• Mining has experienced a recent boom, with seven licenses issued just last year.

  • Already abundantly blessed with fruits, vegetables and grains, Karabakh could exploit its farming potential if proper infrastructure is put in place.

  • Karabakh now has 11 hotels. Vallex Hotel above is one of the recently constructed ones.

  • Artsakh HPP is leading the push to make energy a major economic resource in Karabakh.

December 1, 2012 | Magazine Archive

BUILDING A BUDGET BASE: TARGETING GROWTH IN FIVE KARABAKH INDUSTRIES

By Naira Hayrumyan

Some 140,000 people who live in the Nagorno Karabakh Republic (NKR) today are trying to build an economy that would allow them not only to survive the blockade imposed by Azerbaijan, but to secure a comfortable, safe and prosperous life, as well.

In doing so, they are helped by the Republic of Armenia and the worldwide Armenian Diaspora. In 2011, as in previous years, Armenia provided Karabakh with an interstate loan of about $87 million—about $16 million more than Karabakh’s own budget ($63.5 million). Diaspora sources sent an additional $10.8 million, aimed at various social endeavors.

The peculiarities of Karabakh’s economy are predetermined by the country’s geopolitical position: It is not recognized internationally, is still in a state of undeclared war with Azerbaijan, must spend enormous sums of money on national defense, and a large part of its male population serves in the military. The border with Iran (about 105 miles) is closed due to the country’s political status. Karabakh, then, is linked only with Armenia, by a serpentine mountain road—now a mega-highway compared to previous years—but nonetheless a challenging route separating Stepanakert and Yerevan by five or six hours for passenger cars and more for public transport vehicles.

Such a location limits opportunities for business development; however, some experts say, the economic policies of the government do not encourage widespread business development, either.

The Karabakh government declared mining, power generation, agriculture, tourism and Information Technology (IT) as priority sectors of the country’s economy and has already started to develop these fields. For instance, the mining sector already generates a significant share of Karabakh’s budget revenues; however, completely transparent investment sources and mechanisms of issuing licenses still do not exist in this sphere. In Karabakh there are no laws imposing mandatory equity participation of the government in the development of national wealth; therefore, profits from mining are received only by individuals, while the state budget gets revenues only in the form of paid taxes. Such a system often allows those in power to control national wealth and share it only with a limited number of select investors.

Nevertheless, authorities in Karabakh still manage to provide a tolerable, if not ideal, living standard for the main part of the population, carry out social projects and even build new housing that is available through mortgages. Low incomes, however, make mortgages unaffordable and inaccessible to many, which impedes the development of the real estate market. The government, then, resorts to subsidizing bank interests, in order for housing to be purchasable. In 2011, $6.2 million in mortgage loans were provided to 397 citizens as part of this program.

Social problems are also solved by “inflating” the state apparatus. More than 9,000 people employed—18.75 percent of total citizens employed—are in state-paid institutions. Overall, the number of Karabakh’s employed is 47,949 (the number of jobs grew by 1,058 in 2011).

The average monthly salary is about $243, which is an increase by 6.2 percent over the previous year.

In 2011, Karabakh reported 9.1 percent economic growth. The country’s Gross Domestic Product (GDP) amounted to about $335 million—an increase of about $43 million over 2010. (Still, industrial output showed practically no increase. It amounted to about $113 million, a mere 0.8 percent growth over the 2010 index.)

From 2010-2011, per-capita GDP rose from $2,030 to $2,300. Incomes increased by 16.6 percent and spending by the population has increased by 13 percent.

Economic improvement is trending—but not for everyone. A survey last June by the Yerevan-based Sociometer Center of Sociological Studies found that among Karabakh families who consider themselves “poor”, 58 percent say social conditions “remain bad” or “have deteriorated”.

Meanwhile, the Government of Nagorno Karabakh is seeking to close the “have” and “have nots” gap through development of the above-mentioned five industries.

Karabakh has made little progress on developing Information Technology (IT) so far, unless it is considered that Stepanakert and regional centers and some large villages are now supplied with internet connection, almost all establishments consider websites essential. The Ministry of Culture and Youth Affairs has set up a small information center that is conducting training for young people who want to learn how to use the internet, and has also set up an information website, Artsakhtoday.am.

Artsakh State University has a faculty of applied mathematics, but no IT department is available yet. No major money appears to go to this sector.

AGBU, however, may be ahead of the curve through its support of the NUR Plan, launched in September last year by Argentinean entrepreneur Eduardo Eurnekian’s Fruitful Armenia Fund, and modeled on the One Laptop Per Child program that provides laptops to children in developing countries.

So far NUR has provided over 3,500 “XO” models with Armenian keyboards to elementary school children in Karabakh. The units are designed to be drop-resistant and are made so that information cannot be lost.

The Karabakh government has agreed to make internet available in schools in which the NUR Plan distributes laptops.

“NUR is close to AGBU’s mission. The Union is interested in educational projects. Collaboration within the framework of NUR is favorable for all parties. With this, we will be developing one of the most valuable potentials of the Armenian nation—the human being,” said Vasken Yacoubian, AGBU Central Board member, as the Plan was initiated.

While IT awaits saturation as an industry, other targeted areas are growing, if not thriving…

Mining

The presence of copper, gold, iron, lead, pyrite, zinc, and other mineral deposits in Karabakh has been known about for decades and for the past decade has been exploited. In August 2002, Vallex Group (a consortium of companies, based in Yerevan) founded Base Metals, for the exploration of copper and gold fields near the village of Drmbon in the Martakert region of Karabakh. Now, the plant produces annually industrial concentrate worth $12-14 million. The concentrate goes primarily to Armenia, where metallurgical processing yields gold-containing copper that is taken to European markets.

Base Metals’ presence has led to a recent mining boom. In 2011, seven licenses were granted for mining and another four for exploration. Nine deals were concluded for development purposes, and equipment for a geological laboratory was purchased. At present, mines are being developed in the Kashatagh region, while in the town of Maghavuz in the Martakert region, coal is being mined and supplied to the Yerevan Thermal Power Plant. However, it is not public knowledge to whom the licenses for the exploitation of mineral resources have been granted, or how much investment has been made.

In 2010, Base Metals processed about 365,000 tons of ore and produced 27,000 tons of concentrate, paying to the NKR state budget about $12 million in taxes. Base Metals’s profit for 2010 was more than $51 million. The company paid out about $7 million in wages, with about 1,300 employees earning around $450 a month.

The plant is switching to new production capacities, first of all in the Tsaghkashen mining complex (near the village of Nerkin Oratagh in the Martakert region). According to the company director, Artur Mkrtumian, the mines in Tsaghkashen are not as rich in copper and gold as the ones in Drmbon, but copper and molybdenum resources there will make it possible to set up larger-scale production.

According to Karabakh Prime Minister Ara Harutiunian, in the coming years the country’s economic performance will be ensured by the mining industry. (Base Metals tops the list of Karabakh’s taxpayers.) Work in this direction has already been initiated in Tsaghkashen, Kovsakan, Karvachar and Martuni. He noted with regret that 2013 will be a difficult year, since the reserves of the Drmbon fields are “drying up”, which means budget revenues in the form of taxes from there will also be decreasing. “However, 2014 will be marked by a rise not only due to Tsaghkashen’s field, but also due to the development of other fields,” said Harutiunian.

From January to September 2012, products worth about $71 million were turned out in Karabakh, of which 24.5 percent was the share of the mining industry. In 2011, industrial output in monetary terms totaled close to $120 million, an eight percent rise over 2010. Simultaneously, mining volumes decreased by 14.9 percent. (The apparent discrepancy in the figures is explained by the fact that the value of extracted products have risen, meaning more value for the volume, and by the fact that other industries showed growth.)

Small-capacity Energy

The largest source of electricity in Karabakh, the Sarsang Hydropower Plant, located on the Tartar River, has a capacity of 50 megawatts. The republic is actively developing its smaller hydropower potentialities. Over the past few years several small hydropower plants have been built and operated in Karabakh, including Mataghis-1, Mataghis-2, Syunik-1, Syunik-2, Trghe-1, Trghe-2 and Trghe-3. Construction is continuing on the Syunik-3 Hydropower Plant. Thus, in total, along with the Sarsang plant, which produces annually an average of 130 million kilowatts per hour of electricity, the new hydroelectric facilities have a total capacity for generation of about 330 million kilowatts per hour of electric power. The total potential of the country can secure the production of up to 700 million kw/h of electricity each year—twice as much as the needs of the republic’s population, and an avenue for export.

Construction of the Trghe-2 project was about $6.1 million, and was paid for by Artsakh HPP OJSC (Open Joint Stock Company.) One of the latest launches of hydropower plants took place in the village of Mataghis on July 1. The plant employs 10 specialists from China, the world’s largest consumer of energy.

Syunik-2, with a capacity of 3.2 megawatts and a possibility of generating 26 million kilowatts per hour of electricity a year, was launched in the Kashatagh region. The Akari River annually supplies the Arax with about 720 million cubic meters of water. If this entire amount were used for the production of electricity, it would generate some 45 mega­watts of electricity per hour, says ArmWaterProject Director Yuri Javadian, who manages the project.

Contributing to the implementation of the program are Armenians from Armenia, Belgium, Canada, Iran, Syria, the United Arab Emirates, the United States and other countries.

One of the leading advocates of hydropower production in Karabakh has been AGBU Central Board member Joseph Oughourlian, co-founder and Chief Executive Officer of Amber Capital Investment (based in New York City) and a primary investor in Artsakh HPP. A first step in developing the energy industry has been allowing citizens to become co-owners of state property—anyone can become a shareholder of Artsakh HPP. There are currently 1,200 shareholders.

However, the fact that Karabakh is not recognized internationally and the continuing communications blockade by Azerbaijan, leave no routes to export its electricity. Karabakh could supply electricity to the border areas of neighboring Iran, and in fact, in 2002, started construction of a power plant on the Arax River. Azerbaijan protested to Iran and to international agencies, and construction was halted. (It is believed widely that the plant did start operation in 2008 and has since been supplying electricity, but as it is a politically-sensitive issue, no official information is available to confirm this.)

Waiting to reach its potential output, Karabakh at the moment does not provide enough electricity even for its own needs. ArtsakhEnergo, the power distributing company, distributed in 2011 a total of 259.3 million kw/h of electricity, including 137.6 million kw/h imported from Armenia. Artsakh HPP produced 104.2 million kw/h (40 percent of the consumed amount), and the hydropower plants Syunik-1 and Syunik-2 turned out 17.5 kw/h.

Agriculture

Karabakh, the “Black Garden,” has always been regarded as a country rich in agriculture. But the war in the early 1990s destroyed most infrastructure, and by 2000, only five percent of land was irrigated. The areas under irrigation have been doubled since then. But, despite the fact that the government has declared agriculture a priority area of the economy, dramatic improvement is still needed in this sector.

After the privatization of land, which was carried out in 1996, the bulk of the land in Karabakh has remained uncultivated. The country now has about 18,000 small farms. In the meantime, about $62 to $74 million is spent annually to import food and agriculture-based products that could be produced domestically.

Still, Karabakh’s monetary agricultural production increased 20.1 percent from 2010-2011, reaching about $99 million.

Specialists, however, estimate that the potential of agricultural development in Karabakh is enough to feed not only the republic, but also Armenia. There is an estimated 1.2 acres of cultivatable land per person in Karabakh.

Until recently, a serious obstacle to farming was the presence of land mines buried in much of Karabakh’s arable land. But by 2011, more than 10,000 hectares of land had been de-mined, which is about 90 percent of all known mined territories. (See article on page 65)

Now, irrigation is a bigger issue.

According to the government’s plan, by 2013, as many as 37,000 acres of land will be irrigated, whereas about 24,000 acres receive water currently. Specialists predict that planting in Karabakh can be increased 1.5 times, while animal husbandry output can be increased threefold. Also, they argue, the current showings of agricultural production can be doubled, with food imports reduced significantly if substituted with locally produced foodstuffs.

Food processing enterprises have also been set up in the meantime. ArtsakhKat, a dairy factory, purchases raw materials for processing from local producers. Artsakh Fruit, a cannery set up under the patronage of the state, manufactures canned fruits and vegetables and has successfully exported its products abroad.

Tourism

Tourism has potential for becoming a key sector of Karabakh’s economy, given the opportunities that exist for historical, ethnic and ecological tourism. Despite the blockade, unrecognized status, and anti-Armenian and anti-Karabakh propaganda being carried out by Azerbaijan, the tourism sector in Karabakh grows annually by 40 percent, due to a well-conceived government policy put in place and supported this year with about $827,000 from the state budget. (An additional $67,000 was earmarked for environmental protection, which has an impact on tourism.)

The industry potential is also helped by the geography of the NKR, the presence of thousands of historical, cultural and natural sights and attractions, the rehabilitation of infrastructure, efforts to attract investments, as well as Karabakh’s participation in various international economic and travel fairs and exhibitions.

Hovhannes Gevorgian, the permanent representative of Karabakh in Paris, France, says he has been trying to promote cultural tourism in Karabakh, with an accent on its ancient Christian architectural heritage. “My country has not yet been recognized in the world and neighboring Azerbaijan prevents the normalization of the situation. The European Commission allocates funds for the restoration and development of Abkhazia and South Ossetia, which are two separatist regions of Georgia, but does not help Nagorno Karabakh,” he adds.

According to the Consular Service of the NKR Ministry of Foreign Affairs, 11,362 citizens of foreign states visited Karabakh in 2011, which is 3,000 more than in 2010.

The “geography” of tourists is expanding every year. In 2011, the country was visited by citizens of Bangladesh, Cambodia, Canada, China, Cuba, France, Gabon, Germany, Indonesia, Iran, Ivory Coast, Kenya, Malaysia, Russia, Singapore, South Africa, Ukraine, the United States and other countries.

According to the foreign ministry’s data, during the first half of 2012, Karabakh was visited by 3,820 foreign citizens, which is 874, or 29.6 percent, more than the in the same reporting period last year. (Visitor figures increase dra­ma­tically in the second half of the year, reflecting the peak tourist months of July, August and September. While most foreign tourists are required to get a visa for entering Karabakh, residents of most post-Soviet countries—namely the current members of the Commonwealth of Independent States—enter visa-free.)

The actual number of tourists exceeds the official figures, says Head of the NKR Government-affiliated Tourism and Historic Environment Protection Department Sergei Shahverdian. According to him, official reports of the number of tourists don’t include data on arrivals from Armenia, as well as visiting statistics for numerous Diaspora Armenians who bear the passports of the Republic of Armenia.

On a related note, Shahverdian said that, according to official data, in comparison with 2010, in 2011 the number of tourists increased by 43 percent, while according to the data posted for the first half of this year it increased by 40 percent.

In Shahverdian’s opinion, the increase in the number of tourists is helped not only by Karabakh’s participation in travel fairs and exhibitions, but also by various promotion campaigns carried out by his department.

Eleven hotels have been built in Karabakh, and most run at capacity from May to November. It is noteworthy that while before Karabakh was visited mostly by Armenians from the Diaspora, in recent years there has also been a tendency of rising domestic tourism, with more “Armenia Armenians” touring Karabakh.

In 2011, Karabakh was represented by separate pavilions at tourism fairs in Spain, Italy, the United Kingdom and the United States. Tourism-related websites have been created, films have been shot about Karabakh, advertising campaigns are being carried out and tourist information centers have been opened in Shushi, Stepanakert, Tsaghkashat and Tigranakert. Generally, roads are being improved to tourist destinations and hotels are being upgraded. Historical sites, such as the residence of meliks (representatives of Armenian noble dynasties) in Togh, and even some Muslim monuments are being restored.

It is expected that the opening of Stepanakert’s airport could contribute to increasing the number of tourists, who now have to travel the long and winding road that leads to Zvartnots International Airport in Yerevan.

For Karabakh, tourism has economic significance even if each tourist spends an estimated $100 a day. It also has enormous political significance, helping to create a positive image of Karabakh abroad.

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