Strategy Note /

Armenia-Azerbaijan clash: More tests to come for Russia in its periphery

  • Another round in an old Armenia-Azerbaijan conflict, following what was always going to be a temporary ceasefire in 2020

  • But major foreign policy, domestic political, and economic changes since 2020 in the external actors, Russia and Turkey

  • Question is if this is the first of more tests of Russian influence in its periphery, eg Belarus, Georgia, central Asia

Armenia-Azerbaijan clash: More tests to come for Russia in its periphery
Hasnain Malik
Hasnain Malik

Strategy & Head of Equity Research

Stuart Culverhouse
Stuart Culverhouse

Head of Sovereign & Fixed Income Research

Tellimer Research
15 September 2022
Published byTellimer Research

Armenia and Azerbaijan have again clashed in the disputed Nagorno-Karabakh region with fatalities and accusations of blame on both sides.

A truce was announced on 14th September, but given the protests it triggered in Armenia and the territorial momentum of Azerbaijan forces, there is a high risk that it does not last.

The conflict stretches back to before the collapse of the USSR. Nagorno-Karabakh is internationally recognised as Azerbaijan's territory but is controlled by Armenian separatists.

The last episode of large-scale clashes was over six weeks in the winter of 2020, during which Azerbaijan, with the support of Turkey, made significant gains compared to Armenia, which is closer to Russia.

Every prior round of conflict in Nagorno-Karabakh has led to stalemate and stalled negotiation.

Since 2020, both Russia and Turkey are in weaker economic shape. However, the Russian military is clearly the more distracted and stretched of the two, with its war in Ukraine, where territorial losses have recently accelerated. Turkey, on the other hand, is enjoying improved foreign relations with Israel, Saudi, UAE, and the US.

More widely, the question is whether this is the first of several tests of Russia's influence in countries it has regarded as its security buffer during President Putin's era, should its retreat in Ukraine continue, eg Belarus, Georgia and the central Asian republics.

Another round in an old conflict

The last hot conflict in the Nagorno-Karabakh region took place over six weeks in the winter of 2020 and culminated in a "peace deal" brokered by Russia and Turkey. At the time we argued it was better described as a "ceasefire", because it:

  • Did not settle rival claims to sovereignty between Armenia and Azerbaijan over the entire disputed region; and

  • Was merely one move in one part of an ongoing wider game of geopolitical chess between the two main external actors, Russia and Turkey.

But changes in the two key external actors

Neither Russia nor Turkey is the same as it was in 2020:


  • Foreign relations — Russia is distracted militarily by Ukraine, where territory is now being lost rapidly, and NATO is, to some degree, reunited and reinvigorated.

  • Domestic politics — President Putin's approval ratings are higher (83% in August 2022, compared to 65% in November 2020, according to Levada) but territorial setbacks in Ukraine increase the potential of a split with his military.

  • Economy — Russia is unquestionably worse from a structural perspective, and worse off economically. Its currency may have held up but it is no longer freely convertible, its oil and gas revenues are intact in the short term but imperilled in the long term, and sanctions have disconnected its non-commodity sectors from international investment.


  • Foreign relations — A détente is underway between Turkey and Israel, Saudi, UAE, and, to a degree, the US.

  • Domestic politics — President Erdogan is much closer to the next election (due before June 2023) and the opposition is showing some signs of uniting. However, his personal approval rating is similar (37% in August 2022, compared to 36% in October 2020, according to Optimar), he remains the leading presidential candidate, and parliamentary electoral reform probably reinforces the hand of the ruling AKP (at a cost to newer, smaller opposition parties).

  • Economy — Turkey is unquestionably worse off economically, with non-credible, non-orthodox interest rate policy driving hyper-inflation and currency collapse.

First of several challenges in Russia's periphery?

Two questions accompany this week's events in Nagorno-Karabakh:

  1. Despite its economic stress does Turkey sense an opportunity to extend its influence in an area where Russia regards itself as the decisive external influence?

  2. Is this the first challenge of several in the Russian security buffer:

  • Belarus (buffering Europe).

  • Georgia, Armenia and Azerbaijan to the southwest in the Caucusus (buffering Turkey).

  • Kazakhstan and the central Asian republics (Turkmenistan, Uzbekistan, Kyrgyzstan and Tajikistan) to the south (buffering Iran, Afghanistan and and Pakistan).

Kazakhstan in January versus Armenia in September

In January 2022, Russia responded very quickly to Kazakhstan President Tokayev's request for military assistance in the face of violent domestic protests under the Russian-led Collective Security Treaty Organisation.

The CTSO members include Armenia, Belarus, Kazakhstan, Tajikistan, Kyrgyzstan, and Russia.

Armenia Prime Minister Pahinyan has now made a similar request. At the time of writing, there is, as yet, no Russian troop response, merely a CTSO fact-finding mission on the way.

Troops in Russia and the post-Soviet states

Russia's conventional military is much bigger than those in its "buffer region" but dwarfed the more global the conflict

Fixed income implications

We don’t rate Armenian or Azerbaijan dollar bonds at this stage.

Armenian and Azerbaijan dollar bonds have softened since reports of clashes earlier this week, with Azerbaijan (Ba1/BB+/BB+) perhaps surprisingly having weakened by more than Armenia (Ba3/-/B+), with the ARMEN ‘31s down 2pts (to US$71.9) and AZERBJ ’32s down 3pts (to US$83.4), as of cob 14 September on Bloomberg (mid-price basis). The shorter bonds (ARMEN ‘25s and AZERBJ ‘24s) are down 1.4pts and 1pt respectively.

However, it is hard to disentangle the impact from the clashes with the broader market weakness following Tuesday’s poor US CPI print. Yields on the longer bonds have risen (41bps to 8.3% and 49bps to 5.9% respectively), while spreads have not risen by as much (33bps to 507bps and 43bps to 267bps respectively).

Bonds prices (US$)

By comparison, we note that in the previous clashes in the autumn of 2020, Armenia '25s fell 5pts initially, and by 7pts at their most, before recovering losses going into the end of the year after the ceasefire was announced on the back of the post-Biden/post-vaccine rally.

This time around, however, we think the situation is different, with a weaker external backdrop, due to greater regional uncertainty, particularly around Russia (weaker economically, diplomatically and militarily), and tougher EM financing conditions (scarce capital flows to EM will be even harder to attract for warring countries, especially as the rise in EM yields means there may be more compelling stories elsewhere).

However, the outlook for the bonds will ultimately depend on the length and extent of the conflict. A quick easing in tensions and move to a ceasefire may have little further impact on prices, like last time, although there may be more lasting damage to investor perceptions from the regional rivalry. Conversely, a longer and more intense conflict will add to political uncertainty, risk drawing in other parties, and likely have adverse economic implications (eg for growth and trade).

Still, despite Armenia’s higher GDP growth rate and modestly lower inflation this year, Azerbaijan enjoys much stronger credit fundamentals, with twin surpluses (due to oil revenues) and lower public debt (c20% of GDP), which could mitigate the impact on its bonds and help it to absorb some of the negative economic effects relative to Armenia. In addition, Azerbaijan has a much stronger liquidity buffer with reserves at over 8 months’ import cover, and savings in the sovereign wealth funds (SOFAZ) amounting to another US$45bn (60% of GDP). This should ease any investor concerns over its ability to pay in the event of a more prolonged conflict.

Key macro indicators

Both countries have favourable debt repayment profiles on their dollar bonds, with the next maturities being in 2024 for Azerbaijan (US$1.25bn) and in 2025 for Armenia (US$500mn). Armenia has three dollar bonds with a total outstanding of US$1.75bn (13% of GDP), and Azerbaijan has three dollar bonds with a total outstanding of US$2.6bn (4% of GDP).

However, given Armenia’s higher yields (over 8% on the ten-year) compared to Azerbaijan (6%), and Azerbaijan’s savings, Armenia seems more exposed to refinancing risks. Armenia’s interest in an IMF programme, expressed during the staff visit in June after its previous three-year SBA expired in May, may help reassure investors, although it is not clear if conflict now upsets the negotiations. Programme discussions were meant to start this month.

In addition, to the extent that investors priced in a degree of Russian support for Armenia, a weaker Russia economically may call into question Moscow’s willingness and ability to offer support, increasing moral hazard risk.

Bonds spreads (bps)

Related reading

Nagorno-Karabakh deal yields benefits for Turkey and Russia, Nov 2020

Kazakhstan impact on Uranium, Ukraine, Bitcoin, Putin's succession, FM equities, Jan 2022

Russia and its security buffer, Jan 2022

Russia's setbacks in Ukraine reopen all endgame scenarios, Sep 2022