EVENT: At Armenia's invitation, Turkish President Abdullah Gul attended an Armenian-Turkish football match in Yerevan on September 6.

SIGNIFICANCE: The first visit by Turkey's highest official to Armenia is a clear step in a process that could eventually lead to establishing diplomatic relations and opening borders. This would signify a major geopolitical shift, whose importance goes beyond the South Caucasus.

ANALYSIS: Armenia's invitation to Turkish President Abdullah Gul -- and even more surprising, his acceptance -- came at a time when the balance of power in the wider region around the South Caucasus is shifting and a window of opportunity is opening that may allow the Armenian and Turkish leaderships to break with a difficult past.

Both parties are now more likely to seek compromise, albeit for different reasons:

Armenia. The Armenian leadership is under strong internal and external pressures:

Recalcitrant opposition. The government is still seeking an exit from the impasse following the disputed presidential election and violent clashes with demonstrators that left at least ten dead. The opposition, led by the first president of independent Armenia, Levon Ter-Petrosian, will only talk to the government if it releases more than 70 people detained after March 1. So far, there are no signs of compromise.
Economic reform. The ruling Republican Party and its coalition partners -- the Armenian Revolutionary Federation Dashnaktsutiun (HHD), Rule of Law and Prosperous Armenia -- have pledged reforms to sustain rapid economic growth. However, Armenian society is deeply polarised over whether the pledges are genuine or only window dressing to take the heat out of the stand-off with the opposition and win the support of ordinary Armenians.
Georgia crisis. The Russian-Georgian conflict put the Armenian government under additional pressure. Over 70% of Armenian trade passes through Georgia, which is Armenia's single most important trade outlet; Armenia cannot afford to alienate it. The economy suffered disruptions in rail and ferry traffic from the fighting, which according to one official estimate cost Armenia 680 million dollars, one-quarter of the 2008 state budget.
Should the situation in Georgia not be conducive to trade and transport across its territory, Armenia's sustained economic growth would not materialise. This could lead to popular discontent allowing the opposition to claim power. To prevent this, the Armenian government is seeking to diversify its trade routes:

Iran. Armenia is fostering economic links with Iran, having built a gas pipeline whose capacity is to be enhanced so that it may import 2.0-2.5 billion cubic metres of Iranian gas annually, equalling Armenia's imports of Russian gas.
Turkey. It may now be ready to take serious steps towards a rapprochement with Turkey. Ultimately, this would culminate in the establishment of full diplomatic relations, paving the way for reopening the border to trade. Armenia wants to relaunch the Giumri-Kars rail link connecting western Armenia with Turkey.
Overall, Armenia will continue its foreign policy of 'complementarity', seeking friendly relations with both Russia and the West, but this is a facade covering increasing dependence on Russia:

Russia. The recent crisis strained Armenia's difficult balancing act. A close ally of Russia, it has ruled out formal recognition of Abkhazia and South Ossetia, while supporting their right to self-determination. The military alliance with Russia remains the backbone of Armenia's defence doctrine.
Diaspora. Among Armenians in Armenia, there is a strong feeling that opening the border with Turkey is more important than Ankara's recognition of Ottoman genocide (see ARMENIA/TURKEY: Genocide claims keep relations stalled - May 10, 2006). The HHD is the only political force set on recognition as a precondition to restoring relations with Turkey. The strongest political force in the diaspora, the HHD is relatively weak in Armenia itself, winning only 6% in the last elections. Although the relationship with the diaspora is important to the regime, the combination of unprecedented internal and external pressures on the Armenian leadership may induce it to take bold steps that it would not have been ready for in a less charged situation.
Turkey. After the Justice and Development Party (AKP) came to power in 2002, Ankara re-evaluated its foreign policy, hitherto strongly focused on the EU and United States. It started to give more prominence to relations with its neighbours and positioning itself as a regional power with multiple identities -- a Muslim-majority, secular and increasingly democratic nation:

Neighbours. It has improved diplomatic relations with several neighbours -- most notably Syria, Georgia, Bulgaria and Iran -- increasing its trade with them from 6% of total foreign turnover by volume in 2000 to 35% in 2007.
Iranian gas. The government has signed an agreement with Iran to transport Iranian natural gas to Turkey and Europe, and develop the Iranian natural gas industry by investing 3.5 billion dollars in the South Pars field.
Ankara increasingly realises that closing the border with Armenia in 1993 during the Armenian-Azerbaijani war over Nagorno-Karabakh is not now to its benefit, but changing its policy requires sensitive handling:

South-eastern stability. War in Iraq has highlighted the need for Turkey to stabilise its Kurdish south-east. Border closures have deprived the area of economic development opportunities vital for a solution to the Kurdish problem.
EU conditionality. Since the EU has made improving relations with Armenia a key condition for accession, the government fears that any concessions may make the AKP vulnerable to opposition charges that the government is 'selling out'.
New Armenian leadership. Robert Kocharian's handover of power to Serzh Sargsyan has opened up new possibilities.
Changing public mood. The public reaction to the January 2007 assassination of prominent ethnic Armenian journalist and writer Hrant Dink revealed that Turkish society was more ready for a rapprochement with Armenia than expected.
AKP strength. AKP's electoral success in July 2007, when it was re-elected with 47% of the vote, has given it more room for manoeuvre. Ankara can justify its gradual change of position on Armenia internally by pointing to successes in relations with other neighbours. Improving relations with Armenia would be the logical continuation of that policy of constructive engagement and strengthening its role as a regional power.
Regional player. Following the Russian-Georgian war, Turkey unveiled plans for a regional stability pact, encompassing Armenia, Azerbaijan, Georgia, Russia and Turkey (see TURKEY/CAUCASUS: Ankara seeks regional stability pact - September 4, 2008). The plan may not come to fruition, but it shows Turkey becoming a regional player, seizing the initiative from the United States and possibly Russia too.
Russian position. Moscow may welcome improved relations between Armenia and Turkey. Russia owns most of Armenia's energy and communications infrastructure, including its railway. It is interested in using Armenia as a platform to engage with Turkey economically, which would in turn weaken US influence over Turkey. If Armenia became stronger economically, it could free Russia to meddle in Georgia.

CONCLUSION: How far Armenia and Turkey are ready to go in their search for compromise is unclear. Armenia could drop its demand that Turkey recognise the deaths of Armenians in the First World War as genocide and accept an official apology. Turkey could drop its demand that Armenia normalise relations with Azerbaijan as a precondition for establishing full diplomatic relations. Certainly, Gul's Armenian trip implies a shift in Turkey's relations with Azerbaijan.