TOPIC OF THE WEEK: From Tehran to the pump: oil shock inflation in the Caucasus and Central Asia
The adverse oil shock emanating from the Iran crisis risks derailing the disinflation story that I expected across the CCA this year. Inflation across the region appeared to have peaked in 2025, with most economies projected to see easing price pressures in 2026, including on slower growth, a favorable base and declining (or broadly stable) energy prices. The geopolitical escalation around Iran has now undermined that assumption. With most economies in the region—except Azerbaijan—being net energy importers, the surge in global oil prices introduces a powerful new upside risk to inflation and complicates the case for further monetary easing.
Initial price signals from the pump suggest that this process is already underway. Indeed, retail fuel prices have started to rear their head across the region, with the largest increases seen in Tajikistan, Kyrgyzstan, and Georgia. Although still relatively limited in magnitude, they likely underestimate the impact of this process as retail fuel prices tend to adjust with a lag to global oil markets. The divergence in price dynamics is explained by differences in the structure of fuel import dependency and pricing regimes in the region.
A simple vulnerability framework suggests that Kyrgyzstan and Tajikistan are the most exposed to the oil shock, while Azerbaijan is the best insulated. Heavy dependence on imported energy sources, lack of supplier diversification, and higher oil intensity of GDP make the first two Central Asian economies particularly vulnerable to rising energy costs. Azerbaijan is at the opposite end of the spectrum due to domestic refining and administered pump prices. Armenia, Georgia, and Uzbekistan are somewhere in the middle, although the latter is in a slightly better position due to some domestic refining and a lower oil share of the energy mix.
Even a moderate oil shock could materially shift the inflation outlook—and with it, the policy path for interest rates. A 10% increase in oil prices—roughly the adjustment implied by the post-Iran shift in global forecasts—could add about 0.4–0.7 percentage points to headline inflation across the region. That alone is enough to push projected inflation above central-bank targets in several economies, effectively halting the anticipated regional disinflation cycle. For investors, this should translate into a clear re-pricing of rate expectations, with Uzbekistan emerging as the stand-out casualty given that, pre-Iran, the totality of underlying factors were consistent with a more forceful downward move in policy rates this year. The scope for monetary easing in Georgia, and Azerbaijan has also effectively closed, Armenia may now be facing tightening risks, Kyrgyzstan appears set to continue on its ongoing hiking path, while Tajikistan will finally switch from easing to tightening.
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