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Caucasus Business Forecast Report
May 9, 2014 Friday
Q3 2014
Mitigation Of Regional Tensions Key To Stability
BMI View: Armenia will continue to have difficult relations with
neighbours Turkey and Azerbaijan through the medium term, as a result
of sensitive historical grievances and strong domestic pressure groups
on both sides. Nagorno-Karabakh will remain a particular potential
flashpoint given the high profile of the region and ongoing talks,
which are set to test commitment to peace in both Yerevan and Baku.
The heavy troop presence on both sides of the border will remain a key
risk. That said, the willingness of regional heavyweights Russia and
Turkey to support the ongoing peace process means that a 'hot war' is
not inevitable.
Armenia is a small, landlocked country, mainly surrounded by hostile
or unstable neighbours, which will weigh heavily on the country's risk
profile through the medium term. That said, we hold a relatively
sanguine outlook on Armenia's future, with a gradual mitigation of
regional tensions, strong Russian support and the potential for
reasonable economic growth set to support increased political
stability.
Challenges And Threats To Stability
Nagorno-Karabakh: Armenia's relations with Azerbaijan will remain by
far the single biggest threat to political stability until a
resolution on Nagorno-Karabakh is found. Exchanges of small arms fire
between the countries' armed forces stationed along the border are
common; and an outbreak of war, although far from inevitable, cannot
be ruled out. The situation is exacerbated by the provocative rhetoric
often employed by both sides in relation to the issue.
All Eyes On Nagorno-Karabakh Europe - Map Of Caucasus Region
Europe - Map Of Caucasus Region
Relations With Turkey: Armenia has had no official diplomatic
relations with Turkey since 1993, when its war with Azerbaijan
prompted Ankara to close the border in solidarity with Baku. Although
progress has been made, including the signing of two protocols on the
re-establishment and development of diplomatic relations in October
2009 (yet to be ratified), the issue of relations with Turkey remains
a hugely sensitive topic in domestic Armenian politics. This is a
result of the early 20th century mass killings of ethnic Armenians by
Ottoman forces, which Armenia refers to as genocide.
Growing Domestic Opposition: Widespread perceptions of fraud during
the February 2008 presidential elections led to mass protests and a
violent crackdown by the authorities. While tensions have subsided,
the subsequent period has seen the growth of a stronger and more
active opposition movement both within parliament and among civil
society and other groups. The presidential election in February 2013
has generally been regarded as peaceful and received considerable
praise from international observers. However, although this has the
potential for a positive outcome in the long run, the still closed
nature of Armenian politics means that opposition groups have little
outlet for their frustration at present, which poses risks to
political stability.
Wealth Disparity: Aside from perceptions of fraud in the political
system, much of the opposition is driven by frustration at the large
wealth disparity in society, which is considered by many to be among
the most pronounced in the region. According to the International
Crisis Group, more than 50% of Armenians live below the poverty line,
which creates the potential for growing resentment among disadvantaged
groups to spill over into outright protest. Poverty is most widespread
and most extreme in rural areas, where as many as one-quarter of
households are supported by family members working abroad, mainly in
Russia. The over-dependence on remittance inflows was highlighted
particularly starkly in 2009 as a result of the downturn in the
Russian economy, which forced many migrant workers to return home,
increasing the burden on public services.
Corruption: The perception of public sector graft has been a major
factor driving resentment against the regime in the past two years.
Armenia's Soviet legacy means administrative practices are
inefficient, highly bureaucratic and open to large-scale abuse. The
public sector functions particularly badly at a local level in rural
areas, driving widespread distrust among the population.
Russian Focus: The decision by the Armenian government to join the
Russia-Belarus-Kazakhstan customs union may improve security prospects
in the medium term, with Russian troops set to remain on Armenian soil
for the foreseeable future. However without a strong European Union
policy anchor we may see the drive for further democratisation and
economic development slow in the coming years.
Political Risk Ratings
Our long-term political risk rating for Armenia is 59.6 out of 100,
placing it 17th out of 31 countries in emerging Europe. That said, it
ranks higher than neighbours Russia (57.0), Azerbaijan (49.0) and
Georgia (46.8).
Armenia is strongest on our 'characteristics of society' component,
where it scores 77.5 out of 100, reflecting its highly homogeneous
society and relative lack of religious or ethnic tensions. It also
scores well (60.0 out of 100) for 'policy continuity', given its broad
historical policy stability. Weaker is the 'scope of state' component,
where it scores 55.0 out of 100. This reflects low government spending
on infrastructure and development (due in part to poor tax collection)
and the extent to which policy is influenced by neighbouring states,
particularly Turkey and Azerbaijan.
Scenarios For Political Change
Until 2008, the Armenian population had appeared willing to accept
regular flawed elections and a lack of democratic accountability, with
disengagement and apathy dominant. However, following the February
2008 presidential elections, something of an awakening took place as
thousands of supporters of Levon Ter-Petrossian, the main opposition
candidate, took to the streets to protest against the result. This
culminated in violent clashes with the police, resulting in hundreds
of arrests and more than 100 prosecutions of opposition supporters.
Although there has been no repeat of protests on this scale, the
Armenian population has nevertheless shown itself to be increasingly
engaged in politics in the past four years, demonstrated by a
pronounced increase in the number and profile of protest groups. This
has been met by restrictions on political groups and further efforts
to censor the media, although the 2013 presidential elections were
praised by international observers.
As a result of this and ongoing regional tensions, Armenia faces a
daunting set of external and domestic political challenges over the
next decade. A strengthening and united opposition at home, and
continuing tensions with powerful and aggressive neighbours (Turkey
and Azerbaijan respectively), will provide a stern test of the
country's institutions and the leader's abilities. Despite the clear
risks of further instability, however, we have a relatively sanguine
outlook on political stability and believe that significant potential
exists for democratic advances at home and a mitigation of tensions
abroad.
Best Case Scenario - Big Strides Forward: The best case scenario for
Armenia over the next 10 years, and one that we feel is eminently
possible, is for a significant mitigation of domestic and
international political risk factors. At home, this has been backed up
by the successful presidential election in February 2013 that was free
of major irregularities and allowed a smooth transition of power.
Under this scenario, the domestic opposition would continue to channel
its views through parliament and a broader development of the legal
and regulatory framework would take place. This would mean increased
meritocracy and efficiency, boosting public trust in state
institutions and therefore mitigating the risks of further outbreaks
of public protest.
Internationally, this would require a major breakthrough on
Nagorno-Karabakh, which will be extremely difficult given the lack of
common ground on many aspects of the dispute between Yerevan and Baku.
A land corridor between Armenia and Nagorno-Karabakh and the terms of
a referendum for the enclave's inhabitants will remain the biggest
sticking points. Any significant progress on Nagorno-Karabakh would
increase the potential for the ratification of two protocols on the
re-establishment and development of diplomatic relations with Turkey,
which have stalled since October 2009.
Lachin A Solution Europe - Map Of Nagorno-Karabakh & Surrounding Area
Europe - Map Of Nagorno-Karabakh & Surrounding Area
Should these scenarios play out, we would expect a vast improvement in
Armenia's risk profile, increasing investor confidence in the country
and boosting foreign direct investment inflows. More importantly, a
mitigation of regional tensions would allow vast new trade
opportunities, particularly with Turkey, paving the way for a
significantly higher growth trajectory. The upshot of all of this
would be rising per capita incomes across the board, boosting living
standards.
Intermediate Scenario - 'Same Old': Our intermediate scenario, and one
that we also feel has a strong chance of playing out, is a
continuation of the status quo. Certainly, with progress on relations
with Azerbaijan and Turkey threatening to aggravate domestic and
regional tensions, we expect governments on all sides to remain
extremely cautious. Domestically, the government may also decide to
resist calls for political and legal reform.
Should this scenario play out, we would expect it to limit Armenia's
growth potential through the medium term. Ongoing tensions with
Azerbaijan over Nagorno-Karabakh, as well as continued deadlock with
Turkey, would keep investor risk aversion elevated and severely limit
Armenia's export growth potential. This, in combination with
frustration over the lack of reform at home, would likely increase
domestic political tensions, with further public protests possible.
Worst Case Scenario - Armed Conflict: We refuse to rule out the
possibility of further armed conflict between Armenia and Azerbaijan.
Large troop presences on both sides of the border, heightened
sensitivity and provocative statements from the two parties have
served to keep tensions high, which have often resulted in exchanges
of small arms fire in the past. We highlight the potential for this to
escalate into a bigger conflict, particularly given Azerbaijani
threats to use all means to win back Nagorno-Karabakh if diplomatic
efforts fail. However, this remains an outside bet for two main
reasons. First, the Armenian army remains fairly well equipped and
trained, thanks to Russian support, which is likely to dissuade
Azerbaijan from launching an attack. Second, regional powers Russia
and Turkey have gradually stepped up their involvement in the conflict
in the past two years and we expect the leverage that Moscow and
Turkey have over Armenia and Azerbaijan respectively to prevent an
outbreak of full-scale war.
From: Baghdasarian
May 9, 2014 Friday
Q3 2014
Mitigation Of Regional Tensions Key To Stability
BMI View: Armenia will continue to have difficult relations with
neighbours Turkey and Azerbaijan through the medium term, as a result
of sensitive historical grievances and strong domestic pressure groups
on both sides. Nagorno-Karabakh will remain a particular potential
flashpoint given the high profile of the region and ongoing talks,
which are set to test commitment to peace in both Yerevan and Baku.
The heavy troop presence on both sides of the border will remain a key
risk. That said, the willingness of regional heavyweights Russia and
Turkey to support the ongoing peace process means that a 'hot war' is
not inevitable.
Armenia is a small, landlocked country, mainly surrounded by hostile
or unstable neighbours, which will weigh heavily on the country's risk
profile through the medium term. That said, we hold a relatively
sanguine outlook on Armenia's future, with a gradual mitigation of
regional tensions, strong Russian support and the potential for
reasonable economic growth set to support increased political
stability.
Challenges And Threats To Stability
Nagorno-Karabakh: Armenia's relations with Azerbaijan will remain by
far the single biggest threat to political stability until a
resolution on Nagorno-Karabakh is found. Exchanges of small arms fire
between the countries' armed forces stationed along the border are
common; and an outbreak of war, although far from inevitable, cannot
be ruled out. The situation is exacerbated by the provocative rhetoric
often employed by both sides in relation to the issue.
All Eyes On Nagorno-Karabakh Europe - Map Of Caucasus Region
Europe - Map Of Caucasus Region
Relations With Turkey: Armenia has had no official diplomatic
relations with Turkey since 1993, when its war with Azerbaijan
prompted Ankara to close the border in solidarity with Baku. Although
progress has been made, including the signing of two protocols on the
re-establishment and development of diplomatic relations in October
2009 (yet to be ratified), the issue of relations with Turkey remains
a hugely sensitive topic in domestic Armenian politics. This is a
result of the early 20th century mass killings of ethnic Armenians by
Ottoman forces, which Armenia refers to as genocide.
Growing Domestic Opposition: Widespread perceptions of fraud during
the February 2008 presidential elections led to mass protests and a
violent crackdown by the authorities. While tensions have subsided,
the subsequent period has seen the growth of a stronger and more
active opposition movement both within parliament and among civil
society and other groups. The presidential election in February 2013
has generally been regarded as peaceful and received considerable
praise from international observers. However, although this has the
potential for a positive outcome in the long run, the still closed
nature of Armenian politics means that opposition groups have little
outlet for their frustration at present, which poses risks to
political stability.
Wealth Disparity: Aside from perceptions of fraud in the political
system, much of the opposition is driven by frustration at the large
wealth disparity in society, which is considered by many to be among
the most pronounced in the region. According to the International
Crisis Group, more than 50% of Armenians live below the poverty line,
which creates the potential for growing resentment among disadvantaged
groups to spill over into outright protest. Poverty is most widespread
and most extreme in rural areas, where as many as one-quarter of
households are supported by family members working abroad, mainly in
Russia. The over-dependence on remittance inflows was highlighted
particularly starkly in 2009 as a result of the downturn in the
Russian economy, which forced many migrant workers to return home,
increasing the burden on public services.
Corruption: The perception of public sector graft has been a major
factor driving resentment against the regime in the past two years.
Armenia's Soviet legacy means administrative practices are
inefficient, highly bureaucratic and open to large-scale abuse. The
public sector functions particularly badly at a local level in rural
areas, driving widespread distrust among the population.
Russian Focus: The decision by the Armenian government to join the
Russia-Belarus-Kazakhstan customs union may improve security prospects
in the medium term, with Russian troops set to remain on Armenian soil
for the foreseeable future. However without a strong European Union
policy anchor we may see the drive for further democratisation and
economic development slow in the coming years.
Political Risk Ratings
Our long-term political risk rating for Armenia is 59.6 out of 100,
placing it 17th out of 31 countries in emerging Europe. That said, it
ranks higher than neighbours Russia (57.0), Azerbaijan (49.0) and
Georgia (46.8).
Armenia is strongest on our 'characteristics of society' component,
where it scores 77.5 out of 100, reflecting its highly homogeneous
society and relative lack of religious or ethnic tensions. It also
scores well (60.0 out of 100) for 'policy continuity', given its broad
historical policy stability. Weaker is the 'scope of state' component,
where it scores 55.0 out of 100. This reflects low government spending
on infrastructure and development (due in part to poor tax collection)
and the extent to which policy is influenced by neighbouring states,
particularly Turkey and Azerbaijan.
Scenarios For Political Change
Until 2008, the Armenian population had appeared willing to accept
regular flawed elections and a lack of democratic accountability, with
disengagement and apathy dominant. However, following the February
2008 presidential elections, something of an awakening took place as
thousands of supporters of Levon Ter-Petrossian, the main opposition
candidate, took to the streets to protest against the result. This
culminated in violent clashes with the police, resulting in hundreds
of arrests and more than 100 prosecutions of opposition supporters.
Although there has been no repeat of protests on this scale, the
Armenian population has nevertheless shown itself to be increasingly
engaged in politics in the past four years, demonstrated by a
pronounced increase in the number and profile of protest groups. This
has been met by restrictions on political groups and further efforts
to censor the media, although the 2013 presidential elections were
praised by international observers.
As a result of this and ongoing regional tensions, Armenia faces a
daunting set of external and domestic political challenges over the
next decade. A strengthening and united opposition at home, and
continuing tensions with powerful and aggressive neighbours (Turkey
and Azerbaijan respectively), will provide a stern test of the
country's institutions and the leader's abilities. Despite the clear
risks of further instability, however, we have a relatively sanguine
outlook on political stability and believe that significant potential
exists for democratic advances at home and a mitigation of tensions
abroad.
Best Case Scenario - Big Strides Forward: The best case scenario for
Armenia over the next 10 years, and one that we feel is eminently
possible, is for a significant mitigation of domestic and
international political risk factors. At home, this has been backed up
by the successful presidential election in February 2013 that was free
of major irregularities and allowed a smooth transition of power.
Under this scenario, the domestic opposition would continue to channel
its views through parliament and a broader development of the legal
and regulatory framework would take place. This would mean increased
meritocracy and efficiency, boosting public trust in state
institutions and therefore mitigating the risks of further outbreaks
of public protest.
Internationally, this would require a major breakthrough on
Nagorno-Karabakh, which will be extremely difficult given the lack of
common ground on many aspects of the dispute between Yerevan and Baku.
A land corridor between Armenia and Nagorno-Karabakh and the terms of
a referendum for the enclave's inhabitants will remain the biggest
sticking points. Any significant progress on Nagorno-Karabakh would
increase the potential for the ratification of two protocols on the
re-establishment and development of diplomatic relations with Turkey,
which have stalled since October 2009.
Lachin A Solution Europe - Map Of Nagorno-Karabakh & Surrounding Area
Europe - Map Of Nagorno-Karabakh & Surrounding Area
Should these scenarios play out, we would expect a vast improvement in
Armenia's risk profile, increasing investor confidence in the country
and boosting foreign direct investment inflows. More importantly, a
mitigation of regional tensions would allow vast new trade
opportunities, particularly with Turkey, paving the way for a
significantly higher growth trajectory. The upshot of all of this
would be rising per capita incomes across the board, boosting living
standards.
Intermediate Scenario - 'Same Old': Our intermediate scenario, and one
that we also feel has a strong chance of playing out, is a
continuation of the status quo. Certainly, with progress on relations
with Azerbaijan and Turkey threatening to aggravate domestic and
regional tensions, we expect governments on all sides to remain
extremely cautious. Domestically, the government may also decide to
resist calls for political and legal reform.
Should this scenario play out, we would expect it to limit Armenia's
growth potential through the medium term. Ongoing tensions with
Azerbaijan over Nagorno-Karabakh, as well as continued deadlock with
Turkey, would keep investor risk aversion elevated and severely limit
Armenia's export growth potential. This, in combination with
frustration over the lack of reform at home, would likely increase
domestic political tensions, with further public protests possible.
Worst Case Scenario - Armed Conflict: We refuse to rule out the
possibility of further armed conflict between Armenia and Azerbaijan.
Large troop presences on both sides of the border, heightened
sensitivity and provocative statements from the two parties have
served to keep tensions high, which have often resulted in exchanges
of small arms fire in the past. We highlight the potential for this to
escalate into a bigger conflict, particularly given Azerbaijani
threats to use all means to win back Nagorno-Karabakh if diplomatic
efforts fail. However, this remains an outside bet for two main
reasons. First, the Armenian army remains fairly well equipped and
trained, thanks to Russian support, which is likely to dissuade
Azerbaijan from launching an attack. Second, regional powers Russia
and Turkey have gradually stepped up their involvement in the conflict
in the past two years and we expect the leverage that Moscow and
Turkey have over Armenia and Azerbaijan respectively to prevent an
outbreak of full-scale war.
From: Baghdasarian