SEEUROPE.NET
2005-09-15 16:03:59
Turkey Puts Economical Pressure on Armenia

Armenian Transport Minister Andranik Manukyan said on August 26 that Turkey
is using the proposal to build a new railway line from Kars in north-eastern
Turkey to Akhalkalaki in south-western Georgia to put political pressure on
Armenia, which might find itself in “double isolation”.

The new line would open a link between Turkey and Georgia
bypassing Armenia, reducing the need to revive the Kars-Giumri-Tbilisi line
through north-western Armenia. The fact that Armenia can trade freely only
with Georgia and Iran has incurred some costs, and the economic effect on
the region of the ‘frozen’ conflict over Nagorno-Karabakh is arguably a
reason for seeking
a political solution.

The Armenian-European Policy and Legal Advice Center (AEPLAC), an
EU-sponsored think tank, presented a report in July on the possible impact
of the reopening of the land border between Armenia and Turkey. Turkey
closed its land border with Armenia in April 1993, as an act of solidarity
with ethnically
close Azerbaijan, then in armed conflict with Armenian forces over
Nagorno-Karabakh. The blockade initially included air traffic, but flights
across the Armenian-Turkish border resumed a year later. Armenia’s border
with Azerbaijan was already closed, leaving it able to communicate with only
two of its neighbours.
Economic effects. This situation has created some problems:
Transport costs. Georgia, Armenia’s only outlet by rail to the outside
world, imposed high tariffs for rail freight. According to another study by
AEPLAC, Armenia pays Georgia 38% more in rail tariffs than Azerbaijan, which
does not depend solely on the Georgian rail network. As a result, transport
costs in
Armenia are 20-25% of nominal goods value, more than twice the world average
and the highest in the region, comparable with those of Mongolia, which is
ten times further from the sea. Reopening the Turkish-Armenian border would
bring the
Giumri-Kars rail link back into operation, ending Georgia’s monopoly and
improving Armenia’s access to its markets, including those in the Middle
East.

Turkish trade embargo

Exports of Armenian goods to Turkey are negligible, being
worth less than 1 million dollars per year. Turkish exports to Armenia
(mainly via Georgia) are officially estimated at 40 million dollars,
probably an underestimate. During Armenia’s accession process to the WTO
(which was achieved in early 2003), Turkey made the stipulation that it
would not apply the WTO free trade regime to Armenia. As a result, in 2003,
Armenia’s trade with its immediate neighbours was only 6.2% of total foreign
trade. Georgia’s low purchasing capacity and overall instability has
restricted trade; Iran maintains
high trade barriers.

World Bank study

It has been commonly assumed that reopening the borders with
Armenia’s neighbours would stimulate its economic performance. In
particular, a World Bank study in 2000 claimed that unblocking Armenia’s
borders with both Azerbaijan and Turkey would boost GDP growth by 30%.
However, these estimates
seem exaggerated:

They assumed that Armenia has excess capacity in energy, which may have been
overstated. They were based on the year 2000, since when Armenia’s GDP has
grown by some 60%
in cumulative value. The structure of the economy has since changed to take
high transport costs into account. Compared with Soviet-era Armenia, the
share of production with a high
transport component (chemistry, construction materials exports and
machinery) has fallen. The post-Soviet economy has developed, increasing the
share in GDP of jewellery, information technology (IT) and services. Mining
of copper and
molybdenum has increased lately, but high world commodity prices have offset
the export costs.

AEPLAC study

The latest review evaluates the impact of reopening the border
with Turkey on main economic indicators and foreign trade in particular, in
the short (one-year) and medium (five-year) terms, using general equilibrium
modelling:

Short term. No significant changes are expected in foreign trade structure.
The economy will respond to some reduction in transport costs. Trade volumes
with particular countries will change, but the trade structure will remain
basically
the same. This scenario expects a 0.67% rise in real GDP, to about 20
million dollars.

Medium term

More substantial changes are expected in the volume and structure of trade
between Turkey and Armenia. In particular, electricity exports will be
equivalent to 20% of current (2003-04) production — the study reckons this
to be a ‘conservative’ estimate. Transport costs will continue falling owing
to
more efficient use of Turkish capacities by sea and land. The cumulative
change in real GDP growth over the five years is estimated at 2.7%.

Winners and losers. The mid-term scenario is largely a continuation of the
trends of the short-term scenario. The report expects some industries to
gain but others to suffer from reopened borders:

Winners. There will be a considerable increase in employment and net
investment in the utilities sector, which includes electricity. Exports of
electricity will increase, among other industrial branches. Volumes will
rise for all importing
industries, the importers of textiles, wood, paper and non-classified
manufacturing industries being the biggest gainers.
Losers. Transport, chemicals, the wholesale and retail trade, mining,
textiles and agriculture are expected to suffer, with most job losses in
these sectors. Textiles, mining and chemicals are expected to record the
largest relative
decreases in net investment. Wholesale and retail trade, and financial
intermediation will suffer to a lesser extent.
The effect on Armenia’s economic performance is therefore expected to be
rather modest. The AEPLAC authors even claim that Turkey’s eastern regions
will gain more than Armenia, as their living standards are lower (in 2002,
GDP per capita
at purchasing power parities was estimated at 2,950 dollars in Armenia and
6,000 throughout Turkey, but 1,200 in eastern Turkey).

Critique. The authors are probably correct that only limited growth in
turnover may be expected, along with some stimulation of investment, in the
short run. However, they may not be correct to expect only a mechanical
continuation of the
same trends in the medium term, with a decelerating rate of investment
adjustment. They assume that technology investment will not grow apace in
the medium term, and therefore some portion of foreign demand growth will be
met at
the expense of domestic consumption. This is not self-evident. The AEPLAC
mathematical model’s assumption that Armenia has little economic incentive
in seeking to reopen its land border with Turkey probably underestimates the
stimulation of investment that might be expected, as the term ‘blockade’
still deters potential investors in Armenia.
Turkish position. Turkey does not seem to be about to reopen its border with
Armenia. It continues to demand that the forces of unrecognised Karabakh,
supported by Armenia, withdraw from territories occupied in 1993-94. The
pro-Azerbaijan lobby in Turkey backs this position. However, another demand
is probably more important for Turkey itself. Ankara is demanding that
Yerevan abandon trying to achieve international recognition of massacres of
Armenians in
1915-22 as genocide, possibly leading to compensation claims from the
descendants of the victims, or even to demands for a revision of the current
border with Turkey. The EU wants Ankara to reopen the border, but its
influence
over Turkish policy-making is problematical, given the difficulties of the
accession issue.

The AEPLAC study’s conclusion that reopening Armenia’s border with Turkey
will have little economic effect probably overstates the case, but it may be
welcomed by those who expect little progress on an issue whose resolution
does not depend on the economic argument.