Growth in uncertain times for Nagorno-Karabakh

By bne IntelliNews April 5, 2012

Clare Nuttall in Stepanakert -

The tiny, self-declared republic of Nagorno-Karabakh has seen rapid economic growth in recent years, as the mining sector expands and the government launches new incentives for investors. However, the ethnic Armenian enclave has never achieved international recognition of its independence from Azerbaijan, and despite an 18-year ceasefire its population lives under the persistent threat of a new war.

Five years of double-digit growth peaked at 13% in 2009. While GDP per capita is still at the modest level of $2,500, Nagorno-Karabakh's isolation from the international economy, coupled with rising investment, allowed GDP growth to continue while other countries were in the depths of the crisis. The current government forecast is for growth to continue at 9-11% for the next few years. "It's very important for us to maintain this momentum," Economic Development Minister Kazen Jesayan tells bne.

This will depend on maintaining investment levels. On March 19, a major deal was signed between the government and Armenia's Vallex Group to develop the Kashen copper and molybdenum mine in the Martaket region. Vallex will invest $80m in the mine, where commercial production is due to begin in 2015. Vallex subsidiary, Base Metals, is already the largest taxpayer in Nagorno Karabakh. "The mining sector is the largest in our economy. Millions of dollars worth of investments are planned for 2012 and 2013, which will result in new working places, higher tax revenues and other macroeconomic effects," Jesayan says. "Agriculture, the first sector of the economy from the end of the war until the late 1990s, was the fastest growing sector in 2011, and there is still huge potential for development of agriculture and food processing."

Outside help

Part of the reason for Nagorno-Karabakh's rapid growth in recent years is that it started from an extremely low level, Masis Mayilyan, chairman of Stepanakert-based think-tank Council for Security and Foreign Policy, points out. "The government is doing a lot to encourage investors. The tax regime now offers a lot of benefits, but there are legal risks because the country is not recognised internationally," Mayilyan says.

As in Armenia, the diaspora has been highly important in providing aid and later infrastructure investment. The main highway from the Armenian border to Nagorno-Karabakh's capital Stepanakert is lined with billboards listing the donors that funded its construction. But while Armenia now has a diversified investor base, Nagorno-Karabakh continues to rely on Armenian and diaspora investors like Vallex.

An important step forward was the IPO of Artsakh HPP, the main generator of hydropower in the republic on the Armenian stock exchange in March 2009. "Artsakh HPP was quite a successful issue. A lot of non-resident investors, both diaspora investors and other foreigners, participated, which was very interesting," says Aram Kayfajyan, CEO of Armenbrok, the adviser and underwriter for the IPO. Thanks to the funds raised in the IPO, construction of new hydropower plants is going ahead and Nagorno-Karabakh will be energy independent by the end of 2013.

"The legal status of the [republic] prevents us from establishing normal international diplomatic and trading relations. However, where things seemed impossible, we have found a way," says Jesayan. "Perhaps the best evidence of this is the development of the real estate market. Our mortgage lending programme is in its fourth years, and the property and mortgage markets are growing steadily, which is a great indicator of economic stability."

The buildings have been given a facelift in central Stepanakert, where the republic's commercial and political life is concentrated. The police headquarters overlooks the blatantly copyright-busting Prada shoe shop, and smart young Stepanakertis gather at the local branch of Russia's Tashir Pizza chain, just a few doors down from the burnt out children's drama theatre. New buildings are going up in all the streets around the city centre.

Stepanakert resident and coffee-seller Anni says that most buildings damaged in the war have recently been rebuilt. "In the early days we didn't do much because there was no money and we didn't know what would happen in the future. But we decided not to wait for a peace agreement to be signed - we must rebuild and believe they will not be destroyed again," she says.

Calm but no closure

Security is light in Stepanakert - while there is no shortage of soldiers strolling around the town, the parliament is guarded only by a young soldier busily texting, and teenagers rollerblade outside President Bako Sahakyan's official residence. But if reminders of the recent war have been removed from the capital, the nearby town of Shushi, where some of the most intense fighting took place, is only now being rebuilt. The town's Soviet-era apartment blocks have been patched up with corrugated iron and breeze blocks, and there are visible scorch marks on walls and roofs.

18 years on from the bloody war between Nagorno-Karabakhis backed by Armenia and Azerbaijani forces, stability has been maintained in the volatile south Caucasus region, but a peace agreement has never been signed. This leaves Nagorno-Karabakh in an uncertain position. It has been de facto independent for nearly two decades, but under international law remains part of Azerbaijan, and has never gained recognition as an independent state.

Relations between Armenia and Azerbaijan have improved somewhat with the election of new presidents in both countries. Armenia's Serzh Sargysyan and Azerbaijan's Ilham Aliyev have met several times since Sargysyan came to power in 2008, under the aegis of the Russian government. At a meeting in January, both men said they were willing to speed up settlement of the conflict. But even with the recent slight thawing in relations, little concrete progress has been made.

Mayilyan believes that despite the warlike rhetoric coming out of Baku and Yerevan at times, none of the parties involved want a renewal of hostilities. "At present there is balance between Armenia, Azerbaijan and Nagorno Karabakh," he says. "It's not likely that Azerbaijan will try to retake Nagorno-Karabakh by force. This would be catastrophic for everyone including the Azeris, who have more to lose than anyone because of their investments into oil and gas infrastructure in recent years."

There is, however, a new threat on the horizon that could bring changes to the long-standing status quo in the region. People across the south Caucasus are anxiously watching the situation in Iran, which borders Azerbaijan, Armenia and Nagorno-Karabakh. If there is a war in Iran, the south Caucasus can expect at least a humanitarian crisis, with a flood of refugees. More than that, however, war in Iran could also destabilise the fragile balance that has endured in the region for almost 20 years.

Growth in uncertain times for Nagorno-Karabakh

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