Business Monitor Online
Thursday
Nagorno-Karabakh: Risks Of Regional Escalation To Keep A Lid On Conflict
Tensions between Azerbaijan and Armenia remain extremely elevated, and the number of armed incidents involving heavy weapons has risen sharply in 2017. However, due to the balance of power, the risk of a full blown war remains relatively low, as both Russia and Turkey would not risk being dragged into a proxy conflict with one another.
BMI View: Tensions between Azerbaijan and Armenia remain extremely elevated, andthe number ofarmed incidents involving heavy weaponshasrisen sharply in 2017. However, due to thebalance ofpower,the risk of a full blown war remains relatively low, as both Russia and Turkey would not risk being dragged into aproxyconflictwith one another.Tensions between Azerbaijan and Armenia will remain high over the coming years, and while the risk of the conflict escalating into a all out war remains relatively low, it has risen over the past few months. A brief flare-up in April 2016 between the two countries, leaving over 200 casualties, pushed the two sides further apart, destroying much of the peace negotiation progress made over the past decade. In addition, in the first half of 2017 there have been a number of armed incidents in the heavily militarised and contested region of Nagorno-Karabakh, involving heavy artillery and missiles. These skirmishes have the potential of escalating the conflict, in particular as the fighting often takes place in close proximity to populated areas. As a result, we have lowered BMI's short-term political risk score for Azerbaijan slightly to 65.0 out of 100 on account of a lower score in the security and external threats subcategory ( see chart below).
Security Environment Constant Drag
Azerbaijan – Short Term Political Risk Index & Component, Out of 100
Source: BMI. Note: 100 is the best score available, zero the worst.
The 2016 conflict was the bloodiest confrontation in the frozen conflict since the 1988-1994 war over the Nagorno-Karabakh region, which left over 20,000 casualties and hundreds-of-thousands displaced persons. We note that although a ceasefire was reached, a peace treaty between Baku and Yerevan was never signed, as the main source of volatility and centre-point in the conflict, Nagorno-Karabakh, was never resolved. The region remains occupied by the Armenian armed forces and therefore violates the UN Security Resolution 884 of 1993.The Minsk Group, a sub-organisation of the Organisation for Security and Cooperation (OSCE), co-chaired by France, the US, and Russia, oversees the peace negotiations, but has made little progress over the past several quarters. Russia remains the most involved mediator in the region with the ability to bring the two sides to the negotiating table. However, Armenia and Azerbaijan have been growing increasingly distrustful of Russia, as Moscow has been selling arms to both sides since the 2016 conflict, complicating matters further. In our view, this reduces the chance of any groundbreaking progress in the peace negotiations over the coming years.The peace negotiations mainly focus on the creation of buffer zones in the seven regions surrounding Nagorno-Karabakh. However, since the 2016 escalation, active peace negotiations between the governments in Baku and Yerevan have completely ceased, and both sides are limiting their communications to threatening public statements. In addition, Azerbaijan is increasingly resorting to international law for its claim on Nagorno-Karabakh and attempting to win over regional peers, as the region remains internationally recognised a part of Azerbaijan, as the UN resolution proclaims. As a response, Armenia continues threatening to occupy the remaining area between Armenia and the region to reassert its claims (the vast majority of the population are ethnic Armenians). Changing Balance Of Power Preventing Escalation Although the Soviet Union sided with Azerbaijan against Armenia during the Nagorno-Karabakh war, the balance of power in the region has changed since. Armenia has been part of the Russian-led Eurasian Economic Union (EEU) since 2014 and is host to a Russian military base on its territory. This greatly diminishes the risk of an Azerbaijani-led invasion of Armenia, despite its military superiority over the latter. Both countries spend over 4.0% of GDP on defence, but due to Azerbaijan's rapid growth over the past decade on the back of its large oil and gas industries. This has led Baku to outspend its neighbour by a factor of seven to one ( see chart below).
Azerbaijan With Clear Superior Capabilities
Caucasus – Military Expenditure, USDmn
Source: Stockholm International Peace Research Institute, BMI
Azerbaijan is currently not seeking membership in either the EEU nor the European Union (EU) or NATO, and will unlikely to do over our forecasting period to 2026. We note that although Baku has approached the EU in regards to a security, trade, and investment agreement, it lacks the political reform willingness Brussels demands. This means a rapprochement between the two remains extremely unlikely over the medium term. Instead, Azerbaijan is a close ally of Turkey, which has vowed to unconditionally support Baku's claim. However, Turkey would not risk to be dragged into an armed conflict with Russia over Nagorno-Karabakh, while it also remains pre-occupied with its conflict against Kurdish separatists and its military involvement in Syria. As a result, the current balance of power does not allow for an escalation of the conflict, as it would not be in neither Russia's nor Turkey's interest.