Publication: Eurasia Daily Monitor Volume: 5 Issue: 209

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.