Economic Modernization and Strategic Positioning of Algeria

Emerging from a complicated history of colonialism, civil war, and socialism, Algeria is evolving into a regional power and opening up for investments. The country holds substantial natural resources (including oil, natural gas, and minerals), a mild climate, and an educated workforce. In addition, following Russia’s invasion of Ukraine in February 2022, Algeria has become more strategically important to Europe’s energy diversification efforts: It is now the third-largest supplier of natural gas to the European Union, and the European Union is the largest importer of Algerian gas. To capitalize on these assets, it needs to attract significant investment into key strategic sectors by continuing to pursue reforms, removing bureaucracy and red tape, and building the country’s reputation as an investment destination.

As the country opens up and diversifies its economy, it will have to navigate complex relationships with major powers and neighbors, create meaningful employment for its youth, and sustain economic reforms. This commentary outlines impressions from a recent visit to Algeria in May 2026, during which I met with key leaders from government, industry, and research centers.

The United States’ Footprint in Algeria

Algeria is an important regional player, connecting the Mediterranean, the Sahel, and North Africa, but it maintains some relationships with U.S. adversaries. It maintains long-standing defense ties with Russia and has purchased large quantities of Russian military equipment. Likewise, China is also a major infrastructure and construction partner for the country.

However, Algeria wants to forge stronger economic ties with the West, and particularly the United States. Beyond cooperation on terrorism and border security, there is ongoing dialogue about the future of the Sahel, Libya, and broader challenges across the Middle East. The country is seeking to diversify its weapons procurement by opening the door to purchasing from other countries, including the United States. The two countries signed a groundbreaking memorandum of understanding on military cooperation in January 2025. The agreement initiates a process to identify areas where both militaries can cooperate and instructs them to start meeting and exchanging ideas on foreign military sales, exercises, and trainings.

In addition to growing U.S.-Algeria security cooperation, as well as Algeria’s role as an important partner in the fight against terrorism, the two countries have recently begun to build a stronger trade and investment bond. 

There are over 100 American companies present in Algeria, mostly in the oil and gas sector, and the United States is the largest source of foreign direct investment (FDI) in the country. Occidental Petroleum has a long-standing presence in Algeria and a major production-sharing partnership with the state-owned oil enterprise Sonatrach. Oil services companies, including Baker Hughes and Halliburton, are also operating in the country, partnering with Sonatrach on drilling, testing, and seismic services.

Collaboration in this and other sectors have started to increase in the past five years. Deputy Secretary of State Christopher Landau recently traveled to the region to enhance security and commercial cooperation. The country is hoping to soon sign agreements with Exxon and Chevron to develop its large reserves of shale gas, and companies such as GE Vernova have recently partnered with state-owned electricity and gas enterprise Sonelgaz to supply high-voltage equipment, components, and grid automation solutions for 134 substations by 2028. Elsewhere, the Qatari firm Baladna will import 30,000 cows from the United States into Algeria, to be flown in 109 trips, to help develop the local market for powdered milk in the country. The complete project could potentially create 1,200 jobs in the United States and 15,000 jobs in Algeria.

Algeria’s Economic Challenges

Algeria is a relatively rich country, classified as an upper-middle-income country by the World Bank, with a GDP per capita of more than $5,000. It has a low poverty rate, and it scores above its peers in the Middle East and North Africa region on human capital development but below the upper-middle-income country grouping. However, Freedom House still classifies the country as “not free.”

Within this context, some of the main challenges the country will have to address in the next decade include:

• Economic opening and diversification: Since the discovery of oil in the country in 1956, Algeria’s economy has been driven by hydrocarbon Algeria is seeking to capitalize on its hydrocarbon endowment while simultaneously developing other sectors that can generate greater value added, employment, and export revenues. As one expert from the Algerian Economic Renewal Council highlighted during the trip, “energy will always be an important component of our economy but there are new sectors emerging.” Examples of new areas of economic activity include agriculture, tourism, fertilizer, green hydrogen, and data centers.
  
  At the same time, Algeria remains relatively insular, reflecting a long-standing socialist legacy, with state-owned enterprises accounting for more than half of the formal economy.
  
  Access to finance is a stumbling block, especially for small and medium enterprises. The now-defunct Doing Business assessment by the World Bank showed that Algeria scored quite poorly in terms of access to credit. The financial sector remains largely closed and dominated by the state, and public banks are compelled to “purchase government securities when offered, meaning they have little leftover liquidity to make other investments.” Capital markets remain shallow, with the Algiers Stock Exchange listing only six firms. Overall, Algerian society remains dominated by cash, with minimal digital finance and limited credit card availability outside international hotels.
  
  FDI has remained at modest levels, even compared to other oil-producing countries such as the United Arab Emirates, Qatar, and Saudi Arabia. Even countries like Vietnam, which also experienced intense colonization under the French and a brutal 20-year war for independence, have been able to attract significant levels of investment. 
  
  Algeria is not alone—attracting FDI is a challenge across North Africa. The region receives less than 1 percent of all global FDI (despite accounting for roughly 3.4 percent of the global population), which is even less than its share of global GDP. Even sub-Saharan Africa, which has a lower regional share of world GDP, has outperformed North Africa in attracting FDI.
• High levels of youth unemployment: Algeria has a youthful population: Out of the 47 million inhabitants, approximately 45 percent are under the age of 25. This demographic dividend needs to be capitalized on to increase the productivity of the economy. However, youth unemployment remains stubbornly high, with approximately 30 percent of young people out of work and approximately one-third of all youth lacking education, employment, or other training. The youth labor market has been characterized by precarious employment, a mismatch of skills between the unemployed and available jobs, significant rural unemployment, and cultural and social factors that deter young women from entering the labor force.
• Weak regional integration: Algeria’s economic growth is also limited by security challenges and political developments in its neighborhood, limiting trade and economic integration in the region. An International Monetary Fund study suggests that increased supply chain participation and investment among North African countries could increase the region’s trade by 50 percent, GDP by 2 percent, and FDI by 50 percent. Disputes with Morocco over Western Sahara and Libya’s unstable political and social environment have the potential to negatively impact economic prospects until they are resolved.
   

Algeria’s Future Opportunities

Despite these challenges, the country has strong assets that it can build on:

• A new generation connected to the world: Algeria’s young population is more connected globally than previous generations and is adopting English as a second language. The country is pivoting from French to English, as English dominates international business as well as science and technology. As of 2023, English was being taught in schools starting in 3rd grade, and public universities are adopting English as a language of instruction. 
  
  According to surveys, the top concern for young people in Algeria and North Africa is job security. Since the Arab Spring in 2011, the region’s youth have been more empowered and increasingly have sought to be included in political processes and social development. Young people are also drawn to the information technology (IT) sector, which can provide significant employment opportunities. Given that the country’s digital economy remains underdeveloped, the sector presents a significant opportunity to create jobs for the country’s youth.
• Key sectors with growth opportunities: Beyond hydrocarbons, sectors such as solar energy, pharmaceuticals, agriculture, and mining are ripe for development and could attract significant FDI. Another overlooked sector is travel, tourism, and hospitality. The country hosts amazing archaeological sites and tourist destinations, such as a coastline of pristine beaches, which would attract a sophisticated international clientele. This sector would also create employment for youth, if combined with the right training and skilling initiatives. Neighboring Morocco, for example, had a record number of tourists in 2025, with tourism accounting for 7 percent of GDP. Unfortunately, there are no direct flights from Algeria to the United States to date, while Morocco has on average 92 weekly flights through Royal Air Maroc, Etihad, American Airlines, and United Airlines. A “Visit Algeria” marketing strategy coupled with more international flights and the development of digital payments could attract significant revenue for the country.
• Building on the reform momentum: Algeria has been making concerted efforts to ease doing business. The Algerian Investment Promotion Agency, established in 2022, has been active in implementing the country’s vision to diversify its economy and be more competitive. Significant reforms include easing the 51/49 ownership rule for foreign investors in certain sectors, which lifts the requirement of majority Algerian shareholding; setting up a one-stop-shop digital platform to simplify investment procedures; and establishing tax incentives for companies willing to invest in Algeria.
   

Looking Ahead

Algeria is a sophisticated and strategically positioned country that has the potential to emerge as a leading regional power. It can preserve its sovereignty while gradually opening its economy and society. Its identity as simultaneously Mediterranean, Arab, and African gives it a unique geopolitical and economic position at the crossroads of multiple regions and markets.

At the same time, U.S.-Algeria relations are evolving beyond a primarily security-focused partnership toward deeper trade and investment engagement. Significant opportunities exist in sectors such as pharmaceuticals, mining, agribusiness, digital infrastructure, and technology.

To fully realize this potential, Algeria could do more to position and promote itself to international investors by clearly articulating its comparative advantages relative to Gulf and other Mediterranean economies, including its geographic location, energy resources, industrial base, and access to African and European markets. The country has the elements to become a regional power and engine of growth not only for North Africa but for the whole African continent.

Romina Bandura is a senior fellow with the Project on Prosperity and Development at the Center for Strategic and International Studies in Washington, D.C.