Azerbaijan is a post-socialist transition country affected by regional tensions similar to those found in Armenia, Georgia, Tajikistan, Macedonia and Croatia. This article examines the historical background of a specific source of tensions, namely the Nagorno-Karabakh issue, its legacies and significance for the economic transition of Azerbaijan. The Azerbijani economy has been among those to suffer most after the demise of the Soviet Union. These legacies underlie Azerbaijan’s current situation whereby macroeconomic policies and structural reforms are driven by developments in exploration and exploitation of the Caspian hydrocarbon resources. The author finds evidence that economic and commercial cooperation can reduce political risks and discourage nationalistic power politics both in domestic and international contexts.

A firm and continuing commitment by the Azerbaijani government to pursue the process of economic transition combined with peace and stability in the region is necessary for the progress of transition. The rate of reform appears to be critical for the transition process in Azerbaijan and the Caucasus generally. Rapid economic growth fuelled by the expected influx of oil revenues could find Azerbaijan ill prepared to lock in the quality and sustainability of such economic growth. Subsequent papers in this series will deal with the implications for economic development, process of transition, structural reforms in Azerbaijan