Director of National Intelligence James Clapper testifies during a hearing before Senate (Select) Intelligence Committee January 29, 2014 on Capitol Hill. (Source: AFP)

WASHINGTON (RFE/RL) — Azerbaijan’s current economic woes caused by falling oil prices may have heightened the risk of a further escalation of violence in the Nagorno-Karabakh conflict, the top U.S. intelligence official said on Tuesday.

“Baku’s sustained military buildup coupled with declining economic conditions in Azerbaijan are raising the potential that the conflict will escalate in 2016,” Director of National Intelligence James Clapper warned in his annual assessment of threats to the United States.

“The aversion of Azerbaijan to publicly renounce claim the Nagorno-Karabakh and Armenia’s reluctance to give up the territory it controls continue to complicate any possibility of a peaceful solution,” said Clapper.

Heavily dependent on its oil revenues, Azerbaijan is increasingly suffering from the collapse of global oil prices. The Azerbaijani national currency, the manat, lost more than half of its value against the U.S. dollar last year, despite the fact that the authorities in Baku spent almost $9 billion on sustaining its exchange rate.

Last month, the agency Standard and Poor’s lowered the rating of Azerbaijan by one notch and said now fear the recession of Azerbaijan’s economy this year, after more than a decade of rapid growth driven by oil.

The country’s economic problems have led to rare protests recently in several Azerbaijani towns over worsening living conditions, including the increased price of bread. The protests have fueled speculation in Armenia that President Ilham Aliyev’s government might intensify ceasefire violations in the Karabakh conflict zone to distract the disgruntled domestic public from its failed economic policies.

Last year already saw a sharp rise in fighting along “the line of contact” around Karabakh and the Armenian-Azerbaijani border, which caused both warring sides to suffer their biggest combat casualties in nearly two decades.

The U.S. as well as Russia and France, the two other mediating powers trying to broker an Armenian-Azerbaijani peace deal, expressed concern at that escalation throughout 2015. “There is no military solution to the Nagorno-Karabakh conflict,” U.S. Secretary of State John Kerry, Russian Foreign Minister Sergey Lavrov and France’s European Affairs Secretary Harlem Desir said in a joint statement issued in December.

Buoyed by his nation’s massive oil revenues, which have totaled over $116 billion since 2001, Aliyev has for years spoken of a “widening gap” between Armenia and Azerbaijan which he said will eventually allow Baku to regain control over Karabakh. A considerable part of those revenues have been spent on the acquisition of large quantities of offensive weapons for the Azerbaijani army.

The decreased oil prices may have put an end to that military buildup. Azerbaijan reportedly plans to spend an equivalent of $1.2 billion on defense and security in 2016. Only four years ago, Aliyev declared that Azerbaijani military expenditure has surpassed Armenia’s entire state budget worth about $3 billion.

The collapse of the Azerbaijani currency has also translated into some embarrassing economic statistics for Aliyev: at less than $300 a month, the official average wage in Azerbaijan is now considerably lower, in dollar terms, than that in resource-poor Armenia.