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Over the past twenty years Azerbaijan has been experiencing a difficult time of radical eco-nomic transformation. After achieving political independence it also acquired economic sover-eignty, since it now controls its own resources and potential and independently determines themodels and priorities of its own economic development, thus confirming its own financial valid-ity. During this period Azerbaijan essentially completed the main reforms aimed at transferringto market methods of economic regulation, achieving predominance of the private sector in theeconomy, establishing a sufficiently liberal system of price formation, and ensuring acceptablefreedom of foreign economic interactions. The country has managed to create a more competitiveeconomy than its neighbors, particularly with respect to the material conditions of business ac-tivity.

Nevertheless, in the short and medium term, more complicated tasks will have to be solved. Themain one is to remove the political restrictions on economic development. This applies in particular toliberation of the currently occupied territories with their subsequent full-scale socioeconomic reha-bilitation. Reducing the informal economy to a minimum and improving the sectoral and territorialmake-up of the economy are among the priority goals for the near future.

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D.Sc. (Econ.), professor,member of the board of the National Bank of Georgia,

researcher at the Case-Transcaucasus Foundation(Tbilisi, Georgia).

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D.Sc. (Econ.), professor,Corresponding Member of the National Academy of Georgia

(Tbilisi, Georgia).

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his article presents an analysis of theinstitutional changes in the foreign tradepolicy of the Central Caucasian coun-

tries and reveals the special features of theirforeign economic activity at the currentstage. The authors also look at the main

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After they gained their independence, the Central Caucasian countries (Azerbaijan, Armenia,and Georgia) began to elaborate measures for making the transition to a market economy and for cre-ating institutional conditions to facilitate their integration into the world economy. In contrast to theother post-Communist countries which unexpectedly found themselves at this historical milestone,the Central Caucasian countries began reforming their domestic and foreign policy amidst acute na-tional conflicts. They came up against the complicated but necessary task of forging a radical changein their foreign economic policy in order to obtain benefits from commerce both within the region andthroughout the world. In order to successfully accomplish this task, they first had to introduce a freetrade model. The governments of the Central Caucasian countries expressed their political will anddesire to join the WTO at the beginning of this century.1 However, conservatism and regionalism, onthe one hand, and ingrained views about protectionism as protection of national interests, on the oth-er, impeded implementation of the free trade scenario in these countries. Practical approval of themarket principles of foreign trade began at the same time as the abovementioned processes took off.At present, efforts to integrate the Caucasian market into the global economic space and implement afree foreign trade policy in the Central Caucasian countries are becoming more important than protec-tionism and protection of the national economy. Moreover, reciprocity in foreign trade among theCentral Caucasian countries is still a thorny issue. This is explained by the fact that along with glo-balization and the successful development of the international market in this region, which is largelyassociated with the export of Caspian oil and petroleum products, there are still internal markets in theregion that are divided into parts and isolated, which in turn is largely due to the frozen ethnopoliticalconflicts in the region.2

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Until independence was restored in 1991, the economy of the Central Caucasian countries waspart and parcel of the economy of the other Soviet republics. But during the first years of independ-ence, there were essentially no foreign trade relations among the Central Caucasian countries due tothe breakdown of the old cooperation and commerce system, the emergence of political and militaryconflicts, as well as the discrimination in trade policy, etc. There can be no doubt that all these issueshad a direct effect on international trade in the region and, in addition to other factors, hindered itsdevelopment. So these countries had to deal with the major structural upheavals and intense unrestthat went hand in hand with the severe deterioration in trade conditions.

Three development stages of foreign trade relations can be traced in the Central Caucasiancountries:

development trends in the regional marketand at the factors promoting and impeding

foreign trade in these countries which havean impact on their economic development.

1 Georgia has been a member of the WTO since 2001 and Armenia since 2003, whereas the Azerbaijan Republichas expressed its political desire and has begun making preparations to join this organization.

2 The ethnopolitical conflicts in Abkhazia and South Ossetia (Georgia) and Nagorno-Karabakh (the Azerbaijan Re-public) have affected a total of more than 10% of the entire population of the Central Caucasus.

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� The first stage covers the first years of these countries’ independent development (1991-1995) and is characterized by a huge slump in their economy. The reforms were carried outat different rates and times, which made the drawing up and coordination of foreign tradepolicy even more complicated. Assistance from international organizations aimed at advanc-ing the reforms in these countries was very ineffective. The governments’ lack of preparationand experience in generating major transformations took its toll, on the one hand, while eth-nic wars and lack of definition of the state borders made it impossible for the Central Cauca-sian countries to expand their trade boundaries, on the other. At the same time, the states ofthis region essentially continued carrying out the old policy, only with a few modifications.The main talks were held between Georgia and Armenia and Georgia and Azerbaijan withthe aim of opening customs services.3 Since the commerce and taxation system of the Sovietperiod had already broken down and efficient mechanisms of international exchange had stillnot been introduced, export in these countries ultimately inevitably decreased. Between 1989and 1998, the share of export and servicing in the GDP in the Central Caucasian countriesdecreased on average from 55% to 20%.4

� At the second stage (second half of the 1990s), Georgia and Armenia and Georgia and theAzerbaijan Republic entered several agreements, and laws on trade liberalization in thesecountries were adopted.5 The postulate that a strategy aimed at liberalizing free trade wouldassist rapid and stable growth in the GDP was regarded as the main principle of economicpolicy.6 Reform of foreign trade became the main way to create market competition condi-tions for domestic producers. But the absence of a legal and organizational base at this stagethat met the demands of the market economy impeded the reforms. Under these conditions,several measures were carried out aimed at gradually removing the prohibitions and limita-tions on the export of certain goods and services.

At this stage, Armenia’s foreign trade policy became more liberal. Armenia’s maxi-mum import customs duties were fixed at a level of 10% (while in Georgia and Azerbaijanthis level was 20%), which is partially explained by this country’s geopolitical position. Ar-menia does not have direct transportation access to its main trade partner, Russia, and de-pends on neighboring countries. Since the Armenian-Azerbaijani Nagorno-Karabakh con-flict closed this route through Azerbaijan, transit routes through Georgia remained the onlytrade communication with Russia. But after interstate relations between Georgia and Russiabecame aggravated (2006-2008), all the control and check points were closed down, whichgreatly reduced the goods turnover between these two countries and Russia.

3 For example, the Agreement between the Customs Committees of the Republic of Georgia and the AzerbaijanRepublic on the Opening of Customs Checkpoints on the Border of the Two States (3 February, 1993); the Agreement be-tween the Governments of the Republic of Georgia and the Republic of Armenia on the Development of Cooperation inEconomic Trade Relations (17 June, 1992).

4 Due to the absence of reliable statistics many foreign trade parameters in the region are fragmented and contradic-tory. This problem is also aggravated by the high percentage of contraband. The article presents the official data of the re-publics and of international organizations. They may differ from each other.

5 See, for example: On Liberalization of Foreign Trade in the Azerbaijan Republic, Presidential Decree Enacted on15 November, 1995; On Further Development of Foreign Trade Regulation, Presidential Decree Enacted on 17 Decem-ber, 1996; On Further Liberalization of Foreign Trade, Presidential Decree Enacted on 24 June, 1997; On a Commissionfor Bringing the Activity of Control and Check Points in the Azerbaijan Republic into Harmony with International Stand-ards, Presidential Decree Enacted on 20 May, 2000; Agreement between the Government of the Republic of Georgia andthe Government of the Republic of Armenia on Free Trade (1995); Agreement between the Governments of the Republicof Georgia and the Azerbaijan Republic on Free Trade (10 June, 1996); Declaration between the Republic of Georgia andthe Azerbaijan Republic on Intensifying Strategic Cooperation (1998).

6 The positive influence of foreign trade on the country’s economic growth was first noted as early as the 18th cen-tury by Adam Smith (1776). At present, this concept is the basis of the policy of international organizations, the EU, andthe countries that have joined the WTO.

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2002-2007

127.2

128

139.2

1996-2001

108.3

98.7**

110.3

2002-2007

150.8

118.9

126

1996-2001

126.9

116.2**

114.6

2002-2007

119.1

113.1

109

1996-2001

108.8

105.8*

104.6

7 Host Government Agreement Between and Among the Government of Georgia and the SCP Participants (2001);Agreement Between Georgia and the Azerbaijan Republic Relating to the Transit, Transportation and Sale of Natural GasIn and Beyond the Territories of Georgia and the Azerbaijan Republic Through the South Caucasus Pipeline System(2001); Convention between the Republic of Armenia and Georgia for Advance of Double Taxation with Respect to Tax-es on Income and Capital and for the Prevention of Tax Evasion (3 June, 2000).

8 State Statistics Board of Azerbaijan: [www.azstat.org/]; National Bank of Azerbaijan [www.nba.az/]; CentralBank of Armenia [www.cba.am/]; National Statistics Board of the Republic of Armenia [ww.armstat.am/]; Department ofStatistics at the Georgian Ministry of Economic Development [www.statistics.ge/].

So these countries, after finding themselves in unfavorable conditions, are trying tocarry out a liberal foreign trade policy in order to make their market more attractive. At theend of the 1990s, it was precisely these conditions that became the determining factor ofArmenia’s foreign trade policy.

� The third stage covers the period from the beginning of the 21st century and is characterizedby Armenia’s and Georgia’s membership in the WTO, as well as by the emergence of newinstitutional interrelations between Georgia and Azerbaijan regarding gas and oil transit.7

The Baku-Supsa and Baku-Tbilisi-Ceyhan oil pipelines and the Baku-Tbilisi-Erzurum gaspipeline have turned the Central Caucasus into an important center for the delivery and tran-sit of the Caspian’s energy resources to the world market. Europe primarily ensures its ener-gy security and relative liberation from its dependence on Russia in this respect precisely bymeans of Caspian oil and gas deliveries. Thus the Central Caucasian countries have deter-mined promising vectors for themselves in international trade—these are liberation (Arme-nia, Georgia) and increasing the export and transit of energy resources (Azerbaijan, Geor-gia), which have helped to accelerate both growth in the GDP and an increase in export andimport compared with 1996-2001 (see Table1).

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Dynamics of the GDP and Export-Import (%)

Countries

Growth in GDP Growth in Export Growth in Import

Azerbaijan

Armenia

Georgia

Note: * 1997-2001;** 1998-2001.

S o u r c e s: Internet resources of the countries’ statistic boards and national banks,and the authors’ estimations.8

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All the Central Caucasian states have certain characteristics in common: extremely limited pro-duction resources, the impossibility of developing a multi-vector economy, and difficulties due to this

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in meeting their diverse internal needs by means of domestic production. As a result, they are experi-encing an objective need for deeper integration into the world economy than other countries (largestates like Russia for example) in order to meet their own demand for diverse goods and services.

The current state of political relations among the Central Caucasian countries essentially reduc-es to naught the possibility of creating a regional market and strengthening the integration processeshere. So these countries are primarily oriented toward international markets where they deliver theirmain export products (oil and petroleum products, precious metals, manganese, fruit, subtropicalproducts, wine and wine products, etc.).

For example, in 2007, the share of oil and petroleum products in Azerbaijan’s export structureamounted to 82%; Armenia’s main export products, ferrous alloys and precious stones (diamonds),accounted for 21% and 18%, respectively, and in Georgia the share of ferrous metals and wine prod-ucts amounted to 22% and 12%. Armenia’s and Georgia’s export potential is not high. In addition toa high share of imports, these countries are characterized by a lower level of exports vis-à-vis thegross domestic product, which also determines these countries’ place in the international division oflabor.

In 1995-2006, the share of export in Armenia’s and Georgia’s GDP lagged 2.5-fold behindAzerbaijan’s indices (see Fig. 1). In large industrially developed states, the share of export and importwith respect to the gross domestic product fluctuates between 20-25% (France, Italy, Great Britain,and Sweden) and 50-55% (Belgium, Ireland, the Netherlands).9

Studies show that Azerbaijan has high economic growth rates, which are primarily achieved byexporting its energy resources. In the other Central Caucasian countries the share of export in the

100

90

80

70

60

50

40

30

20

10

0

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

Armenia Azerbaijan Georgia

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Share of Export in the GDP (%)

S o u r c e: Data of the World Bank, available at [http://ddp-ext.worldbank.org/ext/DDPQQ/showReport.do?method=showReport].

9 Data of the World Bank, available at [http://ddp-ext.worldbank.org/ext/DDPQQ/showReport.do?method=showReport].

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goods turnover is falling, while import is steadily rising, which is ultimately explained by theirsomewhat limited export potential. Over the past five years (2003-2007), the growth in the GDP inArmenia and Georgia amounted to an average of 13% and 10%, respectively, while the share ofexport in the goods turnover dropped by 15-20 percentage points. However, in Azerbaijan the op-posite trend is occurring—with a 3.5-fold increase in the positive trade balance, the growth rates inthe GDP amounted on average to 20% (see Table 2). In so doing, it should be noted that the shareof oil and petroleum product production has been steadily rising in Azerbaijan’s GDP structuresince 2000. Whereas in 2000, these products accounted for 1.2% of the GDP, in 2006-2007, theirshare increased to 13-15%.10

Consequently, the trade balance indices of the Central Caucasian countries (apart from Azerbai-jan) are negative. In Armenia, import exceeds export by 2.8-fold and in Georgia by almost three-fold.A negative payment balance has also become a chronic phenomenon in these countries.

In the Central Caucasus, economic interrelations are built in keeping with the principle of“economic gravitation” toward large historical or geographical partners. At present, the regionalmarket here is developing exogenously. Internal regional economic relations and trade ties amongthe Central Caucasian countries are mainly developing in the Georgia-Azerbaijan and Georgia-Armenia vectors. For well-known reasons, these relations are totally absent between Azerbaijanand Armenia (see Fig. 2).

It should be noted that the economies of the Central Caucasian countries are still closely tied tothe Russian economy. Russia is the main trade partner of all the Central Caucasian countries. Russiaoccupies first place in Armenia’s foreign trade turnover, although recently the share of Germany, theNetherlands, Belgium, and Switzerland has been gradually increasing. Georgia’s main partners areTurkey, Azerbaijan, Ukraine, Germany, and the U.S. Russia’s share in foreign trade relations with theCentral Caucasian countries is on the decline (see Table 3).

Growthin GDP

105.5

111.1

105.9

109.6

109.4

112.4

Ratio ofexport

to import

0.43

0.40

0.35

0.35

0.25

0.24

Growthin GDP

113.2

114.0

110.5

113.9

113.3

113.7

Ratio ofexport

to import

0.51

0.54

0.54

0.54

0.45

0.35

Growthin GDP

110.6

111.2

107.0

126.4

134.5

125.0

Ratio ofexport

to import

1.26

0.96

1.05

1.76

2.52

3.52

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Ratio of Export to Import and Growthin the GDP in the Central Caucasian Countries (%)

Azerbaijan Armenia Georgia

Years

2002

2003

2004

2005

2006

2007

S o u r c e s: Data bases of the central banks and statistics boards of the indicatedcountries.

10 Data of the National Bank of the Azerbaijan Republic.

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17.6

15.1

11.06

22.4

13.9

15.2

17

13.5

15.4

16.2

11.8

14

14.6

13.7

14

8.7

17.5

3.7

5.4

12.3

8.1

6.6

12.2

17.8

5.8

10.8

16.1

5.7

13.8

18

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Trade with Russia (%)

Export to Russia Import from Russia

Countries (share in total export) (share in total import)

2003 2004 2005 2006 2007 2003 2004 2005 2006 2007

Azerbaijan

Armenia

Georgia

S o u r c e s: Data bases of the statistical boards of the Central Caucasian countries.

Turkey, Ukraine, Azerbaijan, and Germany are becoming Georgia’s main trade partners. Tur-key, Italy, and Russia occupy the leading places in Azerbaijan’s foreign trade relations. Russia is stillArmenia’s main partner, although an increase in the share of the European Union countries is alsonoted.

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The Central Caucasian countries regard the development and diversification of their foreigneconomic relations as a significant guarantee of their own development. So comprehensive work in

350,000

300,000

250,000

200,000

150,000

100,000

50,000

0

2000

2001

2002

2003

2004

2005

2006

2000

2001

2002

2003

2004

2005

2006

Export���� Import

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Trade between Georgia and Armenia (left-hand side) andGeorgia and Azerbaijan (right-hand side)

S o u r c e: Georgian Department of Statistics.

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being carried out in these states to bring their economies into harmony with the requirements of theliberal market and free trade. Great efforts are being exerted to make efficient use of their geographicconditions and natural resources and develop export-oriented production units in order to offer a wid-er assortment of products for the international markets. In the future, this trend will lead to greaterinternational integration of the Central Caucasus and a decrease in its dependence on traditional his-torical markets.

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Ph.D. (Hist.), researcher at the Institute of World Economics andInternational Relations, Russian Academy of Sciences

(Moscow, Russia).

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Widespread interstate migration is a stable trend of contemporary world development. For his-torical reasons, the post-Soviet expanse has found itself in the epicenter of cross-border migration.According to the U.N., in 2005 there were 26 million people living in the Commonwealth of Inde-pendent States (CIS) who were born beyond the border of their place of residence. In absolute termsof this category, Russia ranked second (12.1 million people) in the world this year after the U.S., fol-lowed by Germany in third place. Ukraine, which has 6.8 million residents who were born outside thecountry, ranked fourth, while Kazakhstan with 2.5 million people in this category took 17th place.More than one million people in Uzbekistan and Belarus each were born beyond the border of theirplace of residence.1 According to the World Bank’s estimates, which differ slightly from the U.N.’s

1 All of the estimates in this article, unless otherwise stipulated, were made in compliance with the data bases of theUN and its specialized organizations, the World Bank, and Soviet and post-Soviet population censuses. To save space,references to these sources are not given.

�his article focuses on two of the mainmigration processes in the post-Sovi-et states: first, the so-called great mi-

gration of nations generated by the collapseof the U.S.S.R. and the formation of inde-pendent states on the basis of the former

Soviet republics and, second, the labormigration prompted by the significant dif-ferences in the level of socioeconomic de-velopment of the new states and, corre-spondingly, in the material status of thebroad population.