This essay discusses and analyzes thecurrent economic situation in South Caucasus, main challenges, and developmentsin the region.

I am going to show the possibilities of economic cooperationbetween Georgia, Armenia, and Azerbaijan. Also, Turkey in understanding ofeconomic cooperation in transportation of regional trade and energy. As weknow, South Caucasus is a meeting point of three great regional powers, whichare Turkey, Iran and Russian Federation. All of them are trying to gain andincrease their influence in this region. South Caucasus has always been geopoliticallyand economically important region, that’s the benefits of being at thecrossroad of Europe and Asia with a necessary energy direction. South Caucasusis an essential part of strategic South Gas corridor, which is giving Caspian-basinnatural gas from Azerbaijan to European markets in the West. It will be themain resource in European energy security.

In addition, we should consider theSouth Caucasus’s location on the “New Silk Road” from China to Europeancountries.The South Caucasus includes three statesof Georgia, Azerbaijan, and Armenia. After 20 years the breakup of the SovietUnion, the republics of Georgia, Armenia and Azerbaijan are still coming acrosswith noticeable challenges in building sustainable and inclusive economicgrowth and in creating democratic states and pluralistic societies.Furthermore, all of these countries have potential in creating prosperouseconomies with their rich human resources and cultural heritages. After the EUEastern Partnership policy was launched, the importance of the South Caucasushas been increased. The EU is committed to building strong and mutuallybeneficial relations with this region.

The Association Agreements/Deep andComprehensive Free Trade Areas (AA/DCFTAs), concluded in 2014, have brought therelations between the EU and Georgia to a new level. These agreements aim atstrengthening political association and economic integration and create newopportunities in the region as increasing economic development. As I alreadymentioned, South Caucasus is faced with the strategic Southern Gas Corridor.After completion, it will deliver Caspian-basin natural gas (first fromAzerbaijan, and later perhaps from Turkmenistan, northern Iraq, or otherregional producers) via Azerbaijan, Georgia, and Turkey, to European markets inthe Balkans and Italy. The South Caucasus is situated at thecrossroad of the Russia, Turkey, Iran, Europe, and Central Asia. The gas and oilreserves in the Central Asia and Caspian Sea and the pipelines to Europethrough the South Caucasus make clear the geopolitical importance of theregion. The rotation from the Soviet system to diverse democratic societies andfunctioning market economies have been going through with political and socialdisruption, governance deficits, wars, occupation, and conflicts in differentregions. For the last two decades the three South Caucasus countries has practicedsocial troubles, some armed conflicts, and territorial disputes, namely withregard to Nagorno-Karabakh, Abkhazia and South Ossetia/Tskinvali Region and waragainst Russian Federation.

Today there are still around 1.2 million internallydisplaced persons (IDPs) and refugees in the three countries. Despiteinternational mediation, the conflicts are still frozen. Armenia standscompletely isolated mainly because its borders are closed with Turkey andAzerbaijan. The country has friendly relations with Iran and after joining tothe Eurasian Economic Union, continues to depend economically and politicallyon the Russian Federation. Due to regulatory reforms, an improved businessenvironment and higher exports of commodities, Armenia’s economy is slowlyrecovering.

According to World Bank GDP (2015) is 10.561 $billion. However,poverty and unemployment remain high, particularly in rural areas and havefurther increased over the last few years. Remittances from working migrantsand the Armenian diaspora play an important role for family income support andinvestments in the country. Subsistence agriculture remains the majoremployment sector, accounting for 45% of the working population. Marketliberalization has placed large constraints on the once heavily subsidizedagricultural sector and colluding interests pose threats to fair competition.

 Azerbaijanmainly derives its revenues from oil and gas exports. Its considerable economicgrowth in the mid-2000s slowed down after 2006, partially due to reduced oilproduction. This reflects the high dependence of Azerbaijan’s economy onnatural resources. Pressure to diversify its economy is increasing. The non-oilsector, in particular construction, telecommunications and banking services, issteadily growing, however it is mainly supported by oil financed, unsustainablegovernment spending. The agricultural sector employs 40% of the population butcontributes only 5.

2% to the gross domestic product (GDP). Azerbaijan wasdeclared as the world’s top regulatory reformer in the World Bank’s 2009 DoingBusiness Report, but competition is still hampered. While Azerbaijan iscompliant with the Extractive Industries Transparency Initiative (EITI) and hasintroduced some formal anticorruption measures, it continues to suffer fromhigh perceived levels of corruption. The general Azerbaijani population isbenefiting to some degree from the large revenues derived from naturalresources.

This positive development is reflected in the country’s decreasingpoverty rate, from 43.7% in 2003 to 7.6% in 2011.

IDP’s and refugees constitutethe poorest and most vulnerable segment of the population.Georgia has been going through verydamaged and difficult stage of development. During the yearly period, it wasinvolved two ethno-conflicts, into the different part of state, which wasencouraged by Russia. Georgia was faced to necessity of launched new tradeconnections and find new partners.

From that period Georgia set up and hasexperienced pro-western foreign policy. Today, Georgia is strongly strivingtowards Euro-Atlantic integration. Apart the other neighbors, it has the deepestrelations with EU. Yet, in 2012 Freedom House qualified Georgia as only ‘partlyfree’.

The lack of independence of the judiciary remains a major concern. Thearmed hostilities with the Russian Federation in 2008 and the economic crisisat that time pushed the country into a deep recession. However, in the past fewyears 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 arebeing carried out following a neo-liberal approach, including in socialservices. Agriculture remains one of the sectors with the biggest growthpotential, employing almost half of the total working population. Following the breaking up of the SovietUnion, the South Caucasus experienced a full economic fragmentation. FormerSoviet States were faced to necessity of launched new trade connections andagreements. Additionally, the political elites were vigorously engaged inbuilding ethnically-defined nation states, whereas the strenuous battle togetting power. They also struggle for domination over the economic resources ofthe newly independent states.

In the South Caucasus, these processes wereexaggerated by nationalistic rhetoric and policies that led to violentconflicts. One of those conflicts has been over the Nagorno-Karabakh regionbetween Armenia and Azerbaijan. Turkey closed the rail and air connections withArmenia 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 thesouth. On my point of view, this is an obstacle for the establishment ofregional economic cooperation and the implementation of new projects. Armeniahas good relations with Georgia and their current economic connections are veryimportant for Armenia, as well as for Georgia. Iran and Armenia have also good energyand trade cooperation and collaborations. Russia plays an important role inArmenia’s economy because of the huge number of remittances and also theinvestments from Russian people.

And because of that Armenia strengthened itseconomic integration with Russia within the framework of the EAEU along withBelarus, Kazakhstan, and Kyrgyzstan. With this cooperation Armenia will benefitfrom new chances and opportunities. Georgia plays a crucial role in the socialand economic relations of the South Caucasus. And nowadays, Georgia has good socio-economiccooperation with all neighboring countries.

In my opinion, there are many reasons foreconomic cooperation between countries in South Caucasus. Economic aspect,historical past, cultural connections and social elements are inspiring economiccooperation between these countries. In addition to this, the geographical closenessand the same identity of the countries in the region is encouraging factor for creatingeconomic cooperation. As we know, there is no economic or diplomatic connectionsbetween Azerbaijan and Armenia. It explains why Armenia doesn’t take part inany regional or transitional projects.

It has resulted during the formation ofa new East-West Silk Road through Georgia to Europe via Turkey. Today as a maintransportation corridors, Azerbaijan and Georgia are becoming very importanttransit tie between East and West. The economic cooperation between Georgia. Turkeyand Azerbaijan, has been advanced through huge projects in energytransportation. We have free trade agreement between Georgia and Turkey. Also,Georgia and Turkey have visa free regime for their citizens. All of these threecountries are trying to gain benefits from the recent regional connection initiativesto advance trade, maximize foreign direct investments and raise its economy.

Azerbaijan has borders with Kazakhstan and Turkmenistan via the Caspian Sea andit has land borders with Georgia, Russia, Iran, Armenia, and Turkey.Azerbaijan’s cooperation with Turkey and Georgia is focused on naturalresources and eliminate Armenia due to the Nagorno-Karabakh conflict.Azerbaijan has one of the richest oil and gas reserves in this region andtherefore it plays a considerable role in major energy projects. In addition tothis, Azerbaijan is one of the supporter of the East-West and North-South transportcorridors.Azerbaijan’s one of the main priority isthe development of transport infrastructure.

Nowadays it is restoring thehistorical Silk Way with the modern technologies and with the participation ofneighboring countries. Today, the Baku-Tbilisi-Kars railway – running fromAzerbaijan through Georgia and into Turkey – is under construction and will forthe first time connect Azerbaijan with Europe by train.This project will completely open a newrail 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 benefitfrom developed trade and economic cooperation and gain additional ForeignDirect Investments (FDI) through the new railway connecting Europe and Asia.According to the international interest of Georgia, the Baku- Tbilisi- KarsRailway is expected to enhance Georgia’s status as a transit country, anddeveloping a strategic alliance with Turkey and Azerbaijan. TheKars-Akhalkalaki-Baku railway line promises other benefits for Georgia.

Aswell, 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 thesea. Caspian traders have a possibility to deliver its oil by rail directly toEuropean purchasers. They will obviously save money and time if skip tankerroutes by The Black Sea. Georgia could offer two different oil transit routesto Europe, by sea and by land. It’s making the country an important part of thetransport corridor linking Asia, the Caucasus, and Europe.

When we are talking about the importanceof the South Caucasus region as an important economic partner, we shouldmentione The Southern Gas Corridor (SGC), which is aimed at developing the securityand diversity of the European Union’ energy supply by delivering gas from CaspianSea to European countries. The South Caucasus Pipeline (SCP) was built toexport gas from Azerbaijan to Georgia and Turkey. Because of the implementationof the “Southern gas corridor”, several countries will gain access to theAzerbaijani gas as an alternative gas reserve. Georgia, Turkey, Greece,Bulgaria, Albania, and Italy are among the participants of the “Southern gascorridor” project. So, this shows how important is Azerbaijan and Georgia as reliablepartner for providing the energy security policy of Europe.In conclusion, in this paper we discussedabout the current situation in the South Caucasus, as well as the prospects forregional cooperation and integration. The article diversified some strategicdirections, which would have significant mean for future development of thisregion, meanwhile it depends on European Security policy and also global traderoutes. Taking into account, the recent economic developments and attemptstowards economic integration between Azerbaijan, Turkey and Georgia and othermega projects from Central Asia to Europe making the South Caucasus a transitregion, showed that this transportation corridor is a new strategic andsignificant one for Western and European countries in energy security policy.

Convinced that regional economic cooperation could be an important step towardsconflict transformation in the South Caucasus, this paper suggests that theprospects of such integration be considered. South Caucasus which has functionas a bridge between Europe and Central Asia, has been improved its strategic importancethrough mega pipeline projects, which are transporting crude oil and naturalgas from Central Asia, Caspian and Iran to Europe.

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