition talking points, such as those accusing the government of suppressing speech and political prosecutions.   

The Kremlin has infiltrated charities, movements, and foundations, such as the “Foundation to Battle Injustice,” established by the late Wagner Head Yevgeniy Prigozhin. Russia and Armenian Church leaders are also in lockstep, each amplifying the other’s attacks on the government, messaging on traditional values, and criticism of Western institutions. Russia has also mobilized the Armenian diaspora to vote in previous elections, paying for transport and vote buying. Russian banks and businesses operate throughout the country making financing of influence operations and proxies easy. 

It is widely acknowledged in Yerevan that the country is not adequately prepared to defend against this threat. Government bodies are poorly resourced and often lack the mandate, technology, and tools to investigate or conduct counter efforts. There are also legal loopholes, such as the lack of regulation on third parties, which frequently engage in political activity. Civil society groups, research institutes, and independent media – central to building resilience to hybrid threats – are also poorly resourced, particularly since the elimination of USAID.

Electoral victory for the main opposition blocs, the beneficiaries of Russian influence, would signify a reversal on the country’s current trajectory. Russian citizen Samvel Karapetyan, owner of the Russian Tashir Group, founded the opposition Strong Armenia. The other main opposition bloc, Armenia Alliance, is led by former President Robert Kocharyan who serves on the board of directors for Sistema PJSFC, one of Russia’s largest investment companies. In addition to their obvious Russian ties, the parties reject Pashinyan’s peace agreement (and do not offer a clear alternative), do not approve of TRIPP, and believe Armenia is “not ready” for the EU. 

According to recent polling, Civil Contract is polling at 24 percent, Strong Armenia at nine percent, and everyone else below the threshold. This polling also shows the majority of support for the ruling party comes from older (56+) and more urban citizens. Importantly, those who select Civil Contract are far more likely to identify as “pro-Western” (73 percent) while those who support Strong Armenia believe the country’s policy should be “pro-Russian” (71 percent).

CONCLUSIONS:

Armenia’s election could lead to the continuation of the country’s new foreign alignment course, forging new economic and security relationships and exerting greater freedom from Russian control. Alternatively, the country could abandon this direction, taking a closer path to that of neighboring Georgia, which has alienated the West and forged closer ties with Russia, China, and Iran. At a time of upheaval and uncertainty in the region, a strong alliance of pro-Russian governments along the vertical axis from Moscow to Tehran would have significant consequences. It could block Western interests in and access to the region and beyond, lead to new destabilization between Armenia and Azerbaijan, and embolden Russia to act elsewhere. 

Enhanced U.S. and European support would help fortify the elections from malign actors through increased technical assistance, intelligence, financing, and training to Armenian partners.

AUTHOR’S BIO: 

Laura Thornton has spent more than 30 years in the democracy, governance, and security space both as a practitioner and policy and advocacy expert. She lived more than two decades in Asia and the former Soviet Union and has held positions at the McCain Institute, the German Marshall Fund, International IDEA, and the National Democratic Institute.

By Eldaniz Gusseinov and Rassul Kospanov

Pakistan's declaration of “open war” on Afghanistan in late February 2026, following sustained airstrikes on Kabul, Kandahar, and Bagram airbase under Operation Ghazab Lil Haq, has effectively closed the principal corridor through which Afghan trade reached the sea. While attention has been concentrated to the immediate military dimension, a structurally more consequential process is unfolding in parallel: a reorientation of Afghanistan’s external economic links away from Pakistan and toward Central Asia. This shift was already underway, driven by periodic border disruptions, trade friction, and the steady maturation of northern infrastructure, but the war has compressed its timeline considerably. Three concurrent developments: the collapse of Pakistan-Afghanistan commerce, the ratification of a preferential trade agreement between Uzbekistan and Kabul, and the near-completion of the CASA-1000 power transmission project, suggest that Afghanistan's economic geography is quickly being redrawn.

 Image Credit: View of the old city of Kabul, Afghanistan, first uploaded on Wikipedia Commons [http://en.wikipedia.org/wiki/User: Casimiri]

BACKGROUND:

Afghanistan’s economic dependence on Pakistan long predated the current escalation. The Torkham and Chaman crossings served as the country’s principal gateways to Karachi and Gwadar, providing access to maritime trade routes that Central Asian landlocked corridors could not replicate. Yet the relationship was structurally vulnerable. Kabul’s refusal to formally recognize the Durand Line as an international border underpinned recurring post‑2001 border closures and trade disruptions, and the Taliban’s return to power in August 2021 added a new layer of friction as Islamabad’s demands that Kabul curb TTP sanctuaries went largely unmet. By 2024, divergence was increasingly visible: Pakistan substituted Afghan coal for sea‑borne coal imports and other suppliers while Afghan exporters faced tightening customs and transit restrictions. Bilateral commerce between Pakistan and Afghanistan contracted from approximately USD 2.46 billion in 2024 to USD 1.77 billion in 2025. At the same time, Afghanistan’s trade with Central Asian countries increased significantly, rising by 77 percent. The main driver of this growth was trade between Uzbekistan and Afghanistan, which expanded by 53 percent, reaching approximately US$ 1.6 billion.

The February 2026 escalation removed whatever residual reliability the southern corridor retained. Pakistani airstrikes under Operation Ghazab Lil Haq targeted Taliban military infrastructure across multiple provinces, a full trade suspension was imposed, and buffer-zone operations along the Durand Line added a physical barrier to the political and commercial obstacles already in place. For Afghan business networks and logistics operators, the southern route shifted from periodically unreliable to operationally closed.

Uzbekistan’s Hairatan border crossing on the Amu Darya handled approximately 76 percent of Afghanistan’s northern freight transit before the current escalation, channeling goods toward Russia, China, and the Caspian. Afghanistan’s dependence on Central Asian electricity suppliers, principally Uzbekistan, Tajikistan, and Turkmenistan, which together provide 80-85 percent of the country's power imports, had established dense operational relationships at the border long before formal trade policy followed. Total transit volumes through Afghanistan reached 5 million tons in 2024, demonstrating that the trans-Afghan corridor had become integral to Central Asian commerce with South Asia. The Central Asian factor in Afghanistan’s economy was already structural; yet the war changed its relative weight.

IMPLICATIONS:

The most immediate institutional development is the Uzbekistan-Afghanistan Preferential Trade Agreement, signed at the Tashkent International Investment Forum on June 10, 2025, and ratified by President Mirziyoyev in March 2026. The agreement eliminates customs tariffs on 14 categories of goods, prioritizing Afghan agricultural exports, streamlines phytosanitary certification for Afghan farm produce, and formalizes 24-hour operations at the Hairatan-Termez border crossing to accommodate increased volumes. Tashkent’s stated ambition is to raise bilateral trade from roughly US$ 1.6 billion toward US$ 5 billion within five years. It is significant not merely as a commercial target but as a political signal. By institutionalizing preferences and creating a structured long-term framework, Uzbekistan has moved well beyond the ad hoc transactional engagement that characterized the immediate post-2021 period.

The CASA-1000 project, which will add approximately 300 megawatts to Afghanistan’s power supply via a transmission line from Kyrgyzstan and Tajikistan, has reached an advanced stage of completion on the Afghan segment, with commissioning targeted for 2027. Uzbekistan has separately committed US$ 1.15 billion in deals for gas-fired generation and transmission infrastructure within Afghanistan, while a 25-year contract for development of the Toti-Maidan gas field deepens the bilateral energy relationship further. In parallel, following the Kazakhstan–Afghanistan business forum held in Shymkent, Astana announced plans to begin geological exploration in Afghanistan’s Laghman province. As part of this initiative, the Kazakh companies Kazatomprom and Kazakhmys conducted two geological missions to assess the potential development of beryllium and lead deposits.

These linkages carry strategic weight beyond their technical specifications: a country that depends on Central Asia for the electricity powering its cities and industries has strong incentives to sustain institutional connectivity with the region, irrespective of the diplomatic nuances in its relations with individual Central Asian capitals.

The Trans-Afghan Railway, whose feasibility framework was signed in July 2025, constitutes the third pillar of this emerging architecture. The corridor, linking Uzbekistan through Mazar-i-Sharif toward South Asian ports, had historically been conceived as a north-south bridge serving Central Asian exporters seeking sea access through Afghanistan. 

Kazakhstan does not oppose Uzbekistan’s project but is promoting an alternative corridor through western Afghanistan. The route Turgundi–Herat–Kandahar–Spin Boldak is considered technically simpler due to its largely flat terrain, compared to the Uzbek route that passes through the high-altitude Salang Pass. Kazakhstan plans to invest around US$ 500 million, including the construction of railway segments and the creation of a logistics hub in Herat, which is expected to become a key “dry port” for Kazakh cargo.

If realized, this project would represent the first attempt since the nineteenth century to build a railway corridor in this direction. In 1879, British authorities considered constructing a railway to Kandahar. It was never implemented due to resistance from local tribal elites and the ongoing Anglo-Afghan War. After the Russian Empire captured the Panjdeh area north of Herat in 1885, Russian officials explored but never realized the possibility of extending the Trans-Caspian Railway from Krasnovodsk (now Turkmenbashi) through Merv to Herat. Kazakhstan is now demonstrating political boldness by advancing an ambitious initiative seeking to accomplish what the great empires of the past ultimately failed to achieve.

While the Pakistani military campaign has not eliminated the long-term logic of that corridor, it has introduced a medium-term disruption that reinforces Afghanistan’s own interest in northern connectivity, not merely as a transit function enabling others.

The structural dynamic underlying all three of these processes is that Central Asian states, particularly Uzbekistan, have pursued a consistently pragmatic engagement with the Taliban since 2021. Tashkent, Astana, and Ashgabat have avoided formal recognition while building dense working relationships on trade, border management, energy supply, and security coordination. For the Taliban, whose options have narrowed sharply as a result of the Pakistan conflict, this transactional model is comparatively attractive. Central Asian partners do not demand regime change or condition economic engagement on governance reforms and are geographically indispensable for the country’s energy supply. Tashkent and Kabul are not natural allies but increasingly unavoidable partners.

The risks in this trajectory lie in its structural fragility. Afghanistan’s trade deficit reached approximately US$ 9.4 billion in 2024, its export base remains concentrated in agricultural goods and coal, and its settlement infrastructure relies heavily on informal hawala transfers rather than banking channels. Northern trade growth has been accompanied by a persistent imbalance: Central Asian exports to Afghanistan are growing in volume while narrowing in variety, concentrated in flour, fuel, and electricity, with volatility coefficients suggesting that these supply chains remain sensitive to disruption. A durable transformation will require not merely preferential tariff access but energy and industrial investment capable of shifting Afghanistan from a consumer of basic goods to a contributor of productive capacity. For Central Asian states, this is not merely an altruistic objective: without a functional industrial base in Afghanistan, Central Asian exporters will face continued concentration risk in a market that is simultaneously growing and fragile.

CONCLUSIONS:

The Pakistan-Afghanistan war has accelerated Afghanistan’s northward economic pivot. By severing the southern corridor at precisely the moment that Central Asian infrastructure like CASA-1000, the Hairatan-Termez corridor, and the Trans-Afghan Railway framework are reaching operational maturity, the conflict has compressed a decade-long structural transition into a period of months. Uzbekistan has moved most aggressively to institutionalize this realignment through the Preferential Trade Agreement and its energy investment commitments, but the broader dynamic reflects a regional logic that extends to Kazakhstan, Tajikistan, and Turkmenistan: Central Asian states require a stable Afghanistan as a transit corridor and buffer against militant spillover, while Afghanistan requires Central Asian energy, markets, and institutional connectivity as substitutes for a now-hostile southern partner. Whether this convergence of interests consolidates into durable integration will depend on whether both sides can address structural fragilities such as payment infrastructure, export diversification, and logistics gaps, which continue to constrain the corridor’s full potential. The war has resolved an ambiguity in Afghanistan’s foreign economic orientation; the harder task of building a resilient northern integration architecture now begins.

AUTHOR’S BIO: 

Eldaniz Gusseinov is Head of Research and сo-founder at the political foresight agency Nightingale Int. and a non-resident research fellow at Haydar Aliyev Center for Eurasian Studies of the Ibn Haldun University, Istanbul. Rassul Kospanov is a Senior Researcher at the National Analytical Center under Nazarbayev University, where he coordinates socio-political research projects and prepares analytical reports and policy recommendations for central and local government bodies. His work focuses on political processes in Kazakhstan and across Central Asia, as well as issues of regional cooperation.

By Tomáš Baranec and Giorgi Khishtovani

Long-term rapid GDP growth is one of the pillars on which the Georgian government builds its legitimacy amid social and political instability following the October 2024 parliamentary elections. The numbers seemingly confirm the government’s argument. Georgia's GDP growth was 7.8 percent in 2023 and 9.7 percent in 2024. In 2025, overall growth is expected at 7.5 percent and International financial institutionsexpect GDP growth at 5-5.5 percent for 2026. The growth of recent years, however, was driven by several temporary and random factors rather than structural reforms. Numerous indicators suggest that growth in 2025 was artificially inflated and that the Georgian economy is in fact entering a turbulent phase.

BACKGROUND:

Georgia’s high GDP growth after 2020 was driven by three primary and two secondary factors. The first, most short-term, primary factor was natural growth after a sharp decline during the first year of the COVID-19 pandemic. After a contraction caused by the pandemic in 2020, when GDP fell by 6.3 percent, GDP grew by 10.6 percent the following year. The economy grew rapidly, primarily due to the fading of the initial shock from the pandemic and adaptation of the labour market and supply chains to the new pandemic reality.

While the effect of adaptation to the pandemic gradually faded, two other strong primary factors of GDP growth emerged, both associated with the Russian invasion of Ukraine in the spring of 2022. These were the mass arrival of Russian citizens and the opening of a transport corridor for sanctioned goods to Russia via Georgia. Following 2022, more than 80,000 Russian citizens settled in Georgia, mostly IT professionals, small businesspeople, and other members of higher-income groups. Their arrival stimulated overall demand, particularly growth in housing prices and development of the construction and IT sectors. In addition, Russian capital in the form of deposits from Russian citizens began flowing into Georgian banks in large quantities in 2022.

After 2022, Georgia became one of several transport corridors for the (re)export of sanctioned goods to Russia. Official statistics indicate Georgia’s role as an export corridor for passenger cars. In 2025, Kyrgyzstan (export from Georgia US$ 1.49 billion) and Kazakhstan (export from Georgia US$ 909 million) became Georgia’s main trading partners, and the main official export destinations for passenger cars from Georgia. The export value of this commodity reached US$ 2.81 billion. Passenger cars were also the largest import item to Georgia with a total value of US$ 3.87 billion. It should be noted that the “Georgian corridor” is partly absent from Kyrgyz and Kazakh statistics. While there is an immense increase of Georgian exports to Asia, the corresponding imports from Georgia are missing in the statistics of these countries. For instance, Kyrgyzstan’s official imports from Georgia are at least ten times lower than exports from Georgia to Kyrgyzstan.

The war in Ukraine also became the impetus for the emergence of two secondary factors of GDP growth in Georgia: foreign students and Russian tourists. Before the war, universities in eastern Ukraine were the main competitors of Georgian universities for international students, especially from India. After the war broke out, large numbers of students instead came to Georgia, increasing by an average of 20 percent year-on-year. In the 2024-2025 academic year, 37,100 international students studied in Georgia, more than double the 17,500 foreign students in Georgian universities in 2021-2022. This factor is an often overlooked yet significant secondary driver of Georgia’s GDP growth over the past few years.

Moreover, unlike many Western countries, Georgia has not banned flights to Russia, thereby stimulating growth in tourism. Russians represented 23.32 percent of total visits to the country in 2025.

Increased state revenues are an additional element that have contributed to strong growth figures and increased government spending in the years 2021-2025. Central government tax revenues rose from US$ 3.5 billion in 2021 to US$ 8.0 billion in 2025, reflecting a 128 percent increase, while state budget appropriations increased from US$ 6.19 billion to 10.3 billion, a 66.3 percent rise.  

IMPLICATIONS:

Several trends indicate that the main drivers of Georgia’s growth have already peaked and are beginning to fade. The economic growth in 2025 was likely inflated mainly by the International Company Status Act adopted in 2020. The Act grants certain types of companies in the IT and maritime sectors the opportunity to qualify for significant tax breaks. The changes adopted in 2020 allow foreign IT companies to register in Georgia, having to pay only a 5 percent corporate tax and 5 percent on employee wages. The ultimate catalyst for growth under the legislation was the arrival of Russian and Belarusian IT experts in 2022. In parallel with this law, the government also introduced simplified permanent residence for employees in the Information and Communication Technology (ICT) sector in 2025.

In the third quarter of 2025, the ICT sector grew by 21.1 percent; in the second quarter of 2025, by 37.1 percent; and in the first quarter of 2025, by 28.6 percent. In the third quarter of 2025, the sector reached 7.4 percent of the country’s GDP, from only 3 percent in 2020. While the state’s revenues from this scheme are rather insignificant, it does contribute to inflating growth statistics.

At the same time, almost all sectors relevant to the real economy and the state budget recorded a decrease in growth or a decline in the third quarter of 2025: energy (-3.3 percent), agriculture (-5.4 percent), construction (0.2 percent), trade (+3 percent) and manufacturing (+2,5 percent).

Other trends also contribute to the slowdown of the real Georgian economy. The number of people employed in the Georgian economy has decreased (most probably due to emigration) in the third quarter of 2025. Meanwhile, growth rates of imports are decreasing as compared to 2024. 

While state budget revenues increased by approximately 25 percent in 2024, they increased by only 10 percent in 2025, with 4 percent offset by current inflation. These trends contradict the estimated 2025 GDP growth rate.

The Georgian economy’s growth was not only an important PR tool for the Georgian government but also a practical means for maintaining its public support in the critical years of 2024 and 2025.

During its time in power, Georgian Dream has created a self-dependent layer of civil servants and citizens receiving various social benefits. Over the past two years, the ruling party has further strengthened their loyalty by increasing salaries and benefits. This was permitted by strong economic figures in 2022-2024. After 2025, Georgian Dream is starting to run short of resources to continue buying the support of these groups.

Most probably, the Georgian government is aware of the real slowdown in economic growth and the threats it poses to its legitimacy. It is currently taking several steps to address this threat. In the summer of 2025, the National Bank of Georgia managed to restore its dollar reserves to the same level as in 2024, before it started to sharply sell US$. 

Keeping a stable currency is one of Georgian Dream’s main priorities. The government has also become more careful in spending budgetary funds in comparison to previous years, and is actively building a financial reserve to limit the impact of slowing economic growth.

Georgian Dream’s ability to prepare for a period of economic turbulence will depend on several factors. These factors cannot currently be estimated accurately, however, the duration of Western sanctions against Russia stands out among the most relevant. Maintaining Georgia’s relevance as a transport corridor to Russia would significantly help Tbilisi weather the upcoming economic turbulence. On the other hand, a quick resolution of the conflict in Ukraine and the restoration of trade relations between Moscow and the West could, indirectly but significantly, weaken Georgian Dream’s position.

CONCLUSIONS:

The slowdown in the Georgian economy’s real growth will likely be the next big challenge for the ruling Georgian Dream party in the coming years, following the protest year of 2025. Unlike the mass protests, a significant deterioration in the population’s socio-economic situation could undermine support for the ruling party, even among its core electorate. Several current government actions indicate that Georgia’s de facto leader, Bidzina Ivanishvili, is aware of this threat and is taking steps to maintain the government’s capacity to support the existing social system. However, several key factors in this direction are shaped by other actors and trends and depend only marginally on the actions of the Georgian government. Of these, an end to the war in Ukraine could have the most severe negative impact. Moreover, the data accounted for here precedes the recent outbreak of war in Iran. The fallout from the conflict adds uncertainty to an already precarious economic situation in Georgia.

AUTHOR’S BIO: 

Tomáš Baranec is a Research Fellow and Head of the Caucasus Program of the Slovak think tank Strategic Analysis. He currently works as a field researcher on the Georgian-Ossetian ABL. Tomas studied Balkan, Central European and Eurasian Studies at Charles University in Prague. Giorgi Khishtovani is a Full Professor and Head of the Department of Finance at Ilia State University (Georgia). He holds a PhD in Economics from the University of Bremen (Germany), an MSc in Business Administration, and an LLM in Law from the University of Trier (Germany). His research focuses on political economy, governance, economic and fiscal policy.