POSTWAR ECONOMY OF NAGORNY KARABAKH

Naira AIRUMIAN


Naira Airumian, Deputy Editor of the Azat Artsakh newspaper (Stepanakert, Republic of Nagorny Karabakh)


About nine years ago Azerbaijan and Nagorny Karabakh, the sides in the conflict, signed an armistice that is now being observed without an involvement of peacekeeping and other forces. Despite bellicose statements that reach Nagorny Karabakh nearly daily together with Azerbaijanian media neither side wants a war while the nations prefer to develop economic and civil society.

Under Soviet power, Karabakh economy could be described as a self-sufficient entity. An agrarian area, it supplied the metropolitan country (Azerbaijan) with meat, milk, grapes, wines and liquor. It also had industry of its own: there was a silk mill, the largest in the region, in Stepanakert (the capital of the autonomous region), an electrical engineering and capacitor works, a shoe and a garment factory. Being dedicated to the Soviet principle each region should have its profile Baku was skillfully turning Karabakh into its raw material appendage or a producer of semi-finished goods. Here is an example: the silk mill had all production cycles minus dye works. The mill had to send its product for a raw-material price to one of regions peopled with Azerbaijanis to be dyed. After that silk fetched three times more. (Today, the silk mill remains idle partly because it lacks the dyeing stage.)

To this day none of the large-scale full-cycle enterprises (that covers all stages from a raw-material base to selling finished products) have been restored. Agriculture was announced to be the priority economic sector. Wheat is sown everywhere where it grows, cattle stock is being actively increased. This covered, to a certain extent, consumer demands for the most essential foodstuffs.

It was nearly impossible to develop the regions entire economy in the early years of armistice: arable land was turned into minefields, industrial enterprises lay in ruins, economy was devastated while social problems were piling up, men were conscripted into the army. These and other factors left no choice for the authoritiesthey had to maintain a definite defense capability level and a more or less adequate standard of living for the civilian population. The fact that by the time of the armistice the military elite had been at the helm made things worth. Wily commanders disposed of public property as if it was their own. They also used property left without owners as starting capital. In short, they plunged headfirst into trade that, in some cases, assumed fairly large proportions.

The totalitarian regime of the military headed by the former defense minister of the Republic of Nagorny Karabakh survived till 1999. Despite its numerous negative aspects it centralized administration and created a more or less wealthy elite that, at that time, did not know how to invest its money to obtain profit. They went into real estate and bought widely in and outside Karabakh and took up trade. All sorts of shops were mushrooming only to become bankrupt and be replaced with new ones. Peoples purchasing power was maintained through a socially oriented budget: today nearly 70 percent are eligible for all sorts of pensions and allowances. (The war created new and fairly numerous categories: families of those killed in action, disabled, orphaned children, etc.) The state was creating more budget-supported jobs thus inflating the number of bureaucrats. To prove their worth the authorities shocked people with large-scale projects such as asphalting all streets in the capital or building a huge bridge in its center. It was a narrow circle with good contacts outside the republic that was in control of all financial resources both created inside the state and flowing from Armenia and the Armenian diaspora. Wages and salaries were paid irregularlythe money was put through commercial banks to create more money. Part of it was put into construction projects, the other part lined private pockets to be spent in posh cars and feasts.

Legally elected president Arkadi Gukasian led a riot against the authoritarian regime of Defense Minister Samvel Babaian and won. This changed economic priorities together with the nature of the political regime in the republic. Anushavan Danielian who was appointed prime minister torn the republics economic policy to pieces, especially the hasty privatization of land that destroyed all collective farms including those that had been doing quite well. Their machines, buildings and cattle disappeared together with them. What was more, the postwar government that claimed that it wanted to restore agriculture started giving left and right small and large loans out of the state budget and from a certain Artsakhinvest fund instituted by nobody knew whom and nobody knew how. Part of the money was transferred abroadthe budget is still waiting for repayments. Another part went to the still alive farms as short-term credits. When the farmers failed to repay the debt within nine months they found themselves trapped: they had to sell everything they had for mere pittance to the local lords.

Little by little, by summer 1999 Nagorny Karabakh had found itself in the following economic situation: the majority of villages and peasant farms were destroyed by the war (many of them had been deported or suffered from artillery fire) or were decentralized intentionally or unintentionally. Money from outside had paid for military and civilian objects and dwelling houses in the capital and elsewhere. The Armenian diaspora paid for the state-of-the-art highway between Goris and Stepanakert that connects Artsakh (Karabakh) with the rest of the world. There are humanitarian (medical and charity) programs realized by international and Armenian organizations. At the same time, industry remains either totally idle or working at 10 percent of its capacity. The already known raw material resources are not mined. A ramified network of shops was engaged in selling imported goods. Furthermore, the state budget mainly composed of state loans from Armenia can hardly cover social payments. The rich military elite living in posh mansions lacked only personal planes. The local capitalists did not want to invest in Karabakh while foreign investors, mainly Armenians, prepared to invest and to lose part of the money, were deterred by the obstacles created by the local administration and instability.

The new government created several integral development programs for districts and the key economic branches. Because of the regional specifics and the republics enclave existence it was decided to develop those branches that can use the local raw materials and whose products can be easily sold. Special studies confirmed that the republic is a potential large-scale energy exporter. Today there is a fairly expensive project of a cascade of mini-hydroelectric power stations on three rivers that will meet local requirements (today the republic lives mainly on the energy that comes from Armenia) and will be exported to other countries, in particular to Iran. The cabinet that offers favorable conditions is looking for investors. Construction of one of the stations has already begun.

Mining is another priority. During Soviet years because of discrimination there was no mining industry in Karabakh to speak of. The gold mines in the village of Drmbon (Martakert District) remained closed since the beginning of the 20th century. Marble and granite are mined on a small scale in the Gadrut and Askeran districts. So far, next to nothing is known about other raw materials. Several months ago the Armenian Copper Program revived gold and copper mining at Drmbon. An ore-dressing mill is under construction, the mining projects have already created dozens of jobs. The project will require over $20m of investments. According to unofficial information, the need to move large amounts of semi-finished products to Alaverdi in Armenia will either call for an overhaul of the road leading from Karabakh to Armenia through Karvachar or for building a railway that will cut down transportation costs.

Woodworking is another potentially promising branch. The local mountains abound in valuable timber (oak, beech, and walnut). It was expected from the very beginning that investment would first flow there and these hopes proved justified. An American of Karabakh origin invested about $2m in a new woodworking factory in the village of Vank (Martakert District). He brought in the latest German equipment and is now producing top-quality products. The village also received an amusement complex and a set of service enterprises. Transport is the only problemthe single mountain road that connects Erevan with Goris and Stepanakert is hard to negotiate with heavy cargoes. Hauling is a risky and expensive enterprise that sends up the cost of products and cuts down competitiveness. The businessman from Vank has to address other problems. As a result his enterprise has not yet reached the profitability level. On both sides of the border the greens launched a campaign against wood felling. Today, there are two more woodworking enterprises in the republic that still have to develop investments.

Radical tax reforms attracted more money and revived the local economy. Since 1999 the taxes have been steadily lowering. In 2000-2002, profits tax dropped from 15 to 5 percent, while income tax was lowered from 30 to 5 percent. In 2001, all complete-cycle distilleries in wine industry using local raw materials were exempt from excise tax. The land tax lowered from 15 to 6 percent. In 2002, a single trade tax of 2.4 percent of trade turnover was introduced.

These measures increased budget revenues mainly due to the fact that some of the businesses emerged from the shade and the number of economic entities increased. Liberalized economy holds more promises for potential investors yet it has become clear that tighter tax control that goes hand in hand with lower taxes together with stronger bureaucratic pressure have already squeezed out small and even medium-sized enterprises. Gradually, comparatively large-scale businesses started absorbing weaker and smaller ones. It is too early to speak of monopolies yet the state has no plans of elaborating anti-monopoly law. The leaders are probably convinced that at this stage the country needs strong monopolies.

Monopolization is best seen in the sphere of wine and alcohol production. At all times Karabakh has been famous for its wines and mulberry vodka. The traditions are gradually restored. One of the firms, JVS, is working for export. It rents lands on which it grows wheat and vine. The firm has concentrated all production stages from growing raw materials to turning out finished products. On the one hand, this creates monopolies, on the other, production is restored, new jobs appear and large tracts of land are tilled.

It should be said that the demand for land has increased. It is mainly created by large businesses from Armenia. In 2002, the state rented out much more land than before. According to experts continued stability will boost the demand for land that will send land prices up but its cadastral price is too low to allow the prices to rise too high.

One would expect agriculture to be the most profitable branch in Karabakh. So far, it has been slowly developing that can be explained by the war and poor administration that have been plaguing the peasants in the last 10 years. Having been left without machines and money the peasants are not ready to accept the new rules of market economy. Many of them cannot understand why the leaders of the country that was waging a war and should, therefore, be striving to centralization preferred to pitilessly liberalize its economy, destroy peasant economies and denationalize everything they could lay their hands on. No wonder the latest public opinion polls showed that about 80 percent of respondents in Karabakh wanted the collective farms back.

There are examples of successful denationalization, too. For example, as a result of partial privatization of the republics national bank Artsakhbank about 70 percent of its shares belong to Swiss and American financiers. New investments increased the banks assets by 2.8 times, the authorized capital grew by 3.2 times. The bank now holds one of the top places in the list of most reliable Armenian banks.

It is for the third year now that the Savings Bank (a branch of Artsakhbank) has been compensating to old people (born before 1934) the money lost in 1993 (per 1 thou of Soviet rubles they get about $50). Each family gets a bonus for its third and next child, the money being deposited in the same bank. When these children reach maturity at 18 they get about $1,000. Before that the parents can use monthly interest. This encourages people to have more children while the banks get additional current assets. Every year the project encouraging large families gets 300-350m drams ($1 = 558 drams).

The turn of tourist industry has come: one can easily imagine sightseers from all over the world, Armenians especially, flocking to look at the famous historical and cultural monuments of Karabakh and to enjoy its strikingly beautiful landscapes and pure ecology. So far, the republic lacks hotels, services and roads. In 2002, it acquired the first hotel called Nairi owned by Australians of Armenian origin. The Karabakh Hotel is being rebuilt by a Swiss firm that privatized it. Several small hotels are under construction. Roads are much harder to build: there is a project of the North-South highway that will cross the republic and branch off to the remotest corners, large historical monuments and spas. The funds are flowing from all over the world: Armenians never tire to organize TV marathons and collect donations. The roads two stretches have been commissioned. In the next two to three years the project will be completed and, the government hopes, there will be any number of tourists wishing to enjoy the places of interest in Karabakh thus adding money to the republics still nearly empty coffers.

Politically, this is a de facto republic that received no international recognition, which, undoubtedly, affects its economic development. Today, large countries are locked in struggle over domination in the Southern Caucasusglobalists obviously want to turn the region into a communication link between Europe and East Asia. Obviously, the countries involved will not encourage more fighting in Karabakh. Businessmen wishing to expand the new markets and production areas can profit from this. In fact, recently foreign companies have been displaying their interest in the republics virtually untapped riches. Early in 2002, a Lebanese firm rented, for a long term, the only communication enterprise thus becoming the telecommunication monopoly. The republic acquired mobile communication and better satellite and Internet services. Cable telephone connections leave much to be desired. The Karabakh-Telecom has already invested about half of the planned $15m and is reaping profits. It seems that in the course of few years it will return its investments.

Swiss watchmakers have also come: a branch of Franck Muller, a well-known firm, is using the local skills and extremely cheap labor. Some of the local specialists were trained in Switzerland. The wages are low by Western standards yet quite adequate according to the local conditions.

Carpet weaving is most profitable among all other traditional handicrafts. At all times local carpets were known for their high quality, elegant patterns and fast colors. There are two American firms working in the republic. Together they have invested $150 thou and are resolved to create a complete cycle up to producing natural dyes. A large number of local carpets is sold in the United States.

Ara Abramian, President of the Union of Armenians of Russia, presented a promising project of a large-scale refrigerator industry. It should be said that despite a vast Armenian sector in Russian economy businessmen from Russia have not yet betrayed much activity. Many of the Karabakh men left the republic in search of earnings and settled in Russia. True, in the last one or two years an outflow diminished yet many of the local families live using the money they receive from Russia.

According to the republics leaders the rates of tax and legislative reforms are outstripping the pace of changes needed in the personnel sphere. Many of those engaged in the economic sphere lack management and marketing skills, which they never learned. Psychologically they are ill fitted to new conditions. This is especially true of the bureaucrats of the middle level called in Karabakh the Great Wall of China: people find it hard to overcome them. This keeps many away from any business initiatives. The problem of structural and personnel changes became even more topical after the presidential elections of 11 August, 2002. So far, nobody knows how soon it will be resolved and whether an efficient answer will be found. What we do know is that the top people prefer to avoid personnel-related scandals and crises.

I would like to say here that the development rate of the local economy is directly related to the attitude of the international community to the problems of common people. To help them restore their standard of living there is no need to recognize the republic. Help can go to the social sphere and certain economic branches. The United States can serve as a positive example: under a Senate decision during a year the country has been extending its direct aid equal to the republics budget. The money goes to the construction sector to restore ruined dwelling houses and build new ones, to health protection and programs in other spheres.

No matter how fast the republics budget will grow the war and incompetent management have already destroyed so much that outside aid became indispensable. Beside the aid coming from the U.S. and the state loan from Armenia there are humanitarian projects supported by international and Armenian organizations, and individuals. This helps address a huge set of everyday social problems yet cannot help deal with large-scale problems. An irrigation project calls for large-scale funding that the republics budget cannot provide. Some of the organizations involved do work on limited projects of irrigation and drinking water supply to individual villages.

It should be said that nearly all villages have stable water and electric energy supply. Gas is gradually coming to all of them. Schools and medical stations have been restored in many villages, new ones built where they were needed. The peasant psychology should be changed: local peasants are still looking at the state for help. They have not yet recognized that roads, houses, and land belong to them and they have to look after them themselves. They should not expect compensations for adverse weather conditions or supplies of free seeds and machines. This will take time. So far, there are no insurance companies in Karabakh, business is still not coming to agriculture, the government finds it hard to get back its loans while people pin their hopes in the state and God. So far, people in cities have not yet recognized that privatized enterprises work better than the state ones (the state has no money to retool them). Large enterprises are bought by private personstheir collectives betray no desire to become masters of the plants at which they work. One can only hope that over time this idea will strike root in peoples minds.

Today, the share of state involvement in the economy is too small for a country still living in a state of emergency, which has just left behind an armed conflict and the change of formations. This share is too large for a state that announced a course toward democratization and economic liberalization. Further economic development will depend on whether public or private property wins.


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