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yerkir: 2. Prospects of Armenian-Turkish economic relations

By Ashot Yeghiazarian,

Yerevan State Economic Institute Professor

The closed border between Armenia and Turkey and the absence of official
trade and economic relations between the two countries hinders the trade
relations between the other countries in the region and slows down the
regional integration processes. Meanwhile, both USA and the European Union
— and Russia under certain circumstances — are interested in further
integration in the region.
At the same time the conflict of interests of the countries concerned makes
any regulation approaches put forward by third parties unappreciable to the
region. This is why those dealing with the issue gradually realize that the
solution to the problem is connected with regional security issues.
In this context it is not reasonable to speak about establishing official
relations (including economic relations) between Armenia and Turkey. Let us
try to analyze and assess the current situation with the unofficial
economic relations between Armenia and Turkey and look at the consequences
deriving from opening the border.

1.Turkey’s current foreign trade and tendencies for change

Many Turkish and foreign experts insist that Turkey’s economic
accomplishments in the 20th century were the result of the policies of
Etatism (i.e. the Turkish model of the state interfering with the economy).
What did Turkey gain when it opened up for Europe?
In 1996 the Customs Union treaty was signed between Turkey and the European
Union. It significantly eased the regulation of export and import. The
dynamics of Turkey’s foreign trade shows that the customs union with the EU
has not yielded the expected results yet.
In 2000 Turkey’s foreign trade deficit increased by 87% as compared to
1999. This happened as a result of a sharp increase of imports (32.4%).
Imports increased by $54 billion while export increased by only $27 billion
We can see that Turkey’s export did not grow in that period. Moreover, the
export rate has not changed since 1997: it amounted to $26.5-27 billion in
At the same time, the impact of both exports and imports is determined by
their pattern. Turkey mostly imports processing industry goods ($44.5
billion or 82.5% of total imports). The second largest share of products
imported to Turkey is natural resources ($7.96 billion or 13.2%).
Agricultural products, including sea products constitute $2.1 billion
(3.9%) and other goods constitute 0.4% of Turkey’s imports.
The share of consumer goods imported to Turkey has increased by 1.1% while
the share of investment goods decreased by 0.7%. The share of the
“intermediate products” (raw materials) practically has remained the
same-65.3% in 1999 and 65.4% in 2000.
The share of import of raw materials has not changed while the share of
imported consumer goods has significantly increased. This tendency will
inevitably have its negative impact on the development of domestic economy
and on the industry. It will also influence the foreign trade policy, its
priorities and selection of trade partners.
Currently Turkey’s main trade partners are the Organization for Economic
Cooperation and Development (OECD) and the EU member states included in
this organization. Export to OECD countries constituted 65.9% of Turkey’s
total exports in 2001 and import from those countries constituted 62.3% of
the country’s total import. The corresponding figures for export and import
from and to the EU members constituted 51.6% and 44.6%.
The share of Turkey’s export to OECD has recently increased (62.9% in 1998,
67.8% in 1999 and 68.5% in 2000). Meanwhile, the share of import from OECD
countries has decreased 72.9%, 69.5%, 65.5% correspondingly (source: State
Statistics Agency of Turkey).

It is natural that in the existing situation Turkey’s foreign trade deficit
will result in regional economic expansion rather than in limitations of
foreign trade relations. In order to improve its foreign trade balance
Turkey will try to get into new regional markets where its products will be
more competitive. Turkey will most likely target the Black Sea Economic
Cooperation countries (BSEC).
Currently, the Turkish companies in BSEC countries mostly operate in the
spheres of production and transportation of energy resources, construction,
banking, insurance, telecommunications, food production, production of
construction materials and vehicles, tourism. As a result of
intensification of regional economic relations Turkey has started
implementing more complex projects within BSEC cooperation.
Turkey mostly exports textiles, electric devices, pastry products and soap
to BSEC countries. It imports energy resource, metals, fertilizers and
chemical products. Turkey’s exports to BSEC countries are accompanied with
“shuttle” trade, amounting to $10-12 billion. Trade with Russia accounts
for about half of that amount.
However, Turkey’s economic expansion is directed towards Eurasia,
particularly to the South Caucasus and Central Asia. Turkey’s economy is
significantly more developed than the economies of the countries in those
regions and that puts Turkey in an advantageous position vis a vis those
It would suffice to note that per capita GDP amounts to $3,100 in Turkey,
$550 in Armenia, $490 in Azerbaijan, $530 in Georgia and $520 in Central Asia.

Why does Turkey aim at the South Caucasus and Central Asia? In addition to
merely economic interests, Turkey has cultural ties with Azerbaijan and the
Central Asian countries. The mentality and the business culture are very
similar in those countries. Besides, Turkey has experience of economic and
trade activities in the region. Finally, from the geopolitical point of
view Turkey views itself as the bridge connecting Europe and Asia.
Turkey’s economic involvement in the region is accomplished at two levels:
state agencies and investments made by Turkish companies. The most
prominent agency is the Turkish Agency for Cooperation and Development
established in 1992. It can be compared with the United States Agency for
International Development. Those agencies provide technical and financial
However, Turkey’s trade relations with the South Caucasus and Central Asia
are not on an adequate level yet. If we look at Turkey’s exports during
four month in 2001 we can see that Azerbaijan receives 0.7% of Turkey’s
export (and occupies the 21st place) and Georgia receives 0.4% (34th place)
(source: http://www.foreigntrade/gov.tr).

Turkey’s trade with Eurasian countries increases annually. In 1997-2002 it
amounted to $40.4 billion which constitutes 9% of Turkey’s total turnover.
Turkey’s investments in the Eurasian region in 2002 amount o $6.1 billion
including $1.5 billion in Azerbaijan, $125 million in Georgia, $1.3 billion
in Kazakhstan, $1.25 billion in Turkmenistan, $800 million in Russia, $750
million in Uzbekistan, $350 million in Kyrgyzstan, $100 million in Ukraine,
$42 million in Moldova, $30 million in Tajikistan, $9 million in
Byelorussia (source: Turkish State Statistics Agency).

2. What economic benefits can the parties concerned expect from opening up
the Turkish-Armenian border?

Even though Turkey was among the first countries to recognize Armenia’s
independence in 1991, no diplomatic relations were established between the
two countries. Turkey puts forward two preconditions for improving its
relations with Armenia: Armenia and the Armenian Diaspora must stop
claiming international recognition of the Armenian Genocide, the Armenian
troops must withdraw from Nagorno-Karabagh Republic and the liberated

In April 1993 Turkey closed the Armenian-Turkish border. However, it had to
quit the air blockade in 1994 tacitly acknowledging that it had a negative
impact on its own economy. Because of the land blockade of Armenia Turkey
suffers losses of $500-600 million annually.
However, this does not mean that Turkey believes the Armenian market is
very important for its economy. We have to agree with the opinion expressed
by European coordinator of the Armenian-Turkish Council Burju Gyultekin
that Turkey is not interested in Armenia’s small market either in terms of
trade relations or in terms of international reputation.
The Turkish businessman noted that Turkey views Armenia as merely a transit
country: Turkey for Armenia is a gateway to Europe while Armenia for Turkey
is a gateway to Azerbaijan. It should be noted that the Turkish experts
believe Turkey’s export to Azerbaijan, Central Asia and China could be at
least three times larger than now if the railroad and automobile
communication routes are restored through Armenia and Nakhidjevan.

Thus, improving the economic relations with Armenia and opening up the
borders is in Turkey’s interests. It is of crucial importance in terms of
Turkey’s economic policies of expansion to Eurasia. We can assume that by
putting forward some preconditions Turkey simply wants to preserve its
political advantages in the relations with Armenia before the inevitable
opening of the borders. Naturally, Azerbaijan exerts certain pressure on
Turkey too.

How will Armenia benefit if it opens up for Turkey?

There are several approaches to this issue but two main approaches prevail.
According to co-chairmen of the Armenian-Turkish economic committee Arsen
Ghazarian and Kaan Soyak, the relations between the two countries can have
serious prospects if the Turkish authorities change their position.
According to the proponents of this view, Armenia will benefit from
establishing economic relations with Turkey, especially because Armenia
will be able to export electricity to the eastern regions of Turkey, it
will be able to enter the Turkish markets and will expand its economic and
trade relations with the European countries through cooperation with Turkey.
While discussing the Armenian-Turkish economic relations the following
factor is very often taken into consideration: Armenia’s foreign trade will
increase for $500 million if the Turkish-Armenian border is opened. This
number was most likely calculated based on the estimate of the World Bank
experts. According to that estimate, trade between Armenia and Turkey might
amount to $420-500 million if the political problems between the two
countries were resolved.

It should be noted that the above-mentioned estimate implies that Armenia’s
relations with Azerbaijan must be settled too. The assumption is that
Armenia will be able to get cheaper energy resources from Azerbaijan and
export electricity to Turkey.
If these conditions are satisfied, the overall benefit from settling the
relations and opening the borders will include: $6.4-8.4 million savings of
transportation costs, $45 million savings from cheaper energy resources,
$268.9-342.4 million increase of export, and the total benefit will amount
to $320.3-395.8 million.
If we subtract $80-100 million (for additional import of energy resources
from Azerbaijan) from this amount, Armenia’s overall benefit will amount to
$220.3-315.8 million (source: Evgeny Polyakov, Changing Trade Patterns
after Conflict Resolution in the South Caucasus, The World Bank, Poverty
Reduction and Economic Management Sector Unit, April 2001).
As for the possible economic relations between Armenia and Azerbaijan, it
should be noted that it would be impossible to restore the trade patterns
that existed between Soviet Armenia and Soviet Azerbaijan. The situation
has significantly changed in the course of the 13 years after the collapse
of the Soviet Union. Azerbaijan used to export black oil during the Soviet
period. However, now Azerbaijan can no longer export it because it is
crucial for the country’s own energy supply.

Natural gas is another commodity that is much in demand. Armenia can use
alternative sources of natural gas and import it from Turkmenistan and
Iran. Armenia is planning to construct a 140km gas pipeline with Iran (the
project will cost about $100 million). The pipeline is connected to the
Turkmenistan pipeline through the territory of Iran. It is true that
Azerbaijan’s market has decreased in terms of diesel fuel (Azerbaijan lost
the Iranian market). So for Azerbaijan Armenia can potentially become a
market for exporting diesel fuel in the future.
As to the goods that were previously exported from Armenia to Azerbaijan,
it should be noted that currently other countries export those goods to the
Azerbaijani market. Of course, there are unofficial trade relations in the
border territories between Armenian and Azeri citizens (import of oil
products to Armenia and export of electric equipment, food production and
light industry goods) on the territory of Georgia (at Sadakhlo). However,
this sort of trade relations are not likely to expand.
Several models of regional integration emerge irrespective of Armenia’s and
Azerbaijan’s will. For instance, there are the so-called “uniform economic
models” that are being introduced in the South Caucasus region by the World
Bank and the International Monetary Fund. It should be noted that the
western countries spend enormous funds for creating a compatible legal
environment in the South Caucasus states.
Some foundations do their best to foster joint projects involving the three
South Caucasus republics. For instance, TACIS initiated a project for
united energy system for Armenia, Azerbaijan, Georgia and Turkey. The
country with electricity surplus can export it to any of those countries.
Even though all of those countries are currently experiencing deficit of
electricity, the project can have great significance once the regional
conflicts are resolved and regional peace is restored. That process is
underway now but Armenia is not formally included in it.

3. Armenia’s economic interests and security

There are quite many people in Armenia who believe that once the
Armenian-Turkish border is opened the threat of Turkey’s economic and
political expansion will grow. The arguments put forward in support of this
position hold that the Turkish products are significantly cheaper and
consequently the Armenian products will no longer be competitive once the
border is opened. Meanwhile, importing Turkish products in large amounts
will have a destructive impact on the national economy.
There are some other concerns: the Turkish capital will submerge the
Armenian enterprises, Turkish citizens might be spying on the Armenian
territories, finally, Armenia is too weak politically and the state
institutes are not mature enough to deal on equal grounds with a state with
a population of 67 million.

Such statements might sound a bit declarative at first sight. However, it
is unquestionable that any actions undertaken in the context of
Armenian-Turkish relations must be perfectly thought out. Once the border
is opened, all the negative processes that might hinder the restoration of
railroad and automobile communication between Armenia and Turkey must be
These issues would be easy to settle if Armenia had natural resources. On
the other hand, the situation for Armenia does not improve because it
joined the World Trade Organization in February 2003. This means that the
WTO regulations will apply to any economic relations with Turkey, which is
also a member of that international organization.
Armenia’s commitments in the sphere of support of agriculture and
subsidizing exports can be summed up as follows:

a) Armenia will not have the right to subsidize agricultural exports,

b)zero-rate of overall support, i.e. Armenia will have to keep up the
“yellow basket” subsidies at the rates mentioned in point, (c)

c) the minimal subsidizing rate of domestic productions will be 10% until
December 31, 2008.
The subsidizing rate will be reduced to 5% in 2009. In other words, Armenia
will only be able to subsidize the agriculture in the amount of 5% of the
annual agricultural production.

d) Starting January 1, 2009 VAT exemption will be eliminated for
agricultural products and veterinary goods.
In other words, VAT will be applied to agricultural production too.

The tendencies of liberalization of international trade will eventually
result in opening the border between Armenia and Turkey. Today we can
assess all the consequences deriving from opening the border with Turkey.
Turkey’s share of Armenian export was 0.1% in 1994, 1.4% in 1998 (about $3
million). The share of import was 0.1% and 6.3% ($14 million)
correspondingly. We can see that the levels of import and export were equal
in 1994 while in 1998 import from Turkey was 4.5 times larger than export
from Armenia (source: Statistical Yearbook of South Caucasus, 2000).
According to some unofficial estimates, the trade between the two countries
mediated through Georgia and Iran amounts to $200 million. There are 20
Turkish-Armenian joint companies in Armenia working mostly in the sphere of
light industry and food production. Import of consumer goods from Turkey
constitutes the largest share of trade between the two countries. Raw
materials, metals and leather are mainly exported from Armenia to Turkey.
We can see that the foreign trade balance between Armenia and Turkey and
its pattern are not in favor of Armenia. In this situation opening the
border and applying the WTO regulations can have the following results:
significant increase of import of Turkish goods to Armenia (those goods are
currently being imported through the territory of Georgia and Iran). This
can harm the domestic producers especially in the spheres of agriculture
and light industry.

In 1998, the average rate of wholesale prices for agriculture goods in
Armenia as compared to Turkey was 104%. The rate of wholesale prices for
wheat was 111%, 218% for sunflower, 34% for meat, 113% for chicken, 33% for
wool, 163% for eggs, 41% for butter, 55% for sugar, 144% for flour (source:
Armenian Statistic Service).
The dynamics of products exported from Turkey (as compared to 1994) in the
sphere of agricultural products is as follows: 11.9% in 1998, 102.3% in
1999, 99.3% in 2000, 89.7% in 2001, 85.8% in 2002. The import rates are
97.6%, 81.1%, 79.4%, 75.0%, and 72.9% correspondingly. The dynamics of
prices for textile products (as compared to 1994) is as follows: 101.1% in
1998, 90.3% in 1999, 83.6% in 2000, 82.2% in 2001 and 79.9% in 2002. The
import rate is 99.2%, 88.2%, 84.2%, 85.9%, 82.5% correspondingly (source:

The above mentioned indexes show that Armenia’s agriculture and light
industry can potentially be submerged by the corresponding branches of the
Turkish economy if free trade relations are established between the two


We can draw the following conclusions:

1. The deficit of Turkey’s foreign trade balance with OECD and EU members
and its import-export patterns require turkey to attempt economic expansion
towards Eurasia.

2. Armenia is a transit country for Turkey to enter the markets of
Azerbaijan and Central Asia. In this respect, opening the border with
Armenia is in Turkey’s economic interests.

3. The announcements and expectations of economic benefits for Armenia
deriving from opening the border with Turkey are exaggerated.

4. Moreover, in the context of Armenia’s membership in the WTO opening up
the border with Turkey might result in sharp deterioration of Armenia’s
food security and invasion of the Armenian markets by Turkey’s agriculture
and light industry.

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