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Partnership and Pathways
for the Future:AZERBAIJAN,
ARMENIA and the US
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| By Philip O'Cealligh |
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It has been suggested, with the formation of the twentieth-century states, Armenia and Azerbaijan, that each will follow separate but equally successful pathways of development. More importantly, that with a large Diaspora of Armenians, that even with lack of natural resources, that this stage could compensate with both help and direct involvement of the larger total worldwide Armenian population. The same could be true if Azerbaijanis were living in developed countries; only 5.8 million of the world's estimated 19 million actually live in Azerbaijan, with most of the population living in Iran across a southern border fixed with Persia and Russia in the nineteenth century. At the same time, slightly more than half the world's 6.3 million Armenians are widely scattered outside the borders of the Republic of Armenia.
For Armenia and Azerbaijan, the center of nationalist self- expression in this period was the Nagorno-Karabakh, Autonomous Region of Azerbaijan. After the Armenian majority declared unification with Armenia in 1988, territorial conflict broke out in the region. International mediation efforts were stymied by the intransigence of the two sides and the ineffectiveness of go-betweens. The military conflict in Nagorno-Karabakh put an enormous stress on the health and social welfare systems of combatants and negatively impacted economic development and political stability in the entire region.
The relationship of Russia to the former Soviet republics in the Transcaucasus caused a heightened level of international concern in the transitional years, especially to US policy and energy interests. Consequently Russia was determined to improve its economic and military influence in Armenia and Azerbaijan. After 1991 Russia remained Armenia's foremost trading partner, supplying the country with fuel. As Armenia's foreign policy was dictated by the Karabakh conflict, after independence.
New Era of Development
With many elements of post-Soviet economic reform in place, a steady flow of assistance from the West and the US, and an end to the Karabakh conflict in sight, Armenia looked forward to a new era of development. Both countries are coming to realize that the opportunity is at hand with the essential elements in place: stabilization of national currency, institution of private ownership and privatization of agricultural land, liberalization of prices and elimination of subsidies; along with other related reform. The IMF, World Bank, EBRD, as well as other financial institutions and foreign countries, are extending considerable grants and loans for: development of private businesses, budget deficit reduction, local currency stabilization, energy, agriculture, food processing, transportation, and health and education sectors, and for rehabilitation work in the areas affected by the 1988 earthquake.
Parallel to government policy, the country's industrial strengths and natural and human resources are worth emphasizing. Regardless of Armenia's political stability, its major hindrance to development is the trade embargo imposed by two of its four neighbors - Turkey and Azerbaijan. The recent dialogue between the Presidents of Armenia and Azerbaijan has been a positive attempt toward improving their relations and establishing diplomatic and trade relations with Turkey and Azerbaijan.
Armenia maintains a healthy relationship with the US; it is the third largest recipient of U.S. Foreign AID. In 1992, Armenia signed three agreements with the United States affecting trade between the two countries - Agreement on Trade Relations; Investment Incentive Agreement, and the Treaty concerning the Reciprocal Encouragement and Protection of Investment (known as Bilateral Investment Treaty - BIT). US businesses should be aware that the Constitution of Armenia protects all forms of property and the right of citizens to own and use property. Foreign investments cannot be nationalized; they also cannot be confiscated or expropriated except in extreme cases of a natural or state emergency, upon a decision by the courts and with full and mandatory compensation. The Bilateral Investment Treaty (BIT) protects investors' rights - in the case of conflicts between an American investors and the Republic of Armenia, the investor may resort to international arbitration. The Treaty supercedes Armenian law. In addition, Armenian courts are becoming increasingly independent; the Ministry of Justice is gradually limiting its involvement in civil cases. Armenia intends to sign the International Convention on Investment Disputes and become a member of the International Center for the Settlement of Investment Disputes (ICSID). According to the State Department, there has not been observed politically charged incidents in Armenia that intended to impair commercial property, and civil disturbances against US businesses are less likely to occur.
Apples and Oranges
Azerbaijan, on the other hand, has the richest combination of agricultural and industrial resources of the three states. Like the other former Soviet republics, Azerbaijan has been seeking the right combination of domestics and imported skills and materials to put its house in order. And, like Armenia, Azerbaijan faced the complications of internal political disruption and military crisis in the first years of this process. In spite of these setbacks, Azerbaijan's economy remains the healthiest in the region, largely because unexploited oil and natural gas deposits are plentiful and because electric-power generating plants are in operation. Azerbaijan has been able to attract Western investment in its oil industry in the post-Soviet years, although Russia remains a key oil customer and investor.
Azerbaijan's post-Soviet foreign policy attempted to balance the interests of three stronger, often mutually hostile, neighbors - Iran, Russia, and Turkey while at the same time using those nations' interests in regional peace to help resolve the Karabakh issue. In 1993, Aliyev signed the NATO Partnership for Peace agreement, giving Azerbaijan the associate status. Additionally, Aliyev developed relations with US charged with diplomatic support for the Nagorno-Karabakh peace process, Caspian Sea oil exploration by US firms, and bilateral trade agreements. He also extended his diplomacy to the Muslim world, Saudi Arabia and Iran, in an effort to balance his diplomatic contacts with the West. Iran was especially important because of its proximity to Karabakh and its interest in ending the conflict on its border.
Business Climate
The American Chamber of Commerce in Azerbaijan plays an active role in improving the business climate. This is especially useful in combination with a number of structural reforms; both domestic and foreign trade regimes have been substantially liberalized with the abolition of the state order system, export and import quotas, licensing requirements and the export registration scheme. The government is interested in foreign direct investment and officially welcomes it with open arms. Contract enforceability is also guaranteed; any subsequent legislation, which may change the status of the contract, is not retroactive. Foreign participation is possible through joint ventures with local companies, wholly foreign-owned enterprises, and representative offices.
Other laws governing foreign investment include; the Law on Investment Activity, the Law On Privatization of State Property, and a presidential decree on approval of the Second Program of the Privatization of State Property. Also, the U.S. Senate ratified the Treaty concerning the Encouragement and Reciprocal Protection of Investment (BIT). Foreign investors, according to the Privatization Law, may participate in Azerbaijan's mass privatization by acquisition of state privatization options; a land law allows for private ownership of land. Finally, there are no restrictions on converting or transferring funds, nor are there any restrictions on the remittances of profits.
The banking system in Azerbaijan is weak, long-term loans and mortgages are not available, and Azerbaijan's bankruptcy law does not function effectively. Overall, lack of credit is a key constraint to the development of private business in Azerbaijan.
Despite positive shifts in the economy of both countries, a number of fundamental issues remain unresolved. Government policy plans to concentrate on the development of the existing macroeconomic framework, but the introduction of some new elements is needed. The most important issues to be solved in the near future are: inefficiency of tax collection mechanism; absence of normally functioning real estate and financial markets; grave financial position of the majority of commercial banks, lack of popular trust in the banking system, and, as a result, low level of individual savings as a viable investment instruments, etc. Equal access of the population to credit, which is currently lacking, requires a revision of credit policies, the creation of new credit institutions and encouragement of borrowing by the private sector.
Azerbaijan is very interested in closer cooperation with the United States. President Aliyev in April 2001 visited the US for a dialogue with Armenian President and President Bush on the Nagorno-Karabakh issue. In partnership with France and Russia of the OSCE Minsk Group, the United States actively participates in mediations for a peaceful resolution of the conflict.
Balancing Strategic Interests
Doing business in the regions involves careful examination of Russia's intentions and the degree of local support it receives, political stability - especially the Nagorno Karabakh conflict; local attitudes towards US engagement in the region; motives and political interplay of the US and Russia in the region, and the degree of economic or political dependence either on Russia or the US.
As far as Armenia's and Azerbaijan's attitudes towards the US are concerned, both are pursuing a strategy to strengthen contacts with the US, and they view the US presence in the region more positively relative to that of the Russia's.
At present, the configuration of the world order largely resembles a one-sided system, in which NATO and the US play the dominant role. The US has interests in all relatively significant regions of the world, and the Caucasian region is one of the strategically important zones for the US in a number of ways:
In terms of communication and transport, it represents alternative routes of the delivery of Caspian basin oil to the West. A special role is assigned to the Baku-Ceyhan oil pipeline, since it can solve several problems, the mainly through providing an alternative to Russia's monopolistic transportation of Caspian and Kazakhstan's oil through its territory to Europe, and the consequent opportunity for closer cooperation among Turkey, Georgia and Azerbaijan.
Moreover, the fight against terrorism: the region is the immediate proximity and vicinity of Iran and Iraq considered by the US among the states of the "axis of evil". The US could use the military bases of the states for carrying out operations, including intelligence, against those states.
The US is interested in the creation of democratic orders in all three countries of the region - Armenia, Georgia, Azerbaijan. The lack of a settlement in Nagorno-Karabakh has been a major source of instability in the Caucasus, diverting attention and resources away from economic development issues in both Armenia and Azerbaijan. The consolidation of statehood of the South Caucasian countries is also important for the US in terms of weakening the influence of Russia in the region, as Russia has a tendency towards the resolution of problems with is neighbors through exerting direct pressure upon them.
A cease-fire ended the conflict in Nagorno Karabakh, but the dispute is unresolved, despite international bids to broker a peace deal. Armenia refuses to accept any arrangement that leaves Nagorno-Karabakh under Azerbaijani jurisdiction. Baku, has offered the enclave broad autonomy but insists it remain a constituent part of Azerbaijan. The US military aid to Azerbaijan, however, raises concerns in Armenia that militarily stronger Azerbaijan would attempt to regain the 'occupied' land.
Russia has an explicitly negative attitude toward the Baku-Ceyhan project, considering that the oil pipeline will weaken its influence over the region; its oil companies are prohibited from participating in financing and implementing this project. Russia also actively participates in the regional conflict resolution processes (the Karabakh, Abkhazian, and South Ossetian conflicts) both within the framework of the Minsk group of the OSCE and within other international frameworks, and thereby maintains its influence over ongoing processes in the region.
It is crucial to recognize how Moscow views its own interests and understand that Russia will not hesitate to undermine the US foreign policy or take significant steps in the Caucasus. For instance, Moscow had reportedly tried to win control of lucrative Armenian industries, such as copper mines and power-distribution companies, in return for writing off the $97 million Armenia 's debt to Russia. Russia is already the sole supplier of natural gas, nuclear fuel, and other energy resources to Armenia. According to Shakariants, an expert on ex-Soviet affairs at the Armenian Center for National and International Studies (ACNIS), Russia is trying to counter the decline of its influence in the region. Russia is emphasizing that it has an ally in the Caucasus, that that ally must necessarily receive Russian assistance and that Russia will not stop asserting its interests by helping those countries that accept those interests. Faced with the weakening of its positions in pro-Western Georgia and Azerbaijan, Moscow is trying to remain a key regional player by strengthening its ties in Armenia, its sole Caucasian ally. Armenia's dependence on Russia for security - necessitated by its unresolved disputes with Azerbaijan and Turkey - bodes well for the success of that strategy. Yerevan is bound to seize on any opportunity to reinforce its army. It would also welcome Russian efforts to contain Turkey, which too is expanding military cooperation with Georgia and Azerbaijan.
Rule of Law and Corruption Factors
In nearly all cases of endemic corruption, there must be a significant weakness in the rule of law in the both countries. Most post-Soviet countries in transition are victim to corruption, as the breakdown of the rule of law and a weak state created an environment most conducive to an expanding shadow economy. Corruption appears most pervasive in the regulatory, tax, customs, and dispute settlement systems. Throughout the countries, problems in the quality, reliability and transparency of governance, as well as abuse of the regulatory system and poor contract enforcement, significantly impede the ability of many companies to do business and have driven many companies, including some major Western firms, from the market. Laws and regulations that exist to combat corruption are not effectively enforced. The World Bank warns that unless the government undertakes urgent reforms, it would run the risk of being compared to Nigeria - another notoriously corrupt state, which had the dubious distinction of being named the most corrupt country in the world according to the 2000. Transparency International survey. The U.S. State Department reported that the 1998 presidential election that returned Aliyev to power were marked by numerous serious irregularities and lack of transparency in the vote counting process.
President H.Aliyev publicly acknowledged the problems occurring when state enterprises responsible for regulating industries compete commercially with the private sector. He recently established new Ministries of Fuel and Energy and of Economic Development that are intended to separate commercial and regulatory interests in energy and other sectors. A focus of current IMF and World Bank work in Azerbaijan is combating corruption and improving governance, including restructuring of the State Customs Committee and reform of its operations.
Considerable efforts are being taken in the country to reduce the level of corruption, both on the government and non-governmental levels by national and foreign entities. Statements and decisions are made on the government level from time to time to step up or facilitate the struggle against corruption. The most noticeable of them have been a number of presidential decrees banning unfounded inspections of private companies.
All these efforts, however, have not been sufficient; the measures have not yielded the desired effect in reducing corruption in the country. The Private sector is probably one of the worst affected by the corrupt nature of government officials, representatives of the business sector prefer to remain silent, while some of them, taking advantage of rife corruption, try to get an edge on their competitors by selling goods and services on state orders. An important contribution by private companies could be the adoption of ethical codes of conduct. The most effective way of stepping up activities to this end could be the increased financial and technical assistance for all anti-corruption initiatives.
Common Problem
Corruption is preventing the emergence of a democracy in Armenia as well. Much of the challenge of corruption in Armenia can be attributed to the authorities' failure to properly recognize the nature and severity of the threat. Ironically, the existence of an impressive legislative framework establishing the foundation for an open, market-friendly economy obscures the threatening presence of corruption. One of the primary points of entry for highlighting the problem of widespread corruption is inadequate enforcement of laws in a way which clearly demonstrates the incentives which exist for increased transparency and fundamental reform in the customs area as relates to trade and investment. Trade and investment are the propelling forces for economic reforms and a more stable democracy in Armenia today. According to Council of Europe Monitoring Commission's opinion, Armenia has honored its commitments and obligations by 70-75% only. The Council of Europe does not seek excuses and requires that Armenia fully adopt Criminal Code and ratify other protocols concerning the Protection of Human Rights and Fundamental Freedoms. Armenia is mostly concerned for the revision of the Constitution on human rights; Armenia falls behind even of Azerbaijan in failing to amend the Constitution and is the only country where the citizens are unable to apply to the Constitutional Court - citizens are deprived of judicially protecting their rights by state means. Although governmental corruption in Armenia is not near the extent of its neighbors, the continued neglect of this problem allows it to encourage social inequality and impede development. It also diminishes the capabilities of state institutions to perform their functions properly and further weakens the state's capability to govern effectively. The negative economic effects of corruption are sizable, especially for a small struggling country like Armenia facing the tremendous obstacles of a dual blockade by Azerbaijan and Turkey.
Averting Risks
U.S. firms should consult thoroughly with local lawyers on every aspect of their future activities in the republics in terms of registration, licenses, taxes, specific tax incentives, local accounting principles, import/export procedures, certification requirements, contracts, etc.
U.S. businesses are encouraged to consult with the U.S. Embassy's Commercial Section.
As misinterpretation of business terminology is possible, the US businessmen must clarify the content of rules, agreements or arrangements with the Armenian counterparts. The State Department strongly advised to check the credibility and reputation of local companies targeted for investment. U.S. firms considering joint ventures (JV) should carefully examine the deal structure before committing themselves - weak shareholder rights, an inadequate legal system, and poor understanding of Western business practices may bring about unintended consequences.
Should a JV become initiated, the U.S. firms must establish stringent management control, auditing mechanism, and an exit strategy Documentation must be made obligatory; public and open evaluation of all bids and justification of the decision taken. Greater transparency is essential to overcoming. Build-up or improvement of internal audits and controls by higher authority is necessary and must be applicable to the business sector. As is the case with any endeavor to bring about constructive social change, joint effort undertaken in concert stands a greater chance of succeeding than does single-handed action. In the confrontation with corruption the situation is comparable to the 'prisoners' dilemma', i.e. cooperating in good faith is more likely to produce better results. If whole sectors, or at least the market leaders in a sector, were prepared to renounce corruption in any form as a marketing instrument, the pledging companies would strengthen their own security. More, the show of solidarity with NGOs and other entities willing to fight corruption would be more effective than single efforts in reaching the goal envisaged. Institutions like Transparency International, could not only help to initiate and co-ordinate; their published reports they would also have the means of arousing public opinion and with it the political pressure needed to combat and at least reduce corruption.
Codes of Conduct
An important contribution by companies to the anti-corruption struggle could be their introduction of ethical codes of conduct. Companies should set a good example - avoid anything that could lead employees to conclude that corrupt practices to be tolerated in the company. Companies, which do business in the region and are approached by top officials for commissions must refrain from taking part in sales transactions or projects that in the company's judgment are disadvantageous for the buyer or interested authority, respectively. Further, no compromising of the company's standards should be entertained. Through a strict corporate policy every company, and through the exercise of responsible judgment every individual should take responsibility to fight corruption.
Finally, political and business climate in both countries can be regarded as relatively stable - Nagorno - Karabakh issue remains unresolved but it does not pose an immediate threat, and Russia currently is not a big impediment to the US business interests in the region. Despite the current efforts, there is still much work is needed particularly in stabilizing markets, attracting foreign investment, and ensuring peace and stability. Nevertheless, the US businesses should seize the advantage and explore new markets.
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