Changing Trade Patterns after Conflict Resolution in South Caucasus

Abstract

this paper are those of the author alone and should not be attributed to the World Bank. We are grateful to Lev Freinkman, Bartek Kaminski, Beata Smarzynska, Christian Petersen, Jonathan Walters, Salman Zaheer, Ralf Schimmbeck, Artashes Kazakhetsyan, and Alexander Astvatsaryan for fruitful discussions and comments. Summary findings Karabakh and other regional conflicts, and the consequences of lifting the associated economic blockade on the international trade in the South Caucasus region, with concentration on Armenia, Georgia, and Azerbaijan. The examination of short-term impacts includes the analysis of missing exports, opportunities for export creation, and transport savings. As a result of these conflicts, trade flows in the region are seriously distorted. Disrupted traditional transportation routes stifle the export and import capabilities of Armenia and Azerbaijan. At the same time, Georgia enjoys some benefits of higher-thannormal transit through its territory. Trade in some important commodities does not exist. For instance, there are no exports of gas from Azerbaijan to Armenia and of electricity from Armenia to Turkey. The data collected during interviews of forwarders and traders in the region suggest that transport tariffs are unusually high. Further aggravating the situation, government-imposed transit fees (in fact, taxes) in Armenia and Georgia constitute a significant portion of transport tariffs thus further raising the costs of trade. Nevertheless, trade restrictions have had a tendency to ease over time. Trading partners have founds ways to conduct trade despite closed borders and economic blockades, albeit at extra cost. Applying a gravity model to the regional trade, we concluded that the South Caucasus countries tend to trade sufficiently with th...