A mosque and the city waterfront are reflected in a new building in Baku (David Mdzinarishvili / Courtesy Reuters)

As Iran’s progress on its nuclear program continues unabated, 2013 may well mark the climax of the long-standing impasse between the Islamic Republic and the West. Hopes for a diplomatic solution are fading, and an Israeli or a U.S. military strike on Iran’s nuclear program seems increasingly likely. The potential fallout from such an action for the United States, Europe, and the Middle East has been the object of frequent speculation; far less discussed, although no less pertinent, is what a violent confrontation would mean for the South Caucasus -- an area just north of Iran where the standoff between the Islamic Republic and the West is already palpable in everyday life. Long considered a powder keg, the region, which includes Armenia, Azerbaijan, and Georgia, is once again on the brink.

At the center of the tensions in the region lies Azerbaijan, a country with firm historical and cultural connections to Iran but one whose interests have overlapped with those of Israel, the Islamic Republic’s mortal enemy. During his visit to Baku last October, Iranian President Mahmoud Ahmadinejad described his country’s relationship with Azerbaijan as “brotherly and very deep,” drawing on the two countries’ shared ethnic and religious heritage. (Ethnic Azeris populate much of the northwest region of Iran, which is also known as Azerbaijan, and both countries are predominantly Shia.) Ahmadinejad’s statement, however, blatantly misrepresented the current state of affairs; today, it is not historical affinity but rather intense suspicion and rivalry that shape ties between Baku and Tehran. The same month Ahmadinejad made the statement, a court in Baku gave lengthy prison sentences to 22 Azerbaijanis charged with spying for Iran’s Islamic Revolutionary Guards Corps (IRGC) and plotting to carry out attacks against U.S. and Israeli targets in Azerbaijan. Meanwhile, in December, Tehran kicked up a fuss after ethnic separatists from the northwest Iranian region of Azerbaijan held a conference in Baku.

Yet Ahmadinejad’s statement in Baku was not entirely insincere. Over the past few months, Iranian officials and the state-controlled media have stressed Tehran’s desire for friendlier relations with Baku; at the same time, they are prodding the Azerbaijani government to reconsider its foreign policy alignments -- principally its close ties with Israel. Nowhere in its immediate neighborhood does Iran see such an unambiguous Israeli footprint as it does in Azerbaijan. Israel and Azerbaijan share the common goal of containing Iranian influence. In this joint front, Azerbaijan provides proximity to Iran -- with much speculation about Azerbaijani soil being used as a staging ground for Israeli military operations -- while Israel possesses superior weapons technologies and other resources. But the Azerbaijani-Israeli partnership does not rely solely on the question of Iran; it spans broader economic and military cooperation, trade and investment, and mutual diplomatic support. For Iranian leaders, this uncomfortable reality has raised the stakes, forcing them to vacillate between threats and overtures in their attempts to sever Baku’s relationship with Israel.

Nevertheless, although the Israeli presence in Azerbaijan is a significant security concern for Iran, it represents only one aspect of Tehran’s interests in the South Caucasus. In fact, the three countries of the region view their large southern neighbor through very different lenses. Iran enjoys cordial ties with Georgia and intimate relations with Armenia, which has helped Tehran evade sanctions through its banking sector. As the Western standoff with Iran plays out over the next year, scholars and policymakers alike cannot afford to ignore the parallel developments in the South Caucasus.

INTERTWINED HISTORY

It has been nearly 200 years since Iran lost its foothold in the South Caucasus. In 1813 and 1828, having repeatedly failed to repel invading Russian armies, the Persian Qajar dynasty signed the treaties of Gulistan and Turkmenchay. With the two agreements, Persia relinquished to the Russian Empire its territorial claims on most of the eastern parts of present-day Georgia and the territories that now make up Armenia and Azerbaijan. In Iran, the word “Qajar” is still synonymous with territorial loss and national humiliation.

Occasional statements from Tehran leave no doubt that many Iranians still consider the South Caucasus part of their historical domain, a sphere where deference to Iranian interests is expected if not vocally demanded. In August 2011, General Hassan Firouzabadi, the chief of staff of Iran’s armed forces, lambasted the Azerbaijani government for its secular policies and ties to Israel. In an explicit threat, Firouzabadi warned of insurrection in Azerbaijan, stating that “Iranian blood flows in the veins of the people of [Azerbaijan], and their hearts beat for Islam.”

As two of only four Shia-majority countries in the world, Azerbaijan and Iran share important religious ties. And there are more ethnic Azeris living in Iran (estimated at 15-20 million) than in the Republic of Azerbaijan itself (around nine million). Many families have branches on both sides of the Azerbaijani-Iranian border. With so many commonalities, Azerbaijan and Iran would seem likely to be natural allies.

But the opposite has been the case. When Azerbaijan broke away from the Soviet Union in 1991, Tehran quickly recognized it as an independent state, hoping that it would serve as fertile ground for spreading the Islamic revolution. But from the early days of independence, the Azerbaijani elite evinced no interest in emulating Iran’s marriage of religion and politics, looking instead to secular Turkey as its prime political and economic partner. Iran’s initial euphoria at the prospect of a new Shia state quickly turned into dread, as Baku expressed irredentist sentiments and promoted the idea of a “Greater Azerbaijan,” which would unite Azerbaijan (the country) and Azerbaijan (the region in northwest Iran). Fearing Baku’s intentions to fuel secessionism inside its borders, Iran provided vital backing to Armenia in its war against Azerbaijan over the disputed region of Nagorno-Karabakh, which dragged on from 1988 to 1994 and ended in an inconclusive cease-fire. In Azerbaijan, Iran’s stance in that unfinished war has never been forgiven, and Tehran has continued to support Armenia ever since.

From the end of the Nagorno-Karabakh war in 1994 to the early years of the twenty-first century, formal relations between Azerbaijan and Iran grew more stable. Tehran broadly acknowledged that the South Caucasus fell within Russia’s sphere of influence and thus avoided playing its Islamist card too blatantly in Azerbaijan; Moscow is highly sensitive to Islamism on its southern flank. Meanwhile, during the tenure of Azerbaijani President Heydar Aliyev, from 1993 to 2003, Baku quieted its calls for unification with the northwest Iranian region of Azerbaijan. In recognition of the improved relations, Iran rewarded Azerbaijan with a consulate in the northern Iranian city of Tabriz, the world’s second-largest Azeri-populated city.

Since Ilham Aliyev became president of Azerbaijan in 2003, however, Baku has grown both considerably richer -- thanks to revenues from energy exports -- and noticeably bolder in its foreign policy. Nothing exemplifies this latter shift more vividly than the close ties Azerbaijan has forged with Israel, despite knowing full well that this would anger Iran. Azerbaijan has been adamant that Iran has no basis to criticize its ties with the Jewish state given that Tehran has long ignored Baku’s pleas to shun Christian Armenia.

When Tehran has appealed to Azerbaijan’s Islamic identity, the Azerbaijanis quickly point out that Tehran’s relations with Armenia have been trouble-free compared with its ties with its Muslim neighbors. Armenia and Iran have signed more than 30 bilateral agreements, and Iran provides Armenia with roughly 23 percent of its natural gas supply -- the country’s chief source of energy. As Araz Azimov, Azerbaijan’s deputy foreign minister, recently put it: “Iran gives life to Armenia.”

A PRECARIOUS BALANCE

A cycle of provocation and retaliation has become the central characteristic of Iranian-Azerbaijani relations in recent years. Tit-for-tat measures have included arrests of each other’s citizens on charges of espionage, most recently in March and July 2012; deadly border incidents in July and October of the previous year; the recall of ambassadors in May 2012, after Tehran protested against the burning of pictures of Iran’s supreme leader, Ayatollah Ali Khamenei, at a rally in Baku; and plenty of incendiary rhetoric.

Last February, when Azerbaijan signed a $1.6 billion defense deal with Israel that included air defense systems, intelligence equipment, and unmanned aerial vehicles, Iran was swift to condemn the Aliyev government. Tehran claims that Baku has given the Mossad a blank check to conduct operations against Iran from Azerbaijani soil. Esmail Kosari, a senior member of the Iranian parliament and a former IRGC commander, said that “Azerbaijan’s cooperation with the U.S. and Israeli spy agencies will harm the Azeri people” and claimed that Iran had documents showing “Azeri officials have helped Mossad and CIA agents” in “the assassination of Iranian nuclear scientists.” (The documents have not yet been publicly released.) Baku, meanwhile, complains that Tehran does not respect Azerbaijan’s sovereignty, finances radical Islamist groups in the region, and is willing to go to any length to undermine the legitimacy of its leadership, including sponsoring anti-Aliyev broadcasts in the Azeri language.

Yet, despite all the acrimony, neither side appears ready to let ties plunge much further. At the Non-Aligned Movement conference in Tehran last September, the Azerbaijani Foreign Minister Elmar Mammadyarov reportedly told his Iranian hosts that “Azerbaijan will never allow an action against Iran from its soil.” Shortly thereafter, Iran’s vice president, Hassan Mousavi, extended an olive branch by visiting Aliyev in Baku, and Iran released two Azerbaijanis who had been arrested on charges of espionage. In turn, Baku released an Azerbaijani citizen who had been charged with spying for Iran.

Tehran’s recent overtures to Azerbaijan are part of a broader effort to limit Iran’s isolation and prevent Baku from aiding or joining an Israeli or U.S. military operation against its nuclear program. But these worries are vastly exaggerated. Baku fully understands the security risks it would face in the event of a war between Iran and the West, including mass refugee inflows, inaccessibility to the semi-autonomous exclave of Nakhchivan (an Azerbaijani region sandwiched between southern Armenia and northern Iran), and, in the worst case, direct Iranian military retaliation. Moreover, there is no evidence that Baku would look to an attack on Iran as an opportune moment to realize its irredentist dreams. It is clear that the idea lacks momentum among Azeris living in Iran, a fact that the leadership in Baku is well aware of. As one senior Azerbaijani parliamentarian, Asim Mollazade, put it to me in Baku, “No serious person in Azerbaijan speaks of unification [with the south].”

The standoff between Iran and the West also threatens Armenia. Ever since Armenia’s borders with Turkey and Azerbaijan closed in 1993, Yerevan has grown reliant on Iran and Georgia, which have become Armenia’s sole avenues to world markets and its principal trading partners. A war involving Iran, therefore, would almost definitely harm Armenia’s economic interests.

And the political impact could be greater still: the main fear in Yerevan at the moment is that Tehran might be forced to reassess its close ties with Armenia as a result of the impasse. If Iran wants to mollify Azerbaijan to ensure that it does not aid the United States or Israel in a military operation, Tehran might agree to distance itself from Armenia. From Armenia’s perspective, however, this would be the worst-case scenario, because it could embolden Azerbaijan and tempt it to seek a military solution in Nagorno-Karabakh. Armenian President Serzh Sargsyan recently suggested that Baku’s defense buildup could be a precursor to a new round of war: in 2003, Baku spent $175 million on defense; in 2012, the figure was estimated at $4.3 billion. Government officials across the South Caucasus are now experiencing first-hand the cost of the region’s three unresolved territorial disputes (Nagorno-Karabakh, South Ossetia, and Abkhazia): when the status quo is so fragile, any jolt to the geopolitical landscape has the potential to reignite old, violent conflicts.

Where does Iran fit in the geopolitical landscape of the South Caucasus? For starters, Tehran’s latest political maneuvers vis-à-vis Azerbaijan are driven by the perception that its security is at risk. Although it is debatable whether Azerbaijan has agreed to become a launchpad for Israeli operations, that is Tehran’s assumption, which in turn guides the mix of Iranian threats and conciliatory measures aimed at Baku. But there is also a larger factor at play: the ascendency of Azerbaijan as an economic and military player. That, more than anything else, is forcing Tehran to recalibrate its overall approach to the South Caucasus.

Whether or not the confrontation between Iran and the West comes to a head in 2013, the South Caucasus will remain entangled in the stalemate with much at stake. Azerbaijan is unlikely to abandon its deepening ties with Israel or pursue adventurous actions against Iran. From Baku’s perspective, being wooed by both Iran and Israel has its benefits, despite the fact that Israel is the more reliable partner. This regional dynamic, in turn, weakens the hand of Armenia, which understandably fears a more aggressive Azerbaijani posture. On the whole, the standoff between Iran and the West is shifting the geopolitics of the South Caucasus. Both a more stable peace and another descent into war seem but a hair’s breadth away.