Developments in Nagorno-Karabakh are likely to tarnish Azerbaijan’s reputation in the West, but international sanctions are less likely
The region is likely to experience short-term instability, but the potential for long-term stability hinges on the parties’ ability to successfully conclude a peace treaty in the near future. Armenia and Azerbaijan are closer than ever to signing such an agreement, yet two significant obstacles remain: border delimitation and the opening of the Zangazur transport route (referred to as the Zangazur corridor, a term the Armenian side avoids due to concerns about its impact on Armenian territorial integrity).
Major disruptions to business operations in the region are not anticipated at this time, but the situation remains fragile and requires continuous monitoring of recent developments. The relocation of ethnic Armenians fleeing Nagorno-Karabakh to Armenia will come with a substantial political and economic cost for Armenia, thereby increasing the likelihood of domestic instability. However, this is unlikely to lead to the downfall of Prime Minister Nikol Pashinyan’s regime at least in 2023–2024. Nevertheless, businesses in Armenia should establish contingency plans in case of heightened domestic instability and maintain moderate growth expectations for the premium goods market. B2G companies in Armenia may see reduced business opportunities, as social spending to protect vulnerable populations will take precedence.
Multinationals specializing in infrastructure development, architecture services, and sustainable solutions will see growing business prospects in Azerbaijan as the government maintains its multimillion-dollar investments in the reconstruction of the Recovered Territories. While not our base-case scenario, the resurgence of revanchist rhetoric and an escalation of the refugee crisis inside Armenia could potentially trigger terrorist attacks in major Azerbaijani cities, as observed in the early 1990s.
- On September 19, Azerbaijan initiated what it termed an “anti-terror” operation in Nagorno-Karabakh (NK), employing artillery and drones against local Armenian defense units.
- Within less than 24 hours, the local military forces announced their surrender, and by September 28, the leadership of the unrecognized Nagorno-Karabakh Republic declared the region’s sovereignty nullified.
- Consequently, there was an abrupt and tumultuous exodus of approximately 100,000 ethnic Armenians from NK to Armenia, as most individuals were unwilling to live under Azerbaijani control, despite Baku’s assurances of safeguarding civilians’ rights.
- The latest UN observation mission, visiting NK for the first time in 30 years to assess the on-ground situation and identify humanitarian needs, estimated that between 50 and 1,000 Armenians might remain in Nagorno-Karabakh.
- In an effort to facilitate the reintegration process, Azerbaijan unveiled a delayed reintegration plan that guarantees equal rights and freedoms for ethnic Armenians, along with tax incentives, subsidies, and access to healthcare, education, and other public services. By October 3, seven Armenians had applied for Azerbaijani citizenship.
We do not foresee a return to a full-scale war between Azerbaijan and Armenia, given that Azerbaijan has fully restored Azerbaijan’s territorial integrity and Armenia remains weak in terms of military power. Both sides are expected to eventually sign a peace treaty; however, harsh rhetoric and Russia’s interference could potentially cause delays but not eliminate it. Additionally, there is pressure from the West to establish an observation mission in Nagorno-Karabakh to ensure the safety of Armenians. Russia is determined to avoid this and instead advocate for its peacekeeping mission to continue in NK beyond 2025 at all costs. The coming months and year will be pivotal for both sides, particularly for Azerbaijan, to take decisive actions in resolving the crisis, as the latter holds a strong position due to its robust military presence and support from allies such as Turkiye and Israel.
Recent developments in NK mark a turning point in the Armenian-Azerbaijani conflict, raising numerous questions. The primary focus now centers on improving Baku-Yerevan relations, a task contingent on the signing of a peace treaty. Both Pashinyan and Aliyev have expressed an interest in finalizing the treaty; however, unresolved issues such as border delimitation and unblocking transport routes could potentially delay the signing. Hopes were pinned on the upcoming meeting in Granada, Spain, between the two leaders to address these questions. Regrettably, President Ilham Aliyev of Azerbaijan declined to attend the meeting at the last moment, citing dissatisfaction with the presence of France’s President Emmanuel Macron in the talks. The French foreign ministry’s recent announcement of weapon supplies to Armenia has clearly upset Azerbaijan. Aliyev is also aware of EU member states’ growing dissatisfaction toward Azerbaijan, though the EU remains cautious about directly accusing Azerbaijan of ethnic cleansing. While harsh sanctions against Azerbaijan seem unlikely, international pressure for advocating for a softer approach around the Zangazur “corridor” and respecting Armenia’s territorial integrity will continue.
Relations between Armenia and Russia will remain tense, and we do not expect them to return to normal. The Pashinyan administration will continue to distance itself from Russia. The recent ratification of the Rome Statute of the International Criminal Court, which implies that Armenia would have to detain President Vladimir Putin if he were to visit Armenia, is likely to further deteriorate relations between the two nations and may fuel additional protests supported by pro-Russian opposition and communities. There is also a historic opportunity for Armenia to work toward normalizing relations with Turkiye, which could ultimately reduce Armenia’s economic dependence on Russia and bring long-lasting peace and stability to the region.
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