BACKGROUND: Throughout the duration of the Armenian-Azerbaijani conflict over Nagorno-Karabakh, the Minsk group of the OSCE, created in 1992 and responsible for finding a solution to the 14-year old conflict, has been pressuring both sides to enter into economic cooperation. Perceiving the war as a conflict of economic interests between Azerbaijan and Armenia, as well as of many other countries, such as the U.S., Russia, Iran, Turkey and EU, the negotiators attempted to solve the problem by promising economic incentives to the warring sides, hoping that economic benefits will compensate the interests of these sides. This pressure increased even further after 1998, when all the three peace plans had been rejected either by Armenia or Azerbaijan, citing bias toward the other side. Several influential western political organizations, NGOs and government officials have emphasized economic cooperation between Azerbaijan and Armenia as a prerequisite for peace between the two countries. Economic concerns were seen by outsiders as central to the conflict, as in the summer of 2000, when negotiators started talking about monetary incentives to resolve the conflict and promised economic aid if the two sides came to compromises. This idea further developed in the following spring, when the New York Times reported that relief agencies were already putting together an aid package that would be part of a future peace treaty, and would presumably act as an incentive for the same. The OSCE itself has at numerous occasions called upon Azerbaijan to open its trade and communications links with Armenia. Other organizations joined the bandwagon. The Brussels-based Center for European Policy Studies proposed a "Stability Pact for the South Caucasus", arguing that "economic cooperation and, eventually, integration is the only way out of the current impasse", described as a "low-welfare, deadlocked equilibrium." Responding to these pressures and calls, the Azerbaijani government has always rejected the idea of economic cooperation until the seven regions, contiguous to Nagorno-Karabakh, are freed from occupation. In a way, Azerbaijan has considered the opening of trade and communication links with Armenia as its major bargaining chip, hoping that the economic stagnation in the country would force the Armenian leadership to compromise. Last week's visit of the Minsk group co-chairs to the region was not only remembered by the demonstration of the Karabakh Liberation Organization in front of the OSCE's office in Baku, where protestors tried to burn the OSCE's flag, or by the questioning of the word "occupation" (regarding the occupied territories) by Russian Deputy Foreign Minister Vyacheslav Trubnikov, reportedly in a drunken condition, but more importantly by the collapse of the concept of "economic cooperation" as a solution to the conflict. When asked about the details of his most recent meeting with Armenian President Kocharian at Sadarak on August 14, 2002 President Aliyev admitted that he had proposed to the Armenian side the opening of trade and communication links between the two countries in exchange for the Armenian liberation of the four Azerbaijani regions to the south of Nagorno-Karabakh, along the Iranian border. (Fizuli, Zangelan, Jabrail and Gubadli). The Armenian side, according to the President Aliyev, rejected the offer. "Well, then let's close this topic for good", President Aliyev told the Minsk Group co-chairs.

IMPLICATIONS: The incident, although only a minor part of the talks, has shown several trends in the Nagorno-Karabakh peace process. Foremost, Armenians have put an end to suggestions that they could be bought by economic incentives. The refusal of President Kocharian to liberate even a portion of the occupied territories in exchange of full resumption of economic cooperation shows that Armenians place economic benefits at the bottom of their priority list, and remain unwilling to accept compromises or make concessions. Continuing economic hardship does not seem to alter this view. The Armenian economy, although still lagging behind the Azerbaijani one, seems to have successfully shifted its dependence on transport links passing through Azerbaijan to links passing through Iran and Georgia. The population does not experience as much gas and electricity problems as in the beginning of 1990s, and the overall economy has been on the rise since the mid-1990s. Thus, economic incentives in the solution of the conflict are becoming less and less attractive for them. At the same time, the Azerbaijani side seems not only to be losing its major, and perhaps, only trump card, but also to be softening its demands. Whereas only several years ago President Aliyev was demanding the complete liberation of Nagorno-Karabakh in exchange for economic cooperation, his most recent offer shows that he would accept much less than that. This incident severely narrows the options for further peace talks between the two countries and raises the possibility of another war. Azerbaijan's economy is on the rise and the army significantly strengthened, and frustration among the population and politicians over the peace process is becoming intolerable. The opening day of the fall session of Parliament on September 30 was unusually critical of the peace process. Several deputies from the opposition parties called for the end of negotiations and resumption of war. President Aliyev himself stressed these tendencies during the meeting with the co-chairs, saying that "the Azerbaijani population is coming to the view that we have to recover our land ourselves by whatever means necessary". Seeing the gradual, but steady integration of Nagorno-Karabakh into Armenia and the ever lessening value of its bargaining chip, the Azerbaijani side might risk to "take it all or loose it for good".

CONCLUSIONS: The resumption of war will undoubtedly damage the fragile economic and social developments and political stability of both countries. This, in turn, will decrease foreign investment and economic aid and put the completion of Baku-Ceyhan oil pipeline at risk. Yet the deadlock over the peace process and the gradual loss of its major bargaining points might force the Azerbaijani leadership to surrender to domestic pressure. Thus international mediators will need shift their focus from economic factors to more important issues. Attempts to create a "mini European Union" in the Caucasus failed due to the high level of historic antagonism and lack of attention to emotional issues, such as the political status of Nagorno-Karabakh, and in the case of Azerbaijan, the liberation of occupied territories and the status of Shusha.

AUTHOR BIO: Fariz Ismailzade is a freelance writer on Caucasus geopolitics and economics based in Baku. He holds a master's degree from Washington University in St. Louis and currently works for the International Republican Institute's Baku office and Cornell Caspian Consulting. The views expressed in this article are solely of his own and do not represent the views of these organizations.

Copyright 2001 The Central Asia-Caucasus Analyst. All rights reserved.