Frozen Karabakh war could flare again -think-tank

By Christian Lowe

MOSCOW, Nov 14 (Reuters) - A 20-year-old conflict between ex-Soviet neighbours Armenia and Azerbaijan could re-ignite into a war that would threaten the region's oil exports, an influential think-tank said on Wednesday.

The two countries fought a war in the 1990s over the territory of Nagorno-Karabakh which killed about 35,000 people and displaced over one million. A ceasefire was agreed in 1994 but the search for a lasting peace is stalled.

The Brussels-based International Crisis Group (ICG) said in a report the fragile truce is under threat because Azerbaijan is using cash from oil exports to beef up its military and both sides are refusing to compromise.

A major oil pipeline linking Azerbaijan's Caspian Sea oilfields to the Mediterranean Sea runs a few kilometres (miles) to the east of Nagorno-Karabakh. Operated by a BP-led (BP.L) consortium it will soon pump one million barrels of oil a day.

"The international community needs to take the threat of war seriously," said Magdalena Frichova, ICG's Caucasus Project Director. "The risk of armed conflict is growing, and the dangers of complacency enormous."

The report said the riskiest period could be around 2012, when Azerbaijan's oil exports are expected to start slowing, possibly triggering economic problems.

"A military adventure might seem a tempting way to distract citizens from economic crisis," ICG said in a preface to the report.

"Important oil and gas pipelines near Nagorno-Karabakh would likely be among the first casualties of a new war, something Europe and the U.S. in particular have an interest in avoiding."