Azerbaijan will find it more difficult to balance its foreign policy orientation in the coming years in the wake of attempts by Turkey and Armenia to improve relations, and increased interest from the West and from Russia in Azerbaijani energy resources. The authorities have so far taken a careful approach, seeking stronger energy and security ties with the West, but at the same time maintaining military and economic links with Russia. However, Azerbaijan is now coming under greater pressure from the West to sign up to new energy projects, and from Russia to reject such initiatives in favour of closer energy ties between Azerbaijan and Russia. Although Azerbaijan will continue to pursue a cautious, balanced approach towards Russia and the West, its foreign policy decisions will be heavily influenced by its desire to secure a reliable transit route for the gas from the second phase of the Shah Deniz project, which is expected to come on stream in 2016-17.

The decision by Azerbaijan's long-standing ally, Turkey, to pursue better relations with Armenia-which culminated in the signing of two protocols in October 2009, aimed at establishing diplomatic relations and developing bilateral ties-increased tensions between Azerbaijan and Turkey. However, relations between Armenia and Turkey have since soured, with the Armenian president, Serzh Sargsyan, suspending ratification of the protocols in April 2010, claiming that the Turkish administration had dragged out the ratification process beyond a reasonable timeframe. Mr Sargsyan also raised concerns over the Turkish administration's decision to attach preconditions, probably referring to the Turkish authorities' assertions that a settlement of the Nagorny Karabakh dispute between Azerbaijan and Armenia was crucial to an improvement in Turkish-Armenian relations.

Following the setback in attempts to improve ties between Turkey and Armenia, relations between Turkey and Azerbaijan have improved. The two countries signed a gas deal in June 2010, ending a long-running gas dispute. In August Azerbaijan and Turkey signed a "Strategic Partnership and Mutual Co-operation" treaty, which reconfirmed the friendly links between them. However, if Turkey were to seek to improve ties with Armenia without a breakthrough in the Nagorny Karabakh talks, this would have a negative impact on Azerbaijani-Turkish relations. Talks between Azerbaijan and Armenia aimed at resolving the Nagorny Karabakh conflict are ongoing, but progress has been limited in recent months. In early 2010 Mr Aliyev and Mr Sargsyan reached an agreement on a preamble to the Madrid Principles, which outline a step-by-step approach to resolving the conflict. Further progress in restoring ties will remain slow over the forecast period.

Azerbaijan has been more open towards Russia's offer to buy all of its gas, as a result of the attempts to improve Turkish-Armenian relations. The decision has the potential to render commercially unviable the EU-backed Nabucco pipeline, which would take Caspian gas to Europe, bypassing Russia. Azerbaijan will continue to hold out the promise of closer energy co-operation with Russia in exchange for greater Russian support for its position in the conflict with Armenia. Azerbaijan raised its exports to Russia to 2bn cu metres of gas per year in 2011 (from 1bn cu metres). This will increase pressure on Turkey, which hopes to become a main transit country for the transport of Caspian gas to Europe. In this respect, Azerbaijan will hope that Turkey does not move too far away from supporting its position over Nagorny Karabakh.