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ANALYSIS-Riots, standoff destabilise Armenia

YEREVAN, March 7 (Reuters) - A political standoff has destabilised Armenia and threatens stability elsewhere in the volatile Caucasus, even though soldiers have restored order in the capital after the worst street violence since independence.

President Robert Kocharyan declared a state of emergency in Yerevan last Saturday after eight people were killed in clashes between police and protesters who say he rigged a presidential election on Feb. 19.

Armenia is a Christian state of 3 million people on the edge of the Caucasus, a major energy route from Asia to Europe.

"Armenia has had a reputation as the most stable country in the region and any sign of instability here is a concern," a Western diplomat said.

The protesters say the election was rigged against former President Levon Ter-Petrosyan, who accuses Kocharyan and Prime Minister Serzh Sarksyan of nepotism and corruption. Sarksyan was declared the winner with nearly 53 percent of the votes.

"He opened a Pandora's box of questions which started to resonate with a lot of people," said Svante Carnell of the Institute for Security and Policy Development in Stockholm.

In Greek legend Pandora, the first woman, opened a box that releases evil and misery on the world.

Kocharyan and Sarksyan are part of a group that has ruled Armenia for a decade and comes from the disputed border region of Nagorno-Karabakh, which threw off Azeri rule during a war in the 1990s.

Witnesses at rallies say Ter-Petrosyan has whipped up anti-Karabakh sentiment to present the government as greedy outsiders, a tactic that political analysts say stokes tensions.

Badges handed out at election rallies declared: "I'm a true Armenian". In interviews Ter-Petrosyan alluded to the government as "Tartar-Mongols", who in Armenian stories are portrayed as clan-based Muslim invaders.

"This is a dangerous tactic which could divide Armenians further and lead to more violence," Alexander Iskandaryan, head of the Yerevan-based Caucasus Media Institute, said.

DISSENTERS

The government says the 20-day state of emergency, banning demonstrations and censoring media, is needed to restore stability, hunt for illegal weapons and counter coup plots.

Opponents say the government is abusing its powers to crush dissent and have vowed to resume the daily protests which had regularly attracted 20,000 people since the election, in which Ter-Petrosyan won only 21.5 percent of the votes.

Outside Yerevan's central market, labourers are knocking together shelves in a supermarket looted on Saturday. Dozens of protesters and police are recovering in hospitals.

Mediators from the United States and Europe are trying to bring the sides together but neither has agreed to negotiate.

"There's a chance that the events of Saturday radicalised and polarised the people and there's also a chance of further street protests," Iskandaryan said.

Support from the army is vital for Kocharyan and Sarksyan, political analysts say. The army has been loyal to the government but its support is not guaranteed.

Any uncertainty could dent foreign investment to Armenia which last year hit about $600 million, much of it in the construction and telecommunications sectors.

Despite Armenia's rugged terrain, lack of natural resources and closed borders with Turkey and Azerbaijan, its economy grew in the last decade, helped by remittances from a huge Armenian diaspora. More Armenians live outside the country than in it.

In 2007, Armenia's economy grew by nearly 14 percent to around $10 billion and Armenia has an average income per person similar to Egypt or Albania.

But many people, especially in Yerevan, blame the government for the large gap between rich and poor, inflation and high unemployment. One in four Armenians lives in poverty.

Any leadership weakness in Yerevan could unsettle the fragile peace with Azerbaijan, which said 12 Armenians and four Azeri soldiers died in clashes in Nagorno-Karabakh this week.

"An unstable Armenia is a big problem and threatens to upset the whole region," Iskandaryan said. "This is a small region where all the countries and peoples are interwoven."

It could also impact Georgia and Azerbaijan, which host a pipeline that pumps 1 million barrels a day of oil from the Caspian Sea to the West, a major energy source for Europe.

Instability could spill over into border areas of Georgia where thousands of Armenians live.

Georgia also imposed a state of emergency in November after police crushed protests. Azerbaijan holds an election later this year which could prompt demonstrations. (Editing by Timothy Heritage)

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