Opinion: the economic impact of an Armenia-Azerbaijan peace agreement should not be overestimated

As the Armenia-Azerbaijan peace process progresses, Onnik James Krikorian writes in this op-ed for commonspace.eu that it is vital that "simplistic promises of economic prosperity without the appropriate research and a realistic analysis do not lead to later disappointment and disillusionment. That would only be exploited by nationalists and external powers opposed to the normalisation of relations." While the economic impact of a peace agreement should not be overestimated, however, this does not mean that there won't be any advantages, he argues.

While economic relations can serve as a means to foster cooperation and build confidence between countries in conflict, genuine progress in the political realm remains essential for any meaningful financial impact. Economic ties alone are insufficient to prevent the recurrence of war, especially in a protracted conflict such as that between Armenia and Azerbaijan.   

While economic growth would obviously help alleviate poverty and inequality in both societies, it would be erroneous to assume that Armenia and Azerbaijan could establish robust economic connections in the immediate aftermath of a peace agreement. Given that any treaty can also fail, it is unlikely that either country would make substantial investments in this area in the short term.   

Indeed, there is also no sign of significant economic dividends in the mid-term either. One need only to look at Georgia to see how its trade relations with Armenia and Azerbaijan remain under-developed apart from in very select areas. Oil and fuel exports, for example, make up the lion’s share of Azerbaijani exports to Georgia, amounting to $573 million in 2022.

Georgia’s exports to both countries are also highly dependent on the re-export of new and second-hand motor vehicles rather than the actual production of goods.

Though some claim otherwise, it is also unlikely that Azerbaijan would find a new market for fuel in Armenia. The issue of energy security would remain a major concern for Yerevan in the foreseeable future, while there is also nothing to indicate that prices would drop. The Azerbaijani State Oil company, SOCAR, operates in Georgia, for example, and this has not happened.

As of April 2023, the price of regular petrol in Azerbaijan was $0.59 a litre while SOCAR in Georgia sells it for $0.92. This is roughly the same price that other companies sell it for in Armenia. Moreover, a significant number of Armenians have anyway switched to using liquefied gas in their vehicles, making it highly improbable that Azerbaijan would even want to enter this market.

Armenia benefits from discounted gas from Russia, which Azerbaijan is unlikely to match

And it isn’t just petrol. The situation becomes even more problematic when it comes to natural gas. Long an instrument in Moscow’s soft power toolbox, Armenia is already receiving discounted natural gas from Russia priced at $165 per 1,000 cubic meters whereas Azerbaijani gas currently trades at $794 per 1,000 cubic meters in 2022. Baku is hardly likely to match Moscow’s pricing policy.

Additionally, as Armenia is a part of the Russia-led Eurasian Economic Union (EAEU), there are various customs and import duty regulations that must be factored in as well. This all the while as Armenia’s other main supply of energy – Iran – and the EAEU are already cooperating. On 19 January 2023, the two signed an agreement on a free trade zone with zero tariffs on 90% of goods.

Unfortunately, it also appears improbable that there would be a significant number of Armenians or Azerbaijanis interested in buying goods from each other’s countries even if they could. What informal trade that has taken place between the two countries in Georgia has already not been without controversy. 

In 2011, for example, garlic produced in Azerbaijan was discovered being sold in Yerevan supermarkets but was quickly taken off the shelves. The same happened in 2014 when potatoes grown in Armenia were found for sale in Baku. And in March 2023, the government was quick to discount any possibility of Azerbaijani petrol being inadvertently sold when the multinational Shell oil and gas opened up shop.

Railways, economic forums, and markets in Karabakh

But that does not mean that there are not some economic advantages.

One key factor underpinning any lasting peace through economic interdependence is already enshrined in the November 2020 trilateral ceasefire statement, namely the resurrection of the Soviet-era railway connecting Azerbaijan to its exclave of Nakhichevan, which would also facilitate Armenia rail access to the Iranian and particularly the Russian market.

That, of course, seems a long way off now, but it has been included in numerous proposals aimed at resolving the Armenia-Azerbaijan conflict in the past. Moreover, there is no doubt that Armenia could benefit from inclusion in regional infrastructure projects, most of which have passed it by because of the unresolved Karabakh conflict. Such projects would attract investment.

Meanwhile, the creation of a South Caucasus Economic Forum, one of 30 confidence building measures recommended by LINKS Europe, could also be of importance along with the also proposed creation of a special economic zone in Georgia, likely close to its borders with Armenia and Azerbaijan. Indeed, it is this regional aspect that should be advocated for more openly. 

The dividends might be small to begin with but such developments would at least establish communication and cooperation – and ultimately trust. Moreover, perhaps the real potential lies when economic linkages are developed and nurtured between the ethnic Armenian population of Karabakh and Azerbaijan proper. This too has featured in previous proposals, most notably in 1997.

In the package variant under consideration then, but which ultimately led to the resignation of Levon Ter-Petrosyan, the opening of daily or weekly markets in Karabakh were included.

"Simplistic promises of economic prosperity" must not lead to "disappointment and disillusionment"

Regardless, any reduction in military expenditure is a win-win for everyone. Moreover, the absence of armed conflict would at least make Armenia and Azerbaijan more appealing to foreign investors. Focus should also be more on the potential for vital albeit reluctant cooperation between Armenia and Azerbaijan on renewable energy and especially the management of shared water resources. 

The latter, of course, is highly pressing given that competition over water could lead to conflict in the future while also being necessary for agricultural production in the present.

Otherwise, perhaps the main potential economic benefit from any peace agreement lies not between Armenia and Azerbaijan, but arguably between Armenia and Turkey. It is noteworthy that successive governments in Armenia see the normalisation of relations with Turkey as important for the local economy. Even then, however, expectations need to be managed.   

“In the dimension of trade, benefits of peace exist, but would overall be smaller than might be expected at first,” a 2019 report funded by the European Union by Berlin Economics found. “As Armenia and Azerbaijan are both relatively small economies and complementarities in the export and import baskets are not large, bilateral goods trade would be limited at around 1% of total trade for Armenia and less than 1% of Azerbaijan's total trade in the long run.”

It is vital, therefore, that simplistic promises of economic prosperity without the appropriate research and a realistic analysis do not lead to later disappointment and disillusionment. That would only be exploited by nationalists and external powers opposed to the normalisation of relations. 

“A political settlement per se would not bring about immediate and drastic changes in the overall economic performance in the South Caucasus […],” a 2001 World Bank study warned. “Widespread expectations to the contrary are hardly realistic. Too many overoptimistic projections of peace benefits circulate in the region.”

source: Onnik James Krikorian is a journalist, photojournalist, and consultant from the U.K. who has covered the Armenia-Azerbaijan conflict since 1994.
photo: RaillyNews
The views expressed in opinion pieces and commentaries do not necessarily reflect the position of commonspace.eu or its partners

Related articles

Editor's choice
Borrell tells the European Parliament that the situation in Afghanistan was critical, but the EU will remain engaged

Borrell tells the European Parliament that the situation in Afghanistan was critical, but the EU will remain engaged

Borrell underlined that the European Union will make every effort to support the peace process and to remain a committed partner to the Afghan people. "Of course, we will have to take into account the evolving situation, but disengagement is not an option.  We are clear on that: there is no alternative to a negotiated political settlement, through inclusive peace talks.