Unresolved War Hampers Armenian Economy

BY LAWRENCE SHEETS

YEREVAN (Reuters)–Armenia’s economy has made impressive strides in recent years but is still badly handicapped by a 10-year conflict with neighboring Azerbaijan.

The landlocked former Soviet republic was an economic disaster in the early 1990’s–gaining international attention for crippling electricity shortages–a wave of emigration and even talk of famine.

Radical structural adjustmen’s have since put the glow back into the light bulbs and thriving small businesses have emerged.

Bright spots have appeared in sectors such as mining. Foreign firms plan to invest $200 million over 10 years in upgrading two gold mines and building a tailings processing plant. Production is expected to reach 18 tons per year by 2000.

Investors have expressed interest too–in Armenia’s diamond refining industry and privatization via international tender of some expensive items has begun.

The Greek telecoms company OTE won a tender last month for 90 percent of the ArmenTel company which handles most of the country’s telecommunications with the outside world.

A majority stake in the Yerevan Cognac Factory–whose legendary products were favored for decades by Kremlin leaders–is also on sale.

Perhaps the most impressive achievement is the restoration of plentiful supplies of electricity–once rationed to less than two hours a day in the capital Yerevan. Higher rates for power and a strict paymen’s regime has eliminated blackouts.

But most Armenia’s remain mired in poverty–and 1997 saw higher inflation and much lower growth than had been forecast.

Analysts and some government leaders say the country cannot fulfill its potential without resolving a 10-year conflict with oil-rich Azerbaijan over the enclave of Nagorno-Karabakh–which cost 35,000 lives before a 1994 cease-fire was signed.

"The Armenian economy is like an infant who isn’t getting enough vitamins. Its growth is being stunted by the war," said one Western diplomat in Yerevan.

Armenia’s from Karabakh–which lies within Azerbaijan–routed the Azeris during the war. Support from the rest of Armenia meant they even conquered large parts of Azerbaijan outside Karabakh’s Soviet-era administrative borders.

But their victory had a price. Armenia’s traditional trade routes through Azerbaijan were cut when the war began and Turkey shut its frontiers with Armenia after a 1993 Armenian offensive. President Changes Tune on Conflict

"Be bold enough to face up to the fact and make everyone aware that we will not live well until the Karabakh conflict is settled and the blockade of Armenia is lifted," President Levon Ter-Petrosyan said earlier this year.

"At the current time–the deman’s to give full independence to Karabakh or for it to unite with Armenia–just like any attempt to use force to make Azerbaijan capitulate–are not realistic," he said.

His words represent an about-face of Yerevan’s long-held agreement with Karabakh’s Armenia’s that the region must have the right to full self-determination.

They want to be allowed to join the rest of Armenia one day and Ter-Petrosyan’s volte-face has put him in a potential political minefield at home–where his critics say the country can develop without such concessions.

But diplomats say it is necessitated by realism and by pressure from international donors and investors who argue the Armenia’s have been too intransigent on the issue.

"Ter-Petrosyan’s new position is recognition of this fact that there is no normal future without serious compromise from the Armenian side and it shows how much international pressure is mounting on him," said the diplomat. Economic Restructuring

Armenia was among the first of the ex-Soviet states to embark on radical economic restructuring–and its early efforts bore fruit. Gross Domestic Product grew nearly six percent in 1996 and inflation was just 5.8 percent.

Last year was a disappointment–however–with year-on-year inflation over 20 percent. GDP growth–at around 2.5 percent according to preliminary figures–was half of what had been projected and insignificant considering how far output had plunged.

Today Armenia has only a thin stretch of border with Iran to the south and two road links with Georgia to the north which are in very bad condition–hampering the development of export industries and driving up importing costs.

The conflict also saddles it with a dubious image among foreign investors–even the sizable Armenian Diaspora abroad.

Direct foreign investment in the economy totaled a meager $12.3 million for 1996–according to IMF estimates.

"Access to markets is vital. A small country like this has to export in order to develop fully because the internal market is small," said Vahram Nercissiantz–World Bank representative in Armenia.

"Living standards will not rise unless they get sizable private foreign investment. Also–the presence of the conflict gives them a reputation problem which could be improved with peace initiatives," he said.

Personal incomes are some of the lowest among the ex-Soviet states. In government jobs they can be as small as $20 a month.

"Three or four years without a significant rise in living standards and the stability of the country will be in question," said Nercissiantz. Karabakh Holds Out for Independence

Ter-Petrosyan has accepted a formula put forward by international mediators for the conflict to be resolved within a framework that gives Nagorno-Karabakh a very high degree of autonomy while preserving Azerbaijan’s territorial integrity.

But the Karabakh government has yet to accept the proposals.

In the meantime–Armenia is loosing sight of a chance to secure a huge planned oil pipeline from Azerbaijan’s Caspian Sea coast through Armenia and into Turkey.

Logistically the route from Azerbaijan through Armenia and Turkey would be the shortest option–but Azeri leaders refuse to contemplate it with no end to the conflict and are considering routes through Russia and Georgia instead.

A resolution to the conflict could also bring investors to high-tech industries which were concentrated in Armenia before the break-up of the Soviet Union.

"They designed guidance systems for ground-to air missiles–computers–and much more. They are very analytically–precision-minded people," said Nercissiantz.

A stock exchange has opened and foreign investors are also showing interest in a developing treasury bill market.

"In the very long run the economy has great potential. The work force is well educated and the sense of entrepreneurship is strong," said Jeremy A J Hunt–CEO of Midland Armenia Bank.

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