FT.com
By Leyla Boulton and Isabel Gorst ,
25, January 2008

Ramana, near Baku, is one of the new settlements being built to house people who fled the disputed enclave of Nagorno Karabakh during the war with Armenia in the early 1990s. Financed by the state oil fund, the $35m settlement has a music school and shop, gas, power and running water. Each house has a small plot of land.

"You cannot keep people in camps if you have oil wealth," explains Araz Azimov, deputy foreign minister and President Ilham Aliyev's special envoy on Nagorno Karabakh. He adds, however, that the housing is temporary until they can return home.

"These buildings are comfortable, but that is not what we need," says Rafael Temurlu, a school teacher. "We need to return to the place they chased us from."

Fourteen years after a ceasefire left Armenia in control of Nagorno Karabakh, memories of the conflict, which deprived Azerbaijan of 14 per cent of its territory and claimed up to 25,000 lives, still evoke anger.

In a region traditionally inclined to blood feuds, this so-called "frozen conflict" is the most pressing foreign policy challenge faced by Azerbaijan.

Any renewal of the conflict would threaten the strategic pipeline corridor carrying oil and natural gas across Georgia to the west.

But Mr Azimov agrees with western diplomats who say neither side has an interest in resuming hostilities.

Ethnic tensions over Nagorno Karabakh, established as an autonomous region within Azerbaijan with a predominantly Armenian population as part of the Kremlin's divide-and-rule policies, erupted into violence as the Soviet empire began to disintegrate in the late 1980s.

Armenians seized control of the region and occupied a clutch of surrounding Azerbaijani provinces. In 1994, Azerbaijan opted for a ceasefire. International efforts to broker a resolution of the dispute have proceeded fitfully since 1994.

Azerbaijan's ministry of foreign affairs says 760,000 internally displaced people from Nagorno Karabakh and the surrounding occupied territories live in Azerbaijan, in addition to some 220,000 refugees from Armenia proper.

The principles of a settlement contained in an agreement in 2004 call for selfdetermination on the future legal status of Nagorno Karabakh, the withdrawal of troops from adjacent provinces and the deployment of international peace keepers.

Azerbaijan and Turkey refuse to lift their blockade of Armenia until the dispute is resolved.

The two have also excluded Armenia from regional co-operation projects, ranging from the Baku-Tbilisi-Ceyhan pipeline and, in spite of US protestations, the Baku-Tbilisi-Kars railway scheme.

President Aliyev has described 2008 as a decisive year for solving the dispute and Matthew Bryza, US deputy assistant secretary of state responsible for the region, last week resumed shuttle diplomacy between Baku and Yerevan.

But it is not clear how progress can be made in the run-up to PRESIDENTIAL ELECTIONSs scheduled in both Azerbaijan and Armenia this year. In both countries any signal of a willingness to compromise in the dispute would risk votes.

Azerbaijan plans to increase defence spending this year to $1bn from $600m in 2007, in proportion with an expansion of its overall budget. However, Mr Azimov says Baku is determined to regain the territory by peaceful means, albeit from a stronger and richer position than in the early 1990s, when its fledgling army was crushed by better-equipped and trained Armenian forces.

He says: "All we are saying to the Armenians is 'look at the reality. If you want to be part of a success story, come with us'." With many saying that only Russia - one of three international mediators in the dispute together with the US and France - can influence Armenia, Mr Azimov detects a shift in Moscow's position.

"Russia started realising they need stability and economic viability in the South Caucasus," he says. "They realise it is better to run tankers rather than tanks in the area." In the meantime, the people of Ramana are likely to remain pawns in a bigger geopolitical game.

Most of Mr Temurlu's pupils are too young to remember life in Nagorno Karabakh.

But he tells them all they will one day leave Ramana and return to their rightful home. "We will rebuild our land. We can make bread out of stones," he says.