Transcript A Phased Strategy for Opening Armenia’s Western Border

A Phased Strategy for
Opening Armenia’s
Western Border
Armenian International Policy Research Group
Torosyan, Gagnidze, Beilock
Introduction
This study:
 outlines a plan to open Armenia’s borders with
Turkey
 examines likely changes in trade flows between
Armenia and Turkey
 discusses how open border will affect other
countries in and around the region, including:
Azerbaijan, Georgia, Iran, and Russia
Literature review
Polyakov “Changing Trade Patterns after
Conflict Resolution in South Caucasus”, 2001
 uses a gravity model to estimate trade flows
between Armenia and Turkey
 estimates are overly optimistic: the overall
effect on Armenian economy from border
opening is calculated to be as much as 38%
of the the size of GDP.
Literature review
AEPLAC’s “Study of the Economic Impact on
the Armenian Economy from Re-Opening of
the Turkish-Armenian Borders”, 2005
 estimates a gravity model of trade to calculate
short and medium term effects of border
opening. Uses CGE modeling to estimate
longer term effects of border opening.
 too conservative in estimates of potential
economic effects of border opening.
Current access to Turkey
Currently almost all overland trade between
Armenia and Turkey takes place via Georgia.
There are two major border passages that are
being used for Armenian trade with Turkey:
 passage G1 - south of Batumi
 passage G2 - south-west of Akhaltsikhe
An additional passage that is sometimes used
is G3 south-west of Akhalkalaki.
No railroad between Georgia and Turkey.
Current access to Turkey
Strategies for Opening the Border
There are at least six potential border crossings
by road and one rail connection between
Armenia and Turkey.
Stage I: Opening two
passages to handle
initial traffic and test
systems.
A1 – Metsamor
A2 – Gyumri
Strategies for Opening the Border
Stage II: As traffic volumes increase, both
countries could set up additional border
crossings. Options:
A3 - Margara village
A4 - Bagaran village
A5 - Haykadzor village
A6 - Paghakn village
Looking at the Region
What are some of the potential benefits of open
borders to the following countries of the
region?
 Azerbaijan
 Georgia
 Iran, Gulf States
 Armenia
 Turkey
Azerbaijan
The scenario around which the project has been
developed is the opening of borders between
Turkey and Armenia, but not between
Azerbaijan and Armenia.
However, Turkey closed the border in support of
Azerbaijan. Ending it without Azerbaijan’s
acquiescence would be politically difficult, at
best, and more likely impossible.
To have Azerbaijan’s consent, concessions
favoring Azerbaijan could be negotiated.
Armenia’s Potential as a
Transshipment Corridor
 north-south routs through Armenia are both
longer and more difficult than other routes
 in an east-west direction, Armenia has
considerable potential for transshipments:
between Baku and Kars or Istanbul, routes
through Armenia are as short as or shorter than
alternative routings and have to negotiate fewer
natural barriers (i.e. mountain ranges).
 moreover, the only rail connection between the
Caucasus and Turkey is through Armenia.
The Georgian Buffer
Our study assumes that full cessation of the
closed border between Armenia and
Azerbaijan (“mainland”) is impossible.
Fortunately, the main east-west rail line and
roadway connect Armenia and Azerbaijan via
Georgia => carriers and freight can transit
between Armenia and Azerbaijan without
crossing a common border.
Transshipments via Armenia
With an open border between Armenia and
Turkey, Turkish carriers would be free to transit
Armenia, improving linkages between
Azerbaijan and Turkey.
Armenia’s rail system also could carry
transshipments of freight bound to or from
Azerbaijan.
There would have to be
 non-discriminatory treatment of cargoes
 at or near cost level fees
Access to Nakhichevan
Armenia could consider effecting a partial opening
of the border with
Nakhichevan. This
might be conceived of
as Stage III of a
phased opening,
giving better access to
 South Armenia
 Nakhichevan
 Iran
Georgia
Because of the closed border, Georgia has had
a virtual monopoly over surface freight
movements to and from Armenia.
For many years Georgia levied surcharges on
all freight to and from Armenia. Recently
Georgian government has taken steps to
lower transit fees for Armenian trade, and
also to limit unofficial payments on the road.
Virtually all freight moving between the West
and Azerbaijan uses Georgian roads or rails
and its ports.
What’s in for Georgia?
Open borders between Armenia and Turkey
may reduce the volumes and/or premiums for
Georgia from Armenian transit traffic, but is
unlikely to threaten transit trade to/from
Azerbaijan going through Georgia.
If transit traffic through Nakhichevan were
permitted, Georgian importers and exporters
would benefit from improved access to Iran
and the Gulf States.
Georgian importers and exporters would also
benefit from improved road and rail access to
some parts of Turkey.
Increased Competition in Turkey?
There is a possibility of negative effects of
export diversion for Georgia when ArmenianTurkish border opens. The magnitude of this
effect would depend on how much overlap
there might be between Georgian and
Armenian exports to Turkey.
To determine the extent of that overlap we use
export similarity technique, also known as
Finger-Kreinin Index (FKI). The index ranges
from 0 (no overlap) to 1 (complete overlap).
More Compliments than Substitutes
Armenian and Georgian export flows to the EU
in 2004 did not have a big overlap: FKI is
calculated to be 0.182 => Armenian and
Georgian goods are not very close
substitutes in European markets.
Products that do overlap either have a small
share in overall exports in both countries, or
are homogeneous in nature =>
Development of Armenia-Turkey trade will not
have a very strong diversion effect on
Georgian exports to Turkey.
Iran, and the Gulf States
Opening the border with Turkey will allow
shortening of travel distances to
 Iran (to Tabriz, by road)
 Syria (to Aleppo, by road and rail)
 Lebanon (to Beirut, by road and rail)
 further to the south.
Railroad from Gyumri will allow convenient
access to Greece (Thessaloniki) and other
European counties.
Russia?
Trade benefits from open border would be
magnified if road and rail transits through
Abkhazia were also restored.
Estimating Changes
in Regional Trade Pattern
To assess potential trade flows between
Armenia and Turkey a gravity model is
developed and estimated. Model features:
 Countries: transition countries, developed
European countries, Turkey, and Israel
 Estimation: data for 1999 are used to
estimate the model, data for 2004 are used to
predict potential trade flows between Armenia
and Turkey.
Results:
TE Imports from Europe and Turkey
Variable
Log GDP Exporter
Log GDP Importer
Log GDP per capita Exporter
Log GDP per Capita Importer
Log HDI Exporter
Log Land/labor Exporter
Log distance
Log markers and trade Index
Common Border
Free Trade Agreement
Caucasus
Asian Republics of the FSU
Baltic States
South-Eastern Europe
Central-Eastern Europe
Constant
R-squared
Estimate
1.15
1.03
0.19
-0.07
1.09
-0.31
-1.56
0.10
0.41
0.67
0.72
-0.19
1.09
0.76
0.21
-36.57
St.Error
0.06
0.07
0.68
0.19
4.82
0.08
0.15
0.46
0.21
0.22
0.25
0.28
0.30
0.27
0.29
8.32
0.8150
Results:
TE Exports to Europe and Turkey
Variable
Log GDP Exporter
Log GDP Importer
Log GDP per capita Exporter
Log GDP per Capita Importer
Log HDI Exporter
Log Land/labor Exporter
Log distance
Log markers and trade Index
Common Border
Free Trade Agreement
Caucasus
Asian Republics of the FSU
Baltic States
South-Eastern Europe
Central-Eastern Europe
Constant
R-squared
Estimate
1.21
1.25
-2.08
-0.41
21.29
0.36
-1.26
-0.17
0.32
1.51
-1.72
-1.15
0.31
0.06
-0.23
-14.78
St.Error
0.12
0.07
1.18
0.27
10.53
0.22
0.17
0.60
0.27
0.23
0.65
0.47
0.50
0.43
0.43
15.26
0.7512
Estimating Changes in Regional
Trade Pattern
Our model explains 75-80% of total variation in
trade for sample countries. Most of the
coefficient estimates are highly significant and
are in line with expectations.
To check the robustness of our results we
estimate Armenia-Turkey trade volumes for
2004 and compare them with actual data:
Estimated
Imports from Turkey $33,887,690
Exports to Turkey
$3,918,173
Actual
$37,498,051
$1,200,233
Results: Open Border Effect
After obtaining gravity model estimates we
calculate the increase in trade that will result
from border opening
 estimated volume of Armenian imports from
Turkey is $51,041,170, some 50% higher
than with closed border
 estimated volume of Armenian exports to
Turkey is $5,404,574 which corresponds to
38% increase in exports
Results: Reduced Distance Effect
If we adjust distance as well to reflect shorter
travel time increase in trade volume is likely
to be even higher:
 each 10% of reduction in distance will lead to
15.6% increase in imports from Turkey
 each 10% of reduction in distance will lead to
12.6% increase in exports to Turkey
Results: GDP Growth
Our estimates are for 2004 levels of GDP and
GDP per capita. However, due to
1.
2.
High rates of GDP growth in Armenia
Turkey’s emphasis on increasing GDP
we are likely to observe a further expansion in
Armenia-Turkey trade relations.
GDP growth rates in 2005 were 5.6% in Turkey
and 13.9% in Armenia. This would increase
our exports estimates to Turkey by 23.8%
($1.3 mln.), while imports from Turkey would
be 20.8% higher ($14 mln.)
Results
In addition, we should take into consideration
the fact that with open border there will be
railroad connection between Armenia and
Turkey, which is not reflected in our model.
Hence, there is another important factor that
will influence trade volumes between our two
countries.