Iran, Israel and the Rising Tensions in the Caucasus

(Bloomberg) -- Iran is building up its military presence on its border with Azerbaijan in a dispute between the neighbors over Israel. What started as local muscle-flexing could develop into a more serious confrontation with wider ramifications for a region crisscrossed by pipelines shipping oil and natural gas to the West, and in which Russia and Turkey also have strong interests.

1. What’s the dispute over?

The most recent tensions began when Iran alleged that Azerbaijan was allowing Israel’s military to have a presence near the Iran-Azerbaijan border. Citing “Israel’s presence,” Iran staged military drills close to the border on Oct. 1. Azerbaijani President Ilham Aliyev denied harboring Israeli forces and countered by holding military exercises with Turkey, an ally. More broadly, Baku’s closeness to Israel, especially with regards to its military trade, worries Tehran, which suspects Israel is behind clandestine attacks on its nuclear program. While Iran and Azerbaijan are both majority Shiite Muslim countries that share strong ethnic and linguistic ties and centuries of history, there are also tensions after last year’s war between Azerbaijan and neighboring Armenia over the territory of Nagorno-Karabakh. 

2. What was the outcome of that conflict?

After declaring victory over Armenia, Azerbaijan reclaimed districts along a 130-kilometer (81-mile) stretch of its border with Iran that Armenians had occupied since the 1990s. It also regained part of the main highway linking Iran to Armenia through Azerbaijan, a critical trade route to the Black Sea and Russia. Tehran reacted angrily when Azerbaijan imposed a heavy tax on Iranian trucks carrying goods to Armenia, effectively paralyzing trade between them and jeopardizing Iran’s access to markets farther away. Aliyev accused Iran of ignoring demands to stop delivering goods to Armenians in Nagorno-Karabakh. Iran and Armenia have been discussing plans for an alternative road avoiding Azerbaijan. 

3. What’s at stake?

A conflict between Iran and Azerbaijan could put at risk regional energy projects. BP Plc and its partners have invested more than $70 billion in Azerbaijan’s energy development and transportation projects since 1994. The projects include a 1,768-kilometer (1,098-mile) pipeline connecting Caspian Sea output with Turkey’s Mediterranean port of Ceyhan. Azerbaijan helped build 3,500 kilometers (2,174 miles) of natural gas pipelines to Europe via Georgia and Turkey. Azerbaijan started gas exports Dec. 31 to European Union countries, including Greece and Italy, via the U.S.-backed Southern Gas Corridor. 

4. Could the tensions escalate into a conflict?

Iranian unease over Azerbaijan’s relationship with Israel isn’t new, but the rival military drills are a hard indication that temperatures are running unusually high. Iran’s Supreme Leader Ayatollah Ali Khamenei, in an Oct. 3 address, warned neighboring countries against harboring foreign armies. While he didn’t name Azerbaijan, his official Twitter account translated the comments into Azeri. Azerbaijan’s decision to stage joint military drills with Turkey and Pakistan near Iran’s border last month also roiled Tehran. Complicating matters is Iran’s own Azeri population, constituting almost a third of its population of 85 million. Many have a strong affinity with Azerbaijan, and Iranian officials are keen to avoid inflaming separatist unrest if the standoff worsens.

5. Who else may get involved?

An outbreak of fighting would quickly entangle NATO member Turkey, which signed a mutual defense pact with Azerbaijan in June pledging “necessary assistance” in case of attack. Turkey has long been Azerbaijan’s main military backer, openly supporting it with weapons and advisers against Armenia. It’s now deployed troops to monitor the Azerbaijan-Armenia cease-fire alongside Russia, which has sent 2,000 peacekeeping soldiers to Nagorno-Karabakh. Russia has a military base in Armenia and the two nations have a defense pact, while Moscow’s relations with Azerbaijan have been strained since the war amid squabbles over the truce agreement. 

6. Why is Iran worried about an Israeli presence?

Iran sees Baku’s ties to Israel as a national security threat. For years, it’s suspected Israel of using the relationship to spy on Iran through tools like unmanned surveillance aircraft. Azerbaijan’s State Border Service is the main recipient of sophisticated Israeli intelligence and attack drones. Iran has accused Israel of being behind several attacks on its nuclear facilities and the assassination of five scientists, including Iran’s most senior nuclear expert last year. Israel, which has vowed to prevent Iran acquiring a nuclear bomb, has neither confirmed nor denied involvement. 

7. What do Azerbaijan and Israel offer each other?

Azerbaijan is a major oil supplier to Israel, which sells high-tech drones and other weapons in return that were crucial in helping Aliyev to win the war. Israel was the second-largest arms supplier to Azerbaijan from 2011 to 2020, after Russia, according to the Stockholm International Peace Research Institute. Arms exports to Azerbaijan accounted for 17% of Israel’s overall exports of major arms from 2016 to 2020, according to SIPRI. While Azerbaijan has repeatedly hosted Israeli leaders, amid objections from Iran, no Azerbaijani president has yet paid an official visit to Israel. The relationship remains a sensitive one for Muslim-majority Azerbaijan. Israel has an embassy in Baku, but Azerbaijan has yet to open a diplomatic mission in Tel Aviv.

The Reference Shelf

• A QuickTake on the shadow war between Israel and Iran.
• A QuickTake on the Azerbaijan-Armenia conflict and its regional implications.
• An April 2021 SIPRA report showing Israel’s arms sales to Azerbaijan.
• A Bloomberg News report in September on Iran’s new government.

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