Peace in the Caucasus could mitigate Israel-Hamas economic spillover in Tanzania

With civil war raging in Sudan and coups spreading across the Sahel, it may seem of little relevance that the South Caucasus is on the precipice of peace.

But whilst geographically remote, developments in the region that sits between Russia, Turkey and Iran could have widespread ramifications for global trade – which could directly impact Tanzania.

The war in Ukraine hit Tanzania hard. Energy and food prices spiralled out of control. Big fuel crisis occurred in 2023, with prices that have gone up by 17 percent within a short amount of time.

International investor risk appetite collapsed. Capital flight spread across the continent. As inflationary pressures mounted, the American Federal Reserve hitched interest rates, taking the dollar to new heights as global capital sought safe havens. Consequently, the Tanzanian shilling remains constantly unstable.

Oil marketing companies are facing a critical financial challenge, needing a total of $747 million (approximately Sh1.9 trillion) to settle unpaid invoices for petroleum products purchased during the dollar crisis.

According to the Bank of Tanzania's Monthly Economic Review (MER) the current account deficit, although gradually narrowing in recent months, remains large at U $2,903 million.

Just when pressures appeared to be easing, with interest rates falling and the risk appetite for developing markets growing, war between Israel and Hamas threatens another choke point of global trade.

The Houthis, in solidarity with the Palestinians, have been attacking Western commercial ships traveling through the Red Sea on their way to the Mediterranean through the Suez Canal.

The waterway is critical for global trade: one-third of all container traffic passes through it. It is also an energy artery for Europe (and of heightened importance since the Ukraine war): 12 percent  of seaborne oil and 8 percent of LNG also flow through it.

Whilst Tanzania is still reeling from the fallout from the Russia-Ukraine war, contagion from the Israel-Hamas war threatens more of the same.

The two conflicts show the pressures that chokepoints in the global trading architecture can exert on the developing world. Alternatives are needed to prevent geopolitical instability cascading across the globe.

The South Caucasus is one of those alternatives. Azerbaijan, with large oil and gas reserves in the Caspian Sea, already supplies energy to Europe and has agreed to double capacity in the wake of the Ukraine war, easing pressures on international markets. But there is also the potential to bring the vast energy reserves of Central Asia across the Caspian Sea and through the South Caucasus infrastructure to Europe.

The region could also become vital for other trade. The only feasible overland freight lines from Asia to Europe runs through here (the other ones travel through either Russia or Iran, making them a dead-end for Europe).

But its full potential as a conduit for global trade has been hindered by the conflict between Azerbaijan and Armenia over the province of Karabakh – a region internationally recognised as Azerbaijan, but which had been occupied by Armenia for the past thirty years.

However, after a war in 2021 which saw Azerbaijan regain its lands, the two are on the brink of signing a peace deal.

It has taken the two countries a long time to get to this point. But an election in Azerbaijan could potentially derail talks if the electorate do not vote for another term for current President Ilham Aliyev.

Yet this seems unlikely. Regaining Karabakh from Armenian occupation has been a national cause since its loss in the 1990s. Having delivered it, the President is riding a wave of popular support going into the election. But he has also put the peace deal at the centre of his campaign. The vote is essentially a referendum on it.

But for the peace agreement to go through, it is also essential his Armenian counterpart stays in power.

When Azerbaijan reversed the occupation, he became the first Armenian leader since independence to state he will recognise, as every other country in the world does, that Karabakh is Azerbaijan’s sovereign territory.

However, he faces pressure from a nationalist opposition bent on toppling him and scuppering the peace deal. 

This would be a disaster for Armenia. The country has been regionally isolated due to its occupation of its neighbour’s territory. Its economy has suffered as a consequence. Yet a peace deal would see borders reopen and reintegration begin.

Failure to do so would also prevent the region reaching its full potential as a trading hub connecting the Eurasian landmass.

At the moment, energy infrastructure and freight lines navigate a narrow path from Azerbaijan, around Armenia, through Georgia, passing into Turkey then onto Europe.

Peace could offer the prospect of connective infrastructure passing more logically through Armenia, reintegrating the country back into the region, whilst vastly expanding the capacity of energy, commodities and goods that can move through the region.

The ripple effects of this development could help Tanzania better weather the effects of geopolitical turbulence. With more options for global trade, the risk of explosive and destabilising commodity hikes and inflationary spirals off the back of conflict would be mitigated.

For these reasons, we should all be hoping the leaders of both Azerbaijan and Armenia stay in power to ink the peace deal.