Azerbaijan

As negotiations between Azerbaijan and Armenia to resolve the conflict over Nagorno-Karabakh stall, the Azerbaijan government has improved living conditions for the internally displaced (IDPs), though return to the occupied territories remains by far the preferred solution.

Escalating front-line clashes, a spiralling arms race, vitriolic rhetoric and a virtual breakdown in peace talks increase the chance Armenia and Azerbaijan will go back to war over Nagorno-Karabakh, with devastating regional consequences.

If it continues to ignore the need for economic and political reform, Azerbaijan will squander an historic opportunity to use the country’s energy resources to build a more durable state system and a prosperous nation.

A preliminary breakthrough in the two-decades-old Nagorno-Karabakh conflict – a framework agreement on basic principles – may be within reach.

Azerbaijan wants to create a strong army to regain Nagorno-Karabakh and seven adjacent districts, either by improving its negotiating leverage with Armenia or going back to war. It has exponentially increased its military budget, though it has not so far gained clear superiority over Armenian forces. If the new military is to be not only stronger but also better governed, however, it needs deep reforms to make it less corrupt and personality driven, more transparent and better directed.

Claims that major terrorist acts were foiled in Azerbaijan at the end of 2007 have prompted discussion about the extent to which Islamic extremism is a genuine threat in the oil-rich land.

Armenia and Azerbaijan have failed to resolve the Nagorno-Karabakh conflict, even though the framework for a fair settlement has been on the table since 2005. A comprehensive peace agreement before presidential elections in both countries in 2008 is now unlikely but the two sides still can and should agree before the polls to a document on basic principles, which if necessary clearly indicates the points that are still in dispute.

Azerbaijan's elections, in which pro-government parties won an overwhelming majority, once again failed to meet international standards. The opposition cried foul, organising peaceful street demonstrations and filing court complaints. Though President Ilham Aliyev has pledged reforms, his actions remain tentative.

Settlement of the long running Nagorno-Karabakh conflict -- the most significant obstacle to stability in the South Caucasus -- remains elusive, despite more optimistic noises recently from Azerbaijan and Armenia. Eleven years after the 1994 ceasefire, burgeoning defence budgets, increasing ceasefire violations, and continuing demonisation by each side of the other side are ominous signs that time for a peace agreement is running out.

The conflict between Azerbaijan and Armenia over Nagorno-Karabakh is the most significant obstacle to peace and stability in the South Caucasus. Eleven years into a ceasefire, the parties have been unable to sign a single document bringing them closer to a settlement. Whatever is being done at the internationally mediated negotiations, at ground level resumed war appears a real possibility.