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ECONOMIC INTEGRATION OF NAGORNO-KARABAKH: WAYS AND CHALLENGES

PUBLIC COUNCIL FOR NAGORNO KARABAKH Georgia apostille. Certification and document authentication. Birth certificate apostille.

ECONOMIC INTEGRATION OF NAGORNO-KARABAKH: WAYS AND CHALLENGES

Sabit Bagirov

Entrepreneurship Development Foundation:

Centre for Economic and Political Research

Baku – 2010-07-08

CONTENTS:

Introductory word……………………………………………………………………….
Scenarios of economic integration of NK and Azerbaijani economies
Governments’ actions after signing of peace treaty

  • Restoration and development of transport infrastructure and regular communications and traffic
  • Restoration and development of transport infrastructure inside NK
  • Unification of power engineering supply systems
  • Restoration and development of mail and telecommunication service
  • Restoration of manat in money turnover
  • Harmonization of budgetary planning and performance
  • Harmonization of tax planning and performance
  • Development of cooperation between economic entities of NK and the rest of the country
  • Development of large-scale regional projects
Challenges of economic integration and ways of their removal

INTRODUCTORY WORD

Official statements of the governments of Azerbaijan and Armenia, as well as those of mediation missions are indicative that the Karabakh peace agreement will be followed by, at least, economic independence of the region. The NK government will be able to independently follow its own economic political line and decide how and with whom to collaborate in the economic sphere.

Despite 13% growth in 2009, the NK economy is faced with numerous problems, as evidenced by credit volumes granted to NK by Armenia (above 55% of budget in 2010). With its huge financial potentialities, Azerbaijan is in position to help NK with paying off its debts and solving sustained economic development problems.

The article attempts to outline a range of issues related to the restoration and subsequent development of economic relations between Nagorno Karabakh and the rest of Azerbaijan. The process is likely to result from the political settlement of the conflict and thus consolidate successes possibly reached.

SCENARIOS OF ECONOMIC INTEGRATION OF NK AND AZERBAIJANI ECONOMIES

Below cited are probable scenarios of the development of economic relations:

  1. Relations will develop due to initiatives of the governments of NK and Azerbaijan. The governments agree with a concerted program of activity for the near- and medium-term prospects;
  2. Relations will develop in terms of the establishment and development of economic cooperation between Armenia and Azerbaijan. Within the framework of the process the governments of the two countries adopt a special program of economic development of NK;
  3. Relations will develop due to initiatives of local population and private structures of Azerbaijan, Nagorno Karabakh and Armenia. The governments will raise no difficulties to initiatives from below;
  4. Relations will develop on initiatives both of upper and lower strata, i.e. the governments of Azerbaijan, Armenia, Nagorno Karabakh, as well as population and private structures.

Beyond any doubts, international organizations will contribute to these scenarios. It may be supposed that the contributions above will be dependent upon a scenario chosen by the governments.

With respect to the scenarios above, the two questions arise: 1) which of these scenarios is equitable to the interests of Azerbaijanis, Armenians and the region as a whole? 2) which of these scenarios is most probable?

Under the first scenario, Armenia is excluded from the development of economic relations between NK and Azerbaijan. This exclusion seems to be hardly probable, since today the NK’s economy is integrated into the Armenia’s economy. For instance, Armenian dram is circulated on the territory of NK. Also, energy, transport and telecommunication systems of NK are integrated into appropriate systems of Armenia. The flows of commodities, finances and labor force between NK and Armenia are a reality, so one cannot ignore the fact when integrating the NK and Azerbaijani economies.

The second scenario is sufficiently realistic; yet, it will take more time for the development of economic relations between NK and the rest of Azerbaijan. The point is that in the given case the governments would be engaged, first of all, in establishing inter-state relations, while a task of developing economic relations with NK would be of minor importance.

The third scenario is a passive development of NK’s economic integration. Such a model is unlikely to assist an accelerated integration of the NK’s economy into the Azerbaijani one. At the same time, under this model the governments would not impede initiatives from below, though a mutual enmity and mistrust between Azerbaijanis and Armenians are so great that no impetuous growth of the initiatives is expected to take place.

Beyond any doubts, the 4th scenario is fully consistent with achievement of peace treaty, urgent removal of military confrontation consequences, restoration of mutual trust, improvement of population’s living standards, immediate political and economic integration of the Central Caucasus, as well as integration of South Caucasus into Europe. It is essential to specify in a peace treaty to be signed the governments’ obligations on immediate restoration of economic and other ties, and the joint contribution to the Karabakh region development.

The choice of the most probable scenario is dependent on the good will of the negotiation parties, on the level of mutual confidence and respect. However, these factors are far from desirable level. An impression is that if not initiatives of the international mediation, the negotiation process would be discontinued at all. In this case, relapse of combat operations would be probable. Hopefully, mediation efforts aimed at easing tensions between the parties to the conflict would be ended with signing a peace treaty.

The maximum target to be specified in a text of peace treaty is to create a Unified South Caucasian Market like the Unified EU Market. In other words, the parties should assume obligations and demonstrate a proper will toward this target achievement.

There are four principles of the unified European market: 1) freedom of goods movement; 2) freedom of capital movement; 3) freedom of human movement; 4) freedom of services movement. Provision of these freedoms as set forth in the Caucasian integration case would call for substantial efforts and time.

HOW GOVERNMENTS will ACT AFTER SIGNING OF PEACE TREATY

Suppose that the 4th scenario is realized. The governments of Azerbaijan and Armenia will demonstrate their will toward the development of inter-country economic relations, particularly, integration between economies of NK and the rest of Azerbaijan. What directions should they concentrate their efforts on and what challenges may they face with?

First of all, it is imperative to set up an intergovernmental commission for the development of economic relations between Azerbaijan and Armenia, as well as sub-commissions in charge of:

  1. Freedom of trade and transit;
  2. Agricultural cooperation;
  3. Production cooperation;
  4. Regulation of currency politics;
  5. Promotion and encouragement of mutual investments;
  6. Development of transport communications (pipelines included);
  7. Power engineering cooperation;
  8. Restoration of mail and telecommunications;
  9. Air traffic;
  10. Demarcation of borders, etc.

The sub-commissions shall draw up draft inter-governmental agreements on the all issues enumerated above.

Along with the commission above, with the purpose of accelerated cooperation of NK economy entities with entities of other regions of Azerbaijan, it is crucial to establish a trilateral inter-governmental working commission made of representatives of governments of NK, Azerbaijan and Armenia.

The trilateral inter-governmental working commission will be responsible for:

  • Restoration and development of transport infrastructure and regular communication and transportation between NK and the rest of Azerbaijan;
  • Restoration and development of transport infrastructure inside NK;
  • Unification of power engineering supply systems;
  • Restoration and development of mail and telecommunications;
  • Restoration of manat turnover in parallel with dram;
  • Coordination of budget planning and execution questions;
  • Coordination of tax planning and execution questions;
  • Development of cooperation between NK economic entities and the rest of Azerbaijan;
  • Development of large-scale regional projects;
  • Implementation of large-scale tourism development projects in NK, etc.

Restoration and development of transport infrastructure and regular communications and carriages.  At present, an airport of Khankendi (Stepanakert) and a railway communication between Khankendi (Stepanakert) and Agdam are inactive. Both infrastructural facilities had been active before the conflict to play an essential role in passenger and cargo transportation. The Khankendi (Stepanakert) airport carried out flights to some towns of Azerbaijan. The restoration of the airport would provide air communication with towns of Armenia, Russia, Turkey, Iran, etc. Nowadays the reconstruction and raising of capacities of passenger segment of the airport are underway#. The work is expected to be over in the end of 2010.

Investments will be required to restore a motor road between Khankendi (Stepanakert) and Agdam. The economic integration is likely to contribute to these plans, while the financing of transport infrastructure development projects might be a part of the current state program of motor road development project financing in the AR.

Restoration and development of transport infrastructure inside NK. The NK government has lately been attaching a great importance to the development of motor roads inside NK. In particular, one of the major projects is the project of motor road communication “North-South”.

Under NK statistical data, freight turnover of the transport of common use rose in 2009 by 30.3% from 2008#, while passenger traffic – by 28.6%. These are good results indicative of high dynamics of economic processes.

In total, there were 110 car passenger carriages in NK later last year, of which 30 proved to be unprofitable#. Carriages are granted to private companies on tender basis.

Azerbaijan is in position to credit urban passenger transport change in Khankendi and Shusha, as well as transport facilities engaged in carrying passengers between NK regional centers and villages. The renovation of bus fleet is underway in NK, though slowly.

Unification of power engineering supply systems.  This target seems to be mutually profitable both for NK and neighboring regions of Azerbaijan. At present, the NK power supply is carried out at the expense of supplies from Armenia and local production.

The strategy of power engineering security of NK is based on the construction of mini hydro electric power stations. These involve already commissioned “Trge-1” and presently underway “Trge-2” to be commissioned in March-April 2011#.  “Тrgе-2” will be followed by the construction of “Trge-3”. These mini hydroelectric power stations on river Trge will make it possible to generate 65,5 mn kWh a year. Underway is the construction of hydroelectric power stations “Matagis-1” and “Matagis-2” to be completed in January-March 2011. Aggregate capacity of these stations is approx. 55 mn kWh a year. Note that the stations are being constructed by open joint stock company “ArtsakhGES” (above 1100 stock holders) with authorized capital at 6 bn drams (about $16.8 mn).

According to NK leaders, investments into the energy sector will make it possible to raise a level of self-supply to 80-85%#. Total need of NK in power supply will make up 300 mn kWh a year in 2012#.

The unification of power engineering systems of Azerbaijan and Armenia is supposed to be a priority direction of integration and mutually profitable cooperation between the two countries. The NK power engineering system as having already been integrated into the Armenia’s power supply system will, in this case, be unified with the Azerbaijani one as well.

Restoration and development of mail and telecommunication. No technical problems are expected to take place on this track. At present, mobile telephone and Internet services are provided by “Karabakh-Telecom” company#. Though the Ministry of Communication and Information Technologies of Azerbaijan had some claims to this company#, the signing of peace treaty will contribute to the establishment of partnership relations.

The peace treaty will open up opportunity for closer cooperation between “Аzercell”, “Bakcell”, “Narmobile” and “Карабах-Telecom” companies.

Restoration of manat in money turnover.  This issue is expected to be sensitive both for elite and ordinary population of NK. At present, Armenian dram is in use in the region, so putting manat into parallel circulation will call for the concerted policy of the National Banks of Azerbaijan and Armenia. The probability remains that today’s manat as much stronger currency (as compared with dram) would become more attractive for the NK population and business circles.

Harmonization of budgetary planning and performance. NK is sure to have its own budget. The question is how much the region will be backed by the state budget. For instance, Nakhchivan has its own budget adopted by the Parliament of this autonomous republic, and the support from the central budget is great and inadequate with sums coming into budgets of other regions. Therefore everything will be dependent on the formula of NK sovereignty within the framework of the AR. The greater the sovereignty, the lesser the receipts from the state budget.

It should be noted that the NK budget for 2010 is 59,879.7 mn drams# (approx. $ 168 mn) which is up the 2009 budget. A greater portion of this budget – 33,185.8 mn drams, i.e. 55.4% ensured at the expense of a credit from Armenia.

Note that NK GDP in 2009 amounted to 102.3 bn drams# (about $ 286.5 mn). Also, there is a 13.1% GDP growth as against 2008.

A share of industrial production made up 33.4 bn drams, while growth rate in the sector comprised 15.6%. Note that 39.4% in the volume of industrial production fell to the share of mining industry; 38.1% – to the share of processing industry; 22.5% – sector of production and distribution of electric power, gas and water.

Following the results of 2009, the agrarian sector rose by 1.1%, largely at the expense of rise in cattle-breeding by 9.4%. Crop production with its 63.8% last year dropped by 28.2% in 2009 as compared with 2008.

As compared with 2008, an essential growth was typical for the building sector – 33%.

A financial aid from Armenia is formed as inter-state credit (not subsidy). That means that in case of NK’s return under the Azerbaijan jurisdiction, the government of metropolitan country should solve the repayment of the credit to Armenia.

Harmonization of tax planning and performance. Much on the subject will be dependent on the model of sovereignty. In case of Nakhchivan, there is an avowal of rights to taxation; at the same time there is a unique Tax Code. Comparison of tax rates in NK with the ones as set forth in the Tax Code of Azerbaijan is illustrative that NK rates are much profitable for business activity. Such a situation may contribute to the growth of interest in NK investments. It would be appropriate to find a formula of preservation of this difference in the taxation. By the way, contributing to the inflow of investments from Azerbaijan may be exemption from VAT in the housing construction on the territory of NK from January 2009 to 2013#. Of interest for businessmen is the facilitation of accountability since 2009. As a result, 35% of taxpayers, or about 1200 private entrepreneurs submitted their reports regularly, each half year (instead of previous monthly or quarter).

Development of cooperation between economic entities of NK and the rest of the country. According to the information available, some NK enterprises are faced with difficulties. These involve electro-technical and condensate plants, shoe, silk mill and carpet factories. The governments of NK and the metropolitan country could agree on special plans of development of the said plants and factories, including a system of preferential crediting and/or customs, tax and other privileges; draw up a special program of encouragement of cooperation between NK economic entities and the rest of the country. Under other circumstances this could have been settled on the basis of market-dictated economic expediency. However, the economic integration would be more successful in terms of implementation of a certain governmental industrial policy.

Development of large-scale regional projects. As is known, one of the large-scale regional project is the construction of Trans-Caspian gas pipeline from Turkmenistan via the territory of Azerbaijan, further to Turkey via…what country? The probability of the Georgian variant is higher. But in case of NK settlement, why not through NK and Armenia? The regional importance of the approach is indisputable. The peace agreement could contribute to the sale of the Azerbaijani gas from Baku-Tbilisi-Erzurum pipeline to consumers in Armenia. Also, it would be possible to supply Armenia with crude Azerbaijani oil from Baku-Tbilisi-Ceyhan pipeline. For this to happen, it would be necessary to build a special branch from BTC. Azerbaijan would be able to allocate funds to implement these projects.

Challenges to economic integration and ways of their removal

There are several challenges of this sort.

The first challenge is psychological. Long years of conflict confrontation have had their effect on relations between Azerbaijanis and Armenians. It is enmity and aversion to each other that prevail in human conscience. This is reality that cannot be changed straight after signing of peace treaty. It will take years, perhaps, decades to replace current relations by trust, mutual understanding and friendship. True, duration of the process will be dependent upon mutual efforts of the governments of the two countries. However, it would not be advisable to put off a question of economic integration until relations between representatives of the two peoples are radically changed. Also, it is the economic rapprochement to urge this process, for the point is about “the two ways street”.

What to do? Measures of economic rapprochement call for the establishment of contacts between yesterday’s adversaries. Hence, a package of measures for economic integration shall provide for contacts and interaction between peoples to develop at an increasing rate, gradually. That’s to say that the first years of economic rapprochement shall provide for implementation of projects drawn up by the said working commissions or the ones that require no contacts of project executors or tend toward minimum contacts. These may be infrastructural projects, such as restoration of rail and motor-road communication between Agdam and Stepanakert. Note that a main portion of work will be done independently on the territories of NK and Agdam regions. Interpersonal contacts will take place on the junction of frontier sections of the said regions.

The same is true of the implementation of projects aimed at unifying power engineering systems, connection of the gas system to Baku-Tbilisi-Erzerum pipeline, construction of a branch of Baku-Tbilisi-Ceyhan pipeline to Armenia, telecommunication projects, establishment of mail communication, etc.

Engraved on everyone’s memory is a market of Sadakhlo in Georgia where buyers and sellers of Armenian, Azerbaijani and Georgian nationalities freely collaborated with each other. Identical markets could be created on the border of NK and Agdam region; on the border of Armenia and Azerbaijan in Qazakh and Gubadly regions. If based on free economic zone principles, these markets would provide conditions for people to contact with each other and thus contribute to the development of cooperation and mutual trust between Azerbaijan, Armenia and NK. By their mentality, both Azerbaijanis and Armenians are rather enterprising; hence, this would contribute to the immediate mutual understanding and establishment of joint business structures whose activities are sure to penetrate deep into Azerbaijan, Armenia and NK.

The second challenge is current differences in the two countries’ legislations. Perhaps, these differences are not fundamental, for both countries chose the path of market relations. At the same time, a mutual analytical work, agreement and possibly unification of standards regulating economic activity on both countries’ territories, will be required.

The third challenge is mutual economic claims not only at the inter-state level but also at the level of economic entities of Azerbaijan, Armenia and NK. These claims have to shelved for the future to accelerate processes of economic integration. Any attempts to satisfy claims of economic nature in the beginning of the peace process or try to compensate the population for losses incurred (property, unpaid pensions, allowances, arrears of wages, etc.) will impede the peace process. A comprehensive analysis and concerted decision will be required in the years to come. Conflict-affected citizens and other economic entities will be in need of firm and clear guarantees of the both governments that their losses will be indemnified. All these will be reflected in the text of peace treaty.

The fourth challenge to the economic integration is Azerbaijan’ and Armenia’s obligations to other countries. Invisible today but realistic, there are “reefs” to be analyzed and properly responded to thus reduce their negative effect on the peace process.

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