WHAT THE SOUTH CAUCASUS REGION COULD BE: EXPLORING THE ROLE OF ECONOMIC INITIATIVES AS PEACE BUILDING TOOLS IN THE NAGORNO-KARABAKH CONTEXT SECOND STAKEHOLDER CONSULTATION ROUND WITH POST-CONFLICT SCENARIO BUILDING WORKSHOP BERLIN, JULY 2014 European Geopolitical Forum's Research on: ECONOMIC INCENTIVES AS CONFLICT MANAGEMENT/ RESOLUTION TOOLS IN THE SOUTH CAUCASUS: THE CASE OF NAGORNO-KARABAKH Briefing by Mr. George Niculescu, Head of Research, EGF, Brussels,

The Overall Finding of Phase1 : Economic incentives, cannot, on their own, substitute a political settlement to the conflict, including its territorial dimensions. However, they could play a key role in confidence building.

 VISION:  “A peaceful South Caucasus reinforced by comprehensive, integrated and sustainable cooperation, which would ultimately enable free movement of people, goods, services and capital at the regional level, lead to economic integration and the opening of all closed borders.“  AIMS:  to identify possible pilot projects enabling potential economic cooperation between Armenia and Azerbaijan.  to create a platform for exchange of information on economic issues between Armenian and Azerbaijani experts and businesses as Track 2 Diplomacy on conflict resolution.

THE PILOT PROJECTS THREAD Key Questions for Phase 2 of Research: 1. Which regional projects involving both Armenia and Azerbaijan might better respond the requirements of a post- conflict scenario aiming at South Caucasus regional integration? 2. Could such projects provide incentive sufficient for Armenia and Azerbaijan to alter their respective positions towards the Nagorno-Karabakh peace process?

No.Title of the Project Existing Feasibility Study Data for Feasibility Study Available Links with the situation of IDPs Potential International Stakeholders 1. Baku-Fizuli- Megri- Nakhitchevan-(Yerevan)-Gyumry-Kars railway Partial Mirimanova Partial Mirimanova Yes Turkey, EU, Russia 2. Baku-Ijevan-Diljan-Yerevan-Nakhichevan railwayN/A No EU, Russia, Turkey 3. Baku- Bharda- Aghdam- Stepanakert/ Khankendi- Sisian (Armenia)-Nakhichevan highway N/A YesEU, Russia,Turkey 4. Establishing a regional electricity grid covering Georgia-Armenia- NK-Azerbaijan N/A Partial Various sources Yes EU, Turkey, Russia, Iran 5. Baku- Aghdam – Khankendi/Stepanakert – Shusha – Lachin – Goris – Sisian – Nakhichevan - Turkey gas pipeline N/A Yes EU, Turkey, Russia, stakeholders of Shah Deniz II 6. Restoration of transport infrastructure in the territories surrounding NK Partial Muzafarli, Ismailov Partial Muzafarli, Ismailov Yes EU, Russia, Turkey, Iran 7. Restoration of telecommunications network in the territories surrounding NK Partial Muzafarli, Ismailov Partial Muzafarli, Ismailov Yes EU, Russia, Turkey, Iran 8. Restoration of social facilities in the territories surrounding NK Partial Muzafarli, Ismailov Partial Muzafarli, Ismailov YesEU 9. Legalization and modernization of the Sadakhlo market in Georgia N/A NoEU, Georgia, Turkey Potential Regional Economic, Energy and Infrastructure Projects of Common Interest To Both Armenia and Azerbaijan

IMPACT OF THE NK CONFLICT ON REGIONAL DEVELOPMENT  Opportunity costs of unrealized trade and investment;  Non-engagement of the most efficient trans-regional lines of transport and communications;  Closed borders, demographic shifts, over-sized defence budgets undermine regional development;  The status of economy used in the information war;  Armenia has partially diffused the economic pressure created by the blockade;  The dynamics of the global demand for oil and gas set to further prop up Azerbaijani economic growth;  The main challenge is not so much the threat of economic collapse, but rather “building-up a sound framework for economic governance”.

THE STRATEGIC PLAN FOR REGIONAL DEVELOPMENT THREAD - A public debate amongst NK stakeholders on the advantages & disadvantages of choosing peace and regional economic development over the current state of hostility might facilitate political compromise. Could a SPRD trigger such a debate? - Turn the “Armenian-Azerbaijani economic dialogue” from an instrument of information war into an incentive for future peace: - What scope for a blueprint for regional development? - What key priorities? What other topics could be included? - What regional frameworks might enable joint planning, funding, and management of economic projects? - What impact might have the on-going European and Eurasian integration processes? - How to inter-connect the process of resettlement of the IDPs and refugees communities of both ethnicities with it? - Are the prospects for regional development strong enough to change the current security concerns across the South Caucasus region?

INITIAL THOUGHTS ON A STRATEGIC PLAN FOR REGIONAL DEVELOPMENT A scenario building exercise rather than a political/legal document; Build upon previous attempts (i.e. Stability Pact for the Caucasus, Caucasus Stability and Cooperation Platform, etc.) without duplicating them; Underpinned by the principles of the Brussels Consensus on Post- Conflict Regional Integration Scenarios for the South Caucasus; Keep eyes open at the dynamics of the regional context, but focus on Armenia, Azerbaijan and Nagorno-Karabakh; inclusive approach against other regional actors; Address the dichotomy of European and Eurasian integration processes; Consistency with the political and security aspects of conflict resolution scenarios is vital; Involve to the largest extent possible interested business circles; Enshrine relevant political and diplomatic feedback.

 “Armenian and Azerbaijani authorities could initiate steps now aimed at rooting the mutual tolerance and openness for dialogue in both societies.[…] Perhaps it would be more pragmatic to proceed based on the principle “territory in exchange for Nagorno-Karabakh security” rather than “territory in exchange for independence of Nagorno-Karabakh”. Such a stance of Armenia could be reciprocated by Azerbaijan with the renouncing of the policy of isolating Armenia from international and regional energy and transport projects in the South Caucasus. It is evident that regional economic and energy cooperation running parallel with the conflict resolution efforts, could serve as a fertile soil for softening the position of both sides, regional common Armenian-Azerbaijani interest could take shape which might eventually bring about a final and mutually acceptable resolution to the Nagorno-Karabakh conflict.”*   * Analytical Centre on Globalization and Regional Cooperation, Yerevan, Armenia - “Armenian Foreign Policy Agenda for ”, 2014, p.43,

The Way Forward Ideas generated during this seminar will enter the scope of EGF’s new study on the economic dimensions of the Nagorno-Karabakh conflict resolution process.