OUTLOOK 2023: South Caucasus

OUTLOOK 2023: South Caucasus
Moscow’s diverted attention has opened up space for the EU and US to become more involved in the Nagorno-Karabakh dispute and in the region as a whole. / bne IntelliNews
By Robert Anderson in Prague, Cavid Aga in Baku, Mack Tubridy in Tbilisi January 19, 2023

This outlook is part of bne IntelliNews' annual series of reports looking ahead to what 2023 holds for the countries in our region. Read the full report here or download the pdf at the bottom of this article.

2023 is likely to be a crunch year in the South Caucasus, with a high risk of a renewed outbreak of fighting between Azerbaijan and Armenia, and a slight chance of a peace deal that settles the status of the ethnic Armenian enclave of Nagorno-Karabakh within Azerbaijan.

Throughout 2022 Azerbaijan cranked up the pressure on Armenia to sign a final peace treaty following the 2020 war in which it retook most of Nagorno-Karabakh. Baku seeks complete control of the enclave (without granting it any significant autonomy), while also taking over what it calls the Zangezur corridor, linking Azerbaijan across Armenian territory with its exclave of Nakhchivan. 

Baku is still occupying strategic heights on the Armenian border after its incursion in September 2022. Azerbaijani so-called environmental activists have also blocked the Lachin corridor, the only road linking Armenia and Nagorno-Karabakh, for the past month, causing severe hardship there over the winter. 

Recognising Armenia’s weakened position, Prime Minister Nicol Pashinyan has pursued improved relations with both Azerbaijan and its ally Turkey. Ankara this month ended its ban on air freight connections and has signalled that it would open the border once Yerevan reaches a peace deal with Baku.

Pashinyan had previously indicated that he was ready to do a deal that would settle Nagorno-Karabakh’s status, despite strong domestic opposition and protests from Stepanakert. However, Baku’s hardball tactics so far seemed to have been counter-productive, and Armenia has reacted to these provocations by halting the peace talks.

Russia, the traditional guarantor of Armenia’s security, has been diverted by its disastrous invasion of Ukraine and has failed to intervene to manage these disputes. 

This has created a vacuum that has been exploited by Baku and which has damaged Armenian-Russian relations. Russian peacekeepers have stood by while Azerbaijan has staged its series of provocations, leading Armenia to retaliate by cancelling military exercises by the Russian-led security pact CSTO on its territory. Yerevan has also refused to attend peace talks arranged by Moscow.

Moscow’s absence has also opened up space for the EU and US to become more involved in the dispute and in the region as a whole. Both have led talks on the conflict, while the EU has reached a deal with Baku on expanded gas deliveries, and given Georgia hope of eventual accession.

Mixed economic impact of Ukraine conflict

As well as weakening Russia’s geopolitical position in the region, President Vladimir Putin’s invasion of Ukraine has also had significant economic repercussions. A wave of Russian migrants has fled to Armenia and Georgia. These migrants have brought spending power – an estimated $2bn has been transferred to Georgian banks – and talent, notably in IT. 

Sanctions on Russia have also led some trade and financial flows to be rerouted via the South Caucasus countries, none of which have signed up to the Western embargoes, though they cannot be seen to violate them too openly.

At the same time, the fragile economies of the South Caucasus have been hit by the severe downturn of the Russian economy, on which they are still very dependent, as well as soaring energy prices and the Eurozone’s slowing growth. According to the World Bank Global Economic Prospects, released this month, growth in the region in 2023 is projected to halve to 3.3%

Hydrocarbon producer Azerbaijan has actually benefited from the high energy prices and it has also improved its geopolitical position because of Europe’s search for non-Russian oil and gas supplies. Brussels signed a deal with Baku in July to double the gas imports it buys and European Commission President Ursula von der Leyen visited Baku in August in a trip notable for the lack of criticism of President Ilham Aliyev’s dictatorship. Meanwhile, Aliyev has used his strengthened position to tighten his grip on the media and further restrict the position of political parties.

For Georgia, as for Armenia, Russia’s invasion of Ukraine in February has sharpened its economic and geopolitical dilemmas. Paradoxically the invasion has made it even more dependent on Russia. Meanwhile, the wave of Russian migrants – an estimated 60,000 to 100,000 of whom still live in the country – has sparked calls from the political opposition for visas to be imposed.

Georgia’s refusal to sign up to Western sanctions on Russia was undoubtedly a factor in its failure to be awarded EU candidate status in June, though its key failing was democratic backsliding.  

The country’s worsening international image was epitomised by the government’s tone-deaf response to the outcry over former president Mikheil Saakashvili’s deteriorating health in jail. If the opposition leader were to die in jail there would be huge international damage and potentially grave internal disruption.

Brussels has handed Tbilisi a wishlist of 12 political reforms that must be undertaken before the country can become a full candidate. The biggest challenge will be “de-oligarchisation”, restricting the influence of the country’s top business figures, notably Bidzina Ivanishvili, godfather to Georgia’s ruling Georgian Dream Party. 

A bill to supposedly achieve this has drawn sharp criticism, after lawmakers from the ruling party insisted that it will not apply to Ivanishvili. In November, the government capitulated to demands from both the opposition and Western leaders to send the draft bill to the Venice Commission for a legal opinion. How the government responds to the Council of Europe advisory body will show how serious it really is about achieving EU accession.

 

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