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A year after the agreement between Armenia, Azerbaijan and Russia: Uncertainty lingers

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Following last year’s deadly clashes between Azerbaijan and Armenia that lasted 44 days, a trilateral agreement was signed with the mediation of Russia; however, the dust has not settled yet in Karabakh. The 44-day war was a turning point not only for Azerbaijan, but also the whole region where various geopolitical interests overlap or compete. Although the agreement signed in consequence of the war was evaluated as a possible settlement of the conflict which has been a threat to regional security and development, there are still some barriers on the way to make a firm and final resolution. Unwilling to accept new realities and consider practical options for the region’s long-term prosperity, Armenia delays fulfillment of Article 4 and Article 9 of the agreement. Nationalistic appeals by Prime Minister Nikol Pashinyan and overconfidence of the Armenian government which brought the possibility of peaceful negotiations into question have become a costly trap for Armenia itself. In this respect, the role of Armenian diaspora and ambivalence dominating structures of the country are undeniable factors. Communities who salute ex-presidents for their harsher attitudes towards cooperation and establishment of a new future in the region halt and delay implementation of articles.

According to Article 4 in the trilateral agreement, the withdrawal of the Armenian armed forces should have been completed in parallel with the deployment of the Russian peacekeeping contingent. Until this day, illegal Armenian armed detachments occasionally try to commit provocations and affect the demarcation process. In addition to revengeful motives of Armenian forces, misguided activities of the Russian peacekeeping troops impose another barrier to the successful implementation of the clause. Deviating from its core mission, the peacekeepers were recorded to hold military drills and training, as well as allow entrance of vehicles carrying illegal Armenian soldiers through the Lachin corridor. Following numerous cases of shootings and provocations along the border, Azerbaijani Ministry of Defence sent an official letter of discontent, stating the need to comply with requirements, to the Russian Ministry of Defence and the Command of the Peacekeeping Forces on September 12, 2021, leaving tensions at higher levels.

By the same token, several problems are noticed in the implementation of Article 9 emphasizing the restoration of all economic and transport links in the region. Deriving from the acrimonious attitude towards Turkey and Azerbaijan and the fear of being dependent on two Turkic states, the Armenian government strives to prevent the establishment of the Zangezur corridor necessary for connecting the western regions of Azerbaijan with its Nakhchivan exclave and Turkey. Failing to adequately evaluate the importance of the corridor and transport routes for the development and security of the region, Armenia demonstrates more of an obstructing perspective. In this regard, it ignores the opportunity of leaving the blockade as proposed by Turkey and applauded by neighbouring countries after years of encountering economic difficulties.

Confrontations inside the government of Armenia and snap elections of June 20 substantially affected the implementation of clauses of the agreement which Armenians find humiliating. The negative reputation of Prime Minister Nikol Pashinyan after the defeat in the war compelled him to demonstrate a more rigorous attitude in his approach to the process to diminish risks of being overhauled by his rivals gaining popularity at the time. It is worth noting that much of the disinformation spread over the media about Azerbaijan’s advance over the borders by his main opponent Robert Kocharyan on the eve of elections was mostly popular in provinces where Pashinyan was not favored; like Zangezur (Syunik) region through which the proposed railways and roads are planned to pass through. The effect of the Armenian diaspora calling for the resignation of Pashinyan was undeniable, too.

Nevertheless, an upward trend is being noticed in the process. After the victory in June elections, Pashinyan conveyed more positive messages with regard to bringing peace in the region and stability for people. On October 15, he voiced interest in building peaceful relations and (re)opening transport routes in his speech during the meeting of the Commonwealth of Independent States, even though in June he voiced his absolute rejection of the idea. Foreign Minister of Turkey Mevlüt Çavuşoğlu also confirmed these messages and reiterated the need for practical steps. A similar approach was made by Russia, too. Recently, on 28 October, the spokesperson for the Russian Foreign Ministry Maria Zakharova stated in a briefing that Russia “would consider it correct to adhere to statements and steps that contribute to the implementation of trilateral agreements on unblocking all economic and transport ties in the South Caucasus”.

During his speech at Global Baku Forum President of Azerbaijan Ilham Aliyev reiterated Azerbaijan’s peaceful stance and intention for opening all transportation links in the region. Although back in spring he stressed the necessity of opening the Zangezur corridor regardless of Armenia’s position on the issue, changing dynamics implies possibility of a peaceful resolution. With respect to the demarcation process remaining as an unresolved issue, he emphasized that a proposal has already been made from Azerbaijan’s side to start working on the delimitation and demarcation of state borders with the recognition of the territorial integrity of both countries. Similar points were expressed by Prime Minister Pashinyan as well, sparking rumors that some achievement in this regard is expected in the anniversary of the agreement. On the other hand, the messages were to no avail, since there has been a growing number of cases of provocation during the last months; in particular, following the Victory Day celebrations on November 8 in Azerbaijan. More frequent clashes between the two sides have become a new normal in Karabakh and along the state borders.

To conclude, the failure to resolve the conflict dating back 30 years peacefully in such a geopolitically volatile and important region jeopardizes stability and economic development for the next few years. By demonstrating harsh attitude and hostile policies towards each other, both Azerbaijan and Armenia make a new round of war inevitable, hence canceling out plans for future cooperation. In this context, most will depend on Armenia’s commitment to fulfill the articles of the November 10 agreement.

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Eastern Europe

Shifting Geography of the South Caucasus

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One year since the end of the second Nagorno-Karabakh war allows us to wrap up major changes in and around the South Caucasus. Most of the changes discussed in the scholarly works so far focused on the role of Turkey and Russia. The shifting geography of the South Caucasus, however, has been disregarded.

In many ways, the war accelerated the pre-existing trends, but also initiated new developments. The first and foremost change concerns geography. The South Caucasus has been historically dominated by neighboring states. Whether it is the Sasanian and Byzantine empires in late antiquity or later Ottoman and Persian states, the region was exclusively subject to one or two powers. The idea is that the region was mostly closed to the outside, non-regional influence. The trend continued in 19th-20th centuries when the South Caucasus was exclusively dominated by Russian power. The end of the Soviet Union changed this geopolitical reality when several powers were able to penetrate the region. Yet the pace of the change was relatively slow – Russia was still able to minimize the extent to which the neighboring or non-regional countries were able to act in the South Caucasus: Turkey, Iran, US, EU, and to a certain extent, China have been influencing the region to a limited degree.

But the second Nagorno-Karabakh war accelerated this process. The South Caucasus’ borders are increasingly shifting. No single power or even a duo of countries can dominate the region. It reflects geopolitical changes in the world where the emerging multi-polar world ushers in a different set of rules. Exclusive geopolitical control is no longer viable and the 2020 war showed exactly this.

There is also yet another dimension of the unfolding geographic change. The war also solidified that the Caspian basin and South Caucasus are inextricably linked to the greater Middle East. Russia and Turkey are basing their strategies in the region on developments in the Middle East and the Black Sea region. Not since the end of the Soviet Union has the South Caucasus been such a critical point for the powers around it. In a way, this re-emergence of close contacts between the South Caucasus and the Middle East is a return to normalcy which was disrupted in the early 19th century by Russian annexation of the South Caucasus. Indeed, in pure geographic terms the region is better connected to Turkey and Iran than to Russia, with which it shares the impassable Caucasus Mountain range.

This also means that the role of the South Caucasus in the thinking of Iran and Turkey, and by extension Russia, has grown. Considered if not as a complete backwater region in the calculus of large powers, the South Caucasus has nevertheless experienced a lack of attention. This was especially true for Iran, which now struggles to retain its weakening position in the region.

It is true that Iran was never a dominant power in the South Caucasus. Unlike Russia or Turkey, the traditional power brokers, it has not had a true ally. Tehran was certainly part of the calculus for states in the region, but it was not feared, like Ankara or Moscow. And yet, the South Caucasus represents an area of key influence for Iran, based on millennia of close political and cultural contacts various Persian empires had with the South Caucasus.

The 2020 war changed Iran’s calculus in the region as the Islamic Republic’s interests were largely unheeded. Iran has now to adjust to the changed geopolitical landscape and it can be even argued that the recent escalation it had with Azerbaijan over the detained trucks, drills, and alleged Israeli influence, was an effort to wedge itself back into the geopolitics of the South Caucasus.

Yet there is little Iran can realistically do to boost its position in the region. The South Caucasus will certainly feature higher in Tehran’s foreign policy agenda than before. But Tehran does not have an ally in the region, nor does it have financial means to strengthen its soft power. Iran can support Armenia in its efforts to balance the triumphant Azerbaijan.

The lifting of US-imposed sanctions could augment Iran’s projection of financial and diplomatic power in the South Caucasus. Still, a more realistic approach for Tehran would be to build closer cooperation with Russia. Both loath growing Turkish influence and the Islamic Republic does not object to growing Russian influence as much as it does resent the West’s and Turkey’s presence. Surely, interests with Russia do not align always, but for Tehran, Moscow is a traditional power in the South Caucasus which is about maintaining a status quo. Turkey, on the other hand, disrupts it seeking greater influence.

There has been a certain retrenchment of the Western influence in the South Caucasus. While it does not signify a definitive decline in West’s fortunes, it is nevertheless important for Washington and Brussels to formulate a more robust approach toward the region. Decreasing the tensions with the Turkey could be one of the steps. Increasing economic engagement with the region would be another. Delay could be damaging. Georgia, which serves as a door for the West to the Caspian basin and on to Central Asia, could be the biggest loser if Washington shifts its foreign policy away from the region. An alternative could be a Russian model of peacebuilding and regional order where Georgia, Armenia, and Azerbaijan will face a lack of foreign policy options if the West’s unwillingness to commit to the region continues to grow. Author’s note: first published in caucasuswatch

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Eastern Europe

Russia: The Neighbor From Hell

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Photo: Kuźnica Białostocka, Poland. Migrants' encampment area. Army, Border Guard and Police on the border. Credit: Polish Territorial Defence Force

From Belarus to Ukraine to Georgia, an arc of instability has emerged, offering opportunities for malign activities by foreign powers. This has proved too tempting for Vladimir Putin’s Russia, which openly pursues an activist foreign policy seeking gains for the Kremlin at whatever cost to its neighbors. For the West, it is time to consider the wider Black Sea region as a whole and to develop a strategy. 

The migrant crisis unfolding on the Belarusian-Polish border is the most pressing and serious emergency. For some months, the Belarus dictator Aliaksandr Lukashenka and his security services have been funneling thousands of Middle Eastern migrants toward the EU border. Officially, Russia has distanced itself from the crisis, with President Vladimir Putin on November 13 denying claims he had helped to orchestrate a crisis.  

Russia is often disbelieved by neighbors with unhappy experiences of its statecraft. In this case, too, there are reasons to doubt Putin’s words. Firstly, the Belarus migrant drama bears an uncanny resemblance to the events of 2016, when the Kremlin unleashed a sudden wave of developing world migrants across Finland’s and Norway’s Arctic borders. Secondly, few believe Lukashenka’s regime on its own is sufficiently organized to orchestrate events of complexity spanning two continents.  

Russia’s rapid dispatch of advanced combat aircraft and paratroopers (two of whom died in the exercise) to the Belarus-Poland border and Putin’s contemptuous dismissal of Germany’s Chancellor and the EU’s senior head of government Angela Merkel (she was told to call Lukashenka herself) were open signals of approval for the Belarusian position. Only when Lukashenka mused that he might cut off gas supplies to Europe was he publicly slapped down by Russia. It was also notable that Russia and Belarus recently agreed on further steps in their on-again-off-again Union state. 

To the south, in eastern Ukraine, the clouds are also gathering. Fighting is worsening with Russia’s separatists in Donbas, and ceasefire violations are spiking. US briefings now suggest around 100,000 military personnel and large amounts of armored equipment are located within reach of the border; military movements are being organized at night. Not only does this follow the deployment of large Russian formations for exercises in the Spring, but it also matches a threatening drumbeat of anti-Ukrainian rhetoric from Russian leaders including Putin, who have questioned the country’s right to an independent existence. The Kremlin has increased funding for the Donbas and pledged humanitarian support to the rebel-controlled regions thus facilitating trade between Russia and parts of Donetsk and Luhansk. 

The bottom line is that Russia is putting Ukraine back on the agenda and — as some predicted — forcing the Biden administration to take notice, despite its desire to park Russia and focus on China. Putin and his aides remain determined to build a near-exclusive sphere of influence in its neighborhood and Ukraine is the crown jewel in its geopolitical thinking. If Russia is finally seeking a settlement to its seven-year-long forever war, that would require agreement from Ukraine to effectively hand control of eastern regions to Russia and its local agents, plus a commitment to stop the country from joining Western military and economic institutions. There is no sign that Ukraine will agree to such constraints on its sovereignty. 

Further south in the South Caucasus, Georgia, the West’s only partner in the region, is suffering a continuing crisis following the municipal elections in October and the former president Mikheil Saakashvili’s stealthy return to the country. He is now in prison on a hunger strike. Russia lurks here too. It might not be orchestrating the crisis, as in Belarus, but it does benefit. Russian media has been actively addressing the events in Georgia and playing on recurrent tensions between the country and its Western partners, especially the European Union (EU). As always, chaos — sometimes resulting from direct Russian interference, and sometimes not — makes it harder for candidate countries to meet the membership terms of Western clubs while emboldening those European countries sympathetic to Russia and skeptical of expansion. This makes it harder for organizations like the EU to engage Georgia.

Russia’s grand strategic aim is to maintain its power in neighboring states. That means keeping the West at bay, and political instability serves that purpose. Belarus, Ukraine, and Georgia are distant, but the Kremlin is always present. In some cases, it resorts to military pressure to gain momentum, in other cases it sits and waits, but the pattern signals a clever use of opportunities as they arise, exploiting the space given by a West signaling decreasing willingness to engage in the wider Black Sea region. 

Seen from the long-term perspective, the 1990s and 2000s were a period of a slow but steady decline of Russian influence in what then constituted the former Soviet Union. From the Kremlin’s point of view, the present period is much more productive, with concrete gains and the reversal of the West’s military and economic expansion. For Putin and his ministers, it seems likely that the US considers defending Ukraine, Georgia, and even involvement in the Belarus-Poland border crisis costlier than the potential benefits of having these countries within America’s geopolitical perimeter.

The ground is now prepared to seek a reversal of the West’s geopolitical gains and cast aside the wishes of the people of Ukraine and Georgia. The push against aspiring liberal democracies is now gathering pace, timed to coincide with a wider geopolitical shift, namely the recalibration of US foreign policy to east Asia. 

Author’s note: first published in cepa

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Eastern Europe

Five Important Principles for a Successful Mandatory Funded Pension for Ukraine

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The government’s plans to launch a mandatory funded pension scheme (the so-called second pillar) has provoked a lot of debate about future of pensions in Ukraine. Over the past quarter century, second pillars were introduced in several of Ukraine’s neighboring countries. Contrary to common belief, such schemes are not immune to politics, as they change and evolve constantly. So, it would be important to ensure a design for the program that can be preserved and perpetuated in Ukraine’s specific economic, social and political context.

Neither of the two types of pension schemes – solidarity and fully funded – is better than the other. In fact, they work best when they complement each other, as each is exposed to different risks. Thus, an effective reform will need to be centered around enabling synergies between the two schemes.

While the funded system is proposed as a risk mitigation strategy for the solidarity system in Ukraine, it also carries important implementation risks. To make Ukraine’s pensioners more secure, the Ukrainian government will need to map out all such risks and address them along the path to launching the new system. From global experience assessed by the World Bank, there are five key principles that should guide the preparatory work.

1. Strong regulatory and fiduciary framework. This is a key precondition for safety of the pension assets. First, no funded system should start without a regulator that is well-equipped and able to effectively enforce all legal provisions. Bill 5865 in Rada introduces a proper regulatory framework and powers of the regulator. This bill should certainly form part of the reform package. Second, it will also be important to establish proper segregation of assets and records between the activities of the existing voluntary plans and the new mandatory scheme. And third, several governance issues pertaining to non-state pension funds (especially the ultimate fiduciary responsibility of their boards, risk management and internal controls) will need to be addressed to have these funds prepared for their new role and be seen by the public as effective and trusted custodians of their pension assets.

2. Sustainable financing. The funded system can be introduced either as a complementary scheme to the current solidarity system or as a substitutional system. The current government proposal is a hybrid: on the benefit side, it is complementary, but on the revenue side, part of the solidarity system contributions is proposed to finance the new funded scheme. Such an approach may limit the effectiveness of the new system fiscally and socially, aggravating the risk of falling benefits in the solidarity system. This may result in no net improvement in the future combined retirement benefits from this reform. Instead, to maximize the impact of the new funded system, it will need to be funded from new contributions, without tapping into the same fiscal space that provides for the wellbeing of current pensioners. Ideally, these new contributions should come from employee wages, so there is personal attachment to the pension account – a signature element of individual responsibility in such programs. Such employee contributions could further be co-financed by the employer and/or by the government, as an incentive to contribute more for retirement.

3. Efficient administration. The mechanism of money and information flows in the new system should be carefully designed and tested, so that the administrative costs of the new system are minimized. No single Hryvna should be lost on its way from employers to an individual account, as it passes through the government machinery of revenue collection. For this, every detail of the process needs to be elaborated and all risks mapped and mitigated.  It can be shown that a 1% annual charge on pension assets over someone’s full work career reduces around 20% of their pension benefits by the time of retirement. Therefore, cost reduction is key – and it has been shown that centralizing core administrative functions is an effective cost reduction strategy. Finally, simple provisions need to be introduced for individuals who do not actively choose a fund. This would pave the way to establishing a “default” fund with a life-cycle investment strategy. Importantly, a gradual implementation approach should help minimize various operational risks. So, Ukraine should start with a simple design that can be easily understood by the general public – and add more complex elements to the system over time.

4. Overall pension system design. The new funded scheme will be only a small supplement to the current system. With a 4 percent contribution rate, it will take an individual about 25 years of contributions for the account value to reach their corresponding annual wage in that year in the future. This is a rather insignificant amount, considering that this accumulated amount equivalent to one year’s wage will have to be spread over the remaining life of an individual after retirement. Therefore, better coordination with the solidarity system, especially its system of minimum income guarantees, is required

5. Well-defined role of the state. Explicit legal provisions about what government can and cannot do will put the system on the right track. The state plays several important roles here: ensuring proper regulations and fair competition in service provision; facilitating a “default” fund; providing co-financing from the general budget to stimulate participation; enabling core record-keeping infrastructure and standards of member services; facilitating markets for financial instruments to promote diversification of investments; providing well-coordinated general minimum income guarantees at retirement, through the solidarity system; and so on. So, having a clear implementation plan and well-defined transitional arrangements will be instrumental to the success of this reform.

A lot of work needs to be done to ensure that Ukraine’s future pensioners have an adequate pension that will allow them a dignified retirement. Therefore, learning from the successes and mistakes of other countries, the government should target a realistic timeline to build the second pillar – with well-coordinated preparatory work yielding a consensus on key design elements (incorporating all the above principles).

Originally published in UKRINFORM via World Bank

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