Asian powers entering the South Caucasus: opportunity or threat?

Prime Minister Nikol Pashinyan meets with India’s Prime Minister Narendra Modi. The relationship between India and Armenia has great potential for expansion, especially in the areas of trade and connectivity. Photo courtesy of the Prime Minister’s Office of Armenia

It is also worth noting the economic weakness of the main foreign players traditionally involved in the region, as well as the unfulfilled expectations of Chinese development projects.

As a result, China’s struggles to strengthen its market influence have allowed Pakistan and India to forge close relationships with Azerbaijan and Armenia respectively. Even though the presence of these new powers in the region represents an opportunity for economic growth, it may also involve various risks. Indeed, the three powers could use the South Caucasus as a proxy battleground for their own disputes. Of course, this would only contribute to an already high level of regional tension.

The Pakistan-Azerbaijan axis

Pakistan’s interests in the South Caucasus are mainly focused on strategic and military issues and this is embodied in its long-standing alliance with Azerbaijan. Good relations between Islamabad and Baku date back to 1991, when Pakistan was one of the first countries in the world, along with Turkey, to recognise Azerbaijan’s independence. Bilateral relations were then strengthened by the signing of major defence and military co-operation agreements between 2003 and 2014, which included sending Azerbaijani troops to Pakistan for training. Since then, such issues have proven to be essential elements of the agreements more recently concluded between Baku and Islamabad.

Yet relations between Pakistan and Azerbaijan involve more than a mere bilateral dimension. Certainly, the Islamabad-Baku axis is part of a broader political-military alliance of which Turkey is a key pivot. For years, the three actors have supported each other on the main issues affecting their national interests, namely Nagorno-Karabakh, Kashmir and Northern Cyprus. Notably, Azerbaijan’s support for Pakistan on the thorny issue of Kashmir was reciprocated by Islamabad’s non-recognition of Armenia as a sovereign state.

The 2020 war was a defining moment for Pakistani-Azerbaijani relations. In fact, after the victorious offensive launched by Baku (supported by Islamabad and Ankara), the three allies attempted to develop an alliance that extended beyond the military dimension. Following official meetings held last year, Pakistan, Azerbaijan and Turkey issued several joint statements aimed at promoting trade and economic co-operation, condemning Islamophobia and countering the ongoing global pandemic.

Despite the announcements, however, relations between the three do not amount to much beyond military affairs. In fact, while Turkey’s trade with Pakistan is low, Azerbaijan’s economic links with the country are essentially non-existent. Paradoxically, Baku’s economic and trade relations with India were much more developed than those with Pakistan as recently as 2019. This was mainly due to Baku’s important role in the International North-South Transport Corridor (INSTC) project, a multimodal transport network that aims to connect the Indian Ocean to Russia. However, strategic imperatives have forced Ilham Aliyev’s regime to strengthen relations with Pakistan. This move not only risks Baku’s general relations with India but also its role in New Delhi’s regional connectivity plans.

The trilateral military alliance was formalised in September 2021, when special forces from the three countries participated in a joint military exercise called “Three Brothers 2021”. On that occasion, Baku once again stressed its interest in Pakistani weapon systems and especially its Pakistani-Chinese-made JF-17 fighter jets. Despite this, the Pakistani defence industry is unlikely to meet Baku’s needs due to structural weaknesses and defence cuts imposed by the IMF in relation to an associated loan. As a result, beyond a 2017 agreement for the purchase of ten Pakistani Super Mushshak training aircraft, bilateral trade in this area is very limited. Seen in the broader regional context, the alliance with Pakistan is very useful for the Azerbaijani government and its attempts to pursue its agenda in a more forceful manner. Moreover, the trilateral alliance forms a cohesive bloc that is strongly hostile to Armenia and could create long-term problems for the regional interests of other players such as Russia, Iran and India.

India eyes Armenia

India’s new focus on the South Caucasus should be understood in relation to the two fundamental needs that drive it. On the one hand, New Delhi wants to balance the growing influence of Islamabad and Beijing in the region and more generally in Central Asia. On the other, it needs to open up new routes that allow it to operate in a westward direction. Despite its relative size, India remains closed off to the north and west by China and Pakistan. New Delhi therefore sees the South Caucasus as an unavoidable route for its goods to and from countries to its west.

Indian Foreign Minister Subrahmanyam Jaishankar’s visit to Armenia last October is only understandable in this context. The trip marked the first time that an Indian foreign minister has visited Yerevan since the country gained its independence in 1991. Various bilateral meetings during the visit were focused on (re)launching political, trade and cultural relations. Although Armenia is the only state in the South Caucasus to have formalised its relations with India through a Friendship and Cooperation Treaty in 1995, trade between the two countries is still very low. In 2019 less than two per cent of Armenia’s total imports came from India, while Armenian exports have not fared much better in the Indian market. Defence cooperation is also essentially non-existent, not least because the 1995 treaty did not provide for arms supplies. However, since 2017 the two states have tried to move beyond this approach and there is now a growing relationship between the countries’ respective defence ministries. Nevertheless, whilst Armenia would be interested in diversifying its military purchases, there seems to be no immediate prospect of developing relations. This is largely due to the structural deficiencies of the Indian industry and the constraints imposed by the Collective Security Treaty Organisation (CSTO) on its members regarding the purchase of non-Russian arms.

Despite these difficulties, the relationship between India and Armenia has great potential for expansion, especially in the areas of trade and connectivity. Yerevan and New Delhi, in fact, share the same need to open new trade routes and both depend on Iran to achieve this goal. Jaishankar’s visit revived the possibility of creating an Armenian-Iranian route within the framework of the INSTC project, of which both countries are members. These plans place great importance on the Iranian port of Chabahar, as its location offers the perfect hub for transporting Indian goods. Armenia aims to connect the new route to the Persian Gulf-Black Sea corridor. However, Yerevan will first have to complete several strategic infrastructure projects in order to make this route a reality. Various external factors could favour the realisation of Armenia’s projects, such as the possible conclusion of a free trade agreement between India and the Eurasian Economic Union and successful negotiations regarding the Iranian nuclear issue. In addition to its economic potential, the partnership with India offers Armenia a political advantage in uncertain times. Indeed, while India has always maintained a neutral stance on the Nagorno-Karabakh issue, it supports the OSCE Minsk Group as the only forum capable of resolving territorial tensions between Armenia and Azerbaijan.

In essence, India seems to offer Armenia and the region in general renewed prospects for  connectivity through various projects. However, New Delhi continues to voice its opposition to China’s Belt and Road Initiative (BRI) project and the commercial activities of the Pakistani port of Gwadar. Given the strong regional tensions that prevent the countries of the South Caucasus from taking joint decisions, it appears that major external powers will once again determine the timing and manner of any infrastructural development that could bring the region out of isolation. 

Beijing’s flawed strategy

For China’s global ambitions, the South Caucasus is a strategic region. Indeed, Beijing views it as the gateway to the European markets, which are the final destination for Chinese products. As a result, the region has been included in the BRI. Since its entry into the South Caucasus, China has developed very close relations with Georgia which, due to its geographical position, represents the ideal destination for Chinese goods. A strong bilateral relationship was secured through the adoption in 2017 of a free trade agreement that remains unique in the region. Aware of the important role Georgia can play in its “race to Europe”, China has made significant economic and diplomatic efforts to foster good relations. This resulted in the country becoming the largest market for Georgian exports in 2020. Significant Chinese investment in the country has focused primarily on infrastructure and has been facilitated by the fact that Georgia, as well as Azerbaijan, is a member of the Asian Infrastructure Investment Bank.

Yet, despite excellent results, the Beijing-Tbilisi partnership has not always lived up to expectations. Georgia, in fact, had hoped that China would offer support on the sensitive issue of Abkhazia and South Ossetia. Despite this, China has sent delegations to evaluate possible investments in these areas, thus irritating its fledgling partner.

Tensions and missed expectations are so far not present in relations between China and Azerbaijan. Notably, Baku has managed to establish itself as Beijing’s main economic and trade partner in the South Caucasus by promoting its geographical location and good level of economic development. Chinese-Azerbaijani relations have always been based on a mutually beneficial exchange of oil for money and investment. This has allowed China to strengthen its position to the point that it is now Baku’s sixth-largest export market.

In addition to excellent trade relations, Baku and Beijing also share similar political views. For instance, Aliyev recently reiterated his full support for China with regards to issues involving Taiwan, Hong Kong and Xinjiang. Due to this, Baku and Beijing have pursued defence and security co-operation since 2019. This has mainly involved Azerbaijan purchasing armaments that feature technologies or components from China and various third-party states such as Belarus and Turkey.

While Beijing’s presence in the region has undoubtedly had a positive effect on the economies of Georgia and Azerbaijan, it has been less positive in the case of Armenia. Certainly, it could be argued that Yerevan is the weak link in China’s regional strategy. Although Beijing represents an important market for Armenian exports, it has not been able to solve Armenia’s exclusion from the BRI’s main trade routes. Beijing has also tried to support Armenia’s defence sector through military assistance agreements aimed at restoring the balance of power in the region. These projects, however, have enjoyed little success.

Against this background, Armenian dissatisfaction offered India the perfect opportunity to respond to Pakistan’s engagement with the region. New Delhi has therefore been clever in exploiting the space left by China by offering alternative solutions to Armenia’s existing connectivity problems and providing support for its political demands. In doing so, India is challenging Chinese influence and counterbalancing Pakistan by re-establishing, at least tentatively, a balanced if precarious situation in the area. Even though the Chinese and Indian approaches do not appear to be in conflict, there is a risk that the two states will trigger a protracted trade war of attrition in the South Caucasus. This would subsequently result in the international community wasting yet another good opportunity to promote trade and development in the region and beyond.

Tiziano Marino is a political analyst and researcher specialising in international security and geo-economics. He is a graduate of the College of Europe in Natolin and Roma Tre University. His research interests include the EU Neighbourhood, the South Caucasus and South Asia.

Armenia, Azerbaijan, China, India, Pakistan, South Caucasus