APRIL-2021

BULLETIN H I GHL I GHT OF THE FORE I G N P O L I CY OF REPUBL I C OF AZERBA I JAN

Table of contents

I. The West should support a new post-war configuration in the South Caucasus 2

II. The Iskander-M debacle looms large over Russia-Azerbaijan relations 3

III. Azerbaijan continues the construction of strategic Nakhchivan railway despite Armenian provocations 5

IV. Suez Canal blockage highlights the importance of the Middle Corridor for the global shipping 8

V. Economic implications of the Second Karabakh War for Armenia 10

VI. Building Pax Caucasia: opportunities and challenges 12

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I. The West should support a new which played a critical and positive role in the post-war configuration in the region in the post-conflict period, adding that South Caucasus the US President`s statement was met with concern by Azerbaijan’s leadership and the On April 28, US Secretary of State Antony public. Blinken and President Ilham Aliyev had a phone conversation. According to the With the Second Karabakh War, the balance of presidential press service, the US Secretary of power in the region has sharply shifted in favor State spoke about the importance of further of Azerbaijan. As an artificial Soviet creation of strengthening of bilateral relations, 1923, the term “Nagorno-Karabakh” has also cooperation in the energy and regional lost its relevance after the Second Karabakh security spheres, the successful War. President Ilham Aliyev has repeatedly implementation of the Southern Gas Corridor underscored the fact that “there is presently project, and hailed Azerbaijan's participation no administrative unit named Nagorno- in the peacekeeping mission in Afghanistan. He Karabakh. Azerbaijan has resolved this issue, also said that the waiver of Section 907 of the achieved a historic victory and started Freedom Support Act was extended for restoration work in the destroyed areas”. Azerbaijan for 2021. Mentioning the Karabakh with its flat and mountainous parts is cooperation in the field of regional security, an integral part of Azerbaijan. The U.S. and President Ilham Aliyev stressed the other western powers can help in solidifying significance of Azerbaijan's participation in the peace in the region after the Second Karabakh peacekeeping mission in Afghanistan since the War. However, this largely depends on the initial stage. During the conversation, the sides willingness of the western powers to take a exchanged views on the situation after the more unwavering position towards both Armenia-Azerbaijan war. President Ilham revanchist and separatist aspirations, making Aliyev affirmed Azerbaijan's position on this sure that there is no room for ambiguity, while issue, noting that restoration works are pushing Armenian to fulfill its obligations underway in the country`s territories under the November 10th ceasefire destroyed by Armenians. President Ilham agreement. The lack of consistency in the West Aliyev also noted the significance of opening toward this issue is not only detrimental to the communications in the region and stressed West’s capacity to present a coherent policy Azerbaijan's position on ensuring long-term towards the region, but also undermines the peace. President Ilham Aliyev and the US fragile post-war security situation in the South Secretary of State also discussed the future Caucasus. The revanchists see the activities of the OSCE Minsk Group. During the inconsistency in the West’s position as a phone conversation, the sides stressed the validation of their destructive aspirations, development of democratic processes, the which emboldens them to take drastic steps in importance of ensuring human rights, order to undermine the fragile peace in the preservation and providing of political region. The West should avoid creating the pluralism in Azerbaijan. At the same time, perception that it may be willing to prop up referring to the US President`s recent revanchists and separatists. Instead, efforts statement on the so-called Armenian should be made to explain to revanchists and genocide, the President of Azerbaijan said wannabe separatists why their unilateral Turkey was Azerbaijan`s close friend and ally, destructive actions and attempts at revisions

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cannot and will not be accepted. The West how the Iskander-M missiles which Armenia should learn to act responsibly and be more could not import were fired against the aware of the unintended consequences of its Azerbaijanis. This issue was discussed by actions. Consistency is a virtue. A clear and President Ilham Aliyev and President Vladimir unwavering stance on the territorial integrity Putin during a telephone conversation on of Azerbaijan would protect the West from April, 1, 2021, and Azerbaijan’s Defense accusations of hypocrisy and double Ministry sent a request with video and photo standards, while preventing would-be materials confirming the use of Iskander-M to revanchists from setting up unrealistic the Russian side. Azerbaijan has not received expectations and destroying the nascent adequate explanation from Russia. According peace in the region. to Russian President’s Spokesperson Dmitry Peskov – “Iskander missiles were not used in

Nagorno-Karabakh in the fall of 2020”. II. The Iskander-M debacle looms Russia’s dismissal of the news about the large over Russia-Azerbaijan deployment of Iskander-M by Armenia in the relations course of the Karabakh war raises eyebrows in On April 2, the Mine Action Agency of the Baku and, for President Ilham Aliyev, this begs Republic of Azerbaijan (ANAMA) reported the the question of whether Russia controls finding of the remnants of the Iskander military warehouses in Armenia. “Pashinyan is missiles, also known as SS-26 Stone in NATO the Prime Minister of Armenia. He says we reporting name, in Shusha, a town in the [Armenia] used this missile. A Russian Defense Karabakh region liberated by the armed forces Ministry official said they did not use it. What of Azerbaijan during the war of last autumn. It does it mean? Does this mean that the Russian should be especially highlighted that the Defense Ministry controls the Armenian detected remains of missiles under the 9M723 Defense Ministry?” President Ilham Aliyev index code belong to Iskander-M type. asked at an international conference in Baku. Iskander-M with a maximum range of 500 km It could be speculated that Russia has sold is exclusive for Russian military use, while the Iskander-M missiles to Armenia instead of Iskander-E (9M720) with maximum range of Iskander-E, and Armenian armed forces used 280 km aimed for export. Armenia was the first those missiles against Azerbaijan. In this case, buyer of this complex. The Iskander-E missiles official Moscow violates the Wassenaar were obtained and shown by Armenia at the Arrangement on Export Controls for military parade in September 2016. This Conventional Arms and Dual-Use Goods and finding, however, due to the facts that Technologies. In addition, Russian officials Iskander-M with a maximum range of 500 km always claim that Iskander-M is a serious is considered solely for the Russian army, offensive weapon, and naturally, the complex prohibited for exports under the international will not be exported to other states. Second agreements and only the export version of assumption might be that Armenia through these missiles called Iskander-E is listed in diaspora bought illegally Iskander-M missile Armenia’s arsenal, caused a massive outcry in systems, smuggled it through Russian customs Azerbaijan. Commenting on the findings on and used them against Azerbaijan. In such April 12, President Ilham Aliyev addressed the situation, serious investigations must be Russian leadership asking for an explanation launched in the Russian army to find out

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responsible persons. Illegal acquisition of such regretted that only ten percent of the missiles a strategic weapon is a serious threat not only exploded. His derogatory remarks about to regional security but also to the whole Russia’s well-known military product outraged world. Therefore, the official Kremlin should the Armenian army leaders and Russia’s start its investigation into the remains of political and expert community. Facing the Iskander-M missiles in Karabakh as soon as threat of a military coup and Russia’s possible. However, experts are sceptic with objections, Pashinyan’s office later recanted regard to a possibility to smuggle such weapon his statement saying Prime Minister had been from Russia. And the third assumption as some misinformed, adding that “there is no doubt experts claim Russia could use Iskander-M that Russian weapons are one of the best in missiles against Azerbaijan in order to stop the world”. successful military operations of the The precarious balance Azerbaijan has Azerbaijani army. It is worth remembering maintained with its northern neighbor is that military operations were stopped after challenged by Russia’s continuous military the Russian intervention of November 10, support to Armenia and Russia-supported 2020. Russia, Azerbaijan and Armenia signed modernization of the Armenian army as well. the Trilateral Agreement, and the official Many Armenian military experts have Kremlin became a key guarantor for the highlighted the importance of acquiring ceasefire and peace. According to the Iskander-E missile systems for Armenian agreement, 1,960 armed troops, 90 armored military forces, which had tried to change the vehicles, and 380 motor vehicles and special balance in favor of Armenia. However, official equipment units have been deployed to the Baku acquired the Belarusian-made Polonez Karabakh region. By this, Russia got military multiple-launch rocket system as well as presence in all three South Caucasian Israeli-made LORA operational-tactical missile countries. If Russia used Iskander-M missiles system to keep balance in the region. So far, against Azerbaijan then it may completely Azerbaijan has managed to counterbalance damage the image and credibility of the Armenia’s military capacity and sent a clear Russian peacekeeping forces in Azerbaijan. message to Armenia about the risks of use of The debate about the use of Iskander missiles the Iskander missiles against Azerbaijan. In had, in fact, started in the immediate addition, Azerbaijan strengthened its ballistic aftermath of the conclusion of the 44-day war missile defence by purchasing the Israeli-made in November last year when Armenian ex- Barak-8 air defense system. army chief, colonel-general Movses Hakobyan In his press conference with the declared that Iskander was used during the representatives of foreign and local media in war but refused to provide the details. This late February, President Ilham Aliyev was confirmed by Armenian Prime Minister underscored the potential repercussions of Nikol Pashinyan on February 23. Countering this process stating that “The provision of the accusations by the former Armenian weapons like Iskandar missiles to Armenia President Serzh Sargsyan who had asked why does not serve to stability in the South these ballistic missiles were not launched Caucasus.” President Ilham Aliyev also warned against Azerbaijan during the war as it would against the externally supported plans to have tilted the balance in favor of Armenia, modernize Armenian army, stating “Russian Pashinyan admitted the use of Iskander but side says that it is ready to modernize the

Mirza İbrahimov 8, Baku, AZ1005, Azerbaijan, Phone: (+994 12) 596-82-39, (+994 12) 596-82-41, E-mail: [email protected]

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Armenian Armed Forces.” “But if we are III. Azerbaijan continues the talking about lasting peace, is it worth doing construction of strategic it?”, President Ilham Aliyev rhetorically asked. Nakhchivan railway despite Armenian provocations In the end, it is important to underline that the war is over. On the one hand, there are still The construction of the railroad that will some challenges such as the illegal transit of connect Azerbaijan proper with its exclave, Armenian armed forces and weapons through Nakhchivan Autonomous Republic, via the the Lachin corridor to Karabakh, as well as the Zangezur (Syunik) region of Armenia will be a Armenian armed forces’ withdrawal from historic achievement for Azerbaijan as Azerbaijani territories, on the other hand, Nakhchivan has largely been isolated since the there are important opportunities for regional First Karabakh War of the early 1990s, which integration and stability. Armenia and resulted in the termination of the land route Azerbaijan can support the reconciliation linking mainland Azerbaijan and its exclave via process by showing goodwill. Towards this the “Zangezur corridor”. For Azerbaijan, the end, official Yerevan should implement all reopening of the corridor has geostrategic clauses of the November agreement as well as importance in multiple domains. This route recognize the territorial integrity of was the most direct land passage between Azerbaijan. Last but not least, the processes of mainland Azerbaijan and its Nakhchivan disarmament within the context of post- exclave soon after World War I, when the conflict reconciliation should begin as soon as historical Zangezur (now Syunik) province was possible. The Iskander-M missile system is a granted to Armenia and the autonomous serious threat to the whole region, and the Nakhchivan territory came under Azerbaijani Shusha case demonstrated clearly that arms protection under the Treaty of Kars (1921). The control is very important to strengthen peace termination of the Zangezur land route and stability in the region. As a guarantor of connection with Nakhchivan following the the ceasefire and the post-war regional breakout of the First Karabakh War of the early arrangements, Russia should aim at de- 1990s, however, seriously isolated the escalation in the region and help the Azerbaijani exclave. Since then, Baku could implementation of the peace-building physically reach Nakhchivan only by air or by initiatives such as the re-opening of regional circumventing Armenia to the south, via transportation and communication channels Iranian territory. The latter route came with between Armenia and Azerbaijan. The moves myriads of security and geopolitical challenges in the opposite direction, such as Moscow’s to Azerbaijan, in addition to notable economic upgrading of the Armenian army and its consequences. At the same time, Azerbaijan’s military supplies to Armenia raise numerous dependence on the Iranian land bridge, questions about the future of Russia – coupled with Iran’s supply of energy resources Azerbaijan relations. to the Azerbaijani exclave, provided Tehran with significant clout in its relations with Baku.

This situation is expected to be changed in favor of Baku following the opening of the Zangezur corridor. The Zangezur corridor will

provide Azerbaijan with a direct route for natural gas supplies to the Nakhchivan region

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and, consequently, save on transit fees via This corridor could also play an important role Iran. According to the 2004 swap agreement in the regional integration of the Turkic states, between Baku and Tehran, in return for which have been developing an ambitious Azerbaijan’s supply of gas to Iran’s agenda toward this goal over the last few northwestern border city of Astara, Iran years. Addressing the informal summit of the supplies 85 percent of that volume to Turkic Council, held online on March 31, Nakhchivan, counting the remaining 15 President Ilham Aliyev stated that “transport, percent as a transit fee, which Baku has long communications, [and] infrastructure projects sought to re-negotiate. passing through Zangezur will unite the entire Turkic world,” mentioning also opportunities Securing the Nakhchivan Autonomous for building cross-border railways with other Republic (NAR) has been a particular concern regional countries, including Armenia. for Azerbaijan against the backdrop of irredentist claims from the Armenian side. On February 14, President Ilham Aliyev, during These mounting security threats compelled his visit to the Azerbaijani territories liberated Baku to, in 2013, establish the Nakhchivan- following the Second Karabakh War laid the based Combined Army on the basis of the 5th foundation for a railway that, when Army Corps, in order to reinforce the defensive completed, will connect the towns of Horadiz capacity of the exclave. The lack of direct (Fuzuli district) and Agbend (Zangilan district). access to the region also pushed Azerbaijan to Agbend is located in the southwesternmost more energetically promote military ties part of mainland Azerbaijan, at the politically between Turkey, Azerbaijan’s strategic ally, sensitive junction of the borders of Azerbaijan, and the NAR through joint military exercises Armenia, and Iran. The 100-kilometer-long and consultations. Horadiz–Agbend railway constitutes a part of a larger project to link Azerbaijan proper with The direct land route with Nakhchivan will Nakhchivan. Speaking at the groundbreaking shorten transit between Azerbaijan and ceremony for the Horadiz–Agbend railway, Turkey. Although the two countries are President Aliyev underscored the “great already linked via the Baku–Tbilisi–Kars importance” of the project for the Railroad and roads across Georgia, the shorter transportation of passengers and freight to the route through Zangezur has the potential to liberated territories. “After a long hiatus,” boost economic and human ties between the President Ilham Aliyev noted, “Azerbaijan and two sides. Overland transit via the Armenian its integral part of the Nakhchivan territories will boost trade turnover between Autonomous Republic will be connected to Azerbaijan and Turkey by raising the potential each other by rail, thus achieving our strategic, of the Middle Corridor connecting Europe with economic and political goals”. This railway Asia. The two Turkic states enjoy a preferential route, established during the Soviet period, trade agreement since March 1 and are had been entirely dismantled over the last discussing the possibility of signing a free- three decades of Armenian occupation of trade agreement and switching to national Karabakh and surrounding Azerbaijani currencies in bilateral trade. The two sides districts. The 43.4 km section of the railway seek to increase their bilateral trade to $15 that passed through Armenia from the billion by 2023. Armenian border (Meghri district) to

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Nakhchivan and was owned by Azerbaijan Armenia’s Prime Minister Nikol Pashinyan, at a Railways had not been in use since then. meeting with residents of the Armenian village of Nerkin Bazmaberd, declared passionate At the same time, since the start of the support for the opening of regional construction of the Horadiz–Agbend railway, transportation channels. Assuring that this will the Armenian side has been very inconsistent be advantageous for both Armenia and and provocative about the prospects of the Azerbaijan, Pashinyan noted that “this is revitalizing the Zangezur corridor. “Today beneficial for Azerbaijan because it should Armenia shies away from cooperation, have communication with Nakhchivan. This is attempts to hamper the implementation of beneficial in Armenia because we need to the Zangazur corridor,” President Aliyev obtain a reliable rail and land connection with revealed in his address to the seventh the Russian Federation and the Islamic assembly of the ruling New Azerbaijan Party Republic of Iran. This means that the economy (YAP) in March, adding that “but they will fail.” of our country can change significantly. In Armenia lacks the estimated $3.5 billion another meeting with the local Armenian needed to finance the construction of its own community, on March 28, Prime Minister railway to Iran via the Syunik region. The only Pashinyan once again emphasized the existing land route between Iran and significance of opening up transit channels Armenia—the Meghri–Kapan–Goris with Azerbaijan for the Armenian economy. To highway—suffers from seasonal challenges to support his claim, Pashinyan cited the example passage. And the northern route to Russia via of the copper ore mining industry of Armenia, Georgia is often unavailable for the same saying that it would be “impossible” to reason. The railway path to Iran through modernize the industry and create capacities Nakhchivan would, thus, relieve Armenia of for smelting copper without unblocking the financial burden of building its own railway regional transport infrastructure. “We must via the Syunik region. The rail route to Iran via understand that we cannot get a path through Nakhchivan could also help Armenia reach the the territory of Azerbaijan [to Russia and Iran] long-awaited $1 billion annual trade turnover while, at the same time, refusing to give a path target with its southern neighbor. As such, to Azerbaijan through our territory. We must Yerevan has no real immediate alternatives to be able to mutually use the existing routes,” improving this situation but to unblock the Pashinyan said, highlighting the importance transportation links via Azerbaijani territory. for Armenia to look at the region “from a different angle”. Nonetheless, inconsistent and provocative messages from the Armenian side imply that It will take a significant amount of financial Yerevan might try to reconsider these projects resources to complete the rehabilitation of the after the upcoming June 20 snap east-west rail route via the Zangezur corridor, parliamentary elections. However, Armenia’s which needs to be entirely rebuilt in most rejection of the Zangezur corridor would sections, even though the existence of the jeopardize the entire post-war negotiation previously used track bed helps ameliorate process and undermine the November 10th costs. According to some unofficial estimates, ceasefire agreement, which constitutes the the construction of the missing parts of the foundation for these negotiations. Many in railway along the Kars–Gyumri–Nakhchivan– Armenia understand this. On March 20, Meghri–Baku route (KGNMB) might cost up to

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$433.7 million, with the Azerbaijani section of also responsible for the transportation of 7% the line costing $277.1 million, the Armenian of the world’s oil and 30% of daily container section requiring $104.6 million, and the shipments. Therefore, the blockage of the Turkish section—$52 million. According to canal has considerably affected global trade. other estimates, the reconstruction of the According to Lloyd’s List, a London-based Armenian section of the railway could cost shipping news journal, the estimated daily about $210 million, while rebuilding the value of cargos passing through the canal is Azerbaijani section could take more than $400 $9.7 billion, with $5.1 billion traveling million. Even though the price tag on the westward and $4.6 billion traveling to construction of this railway generally exceeds eastward directions. The incident forced some projections from seven years ago, a revitalized ships to use the alternative route around KGNMB still seems more economical than its Africa’s southern tip, which is dangerous and alternatives. For instance, the building of a increases the transportation costs and time. new railroad between Iran and Armenia is Shipment delays because of the incident in the anticipated to cost $3.5 billion. At the same Suez Canal also negatively affected the time, it remains an open question who will already-disrupted global supply chain. Since undertake the construction of the Armenian the start of the pandemic, shipping delays and section of the route, between mainland shortages have considerably strained the Azerbaijan and Nakhchivan. In fact, the global supply chain. As the commodities contract between Russian-owned South become increasingly difficult to obtain and Caucasus Railway and Armenia, which produce for the companies, customers face designated the company as the owner and limited options and higher prices. Several big operator of Armenia’s railroads, specifically companies such as Nike, Honda, and Samsung does not include the Syunik (Zangezur) branch, have already expressed that supply-chain listing it as an “unused line.” Armenian issueshavesignificantly impeded production experts, therefore, expect that Yerevan may volumes. Thus, the blockage of the canal made seek to draw the necessary funds from the supply chain crisis even worse. international organizations such as the Asian Infrastructure Investment Bank (AIIB), World Almost a week after the “Ever Given” halted Bank and the European Bank for the canal, on March 29, it became possible to Reconstruction and Development (EBRD). free the vessel and the Suez Canal opened for business again; tugboats managed to refloat

the stuck vessel away from the canal’s sandy IV. Suez Canal blockage highlights the bank. During the blockage, at least 367 vessels importance of the Middle were left waiting for the canal to be unblocked. Corridor for the global shipping However, it remains unclear when the traffic in the canal will return to normal, as it will take a On March 23 of 2021, a container ship called couple of days to clear the backlog of ships. the “Ever Given” ran aground in Suez Canal, Some experts have estimated that it could take one of the most important waterways in the more than 10 days. world, and blocked other vessels from using it. This human-made waterway is one of the Despite the fact that the canal was freed, it has world’s most heavily used shipping lanes, raised questions on the risks of the world’s carrying over 12% of world trade. This canal is overreliance on this route. The economic

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damage of the blockade of the Suez Canal of the Trans-Caspian International Transport proved the fragility of global transportation Route. In December 2016, the participants of architecture. This in turn brought up the issue the Coordinating Committee decided to of the development of alternative land or establish the International Association”Trans- maritime transport routes. Hence, after the Caspian International Transport Route”, which incident, Russia and Iran have called for the started its activities in the following year. The need to find alternative shipping routes, main goal of this project is to increase the especially recalling potentials of the Northern volume of freight transportation between East Sea Route (NSR) and International North- Asia, Central Asia, the Caspian and Black Sea South Transport Corridor (INST).By explaining basins and European countries by creating the reasons for considering the NSR, on its alternative or complement to the traditional official social media account Russian state land routes that go through the territory of company Rosatomflot declared that rapid Russia. melting of the Arctic and the existence of Middle Corridor has several advantages in powerful Russian icebreakers improve the comparison to traditional transportation accessibility of the North Sea, which could routes. Compared with the Trans-Siberian become an alternative to the Suez Canal. Railway, which is also called the “Northern Iranian officials, on other hand, called for the Corridor”, it is 2 thousand km shorter and has activation of the INSTC as a reliable and “low more favorable climate conditions. Compared risk” alternative. with the traditional sea route, it shortens the The other alternative route that has the travel time of goods between Europe and potential to become one of the mainland China by about three times, making it only 15 routes for the transportation of goods days. In 2015, the first pilot shipment took between Asia and Europe is the Trans-Caspian place and a container train, which started its East-West-Middle Corridor Initiative, shortly trip from Western China reached Baku through called “The Middle Corridor”. This corridor is Kazakhstan and the Caspian Sea in 6 days. considered as one of the most important Besides, the Middle Corridor creates great routes in reviving the ancient Silk Road. The opportunities for cargo transportation within Middle Corridor begins in Turkey, passes Asia and to Africa. Using this corridor, cargos through the territories of Azerbaijan and from east and south-east Asia could be easily Georgia, crosses the Caspian Sea, reaches transported to the Middle East, North Africa Central Asia, and extends to China through the and the Mediterranean regions using port Turkmenistan-Uzbekistan-Kyrgyzstan or infrastructures of participating states. Kazakhstan routes. The Middle Corridor initiative is also supported The formation and development of the Middle by Afghanistan and Tajikistan as this route Corridor began after the November of2013, creates new transportation opportunities for when as a part of the II International Transport them. By integrating the “Lapis Lazuli” and Logistics Business Forum “New Silk Road” corridor, an international transit route that in Astana, the leaders of JSC “National links Afghanistan to Turkey, to the Middle Company” of Kazakhstan, CJSC “Azerbaijan Corridor, these countries could easily Railways” and JSC “Georgian Railway” signed transport their goods in all directions in Asia. the agreement on the establishment of Integration of these corridors is also Coordination Committee for the development advantageous for the participating countries

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of the Middle Corridor. The agreement on the war-related protests still continue. Along with establishment of the Lapis Lazuli corridor was political problems, the Second Karabakh War signed by Georgia, Afghanistan, Turkmenistan, has also created economic problems for Azerbaijan and Turkey in November 2017, Armenia. Taking into account that even before which added a new artery to the Middle the war Armenia had a fragile economy and Corridor in the southern direction. was dependent on foreign aid, war-related financial problems have made the situation Along with the mentioned advantages, the even worse. Middle Corridor also holds precedence in comparison to other proposed alternatives, War affected the Armenian economy in which have obvious shortcomings. In the case different spheres. First of all, the military of NSR, most of the year it is covered in snow sector of Armenia faced substantial losses. and for transportation of goods through this According to the initial estimations, the road ships of special nature and capabilities minimal cost of Armenia’s military equipment, are required. So, the competition of NSR with destroyed or taken as trophies by the armed the Suez Canal could only be of seasonal forces of Azerbaijan during the war amounts to nature. The INSTR on the other hand, despite $3.8 billion. In the last ten years, the annual its advantages, cannot become the direct military expenditure of Armenia doubled and competitor to the Suez Canal as it serves for reached $716 million, which is a quite large the connection of the Indian Ocean and the amount for a small country like Armenia. Persian Gulf with Northern Europe, not for the Therefore, Armenia has one of the highest connection of east and south-east Asia like the military expenditure to GDP ratio worldwide. Suez Canal. It could compete with the Suez This indicator reached almost 5% in 2019, Canal only if it is integrated into the Middle which is even bigger compared to Russia and Corridor. Hence, the advantages of the Middle the U.S. However, despite the huge military Corridor and shortcomings of other expenditures, Armenia was also faced with alternatives reveal the importance of the heavy defeat and financial damage in the war. Middle Corridor and make it the best The cost of military equipment of Armenia in alternative for the transportation route that the Second Karabakh War makes up 77% of the goes through the Suez Canal. total military expenditures that were spent in the last ten years. Consequently, the Armenian

army lost its combat capability and its recovery V. Economic implications of the requires many years. Second Karabakh War for Along with military losses, the Second Armenia Karabakh war created problems in the energy, The heavy defeat of Armenia in the Second agriculture and financial sectors of Armenia. Karabakh War and the enormous loss of During the occupation of about thirty years, military personnel created a severe political Armenia illegally exploited natural resources in and social crisis in the country. Armenian the occupied territories, which played an citizens began mass protests against the important role in the economic development government, demanding the resignation of the of Armenia. Previously occupied territories Prime Minister. Despite the fact that, in the have great energy potential. The Hydroelectric following months, some progress in Armenia’s Power Stations (HPS) situated in those political situation was achieved, instability and territories played important role in meeting

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the energy demand of the illegally settled 150 thousand tons of different grain products Armenian population. Starting from 2018, were being produced , 66% of which was being even the surplus of the produced energy was exported to Armenia. Imported grain products being exported to Armenia which accounted from Karabakh met about 25% of the local for 7% of the energy supply of Armenia. As a demand in Armenia. Hence, for preventing a result of the war, Armenians lost control over potential food crisis, the Armenian the 30 HPSs out of the 36 that existed in the government has to substantially increase the previously occupied territories, which were grain imports from other countries. Increasing responsible for 53% of electricity production. the share of imported grain in turn will have an In 2020, Armenia planned to import about 330 enhancing effect on inflation and will worsen million kWh of electricity from Karabakh, but the social situation in the country. due to the war, only some part of the planned The war also had a considerable impact on the volume was imported. financial sector of Armenia. Despite limited As Armenia got deprived of electricity import financial resources, during the war, Armenia from Karabakh, it started to face energy had to increase the budget expenditures in shortage. Now Armenia not only has to import order to meet the increasing military the energy to meet the local energy demand expenses. In October 2020, based on the but also has to export electricity to the amendments to State Budget 2020, budget Armenian population that is left in Karabakh. expenditures were increased by about $85 To eliminate energy shortage, Armenia should million. As a result of the amendments, in increase the share of the Thermal Power Plants 2020, the budget expenditure reached 27% of which operate with gas or increase the volume GDP and the budget deficit was increased by of imported energy from abroad. In both about three times compared to the initial cases, it will lead to an increase in the energy predictions and constituted 7.6% of GDP. All prices in Armenia. Already, starting from these changes created substantial economic February 1, electricity prices for households in risks which were reflected in the Debt to GDP Armenia have increased by about 7% and more ratio (DGR), one of the main indicators of the increases are expected. financial security of the countries. In 2020, the DGR of Armenia passed the 60% threshold and Because of the war, the agricultural sector of reached at least 66.5%. As the mentioned Armenia also has been significantly affected. problems have deepened the financial crisis, Like the energy resources, the agricultural the Armenian government now cannot carry resources also have been exploited by out budget projects for 2021. Therefore, the Armenia in the previously occupied territories. government is planning to reduce the cost of As those territories are rich with arable land maintaining the state apparatus (10%) and and pastures, it creates great opportunities for military expenditures. the development of crop production and animal husbandry. Agriculture products The formed financial problems in turn affected imported from Karabakh played important the macroeconomic situation in Armenia. role in the provision of food security in Despite the initial predictions of negative 5%, Armenia. As a result of the war, 90 thousand because of the war, GDP was diminished by hectares or 90% of arable land in those about 8.5% at the end of 2020, which was the territories came under the control of worst economic development indicator Azerbaijan. Annually, in those arable lands, compared to other regional countries. War

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also had a direct impact on the exchange rate war and laid the foundation for solving other of the national currency of Armenia (Dram). thorny issues between Armenia and From the start of the war until the March of Azerbaijan, including the liberation of the 2021, Dram has been depreciated by about remaining territories under occupation 8.6%, forming an inflationary environment. To (Aghdam, Kalbajar, Lachin) as well as the curb the further deprecation of the currency unblocking of all economic and transport and inflation risks, the Central Bank of Armenia communications in the region, may have increased the refinancing rate twice in less heralded the dawning of a different period in than two months. In December 2020, it was the history of a long war-ravaged region of the raised by about 1% and set at 5.25% and in South Caucasus. This is evidenced by the February it was increased to 5.5%. announcement of new cooperation initiatives such as the “six-party cooperation platform” All the mentioned economic and financial and the establishment of the “Zangezur problems demonstrate that the Second corridor,” which aims not only to link Armenia Karabakh War had a significant impact on the and Azerbaijan, but also to play a wider role in Armenian economy. After the war, the enhancing the region’s standing by providing dependence of the Armenian economy on interconnectivity across diverse geographic foreign debt increased, which was one of the and geopolitical zones. This process has main economic problems. As a result of the already involved Russia and Turkey and will loss of the occupied territories, Armenia also potentially facilitate links between Central Asia faced energy and food shortages which will and Europe. There is much going on in the lead to price increases and growing social region in this regard and talks about the discontent. On the other hand, reduced probability of building a Pax Caucasia in the financial resources and deteriorating South Caucasus are more than mere hype. macroeconomic indicators undermine the economic development perspectives. There have already been reports and Therefore, the economic damage of the war testimonies about Azerbaijan’s intention to will have serious economic implications for move on, post-Second Karabakh War, and Armenia in the long-term period undermining adopt a maximally cooperative and its financial security. As Orkhan Baghirov, a magnanimous approach towards Armenia leading advisor at Center of Analysis of following the latter’s defeat in the war. This International Relations (AIR Center), puts it “all was apparent in the many concessions made these problems also show that the aggressive by Azerbaijan in the post-war period, such as and occupational policy against the neighbors providing a ten-day extension (from November never leads to development and the only way 15 to November 25, 2020) of the deadline for for Armenia to achieve rapid economic the Armenian Armed Forces and the Armenian recovery is to join the regional cooperation”. population that had settled in Kalbajar during the occupation to leave the region, and the VI. Building Pax Caucasia: return to Armenia of 69 Armenian nationals opportunities and challenges detained in Azerbaijan and 1400 bodies. The Second Karabakh War ended with the Moreover, as a gesture of good will, Azerbaijan signing of the trilateral declaration between helped with the transfer of humanitarian aid to Armenia, Azerbaijan, and Russia on November Armenian residents in Karabakh; facilitated 10, 2020. The declaration, which stopped the the transfer of goods through Azerbaijan’s

Mirza İbrahimov 8, Baku, AZ1005, Azerbaijan, Phone: (+994 12) 596-82-39, (+994 12) 596-82-41, E-mail: [email protected]

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main territory; allowed Armenian citizens to occupied Azerbaijani territories is very acute. continue using the parts of the Gorus–Kafan According to some estimates, Armenia spent highway that pass through the newly liberated $350 million on planting landmines in and Azerbaijani territories; and last, but definitely around the Nagorno-Karabakh region. ANAMA not least, for the first time in three decades the is currently undertaking operations towards transportation of Russian natural gas to clearing the areas contaminated with Armenia through Azerbaijan became a reality. landmines and unexploded ordnance (UXO) and initial estimates suggest that the However, this cautious optimism about the neutralization of UXO, missiles, and the nascent prospects of peace and cooperation in remaining ammunition in the combat areas the region is facing a number of challenges. could require 5–6 years, while it might take These include Armenia’s flouting of Article 4 of some10–13 years before the mined areas are the November 10, 2020 declaration that completely cleared. Although Azerbaijan is demanded the withdrawal of all remaining also receiving help from its friends, partners, armed groups from Azerbaijani territories; and international organizations, including purposeful misrepresentation by Armenia of Turkey, Russia, and the United Nations, in the militia members captured by Azerbaijan as a form of staff training, delivery of mine-clearing result of counter-terrorist operations since equipment, and financial assistance, this is November 10 as prisoners of war (PoW) and obviously not yet sufficient for tackling this resultant attempts to exert pressure on very difficult and precarious work. Azerbaijan; and the newly intensified debate on who might have launched Iskandar M The issue is further exacerbated by the fact missiles against the Azerbaijani city of Shusha that, in response to all the gestures of goodwill during the 44-day war. The latter issue in by Azerbaijan aimed at turning the page on particular seems to boggle the mind after the hostility and embarking on building a Azerbaijani National Agency for Mine Action cooperative relationship with Armenia, the (ANAMA) recently discovered the remnants of latter still refuses to give Azerbaijan maps of an Iskandar M ballistic missile in Shusha. the landmines planted in its formerly occupied According to the Missile Technology Control territories. Worse still, as noted by the Regime (MTCR), the export version of this Assistant to the President of the Republic of missile is the Iskandar E, which the Russian Azerbaijan – Head of the Department of Federation exported only to Armenia. The Foreign Policy Affairs of the Presidential Iskandar M, the remnants of one of which Administration at the briefing held for the were discovered in Shusha, is in the sole diplomatic corps on the occasion of the possession of the Russian Federation. The “International Day for Mine Awareness and story behind this discovery definitely has a Assistance in Mine Action” (April 5, 2021), on dark side that needs to be clarified, as the the one occasion when Azerbaijan was able to absence of plausible answers may generate obtain maps of purported mined areas from dangerous speculation. Either way, this issue, Armenia, these maps turned out to contain along with the others discussed above, is also false information, as ANAMA was unable to inhibiting a seamless transition to the post- find anything based on the coordinates conflict rehabilitation period. therein. “This could mean that Armenia purposefully misled Azerbaijan,” Mr. Hajiyev In addition to the above, the danger posed by noted. Apparently, there is still no progress the landmines planted in the previously

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whatsoever in terms of persuading Armenia to died or been maimed as result of anti- cooperate on the issue of landmines. However, personnel landmine explosions. If the correct this is hugely important, as refusal to maps of the mined areas are not given to the collaborate on such a crucial issue may Azerbaijani side in due time, the numbers of diminish the already meagre prospects for casualties will increase, adding to the already achieving lasting peace and cooperation daunting global statistics of human deaths due between the erstwhile enemies in the wake of to landmines. It is hoped that Armenia will not Azerbaijan’s one-sided concessions to realize too late that civilians should not be at Armenia. the receiving end of the regime’s frustration and resentfulness over the war that was lost. International conventions prohibit anti- personnel landmines (APL), the most As Dr. Esmira Jafarova, the Board Member of dangerous form used against civilians. Every the Center of Analysis of International year, reputable organizations in the field, such Relations (AIR Center), has noted, “there are as the International Campaign to Ban clearly visible challenges of the post-conflict Landmines (ICBL), report thousands of people period that need to be overcome. The dying or being injured owing to landmines. complexity of the outstanding issues demands Post-Second Karabakh war, Azerbaijan has transparency, cooperation, and mutual already reported the deaths of dozens of its compromise if there is a genuine wish to move citizens as well as military servicemen, away from the horrors of the past”. including Russian peacekeepers, who have

Mirza İbrahimov 8, Baku, AZ1005, Azerbaijan, Phone: (+994 12) 596-82-39, (+994 12) 596-82-41, E-mail: [email protected]