Azerbaijan, Armenia and the importance of Nagorno-Karabakh

The ongoing conflict over the Nagorno-Karabakh region between Azerbaijan and Armenia has had devastating consequences, with frequent bombings on the local population as well as much of the area causing an estimated 5000 deaths and reducing towns to rubble. In addition to the physical impact, the conflict is bound to have long term socio-economic consequences, from the effects of escalated military spending to the rising tensions in surrounding geo-politics. However, should a resolution be found peacefully, it is likely to prove beneficial for both parties from an economic viewpoint as well as a humanitarian one.

The origins of the conflict arise from the collapse of the Soviet Union in the 1980s, with the Nagorno-Karabakh region becoming a part of Armenia, to the dismay of Azerbaijan, leading to ethnic clashes and eventually a war. There have been many brokered ceasefires since, although none of them have lasted. In October, several cease-fires and truces were made, which have since been broken. Russia, who have historically backed the Armenian militarily, have seemed increasingly reluctant to continue their support due to Armenia’s inflexibility in negotiations and irritation with Armenian Prime Minister Nikol Pashinyan. On the other hand, Azerbaijan have been supported by Turkey, with both Turks and Azerbaijanis belonging to Turkic ethnic groups.

A key, underlying economic reason for the war over Nagorno-Karabakh is the region’s abundance of natural resources and their lucrative economic potential. Resources such as gold, silver, copper, iron, zinc and other mineral deposits can be found in the region. Within many of the occupied areas of Azerbaijan, including Nagorno-Karabakh, there are around 155 mining locations of different minerals, 5 of which are gold mines. In addition, the region boasts over 30 companies established in order to excavate these resources, with many of the companies in these occupied territories of Azerbaijan being Armenian, such as Sterlite Gold Ltd, Sirkap Armenian and Vallex Group being some of the most prominent names. It is thought that Vallex group made profits of around $118 million between 2009 and 2017 from metal deposits in a single area in Vejnaly, located in an Armenian occupied region. As such, any potential resolution between the two countries will require Armenia to, at the very least, start to cease mining within these territories, a move the country may reject given that mineral product exports comprise 30% of Armenia’s total exports.

Azerbaijan’s economy is largely based on oil production, natural gas, and exports of minerals. Meanwhile, Armenia’s economy is 4 times smaller and relies on a mix of agriculture, industry and services, and a growing tourism sector. As oil prices have dipped in recent years, so has the value of Azerbaijan’s exports, and thus the country’s economy has been in a considerable depression over the last few years: GDP has contracted in two consecutive years – by 3.1% in 2016 and 0.3% in 2017. Moving away from an oil-based economy is essential for Azerbaijan. Regaining control of the occupied territories and their minerals offers a potential route to do so.  On the other hand, Armenia has seen a relatively steady GDP growth of around 3% in past years, which, when compared to Azerbaijan’s depression, reduces their incentive to reach a solution in the conflict, from an economic standpoint. However, this number has failed to climb higher due to closed borders and poor relations with neighbouring countries, such as Azerbaijan and Turkey. Moreover, in spite of mining’s large presence in their export totals, the sector only accounts for a limited proportion of GDP, around 3%. As such, brokering peace may be in Armenia’s long-term growth interests.  Nevertheless, Armenia runs a large trade deficit, mainly due to a narrow export base already supported predominantly by the mining in occupied regions, reducing the likelihood that Armenia will cease extraction.

Should a resolution be agreed between the two countries, military spending will inevitably reduce significantly, allowing the respective governments to invest in other areas. Furthermore, the region of Nagorno-Karabakh could become open to foreign investment opportunities, previously deterred by the risks of conflict. Ending the conflict also paves the way for international trade between Armenia, Azerbaijan and Turkey, and could also increase water and energy efficiency through connecting powerlines and coordinating water resources across the borders of the countries. In the long-run for Armenia, small GDP growth could potentially increase should stability continue in the area. Even though the economic implications for a halt in conflict remain lucrative, entrenched political motives still look set to undermine any chance of a peaceful end.


By Hadi Ahmed

Sector Head: Jared Gibson

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