Unresolved conflict over Nagorno-Karabakh has had dire consequences on the economic development of both countries
By Orkhan Khalilov, an editor-in-chief, writer of AzEnglishNews.com.
GDP (Azerbaijan and Armenia)
The Azeri economy shrank 3.8 percent year-on-year in 2016, compared to a 1.1 percent expansion in 2015 and worse than earlier estimates from the Economy Minister of a 2.8 percent contraction. Construction was the main drag on growth, decreasing by 27.6 percent. The World Bank expects the GDP to advance 1.2 percent in 2017 amid a stabilization in commodity prices.
GDP in Azerbaijan is expected to be 47.00 USD Billion by the end of this quarter, according to Trading Economics global macro models and analysts expectations. In the long-term, the Azerbaijan GDP is projected to trend around 75.00 USD Billion in 2020, according to our econometric models.
GDP in Armenia is expected to be 12.80 USD Billion by the end of this quarter, according to Trading Economics global macro models and analysts expectations. In the long-term, the Armenia GDP is projected to trend around 13.80 USD Billion in 2020, according to our econometric models.
The opinion of George Vlad Niculescu, Head of Research, the European Geopolitical Forum.
It is often assumed that the unresolved conflict between Armenia and Azerbaijan over Nagorno-Karabakh has had dire consequences on the economic development of both countries.
It has also affected the South Caucasus region more broadly, due to the opportunity costs of unrealized trade and investment, as well as caused the non-engagement of the most efficient trans-regional lines of transport and communications. This may, indeed, be the case. What is more debatable, however, is the relative economic impact that the non-resolution of the conflict is having on each of the parties, independent of the other, as well as on the South Caucasus region as a whole.
Research conducted by the World Bank has estimated that opening the closed borders between Armenia, Turkey and Azerbaijan would increase Armenian exports to $US269-342 million, increase GDP by 30-38%, and result in trade volumes exceeding $US300 million. Other forms of economic impact on Armenia relate to demography: emigration from Armenia to Russia and the West has arguably halved the country’s population. Substantial investment and economic activity in Nagorno-Karabakh has been very low, while in the occupied districts it is practically frozen.
Both Armenia and Azerbaijan have shifted large volumes of their state budgets away from investment into economic development and welfare programs to defence requirements.
Azerbaijan, in spite of its rapid economic development and the rise of its hydrocarbons economy, had to spend a great portion of its national wealth on the needs of Azerbaijanis displaced by the Karabakh war.
Azerbaijan hopes that Armenia, and the Nagorno-Karabakh enclave, will collapse economically sooner rather than later. Armenia is waiting for Azerbaijan’s energy driven economic growth to plummet, to able to re-balance its economic status.
Armenia has shifted its external trade through Georgia (between 70-80%) and via Iran (20-30%).
To further release the pressure of the blockades on its economic development, Armenia has had little choice but to increase its reliance on both Russia (in terms of external loans and foreign investments, but also for security and defence purposes), and the Armenian Diaspora, which is also one of the main pillars of the economy and public budget of Nagorno-Karabakh.
There is no sign that the global demand for oil and gas is set to decline anytime soon, further propping up Azerbaijan’s position and deflating any form of Armenian wishful thinking that Baku’s energy incomes are set for a drastic decline. Indeed, the main challenge for the economy of Armenia is not so much the threat of economic collapse, but rather “building-up a sound framework for economic governance”.
Azerbaijanis would be willing to invest their wealth in post-conflict reconstruction and regional cooperation
The aim of the EGF (The European Geopolitical Forum) research on economic incentives was to develop an alternative narrative on Nagorno-Karabakh through Track 2 diplomacy. This new narrative could highlight the advantages of choosing peace and regional economic development over the current state of hostility, hence it might ease some of the existing tension.
Could a ‘blueprint for regional economic development’ work as a key trigger for such a public debate? This topic was widely discussed with Azerbaijani and Armenian experts at a roundtable organized by the EGF in Berlin, in the summer of 2014.
The short answer emerging from that discussion was “Yes, but…”; while Armenians would favor an immediate resumption of regional economic cooperation, Azerbaijanis believed that, as an initial step to peace, regional cooperation should be pursued in parallel with the return of the seven districts around NK to Azerbaijan.
Azerbaijanis would be willing to invest their wealth in post-conflict reconstruction and regional cooperation, but understandably upon the immediate return of the seven surrounding districts and the settling of the final status of NK.
Post-conflict scenario building workshops were developed by the EGF as a highly interactive negotiation simulation exercise built into stakeholders’ consultation rounds. The given post-conflict scenarios were set in the years 2019 and 2020, respectively. It was assumed that a Peace Agreement (PA) based on the current Madrid Principles was reached in 2019 between the imaginary Republics of Salandia and Oronia, which were engaged in years of fighting over the political status of the ‘break-away territory’ of Mordovia (the country profiles of Salandia and Oronia in 2019 were identical to those of Azerbaijan and Armenia, respectively, while the status of Mordovia was mirroring that of Karabakh).
During the post-conflict scenario building workshops, Armenian and Azerbaijani participants simulated the work of a bi-national Task Force assigned to negotiate a roadmap for the implementation of the economic components of the PA.
The main target of the simulation consisted of identifying joint economic measures in areas such as energy, transport, trade, rehabilitation of the territories affected by the conflict, and the return of IDPs to their homeland. In practical terms, the workshops eventually resulted in drafting a realistic, mostly agreed upon, action plan.
This action plan was set into a timetable outlining a possible post-conflict roadmap for peace building in Karabakh. All of these would make for a huge potential for post-conflict economic cooperation between Armenia and Azerbaijan, which should be factored into the current OSCE Minsk Group negotiations process between the two countries—the sooner the better.