Nestled in the Southern Caucasus, on the eastern extremes of Europe, the ongoing Armenian-Azerbaijani war, which started in 1988, has re-erupted over the past few weeks, with Azerbaijan undertaking a major military operation in the disputed Nagorno-Karabakh region, which is ethnically Armenian but located within the territory of Azerbaijan. This has caused a humanitarian crisis, with over 100,000 civilians fleeing the area and seeking refuge in Armenia (Wright, 2023), and is adding to the economic uncertainty of both the region and Europe (Mills, 2023). This is part of the ongoing war between the two nations, mainly concerning the ownership and sovereignty of the lands of Nagorno-Karabakh and the natural resources found there (Cornell, 1999).
In this article, I explore the wider economic effects of this conflict and the challenges both countries face so long as this conflict continues.
1: Disruption of Trade and Infrastructure
One of the immediate and most visible impacts of the conflict has been the disruption of trade and infrastructure. Both Armenia and Azerbaijan serve as key transit routes for the transportation of goods between Europe and Asia, particularly energy resources such as oil and natural gas from Azerbaijan, which make up the vast majority of Azerbaijani exports (tradingeconomics.com, 2013). The war has not only damaged crucial infrastructure, including pipelines and railways, but has also led to the closure of border crossings, impeding the flow of goods and services (Cornell, 1999). This disruption has reverberated through the global supply chain, affecting the regional economies and the wider global community (Mills, 2023). Nevertheless, owing to the strategic avoidance of conflict-affected areas by oil export infrastructure, the substantial disruption of Azerbaijani oil exports due to the ongoing war has remained relatively low (Bowden, 2020).
2: Humanitarian Costs and Refugees
As previously mentioned, the conflict has caused significant humanitarian costs, leading to the displacement of hundreds of thousands of people, who are now seeking refuge in Armenia. Armenia has had historically high levels of immigration, and this has been accompanied with substantial increases in the cost of living (Bardak, 2011). Furthermore, the integration of displaced populations into the labour market presents long-term economic challenges, potentially leading to competition for jobs and increased social spending. These are issues which Armenia has faced for many years (Bardak, 2011), with unemployment in Armenia still high at 13.7% in March 2023 (World Bank, 2023).
3: Rising Defence Expenditures
Both Armenia and Azerbaijan have increased their defence expenditures to sustain military operations, with Armenia increasing the defence budget in nominal terms by 46% (Freund, 2023). The allocation of a significant portion of their budgets to the armed forces diverts resources from much-needed investments in other sectors, such as education, healthcare, and infrastructure, much of which has remained undeveloped since the Soviet era in both Azerbaijan and Armenia. The long-term economic impact of this diversion will hinder the development of human capital and essential services (Martikian, 2022).
4: Decline in Foreign Direct Investment
The prolonged conflict and geopolitical uncertainty have deterred foreign direct investment (FDI) in the region, as was seen in Armenia in October 2020 when the war last resurfaced (www.ceicdata.com, 2023) Investors are naturally hesitant to commit capital to areas marked by instability and conflict, which has a detrimental effect on economic growth and diversification. The lack of FDI can limit the development of key industries and job creation, perpetuating economic stagnation (Saha et al., 2018).
5: Geopolitical Repercussions
The economic impact of the conflict extends far beyond the South Caucasus. Major global powers, including Russia, Turkey, and the US, have vested interests in the region, with Turkey firmly supporting and arming Azerbaijan and Russia providing soldiers and funds to support Armenia and to keep the peace. (Cornell, 1999). Due to the ongoing war in Ukraine, much of Russia’s military strength has been expended elsewhere, leaving Armenia in a somewhat vulnerable position (Rothing, 2023).
The Armenian-Azerbaijani war in 2023 has unleashed a web of economic implications that extend beyond the immediate region. The disruption of trade, the damage to infrastructure, and human suffering all have far-reaching consequences. The conflict has underscored the interconnectedness of economies and the delicate balance between peace, stability, and economic growth. As this conflict is ongoing, there will continue to be increased economic uncertainty in the South Caucasus.
Article by Marcus King
Edited by Lara Gigov (Editor-in-Chief)
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