As the political and particularly the economic outlooks deteriorate in both Armenia and Azerbaijan, the two archenemies are likely to use the decades-old conflict to try to deflect attention, potentially making 2017 a particularly bloody one in the Caucasus.

Border clashes between Azerbaijan and Armenia are commonplace. The two countries have been fighting a bitter war over the breakaway region of Nagorno-Karabakh since the late 1980s, and, despite signing a ceasefire in 1994, tensions have come to a head frequently in recent years, occasionally bursting into violence. The four soldiers killed in clashes on December 29 were sadly just a few more victims on a roster of thousands of casualties of the so-called "frozen" conflict.

At the heart of the conflict is a dispute over self-determination and territorial integrity. Historically populated by ethnic Armenians, Nagorno-Karabakh was annexed to the Soviet region (oblast) of Azerbaijan in 1923. The region saw its demography change drastically in the ensuing decades, as the ratio of ethnic Azeris increased to almost a fourth of the population on the back of a campaign to "Azerify" the region orchestrated by the late Azerbaijani president and then-Azerbaijani politburo Secretary General Heydar Aliyev. 

In the last years of the Soviet Union, the region became increasingly restless and vocal in its request to be annexed to Armenia. A five-year war waged between 1989 and 1994 resulted in Russian-backed Armenia's occupation of Nagorno-Karabakh and seven surrounding territories that belonged to Azerbaijan, as well as more than 20,000 victims and a million displaced. A ceasefire signed in May 1994 ended hostilities, but not the conflict, and both countries have continued to beef up their military capabilities in the ensuing decades, as internationally mediated peace negotiations failed to make any meaningful progress.

A mountainous, landlocked and water-scarce republic in the South Caucasus, Nagorno-Karabakh traded development for political independence. While it is de facto independent - although that independence is not recognised internationally – in reality it continues to rely heavily on external aid from Armenia, the Armenian diaspora, and, to a lesser extent Russia.

Armenia has also played a heavy price for the conflict in the form of a decade-long economic blockade by Turkey and Azerbaijan in response to its occupation of Azerbaijani territories, as a result of which it remained the least developed country in the Caucasus and heavily dependent on Russia for diplomatic, commercial, developmental and military support.

2016 brought the worst flare up in tensions since 1994, leading to an Azerbaijani incursion into Nagorno-Karabakh in April that is believed to have left several hundred victims and resulted in Azerbaijan recapturing a narrow stretch of Nagorno-Karabakh. As bne IntelliNews argued at the time, the four-day April war marked a new phase in the conflict, one in which the fragile ceasefire could break down at any point as the two sides, and particularly Azerbaijan, were increasingly frustrated with the lack of progress in diplomacy.

Over the decades public opinion has become inured to conflict and antagonistic to efforts toward a peaceful settlement. The looming parliamentary elections in Armenia and an expected continuation of the economic crisis in Azerbaijan in 2017 will likely only exacerbate these tendencies.

Voting for war or peace?

For Armenia’s ruling Republican Party (HHK) the political stakes this year are extremely high. Armenians are scheduled to head to the polls on April 2 to vote in the first government that will solely hold the executive power in the state, following two and a half decades of a presidential republican system.  The HHK is expected to win the election, but has been faced with an increasing public backlash for its management of the economy and for its humiliating defeat in the April clashes.

In July 2016, an angered electorate staged mass protests in support of a fringe armed group that had seized a police station in opposition to the government, and called for President Serzh Sargsyan to step down. HHK's chairman, Sargsyan is currently serving his second and last mandate in power, and his administration has been plagued by accusations of corruption at the top and mismanagement of the economy.

In response to the protests, Sargsyan dismissed Prime Minister Hovik Abrahamyan in September, replacing him with a former executive at Russian gas giant Gazprom, Karen Karapetyan. The new head of government has embarked on a reform agenda to address the electorate's complaints about tax evasion and corruption.

As Richard Giragosian, Director of the Yerevan-based Regional Studies Centre explained in an email to bne IntelliNews, "the political ramification from the April clashes was the stark recognition that corruption is a direct threat to national security".

Giragosian believes that the conflict with Azerbaijan will play an important role in people's choice at the ballot. "Two distinct scenarios are expected in the run-up to the country's parliamentary election: first, the ruling Republican Party will most likely place a new emphasis on national security, aimed at both repairing its own damaged image in the wake of the loss of territory in the April fighting and at restoring its political posture as a strong and decisive party capable of leadership and statesmanship. [...]

“The second likely scenario will be a 'race to the bottom' by much of the country's aspiring opposition parties, more comfortable with putting forward alternative personalities rather than presenting viable policies and platforms. This will only elevate the nationalist rhetoric and once again deprive the Armenian voter of much of a choice or even a voice in the coming elections," he says.

After holding the reins of power for two decades, HHK is so dominant that a weak and fragmented opposition does not stand a fighting chance at the polls in April. Nevertheless, there are signs that the electorate is becoming tired with its governance. In October, the ruling party tied with opposition candidates in two key constituencies - the municipalities of Gyumri and Vanadzor.

Furthermore, opposition parties have moved to form coalitions ahead of the ballot, seeking to challenge HHK's grip on power and proposing more radical policies, such as a distancing from Russia.

Arms race

An added dimension to the April 2016 clashes was a growing dissatisfaction amongst Armenians with Russia for its arms sales to Azerbaijan. Oil-rich Baku has bolstered its military capabilities in recent years with purchases of $4bn worth of armament from Russia and $5bn from Israel, and Armenians perceive the Kremlin's business dealings with their enemy as treason.

"Russian Prime Minister Dmitri Medvedev only enflamed tensions when, during a visit to Armenia shortly after the April fighting, he reaffirmed Russian plans to continue to sell arms to Azerbaijan," Giragosian writes.

Because of the drop in oil and gas prices, hydrocarbon-rich Baku has seen its export revenues halve and its economy contract by 3.9% y/y in January-November 2016. The regime has been forced to cut back on public investments in construction projects and the central bank floated the manat in 2015. The currency has depreciated by more than 60% in the last two years, sending inflation skyrocketing.

In response to the growing dissatisfaction with the plunging living standards - Azerbaijan's GDP per capita more than halved in 2016 compared to 2014 - the Ilham Aliyev regime has responded with a show of force both at home, by cracking down on opposition, and in its dealings with Armenia.

Its military spending, already one of the highest in the world as measured by per capita expenditure, has dwarfed spending on other sectors of the economy, and will continue to do so this year. In 2017, defence spending will amount to a giant 9.5% of government spending, even as living standards in the country have plummeted and areas like education, healthcare and regional development continue to lag.

In December, the Azerbaijani Defence Minister Yaver Jamalov confirmed rumours that the country had reached an agreement with Israel to purchase an Iron Dome anti-missile defence system to protect its border with Nagorno-Karabakh. Experts believe will cost Baku no less than $500mn depending on how many batteries it decides to purchase. Baku's decision likely comes after Armenia purchased some $200mn worth of rocket launching systems and missiles with a Russian loan in 2016, a move that Baku contested heavily.

Military expenditure in the conflict is among the highest in the world, according to a study by the Bonn International Centre for Conversion.

Seeing how the Azerbaijani economy is expected to improve only slightly in 2017 - the government forecast 1% GDP growth, but experts from the Baku-based Centre for Economic and Social Development (CESD) believe that to be an optimistic projection - the Aliyev regime is likely to continue to resort to violence to deflect attention away from economic troubles at home this year.