The Costs of War and the Dividends of Peace Apparently Lost in Karabakh Negotiations

The OSCE-sponsored effort to promote a political settlement of the Nagorno-Karabakh conflict is stalemated, with Armenian and Azerbaijani officials engaging in mutual recrimination over the breakdown in negotiations. Given the economic possibilities, especially in the oil and gas sector, the inability of Armenia and Azerbaijan to reach an agreement is seriously damaging development efforts. But officials involved in the peace process indicate that political interests outweigh economic considerations in the Karabakh equation.

In a recent interview, Judith O'Connor, the World Bank's Country Director for Azerbaijan, Armenia and Georgia, discussed the implications of the conflict in Nagorno-Karabakh for the region's economic development. "The cost of not resolving the conflict, from an economic point of view, is very high," she said. "We have done some estimates in the case of Armenia to suggest the benefits to the economy from peace could be of an order of almost 40 percent of GDP. Opening Armenia's border with Turkey and Azerbaijan could reduce the transport cost by between 30 percent and 50 percent," she said.

O'Connor added the Bank has not analyzed the impact on Azerbaijan, but in her view the dispute clearly affects investments outside of oil and gas. When examining factors that contribute to a healthy investment environment, O'Connor said, "people look at stability." Potential investors are often willing to tolerate flawed local laws and rules, she said, as long as there are no sudden unexpected political or economic developments.

She acknowledged that investments in the oil and gas industry in Azerbaijan are the highest per capita among the countries of the former Soviet Union, but cautioned that, "You see that [investment] only in one sector. What you want to see really is a broad–based investment climate that is attractive for domestic and foreign investments."

Commenting on the investment potential of the region, she observed that the regional market is small, comprising about 17 million people. "So," she pointed out, "it is a small market even [with these countries] taken together," with the additional impediments of transport barriers and blockades.

"A peace agreement on Nagorno-Karabakh can facilitate open borders," including with Iran, she said, adding, "this region has a fantastic role to play as a bridge between East and West and South and North," O'Connor said.

"A peace deal that looked reasonable and sustainable to both sides would be in the long term interest of the whole region, Azerbaijan as well Armenia," she said. "I just very much hope they will do it."

A peace agreement in the near term is appearing less and less likely. Both sides seem unwilling to budge from their negotiating positions, which are separated by wide differences on the future states of Nagorno-Karabakh. Baku is willing to grant the enclave broad autonomy within Azerbaijani jurisdiction. Yerevan insists on Karabakh's independence from Azerbaijan, and also says the enclave must be linked to Armenia proper by a land corridor.

Both sides blame the other for the deadlock. Armenian Foreign Minister Vardan Oskanyan, in an interview with the Mediamax news agency on July 18, described Azerbaijan as "not ready to solve the Karabakh problem through compromise," adding that Baku did not have a legal right to retain the enclave. He reasoned that Karabakh's declaration of independence was based on the Soviet legal framework in effect at the time. "Therefore, Azerbaijan has no legal or lawful grounds with regard to Nagorno-Karabakh."

Meanwhile, Azerbaijani leaders continue to speak about reopening the armed conflict. Azerbaijani Foreign Minister Vilayat Quliyev, in a July 17 interview with the Turan news agency, attributed the stalled talks to "Armenia's non-constructive position." He added that an early July visit by the Minsk Group co-chairs failed to get discussions back on track. He insisted that the OSCE adhere to the organization's principle of territorial integrity.

Sources close to the peace talks said that, following the talks in Paris and Key West, US government officials and representatives of the World Bank met to discuss proposals to provide assistance, in the event of a settlement, to Armenia and Azerbaijan. The recent setback in

negotiations will postpone further discussions of such plans, they say.

A statement issued in July by the Minsk Group – which comprises representatives from France, Russia and the United States -- illustrates the extent to which earlier optimism for a settlement has faded. Rather than engaging the sides in constructing peace, the statement exhorts them to avoid war. "This 'no-peace, no-war' situation is dangerously fragile. We are increasingly concerned that bellicose rhetoric, particularly notable in recent weeks, only exacerbates tensions and increases the risk of renewed conflict," the statement said.

Anticipating the possibility of future violence, the statement continues, "Any new fighting would benefit no one and would undermine the prospects for peace. Calls for a 'military' solution to the problem of Nagorno-Karabakh are irresponsible. We encourage all politicians, leaders of political, public, and religious organizations, figures of science and culture, representatives of mass media and all people of good will to demonstrate restraint and responsibility by avoiding any actions or statements that could aggravate the situation and harm the delicate peace process."

The retreat from a negotiating posture, and the resumption of hostile rhetoric, has renewed uncertainty in the region, forcing the World Bank, and other international institutions, to withdraw to the sidelines and wait.

Explaining their predicament, O'Connor said, "Our mandate is economic, not political.