Armenia loses economic battle, doomed to lose political one

Armenia as number two in the ranking of “The World’s Worst Economies” in US business magazine Forbes should ring the alarm bells for this landlocked country in the Southern Caucasus. It made one thing crystal clear: The continuation of the illegal occupation of 20 percent of Azerbaijani lands despite four UN Security Council resolutions is no longer a sustainable policy for Armenia as it has started to take a heavy toll on the country’s economy.

The lifeline provided to its economy by regional powers Russia and Iran, as well as money flowing from the diaspora, is not enough to halt the deterioration of the Armenian economy. Armenia desperately needs a sustainable long-term economic plan for its people.

The goodwill or shaky strategic assistance secured temporarily from regional powers alone will not help Armenia stay afloat at a time when the world is bracing itself for another economic crisis, likely to originate from a deepening crisis in the eurozone.

You may question the methodology used in Forbes magazine’s calculations, but in the end the analysis used the data provided to the International Monetary Fund (IMF) by Armenia itself, compiled over the last three years and in which the prospects of next year have been factored in. It looked at several factors, like high inflation, lower growth, the income per capita and a negative trade balance. Armenian Finance Minister Vache Gabrielyan may try to put the blame on the 2008-2009 world economic crises as an explanation for his country’s poor development. But the problem is not just limited to whether or not the country’s economy was impacted by external shocks. The country has structural problems and needs to trade more, which looks unlikely given the military occupation of Azerbaijani lands.

At the expense of preserving the current status quo and hopefully gaining independence for Nagorno-Karabakh in negotiations with Azerbaijan, Armenia is losing its vital assets, most importantly its human capital. The number of people who emigrated from Armenia remains unclear. Official figures indicate that nearly 80,000 people left the country for good in the past three years while nongovernmental organizations estimate the actual number during that same period may have reached several hundred thousand. It was claimed that 45,000 people fled the country in just the past four months.

No matter how you interpret the different numbers, the important thing is that there is a clear and identifiable trend pointing to a mass exodus in the two decades since the conflict started. People are looking for better opportunities in terms of employment and escaping from their poor living conditions in Armenia. Most importantly, the majority of people who left Armenia were highly qualified people, the crème de la crème, so to speak. This loss of human capital, which is considered to be part of the national wealth, is not the only source of concern for Armenia. It is faced with the outflow of financial capital as well, which, as is to be expected, is transferred to safe and secure places for investment.

Because of the occupation of neighboring Azerbaijani territories, Armenia cannot trade with the two economic powerhouses in the region — Turkey and Azerbaijan, both of whom have booming economies despite the economic crisis brewing in Europe. Turkey, with record economic growth in the last quarter, even outpacing China, closed its border with Armenia in April 1993 in protest of Armenian aggression. It tied the reopening of the border to a solution of the Nagorno-Karabakh conflict out of solidarity with Azerbaijan, resisting Western pressure to open the borders.

To be cut off from lucrative trade with Turkey was not the only price Armenia had to pay. The Armenian government in Yerevan was also left out of important regional projects like the Baku-Tbilisi-Ceyhan (BTC) pipeline and the Baku-Tbilisi-Kars railway. The access to Western markets via Turkey is a huge loss for the Armenian economy as well. We all remember when Haydar Aliyev, the father of Ilham Aliyev, proposed constructing the BTC pipeline through Armenia in exchange for a return of occupied lands. Both Turkey and Azerbaijan had the BTC run through Georgia instead, meaning a significant loss for the Armenian economy.

The same thing happened with the railway. Just to give an example, Azerbaijan extended a $200 million loan to Georgia as part of the first stage in the construction of this railway with an additional loan of $575 million to be allocated for the next stage. This investment may have easily gone to Armenia had it ended the occupation and established good relations with Azerbaijan. The project is expected to be completed by the end of next year and will make both Georgia and Azerbaijan transportation hubs in the region. The construction of the biggest Caspian trade seaport in Alat will extend the reach of this railway to Central Asia, connecting both eastern and western trade routes. Armenia stands to lose even more in both strategic terms as well as commercially from other energy and transportation projects currently being considered in the region.

Because of the conflict, Armenia has lost contact with the most important economic power in the South Caucasus as well. Azerbaijan constitutes 75 percent of the South Caucasus economy and gross product as well as 90 percent of export potential, thanks mainly to the oil-extracting business. The economy has grown threefold in the past seven years, while gross domestic product (GDP) has increased 300 percent. As personal income levels have risen dramatically, poverty was reduced fivefold, according to government statistics. Just last year, the country received $16 billion in investments. In the first half of 2011, investments worth $5.7 billion were made in Azerbaijan’s economy, with more than 70 percent of these funds being directed to the agricultural sector’s development as part of diversification policies, which gives priority to the development of sectors of the economy other than the oil business.

Given the economic dynamics, time is not on Armenia’s side. They have vested strategic interest in keeping the process of negotiation alive to find a solution for this long-running conflict with Azerbaijan. It is a shame that the Kazan talks, held last month between Azerbaijan and Armenia under Russian stewardship, did not produce any result, but I do not agree with the premise that the status quo benefits Armenia. I think having no breakthrough in talks would hurt Armenia more than ever as it loses out on huge economic opportunities during a time of crisis in the world economy.

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