Clare Nuttall in Almaty -

The latest summit between the presidents of Armenia and Azerbaijan was followed by promises to meet again, but yielded no concrete progress on resolving the territorial dispute over the Nagorno-Karabakh enclave.

Armenia's Serzh Sargsyan and Azerbaijan's Ilham Aliyev held talks in Moscow on July 17, and met again the following day together with Russian President Dimitry Medvedev. Russia, which has considerable influence in the Caucasus and has been seeking to broker a compromise on the Nagorno-Karabakh enclave, described the discussions as "constructive."

"During today's, fourth, meeting, between presidents of Russia, Azerbaijan and Armenia, Dmitry Medvedev confirmed the readiness of Russia as co-chairman of the Minsk Group to continue exerting efforts to find mutually acceptable solutions to the Nagorno-Karabakh settlement," presidential aide Sergei Prikhodko told journalists the following day. "In our view, the meeting was very constructive," he said, adding, however, that, "It focused on certain problems, which remained open."

Some 35,000 people were killed in the early 1990s when war broke out after the ethnically Armenian enclave of Nagorno-Karabakh, backed by Armenia, declared its independence from Azerbaijan. A ceasefire agreement was signed in 1994 bringing an end to the war, but small-scale clashes on the border between Azerbaijan and Nagorno-Karabakh are still frequent. Fifteen years on, no peace treaty has yet been signed and no country has recognised the Nagorno-Karabakh Republic's independence, though it is effectively integrated with Armenia.

In the last year, Russia has stepped up its efforts as it seeks to cement its influence in the South Caucasus, as well as presenting itself in a more positive light - as a peacemaker - after the PR disaster of the 2008 war against Georgia. The ever-present concern that a border skirmish could escalate into full-scale conflict also poses a threat to the region's role as a key energy transit point.

However, while Sargsyan and Aliyev are both participating in discussions, their rhetoric back on their home territory is less conciliatory.

Home truths

Speaking at Chatham House in London the week before his meeting with Sargsyan, Aliyev said that independence for Nagorno-Karabakh was out of the question and refused to rule out a military solution to restore Azerbaijan's territorial integrity. "Nagorno-Karabakh will never be recognised as an independent country. It is absolutely ridiculous to expect that," Aliyev said. "A million refugees from Azerbaijan who were the subject of ethnic cleansing policies of Armenia have a right to return to their land."

On the Armenian side, representatives of the country's large diaspora have spoken out against the Madrid principles, while the head of the hardline nationalist opposition party Dashnaktsutyun party warned Sargsyan against signing any agreement with Aliyev.

The Nagorno-Karabakh government is also dissatisfied with the procedure. In a statement published two days before the talks, the NKR's Foreign Ministry described the talks, from which it is excluded on Azerbaijan's demand - as "distorted."

"Real progress in the negotiations is possible only with the Karabakh party's equal participation in all the stages of the negotiation process," it said.

Despite this, the economic situation in Nagorno-Karabakh has improved somewhat in recent years, with GDP increasing by 116% between 2001 and 2007, according to the republic's statistical office. The economy has also moved away from its previous reliance on agriculture, with that sector's share of GDP falling from 33% in 2002 to 16% in 2007, while manufacturing and services have increased.

In another significant development, the recent IPO of Artsakh Hydro Power Plant, the proceeds of which will be used to build small hydro plants in Nagorno-Karabakh, attracted investment from international investors in countries including France, Russia, Switzerland and the UAE. If progress towards resolving the conflict continues, it could unlock the region's potential in several sectors, in particular mining.

Russia is continuing to keep Armenia and Azerbaijan at the negotiating table, with the next meeting between the two presidents scheduled for October. However, unless the political will for a solution from Baku, Yerevan and Stepanakert increases, progress could remain elusive.

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