By John C. K. Daly

Eurasia Daily Monitor le_id=2373496
Oct 31 2008

Last August the long-frozen conflict between Georgia and Russia
suddenly defrosted, erupting in a bitter, five-day military clash. Now
a sudden rise in defense spending by Azerbaijan may be a seismic
precursor to a possible thawing of a second unresolved Caucasian
conflict, the standoff between Azerbaijan and Armenia.

After a careful study of defense spending, 525-IA Gazeta concluded that
next year Azerbaijan's military budget would increase by 343 million
manats ($424 million) over its 2008 level, a 24.8 percent increase
in a single year (Informatsionnoe agentstvo Regnum, October 28).

Nor is this a one-time occurrence. Surging on a sea of rising
oil revenue, next year's increase is modest compared to previous
years. Baku has poured a substantial amount of its new-found
petrodollars into its defense budget, which has increased by more than
1,000 percent over the past five years, an investment of $4.5 billion
(ANS-PRESS, October 29). The massive increase in military spending is
raising regional concerns that Azeri President Ilham Aliyev, fresh
from his victory in the presidential elections earlier this month,
will be in an enhanced position militarily to recover territories lost
during the harsh 1988-1994 war over the disputed Karabakh enclave,
previously administered by Baku.

By May of 1994, when Azerbaijan and Armenia signed a ceasefire
ending active hostilities, thousands were dead, with hundreds of
thousands of refugees on both sides. Most galling for Azerbaijan,
Armenian Armed Forces were left occupying swaths of Azeri territory,
including Karabakh and seven neighboring districts.

As dark as 1994 looked in military terms, thanks to the efforts of
the current president's father the year would provide the basis for
the dynamic surge of the Azeri economy over the next decade and a
half. The year that ceasefire was signed Azerbaijan's then-President
Gaidar Aliyev signed the "Contract of the Century," a $7.4 billion
production-sharing agreement with Western oil companies to develop
Azerbaijan's Caspian Azeri-Chirag-Guneshli fields. Three years later
the Baku-Novorossiysk pipeline opened to export Azeri oil from the
Black Sea to Western markets, but initial throughput was limited to
40,000 barrels per day (bpd). In 1999 Baku's export options broadened
with the opening of the $600 million, 515-mile-long Baku-Supsa 100,000
bpd pipeline.

In May 2006, when the $3.6 billion, 1,092-mile-long million bpd
Baku-Tbilisi-Ceyhan (BTC) pipeline came online, Azerbaijan was able
to cut itself adrift from Russia's pipeline monopoly. The BTC was
the culmination of Washington's dream of a Caspian export route that
bypassed both Russia and Iran.

The surge in oil revenues is fueling Azerbaijan's $21 billion economy,
the fastest growing economy in the world, currently expanding at
more than triple the rate of China's. Last year the International
Monetary Fund pegged its growth rate at 29 percent, while the CIA
estimated that Azerbaijan's GDP grew by 31 percent, more than twice
Armenia's 13.7 percent growth rate. Since 2004 Azerbaijan's state
budget has quadrupled and its economic planners have won praise from
the international financial community for establishing a State Oil
Fund to invest a large portion of oil revenues for the benefit of
future generations (UPI, June 12). Now a significant portion of the
revenue is being diverted to the military.

Aliyev has not hidden his consideration of possibly using his new
military might to redress the country's territorial losses. On June
26 a military parade commemorating the 90th anniversary of the Armed
Forces of Azerbaijan was held in Baku's Azadliq Square. Addressing
the crowd, Aliyev discussed the military spending increases and said,
"Some of the international community is concerned about this issue. But
I want to point out that the costs have increased not only in the
military but also in other areas. In five years Azerbaijan's (state)
budget has (also) grown by 10 times." After placing the military
expenditures in context he added, and not as an afterthought, "Also, do
not forget that the war is not over, only its first phase is completed"
(Ekho, No. 115(1837), June 28). The proposed military spending,
while onerous, would not unduly drain the Azeri economy. On September
4 the State Oil Fund of the Azerbaijani Republic (SOFAZ) announced
that its funds had reached $10.21 billion (

Those seeking to read inevitably bellicose intentions into the buildup
of Azeri military capabilities may be missing the point, however. At
the parade Aliyev directly addressed the military's usefulness in
diplomacy by observing, "A mighty army increases its capacity to
influence negotiations. We want to restore justice!"

Aliyev again addressed the issue of the country's military expenditures
on October 14, when he said, "Living in the midst of war, we must first
strengthen our military potential... This is our sovereign right. In
doing so, Azerbaijan will continue its policy of isolating Armenia
until it ends its occupation of Azerbaijani lands" (Fineko,,
October 14). Putting the military expenditures into perspective,
Aliyev later noted, "$44 billion has been invested in the economy of
Azerbaijan in the past five years, which accounts for 77 percent of
the overall amount of investment the republic has received since it
gained independence. Azerbaijan is attractive for foreign investors"
(Interfax, October 24).

It is this last statement that is perhaps the key to Baku's policy. The
August five-day conflict between Russia and Georgia was very costly to
Azerbaijan; while it suffered no physical damage within its borders,
the explosion on the BTC pipeline two days before hostilities broke
out and the subsequent closure of Baku-Supsa by its operator BP saw
Azerbaijan lose more than $1 billion in oil revenue (UPI, October
15). For Azerbaijan, military action against Armenia could quickly
entail far higher losses. But the military saber-rattling and the
increased defense spending could actually be intended to stimulate
European consuming nations to redouble their efforts to find a
diplomatic resolution to the impasse.

Baku can also look forward to a new administration in Washington
amenable to fresh diplomatic initiatives. In a largely forgotten
American diplomatic initiative, Washington's interest in resolving the
stalemate in April 2001 led the new administration of U.S. President
George W. Bush to convene a diplomatic summit in Key West under
OSCE auspices between Armenian President Robert Kocharyan and Azeri
President Gaidar Aliyev; but the talks went nowhere. Change, however,
is in the air; and Azeri oil is a far greater player in the global
economy than it was seven years ago.

In attempting to resolve his country's 13 year-old dispute with
Armenia, Aliyev seems to have taken a leaf out of the book of John
McCain's hero, Theodore Roosevelt, speaking softly while acquiring a
bigger stick. If he finally decides to use it, then he has already had
a foretaste of the shock that will accompany the loss of Azerbaijan's
oil revenues.