TBILISI (Reuters) - Armenia stands to make huge economic gains from an open border with Turkey while Ankara can claim a diplomatic triumph if the neighbors see through a promise to restore ties after 100 years of hostility.
The deal, announced on Monday, could see a re-alignment of interests in the South Caucasus, for centuries the backdrop for big-power rivalry over the strategic crossroads between East and West and its energy deposits in the Caspian Sea.
But the risks are real, and could yet derail the project.
Nationalists in Armenia are angry at the thaw after almost a century of animosity stemming from the mass killing of Armenians by Ottoman Turks during World War One. Turkey rejects Armenia's allegation the killings amounted to genocide.
And Azerbaijan, a supplier of oil and gas to the West, opposes any rapprochement between fellow Muslim ally Turkey and Baku's enemy Armenia in the festering conflict over breakaway Nagorno-Karabakh.
For landlocked Armenia, its economy due to contract by at least nine percent this year, the benefits are obvious:
"Turkey is a neighbor of the European Union, and we are a neighbor of Turkey. That means an outlet for Armenia to Europe through Turkey," said Armenian analyst Alexander Iskandaryan, director of the Caucasus Media Institute in Yerevan.
Armenia and Turkey said on Monday they would begin six weeks of domestic consultations before signing accords on establishing diplomatic relations under a road map announced in April.
Turkish Foreign Minister Ahmet Davutoglu said on Tuesday Ankara hoped to open the border by the end of the year, 16 years after closing it in solidarity with Azerbaijan during the war in Nagorno-Karabakh, where ethnic Armenians threw off Baku's rule with Yerevan's backing.
Its western frontier shut, Armenia's economy has become closely tied to Russia's since the collapse of the Soviet Union, with significant Russian business interests in the country of 3.2 million people and a large Armenian workforce in Russia.
The global crisis and Russia's recession has hit Armenia hard. Opening the border would give the country an alternative trade route, and encourage competition, analysts say.
"The open border reduces or even negates Georgia's monopoly on handling and charging exorbitant fees for all goods coming in and out of Armenia through the northern route," said Richard Giragosian, director of the Armenian Center for National and International Studies in Yerevan.
"It's going to introduce a healthy dose of competition and larger markets within the closed Armenian economy," he said. "It will specifically threaten the oligarchs, the commodity-based cartels that are so strongly entrenched in Armenia."
In theory, Armenia also stands to claim its stake in the lucrative oil and gas transit business in the South Caucasus, which is criss-crossed by pipelines that veer through U.S.-ally Georgia rather than Russia's strategic partner Armenia.
But in practice, there are few immediate prospects.
"The only pipeline that's under discussion at all is Nabucco, and we're far from even having a map of what that pipeline would even look like," said Ana Jelenkovic of Eurasia Group.
"Speculating on whether Armenia would be involved in any energy projects, I think there's a long way to go and a lot would depend on how Azerbaijan feels about ... this agreement."
Azerbaijan is Europe's key hope for supplying gas for the proposed Nabucco pipeline that would run through Turkey and reduce Europe's energy dependence on Russia.
Fearing it will lose leverage over Armenia on Nagorno-Karabakh, Azerbaijan said on Tuesday the opening of the Turkish-Armenian border was against its national interests.
Some analysts say Baku's reaction has in fact been quite restrained, and speculate whether the thaw between Ankara and Yerevan might go hand-in-hand with progress in negotiations between Yerevan and Baku on Nagorno-Karabakh, where Azeris and ethnic Armenians continue to face off over a tense frontline.
"The solution for the Armenian issue will pave the way for a solution to Nagorno-Karabakh," Turkish Foreign Minister Ahmet Davutoglu told reporters late on Monday.
Turkey, which wants to join the European Union, looks set to claim a diplomatic coup if the deal with Armenia goes through.
"If this goes through it will be hugely beneficial for Turkey," said Hugh Pope, an analyst with the Brussel-based International Crisis Group. "It removes a stigma for Turkey ... not just in Europe but also in the United States, where this is the single biggest problem."
The debate over the killings of last century has spilled over into European legislatures and the U.S. Congress where diaspora Armenians have pressed for condemnation of Turkey.
The progress being made suggests that for once, in a region where last year Russia fought a war with Georgia to the consternation of the West, Russian and American interests may have converged.
"Both Russia and the United States appear to see it in their interest to have Turkey-Armenia normalize relations," said Pope. The U.S. gains in further stabilizing a region vital for energy export to the West. Russia -- with its huge economic presence in Armenia -- stands to make money.
Moscow might also benefit from a potential shift in Azerbaijan -- its energy resources being courted by both East and West -- away from Turkey and the West, toward Russia.
"They are only going to continue improving relations with Russia, moving away from their strategic alliance with Turkey," said Giragosian.
(For Q+A on Turkish-Armenian relations, click [nL156548]
Additional reporting by Hasmik Mkrtchyan in Yerevan, Paul De Bendern in Istanbul and Zerin Elci in Nicosia; editing by Ralph Boulton