Azerbaijan, the third-largest oil producer in the former Soviet Union, will look past falling crude prices and increase military spending by more than a quarter next year as tensions escalate with neighboring Armenia.

Defense outlays will grow 27 percent to 3.8 billion manat ($4.8 billion), exceeding Armenia’s total budget spending of $3.2 billion, Finance Minister Samir Sharifov said today.

“Azerbaijan’s armed forces need better equipment as Armenia continues its occupation policy in defiance of international law,” Sharifov said today, according to state news service Azartac.

Armenia took over Azerbaijan’s predominantly ethnic Armenian-populated region of Nagorno-Karabakh and seven adjacent districts in a war after the Soviet breakup in 1991. More than 30,000 people were killed and 1.2 million displaced before Russia brokered a cease-fire in 1994.

Tensions escalated last week when Azerbaijan shot down what it said was an Armenian military helicopter east of Nagorno-Karabakh, killing three crew members. It was the first time an aircraft was downed in the conflict zone in the past 20 years. Armenia vowed to retaliate.

More than 20 people were killed on both sides in August when skirmishes along the heavily militarized cease-fire line turned the deadliest since 1994.

Azerbaijan, buoyed by more than $50 billion of investments by BP Plc (BP/) and partners in its energy projects, has promised to use military force to regain control of the territory if peace talks mediated by France, Russia and the U.S. fail.

Azerbaijan plans to spend $3.8 billion on its army this year, up from $3.6 billion in 2013 and $3 billion in 2012.

While Azeri President Ilham Aliyev has met his Armenian counterpart Serzh Sargsyan twice in the past three months, the two leaders failed to narrow their differences.

bloomberg.com