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Caucasus Business Forecast Report
July 30, 2014 Wednesday
Shift Towards Russia To Stoke Nagorno-Karabakh Tensions
BMI View: T he intensification of violence between Armenia and
Azerbaijan over the disputed Nagorno-Karabakh region is not likely to
escalate into a ground war in 2014 or 2015 , and our core scenario
remains that of a prolonged ' frozen conflict ' . However, Armenia's
accession to the Eurasian Economic Union in 2015 could lead to more
support for Yerevan's claim from Moscow, stoking tensions further.
We expect Armenia to continue its progress towards becoming a member
of the Russian-led Eurasian Economic Union (EEU) in 2014, before
joining in January 2015. However, the ongoing 'frozen conflict' with
Azerbaijan over the disputed Nagorno-Karabakh region will remain a
source of extreme tension between Yerevan and Baku, as well as a
potential stumbling block for Russia in its attempt to expand the EEU.
Armenia has been at odds with Azerbaijan over which country has the
legitimate claim to Nagorno-Karabakh (which lies inside Azerbaijan but
is majority ethnic Armenian) since a ground war between the two states
ended in a ceasefire in 1994. Nagorno-Karabakh, as well as surrounding
Azerbaijani territories, remain under the control of Armenian armed
forces, with the borders between these regions and the rest of
Azerbaijan heavily militarised. While skirmishes and even deaths are
not uncommon on the borders of Nagorno-Karabakh, the frequency of
clashes and number of casualties has risen in recent months, in a
situation which threatens to shatter the fragile truce.
Little Chance Of A Mediated Resolution
South Caucasus - Map of Nagorno-Karabakh and Surrounding Regions
Media reports from both Armenia and Azerbaijan consistently blame the
other side for violating the ceasefire, with each country accusing the
other of attempting to provoke military action. In June, alone the
Armenian defence ministry stated that five of its troops had been
killed by Azerbaijani gunfire, while in the same month its Azerbaijani
counterpart alleges Armenian soldiers fired on civilians, injuring
three. Both sides continue to deny the other's claims.
Our core scenario remains one of a prolonged frozen conflict in the
next five years at least that does not develop into an all-out ground
war. Neither of the primary military powers in the region (Russia,
which by-and-large backs the Armenians, and Turkey, which due to
ethnic links and long-standing animosity towards Armenia provides
support for Azerbaijan) have a strategic interest in seeing a
widespread conflict erupt in the South Caucasus. In addition,
Azerbaijan will be deterred from launching a military attack to
reclaim Nagorno-Karabakh by the Russian military presence in Armenia.
However, the recent escalation in violence undoubtedly increases the
risk of a breakdown in the fragile truce between the two states, and
given that international diplomatic efforts remain focused on other
conflicts in Eastern Europe and the Middle East, we cannot rule out an
outbreak of violence in the South Caucasus in the months or years
ahead.
Nagorno-Karabakh Tensions Ensure Low Security Score
Armenia - Short-Term Political Risk Rating and Sub-Components, Out of 100
Moscow's Attitude Towards Conflict Key To Any Resolution
Russia remains one of the key actors in the Minsk Group of the
Organisation for Security and Co-operation in Europe (OSCE) alongside
the US and France, tasked with facilitating a peaceful resolution to
the conflict. The fact that Armenia is on course to join the EEU in
2015 could lead to an increase in overt support from Moscow (in the
form of financial assistance or discounted arms shipments).
Alternatively, the Kremlin could reduce co-operation with Azerbaijan
(which is not on course to join the EEU, and continues to tread a fine
line between closer integration with Moscow or Brussels), which has
picked up over the past two years on the back of increased Russian
arms exports to Azerbaijan. Both of these scenarios would be a net
positive for the Armenian side, as either its armed forces become
better equipped (currently the Azerbaijani forces are much more
technically advanced than their Armenian counterparts) or its
adversary loses a key arms supplier and a potential mediator in the
dispute. Moreover, following Armenia's accession to the EEU it will
likely have a formal say or veto of future expansion of the group. As
such, we cannot rule out a scenario in the future where Armenia
attempts to block Azerbaijani accession, a move that would undoubtedly
raise tensions further between the two states.
Risks To Outlook
In a prolonged and bitter dispute where both sides are heavily armed,
such as Nagorno-Karabakh, there is always the risk that sporadic
violence could escalate into a widespread conflict due to
miscalculation. The elevated tensions on the border make this scenario
more likely as troops on both sides remain in a heightened state of
readiness. If a ground war were to erupt ( see 'Armenia-Azerbaijan
Tension: Conflict Scenarios Assessed', April 8 2011) we would expect
to see Armenian forces pushed back to the border given the greater
numbers of Azerbaijani troops and the newer, more advanced equipment
the Azerbaijani forces posses.
July 30, 2014 Wednesday
Shift Towards Russia To Stoke Nagorno-Karabakh Tensions
BMI View: T he intensification of violence between Armenia and
Azerbaijan over the disputed Nagorno-Karabakh region is not likely to
escalate into a ground war in 2014 or 2015 , and our core scenario
remains that of a prolonged ' frozen conflict ' . However, Armenia's
accession to the Eurasian Economic Union in 2015 could lead to more
support for Yerevan's claim from Moscow, stoking tensions further.
We expect Armenia to continue its progress towards becoming a member
of the Russian-led Eurasian Economic Union (EEU) in 2014, before
joining in January 2015. However, the ongoing 'frozen conflict' with
Azerbaijan over the disputed Nagorno-Karabakh region will remain a
source of extreme tension between Yerevan and Baku, as well as a
potential stumbling block for Russia in its attempt to expand the EEU.
Armenia has been at odds with Azerbaijan over which country has the
legitimate claim to Nagorno-Karabakh (which lies inside Azerbaijan but
is majority ethnic Armenian) since a ground war between the two states
ended in a ceasefire in 1994. Nagorno-Karabakh, as well as surrounding
Azerbaijani territories, remain under the control of Armenian armed
forces, with the borders between these regions and the rest of
Azerbaijan heavily militarised. While skirmishes and even deaths are
not uncommon on the borders of Nagorno-Karabakh, the frequency of
clashes and number of casualties has risen in recent months, in a
situation which threatens to shatter the fragile truce.
Little Chance Of A Mediated Resolution
South Caucasus - Map of Nagorno-Karabakh and Surrounding Regions
Media reports from both Armenia and Azerbaijan consistently blame the
other side for violating the ceasefire, with each country accusing the
other of attempting to provoke military action. In June, alone the
Armenian defence ministry stated that five of its troops had been
killed by Azerbaijani gunfire, while in the same month its Azerbaijani
counterpart alleges Armenian soldiers fired on civilians, injuring
three. Both sides continue to deny the other's claims.
Our core scenario remains one of a prolonged frozen conflict in the
next five years at least that does not develop into an all-out ground
war. Neither of the primary military powers in the region (Russia,
which by-and-large backs the Armenians, and Turkey, which due to
ethnic links and long-standing animosity towards Armenia provides
support for Azerbaijan) have a strategic interest in seeing a
widespread conflict erupt in the South Caucasus. In addition,
Azerbaijan will be deterred from launching a military attack to
reclaim Nagorno-Karabakh by the Russian military presence in Armenia.
However, the recent escalation in violence undoubtedly increases the
risk of a breakdown in the fragile truce between the two states, and
given that international diplomatic efforts remain focused on other
conflicts in Eastern Europe and the Middle East, we cannot rule out an
outbreak of violence in the South Caucasus in the months or years
ahead.
Nagorno-Karabakh Tensions Ensure Low Security Score
Armenia - Short-Term Political Risk Rating and Sub-Components, Out of 100
Moscow's Attitude Towards Conflict Key To Any Resolution
Russia remains one of the key actors in the Minsk Group of the
Organisation for Security and Co-operation in Europe (OSCE) alongside
the US and France, tasked with facilitating a peaceful resolution to
the conflict. The fact that Armenia is on course to join the EEU in
2015 could lead to an increase in overt support from Moscow (in the
form of financial assistance or discounted arms shipments).
Alternatively, the Kremlin could reduce co-operation with Azerbaijan
(which is not on course to join the EEU, and continues to tread a fine
line between closer integration with Moscow or Brussels), which has
picked up over the past two years on the back of increased Russian
arms exports to Azerbaijan. Both of these scenarios would be a net
positive for the Armenian side, as either its armed forces become
better equipped (currently the Azerbaijani forces are much more
technically advanced than their Armenian counterparts) or its
adversary loses a key arms supplier and a potential mediator in the
dispute. Moreover, following Armenia's accession to the EEU it will
likely have a formal say or veto of future expansion of the group. As
such, we cannot rule out a scenario in the future where Armenia
attempts to block Azerbaijani accession, a move that would undoubtedly
raise tensions further between the two states.
Risks To Outlook
In a prolonged and bitter dispute where both sides are heavily armed,
such as Nagorno-Karabakh, there is always the risk that sporadic
violence could escalate into a widespread conflict due to
miscalculation. The elevated tensions on the border make this scenario
more likely as troops on both sides remain in a heightened state of
readiness. If a ground war were to erupt ( see 'Armenia-Azerbaijan
Tension: Conflict Scenarios Assessed', April 8 2011) we would expect
to see Armenian forces pushed back to the border given the greater
numbers of Azerbaijani troops and the newer, more advanced equipment
the Azerbaijani forces posses.