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THREAT TO INVESTMENT TO SUBDUE BORDER TENSIONS
Caucasus Business Forecast Report
February 6, 2014 Thursday
BMI View : T he escalation in violence on the border of the disputed
Nagorno-Karabakh region is unlikely to spur a major conflict between
Azerbaijan and Armenia. Azerbaijan stands to gain significantly in
the long term from increased gas exports to Europe, and will not want
to jeopardise foreign investment by engaging in a conflict that has
been simmering for two decades.
While tensions on the Azerbaijani border with the disputed
Armenian-occupied Nagorno-Karabakh region escalated in early 2014,
we do not believe that this will lead to a significant deterioration
in the region's security outlook. There have been conflicting reports
on the extent of casualties, but it is clear that a number of troops
from both the Armenian/Nagorno-Karabakh and Azerbaijani armed forces
were killed in several skirmishes in January, representing the most
significant ceasefire violations of years.
Although shootouts, and even deaths, on the border of Nagorno-Karabakh
are not uncommon, the frequency of the clashes in 2014 marks an
intensification of the frozen conflict. The Azeri Ministry of Defence
spokesman Vaqif Dargahli claimed on February 3 that two Azeri troops
had been killed, while "Armenian losses ran into dozens". This was
countered by a statement from Nagorno-Karabakh's Defence Ministry
that claimed two Armenians and eight Azeris were killed.
Security Threats The Main Drag Azerbaijan - Short-Term Political Risk
Rating and Components, Out of 100
We do not, however, believe that the deaths will result in a
significant deterioration of the already fractious relationship
between Azerbaijan and its neighbour. With Armenia set to join the
Russian-led customs union in 2014, this will ensure an additional
implicit security guarantee for Armenia (Russia also maintaining
military bases there). The Kremlin will not allow a country that it
pressured into turning its back on the EU, and the security guarantee
that represents, to become a party to a renewed conflict. While
Azerbaijan's military is far larger and more technologically capable
than Armenia's, Baku will not take a decision to engage militarily
with a Russian ally lightly. Azerbaijan will be mindful that Georgia's
attempts to forcibly retake the Russian-back separatist regions of
South Ossetia and Abkhazia in 2008 prompted a Russian invasion.
For its part we do not believe the government of Azerbaijan would seek
to get involved in any widespread conflict over the Nagorno-Karabakh
region. The Azerbaijani economy stands to benefit considerably in
the long term from the increased natural gas exports to Turkey, as
well as Western Europe, facilitated by the Trans-Adriatic Pipeline
(TAP), which is due for completion in 2019 ( see 'Looming Shah Deniz
Decision Turns On TAP' 12 December 2013).
An increase in tensions over Nagorno-Karabakh, or the breakout of
large-scale conflict, would significantly hamper any progress on
Azerbaijan's strategy to become a key energy supplier to Europe.
Foreign direct investment (FDI) into the Azerbaijani oil and gas
sector alone amounted to US$894.2mn in the first three quarters of
2013, nearly 75% of total FDI, and the outbreak of widespread armed
hostilities would certainly result in a sharp decline in this level
of investment.
As a result, while bellicose rhetoric will continue to sustain
popular support for the government of President Ilham Aliyev, we
do not see this translating into a more aggressive military stance
from the government in Baku. According to polls carried out by US
lobbyists and pollsters Arthur J. Finkelstein and Associates before
the October 2013 presidential election, Aliyev retained significant
personal support among the population, not only for presiding over a
period of sustained economic growth, but also for his hardline stance
against what is perceived as Armenian aggression.
Risks To Outlook
As with much political risk analysis on the Nagorno-Karabakh conflict,
the situation between Azerbaijan and Armenia remains fluid and could
deteriorate substantially in a very short period of time. The key
risk would be the initiation of conflict through miscalculation, as
small-scale skirmishes escalate into a cycle of firmer retaliation,
leading to limited war. This would result in a significant reduction
in FDI, diminishing long-term economic growth potential, as well
as a severe downgrade to our proprietary political risk ratings
for Azerbaijan.
Caucasus Business Forecast Report
February 6, 2014 Thursday
BMI View : T he escalation in violence on the border of the disputed
Nagorno-Karabakh region is unlikely to spur a major conflict between
Azerbaijan and Armenia. Azerbaijan stands to gain significantly in
the long term from increased gas exports to Europe, and will not want
to jeopardise foreign investment by engaging in a conflict that has
been simmering for two decades.
While tensions on the Azerbaijani border with the disputed
Armenian-occupied Nagorno-Karabakh region escalated in early 2014,
we do not believe that this will lead to a significant deterioration
in the region's security outlook. There have been conflicting reports
on the extent of casualties, but it is clear that a number of troops
from both the Armenian/Nagorno-Karabakh and Azerbaijani armed forces
were killed in several skirmishes in January, representing the most
significant ceasefire violations of years.
Although shootouts, and even deaths, on the border of Nagorno-Karabakh
are not uncommon, the frequency of the clashes in 2014 marks an
intensification of the frozen conflict. The Azeri Ministry of Defence
spokesman Vaqif Dargahli claimed on February 3 that two Azeri troops
had been killed, while "Armenian losses ran into dozens". This was
countered by a statement from Nagorno-Karabakh's Defence Ministry
that claimed two Armenians and eight Azeris were killed.
Security Threats The Main Drag Azerbaijan - Short-Term Political Risk
Rating and Components, Out of 100
We do not, however, believe that the deaths will result in a
significant deterioration of the already fractious relationship
between Azerbaijan and its neighbour. With Armenia set to join the
Russian-led customs union in 2014, this will ensure an additional
implicit security guarantee for Armenia (Russia also maintaining
military bases there). The Kremlin will not allow a country that it
pressured into turning its back on the EU, and the security guarantee
that represents, to become a party to a renewed conflict. While
Azerbaijan's military is far larger and more technologically capable
than Armenia's, Baku will not take a decision to engage militarily
with a Russian ally lightly. Azerbaijan will be mindful that Georgia's
attempts to forcibly retake the Russian-back separatist regions of
South Ossetia and Abkhazia in 2008 prompted a Russian invasion.
For its part we do not believe the government of Azerbaijan would seek
to get involved in any widespread conflict over the Nagorno-Karabakh
region. The Azerbaijani economy stands to benefit considerably in
the long term from the increased natural gas exports to Turkey, as
well as Western Europe, facilitated by the Trans-Adriatic Pipeline
(TAP), which is due for completion in 2019 ( see 'Looming Shah Deniz
Decision Turns On TAP' 12 December 2013).
An increase in tensions over Nagorno-Karabakh, or the breakout of
large-scale conflict, would significantly hamper any progress on
Azerbaijan's strategy to become a key energy supplier to Europe.
Foreign direct investment (FDI) into the Azerbaijani oil and gas
sector alone amounted to US$894.2mn in the first three quarters of
2013, nearly 75% of total FDI, and the outbreak of widespread armed
hostilities would certainly result in a sharp decline in this level
of investment.
As a result, while bellicose rhetoric will continue to sustain
popular support for the government of President Ilham Aliyev, we
do not see this translating into a more aggressive military stance
from the government in Baku. According to polls carried out by US
lobbyists and pollsters Arthur J. Finkelstein and Associates before
the October 2013 presidential election, Aliyev retained significant
personal support among the population, not only for presiding over a
period of sustained economic growth, but also for his hardline stance
against what is perceived as Armenian aggression.
Risks To Outlook
As with much political risk analysis on the Nagorno-Karabakh conflict,
the situation between Azerbaijan and Armenia remains fluid and could
deteriorate substantially in a very short period of time. The key
risk would be the initiation of conflict through miscalculation, as
small-scale skirmishes escalate into a cycle of firmer retaliation,
leading to limited war. This would result in a significant reduction
in FDI, diminishing long-term economic growth potential, as well
as a severe downgrade to our proprietary political risk ratings
for Azerbaijan.