The Azerbaijan water scarcity crisis

Executive Summary

The water scarcity crisis in Azerbaijan has reached a critical point, and the country plans to make its abatement a key talking point at COP29. At the heart of Azerbaijan’s burgeoning economy lies its freshwater from upstream water basins, and Azerbaijan’s level of dependency on external inflow is at the crux of this water crisis.

Downstream sits the Caspian Basin, within which lies the Caspian Sea, contributing an annual output of US$2.5 trillion to the world’s economy. Water scarcity crisis, which also impacts the state of the Caspian Sea, has implications far beyond its borders. This is a key concern for the Azerbaijan government and a topic at the heart of its COP29 preparations — with water scarcity and its economic and social implications a key theme at this year’s global climate summit in Baku. Currently, the biggest threat to the Caspian Sea is falling water levels. This has been brought about by many practices, including inefficient and unsustainable irrigation practices and pollution, and geopolitical issues arising upstream, and is being accelerated by climate change.

If not addressed, the fallout from Azerbaijan’s water scarcity crisis could have a detrimental effect on its society, the AZ economy and wide-spread impacts on global business.

In this paper, we take a closer look at the water crisis in Azerbaijan and explore the possible repercussions of the crisis on the country’s economy, on global trade, and on a number of global industries closely tied to the country.

The insights in this paper shine a light on how one country and its challenges relating to climate change could be creating a pinch point for an organisation’s supply chain and increasing the risk of business disruption.

We encourage our readers to maintain good visibility across global supply chains and to understand where and why single points of failure may arise. Now is the time to act against the impacts of climate change like water scarcity. With transparency and understanding, organisations are in good stead to build resilience and preparedness.

For Azerbaijan, one resource in particular is essential to the country’s economic growth. Not only does this resource lie at the center of various geopolitical dependencies, but also it is being heavily impacted by climate change and the agenda to reach net-zero. The resource is water. Water scarcity is a real and present danger for Azerbaijan that threatens the country’s communities and economy.

In 2020, the Azerbaijan government appointed a commission to address the challenge of water scarcity and the coordination of water management. As host of COP29, Azerbaijan intends to use this world stage to outline why water scarcity needs to be top of the agenda. The Baku Dialogue on Water Climate Action will be launched as part of Water for Climate Action — one of the COP 29 Presidential Action Agenda Global Initiatives. Azerbaijan’s water scarcity crisis is a live case study on the impact of water stress on a burgeoning economy and the fallout for businesses around the world . The scale and impact of the crisis will be determined by actions now. Water stress is a growing risks in many regions around the world including Azerbaijan, and there is urgent need for comprehensive water risk management from businesses and governments.

In this report, we will explore Azerbaijan’s role within the global economy; the supply and demand pressures on its water; the impact its water scarcity crisis could have on its industry and trade; and how at the heart of it all lies the inflow of freshwater from upstream basins and the Caspian Sea.

Water plays a significant role in facilitating Azerbaijan’s main industries and its trade. Currently 53% of Azerbaijan’s GDP is from industries highly dependent on water, including oil and gas (which makes up 35% of Azerbaijan’s GDP), agriculture manufacturing, and construction (with the three combined attributing 18% of total GDP).

Agriculture has been marked an important sector for Azerbaijan’s economic diversification and 80-90% of Azerbaijan’s agriculture is on irrigated land. For more than a decade, efforts to ramp up the production of raw cotton have been in place. Currently, cotton accounts for an estimated 25% of revenue from agriculture in the country, with roughly 90% being exported to countries like Turkey and Iran. Particular attention has also been paid to cotton production as it is more profitable, with hopes to revive the ginning and processing industries. For all aspects, freshwater is essential, leading the agricultural sector being reliant on freshwater inflows.

In the east of the country lies the Caspian Sea, which plays a vital role in Azerbaijan’s interactions with major international markets, including Italy, Turkey, Greece and India. This body of water is a strategically important trade corridor for not only Azerbaijan, but rather the entire region. The Caspian Sea represents vital economic opportunities for all of its littoral states. This trade route could prove vital to the ability of these countries to diversify their export and import channels, as the old Silk Road continues to be revived.

Currently, 90% of traded goods are shipped, highlighting the importance of waterways. To avoid the pressurised Suez Canal — and the extended shipping times of going around the Cape of Good Hope in South Africa — Companies are increasingly turning to the Trans-Caspian International Transport Route (TITR). The TITR, also known as the Middle Corridor, is a key trade route linking the markets of China, East Asia, and Europe. While most of the route is by land, the Caspian Sea is used to link East and West by providing a connecting passage between Kazakhstan and Azerbaijan.

Azerbaijan, alongside a number of its neighbors, has been investing in infrastructure to increase the cargo throughput of the Middle Corridor, with the goal of reaching throughput capacity of 10 million tons per year by 2027, and transit times of 14-18 days. Waterway transportation is reliant on the bodies of water used maintaining navigable depths. When water levels are too low, ships may not be able to pass. Maintaining navigable water levels becomes increasingly important as the use of waterway transportation grows in significance to the Azerbaijan economy.

The Caspian Sea also boasts abundant natural resources, with the country’s largest hydrocarbon basins located within it. The majority of Azerbaijan’s oil is exported to the West — only one third is used for domestic consumption, with the country utilising natural gas for the remaining two-thirds.

As the world transitions to other forms of energy, Azerbaijan is readying itself for change in this space. At COP26, the country committed to its target of a 35% reduction in GHG emissions by 2030 and, more recently, has committed to a 40% by 2050.

The biggest threat to both Azerbaijan’s freshwater rivers and the Caspian Sea is falling water levels, which is induced by both climate-related and anthropogenic factors. In Azerbaijan, these factors are at the heart of the country’s critical water scarcity issues.

According to the World Resources Institute, Azerbaijan’s overall water risk is extremely high and shows no signs of abating between now and 2080. Azerbaijan faces significant issues relating to water stress, with pressures on both water availability and demand.

Alongside the impact of reduced precipitation on Azerbaijan’s rivers, the Caspian Sea is exposed to the impact of climate-related warming. For most seas, global warming is resulting in rising sea levels and inundation risk; the Caspian, however, is not technically a sea. It is a lake, and as such will experience increased evaporation from climate-related warming. With low precipitation unable to balance out the evaporation, there will continue be a rapid decline in the Caspian Sea’s water levels over the next few decades.

Azerbaijan’s freshwater challenges go far beyond the need to supplement the Caspian Sea. The country remains heavily reliant on external inflows of water from upstream countries. More than 70% of the country’s renewable freshwater comes from tributaries in neighboring countries, including Armenia (Tatar River) and Turkey (Kura and Aras Rivers), which flow through Azerbaijan and into the Caspian Sea. However, both countries have or are in the process of developing infrastructure including dam building on these rivers, which could lead to significant pressure on water for Azerbaijan.

According to the World Bank : “Azerbaijan relies extensively on transboundary water inflows due to its geographical and climatic conditions. A total of about 32 km3 of renewable freshwater — including surface and groundwater — is available on average per year, but only around 8 km3 are estimated to be produced within Azerbaijani’s territory.”

The changing climate has led to a reduction in renewable surface and groundwater supplies, with reduced precipitation contributing only 25% to the water flowing into the country. These waters flow into the country’s rivers and ultimately end in the Caspian Sea. Surface and groundwater — known as renewable freshwater — has decreased from 36,700 million cubic meters (m3) in 2017 to 29,400 million m3 in 2000. This represents a 20% decrease in the space of three years.

The World Bank outlines: “The largest share (78%) of Azerbaijan’s runoff enters through transboundary Kura and Araz Rivers from the three neighboring states.” The impact infrastructure-related restrictions have on the Caspian Sea cannot be viewed lightly. These actions, alongside the damming by Russia of the Caspian Sea’s main tributary, Volga River, could be pivotal in water levels in the Caspian Sea dropping another 8 — 30 meters by 2100. While this will wield the biggest blow to the northeastern part of the Caspian Sea, various water risk models have predicted that the reduced levels could uncover an estimated 93,000 square kilometers of dry land — an area roughly the size of Portugal. A shift of this magnitude will undoubtedly impact Azerbaijan in the southwest.

On the other end of the scale, the move to diversify revenue streams — be it for the country’s adaptation to climate change, or to strengthen the country’s economy — stands to intensify water demand.

In line with the country’s GHG-emission reduction goals, Azerbaijan is increasingly reliant on its non-service economy. This includes sectors like agriculture (16% of non-service economy GDP in 2023), manufacturing (17%), and construction (19%) — all three of which fall within the country’s most water dependent industries.

Agriculture is highly water-intensive due to irrigation; some crops require more water than others, as outlined in the table below. This water will need to come from the restricted tributaries that are also needed to feed the Caspian Sea.

Global water usage for water-intensive crops

Crop	Typical water requirement (in liters) per kilogram of crop
Cotton	7,000 - 29,000
Rice	3,000 - 5,000
Sugar Cane	1,500 - 3,000
Soya	2,000
Wheat	900
Potatoes	500

Italicised crops are all grown in Azerbaijan

Azerbaijan’s rivers and small streams are under extreme pressure due to the agricultural sector’s intensive water withdrawals for irrigation. Water scarcity is a key threat to the biodiversity in the rivers and streams in Azerbaijan. It is also a threat to the biodiversity of the Caspian Sea. If the rivers that run into the Caspian Sea are overutilised, this will further diminish renewable freshwater flowing into the Caspian Sea.

The Manufacturing industry also uses a substantial amount of water for both product creation processes and equipment cooling. Manufacturing and construction are heavily linked in Azerbaijan, as the country’s largest manufacturing companies are cement plants. The construction industry uses water in numerous ways, including equipment operation, landscaping, and dust control. However, during construction most water is consumed in the mixing and curing of concrete. Currently, concrete production accounts for almost 10% of global industrial water use. It is estimated that in 2050, 75% of global water demand for concrete production will occur in regions experiencing water stress; Azerbaijan will likely be among this list.

As the significance of these sectors to the Azerbaijan economy grows, so too will their related water usage. The added demand, alongside the numerous climate and control issues affecting supply, is set to amplify water stress and risk.

Azerbaijan’s water scarcity crisis has been an ongoing problem with a 20% decrease in renewable freshwater since 2000. The continuing pressures of climate change on an already challenged infrastructure have enabled the issues to reach the critical point we are seeing today. Water stress caused by restricted freshwater inflow, in combination with climate-related aspects like more frequent and intense extreme heat, will eventually impede the Azerbaijan population’s ability to access freshwater. Both the World Health Organization and the World Food Programme have highlighted the need to address climate-induced water scarcity on communities in pre-COP29 reports and meetings.

Azerbaijan has plans underway to construct a desalination plant in the Caspian Sea to support its freshwater resource, with priority implementation areas earmarked for completion by 2040.

However, water stress relating to the Caspian Sea has the potential to exacerbate geopolitical tensions also. The Global Risks Report 2024 highlighted the following: “With the livelihoods and food security of millions of people depending on the Caspian Sea, a loss of these ecosystem services will have drastic socioeconomic consequences and may trigger local and regional conflicts..."

As well as societal issues, water stress can take an economic toll. Azerbaijan’s economic stability stands to suffer if its major industries dependent on water — or the passage it provides — are being hampered by water scarcity. A reduction in the country’s GDP from these industries like agriculture, manufacturing, and construction, could lead to notable financial volatility.

In addition, lower water levels for the Caspian Sea could make it too shallow for larger ships to cross, leading to business interruption across supply chains. Events like the blockage of the Suez Canal by Ever Given demonstrate the impact that disrupted marine trade routes can have on global supply chains. Water levels in the region are already challenged, due to the severe lack of dredging — these shallower conditions have already made it difficult for ships to move through the Volga and Volga-Don Canal to the north of the Caspian Sea. Falling water levels will only aggravate the problem.

There will also be impacts on a number of specific industries that not only affect the country socially and economically, but also could increase risk across global supply chains.

Azerbaijan has a strong chemical industry, which takes advantage of a number of available minerals and resources. Iodine and bromine are used extensively by the pharmaceutical industries for medicines and health care products, for example. Petrochemicals are used in fertiliser for the agricultural industry and in plastics. Additionally, Azerbaijan’s chemical industry produces cement additives and waterproofing materials, which are used within construction.

These chemicals are exported all over the world from Azerbaijan, including China, with Brazil and Turkey being top locations. Materials needed to process these chemicals are imported in from locations including China, France, and Germany, and Turkey is the main import location.

Water scarcity has the ability to significantly impede the chemical industry within Azerbaijan — the industry is one of the world’s largest water consumers, with it being essential at every stage of processing. This could delay processing and disrupt supply chains within the chemical industry, both up and down stream.

The falling water levels of the Caspian Sea could also hinder the transportation of chemicals and materials, leading to further raised costs and delays.

It is essential to also note the impact that the chemical industry has on the Caspian Sea. Alongside household and industrial wastewater, the chemical industry contributes towards the over 1 billion cubic meters of wastewater that ends up in the Caspian Sea. Azerbaijan has been active in rallying the coastal countries of the Caspian Sea to commit to its clean-up.

Azerbaijan is host to 773 international mining companies as of 2022. There is high demand for critical minerals, and global efforts to fight climate change are driving the need for cobalt, aluminum, lead, zinc, iron ores, and other minerals essential for building electrics vehicles, solar panels, and other clean technologies — all of which can be produced in Azerbaijan.

Much like with concrete production, The World Resources Institute has found that at least 16% of the world’s land-based critical mineral mines, deposits, and districts are located in areas already facing high or extremely high levels of water stress.

Most methods used to mine critical minerals today require significant amounts of water at all stages of extraction and processing. Waste from mining and processing, including residual minerals and chemicals, also often contaminate the water. This affects nearby communities and ultimately contributes to wastewater in the Caspian Sea.

A typical oil refinery uses roughly 1.5 barrels of water to process 1 barrel of crude oil. In contrast, the typical requirement for 1kg of cotton crop is roughly 44 - 182 barrels of water. While there are clearly some industries, like agriculture, that use more water in their production and processes, the sheer scale of the oil and gas sector in Azerbaijan is what underpins its water intensity.

In April 2024, Azerbaijan produced 596,000 barrels of crude oil a day, and the country currently has 7 trillion barrels of oil in reserve. With 0.4 barrels of water needed during extraction, this equates to 238,400 barrels of water a day. This is a significant drain on the country’s freshwater supplies and, with 47% of Azerbaijan’s GDP coming from the oil and gas sector, will not change until the country’s economy is sufficiently diversified.

In the oil and gas sector, higher water usage correlates with greater risk exposure. Water intensity in this sector is measured by the amount of water used per million dollars generated. To this end, oil and gas producers exhibit greater risk exposure compared with energy services and refiners & pipelines. The discrepancy in risk exposure among the different factions of this industry will be amplified as Azerbaijan experiences greater water stress and scarcity.

Azerbaijan will highlight at COP29 that its water scarcity crisis has implications far beyond its borders and that the world now needs to take note. The Caspian Basin, within which the Caspian Sea and its tributaries sit, contributes an annual output of US$2.5 trillion to the world’s economy.

Falling water levels will increase the risk of ships grounding. Dredging may be a part of the solution but could negatively impact water quality, biodiversity, and the state of banks. The increased necessity to dredge the Caspian Sea, paired with the potential need to reduce carrying capacity of ships, will affect the operation of ports, increase costs, and heighten the risk of supply chain disruption.

Addressing these challenges requires improved governance, investment in sustainable irrigation practices, enhanced transboundary cooperation, and effective pollution control measures to ensure long-term water security for Azerbaijan.

The challenges of the Azerbaijan water scarcity crisis highlight the need for businesses around the world to know and understand the depths of their supply chains. This crisis will touch operators, asset owners, and investors, both locally and internationally, over the coming years.

Sectors that depend on Azerbaijan water — either through water dependent processes and products or through reliance on waterway transportation — need to consider how best to navigate the risks ahead. This could include supply chain management, early-warning technologies, risk assessment and monitoring tools, and process and product innovations to reduce water dependencies. Risk finance will also play an important role in mitigating the threat.

Now more than ever, organizations will need to be able to quantify how global challenges are impacting their operations and becoming a risk to business continuity. With this knowledge, they will be able to both ensure plans are updated appropriately, and smooth financial volatility using insurance mechanisms. For example, crop parametric insurance could be used to insure crop yield in the event of low rainfall and/or drought that could affect the crop production. Trade Disruption Insurance (TDI), which covers financial loss borne from climate-related disruption to supply chains, may also grow in popularity among ship and cargo owners as a form of risk transfer. These kinds of considerations will only increase as we grapple with the challenges of climate change and the transition to more sustainable economies.

Azerbaijan demonstrates the complexities of taking action to drive forward the transition while the climate is changing. A successful transition from fossil fuels is difficult enough. Doing this while water is becoming increasingly scarce is even more challenging. Careful water risk management is needed to enable countries like Azerbaijan to reach their climate goals and their sustainable development ambitions.

Addressing Azerbaijan’s water scarcity crisis is now critical — the fallout from inaction would hit the country hard, and has the potential be felt by businesses around the world.

As countries like Azerbaijan grapple with climate-related challenges, organisations need to find ways to engage early and find collaborative solution involving both public and private sectors to ensure that water scarcity is managed. Having good visibility of supply chains and understanding where pinch points and single points of failure are essential for minimising risk and avoiding hazard multiplication. Ultimately, at the heart of preparedness is good communication; maintaining strong communication channels and networks with suppliers will go a long way to ensuring there is resilience throughout your ecosystem.

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The Azerbaijan water scarcity crisis

Executive Summary

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The Azerbaijan water scarcity crisis

Executive Summary