Nagorno-Karabakh: An Apple of Discord Between Armenia and Azerbaijan (Part II)

Alec Rasizade. Contemporary Review. Volume 293, Issue 1702, Autumn 2011.

Editor’s Note: After a short survey of the history of the region and a brief reminder of the more recent developments in Part One in the June issue, Part Two continues with the negotiations from 1994 to 2010.

Since the truce of 1992, negotiations between Armenia and Azerbaijan to settle the Nagorno-Karabakh conflict have been conducted under an international mediation effort known as the Minsk process. The Conference on Security and Cooperation in Europe (CSCE, now Organization for Security and Cooperation in Europe, OSCE), at the Helsinki meeting of the CSCE Council on 24 March 1992, created the so-called Minsk group, which consisted of eleven members: the USA, France, Russia, Belarus, Germany, Italy, Sweden, Finland, Turkey, as well as Armenia and Azerbaijan. The CSCE Council requested its chairman to convene a conference on Nagorno-Karabakh under the auspices of CSCE to provide a forum for a peaceful settlement of the conflict. The conference was to take place in Minsk, hence its official title. Although it has not to this date been possible to convene the conference, the Minsk group presently spearheads the OSCE effort to find a political solution to this conflict within the framework of a peace process, which is known as the Minsk process.

On 6 December 1994 the Budapest summit of CSCE turned it into an organization—the OSCE, which decided to establish a co-chairmanship for the Minsk group, consisting of the USA, France and Russia. The current co-chairmen of the group are: Bernard Fassier of France, Igor Popov of Russia and Robert Bradtke of the USA. OSCE issued on 23 March 1995 a mandate for the co-chairs, according to which the main objectives of the Minsk process are as follows: 1) Providing an appropriate framework for conflict resolution in the way of assuring the negotiation process supported by the Minsk group; 2) Obtaining conclusion by the parties of an agreement on cessation of the armed conflict in order to permit the convening of the Minsk conference; 3) Promoting the peace process by deploying OSCE multinational peacekeeping forces; 4) The Minsk conference would be attended by the same participating states that are members of the Minsk group. The OSCE established a budget for the Minsk group, which for 2010 was 953,300 euros.

Since 1995, the Minsk group co-chairs have been mediating with the governments of Armenia and Azerbaijan to find a peaceful solution of the conflict. Self-determination and territorial integrity are the basic principles of settling the Karabakh conflict that have been jointly proposed by the USA, Russia and France. Armenia and Azerbaijan say they accept, in principle, a settlement based on a combination of the two principles. Azeri leaders have, at the same time, repeatedly stated that Karabakh’s Armenian population should only be able to determine the extent of the territory’s autonomy within Azerbaijan. The autonomy proposal has been rejected, however, by the Armenians who consider it as a matter that is not negotiable. Azerbaijan has also refused to let the matter subside and regularly threatens to resume hostilities.

Numerous proposals have been made by the co-chairs based on both sides making several concessions. One such proposal stipulated that Armenian forces withdrew from the seven Azeri districts surrounding Nagorno-Karabakh. Another proposal required Azerbaijan to provide the broadest form of autonomy to the Armenian enclave shy of granting it full independence. In 2001 presidents Kocharian and Aliev met at Key West in Florida and almost reached a compromise, but the mounting popular opposition in Erevan and Baku against any concessions thwarted hopes for a peaceful resolution.

The animosity was so implacable that it was marked, among other ugly scenes, by the 2004 murder of the Armenian Lieutenant Markarian, who was hacked to death in his sleep with an axe by his Azeri counterpart, Lieutenant Safarov, at a NATO training seminar in Budapest. Azeri enmity against anything Armenian led to the destruction of thousands of medieval Armenian gravestones, known as khachkars, in the cemeteries of Julfa in Nakhichevan. This destruction was temporarily halted when first revealed in 1998, but then continued on to completion in 2005 [S. Pickman, ‘Tragedy on the Araxes’. Archaeology magazine, New York, 30 June 2006:].

With the death of Heydar Aliev in 2003 tensions took a turn for the worse when his son, the new Azeri president Ilham Aliev, threatened to resort to force to take the territories back and fire exchanges along the frontline increased. The most significant breach of the 1994 truce occurred on 5 March 2008, when sixteen soldiers were killed. Moreover, the use of artillery marked a significant departure from previous clashes, which usually involved only sniper or machine gun fire. This escalation could be explained by the rapid growth of Azeri defence expenditures, driven by the influx of petrodollars, which shifted the military balance in Azerbaijan’s favour. Azerbaijan’s defence budget alone, at 3 billion dollars, exceeds the whole state budget of cash-strapped Armenia.

The escalation in 2008 was also ensuing from Kosovo’s declaration of independence from Serbia on 17 February 2008, which was immediately recognized by Western powers and welcomed in Stepanakert. The Kosovo model led to fears in Baku that an unwanted precedent had been set: the statehood recognition of an autonomous province against the will of its parent state. Aliev-junior spoke out strongly against Kosovo’s independence and declared that, if necessary, force would be used to regain control over Karabakh and that military equipment is being acquired for that purpose. The Azeri fear of the Kosovo precedent was reinforced by Russia’s recognition of Abkhazia and South Ossetia as independent states after the war with Georgia in August 2008.

The Armenian president Sarkisian responded to Aliev’s warnings on 2 December 2010 during the OSCE summit held in Astana. Sarkisian threatened to formally recognize the NKR as an independent state if Aliev tried to use force to win back the enclave and other Armenian-controlled territories around it: ‘If Azerbaijan resorts to military aggression, Armenia would not have any other choice but to recognize the Nagorno-Karabakh Republic de jure and to invest all its capabilities into ensuring the security of the people living there … Nagorno-Karabakh has no future within Azerbaijan’, he said.

On 22 July 2010 the International Court of Justice (ICJ) in the Hague affirmed Kosovo’s unilateral declaration of independence from Serbia, saying it did not violate international law. Belgrade lost control of the territory in 1999 when a NATO bombing campaign brought an end to a war between the Serbian army and Albanian separatists in Kosovo. In 2009 Serbia filed the case with the ICJ saying that the declaration of independence was a flagrant violation of Serbia’s territorial integrity. Nevertheless, the ICJ ruled that Kosovo declared its independence fully in accordance with international law. This ruling has important implications for other regions with separatist movements, including Nagorno-Karabakh. Armenia hailed the ICJ judgment shortly after its announcement. Azerbaijan insisted the next day, however, that the ICJ ruling applied only to Kosovo and Serbia, and cannot have any repercussions for the Karabakh conflict. The NKR welcomed the court ruling upholding the legitimacy of Kosovo’s secession and affirmed its applicability to the Karabakh conflict: ‘That decision has an extremely important legal, political, and moral significance and sets a precedent that cannot be confined to Kosovo’, the NKR foreign ministry said in a statement.

Over the past 15 years that the Minsk group has been trying to find a political solution to the Karabakh conflict, those involved have generally abided by a gentlemen’s agreement that the negotiating process should remain confidential to avoid derailing the peace process by alerting the irascible public in the Caucasus to inevitable concessions that might discredit the national leaders prepared to accept them. At the same time, the co-chairs have on several occasions deplored the failure of Armenian and Azeri presidents to demonstrate what they term ‘the necessary political courage’ and agree at least to the so-called ‘basic principles’ of a settlement that were unveiled in 2006 by the Minsk group. The ‘basic principles’ were revised in November 2007 at the OSCE ministerial conference in Madrid and since then are called the Madrid principles.

These principles include a phased withdrawal of Armenian troops from five Azeri districts surrounding Nagorno-Karabakh (Agdam, Kubatly, Fizuli, Jebrail and Zangelan) with a separate arrangement for another two districts, Kelbajar and Lachin, that separate the NKR from Armenia. The Armenian withdrawal would be followed by demilitarization of those territories; deployment of an international peacekeeping force; demining, reconstruction and the return of Azeri refugees to those districts; and, finally, at some unspecified future date, a plebiscite on the final legal status of Nagorno-Karabakh.

Since then, presidents Sarkisian and Aliev have met 18 times to discuss the Madrid principles, reportedly reaching a verbal agreement on the preamble to that document, which affirms their commitment to resolving the conflict peacefully. However, further progress has been stalled by disagreement over the sequence of implementation of components of the peace plan, that is: whether the decision on the status of Nagorno-Karabakh should be taken before or after the withdrawal of Armenian forces. Erevan wants a binding decision on Karabakh’s future status to precede the pull-out of Armenian troops from Azeri territory, while Baku insists on a reversed sequence: Armenian withdrawal before the Karabakh referendum.

But Stepanakert, which is excluded from the Minsk process, disagrees with at least two of the provisions of the Madrid principles; it insists that the NKR’s independence is non-negotiable and that progress toward a comprehensive peace agreement is contingent on returning the NKR to the negotiating table. Azerbaijan adamantly opposes the participation of Stepanakert in the peace talks at this stage. Therefore, Stepanakert rejects the point on which Baku and Erevan have reportedly reached an agreement, namely holding a referendum on the future political status of the NKR, reasoning that holding a new referendum would call into question the legality of the referendum on 10 December 1991 in which Armenians opted for independence from Azerbaijan.

Stepanakert is also reluctant to cede the Azeri districts occupied by Armenian forces before a firm agreement is reached on the future status of the NKR, on the grounds that an unequivocal return of occupied territories (Stepanakert’s sole bargaining chip) in return for a nebulous promise of a plebiscite on the republic’s status is unacceptable. A further issue not touched upon in the Madrid principles is the future status of several areas that prior to 1988 were part of the then NKAO, but which Azerbaijan took control of during the war, expelling the Armenian population, including the Shaumian district populated before by Armenians. As for the special modalities for Lachin and Kelbajar, Stepanakert insists that these should remain under its control as a swath of land linking Nagorno-Karabakh to Armenia, and that this swath must have the same status as the NKR.

The constitution of Azerbaijan does not permit holding a referendum in one part of its territory. But Stepanakert would not agree to a nationwide referendum in Azerbaijan, as Azeri votes against the independence of Karabakh would far outnumber the votes of the Armenian population in favour. The Madrid principles assign an ‘interim status’ to the NKR until its permanent status is determined. Aliev has always indicated that the concept of an interim status is acceptable for Baku, provided that this status does not violate Azerbaijan’s territorial integrity. In other words, he rules out formal independence for Nagorno-Karabakh. Azerbaijan has further construed the Madrid principles’ ambiguity over the proposed Armenian withdrawal as a major concession, implicitly rejecting the special modalities for Lachin and Kelbajar as envisaged in the original, 2006 version of the ‘basic principles’. Similarly unclear is the role of international peacekeepers, and which countries will provide them. Aliev said they will be deployed along the 1988 administrative borders of the NKAO and remain there until all sides reach agreement among themselves on security measures. Sarkisian wants the peacekeepers to protect the Lachin corridor as well, based on the Kosovo model.

Meanwhile, the military build-up in the region continues. Azerbaijan’s longtime ally Turkey appears to be taking on a larger role in supporting the Nakhichevan Autonomous Republic (NAR), an Azeri exclave isolated from Azerbaijan by Armenia’s Zangezur mountains and the Armenian forces in occupied territories along the Araxes. Turkey, which shares an 11-kilometre border with the exclave, has long provided economic support to the isolated exclave, which has a 246-kilometer land border with Armenia and is separated from Iran by the river Araxes. On 13 October 1921 Armenia, Georgia, Turkey and Azerbaijan signed the Treaty of Kars, which defined Nakhichevan as part of Azerbaijan and assigned Turkey as the guarantor of this status.

Pursuant to the role of guarantor, the Turkish prime minister R.T. Erdogan noted that ‘Nakhichevan is exposed to various threats from the Armenian state. Therefore, military cooperation between Turkey, Azerbaijan and the NAR is one of the major components of our policy’. A Turkish military base may now be deployed in Nakhichevan, as a result of the visit of the Turkish president A. GUI to Baku, which ended on 17 August 2010 with the signing of a new Agreement on Strategic Partnership and Mutual Support. The text of the agreement has not been published for reasons that remain unclear, perhaps due to the Russian president Medvedev’s visit to Erevan two days later, where he was scheduled to sign a 49-year lease agreement on a Russian base in Armenia. GUI and Aliev most likely discussed a Turkish military base in Nakhichevan as an adequate response to a Russian base deal in Armenia.

Indeed, Medvedev and Sarkisian signed a deal in Erevan on 20 August 2010 extending Russia’s lease of a military base in the city of Gumri by 24 years. Russia was to vacate the Gumri base in 2020, but the new deal extends the lease until 2044 and commits Moscow to modernizing Armenia’s military hardware. The new defence agreement formally makes Moscow a guarantor of the country’s security and has important repercussions for the Karabakh conflict. Some analysts argue that Karabakh is not an internationally recognized part of Armenia and therefore cannot be covered by the Russian-Armenian pact. Others say that, after the successful Georgian war of 2008, it is now easier for the Kremlin to find an excuse for intervening in the Karabakh conflict.

The pact also solidifies Russia’s military foothold in Transcaucasia as a warning to the larger neighbours, such as Iran and Turkey. Gumri, Armenia’s second-largest city, is situated just 20 kilometres from the Turkish border. The military alliance with Russia has always been a crucial element in Armenia’s national security strategy, precluding a direct Turkish intervention in the Karabakh conflict. Armenian officials assert that the new defence accord with Russia is a response to Azerbaijan’s ongoing military build-up, fuelled by massive oil revenues, and its growing threat to resolve the Karabakh issue by force. Some Armenian officials even claim that the Russian military is now obliged to openly back Armenia in the case of war. In any case, the Armenian-Russian pact of 2010 will certainly discourage Baku from unleashing the reconquest of Karabakh.

Azerbaijan’s Prospects

Modern Azerbaijan is a typical Middle-Eastern petrostate ruled by a classical Middle-Eastern despot, where political (and economic) power is concentrated and inherited within the ruling Family. The extended Family includes, along with the kinsmen of the Azeri president and his wife, the top bureaucrats who, concurrently with their government duties, run vast business empires in every industry and trade, and enjoy a virtual monopoly in their respective business fields and import operations. The petroleum export operation belongs to the Family, which has been clearly revealed in the series of American embassy dispatches from Baku released by the website WikiLeaks and published in The Guardian newspaper on 15 December 2010.

The largest oil concession was given in 1994 by Heydar Aliev for 30 years to a Western consortium led by British Petroleum, which has persuaded Western governments to overlook the glaring violation of human rights, blatant suppresion of democracy and the egregious conflict of business and political interests in this petro-state for the sake of stability, provided by the Family, for unhampered pumping of one million barrels of Caspian oil daily through a pipeline built in 2005. The Family receives in return 15-20 billion petrodollars annually, which it mostly spends on prestigious construction projects and other grandiose trappings of independence, such as the recently erected tallest flagstaff in the world, turning the city of Baku into a Dubai-style amassment of futuristic skyscrapers by demolishing its European quarters built during the first Baku oil boom of 1907-1915 and brutally evicting its citizens from their homes.

However, this second Baku oil boom of 2005-2013 is doomed to end in a few years without any significant economic achievement as all the petrodollar revenue is being spent in a construction frenzy on ostentatious ‘white elephants’ without modernizing even the city’s basic infrastructure, such as the water and sewage systems, let alone the creation of non-petroleum industries that might become useful in the future with the end of big oil. Almost all the factories and manufacturing plants, left over from the Soviet industrial past, have been demolished to clear the ground for economically useless hotels and convention centres, magnificent mosques and shopping malls, opulent office and residential buildings for Azerbaijan’s new petrodollar elite, and leaving little room to live or space to work for the rest of the population, which is emigrating in large numbers: presently 3 million of Azerbaijan’s 9 million citizens live and work abroad.

Petroleum production provides 85 per cent of Azerbaijan’s state budget revenues, accounts for 78 per cent of the country’s GDP and 92 per cent of Azerbaijan’s export. In other words, Azerbaijan completely depends on oil revenue in its stand-off against Armenia, in its military expenditures, in the food import-based welfare of its citizens and the ensuing political stability. And the lion’s share of oil revenue is provided by one single cluster of three offshore oil fields, Azeri-Chirag-Guneshli, discovered before its independence by Soviet geologists in the Caspian Sea, which presently produces 42 million of Azerbaijan’s 50 million tons of annual oil production. Since then, 23 exploration contracts signed with foreign oil companies have failed to find any new oil deposit in Azerbaijan and its sector of the Caspian Sea.

The embellishment of Azerbaijan’s hydrocarbon assets pursues the well-known formula: the more energy resources a particular petrostate has—the more respect and tolerance the West shows to its regime and its imitation of democracy. Therefore, any speculation about Azerbaijan’s prospects, both domestically and in Karabakh, is made simple by the country’s complete dependence on these three oil fields: with their inevitable depletion, Azerbaijan’s economic strength shall attenuate, which will in turn diminish its chances of resolving the Karabakh issue by force. The reserves of these fields are a state secret in Azerbaijan, but numerous foreign oil industry sources (the lengthy listing of which I am omiting here for the lack of space) show that, at the current rate of extraction, the three main fields will be depleted by 2019.

Here is why. In 1992 the oil deposits of Azerbaijan were estimated at 7 billion barrels, of which 5 billion were under the Azeri-Chirag-Guneshli cluster. The total Caspian Sea reserves, including Kazakhstan, which possesses 80 per cent of Caspian oil, were around 25 billion barrels. Since then nothing new has been found in the Azeri sector of the sea, while the giant Kashagan oil field was discovered in the Kazakh sector. Let us assume that for 16 years since the signing of the concession the Consortium has been pumping half a million barrels of oil per day on average, i.e. 182 million barrels a year. (Since 2004 the daily output has been 1 million barrels.) Multiply that number by 16 years and it turns out that from its total stock of 7 billion barrels Azerbaijan has already pumped out about 3 billion and only 4 billion barrels of oil are left.

Let us now generously presume the remains of Azeri-Chirag-Guneshli oil to be 3 billion barrels (of the initial 5 billion) and divide them by 365 million barrels a year: the resulting estimate gives only 9 more years of production at one million barrels per day (which the Consortium plans to increase up to 1.2 million per day). Thus, it is easy to calculate the end of Azeri-Chirag-Guneshli oil in the year 2019. Given that 2010 was the peak year of Azeri oil production, the descent begins from 2011. (The IMF predicts the beginning of descent in 2012.) Of course, the output will not stop immediately, but its reduction by 10 per cent a year will be a severe blow to this petrostate.

And this is only my generous assumption; the real decline may become even steeper because Azeri officials routinely inflate their oil assets, which are mysteriously increasing instead of decreasing, in spite of the one million barrels pumped out daily: according to them, Azerbaijan’s oil reserves rose last year to 923 million tons, an equivalent of 6.7 billion barrels. In other words, the stock of oil in Azerbaijan, after 18 years of extraction and no new discovery made, has declined by only 300 million barrels, which is Azerbaijan’s production in one year. Where the output of the remaining 17 years has vanished is unknown.

The same kind of overstatement is applied to Azerbaijan’s natural gas resources, which the officials hope will replace the dwindling oil revenues. Gas reserves, however, are insignificant: Azerbaijan exports currently only 5 billion cubic metres (bcm) of gas to Turkey, hoping that the annual production from its Shahdenis gas field will double in the future, compared to the annual export of 70 bcm of Turkmen gas, 46 bcm from Iran and 350 bcm from Russia. Even the gas-thirsty Ukraine, which is entangled in a gas-import dispute with Russia, produces 20 bcm of its own gas, compared to the 15 bcm produced in Azerbaijan. Azerbaijan consumes domestically 10 bcm of gas and exports the rest, while the Ukraine consumes 50 bcm, of which 30 bcm are imported from Russia.

Given this negligible volume of natural gas export and the certain end of big oil, the absence of a real industrial production and manufacturing base in the post-petroleum era could lead to economic plight and public frustration. Azerbaijan has not developed any alternative source of economic income comparable to the present oil-export revenue. Moreover, instead of modernizing the Soviet-era industries, it has torn down the old factories and plants to clear the ground for office buildings and shopping malls, where the petrostate citizens were supposed to spend their petrodollars. But Baku is neither a new Kuwait nor a new Dubai: its oil boom is to end within a few years. Yet the closed political system prevents a meaningful debate on post-boom challenges and stimulates a sense of apathy and complacency.

This over-reliance on petroleum production, discrepancies in wealth distribution and public disenchantment with the government increase the likelihood of radicalism and instability in Azerbaijan. I do not have enough room here to discuss the internal problems of Azerbaijan (which have a secondary impact on the Karabakh issue) and would refer an interested reader to the latest report on this issue, Azerbaijan: Vulnerable Stability, published on 3 September 2010 in Brussels by the International Crisis Group, which examines how oil money has entrenched a stagnant political system, making it even more resistant to reforms.

More important is the international pressure which the Azeri government is trying to exert on the great powers in resolving the Karabakh conflict by using the oil production as a foreign policy leverage. Heydar Aliev hoped in 1994 that the Western interest in energy resources would play in his favour on this issue. The composition of the Consortium, which included European, American and even Russian companies, perfectly fitted into this strategy. However, Aliev’s hope to relate oil development to the resolution of the Karabakh conflict had little effect. The only gain on this path was the softening of Section 907 of the 1992 Freedom Support Act in 2001, when he asked American oil companies involved in the Consortium to lobby in Washington against the Armenian Diaspora for a total repeal of Section 907.

Roughly speaking, the political clout of the one-million-strong Armenian community countervails in Washington the powerful big-oil lobby that promotes Azeri interests there. The strategy of defeating Armenia diplomatically with the support of oil-thirsty great powers has failed: neither the European Union nor the United States have increased their support for Baku in the Minsk process. This strategic failure has caused a reconsideration of the diplomatic impact of Azeri oil on the West: both Alievs turned then to Moscow, trying to manipulate the USA and NATO by playing the Russian card.

Russia is still the strongest military power in the region, but its capacity to control events there is far less than most observers assume. Both the physical barrier of the Greater Caucasus range and the insurgency in its own turbulent North Caucasus reduce Moscow’s ability to operate in the South Caucasus. Therefore, to confront the growing political and economic influence of Turkey and Iran, Russia needs the help of local Armenians, Abkhaz, Ossetians and others capable to maintain the Russian interests. The evidence of this we saw in the 2008 Georgian war and Russia’s recent consolidation of its military alliance with Armenia. The calm reaction in the West to both events leads to the thought that a dose of insignificance for Western strategic interests would be very healthy for Caucasian nations. Viewing the region in this light would allow the local governments to concentrate on solving their essential problems within their own means.

Transcaucasia is indeed an important transport corridor for Caspian energy exports independent of Russia and Iran. But the romantic project of a new Silk Road stretching from Central Asia to Constantinople after the collapse of the USSR was unrealistic, unduly raising the hopes of small nations along the Road that they were essential to the West, while antagonizing Russia and Iran. Also in the 1990s, Caspian enthusiasts in the West extravagantly believed that the oil reserves of the Caspian Basin (allegedly 200 billion barrels) were equal to those of Mesopotamia and the Persian Gulf. Their claims later turned out to be exaggerated almost 10 times. In these contemporary circumstances, due to its impending economic and strategic insignificance to the West after the peak of oil production in 2010, Azerbaijan needs to become more realistic in its claim to Nagorno-Karabakh as its ability to persuade the great powers is set to dwindle synchronously with the depletion of its oil reserves in 2011-2019.

Postscript: The latest negotiations to resolve the Nagorno-Karabakh conflict ended with all hopes that Azerbaijan and Armenia would reach common ground and a peaceful settlement thwarted. Alexander Rahr, a European energy and CIS expert, saw no way forward: ‘I just think that it is one of the conflicts that are impossible to resolve. Armenians are not going to give Nagorno-Karabakh back, whereas Azerbaijan will never agree on any compromise unless its demand for return of Nagorno-Karabakh is satisfied. Either side has its own arguments. […] Each of the states has external support. It is a complete stalemate. I do not see an end to it because the sides are holding diametrically opposite positions. […] I think it can only be settled by the next generation [Interview: 22 August].