Against the backdrop of a rapidly changing global economy, the South Caucasus is increasingly becoming a space where global interests intersect. The region, until recently viewed primarily through the prism of security and protracted conflicts, is now at the center of a struggle for transport routes, energy chains, and new trade links between East and West. Intensifying competition between major powers, the restructuring of global logistics flows, sanctions wars, instability in the Middle East, and the growing fragmentation of the global economy are simultaneously creating new opportunities and serious risks for states in the region.

Against this backdrop, Azerbaijan is striving to secure its role as a key hub in Eurasia – a country capable of connecting markets, resources, and transport routes. However, along with its growing strategic importance, external pressures are also intensifying: the interests of global and regional players are increasingly converging around the South Caucasus, turning it not only into an economic route but also an arena of geopolitical rivalry.

In an interview with CASPIA, Steve H.Hanke, Professor of Applied Economics at Johns Hopkins University in Baltimore, USA and researcher of global economic processes, discusses Azerbaijan's resilience in the new geoeconomic reality, whether the region is capable of becoming a full-fledged transit and investment hub, and the impact of global crises and international competition on the future of the South Caucasus.  He served on President Reagan’s Council of Economic Advisers. Prof. Hanke, a keen observer of the Caucasus, holds a honorary doctorate degree from the Free University of Tbilisi.

- How do you assess the current position of Azerbaijan within the global geo-economic system — is it an independent actor, or is its role still largely shaped by the interests of larger powers?

-On the surface, Azerbaijan appears to be an independent actor. But appearances can be deceptive. A careful analysis shows that Azerbaijan is always a pawn on someone else’s chessboard. Azerbaijan’s room for maneuver is shaped by geography, energy, trade routes, its natural resource endowments, and the ambitions of Russia, Turkey, Iran, Israel, the European Union, China, and the United States. The trick for Baku is to convert its geography and natural resource endowments into optionality, not dependency. So far, Azerbaijan is doing a pretty good job of swimming with the sharks without getting eaten.

-The South Caucasus is increasingly viewed as a strategic corridor between Europe and Asia — to what extent do you see this as an economic reality, and to what extent as a geopolitical construct?

-The South Caucasus is both an economic reality and a geopolitical construct. Corridors matter only if they reduce costs, cut transit times, and attract private capital. Azerbaijan can be a hub, but in my 2025 Hanke’s Annual Misery Index, it ranks 58th most miserable out of 178 countries, with high bank lending rates as the chief component increasing its misery. High financing costs are poison for logistics ambitions.

- Can economic interdependence between Azerbaijan and Armenia become a sustainable factor for peace, or does geopolitics inevitably outweigh economic rationality in such conflicts?

-Economic interdependence and commerce can support peace between Azerbaijan and Armenia, but they cannot substitute for institutions. Adam Smith’s formula remains the right one: “peace, easy taxes, and a tolerable administration of justice.” Without those, trade will not produce durable peace. With them, commerce can do what diplomacy often cannot.

-In the context of competition between the EU, Russia, Turkey, and China for influence in the region, what strategies allow small states to preserve economic sovereignty?

-Small states preserve economic sovereignty by diversifying. Azerbaijan should avoid dependence on any single power, pipeline, lender, market, or corridor. The best defenses are sound money, low and predictable taxes, free trade, property rights, decent courts, and a press free enough to expose graft.

- To what extent does the sanctions pressure on Russia create new economic opportunities for Azerbaijan, and where is the line between benefit and risk?

-As a free-market economist and a free trader, I am against sanctions in principle and in practice. They do not work. They backfire. Sanctions distort trade, create black markets, reward middlemen, and often strengthen the very regimes they are intended to weaken. Azerbaijan may see short-term opportunities from sanctions on Russia in energy, transport, and trade diversion, but Baku should be careful. If Azerbaijan adopts a strategy of exploiting sanctions or getting around them, that too will backfire. The sound policy is simple: open commerce, compliance with the rules, and no schemes.

- How do you assess the impact of tensions surrounding Iran on the economic security of the South Caucasus?

-Iran is one of the largest risk variables in the South Caucasus. Tensions around Iran raise insurance costs, threaten routes, and unsettle investors. Azerbaijan’s best policy is cold realism: avoid provocation, preserve deterrence, keep routes open, and remember Adam Smith’s first condition for prosperity: peace.

- Can instability in the Middle East enhance Azerbaijan’s strategic importance as an energy and logistics hub, or do the risks outweigh the potential benefits for the region?

-Middle East instability can increase Azerbaijan’s importance as an energy and logistics hub. But importance is not the same as security. If the neighborhood burns, Azerbaijan becomes more valuable, but also more exposed. The deeper problem is that Israel’s “Greater Israel” project is destined to keep the whole region in chaos. That chaos raises risk premiums, threatens trade routes, and makes long-term investment more difficult. Azerbaijan should not celebrate instability. It should insulate itself from it with peace, sound money, low business costs, and reliable institutions.

- Amid intensifying competition over transport corridors and logistics routes across Eurasia, are projects such as the Middle Corridor primarily economic initiatives, or instruments of geopolitical influence?

-The Middle Corridor is both an economic project and a geopolitical instrument. But cargo moves because of price, speed, reliability, and insurance, not slogans. Azerbaijan’s problem is that it ranks a lowly 130 out of 165 in the Washington D.C. based Cato institute's free-market ranking. That is a poor showing for a country that wants to be a first-class logistics hub. If Baku wants the Middle Corridor to be more than a geopolitical talking point, it must become a freer, lower-cost, more predictable place to do business.

- Given the current foreign policy trajectory of the administration of Donald Trump, how do you assess the potential impact of U.S. policy on the balance of power and economic dynamics in the South Caucasus?

-The United States could play a constructive role if it nudged Azerbaijan and Armenia toward a free-market model: open trade, private investment, sound money, low taxes, and a tolerable administration of justice. That would be useful. But in the great-power game, I have no confidence that the U.S. will do that. Washington is more likely to add another layer of geopolitical maneuvering than to stick to the basics of economic freedom.

- In the context of China’s expanding economic and infrastructure presence in Eurasia, can we speak of a growing dependency of the South Caucasus on Chinese investment and logistics projects, and how does this reshape the regional geo-economic balance?

-China is now in a strong position in the South Caucasus because of its newfound interest and focus on doing business. Since President Trump’s tariff threats, China has reacted by opening the door to more commerce. Ironically, the largest communist country in the world has become the most important advocate of freer trade. Azerbaijan should take advantage of that. Chinese capital, logistics, and markets can be useful, provided Baku keeps projects commercial, transparent, and non-exclusive. The opportunity is to do business with China, not to become dependent on China.