Karabakh hopes for recognition — from investors

Issue Number: 
Kristine Petrosian

You can't fault their optimism. Although the Republic of Nagorno-Karabakh remains unrecognized by the international community — including, officially, its patron-state Armenia — the Karabakh government is seeking to fashion itself into the most investor-friendly region in the Commonwealth of Independent States.

The mountainous enclave, now fully under the control of the local Armenian population, remains the subject of bitter dispute with Azerbaijan, which continues to hold that Karabakh is rightfully its territory. Many Azerbaijanis were driven out of the territory during the bloody 1988-94 conflict, which saw 35,000 people killed.

Although Armenians made up the majority of the population, Karabakh was claimed by Azerbaijan. Local pro-Moscow Bolsheviks wanted to hand it over to Armenia in 1920, but under pressure from Moscow, it was officially declared part of Soviet Azerbaijan in 1921.

Negotiations between Azerbaijan and Armenia over Karabakh have continued on and off since an uneasy truce in 1994. While a solution may appear far from reach, this uncertainty has not deterred local authorities from pushing ahead with attempts to attract new business to the territory.

"Investors will find they enjoy a much better climate here than in many recognized countries," said Arnold Abrahamian, Karabakh's Minister for the Economy.

"Our army is the best guarantee for investors," he added with a smile. Although Abrahamian was only being mirthful, the Karabakh Army is a very serious institution, as it is the only way to ensure security in the territory.

"There is no border with Azerbaijan, only a front zone," Abrahamian said

The tax regime operating in Karabakh is relatively lenient, and the economics minister said there are moves afoot to further reduce it. Income tax is 7 percent, but a draft law has been submitted to reduce it to 5 percent. The same program will see VAT cut from 20 percent to 14 percent, profit tax reduced from 10 percent to 5 percent and so forth.

Abrahamian said that investment in the economy, although still only a trickle, is showing signs of picking up. "For the past few years we have occasionally received small sums, which I would hardly call investment," he said. "It's more like financial aid."

This year, around $5 million dollars has been put into the Karabakh economy, Abrahamian said. The main sources have been Armenians from the United States and Switzerland. Two Armenian businessmen from the Swiss Andre group invested $900,000 in a watch manufacturing facility in Stepanakert, while American-Armenians spent $2 million on the reconstruction of a hotel in the enclave’s capital.

In Soviet times, Karabakh's main source of income was agriculture, and some experts see the food industry as a possible source of economic growth. The region's industrial sector, which used to account for 30 percent of the economy, was largely destroyed in the war with Azerbaijan.

Some plants in the territory continue to work. A rundown plant in Stepanakert churns out shoes, silk and clothing. A nearby electrical plant produces lamps and medical equipment.

Abrahamian said programs are being developed with the aim of improving the local economy, mainly focusing on the region’s energy and mineral resources. The government is planning to build a number of small hydroelectric power plants — at a cost of $70 million to $80 million — that will supply both domestic needs and provide opportunities for export. The republic currently imports some 60 percent of its electricity from Armenia.

Karabakh is not eligible for credits from international financial organizations, as it is not recognized as an independent country. The republic does, however, receive financial aid both direct from donors or via Armenia. Last year, Abrahamian said, the U.S. Congress allocated $12 million to Karabakh, almost half the enclave’s budget.

The 1999 GDP figure was $59 million, 80 percent down on the figure in Soviet times.

Karabakh also has some gold, silver and lead deposits, which could potentially be exploited. But Abrahamian pointed out that mining requires large investments that are not in the offing at this stage. He also said that Karabakh had large reserves of a rare mineral, Icelandic spar, which is used in laser and space technologies.

Another infrastructure problem coming out of the war was the destruction of the water-pipeline system, difficult anywhere, but worse in an area with a plentiful water supply. But with the construction of hydroelectric power plants, the government is hoping to build another pipeline.

"Then we could even sell water to Azerbaijan," Abrahamian said, "and it will cost more than oil," he added with a smile.

One of Karabakh's most eye-catching pieces of infrastructure is the $15 million Goris-Stepanakert road, built right after the war ended by funding from the Armenian diaspora. Now Karabakh is building the 168 km "North-South" road at a cost of $25 million.

While international organizations have tried different approaches, and failed, in bringing together Armenia, Azerbaijan and Karabakh to settle the territorial conflict, the people of Karabakh remain confident about their future.

"Azerbaijan has only one means to seize the country — another war, which is beyond their ability," said Arsen Melik-Shakhnazarov, the republic's representative in Moscow.