By Felix Light

KHNATSAKH, Armenia (Reuters) -Nightfall is an anxious time for residents of Khnatsakh.

Every evening at around 10 p.m., automatic gunfire echoes through the tiny village in Armenia, locals say – the sound of Azerbaijani troops firing into the night sky from their positions across the border, high above.

The bullets regularly hit houses, though no-one has been hurt, so far, the villagers say. Azerbaijan denies its troops have been shooting across the border, and has accused Armenian troops of violating the ceasefire.

"It’s very tense because at home we have the children, the little ones, and the elderly," said Karo Andranyan, 66, a retired mechanic.

A hundred metres from his front door, on the hillside, an Azerbaijani military position with a flag fluttering in the breeze is a reminder of the proximity of Armenia’s bitter rival. The heavily militarized, 1,000-km border has been closed since the early 1990s.

The countries have fought two major wars in the past 40 years, destabilising the Caucasus - a region that carries major oil and gas pipelines toward Europe, and is strategically important to Russia, Iran and Turkey.

Rising tensions along the border are increasing the risk of new clashes between Armenia and Azerbaijan as they approach a critical juncture in a tortuous peace process, two experts told Reuters.

In March, the two sides said they had agreed the outline of a peace treaty that could be signed in 2026, raising hopes of reconciliation. The draft envisions the two sides demarcating their shared border, and requires Armenia to amend its constitution before Azerbaijan ratifies the deal.

But since then, reports of ceasefire violations along the border have surged, following months of relative quiet.

Andranyan said he thought the nighttime gunfire was meant to intimidate the villagers and the small garrison of Armenian troops stationed there. The village - which census data said had a population of 1,000 - was emptying as locals feared a return to conflict, he said.

"What are we supposed to do?"

Though there have been no fatalities on the border since last year, incidents of cross-border gunfire are reported regularly. Most of the accusations since March, which describe cross-border gunfire and occasional damage to property, have been made by Azerbaijan against Armenia.

Both sides have repeatedly denied allegations of ceasefire violations.

The simmering conflict has shifted decisively in Azerbaijan’s favour since 2020, as the oil and gas producer recaptured territory lost in the 1990s and progressively re-established control over the breakaway Azerbaijani region of Nagorno-Karabakh where ethnic Armenians had established de facto independence since the collapse of the Soviet Union. In 2023, it retook all of Karabakh, prompting the territory’s 100,000 ethnic Armenians to flee en masse to Armenia.

U.S. Secretary of State Marco Rubio told a congressional hearing last month there was a "real risk" of war between the two. He said that the U.S. wanted Azerbaijan "to agree to a peace agreement that does not cause them to invade a neighboring country, Armenia."

Azerbaijani President Ilham Aliyev, in power since 2003, said in January that Armenia presented a "fascist threat" that needed to be destroyed.

Laurence Broers, an expert on Armenia and Azerbaijan at London’s Chatham House think tank, said that though a return to full-scale war was possible, more localised skirmishes were more likely.

He said Azerbaijan, whose population of 10 million is three times Armenia’s, has few incentives to agree swiftly to a peace treaty and may instead rely on smaller scale escalations to force its neighbour to make further concessions in the talks.

“Escalation and militarization has been a very successful strategy for Ilham Aliyev,” he said.

Armenian authorities have repeatedly insisted there will be no war. In a speech last month, Prime Minister Nikol Pashinyan said that the two countries would not resume fighting, “despite all the arguments, all the provocations”.

In response to questions about the border tensions, Azerbaijan’s Foreign Ministry referred Reuters to its previous public comments.

In a statement in May, it said that Baku is committed to peace and has no territorial claims on Armenia. It said that Yerevan’s actions "call into question Armenia’s commitment to peace".

Azerbaijan’s Defence Ministry has consistently denied Armenian reports of cross-border gunfire.

TENSIONS IN THE SOUTH

Armenia’s southernmost province of Syunik is at the heart of the dispute and is where most ceasefire violations are reported.

Syunik separates the main body of Azerbaijan to the east from the Azerbaijani exclave of Nakhchivan to the west. It also provides a vital trade route for Armenia to Iran, which it borders to the south.

Azerbaijan has since 2020 demanded Armenia provide it with a corridor through Syunik to Nakhchivan. Baku has said that the passage would remain Armenian territory but have minimal controls from the capital Yerevan.

Some Azerbaijani officials have also suggested that southern Armenia is historically Azerbaijani territory, though they have not pressed a formal territorial claim.

In addition to its border with Azerbaijan, Armenia’s frontier with Turkey – a close ally of Baku’s – is also closed, making its boundary with Iran a lifeline for trade. A corridor through Syunik could risk shutting off its access to the remote, mountainous border.

Armenia and Iran have warm ties, despite Armenia’s Christian religion, and increasingly pro-Western orientation. In 2022, Iran was Armenia’s fourth-largest source of imports. In May, Tehran’s defence minister visited Yerevan, with Iranian media quoting him as expressing Iran’s opposition to redrawing borders in the region.

The dilemma is heightened by Armenia’s strained ties with traditional ally Russia, which opposes Armenia’s bid to draw closer to the West, and which has deepened its links with Azerbaijan.

"Armenia has two open borders, one with Georgia, and the other one with Iran. And this keeps the country going,” said Tigran Grigoryan, director of the Regional Centre for Democracy and Security think tank, in Yerevan.

Grigoryan said that Azerbaijan’s demands for the corridor could be the spark for future military escalation. He suggested that the ceasefire violations may be an effort to force Armenia into making concessions on the issue.

"If Armenia loses its border with Iran, that would be a catastrophe,” he said.

The Iranian and Russian foreign ministries did not reply to requests for comment.

Throughout Armenia’s isolated south, the importance of the Iranian connection is clear.

Along the single route that links the two countries, Iranian road workers are labouring to expand a narrow, zig-zagging mountainside road clogged with lorries from south of the border, heading north towards Georgia and Russia.

Along the way, some locals sell plastic bottles full of red wine to truckers newly arrived from Iran, where alcohol is banned.

At Armenia’s southernmost tip sits the historic town of Meghri, the gateway to Iran.

Only 16 km away from Azerbaijan, the town of 4,000 has seen its daily life overshadowed by tensions with Baku, deputy mayor Bagrat Zakaryan said.

“Given the recent events in Karabakh, and what the president of Azerbaijan has been saying, there is this feeling of fear,” he said.

OPPORTUNITY FOR PEACE

Others are more optimistic about the prospect of peace.

Until 1993, Armen Davtyan was the deputy director of Meghri’s railway station, which sat at a crossroads connecting Yerevan to Baku, and Iran to the Soviet Union, until the latter’s 1991 dissolution.

But after the 1988-1994 Karabakh war and the closure of the frontier, the tracks connecting Armenia to Azerbaijan were ripped up and Davtyan went to work as a border guard.

A rusted train, emblazoned with a Soviet emblem, lingers outside the station building, now a derelict shell metres from the Iranian border.

Davtyan said he fondly remembered the pre-war days, when Armenians and Azerbaijanis worked together on the railways, and hopes that one day cross-border trains might again pull into Meghri station.

"I do understand that some people are scared that if the railway reopens, the Azerbaijanis will return," he said.

"But if in 2025, people are still scared of us opening transport links, I think that’s a little absurd."