Cautiousness in the Caucasus: Azerbaijan and Armenia clash

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Hello and welcome to the Intelligence from the Economist. In London, I'm Jason Palmer.

And in New York, I'm John Fassman. Every weekday we provide a fresh perspective on the events shaping your world.

In the Gulf, energy exporters will end up with billions and billions more in their coffers than they expected this year. Our correspondent looks at where all that cash might go. From quixotic cities in the desert to swathes of plush new public sector jobs.

And in Lebanon, there's no such thing as a civil wedding. Residents must marry according to the laws of one of the country's 18 recognized religions. That poses a problem for interfaith couples, which they've taken to solving in cyberspace and Utah.

But first, Anger and sadness as a funeral takes place in Azerbaijan, with blame falling on Armenia. Nearly 100 people have reportedly been killed in renewed clashes in the southern Caucasus, a region that links Eastern Europe with with Western Asia. Each side blames the other for the flare up. Things may calm after Russia said it had brokered a ceasefire. But we've been here before. Back in 2020, the two countries were at the brink of a full on war. At issue was and again is the region of Nagorno Karabakh, an enclave that's formerly part of Azerbaijan, but is filled with ethnic Armenians. It's been disputed territory since the Russian Revolution during the First World War when the two countries were first formed. They've since fought two wars over it and other territories. It's not a conflict in isolation. Russia backs the Armenians and Turkey is on the side of the Azeris. Yesterday, Turkey's foreign minister said, we say it once again, beloved Azerbaijan is not alone. A spokesman for the Kremlin said that Russia's president was making every effort towards calming tensions. But Russia merely imposing a ceasefire, as it did in 2020, may not be enough to put an end to a decades Old conflict.

Tensions between Armenia and Azerbaijan have been high for some time. There have been sporadic clashes in the border areas over the past year.

Piotr Zalevsky is the Economist's Turkey correspondent.

But this is by far the heaviest round of fighting we've seen since the end of a war over Nagordo Karabakh that took place in 2020.

And what exactly has happened?

Most recently, it seems Azerbaijan has launched an attack against Armenia. On September 13, ostensibly, or according to Azeri officials, after Armenian provocations, the Azerbaijani army conducted artillery and drone strikes against Armenian positions in the country's east. The Armenian president said 49 of his troops were killed in fighting, and azerbaijan said that 50 of its servicemen were also killed. Armenia called this an unprovoked attack. Azerbaijan said it was responding to subversive acts. America, the eu, and Russia have all called for an immediate end of hostilities. And the csto, that's the Collective Security Treaty Organization, led by Russia, has dispatched a monitoring mission to Armenia.

And we spoke on the show at the time of the conflict in 2020 and the peace agreement that resulted after all of that. What's been going on since then? What's the background here?

So the war that took place in late 2020 was launched by Azerbaijan, backed by Turkey, and it was a war to try to retake Nagorno Karabakh, which is an Armenian enclave that is formally part of Azerbaijan. Now, Nagorno Karabakh is populated almost exclusively by Armenians and has been held since the 1990s by ethnic Armenian forces. So in 2020, late 2020, the fighting went on for about seven weeks. And by the time it ended, Russia, which is an ally of Armenia, imposed a ceasefire. Under that ceasefire, and as a result of the fighting itself, Azerbaijan had recovered a chunk of Nagorno Karabakh, as well as all of the surrounding districts, which had also been occupied by armenia since the 1990s. And under the deal, Russia deployed 2,000 peacekeepers to Nagorno Karabakh to prevent further violence. So this conflict has festered on.

So what is it, you think that has made hostilities break out so sharply now?

So you have to bear in mind that what ended the war in 2020 was not a peace agreement, but a ceasefire imposed by Russia. And talks about a possible peace settlement between Azerbaijan and Armenia have been ongoing. I think the latest round took place in Brussels. These talks are being mediated by the EU in late August, and in fact, in early September, the Azerbaijani president, Ilham Aliyev, mentioned that the two sides were probably months away from a peace agreement. But, and this is a very big but, Azerbaijan wants Armenia under such a peace agreement to acknowledge its unconditional sovereignty over Nagorno Karabakh. Armenia is not so keen for that to happen. And Armenia also demands guarantees for the region's ethnic Armenians. Analysts I've spoken to say that Azerbaijan, and this would explain the latest round of fighting and its attacks on Armenian positions, that Azerbaijan may have decided that now is the perfect time to use armed force to pressure Armenia into accepting a settlement on its terms.

Why though? Why is now specifically the time to exert that pressure?

Well, Azerbaijan may have concluded that Russia, which has been keeping the peace in the region and remains the biggest outside power in the Caucasus, is too distracted by its unraveling war in Ukraine, especially amid news of Russian losses over the past few weeks. So Russia is an ally of Armenia. It's also a close friend of Azerbaijan. But it certainly seems to be too bogged down and too bloodied in Ukraine to try to intervene on Armenia's behalf. And in fact, Armenia has invoked a mutual defense treaty with Russia which commits Russia to defend Armenia in case of an outside attack. But there is no indication that Russia will be willing or able to mount a robust response at the same time. Another reason why Azerbaijan may have decided this was a good time to launch an attack, the global energy crunch means that Europe's dependence on gas producers like Azerbaijan has been increased, increasing. So that presumably gives Azerbaijan some leverage over Western countries. Bear in mind that Azerbaijan's energy ministry recently said the country plans to increase gas exports to Europe by 30% this year. So you have a situation where Azerbaijan feels strategically emboldened knowing that it's going to be an increasingly important energy partner for Europe.

So with that in mind, where does this go? Are we headed back toward the sort of full scale war that we saw in 2020?

Well, it's still unclear as to whether Azerbaijan is trying to exploit security vacuum in order to launch an all out war against Armenia or whether it is doing this to try to exert pressure on Armenia at the negotiating table. At least among analysts, the consensus seems to be that this is the latter, that Azerbaijan is simply using armed force to press home its advantage and to get more concessions from Armenia. Armenia, as I mentioned, has asked Russia to come to its defense. That has not happened and probably will not happen, at least given the scale of the fighting so far. Russia will probably respond with symbolic measures rather than a large scale military deployment, but Azerbaijan will probably have to tread carefully. The government in Baku would like to weaken Russia's grip over the Caucasus and over the Nagorno Karabakh conflict. And Azerbaijan certainly does not like to see 2,000 Russian peacekeepers in the area. But it has nothing to gain from confronting Russia openly. So that, I think, mitigates against the danger of an all out war with Armenia. But as long as the Nagorno Karabakh issue festers, and as long as one side uses force to press home its advantage, the situation will remain highly unstable.

Piotr, thank you very much for joining us.

Thank you for having me.

A revolution in civilization is taking place.

The world's longest set of buildings stretching for over a hundred miles to protect and enhance nature. Beaches lined with marble. Fleets of drones forming an artificial moon. Robots carrying out the menial work. These are some of the plans for NEOM, Saudi Arabia's vision for a vast, frankly improbable $500 billion city in the desert. Could the profits from soaring oil prices make what once seemed like a flight of fancy a realistic prospect?

When Saudi Arabia unveiled Neom in 2017, financing it seemed almost impossible.

Greg Karlstrom is our Middle east correspondent.

The scale of the project was huge. It was an untested new idea. But pandemic recovery and the Russian invasion of Ukraine have pushed up oil prices, which suddenly makes it look possible. The IMF estimates that energy exporters in the Middle east and Central Asia will net about $320 billion this year in oil revenues above what they expected. That's another 7% or so of their combined GDP. So there is a torrent of money going into Saudi Arabia to help get NEOM going and going into the other Gulf states. Now they have to work out what to do with it.

And so do other Gulf states have similarly ambitious plans.

It would be hard for anything to be similarly ambitious. NEOM is a project so big that the curvature of the earth becomes an engineering challenge. But Dubai has a somewhat zany plan to create 40,000 jobs in the metaverse in the next five years, even though no one is entirely sure what the Metaverse is yet. In Bahrain, there's a plan to expand the land mass of the island by about 50% to make the country bigger. But there are also some states that are talking about using this windfall to save for what will eventually be a post oil future. We've heard even the Saudi finance minister say that they're not going to touch this oil windfall this year. They're going to stash it away at the central bank and then use it next year either to replenish some of their foreign reserves or to top up the main sovereign wealth fund, which has become the main driver of investment in the Kingdom over the past few years. But as much as some of them would like to save, there's also going to be a very intense pressure to spend.

Why saving and investing when you have a big windfall is normally the smart way isn't is.

And when you talk to money managers in the Gulf, they'll tell you they feel like they have competing priorities. One of those is to use the money to drive economic transformation. There's also, in some Gulf states, an interest in using this money to lower their debt levels. You have Bahrain, for example, where the debt to GDP ratio rose to 130% during the pandemic. They're hoping to shave about 12 percentage points off of that this year. And then there's also pressure from citizens, some of whom are increasingly complaining that they're feeling the pinch at home. Inflation in the six Gulf countries is expected to peak at 3.1% this year, according to the IMF. You compare that to America or to Europe and it looks great, but it comes off the back of years of austerity measures. You've had higher taxes, new taxes, in some cases. In the Gulf states, you've had subsidy cuts. The UAE, for example, phased out fuel subsidies in 2015, so petrol prices are now more or less lined with global markets. And in July, drivers here were paying $1.23 a litre, which again, may not sound bad by world standards, but for a wealthy petro state in the Gulf, is shockingly expensive. So the UAE said earlier this summer that it would double the welfare budget that it spends on poor citizens. Subsidies for housing, food, energy, various other things. So there is some pressure that is bubbling up to share this oil bounty with the public.

Well, is this a strictly either or question? Why not a little bit of save and invest and a little bit of splurge on the public?

A lot of that depends on the size of the countries involved. You look at the UAE, for example, where citizens are just 10% of the population, to spend more money on targeted subsidies going to poorer families here represents a tiny fraction of what the government is going to earn. It's a much bigger challenge somewhere like Saudi Arabia, which has 35 million people and about two thirds of them are citizens. Now, in the past, what would happen is when there was an oil boom, the government would lay on more jobs in the public sector. That now runs counter to Vision 30, which is the Kingdom's plan that is meant to boost the private sector and shift the economy away from oil. But there are other ways, aside from expanding the bureaucracy, that Saudi Arabia could spend some of this money on citizens. One is again to follow the model of the UAE and to go with more targeted subsidies. Another would be to fiddle with the tax scheme. Four of the six Gulf states have introduced a value added tax over the past few years in Saudi Arabia. Unlike the other three states that have done this, the VAT is now 15%. It's only 5% in the other Gulf states that have it. And so one thing the Saudis could do, for example, is they could lower vat. But they also need to look longer term and think about what they're going to do when there are no more oil booms.

And so that's where big projects like NEOM and getting into the Metaverse comes in.

It is, although you would hope that there's more going into it than that, look around this region, and there is not a great track record of big economic programs that come out of oil booms. You go to Riyadh in Saudi Arabia, and they started building about 15 years ago, a gleaming new financial district that was meant to compete with Dubai's. And it has basically sat empty now for years because banks saw no reason to move there. You go to the uae, and a few kilometers up the road from where I live in Dubai, off the coast, there is an archipelago of artificial islands that are shaped like a map of the world. And it was meant to be a massive tourism project, cost billions of dollars. Almost all of these islands remain empty, uninhabited. The UAE has in the past announced big plans to become a center for health tourism or a hub for semiconductor manufacturing, various other things. None of these projects have gone anywhere. They've fizzled out. The Gulf states really would be wiser, I think, to focus on areas where they have a competitive advantage. Things like clean energy, desalination. The UAE and Saudi Arabia and other Gulf states could be investing in installing that in other arid parts of the world, making returns on that investment. So there are things that they could be looking at that dovetail with their competitive advantage and also could offer them a healthy return in the long term.

So given that track record with big, flashy, expensive projects, why aren't the Gulf states doing things like that, for example, getting big in international desalination technology?

A lot of this has to do with image and reputation. There's been enormous amounts of Saudi money spent on burnishing the kingdom's reputation. You look at the world of golf, the kingdom has spent hundreds of millions, if not billions of dollars financing a rival to the PGA Tour, which started events this year. It started hosting a Formula One race in 2021. You know, this is a country that is widely associated abroad with the war in Yemen, with religious conservatism, with negative things. And so there's a lot of money being spent to change the kingdom's reputation in foreign countries and to buy a.

Little bit of soft power and slightly.

Harder power as well. I mean, we've seen already some governments approaching the Saudis and other Gulf leaders for money. Egypt, which is struggling with a balance of payments crisis right now, is desperate for investment from the Gulf states. Pakistan is trying to renew a $3 billion deposit at its central bank from Saudi Arabia. The Gulf states are now playing a role in lending that was previously reserved for advanced economies and the IMF for the World Bank. So as we see more and more of an economic crisis across low and middle income economies, it could give the Gulf states significant leverage over those countries should they choose to wield it. But it might be the last such opportunity. You look around the world, certainly at Europe, there's a new urgency to try to reduce your dependence on fossil fuels and move towards renewables. So when you talk to investors and businessmen in the Gulf, there's very much a sense that it's an unexpected boom. They're very excited about it, but they're also fairly convinced that this might be the last one and that their days are numbered.

Thanks very much for joining us, Greg.

Thank you.

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In the last few years, video calls have gone from esoteric to ubiquitous. Work meetings, family time, game nights, and even online doctor's appointments have become a norm. But some things are just better in person, right?

Right.

Not in Lebanon.

This is the wedding ceremony for Rana and Wassin.

So imagine a typical traditional wedding.

Margaret Khadifa is a Britain correspondent for the Economist.

The bride is in a white dress. The groom is in a tuxedo. They're on a picturesque mountaintop outside of a city.

I ask that you please face each other now and join hands as you join your lives to be connected completely. Two hearts united as one.

There's a beautiful venue. There are flowers, there's champagne. There are friends and family. So far, so normal, except that there.

Isn'T an officiant while we are conducting the ceremony. Virtually, it is of no less importance than if we were all gathered together in the same meadows as we are gathered here today in celebration of your love.

So for this wedding that I zoomed in for, the officiant also joined via Zoom on a tablet or at others, he comes in through a big screen. And that's becoming an increasingly popular choice in Lebanon.

And why is that? Is this about protection from COVID That's.

A fair guess, but actually the main reason is legal. Lebanon has essentially no civil marriage for people who want a secular wedding. Instead, residents have to marry under the laws of their religion, of which there are 18 recognized in the country. And this poses spiritual and practical problems. If you've got a couple where the partners are from different religions, one person may have to convert. And practically, many of the religious laws and the courts that uphold them make divorce difficult. And they discriminate, often against women when it comes to things like children's custody and the division of money and property. But Lebanon does recognize civil marriages performed in other countries.

So how do these virtual weddings actually help these couples get around that problem?

Almost three years ago, Utah in the United States allowed the entire marriage process, so from your license application to your ceremony to be conducted online. And the only person involved who needs to physically be in Utah is the officiant.

The.

The couple doesn't even have to be in the same place. And the first time Lebanese people married under this law may have been in November of 2021. And it could have been a couple called Khalil and Nada. And their original plan was to go to a vacation destination in Europe like Paris, to have a secular wedding. But because they got married during COVID they were worried about asking relatives to travel, so they decided to get married on Zoom so that their family could celebrate with them in Lebanon.

And.

And they now run a business on the side helping others marry via Zoom. And the Utah officiant who married them has now done about two dozen Lebanese weddings.

So is Zoom the only option for getting around this problem?

No, it isn't. What used to be the most popular option was to fly to another country like Cyprus, which is nearby, get married there, and then register the marriage back in Lebanon. And travel companies offer package deals from Lebanon to Cyprus that covers flights and hotels and marriage fees. And then if a couple who marries abroad divorces, the Lebanese courts will follow the civil laws from the country under which the marriage took place. But this isn't always possible anymore. Covid has made travel quite a bit trickier. Lebanon is in the midst of an economic crisis, so fewer couples can afford the expense of the plane. Flight somewhere else and even getting a passport quickly has become trickier. And then, of course, visas fall through as well.

And Margaret, you said earlier that you'd been to one of these weddings. Tell me more about that experience.

Yes, I zoomed into one a couple of weeks ago and it felt a lot more traditional than I thought it would. The minister learned a bit about the couple.

Do you vow that no matter what happens, you will always be there for her?

Yes, I do. He does an eight minute ceremony that is about $75. He throws in the word mabrook, which is Arabic for congratulations at the end.

Of the Many blessings to you both for a long and very happy life together. Mabrook.

Of course, as we all know, virtual calls don't always go very smoothly. So in this case, the tablet the couple was using overheated from the sun and cut out midway through. And then the officiant had to speak a bit faster than you'd expect to finish the wedding before the tablet cut out again because of 3G. But for the most part, it works.

Margaret, thanks so much for joining us today.

Thank you for having me.

That's all for this episode of the Intelligence. Let us know what you think of the show. You can get in touch at podcasts at economist.

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