This essay discusses and analyzes the
current economic situation in South Caucasus, main challenges, and developments
in the region. I am going to show the possibilities of economic cooperation
between Georgia, Armenia, and Azerbaijan. Also, Turkey in understanding of
economic cooperation in transportation of regional trade and energy. As we
know, South Caucasus is a meeting point of three great regional powers, which
are Turkey, Iran and Russian Federation. All of them are trying to gain and
increase their influence in this region. South Caucasus has always been geopolitically
and economically important region, that’s the benefits of being at the
crossroad of Europe and Asia with a necessary energy direction. South Caucasus
is an essential part of strategic South Gas corridor, which is giving Caspian-basin
natural gas from Azerbaijan to European markets in the West. It will be the
main resource in European energy security. In addition, we should consider the
South Caucasus’s location on the “New Silk Road” from China to European

The South Caucasus includes three states
of Georgia, Azerbaijan, and Armenia. After 20 years the breakup of the Soviet
Union, the republics of Georgia, Armenia and Azerbaijan are still coming across
with noticeable challenges in building sustainable and inclusive economic
growth and in creating democratic states and pluralistic societies.
Furthermore, all of these countries have potential in creating prosperous
economies with their rich human resources and cultural heritages. After the EU
Eastern Partnership policy was launched, the importance of the South Caucasus
has been increased. The EU is committed to building strong and mutually
beneficial relations with this region. The Association Agreements/Deep and
Comprehensive Free Trade Areas (AA/DCFTAs), concluded in 2014, have brought the
relations between the EU and Georgia to a new level. These agreements aim at
strengthening political association and economic integration and create new
opportunities in the region as increasing economic development. As I already
mentioned, South Caucasus is faced with the strategic Southern Gas Corridor.
After completion, it will deliver Caspian-basin natural gas (first from
Azerbaijan, and later perhaps from Turkmenistan, northern Iraq, or other
regional producers) via Azerbaijan, Georgia, and Turkey, to European markets in
the Balkans and Italy.

The South Caucasus is situated at the
crossroad of the Russia, Turkey, Iran, Europe, and Central Asia. The gas and oil
reserves in the Central Asia and Caspian Sea and the pipelines to Europe
through the South Caucasus make clear the geopolitical importance of the
region. The rotation from the Soviet system to diverse democratic societies and
functioning market economies have been going through with political and social
disruption, governance deficits, wars, occupation, and conflicts in different
regions. For the last two decades the three South Caucasus countries has practiced
social troubles, some armed conflicts, and territorial disputes, namely with
regard to Nagorno-Karabakh, Abkhazia and South Ossetia/Tskinvali Region and war
against Russian Federation. Today there are still around 1.2 million internally
displaced persons (IDPs) and refugees in the three countries. Despite
international mediation, the conflicts are still frozen. Armenia stands
completely isolated mainly because its borders are closed with Turkey and
Azerbaijan. The country has friendly relations with Iran and after joining to
the Eurasian Economic Union, continues to depend economically and politically
on the Russian Federation. Due to regulatory reforms, an improved business
environment and higher exports of commodities, Armenia’s economy is slowly
recovering. According to World Bank GDP (2015) is 10.561 $billion. However,
poverty and unemployment remain high, particularly in rural areas and have
further increased over the last few years. Remittances from working migrants
and the Armenian diaspora play an important role for family income support and
investments in the country. Subsistence agriculture remains the major
employment sector, accounting for 45% of the working population. Market
liberalization has placed large constraints on the once heavily subsidized
agricultural sector and colluding interests pose threats to fair competition.

mainly derives its revenues from oil and gas exports. Its considerable economic
growth in the mid-2000s slowed down after 2006, partially due to reduced oil
production. This reflects the high dependence of Azerbaijan’s economy on
natural resources. Pressure to diversify its economy is increasing. The non-oil
sector, in particular construction, telecommunications and banking services, is
steadily growing, however it is mainly supported by oil financed, unsustainable
government spending. The agricultural sector employs 40% of the population but
contributes only 5.2% to the gross domestic product (GDP). Azerbaijan was
declared as the world’s top regulatory reformer in the World Bank’s 2009 Doing
Business Report, but competition is still hampered. While Azerbaijan is
compliant with the Extractive Industries Transparency Initiative (EITI) and has
introduced some formal anticorruption measures, it continues to suffer from
high perceived levels of corruption. The general Azerbaijani population is
benefiting to some degree from the large revenues derived from natural
resources. This positive development is reflected in the country’s decreasing
poverty rate, from 43.7% in 2003 to 7.6% in 2011. IDP’s and refugees constitute
the poorest and most vulnerable segment of the population.

Georgia has been going through very
damaged and difficult stage of development. During the yearly period, it was
involved two ethno-conflicts, into the different part of state, which was
encouraged by Russia. Georgia was faced to necessity of launched new trade
connections and find new partners. From that period Georgia set up and has
experienced pro-western foreign policy. Today, Georgia is strongly striving
towards Euro-Atlantic integration. Apart the other neighbors, it has the deepest
relations with EU. Yet, in 2012 Freedom House qualified Georgia as only ‘partly
free’. The lack of independence of the judiciary remains a major concern. The
armed hostilities with the Russian Federation in 2008 and the economic crisis
at that time pushed the country into a deep recession. However, in the past few
years the Georgian economy has slowly recovered with a growth rate of above 5%.
According to World Bank, GDP is 13.965 $ billion (2015). Major reforms are
being carried out following a neo-liberal approach, including in social
services. Agriculture remains one of the sectors with the biggest growth
potential, employing almost half of the total working population.

Following the breaking up of the Soviet
Union, the South Caucasus experienced a full economic fragmentation. Former
Soviet States were faced to necessity of launched new trade connections and
agreements. Additionally, the political elites were vigorously engaged in
building ethnically-defined nation states, whereas the strenuous battle to
getting power. They also struggle for domination over the economic resources of
the newly independent states. In the South Caucasus, these processes were
exaggerated by nationalistic rhetoric and policies that led to violent
conflicts. One of those conflicts has been over the Nagorno-Karabakh region
between Armenia and Azerbaijan. Turkey closed the rail and air connections with
Armenia and halted the transit of humanitarian aid through its territory. Today,
Armenia has two connections to the world – Georgia to the north and Iran to the
south. On my point of view, this is an obstacle for the establishment of
regional economic cooperation and the implementation of new projects. Armenia
has good relations with Georgia and their current economic connections are very
important for Armenia, as well as for Georgia. Iran and Armenia have also good energy
and trade cooperation and collaborations. Russia plays an important role in
Armenia’s economy because of the huge number of remittances and also the
investments from Russian people. And because of that Armenia strengthened its
economic integration with Russia within the framework of the EAEU along with
Belarus, Kazakhstan, and Kyrgyzstan. With this cooperation Armenia will benefit
from new chances and opportunities. Georgia plays a crucial role in the social
and economic relations of the South Caucasus. And nowadays, Georgia has good socio-economic
cooperation with all neighboring countries.

In my opinion, there are many reasons for
economic cooperation between countries in South Caucasus. Economic aspect,
historical past, cultural connections and social elements are inspiring economic
cooperation between these countries. In addition to this, the geographical closeness
and the same identity of the countries in the region is encouraging factor for creating
economic cooperation. As we know, there is no economic or diplomatic connections
between Azerbaijan and Armenia. It explains why Armenia doesn’t take part in
any regional or transitional projects. It has resulted during the formation of
a new East-West Silk Road through Georgia to Europe via Turkey. Today as a main
transportation corridors, Azerbaijan and Georgia are becoming very important
transit tie between East and West. The economic cooperation between Georgia. Turkey
and Azerbaijan, has been advanced through huge projects in energy
transportation. We have free trade agreement between Georgia and Turkey. Also,
Georgia and Turkey have visa free regime for their citizens. All of these three
countries are trying to gain benefits from the recent regional connection initiatives
to advance trade, maximize foreign direct investments and raise its economy.
Azerbaijan has borders with Kazakhstan and Turkmenistan via the Caspian Sea and
it has land borders with Georgia, Russia, Iran, Armenia, and Turkey.
Azerbaijan’s cooperation with Turkey and Georgia is focused on natural
resources and eliminate Armenia due to the Nagorno-Karabakh conflict.
Azerbaijan has one of the richest oil and gas reserves in this region and
therefore it plays a considerable role in major energy projects. In addition to
this, Azerbaijan is one of the supporter of the East-West and North-South transport

Azerbaijan’s one of the main priority is
the development of transport infrastructure. Nowadays it is restoring the
historical Silk Way with the modern technologies and with the participation of
neighboring countries. Today, the Baku-Tbilisi-Kars railway – running from
Azerbaijan through Georgia and into Turkey – is under construction and will for
the first time connect Azerbaijan with Europe by train.

This project will completely open a new
rail which will be the only corridor from the Caspian Sea to Europe via Turkey.
When the railway will be fully operational, all three countries will commonly benefit
from developed trade and economic cooperation and gain additional Foreign
Direct Investments (FDI) through the new railway connecting Europe and Asia.
According to the international interest of Georgia, the Baku- Tbilisi- Kars
Railway is expected to enhance Georgia’s status as a transit country, and
developing a strategic alliance with Turkey and Azerbaijan. The
Kars-Akhalkalaki-Baku railway line promises other benefits for Georgia. As
well, railway line is the direct ground route between Baku and Istanbul.
According to the latest analysts, the railway has the power to attract transportation,
including oil, from Central Asia to Turkey by offering a further outlet to the
sea. Caspian traders have a possibility to deliver its oil by rail directly to
European purchasers. They will obviously save money and time if skip tanker
routes by The Black Sea. Georgia could offer two different oil transit routes
to Europe, by sea and by land. It’s making the country an important part of the
transport corridor linking Asia, the Caucasus, and Europe.

When we are talking about the importance
of the South Caucasus region as an important economic partner, we should
mentione The Southern Gas Corridor (SGC), which is aimed at developing the security
and diversity of the European Union’ energy supply by delivering gas from Caspian
Sea to European countries. The South Caucasus Pipeline (SCP) was built to
export gas from Azerbaijan to Georgia and Turkey. Because of the implementation
of the “Southern gas corridor”, several countries will gain access to the
Azerbaijani gas as an alternative gas reserve. Georgia, Turkey, Greece,
Bulgaria, Albania, and Italy are among the participants of the “Southern gas
corridor” project. So, this shows how important is Azerbaijan and Georgia as reliable
partner for providing the energy security policy of Europe.

In conclusion, in this paper we discussed
about the current situation in the South Caucasus, as well as the prospects for
regional cooperation and integration. The article diversified some strategic
directions, which would have significant mean for future development of this
region, meanwhile it depends on European Security policy and also global trade
routes. Taking into account, the recent economic developments and attempts
towards economic integration between Azerbaijan, Turkey and Georgia and other
mega projects from Central Asia to Europe making the South Caucasus a transit
region, showed that this transportation corridor is a new strategic and
significant one for Western and European countries in energy security policy.
Convinced that regional economic cooperation could be an important step towards
conflict transformation in the South Caucasus, this paper suggests that the
prospects of such integration be considered. South Caucasus which has function
as a bridge between Europe and Central Asia, has been improved its strategic importance
through mega pipeline projects, which are transporting crude oil and natural
gas from Central Asia, Caspian and Iran to Europe.