Economic Drivers Behind the Nagorno-Karabakh Conflict

Background

For the last three decades, the Nagorno-Karabakh conflict has been one of the most significant issues in the Caucasus. The conflict started with the First Karabakh War (1988-1994), where Azerbaijan had lost Nagorno-Karabakh and surrounding areas, which concluded only after the recent war in 2020. The war was followed by a peace deal involving Azerbaijan, Armenia, Turkey, and Russia.

High Stakes

Given the importance of the region, it is not surprising that a lot of external actors have stakes in the conflict. Although the main external actors were Turkey and Russia due to their regional proximity and cultural similarities with either of the sides, several other states, including Israel, Pakistan, and numerous European states, have directly or indirectly revealed their sides over the past years and during the recent Nagorno-Karabakh war. It can be said that economic interests were the main determinants of their preferences, though many other factors have also played very important roles.

Azerbaijan

The Karabakh region has always been an economically significant place for Azerbaijan mainly due to its natural resources. Azerbaijan was deprived of several gold and copper mines, including Vejnali, Soyudlu, Gyzilbulakh, and Demirli, all located in the region. Every year, tons of gold is extracted from the mines. For example, Soyudlu or Zod gold mine, of which 76% are located in Azerbaijan and the rest in Armenia, was estimated to contain 120 tons of pure gold in 2010, and its minimum profitable content was 0.8 grams per ton.[1]

Additionally, some territories of the Karabakh region, such as Sugovushan (formerly Madagiz) and Khudaferin, are home to several important water sources.[2] Every year, almost 25% of Azerbaijan’s local water resources are generated in the area. According to the Ministry of Energy, the major rivers of the region, Tartarchay, Hakari, and Bazarchay, have great water energy potentials. One of the strategic hydroelectric power plants in the region is the Tartar hydroelectric plant, which can generate 50 MW of energy. Furthermore, according to the current estimates, the region has a potential of 300-500 MW of wind energy and 3000-4000 MW of solar energy. The Karabakh area is also replete with geothermal waters and coal reserves, which are also used in generating energy. Chardagli village alone has 8.5 tons of coal reserves.[3]

Also, the ceasefire requires Armenia to provide Azerbaijan a passage to its exclave, Nakhchivan. Surrounded by Iran, Armenia, Turkey. This has several benefits. Firstly, the countries are planning to build a new railroad connecting Armenia, Azerbaijan, and Turkey. Secondly, Nakhchivan, which has been purchasing gas from Iran after being isolated as a consequence of the first war, will receive an uninterrupted gas supply directly from Turkey when Azerbaijan and Turkey finish building the new pipeline[4].

Besides the benefits mentioned above, Azerbaijan is expected to diversify its transport connections due to its expanded trading routes.

Armenia

For Armenia, keeping the Nagorno-Karabakh under occupation was both beneficial and costly. As stated above, the region contained gold deposits, copper deposits, and other valuable materials. Armenia and Nagorno Karabakh had been benefitting from the goldmines until the recent war.[5]

The enmity between Azerbaijan and Armenia has led to the isolation of Armenia as both Turkey and Azerbaijan closed their borders with the country and stopped allowing trade flows from it. After the reactionary measures were taken, Armenia could only use the trade routes in Georgia to trade with Europe, its main trading partner. Also, Georgia has been the main turnpike of trade in the South Caucasus since the collapse of the Soviet Union. This was costly for Armenia, as it could connect trade routes of major countries, such as Iran, Russia, and Turkey[6]. Although Georgia, which has been gaining 5% of its GDP from transit-related income,[7] will still play an important role in trade, its importance is expected to diminish as Armenia is likely to cooperate with the surrounding countries.

Turkey

Turkey shares similar cultures, languages, and religious beliefs with Azerbaijan, as both belong to the Turkic nations. This is one of the main reasons behind Turkey’s explicit support for Azerbaijan in almost all issues, including the Nagorno-Karabakh conflict. It is worth noting that the issue of the Armenian genocide is another reason behind Turkey’s current state of affairs with Armenia.

Turkey’s support for Azerbaijan had its economic aspects too. Turkey accounts for around 14% of Azerbaijan’s exports and 15% of its imports. It is also the main energy transit partner of Azerbaijan. South Caucasus pipeline carries gas from the Shah Deniz field of Azerbaijan to Turkey. From there, it is carried to Europe with the help of the Trans-Anatolian gas pipeline (TANAP) and Trans-Adriatic Pipeline (TAP).[8] Baku-Tbilisi-Ceyhan pipeline, which is used to export the largest portion of Azerbaijan’s domestic oil, also passes through Turkey, whereas oil transferred by Baku-Supsa Western Export Pipeline is shipped to Europe through the Bosporus Strait in Turkey.

Similarly, the Baku-Tbilisi-Kars railway connects the two countries and Georgia and is expected to have the potential to carry 17 million tons of cargo.[9] Besides, Turkey and Azerbaijan have already agreed on building a new pipeline, which was made possible after the Nagorno-Karabakh deal. All of these show how important the partnership is for both countries.

Additionally, Turkey supplies Azerbaijan with weapons and military equipment in accordance with several agreements, including the 2009 agreement. According to the Turkish Exporters Assembly, the dollar amount of defense and aviation equipment exports in the first nine months of 2020 alone was $123 million, significantly higher than in previous years.[10] Currently, Turkey is the largest supplier of military equipment to Azerbaijan after Israel and Russia.[11]

Russia

Similar to Turkey, Russia also has economic and political stakes in the conflict. The conflict has been providing Russia with the means to control both sides of the conflict and stay as the major power bloc in the region. Even today, Russia has its peacekeepers in the region, which shows it still has control over the conflict to a certain degree.

Russia is known to be one of the major arms suppliers of the two countries. Although both countries have been purchasing weapons from various countries, it can be said that Russia has always been the biggest common arms exporter for them. The country has naturally favored Armenia in its arms sales by providing loans and making it easier for them to pay in Russian currency as a result of the military cooperation agreement in 2013. Additionally, Russia has established its large military base in Armenia. According to the SIPRI Arms Transfers Database, Russia accounted for 94% of Armenia’s total arms imports between 2015 and 2019.[12] Whereas Azerbaijan only purchased 31% of its weapons from Russia over the period, the percentage was roughly 80% over 2009-2013. Although Armenia disapproved of arms sales to Azerbaijan, the Russian government stated that sales to both sides helped keep the balance in the region.

Russia is also one of the main trade partners of Azerbaijan and Armenia. The country is among the top export and import partners of both countries. Moreover, Russia has a transit partnership with Azerbaijan. Baku-Novorossiysk oil pipeline carries oil from the Sangachal terminal near Baku to the Black Sea port of Novorossiysk. Nevertheless, Azerbaijan is considered Russia’s rival by many analysts since Azerbaijan is almost the only way for Europe to get the Caspian oil and gas without dealing with Russia. This is the main reason behind the European Commission’s approval and backing of Azerbaijan’s new pipeline projects.[13] The rivalry between the two may have had a role in Russia’s stance towards Azerbaijan.

According to United Nations Conference on Trade and Development, Russia is the main source of FDI to Azerbaijan. Russia invests in Azerbaijan’s agriculture, services, information technologies, construction, banking, and other sectors. Similarly, the same report lists Russia as one of the main sources of FDI in Armenia.[14]

The relations between Russia and the two sides of the conflict partially explain why the country does not explicitly support either of the sides explicitly, and it may also explain Russia’s reticence during the recent war.  It should also be noted that economic interests are among the main factors behind Russia’s agreement with Turkey. First of all, this is not the first time where Russia and Turkey have come to a common ground. In several instances, the countries supported each other in the Syria case, the S-400 case, the helicopter shooting case despite some minor disagreements. The two countries depend on each other economically and politically, which became even more obvious when they both suffered from the imposed sanctions after a Turkish soldier shot a helicopter. The bilateral trade volume between Russia and Turkey was slightly over $25 billion in 2019, and they have set the target at $100 billion, which shows they are willing to increase their economic relations.[15] Turkey is very important for Russia, both because of its strategic location and its NATO membership. The country is one of the main consumers of Russian energy and is located in a perfect place for transportation. Turkey serves as a bridge between Central Asia, the Caucasus, and Europe and is located near the world’s 72% and 73% of gas and oil reserves, meaning it connects sellers with buyers.[16] Another advantage of Turkey is that it has sole access to the Black Sea region, which means Russia’s access to the region depends on Turkey. Despite this, Turkey itself needs gas and is the second most valuable market for Russia after Germany. Russian gas is carried to Turkey by the Trans-Balkan pipeline and Blue Stream. Additionally, the countries have signed agreements for the use of nuclear energy for peaceful purposes and early notifications about nuclear accidents.[17]

Other Actors

Since the first Karabakh war, Israel has been supporting Azerbaijan, although the country has not formally voiced its support. Many found it very surprising since the two countries seemed to be unrelated and had different ethnic and religious compositions. However, Israel has economic and political interests in Azerbaijan. First of all, Israel has been selling weapons to Azerbaijan. According to SIPRI, Israel accounted for 61% of Azerbaijan’s arms imports in 2015-2019, twice larger than the figures for 2013-2017.[18] Immediately after the recent war ended, Israel sent humanitarian aid to Azerbaijan. Secondly, Israel needs to keep an eye on Iran, and no country is better for this purpose than Azerbaijan. Finally, Azerbaijan is the most secular Muslim country, and it allows Israel to build relationships with the Muslim world. Several analysts argue that Azerbaijan causes the recent improvements in relationships between Israel and Arab countries.[19] The two countries have good trade relations as well. In 2019, the volume of exports from Azerbaijan was over $1.3 billion.[20] Iran and Armenia’s relationship is not favored, which partially explains Iran’s stance towards the conflict and its sides.[21] Despite its acquiescence, Iran has previously implied its support for Armenia.

Another political actor is the EU, which is claimed to have “acted” by not taking any action. From an economic perspective, this can be explained by the importance of both sides of the conflict for the EU. The European Neighborhood Policy covers both Armenia and Azerbaijan. Also, the EU is the biggest export market for Armenia, meaning their trade relations may be a factor preventing the EU from going directly against Armenia.[22] Moreover, as mentioned above, to avoid dependence on Russian oil and gas, the EU needs to build good relationships with Azerbaijan. The countries’ almost equal importance may explain why the EU and other similar states did not immediately support or criticize either side of the conflict.

Although the conflict itself and other actors’ actions cannot be fully explained by economic factors and interests alone, economic interests have certainly played an important role in shaping the current situation in the region. Therefore, the economic factors should neither be overestimated nor ignored.

Notes:

[1] “Energy Potential of Nagorno-Karabakh and Surrounding Regions,” Ministry of Energy of the Republic of Azerbaijan, November 2, 2020, https://minenergy.gov.az/en/xeberler-arxivi/dagliq-qarabag-ve-etraf-regionlarin-enerji-potensiali

[2] Palazzo, Claudia, “The Water Factor in the Karabakh Conflict,” Jamestown Foundation, October 28, 2020, https://jamestown.org/the-water-factor-in-the-karabakh-conflict/

[3] “Energy,” Ministry of Energy of the Republic of Azerbaijan.

[4] Karimli, Ilham, “Azerbaijan, Turkey Agree to Build New Pipeline to Landlocked Nakhchivan,” Caspian News, December 17, 2020, https://caspiannews.com/news-detail/azerbaijan-turkey-agree-to-build-new-gas-pipeline-to-landlocked-nakhchivan-2020-12-15-21/

[5] Mejlumyan, Ani and Natiqqizi Ulkar, “Following war with Armenia, Azerbaijan gains control of lucrative goldmines,” Eurasianet, January 27,2021, https://eurasianet.org/following-war-with-armenia-azerbaijan-gains-control-of-lucrative-gold-mines

[6] Lomsadze, Girogi, “Not All Roads Lead to Georgia,” Eurasianet, March 8, 2021, https://eurasianet.org/not-all-roads-lead-to-georgia

[7] Anjaparidze, Zaal, “The Second Karabakh War and Georgia’s Threatened Transit Role,” Jamestown Foundation, February 16, 2021 https://jamestown.org/program/the-second-karabakh-war-and-georgias-threatened-transit-role/

[8] “Fragile oil and gas interests at stake for Azerbaijan, Russia, and Turkey in Nagorno-Karabakh,” Rystad Energy, October 12, 2020, https://www.rystadenergy.com/newsevents/news/press-releases/fragile-oil-and-gas-interests-at-stake-for-azerbaijan-russia-and-turkey-in-nagorno-karabakh/

[9] “Baku-Tbilisi-Kars (BTK) Rail Line, Azerbaijan, Georgia, Turkey,” Railway Technology, https://www.railway-technology.com/projects/baku-tbilisi-kars/

[10] Toksabay, Ece, “Turkish arms sales to sales to Azerbaijan surged before Nagorno-Karabakh fighting,” Reuters, October 14, 2020, https://www.reuters.com/article/armenia-azerbaijan-turkey-arms-int-idUSKBN26Z230

[11] Fraser, Suzan, “AP Explains: What Lies Behind Turkish Support for Azerbaijan,” AP News, October 2, 2020, https://apnews.com/article/turkey-territorial-disputes-azerbaijan-ankara-armenia-9a95d9690569623adedffe8c16f3588d

[12] Wezeman, Pieter, et.al, “Trends in International Arms Transfers, 2019,” Stockholm International Peace Research Institute, Marc, 2020.

[13] Astakhova, Olesya and Soldatkin, Vladimir, “New gas pipeline could heat up Azeri-Russian Rivalry,” Reuters, October 6, 2020, https://www.reuters.com/article/azerbaijan-russia-gas-int-idUSKBN26R27G

[14] “World Investment Report 2020,” UNCTAD, 2020.

[15] Özel, Soli and Uçar, Gökçe, “The Economics of Turkey-Russia Relations,” Edam Centre for Economics and Foreign Policy Studies, July, 2019.

[16] Koutroumpis, John, “Russia and Turkey: An Ambiguous Energy Partnership,” E-International Relations, September 11, 2019, https://www.e-ir.info/2019/09/11/russia-and-turkey-an-ambiguous-energy-partnership/

[17] Koutroumpis, “Russia and Turkey”

[18] Ben-Ephraim, Shaiel, “Israel to Maintain Edge in Karabakh War,” Asia Times, October 14, 2020, https://asiatimes.com/2020/10/israel-to-maintain-azeri-edge-in-karabakh-war/

[19] Rahimov, Rahim, “Israel Delivers Aid to Azerbaijan: Background and Implications,” Jamestown Foundation, November 10, 2020, https://jamestown.org/program/israel-delivers-aid-to-azerbaijan-background-and-implications/

[20] “Azerbaijan’s exports to Israel,” Trading Economics, https://tradingeconomics.com/azerbaijan/exports/israel

[21] Rahimov, “Israel Delivers Aid”

[22] “European Neighborhood Policy and Enlargement,” European Commission, https://ec.europa.eu/neighbourhood-enlargement/neighbourhood/countries/armenia_en