Black Gold: Peace pipe: Wealth soothes the troubled waters of a hostile post-Soviet world

In a region where ethnic conflict seemed to have no end, economic change may prove to be the key that unlocks surprising doors. Gayane Afrikian reports on unexpected side-effects of the oil boom.

The promise of benefits from oil reserves in Azerbaijan is paying dividends in the prospects for peace with its neighbour, Armenia, which supported Nagorno-Karabakh when it attempted to break away from Baku in 1988.

Levon Ter-Petrosyan, the Armenian President, stunned observers with a recent ground-breaking statement on the disputed enclave of Nagorny- Karabakh. Mr Ter-Petrosyan abruptly broke with his own previous position by saying that it was unrealistic for Karabakh to gain independence or unite with Armenia. In a newspaper article published simultaneously in Russia and Armenia last week, he talked of the "fatal illusion that Karabakh's enemy is Azerbaijan".

Increasingly, pipelines and peace have become interconnected. All countries in the region are comfortably situated to benefit from the vast Caspian resources which will bring interdependence between hostile and economically devastated post-Soviet republics. Armenia fears being left out of the oil game unless it reaches a compromise with Azerbaijan. Mr Ter-Petrosyan said that a compromise solution was unavoidable in the face of international opposition to independence for Karabakh, and that Armenia's interests lay in achieving a compromise now, while its position is still strong.

Such a dramatic shift in Mr Ter-Petrosyan's position is prompted by the fact that cash-strapped Armenia's chances of hosting an oil pipeline to carry Azeri oil to world markets rest on rapprochement with Baku.

The direct route for a pipeline to carry Caspian oil from Baku to the west goes through Armenia to the Turkish Mediterranean port of Ceyhan.

Haidar Aliyev, the Azeri President, has publicly suggested that he would consider a pipeline through Armenia if the two countries can settle their dispute over Nagorno-Karabakh. A compromise solution would help normalise Armenia's relations with neighbouring Turkey. At present, the border between two countries is closed - not least because of historic tensions which go back to the Turkish genocide of Armenians in 1915. Such an opening up to Turkey would enable Armenia to weaken its current partial dependence on Russia.

Huge Armenian demonstrations demanding independence for Karabakh began in 1988. The issue quickly developed into the first major ethnic conflict of the Gorbachev era and played a key role in the lead-up to the collapse of the Soviet Union. Around 35,000 people were killed in the war, which has been stalemated since Armenians took control over the enclave and the surrounding area in 1994.

In the oil rush, the Nagorno-Karabakh issue has become a problem of the international community. While investing billions of dollars in Azerbaijan, it is a challenge for Western companies to get the oil out from the explosive region.

Oil will inevitably change the geopolitics of the region; this is the first serious sign of a breakthrough in almost 10 years of conflict.