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Caucasus Business Forecast Report
January 1, 2013 Tuesday
Nagorno-Karabakh Main Policy Priority Ahead Of 2013 Election
BMI View: The Azerbaijani government is increasingly demonstrating its
resolve to address the long-standing dispute over the breakaway
Nagorno-Karabakh region, which is controlled by Armenia. With
presidential elections approachingin late 2013, changing the status
quo over the long-standing dispute will remain a key policypriority,
meaning that regional tensions could rapidly escalate into a
full-blown war.
Azerbaijan's intensification of hostile rhetoric towards Armenian
control of the breakaway Nagorno-Karabakh region has systematically
raised the stakes of the unresolved conflict between both South
Caucasus countries ahead of Armenia's presidential election in
February 2013 and Azerbaijan's presidential election in October 2013.
Months of increasing tensions have recently come to a boiling point
after the extradition and immediate pardon of an Azerbaijani military
officer on August 31. Ramil Safarov served a life sentence in Hungary
for the brutal murder of a fellow Armenian military officer during a
NATO Partnership for Peace exercise in 2004. The pardon was a highly
symbolic gesture by Azerbaijani President Ilham Aliyev, and will have
severely set back previous diplomatic initiatives to bring both
countries closer, possibly by many years, if not decades.
Aliyev's highly publicised presidential pardon and subsequent
promotion of Safarov from lieutenant to major leaves little doubt
about the growing importance attributed by the Azerbaijani political
elite to the unresolved conflict over Nagorno-Karabakh. Local media
reports suggest that the return of Safarov was widely regarded as a
victory for Azerbaijan, as memories of atrocities suffered during the
1988-1994 war over Nagorno-Karabakh still feature prominently in Azeri
society. Tensions are increasingly running high and coincide with key
presidential election cycles in both countries, suggesting that
neither side will likely back down any time soon.
We believe that Azerbaijan's previous efforts to present the country
as an attractive destination for foreign investment, most prominently
during the 2012 Eurovision Song Contest held in Baku, have now assumed
a lower priority. Instead, frequent reports of violent clashes between
police and activists campaigning against headscarf bans and a lack of
political freedom have placed political unity and social stability
higher on the government's agenda ahead of the 2013 presidential vote.
Although Aliyev, who will most likely be seeking re-election after
abolishing term limits in 2009, does not generally face credible
opposition in presidential elections, Azerbaijan's political
leadership has been coming under increasing popular pressure to change
the status quo in the long-standing conflict with Armenia over
Nagorno-Karabakh.
A Less Assuring Economic Outlook
A booming oil and gas export-driven economy had previously provided a
welcome distraction from the politically embarrassing state of affairs
over Nagorno-Karabakh. The region is still considered to be
Azerbaijani territory, but remains under Armenian control since the
1994 ceasefire, and has a predominantly ethnic Armenian population.
Years of windfall oil revenues and higher military spending have
presented an opportune moment for the Azerbaijani leadership to
renegotiate the terms of the 18-year old ceasefire ( see our online
service, July 13,'High Risk Of War'). A peace deal has remained
elusive ever since the war ended, and concerns over a resumption of
military hostilities are running high.
The emergence of Turkey as an economic and political powerhouse in the
region will further strengthen Baku's resolve to change the status quo
over Nagorno-Karabakh, given Ankara's support for Azerbaijan. Going
forward, we do not expect Azerbaijan's oil and gas sector to produce
the same blockbuster economic growth as seen in recent years. Oil
production shutdowns in 2011 exposed the economy's vulnerability to
the energy sector, when the economy grew by a meagre 0.1%, and we are
currently forecasting only a moderate recovery to 3.5% real GDP growth
in 2012.
Even with faster economic growth in subsequent years, we do not
envision a return to the 20%-plus growth seen in the years before the
global financial crisis, suggesting that the Azerbaijani authorities
could increasingly be confronted by domestic political grievances and
a lack of equitably distributed economic development. Moreover, for a
long time we have been flagging up the possibility of Baku
increasingly viewing the current economic and fiscal state of affairs
as a 'now or never' moment for the government to change the
Nagorno-Karabakh situation, either through renegotiations or
potentially by military means.
Aliyev's Legacy
We currently see little to suggest that Aliyev's political power will
be challenged in a meaningful way between now and the presidential
election in October 2013. However, we see increasing scope for the
Azeri leader to seek to bolster his standing and begin building his
legacy, which until now has been overshadowed by his father and former
leader Heydar Aliyev, who ruled Azerbaijan in the Soviet era and again
from 1993-2003. With little to suggest that Azerbaijan is moving
towards greater democratic progress or attempting to alleviate fears
of a renewed military conflict with Armenia, we believe that the
Nagorno-Karabakh dispute can no longer be categorised as a 'frozen
conflict' as has been the case for most of the post-ceasefire period.
Although international mediation, particularly the involvement of
Turkey and Russia (the latter openly supports Armenia), both of which
would like to avoid a military conflict, may ultimately prevent
further escalation of tensions in the region, we believe that the
likelihood of a diplomatic resolution to the current conflict is
looking very small at the present juncture. Although Azerbaijan's
superior spending power and far higher military expenditure in recent
years suggest that Baku could theoretically secure a rapid military
victory in Nagorno-Karabakh, we note that the large ethnic Armenian
population and difficult geographic terrain would make this a conflict
that could not be easily resolved by conventional military means and
superior firing power.
What is more, both sides are far better armed than in the early 1990s,
making the prospect of another war between Armenia and Azerbaijan a
lot more devastating with a potentially higher number of casualties.
Indeed, there is no guarantee that a military intervention would stop
at the border of Nagorno-Karabakh and Armenia. Finally, we note that
outright military intervention or major weapons provisions from Russia
to Armenia and from Turkey to Azerbaijan could indefinitely prolong
and exacerbate any military conflict in the region.
January 1, 2013 Tuesday
Nagorno-Karabakh Main Policy Priority Ahead Of 2013 Election
BMI View: The Azerbaijani government is increasingly demonstrating its
resolve to address the long-standing dispute over the breakaway
Nagorno-Karabakh region, which is controlled by Armenia. With
presidential elections approachingin late 2013, changing the status
quo over the long-standing dispute will remain a key policypriority,
meaning that regional tensions could rapidly escalate into a
full-blown war.
Azerbaijan's intensification of hostile rhetoric towards Armenian
control of the breakaway Nagorno-Karabakh region has systematically
raised the stakes of the unresolved conflict between both South
Caucasus countries ahead of Armenia's presidential election in
February 2013 and Azerbaijan's presidential election in October 2013.
Months of increasing tensions have recently come to a boiling point
after the extradition and immediate pardon of an Azerbaijani military
officer on August 31. Ramil Safarov served a life sentence in Hungary
for the brutal murder of a fellow Armenian military officer during a
NATO Partnership for Peace exercise in 2004. The pardon was a highly
symbolic gesture by Azerbaijani President Ilham Aliyev, and will have
severely set back previous diplomatic initiatives to bring both
countries closer, possibly by many years, if not decades.
Aliyev's highly publicised presidential pardon and subsequent
promotion of Safarov from lieutenant to major leaves little doubt
about the growing importance attributed by the Azerbaijani political
elite to the unresolved conflict over Nagorno-Karabakh. Local media
reports suggest that the return of Safarov was widely regarded as a
victory for Azerbaijan, as memories of atrocities suffered during the
1988-1994 war over Nagorno-Karabakh still feature prominently in Azeri
society. Tensions are increasingly running high and coincide with key
presidential election cycles in both countries, suggesting that
neither side will likely back down any time soon.
We believe that Azerbaijan's previous efforts to present the country
as an attractive destination for foreign investment, most prominently
during the 2012 Eurovision Song Contest held in Baku, have now assumed
a lower priority. Instead, frequent reports of violent clashes between
police and activists campaigning against headscarf bans and a lack of
political freedom have placed political unity and social stability
higher on the government's agenda ahead of the 2013 presidential vote.
Although Aliyev, who will most likely be seeking re-election after
abolishing term limits in 2009, does not generally face credible
opposition in presidential elections, Azerbaijan's political
leadership has been coming under increasing popular pressure to change
the status quo in the long-standing conflict with Armenia over
Nagorno-Karabakh.
A Less Assuring Economic Outlook
A booming oil and gas export-driven economy had previously provided a
welcome distraction from the politically embarrassing state of affairs
over Nagorno-Karabakh. The region is still considered to be
Azerbaijani territory, but remains under Armenian control since the
1994 ceasefire, and has a predominantly ethnic Armenian population.
Years of windfall oil revenues and higher military spending have
presented an opportune moment for the Azerbaijani leadership to
renegotiate the terms of the 18-year old ceasefire ( see our online
service, July 13,'High Risk Of War'). A peace deal has remained
elusive ever since the war ended, and concerns over a resumption of
military hostilities are running high.
The emergence of Turkey as an economic and political powerhouse in the
region will further strengthen Baku's resolve to change the status quo
over Nagorno-Karabakh, given Ankara's support for Azerbaijan. Going
forward, we do not expect Azerbaijan's oil and gas sector to produce
the same blockbuster economic growth as seen in recent years. Oil
production shutdowns in 2011 exposed the economy's vulnerability to
the energy sector, when the economy grew by a meagre 0.1%, and we are
currently forecasting only a moderate recovery to 3.5% real GDP growth
in 2012.
Even with faster economic growth in subsequent years, we do not
envision a return to the 20%-plus growth seen in the years before the
global financial crisis, suggesting that the Azerbaijani authorities
could increasingly be confronted by domestic political grievances and
a lack of equitably distributed economic development. Moreover, for a
long time we have been flagging up the possibility of Baku
increasingly viewing the current economic and fiscal state of affairs
as a 'now or never' moment for the government to change the
Nagorno-Karabakh situation, either through renegotiations or
potentially by military means.
Aliyev's Legacy
We currently see little to suggest that Aliyev's political power will
be challenged in a meaningful way between now and the presidential
election in October 2013. However, we see increasing scope for the
Azeri leader to seek to bolster his standing and begin building his
legacy, which until now has been overshadowed by his father and former
leader Heydar Aliyev, who ruled Azerbaijan in the Soviet era and again
from 1993-2003. With little to suggest that Azerbaijan is moving
towards greater democratic progress or attempting to alleviate fears
of a renewed military conflict with Armenia, we believe that the
Nagorno-Karabakh dispute can no longer be categorised as a 'frozen
conflict' as has been the case for most of the post-ceasefire period.
Although international mediation, particularly the involvement of
Turkey and Russia (the latter openly supports Armenia), both of which
would like to avoid a military conflict, may ultimately prevent
further escalation of tensions in the region, we believe that the
likelihood of a diplomatic resolution to the current conflict is
looking very small at the present juncture. Although Azerbaijan's
superior spending power and far higher military expenditure in recent
years suggest that Baku could theoretically secure a rapid military
victory in Nagorno-Karabakh, we note that the large ethnic Armenian
population and difficult geographic terrain would make this a conflict
that could not be easily resolved by conventional military means and
superior firing power.
What is more, both sides are far better armed than in the early 1990s,
making the prospect of another war between Armenia and Azerbaijan a
lot more devastating with a potentially higher number of casualties.
Indeed, there is no guarantee that a military intervention would stop
at the border of Nagorno-Karabakh and Armenia. Finally, we note that
outright military intervention or major weapons provisions from Russia
to Armenia and from Turkey to Azerbaijan could indefinitely prolong
and exacerbate any military conflict in the region.