Strategic Posture Review: Azerbaijan

Strategic Posture Review: Azerbaijan

Despite its relatively small size, Azerbaijan has frequently been the focus of foreign attention since it gained independence after the collapse of the Soviet Union. This is in large part due to Azerbaijan’s sizable energy resources and pivotal location, which provides the only viable pipeline route for Caspian Basin oil and gas to reach the West without passing through Russia or Iran. Azerbaijan’s leaders have tried to exploit these geopolitical assets to help manage the challenges presented by the country’s volatile neighborhood, which include a number of disputes over Caspian energy reserves, heavy interference by outside powers and the potential for a new war between Azerbaijan and Armenia over the disputed Nagorno-Karabakh region.

Historically, Azerbaijan and the rest of the Caucasus region were an object of rivalry between the Persian, Ottoman and Russian empires. Today, Russia, Iran, the United States and various European governments continue to seek to influence Azerbaijan’s foreign and domestic policies. Since regaining its independence in 1991, Azerbaijan has sought to balance and manipulate these rivalries while pursuing its own regional objectives, which focus on recovering territories occupied by Armenia, averting a war with Iran, minimizing foreign leverage over Azerbaijan’s domestic policies and establishing Baku, the nation’s capital and a major port city, as a center for regional commerce.

By constitutional definition, Azerbaijan is a presidential republic. Since independence, however, the country’s foreign policymaking process has been largely personalized and connected to the person of the president. After the turbulent immediate postindependence period, Heydar Aliyev became Azerbaijan’s president in 1993 and pursued a balanced foreign policy, both regionally and beyond. Aliyev helped stabilize Azerbaijan’s foreign relations, attract foreign direct investment to develop the country’s energy reserves and consolidate political power in the hands of a strong presidential administration. He presided over the so-called contract of the century in 1994 with the Azerbaijani International Operating Company (AIOC), a consortium that was made up of 11 U.S., European, Saudi and Japanese companies. In keeping with Aliyev’s balanced foreign policy, Russia’s Lukoil company was included in the project. This production-sharing agreement on the Azeri-Chirag-Guneshli oil fields successfully established the foundation for using hydrocarbon revenues to develop the Azerbaijani economy.

Aliyev’s son Ilham has held power since the elder Aliyev’s death in 2003, after controversial changes to the constitution allowed Ilham to accede to the position of president from his post as prime minister. Presidential term limits were abolished altogether in 2009. Currently, in the Milli Majlis, the 125-member parliament, 70 of the legislators belong to the president’s New Azerbaijan Party, with much of the media also under the influence of the presidential administration. Meanwhile, Azerbaijan’s beleaguered political opposition is small and divided, and the two main opposition parties, Musavat and the Popular Front, have no representation in parliament.

Azerbaijan’s unresolved conflict with Armenia over the Nagorno-Karabakh region, which dates back to independence, remains a major driver of Baku’s — and the region’s — international relations. The May 1994 cease-fire with Armenia left 14 percent of Azerbaijan’s territory under Armenian occupation and some 700,000 internally displaced Azerbaijanis with unresolved status. Their presence has meant that even Azerbaijan’s strong president cannot make major territorial concessions without risking serious domestic political costs. Armenia also physically separates Azerbaijan from its exclave of Nakhchivan. In the ongoing standoff between the two neighboring states, Armenia is supported by Iran and Russia, while Azerbaijan enjoys backing from Turkey, Georgia and Israel.

Although Azerbaijani officials have emphasized they would like to settle their territorial disputes with Armenia through peaceful means, they have indicated that they cannot accept Armenian occupation of Nagorno-Karabakh and neighboring lands indefinitely. The 2008 Georgia War shows how these supposedly “frozen conflicts” in the former Soviet Union can abruptly thaw and explode, highlighting the danger represented by the current impasse over Nagorno-Karabakh.

In addition to its conflict with Armenia, Azerbaijan faces threats from Iran and disputes over the legal status of the Caspian Sea. Although Azerbaijan shares extensive historical, ethnic and cultural ties with Iran, since 1991 these connections have proved to be trouble for the two countries’ relations. Iran is home to a large Azeri population, and Azerbaijan’s independence rekindled Tehran’s historical fears about separatist and independence movements there. Azerbaijan’s strongly secular government, its general orientation toward the West and, at times, its energy and military policies have further aroused Iranian hostility. For example, Baku has in the past bowed to pressure from the United States to exclude Iran from proposed pipelines. As one of many forms of retaliation, Iran has joined with Russia in refusing to confirm the legality of proposed trans-Caspian pipelines to transport oil and gas through Azerbaijan to Europe and the Mediterranean.

These disputes reflect the major role played by pipeline politics in shaping Azerbaijan’s approach to international relations, with energy revenue constituting a significant portion of Azerbaijan’s GDP. An estimated 30 trillion cubic feet of proven gas reserves and 7 billion barrels of proven oil reserves have given the Azerbaijani government a powerful source of revenue and diplomatic influence. Despite Azerbaijan’s challenging security environment, the country’s oil and gas resources have continued to attract substantial foreign investment, which has helped to boost the country’s economy. In addition to its natural energy resources, Azerbaijan also gains diplomatic leverage from its pivotal geographic position for many energy transport projects.

As a result, U.S. oil companies have invested heavily in Azerbaijan’s oil infrastructure, including the vital Baku-Tbilisi-Ceyhan (BTC) pipeline, which runs from Baku through Georgia to the Turkish port of Ceyhan. Since coming online in 2005, BTC has become Azerbaijan’s main oil-export pipeline, and Azerbaijani strategists now view the BTC as a guarantee of their country’s independence, as it makes it impossible for either Russia or Iran to control its top export commodity.

Conversely, the failure of a European Union-backed consortium to commit fully to the proposed Nabucco gas pipeline has limited the European presence in Azerbaijan’s economy. As a result, much of Azerbaijan’s growing gas exports now go to Russia.

Azerbaijan was until recently one of the world’s fastest-growing economies, with GDP having grown from $1.2 billion in 1992 to more than $54 billion today, an astounding 4,533 percent increase. The country’s natural resource riches helped Azerbaijan surmount the global financial crisis, in sharp contrast to its rival, Armenia, which is still trying to recover. Coinciding with the rise in global oil prices in 2006, growing oil production at the Azeri-Chirag-Guneshli oil field and the discovery of the large Shah Deniz gas field have provided Azerbaijan with a windfall of energy revenues. Baku has used this income to finance a major military buildup. In 2011, Azerbaijan became the second-highest defense spender in the Commonwealth of Independent States (CIS) — only Russia has a bigger defense budget among the former Soviet republics.

Azerbaijan has strived to use its energy resources and diplomatic ties with major world powers to deal with its challenging neighborhood. So far it has failed to recover the lands occupied by Armenian troops or resolve its tensions with Iran, but Baku continues to accrue economic and diplomatic influence that buffers these tensions.

Foreign Policy

A defining feature of Azerbaijan’s foreign policy since independence has been its territorial dispute with its western neighbor, Armenia. The two countries fought a brutal war in the early 1990s over the Nagorno-Karabakh region. The conflict continues to fester, as Nagorno-Karabakh’s status remains uncertain, leaving both nations locked in a dangerous face-off driven by deep-seated grievances as well as competing territorial and historical claims.

At the heart of the Nagorno-Karabakh conflict is the issue of control between ethnic Armenians and Azeris over the landlocked region. Fighting erupted in 1988 when separatist authorities in Nagorno-Karabakh, a semi-autonomous enclave located inside Azerbaijan but with a predominantly ethnic Armenian population, claimed independence from the Azerbaijan state and then sought to join Armenia. The Karabakh Armenians have been in full control of the territory and its surrounding regions since 1994, when the defeated Azerbaijanis, in political and economic disarray and with inadequate military capabilities, accepted a cease-fire that left the Armenian military occupying the entire region as well as additional surrounding Azerbaijani territory.

Over the years, various international mediators have failed to resolve the conflict. The Organization for Security and Cooperation in Europe (OSCE) established what is known as the Minsk Group more than a decade ago to encourage a negotiated resolution that would culminate in a peace conference. Co-chaired by France, Russia and the United States, the group also includes Belarus, Germany, Italy, Sweden, Finland and Turkey, as well as Armenia, Azerbaijan and, on a rotating basis, the OSCE Troika.

The Basic Principles for a Peaceful Settlement of the Nagorno-Karabakh conflict, known as the Madrid principles, were presented to Armenia and Azerbaijan by the foreign ministers of France and Russia and the U.S. assistant secretary of state in the Spanish capital in November 2007. The document envisages a stage-by-stage resolution of the conflict, starting with the gradual liberation of parts of Azerbaijani territory bordering Nagorno-Karabakh that were occupied by Karabakh Armenian forces during the 1991-1994 war. In return, Nagorno-Karabakh would retain a corridor to Armenia and be able to determine its final status in a future referendum.

The pro-Armenian separatists in Nagorno-Karabakh insist that the region be recognized either as an independent entity or as part of Armenia. The Azerbaijani authorities maintain that Nagorno-Karabakh remains a part of Azerbaijan and must be recognized as such. They also demand that Armenian forces withdraw from surrounding occupied regions, and that the hundreds of thousands of ethnic Azeris who fled Nagorno-Karabakh and the surrounding areas during the fighting be allowed to return.

Russia’s pre-eminent role in the South Caucasus has also strongly shaped Azerbaijan’s strategic posture, with the Azerbaijani government seeking to develop good ties with the West without overly antagonizing Russia. Strong economic and social ties between the two countries’ populations have also helped cushion the sometimes tense political ties between the two governments.

Russia is Azerbaijan’s sixth-largest trade partner, with annual bilateral trade approaching $500 million. Azerbaijan has recently become a major natural gas exporter to Russia following an agreement signed in 2009 between the State Oil Company of Azerbaijan (SOCAR) and Gazprom, Russia’s leading energy conglomerate. In 2010, for the first time, post-Soviet Azerbaijan exported some 0.8 billion cubic meters of gas to Russia. Last year, gas exports to Russia rose to 1.5 billion cubic meters a year. In January of this year, the two sides signed an agreement to double gas purchases to 3 billion cubic meters per year, allowing Russia to surpass Georgia as Azerbaijan’s second-largest natural gas customer, after Turkey.

Unlike their Western counterparts, Russian officials do not press Baku to improve its human rights policies. But political-military relations have been strained due to Moscow’s closer ties with Armenia as well as Baku’s suspicions that the Kremlin wants to see the Nagorno-Karabakh conflict continue indefinitely as a means of ensuring Russia’s continued pre-eminence in the region through arms sales and diplomatic influence. A major factor constraining Azerbaijan’s military options regarding Nagorno-Karabakh is the possibility of Russian military intervention on Armenia’s behalf.

Another regional challenge for Baku is its tense relations with Tehran. Azerbaijan has suffered from Iranian threats since it gained independence in 1991, but these have sharply escalated in recent months. A large number of ethnic Azeris reside in northern Iran, also known as “Southern Azerbaijan,” constituting one of Iran’s largest ethnic groups. The region’s population of around 17 million is significantly more religious than the secular population of Azerbaijan. Given these cultural differences, and the fact that Azerbaijan’s current population is only 9 million, the Azerbaijani government has little interest in reunifying the Azeri nation. Nevertheless, the Iranian government is engaged in an active effort to curtail Azerbaijan’s influence in the region, such as by banning education in the Azeri language.

As a result of its deepening ties with Israel, most clearly illustrated by a $1.6 billion arms deal signed in February, Azerbaijan has also found itself caught in the middle of Iran and Israel’s escalating cold war. Tehran recently recalled the Iranian ambassador to Azerbaijan because of a visit to Baku by the Israeli president and also allegedly tried to orchestrate the assassination of the Israeli ambassador to Azerbaijan. Iran further claims that Azerbaijan has served as a transit route for Mossad agents to assassinate several Iranian nuclear scientists, and in August 2012 began requiring that Azerbaijanis acquire a visa to enter Iran.

Recent Iranian provocations toward Azerbaijan have ranged from flying a warplane through Azerbaijani airspace to threatening strikes against Azerbaijan in the event it allowed the U.S. to use Azerbaijani territory in an attack on Iran. The Azerbaijani authorities have responded by arresting a number of alleged Iranian spies over the past year, while also conducting joint military exercises with Turkish forces in the aftermath of the violation of its airspace, which appears to have deterred further Iranian military incursions.

Azerbaijani officials have argued that the Israeli arms purchase was directed against Armenia not Iran, and that they would never allow foreign governments to use their territory to launch strikes against Iran. Moreover, Azerbaijan is unlikely to openly support an Israeli strike on Iran since it would be vulnerable to a range of Iranian retaliatory measures. Even so, in addition to drones, air defense systems and a missile defense radar, Israel is also providing Azerbaijan with Gabriel anti-ship missiles. Given that Armenia does not have a navy, these weapons are more likely intended for contingency plans against Iranian warships in the Caspian, where Azerbaijan and Iran have a disputed maritime boundary and also disagree over the legality of trans-Caspian energy pipelines.

In addition to tensions with Tehran in the Caspian, Azerbaijan also faces competing Caspian claims from Turkmenistan. Baku and Ashgabat have wrestled over ownership of three Caspian oilfields ever since the collapse of the Soviet Union. Two of the three fields are now among Azerbaijan’s energy gems: the Azeri field (claimed by Turkmenistan as Omar) and the Chirag field (claimed by Turkmenistan as Osman), with a total of 620 million tons in oil reserves, both developed by a BP-led consortium. The third disputed field, the Kyapaz field controlled by Turkmenistan and claimed by Baku as Serdar, has about 50 million tons of oil reserves and is still undeveloped.

Perhaps Azerbaijan’s closest regional partner is Turkey, not surprising given that the Azeris are a Turkic people. The two countries share cultural, religious and ethnic ties, and are frequently described as “one nationality and two governments.” In December 2010, Azerbaijan and Turkey signed a mutual defense agreement, which states that the two countries will support each other “using all possibilities” in the case of a military attack or “aggression” against the other. However, it does not allow Turkey, a NATO member, to establish military bases on Azerbaijan’s territory. Furthermore, Turkey is not required to respond immediately to military aggression against Azerbaijan, but only after “additional consultations.” Even so, this bilateral accord is especially important given Azerbaijan’s exclusion from both NATO and the Moscow-led Collective Security Treaty Organization (CSTO), which includes Armenia as well as other former Soviet states.

Turkey and Azerbaijan are further bound by extremely strong economic ties. The two countries are both attractive emerging markets, and Turkey, an EU member candidate, provides Western Europe with a way to access to Azerbaijan’s coveted energy resources while circumventing Russia’s pipeline networks. The already existing BTC pipeline that runs from Azerbaijan to Europe, bypassing Russia and Armenia, has transported more than 1 billion barrels of oil to Europe since it was completed in 2005. In June 2012, Turkish Prime Minister Recep Tayyip Erdogan and Aliyev signed an agreement to build a $7 billion Trans-Anatolian Natural Gas Pipeline (TANAP) that is projected to bring 10 billion cubic meters of Azerbaijani gas to European markets starting in 2018. Meanwhile, by 2017, the Azerbaijani national oil company SOCAR will have about $17 billion worth of investments in Turkey’s economy, making it the single largest foreign direct investor in the Turkish market.

The most serious source of tension between Azerbaijan and Turkey in recent years has been Turkish efforts to reconcile with Armenia. In October 2009, Armenia and Turkey signed protocols for reopening their border and eliminating other tensions between the two countries, the first major step they had taken toward improving ties in the previous 16 years. However, Azerbaijani threats to curtail gas shipments to Turkey along with lobbying by Azerbaijani backers in Turkey have led the Turkish parliament to condition ratification of the protocol on a resolution of the Nagorno-Karabakh conflict.

European engagement with Azerbaijan is largely driven by questions of energy security, with the European Union eager to tap into Azerbaijan’s energy resources, despite reservations about Baku’s record on human rights and democracy. The European Commission has already sponsored several east-west pipeline projects, the most important of these being the Nabucco pipeline. Currently, progress has stalled due to the project’s high cost and a tense political situation between Turkmenistan and Azerbaijan, but Nabucco’s supporters remain hopeful that the project can be realized.

Following Azerbaijan’s post-Soviet independence, the U.S. government and American companies were eager to develop Azerbaijan’s oil and gas fields through foreign direct investment. The U.S. government also saw Azerbaijan as an important ally in its efforts to build the Baku-Tbilisi-Ceyhan pipeline. Nonetheless, in 1992, the United States Congress banned direct aid to the government of Azerbaijan as a response to the Azerbaijani blockade during the Nagorno-Karabakh War. Azerbaijan viewed this as unfair legislation, given that Armenia had seized and occupied portions of Azerbaijani territory.

It was only in 2002 that Congress authorized the president to waive the prohibitions against direct U.S. military aid to Azerbaijan on national security grounds. The move was a response to Azerbaijan’s support in the war on terror following the Sept. 11 attacks. Azerbaijan was among the first countries to offer the United States unconditional support in its war against terrorism, opening its airspace to the U.S.-led Operation Enduring Freedom in Afghanistan and providing landing and refueling support for U.S. military transports to Afghanistan since then. Azerbaijan was also the first Muslim nation to send its troops to serve with U.S. forces in Iraq. The United States has subsequently sold Azerbaijan surveillance and border security equipment under the national security waiver to the ban against military aid.

Nevertheless, the ban on direct aid remains a serious obstacle in relations between the two countries, especially from the Azerbaijani perspective, as Baku objects to being discriminated against compared with Armenia. Azerbaijan does not believe temporary waivers of the ban are sufficient, as it leaves open the possibility that aid can be cut off in the future. In the meantime, U.S.-Azerbaijan defense cooperation remains mostly confined to military training.

Since the early 1990s, Azerbaijan has maintained membership in a wide range of international organizations, including the United Nations, the Black Sea Economic Cooperation Organization, the European Bank for Reconstruction and Development, the Organization of the Islamic Conference, the International Monetary Fund and the OSCE, as well as NATO’s Euro-Atlantic Partnership Council and its Partnership for Peace program. Most recently, Azerbaijan joined the Non-Aligned Movement in May 2011 to garner support in its confrontation with Armenia.

Azerbaijan has consistently sought to balance its foreign policy, while refraining from committing fully to any one country or organization. Indeed, in some instances, Azerbaijan has even sought to cooperate with multiple partners simply to remind its interlocutors that Azerbaijan will not cater to any one country’s demands and does not want to be beholden to any one state or organization. This strategy will continue to shape Azerbaijan’s foreign policy decisions in the future.

Defense Policy

In June 2010, the Azerbaijani Parliament approved a military doctrine that identified the major threats facing the country as Armenia’s occupation of Nagorno-Karabakh and surrounding buffer areas, regional military imbalances, extremist religious movements and claims of neighboring states on Azerbaijan’s territory. The doctrine affirms that Azerbaijan will not start a military operation against any country unless Azerbaijan is the victim of aggression, but it also affirms Azerbaijan’s right to use all necessary means to liberate its occupied territories. Although the doctrine characterizes Armenia as an enemy, it did not list any state as an ally. Both Georgia and especially Turkey have close ties and mutual military and economic commitments with Azerbaijan, but not a formal military alliance.

The doctrine also does not mention Azerbaijan’s desire to integrate into NATO, despite Azerbaijan having worked consistently with the alliance for the past two decades to achieve greater integration with the Euro-Atlantic community and to modernize its armed forces. Azerbaijan joined NATO’s Partnership for Peace program in 1994, which laid the foundation for future cooperation. Since then, Azerbaijan has contributed troops and supplies to NATO operations in Kosovo and Afghanistan, and it has prepared multiple Individual Partnership Action Plans. About a third of all supplies for the International Security Assistance Force (ISAF) in Afghanistan are now transported through Azerbaijan, which is a critical stopover point for ISAF troops as well. Azerbaijan also currently has almost 100 of its own soldiers deployed in Afghanistan.

But NATO’s failure to intervene to prevent Russia’s occupation of Georgian territory in 2008 served as a reminder that the geography of the South Caucasus limits the possibilities for Western military support. Azerbaijan has since stated it has no plans to join NATO, a stance that seeks to avoid alienating Moscow while also avoiding NATO’s requirements for civilian control of the military, democratic oversight and other membership obstacles.

This is no coincidence, as Azerbaijan has consistently suffered from poor civil-military relations. The military overthrew the country’s second president, and the current political leaders see another military coup as a potential threat. For this reason, political and familial connections can influence who is appointed to the most senior military positions.

Despite Azerbaijan’s exclusion from any multinational military alliance, the extraordinarily rapid growth of its economy has allowed the country to finance a sustained military buildup. Defense spending rose from $135 million in 2003 to $3.12 billion in 2011. Azerbaijan’s current military budget, which constitutes one-fifth of the national budget, now stands at $4.4 billion, about 6.2 percent of GDP and a 45 percent increase from 2010. This figure exceeds Armenia’s entire national budget, which in 2011 amounted to only $2.8 billion, with $386 million, or 4.1 percent of GDP, earmarked for defense.

Azerbaijan has used much of this defense spending to make large-scale weapons purchases, with its foreign military shopping spree encompassing many sources, including Ukraine, Belarus, Israel, Russia, Turkey and South Africa. As noted, Azerbaijan has developed a deep military partnership with Israel in recent years, covering many defensive and offensive weapons systems. Its $1.6 billion arms deal with Israel is Azerbaijan’s largest single arms purchase and includes UAVs, anti-aircraft and missile defense systems. Traditional ally Turkey also provides weapons and other military assistance.

Azerbaijan’s main goal for now is to modernize its military, which hitherto has relied heavily on outdated Soviet equipment. Between 2005 and 2010, Azerbaijan was second only to Algeria in purchases of T-72 tanks from Russia, Ukraine and Belarus. Azerbaijan also purchased missile and artillery pieces from Ukraine, anti-tank guns from Belarus and several S-300 anti-aircraft missile systems from Russia.

Over time, Azerbaijan hopes to reduce its dependence on foreign military supplies and technologies by developing a national defense industry, an effort that is led by the Ministry of Defense Industry, created in 2005. In May 2011, SOCAR President Rovnag Abdullayev announced that Azerbaijan would begin producing warships in 2013, and a shipyard for this purpose is already under construction in Baku.

Azerbaijani leaders have repeatedly affirmed that Azerbaijan is in a position to seize the territories disputed with Armenia if war became necessary. Nonetheless, it is not certain that Azerbaijan would win a future war with Armenia. On paper, Azerbaijan has a large military, consisting of 67,000 active duty members and about 300,000 reserve personnel. In contrast, Armenia has less than 50,000 troops. The Azerbaijani military’s major weapons systems include 339 tanks (95 T-55s and 244 T-72s), 468 armored combat vehicles (111 AIFVs and 357 APCs), 458 artillery (including Smerch rocket launchers and Tochka tactical missiles), 187 armored combat vehicles, 41 combat aircraft, 35 helicopters and S-75, S-125/S-200, and S-300 air defense missiles. But a recent European assessment (.pdf) found Armenia’s military better organized and more ready to fight than Azerbaijan’s. Armenian forces also have the advantage of holding the territory in dispute. Through bilateral and CSTO arrangements, Armenia can also purchase military equipment from Russia at discounted rates.

Finally, though Armenia’s army is smaller than Azerbaijan’s, its ranks are bolstered by about 3,000 Russian-commanded troops on its territory, and Russia could easily send additional troops to Armenia in a crisis. In August 2012, Dmitri Medvedev, then president of Russia, signed an agreement with Armenian President Serzh Sargsyan extending the Russian military’s lease on its Gyumri base in Armenia until 2044. Clearly, Armenia sees Russia’s military presence as a strong deterrent to Azerbaijani aggression, especially in light of the Georgia War, where Russian “peacekeeping” forces in Georgia’s breakaway region of South Ossetia intervened to defend the separatists against the Georgian government.

The military balance seems even less favorable for Azerbaijan regarding its various disputes in the Caspian. Azerbaijan has traditionally concentrated on its land capabilities due to the Nagorno-Karabakh dispute. Of the 67,000 active duty troops in the country’s armed forces, only 2,500 belong to the navy and 7,900 to the air force. But since a 2008 maritime clash with Turkmenistan, Azerbaijan has devoted considerable resources to a naval buildup and dual-use maritime facilities to protect its Caspian oil fields. The navy now has 39 warships, the second-largest fleet in the Caspian after that of Russia, and has engaged in increasingly sophisticated naval exercises.

The United States has also been seeking to build up Azerbaijan’s maritime defense and surveillance capabilities. In 2005, Azerbaijan began participating in the U.S. European Command’s Caspian Guard Initiative (CGI), an effort to coordinate U.S. activities with Azerbaijan and Kazakhstan in countering terrorism, nuclear proliferation and drug and human trafficking. Through the CGI, the Azerbaijani navy has received training in maritime special operations, WMD detection, communication, rapid response, border control and naval infrastructure.

Despite Azerbaijan’s military buildup, various constraints limit Baku’s ability to fully exploit its military advantages. These include uncertainties regarding the quality of Azerbaijan’s forces, its lack of formal military allies and the daunting prospect that Iran or Russia — or both countries — could intervene on Armenia’s behalf in the event of an attempt by Azerbaijan to retake its occupied lands by force.

Strategic Priorities

Azerbaijan is developing a new economic stake as well as a form of soft power influence through its growing foreign investments. If in the 1990s Azerbaijan’s economic foreign policy focused on attracting foreign direct investment to the country, now Azerbaijan is becoming a major foreign investor in neighboring countries. For example, in 2011, SOCAR became the largest foreign investor in Georgia. Azerbaijan also provided Georgia with electricity and gas during its war with Russia in 2008, leading Georgian President Mikhail Saakashvili to declare in 2011 that the enemy of Azerbaijan is the enemy of Georgia.

Azerbaijan also uses cultural diplomacy to reinforce its relations with European countries, with Azerbaijani charitable organizations having donated significant funding for the restoration of various historical sites in Europe. For example, the Heydar Aliyev Foundation has funded a project to restore France’s Versailles Palace and the Notre Dame Cathedral in Strasbourg. Azerbaijan has also strengthened its efforts to boost relations with the United States by mobilizing the large number of Azeris living there. But so far the Armenian diaspora in the United States and Europe has been able to blunt these efforts sufficiently to prevent any major change in current Western policies that tend to favor Armenia in its conflict with Azerbaijan.

Meanwhile, the Azerbaijani government is seeking to diversify its energy-based economy. Although Azerbaijan’s natural gas reserves remain plentiful, the country’s oil production is peaking and is expected to decline in the near future. This is a cause for concern, as the national budget has become increasingly dependent on oil revenues, with about three-quarters of the 2012 budget coming from the State Oil Fund of Azerbaijan (SOFAZ) and taxes on oil. Baku is now trying to strengthen Azerbaijan’s status as a transit center beyond energy, most evidently by the new Baku-Tbilisi-Kars railway. The Azerbaijani government is also aggressively investing in a variety of non-energy sectors in an attempt to diversify its economy.

Another concern is Azerbaijan’s high levels of corruption, with Transparency International ranking Azerbaijan 143th out of 180 countries in its 2011 corruption list. The EU and the United States are pressing Baku to address these problems, which could cramp its future development.

A related strategic priority for Azerbaijan is to develop its littoral resources in the Caspian Sea, which contains the world’s third-largest reserves of oil and natural gas as well as considerable quantities of sturgeon and other fish. But major projects are impeded by the ongoing disagreements among the littoral states over where to delineate their boundaries and whether to allow underwater Caspian energy pipelines. Russia and Iran argue that all the littoral countries must approve construction of each energy pipeline that would transit any part of the Caspian. Their stated reason for their stance is that all five countries could suffer from any environmental damage to the Caspian Sea caused by future pipelines. But this position also grants them veto rights over east-west energy pipelines that would bypass their territory.

Azerbaijan, like the other Muslim-majority former Soviet republics, has been surprisingly immune to the effects of the Arab Spring. Human rights advocates argue that the current state of enforced political and social stability in Azerbaijan may not last for long. Despite state-enforced secularism, including a controversial ban on headscarves, religious sentiment in the country is growing, especially among the youth. Since the government stamps out the legitimate nonviolent opposition, alienated Azerbaijanis may join the militant religious opposition, which enjoys some Iranian support and could present the most serious threat to Azerbaijan’s political stability.

Most importantly, Azerbaijan’s security will remain precarious until the Nagorno-Karabakh conflict is resolved. The international outrage that followed Aliyev’s recent pardon of an Azerbaijani officer who had killed an Armenian when they were both on a training mission in Hungary shows how raw emotions on both sides remain. Azerbaijan and Armenia have engaged in a costly arms race, while employing bellicose rhetoric and expressing their obvious impatience with the Minsk Group talks. However, a recurrence of conflict in the region would be disastrous, completely destabilizing the South Caucasus and most likely beyond.

Richard Weitz is a senior fellow at the Hudson Institute and a World Politics Review senior editor. His weekly WPR column, Global Insights, appears every Tuesday.

More World Politics Review