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Drones and missiles tilt war with Armenia in Azerbaijan’s favour

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When Armenia’s foreign minister flew to Moscow last week on a diplomatic tour in search of a ceasefire in the war against neighbouring Azerbaijan, enemy troops had advanced to just 65km from their prime target: a critical road that links his country with the disputed territory of Nagorno-Karabakh.

By the time the ceasefire came into effect five days later, following talks in Washington, the picture was even more bleak: Azeri troops were just 30km from the winding mountain pass, and well within firing range.

That rapid progress by Azerbaijani forces is just one of many reasons why the ceasefire — the third attempt at an internationally-mediated truce since fighting broke out a month ago — collapsed after mere minutes in a salvo of artillery fire.

Backed by far superior military equipment and an airborne fleet of Israeli and Turkish drones that has inflicted major damage on Armenian tanks, air defences and heavy weapons, Azerbaijan’s army has made significant gains over the past fortnight, seizing back land surrounding Nagorno-Karabakh previously occupied by Armenian forces.

“The Armenians have been caught flat-footed,” said Jack Watling, research fellow at the Royal United Services Institute, a UK-based defence think-tank. “One side is deploying modern weaponry and the other is using weaponry from the 1970s and 1980s.”

Map showing Azerbaijan makes major gains in conflict with Armenia

The mountainous region of Nagorno-Karabakh lies inside Azerbaijan but is populated by ethnic Armenians and has been controlled by a Yerevan-backed administration since a 1994 war, which also saw Armenia seize roughly 7,000 sq km of Azeri territory to the south and west of the region.

It is in the south, between Nagorno-Karabakh, the border with Iran and Armenian sovereign territory, where Azerbaijan has had the most success in recent weeks, advancing rapidly across the flat, sparsely populated region where its air superiority has been most effective.

“What we see is that there was a factor of invincibility that Armenia had tried to propagate over many years . . . but they relied too much on old military doctrine and thinking: tanks, heavy artillery and fortifications. It simply reminded us of the second world war,” Hikmet Hajiyev, foreign policy adviser to Azerbaijan’s president Ilham Aliyev, told the Financial Times. “Instead, mobile forces, drone technology and a modern approach has been applied by us.” 

While a lack of international observers and conflicting propaganda claims make tracking the front line difficult, video evidence of captured towns and villages shared by Baku and analysis by military experts suggest Azerbaijan has gained close to 1,500 sq km of territory previously controlled by Armenian forces. Yerevan on Tuesday claimed Azerbaijan was shelling its border.

“Yes, the enemy is successful in certain sectors and has approached the [southern border of Armenia], but the situation is not critical,” Armenia’s defence ministry spokesperson Artsrun Hovhannisyan said on Monday.

Fuelled by billions of dollars in oil and gas sales, Azerbaijan’s military spending over the past decade totalled $24bn, according to data from the Stockholm International and Peace Research Institute. Armenia spent $4.7bn in the same period.

Before fighting broke out on September 27, Azerbaijan boasted twice as many military aircraft as Armenia, more than double the number of artillery launchers, and scores of armed drones. Armenia uses mainly Soviet-era air defence systems that are not integrated with modern radar to target drones.

“Azerbaijan was able to purchase weapons from Israel, Russia and Turkey to attain a substantial military edge,” said Michael Kofman, director of the Russia Studies Program at CNA, a US-based national security research centre. “In general what you see is Armenia fielding a sizeable tank and artillery force that lacks the ability to defend itself from modern precision-guided weapons.”

Evidence presented by Azerbaijan, but disputed by Armenia, suggests that an Israeli Harop “suicide drone” destroyed one of Armenia’s S-300 air missile batteries in late September. Azerbaijan has also relied heavily on armed TB2 drones sold by Baykar, a defence company owned by Turkey’s president Recep Tayyip Erdogan’s son-in-law Selcuk Bayraktar and his family, to destroy scores of Armenian tanks.

“Having high-tech military equipment is not the same as using it properly,” said Mr Watling. “Given the competence that they are now showing, it’s obvious that they have received significant levels of advice from Turkey.”

An Armenian soldier runs to his trench position on the frontline as a drone is heard flying overhead © Alex McBride/Getty Images

Can Kasapoglu, director of security and defence studies at Edam, an Istanbul-based think-tank, said the tactics used by Azerbaijan clearly echoed those used by the Turkish military in its campaign against Syrian government forces in Idlib last February and March. “Turkey has transferred not only weaponry but also concepts of operations,” he said.

Mr Hajiyev said Turkey had provided “extensive defence training” but denied that Ankara was playing a direct role in the conflict.

But despite the superior military equipment, most experts agree that future Azeri gains will be much harder to achieve as their forces head north towards the mountains and the crucial Lachin pass, which connects Armenia to Nagorno-Karabakh.

“The rest of the region is mainly mountains covered with forests, which would require much more military investment to move forward to take over new territories,” said Olesya Vartanyan, senior analyst at the International Crisis Group. “One should also remember that winter is coming, which would make fighting even more difficult.”

Mr Kofman said Armenia considered much of the lost territory to be “buffer space” and is focused on maintaining control of Lachin.

All three ceasefire agreements — to exchange prisoners and the bodies of those killed — have fallen apart almost immediately, with both sides blaming the other for a failure to adhere to the terms. Turkey has criticised efforts by Russia, the US and France to broker peace talks.

“In terms of diplomacy, I am afraid we are still at a square one, similar to the situation on the first day of this war,” said Ms Vartanyan. “We are left with the only option: when one or both sides feel exhausted with the fighting. Only then probably there can be a chance for diplomacy.”

Additional reporting by Max Seddon in Moscow and Laura Pitel in Ankara



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ECB signals rising concern about eurozone bond market sell-off

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The European Central Bank has indicated it will increase the pace of its emergency bond purchases to counter the recent sell-off in eurozone sovereign debt markets if borrowing costs for governments, companies and households continue to rise.

Philip Lane, chief economist of the ECB, said on Thursday that the central bank was “closely monitoring the evolution of longer-term nominal bond yields” and its asset purchases “will be conducted to preserve favourable financing conditions over the pandemic period”.

The ECB has pledged to ensure financial conditions encourage investment and spending, helping the eurozone economy to make a swift recovery and lifting inflation towards the central bank objective of just below 2 per cent.

To achieve this, Lane signalled that it would rely on its pandemic emergency purchase programme, under which it plans to spend up to €1.85tn on buying bonds by March 2022. There is just under €1tn of that amount left to spend.

“We will purchase flexibly according to market conditions and with a view to preventing a tightening of financing conditions that is inconsistent with countering the downward impact of the pandemic on the projected path of inflation,” he said.

Eurozone government bonds fell to their lowest levels for almost six months this week, and while Lane’s comments caused a brief rally on Thursday afternoon, prices then resumed their downward path.

Bond yields move inversely to prices, so the sell-off is pushing up the cost of borrowing for governments, which must sell vast amounts of extra debt this year to cover the cost of the coronavirus pandemic and its consequences.

Germany’s 10-year bond yield has risen to its highest level since last March, while the French equivalent returned to a positive yield for the first time since June and Italian sovereign yields hit their highest level since November.

ECB president Christine Lagarde said in a speech on Monday that policymakers were “closely monitoring” the rises. 

Isabel Schnabel, another ECB executive board member, said in an interview with Latvian news agency Leta published on Thursday: “A too-abrupt increase in real interest rates on the back of improving global growth prospects could jeopardise the economic recovery.”

Lane gave more detail of how the ECB defines “favourable” financing conditions, saying it would track the availability and cost of bank lending and market-based funding — in particular, the risk-free overnight index swap curve and the GDP-weighted eurozone sovereign bond yield curve, which have both risen in recent days.

He warned of the need to avoid “a mutually-reinforcing adverse loop” in which banks interpret lower borrowing demand as a negative signal about the economy and companies interpret a tightening of bank lending conditions as a worrying sign about the outlook. 

Eurozone bank lending to the private sector grew by just under €12bn in January, down 75 per cent from the average monthly loan growth last year according to data published on Thursday.

Much of the slowdown was because of a sharp fall in net lending to insurers and pension funds. Lending to non-financial companies also retreated slightly, while lending to households still grew but at its slowest rate since last April.

Krishna Guha, vice-president at Evercore ISI, said “ECB jawboning” was “having little effect” and “the next step — in our view presaged by Lane — is for the ECB to dial up the pace of its [bond] purchases”.

Last week the ECB spent a net €17.3bn on its emergency bond purchase programme, up slightly from the previous week but still well below the levels of last April, during the previous sell-off in government bond markets.

Frederik Ducrozet, strategist at Pictet Wealth Management, said the ECB was likely to wait until it was clear the bond market sell-off was a lasting shift before increasing its emergency bond buying above €20bn per week. But he said that “will bring the risk of disappointment [for investors] — because you have to walk the walk as well as talk the talk as a central bank”.



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Armenia’s prime minister claims military is plotting a coup

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Armenia’s prime minister has claimed the country’s military is plotting a “coup,” and taken to the streets with his supporters after senior army figures in the former Soviet republic called on him to resign.

Nikol Pashinyan has faced months of protests demanding he step down after the defeat of Armenian forces in a six-week war with neighbouring Azerbaijan that ended in November.

The army weighed in on Thursday, calling on the prime minister to quit after he fired the first deputy chief of staff for criticising him.

A letter to the prime minister signed by 40 senior officers warned Pashinyan not to use force against demonstrators, but did not say whether the army would act to remove him from power.

“The current government’s ineffective management and serious mistakes in foreign policy have put the country on the brink of collapse,” the officers wrote on Facebook.

Pashinyan later fired the chief of the general staff, Onik Gasparyan, ordered police to secure government buildings in Yerevan and told his supporters in the capital’s Republic Square to avoid violent clashes.

Demonstrators at an opposition rally in Yerevan demand the resignation of Nikol Pashinyan. They cheered as a fighter jet flew overhead © Artem Mikryukov/Reuters

Describing the situation as “manageable” the prime minister denied he was planning to flee the country and said the army’s statement was an “emotional reaction” to a dispute over the defeat in the Nagorno-Karabakh conflict.

“We have no enemies in Armenia. I am calling for calm,” Pashinyan said, according to Russian news agency Interfax. “Of course, the situation is tense, but we need dialogue, not confrontation.”

He later took to the streets with several thousand supporters and a megaphone — an echo of the 2018 “velvet revolution” that swept him to power following a march across the country that galvanised popular support. A few thousand opposition supporters gathered at a different square and cheered as a fighter jet flew overhead.

Pashinyan has fought off calls for his resignation since signing a Moscow-brokered peace deal in November that cemented territorial gains for Azerbaijan in Nagorno-Karabakh. The mountainous enclave in the South Caucasus is internationally recognised as part of Azerbaijan, but is populated by ethnic Armenians who seized control after a war that broke out in the dying days of the Soviet Union.

Azerbaijan, a mostly Muslim country and a close ally of Turkey, launched an offensive in September with the aim of retaking the entire enclave. Armenia’s army was ill prepared for oil-rich Azerbaijan’s modern drone fleet and significant backing from Ankara.

More than 3,300 Armenian soldiers died in the conflict, with a further 9,000 wounded. Thousands of civilians were displaced, including some who set their own homes on fire as they fled land now under control of Azerbaijan.

Russia, the traditional regional power broker and Armenia’s most important ally, remained neutral even as several previous ceasefires failed and has deployed 2,000 peacekeepers to secure the region.

Pashinyan admitted the terms were “unbelievably painful for me and my people” but argued the concessions were necessary to prevent further losses.

The devastating defeat sparked fury among Armenians who stormed the country’s parliament and attacked its speaker, demanding the prime minister’s resignation.

Pashinyan backtracked on a pledge to step down after snap elections earlier this month and remained in office in the face of opposition from Armenia’s ceremonial president, three parliamentary opposition parties, and key church leaders.

The Kremlin said on Thursday it was “following events in Armenia with caution” but considered them “exclusively Armenia’s internal matter”.

Dmitry Peskov, President Vladimir Putin’s spokesman, told reporters Russia was “calling on everyone to be calm” and said “the situation should remain within constitutional limits,” according to Interfax.



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German accounting watchdog chief to step down in wake of Wirecard

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The head of Germany’s accounting watchdog is to step down following mounting political pressure over corporate governance shortcomings exposed by the Wirecard fraud.

Edgar Ernst, the president of the Financial Reporting Enforcement Panel (FREP), said on Wednesday he would depart by the end of this year. He is the third head of a regulatory body to lose his job in the wake of one of Germany’s biggest postwar accounting scandals.

The collapse of Wirecard, which last summer filed for insolvency after uncovering a €1.9bn cash hole, triggered an earthquake in Germany’s financial and political establishment.

Felix Hufeld, president of BaFin, the financial regulatory authority, and his deputy Elisabeth Roegele were pushed out by the German government in January for failing to act on early red flags suggesting misconduct at Wirecard. Ralf Bose, the head of Germany’s auditors supervisor Apas, was fired after disclosing he traded Wirecard shares while this authority was investigating the company’s auditor, EY. The German government is also working to revamp the country’s accounting supervision and financial oversight.

Meanwhile, criminal prosecutors in Frankfurt are evaluating a potential criminal investigation into BaFin’s inner workings and on Wednesday asked the market authority to hand over comprehensive documents, the prosecutors office told the FT, confirming an earlier report by Handelsblatt. The potential scope of any investigation as well as the individuals who might be targeted is still unclear. BaFin declined to comment.

Ernst came under pressure as the parliamentary inquiry commission uncovered that he joined the supervisory board of German wholesaler Metro AG in an apparent violation of internal governance rules, which from 2016 banned FREP staff from taking on new supervisory board roles.

Last week, the former chief financial officer of Deutsche Post filed a legal opinion to parliament defending his move. He argued that his employment contract was older than the 2016 ban on board seats and hence trumped the tightened governance regulations.

The German government had subsequently threatened to ditch the private-sector body which currently has quasi-official powers.

In a statement published on Wednesday evening, FREP said that Ernst wants to open the door for a “fresh start” that would be untainted by the discussions around his supervisory board mandates. “FREP is losing a well-versed expert in capital markets,” the body said.



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