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ISET Economist Blog

A blog about economics in the South Caucasus.

Trade with, or Build Walls Around, Frozen Conflict Areas? That is The Question!

With Russia creating or helping sustain so many “frozen conflicts” on its periphery, it is crucially important for countries and nations finding themselves in this predicament to work a sound strategy of dealing with the situation. The military option has been taken off the table ever since the August 2008 attempt by Georgia to forcefully bring South Ossetia back into its fold. Thus, countries such as Moldova, Georgia and now also Ukraine, don’t have too many good alternatives to choose from. One possibility is to isolate and punish in the hope of eroding political support behind the “criminal regimes” of the seceding regions. Another (yet to be tried in most cases) is to win the hearts and minds of former compatriots, be it Abkhazians and South Ossetians, or the Russian-speaking Ukrainians and Moldovans in Crimea, Donbass and Transdniestria.

At least in the short-run, the psychological difficulty of forgiving and forgetting is, of course, pushing nations towards embracing the “isolation” and “punishment” scenario. For instance, just a few days ago, some media quoted President Poroshenko’s advisor Yuri Lutsenko arguing that “the areas of Lugandon [Kyiv’s derogatory shorthand for the self-proclaimed Lugansk and Donetsk republics] have to be isolated and taken under control, for instance, with the help of engineering structures… we should invite them to compete not only in weapons but also in our lifestyles".

While perhaps music to voters’ ears, just how effective is such a strategy in managing “frozen conflicts”?


LEARNING FROM THE GEORGIAN EXPERIENCE

With two frozen conflicts on its hands for over 20 years, Georgia’s rather diverse experience in handling Abkhazia and South Ossetia secessions carries useful lessons for anybody willing to learn, Georgia itself included...

The Sochi ceasefire agreement signed on 24 June 1992 by Shevardnadze and the South Ossetian government included obligations not only to avoid the use of force, but also a pledge by Georgia not to impose sanctions against South Ossetia. The Georgian government retained control over substantial portions of South Ossetia, including the town of Akhalgori, and Georgian troops participated in a joint peacekeeping force along with Russian and Ossetian units. The peacekeeping operation was monitored by the Organization for Security and Cooperation in Europe (OSCE), creating the conditions for “security and cooperation” to, indeed, prevail until 2004.

Highlighted in a 2014 documentary ‘’Divided”, the complicated relationship between Georgia and South Ossetia during this period included a very interesting social and economic bridge over the new border: the Ergneti market. The market sprawled over 50 ha, with roughly half of its territory on the Georgian side and the other in South Ossetia. Functioning as a de facto “free economic zone”, Ergneti served as a convenient hub for North-South Caucasus trade, a place where Russian, Georgian and Ossetian traders could exchange fuel, alcohol, cigarettes and agricultural products without any government paperwork, taxes or custom duties.

 

Existing outside any formal legal and political framework, Ergneti was nothing like the economics textbook “market” in which “faceless buyers and sellers meet… for an instant to exchange standardized goods at equilibrium prices” (Yoram Ben-Porath). Instead, Ergneti was a market in which transactions were frequently repeated and hence very personal. Any differences were ironed out on the basis of an informal but very powerful code of ethics.

Thus, though widely recognized to be the smugglers’ paradise (one of many “black holes” in the Georgian economy prior to 2004), the kind of trust-based, self-regulated environment created in Ergneti inadvertently served the purpose of bringing the two divided people together. A confidence building lab of sorts.

All this came to an abrupt end in summer 2004, when, encouraged by its success in Adjara, Georgia’s new government began a massive anti-smuggling campaign against breakaway South Ossetia with the ultimate goal of returning it under Georgia’s central control. Ergneti was shut down in June 2004. What followed was a series of skirmishes involving Georgian units stationed in South Ossetia, Russian peacekeeping forces, and South Ossetian militias, effectively unfreezing the conflict and turning it into a “problem between Georgia and Russia”, in the words of President Saakashvili. The 2008 Russo-Georgian war over South Ossetia was but a logical final accord in the drama. Until today, that it.


MAKE TRADE NOT WAR

Interestingly, Ergneti market became a subject of political debate in the course of Georgia’s 2012 parliamentary elections, which ended an era of exuberant liberal reforms and cavalier unification efforts. When campaigning in Gori, only 34km away from South Ossetia’s administrative center Tskhinvali, Bidzina Ivanishvili used Ergneti’s example to drive home his argument that “business and common interests link people to each other”. Reflecting this line of reasoning, the idea of restoring the market in some sort of civilized form – as a “free economic zone” – has been on the Georgian government’s agenda since 2012. Similar plans are being developed with respect to Abkhazia (apparently they are to be soon unveiled by the Partnership Fund).

The change in tone and policies towards the breakaway Abkhazia is evident in another very significant speech made by Bidzina Ivanisvhili on the 2012 campaign trail. This time, his focus was on restoring the railway and highway connection from Georgia to Abkhazia and, through it, to Russia – connecting markets, fostering Georgia’s economic development and giving “Abkhaz businessmen the possibility to develop their businesses and encourage their participation in Georgia’s economy.” While yet to be realized, Mr. Ivanishvili’s pragmatic vision of using mutual economic interests in order to bridge over ethnic divides and overcome the trauma of recent bloodshed, is worthy of the highest praise.

Indeed, walls, barbed wire and other “engineering structures”, as perhaps envisaged by Yuri Lutsenko, are a terrible anachronism, contradicting the logic of economic integration, free movement of goods, people and ideas. And as Georgia’s experience demonstrates, they are totally counterproductive as far as the goal of bringing people together is concerned. The temptation to engage in isolationism – as a means of scoring political points and punish people on both sides of new artificial divides should be resisted by all means. As Europe’s inspiring example shows, the 21st century is a time to make trade, not war, connect rather than divide.

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Guest - sjapiashvili on Monday, 15 September 2014 21:07

I agree that Economic incentives might be very important for the dialogue to start, but "the isolation politics" has gone so far by now that it's extremely difficult to imagine the way back. Particularly, I mean the strategy of Europe and responding Russian reaction of banning products. Or maybe the linkage positive effect works only in case of small conflict zones, locally and the national strategy should remain "punishing". It's so difficult to choose a "wise" strategy with Russia that will keep a country safe and will also "melt the frozen conflicts".

Also... do you think some measures could be taken in order to achieve more intensive cultural dialogue between the citizens? Some kind of campaign that will allow people speak a common language (not meaning a particular language)? I guess, looking at Ukraine, Georgia should seriously work on a plan that will allow us remain peaceful AND independent.

I agree that Economic incentives might be very important for the dialogue to start, but "the isolation politics" has gone so far by now that it's extremely difficult to imagine the way back. Particularly, I mean the strategy of Europe and responding Russian reaction of banning products. Or maybe the linkage positive effect works only in case of small conflict zones, locally and the national strategy should remain "punishing". It's so difficult to choose a "wise" strategy with Russia that will keep a country safe and will also "melt the frozen conflicts". Also... do you think some measures could be taken in order to achieve more intensive cultural dialogue between the citizens? Some kind of campaign that will allow people speak a common language (not meaning a particular language)? I guess, looking at Ukraine, Georgia should seriously work on a plan that will allow us remain peaceful AND independent.
Guest - Eric Livny on Tuesday, 16 September 2014 21:28

Dear Salome, thanks for your comment - you are right, we have gone very far in isolationism and it would take years before we are able to unwind the negative energies and hatred that have been accumulated on both sides of the artificial barriers and physical walls now dividing former brothers.

But, a journey of a thousand miles begins with a single step. And this single step is to be made in young people's minds, in the minds of those who have not personally experienced the violence of separation. Those who are able to put the conflict behind and focus on the future gains from renewed collaboration, trade and integration.

Reading your comment, I think you have already made this step yourself, and I hope you would be followed by many others...

I was very happy to read Bidzina's statements regarding Abkhazia and South Ossetia from two years ago. I don't know why this particular part of his vision was not realized in full or not at all. I think this is relatively easy to achieve. It would not require major investment. There are of course internal political constraints (older people not willing to forgive and forget, as well as many others, ignorant and brainwashed by many years of negative propaganda). So, you are right, there is a need for a public campaign and true leadership.

Dear Salome, thanks for your comment - you are right, we have gone very far in isolationism and it would take years before we are able to unwind the negative energies and hatred that have been accumulated on both sides of the artificial barriers and physical walls now dividing former brothers. But, a journey of a thousand miles begins with a single step. And this single step is to be made in young people's minds, in the minds of those who have not personally experienced the violence of separation. Those who are able to put the conflict behind and focus on the future gains from renewed collaboration, trade and integration. Reading your comment, I think you have already made this step yourself, and I hope you would be followed by many others... I was very happy to read Bidzina's statements regarding Abkhazia and South Ossetia from two years ago. I don't know why this particular part of his vision was not realized in full or not at all. I think this is relatively easy to achieve. It would not require major investment. There are of course internal political constraints (older people not willing to forgive and forget, as well as many others, ignorant and brainwashed by many years of negative propaganda). So, you are right, there is a need for a public campaign and true leadership.
Guest - Y on Tuesday, 16 September 2014 15:10

While I understand the point of the article, one should perhaps consider more carefully the context of Mr. Lutsenko's words, before making an example of bad policy out of them (by the way, I couldn't find the transcript of the program the article is referencing, so it is hard to judge what was actually said).

For one thing, consider that there is an ACTIVE conflict in the Donbas region of Ukraine. This means, the Russian military and terrorist forces are not in the business of wanting to set up a "Lilo market" near the Donetsk airport. The business of people who are now in control there is to deliberately destabilize the situation and attempt to gain control over other parts of Ukraine well. While fostering trade ties with the occupied territories may be a good policy idea, it will not be effective in stopping current Grad rocket shelling and infiltration of "green men" into other parts of the country.

The article would benefit from a much more apt comparison with the trade situation in the Crimea. This is indeed a "frozen conflict", although very little fighting actually took place. Here I think Ukrainian government shows that it understands very well the benefits of the "long-term strategy”. The Ukrainian government policies towards the occupied territory of the Crimea are in my opinion more than reasonable.

For instance, no trade restrictions with the Crimea exist from the Ukrainian side (only from the Russian side). Also, residents of the Crimea, holders of Ukrainian passports, have full rights of Ukrainian citizens in the mainland Ukraine. The checkpoints and restrictions on the “border” are necessary only insofar they prevent the infiltration of the Russian military forces into the mainland Ukraine.

As far as the Ergneti example - I don't have much information, but I think it is one thing to try to prevent the smuggling of alcohol or cigarettes (probably not such a good idea, considering the circumstances), and quite another - the smuggling of drugs or weapons. One has to be careful in passing the judgment here as well...

While I understand the point of the article, one should perhaps consider more carefully the context of Mr. Lutsenko's words, before making an example of bad policy out of them (by the way, I couldn't find the transcript of the program the article is referencing, so it is hard to judge what was actually said). For one thing, consider that there is an ACTIVE conflict in the Donbas region of Ukraine. This means, the Russian military and terrorist forces are not in the business of wanting to set up a "Lilo market" near the Donetsk airport. The business of people who are now in control there is to deliberately destabilize the situation and attempt to gain control over other parts of Ukraine well. While fostering trade ties with the occupied territories may be a good policy idea, it will not be effective in stopping current Grad rocket shelling and infiltration of "green men" into other parts of the country. The article would benefit from a much more apt comparison with the trade situation in the Crimea. This is indeed a "frozen conflict", although very little fighting actually took place. Here I think Ukrainian government shows that it understands very well the benefits of the "long-term strategy”. The Ukrainian government policies towards the occupied territory of the Crimea are in my opinion more than reasonable. For instance, no trade restrictions with the Crimea exist from the Ukrainian side (only from the Russian side). Also, residents of the Crimea, holders of Ukrainian passports, have full rights of Ukrainian citizens in the mainland Ukraine. The checkpoints and restrictions on the “border” are necessary only insofar they prevent the infiltration of the Russian military forces into the mainland Ukraine. As far as the Ergneti example - I don't have much information, but I think it is one thing to try to prevent the smuggling of alcohol or cigarettes (probably not such a good idea, considering the circumstances), and quite another - the smuggling of drugs or weapons. One has to be careful in passing the judgment here as well...
Guest - Eric Livny on Tuesday, 16 September 2014 16:38

Our point was NOT to criticize Ukraine's SHORT-TERM response to the crisis. As long as active fighting continues who would even think of trade (or cultural) ties. But a few years into the future, the policy dilemma discussed in the article will necessarily arise. I hope that by then people will come back to their senses and the type of views ascribed to Lutsenko will be marginalized. The Crimean precedent bodes well in this regard.

It is my hope that in the next 10-15 years, the whole region would go through a process of voluntary economic integration, erasing those very borders and artificial barriers that are being erected as we speak... It would be to everybody's advantage...

Our point was NOT to criticize Ukraine's SHORT-TERM response to the crisis. As long as active fighting continues who would even think of trade (or cultural) ties. But a few years into the future, the policy dilemma discussed in the article will necessarily arise. I hope that by then people will come back to their senses and the type of views ascribed to Lutsenko will be marginalized. The Crimean precedent bodes well in this regard. It is my hope that in the next 10-15 years, the whole region would go through a process of voluntary economic integration, erasing those very borders and artificial barriers that are being erected as we speak... It would be to everybody's advantage...
Guest - M on Tuesday, 16 September 2014 19:00

Worth pointing out that the link between economic integration and peace is contested, uncertain, tenuous. Certainly no more Golden Arches theory after the Yugoslavia war. In particular, if the gains of trade/economic integration are asymmetric trade/economic integration might increase not decrease the likelihood of conflict.

Worth pointing out that the link between economic integration and peace is contested, uncertain, tenuous. Certainly no more Golden Arches theory after the Yugoslavia war. In particular, if the gains of trade/economic integration are asymmetric trade/economic integration might increase not decrease the likelihood of conflict.
Guest - Eric Livny on Tuesday, 16 September 2014 21:15

I wish to thank M for his remark.

Yes, indeed, economic integration does not automatically translate into peace and tranquility. In fact, every case of a CIVIL war is a case of an economically and otherwise fully-integrated single entity "going crazy" because of some underlying religious, ethnic and/or economic issue. A perception of unequal gains from trade ("exploitation" of one group by the other) could also be a major cause of civil war and rebellion. The Boston tea party, US War of Independence, and the US Civil War are excellent examples of rebellions fueled by the desire to disintegrate economically (and not to pay taxes to the metropolis). Former Yugoslavia or former USSR republic are just the most recent examples.

Likewise, if we look at separate nation states - the SAME models that explain the incidence and intensity of TRADE (such as gravity models which explain trade by distance, common border, common language and religion, among other factors) would explain the incidence or intensity and frequency of WAR. After all, we mostly fight our neighbors (and, still worse, our brothers) with whom we share everything (including common ancestors) and with whom we are "economically integrated" (when not engaged in fratricidal wars). German principalities have been probably fighting each other much more than anybody else before being united by Bismark and jointly taking on France in 1870.

Finally, and unfortunately, what is true for human societies is also true for individuals. A quick look at homicide statistics in any nation would reveal that by far the largest share of murders happen within the family. Starting with Cain and Abel.

Is any of this an argument for isolationist policies towards former brothers? No, a thousand times no.

I wish to thank M for his remark. Yes, indeed, economic integration does not automatically translate into peace and tranquility. In fact, every case of a CIVIL war is a case of an economically and otherwise fully-integrated single entity "going crazy" because of some underlying religious, ethnic and/or economic issue. A perception of unequal gains from trade ("exploitation" of one group by the other) could also be a major cause of civil war and rebellion. The Boston tea party, US War of Independence, and the US Civil War are excellent examples of rebellions fueled by the desire to disintegrate economically (and not to pay taxes to the metropolis). Former Yugoslavia or former USSR republic are just the most recent examples. Likewise, if we look at separate nation states - the SAME models that explain the incidence and intensity of TRADE (such as gravity models which explain trade by distance, common border, common language and religion, among other factors) would explain the incidence or intensity and frequency of WAR. After all, we mostly fight our neighbors (and, still worse, our brothers) with whom we share everything (including common ancestors) and with whom we are "economically integrated" (when not engaged in fratricidal wars). German principalities have been probably fighting each other much more than anybody else before being united by Bismark and jointly taking on France in 1870. Finally, and unfortunately, what is true for human societies is also true for individuals. A quick look at homicide statistics in any nation would reveal that by far the largest share of murders happen within the family. Starting with Cain and Abel. Is any of this an argument for isolationist policies towards former brothers? No, a thousand times no.
Guest - Toghrul Novruzlu (@T_Novruzlu) on Tuesday, 16 September 2014 19:09

Certainly, an interesting standpoint definitely worthwhile deeming seriously. Unfortunately and suprisingly, the set of the aforementioned conflicts has been compiled selectively with the exclusion of the Nagorno-Karabakh(NK) conflict between Azerbaijan and Armenia. Having flared up on the same grounds as the abovementioned conflicts and predating and surpassing them with its scope of devastation, casualties, the NK conflict can also finally move towards its long-postponed rendezvous with its resolution with the revitalization of the trade between people of the war-torn states. Pertinent to this would be the mention of the Sadakhlo Bazar, again unfortunately left out by the authors, which by bringing together Armenians, Azerbaijanis to trade also created a chance for the recovery of the frayed mutual confidence between the citizens of the countries at war. To the chagrin of many, this market was also closed eliminating another example of the remarkable contribution the trade can make to the resolution of the conflicts and particularly, to the one between Azerbaijan and Armenia, saddled with the acute deficit of the mutual confidence, which can transform the current status quo into a renewed full-fledged war. Hopefully, such examples will again be put into practice.

Certainly, an interesting standpoint definitely worthwhile deeming seriously. Unfortunately and suprisingly, the set of the aforementioned conflicts has been compiled selectively with the exclusion of the Nagorno-Karabakh(NK) conflict between Azerbaijan and Armenia. Having flared up on the same grounds as the abovementioned conflicts and predating and surpassing them with its scope of devastation, casualties, the NK conflict can also finally move towards its long-postponed rendezvous with its resolution with the revitalization of the trade between people of the war-torn states. Pertinent to this would be the mention of the Sadakhlo Bazar, again unfortunately left out by the authors, which by bringing together Armenians, Azerbaijanis to trade also created a chance for the recovery of the frayed mutual confidence between the citizens of the countries at war. To the chagrin of many, this market was also closed eliminating another example of the remarkable contribution the trade can make to the resolution of the conflicts and particularly, to the one between Azerbaijan and Armenia, saddled with the acute deficit of the mutual confidence, which can transform the current status quo into a renewed full-fledged war. Hopefully, such examples will again be put into practice.
Guest - Eric Livny on Wednesday, 17 September 2014 12:29

Dear Toghrul, many thanks for you comments and sympathy to our main ideas. You are right, we chose not to write about NK and the Azeri-Armenian conflict because of its slightly different configuration. In any case, I fully concur with your view that this conflict also deserves to be put behind, resulting in trade and cooperation between all nations and communities involved. In fact, one could apply exactly the same logic to the entire framework of regional inter-relations and inter-dependencies. Why not open the Armenian-Turkish border?

Dear Toghrul, many thanks for you comments and sympathy to our main ideas. You are right, we chose not to write about NK and the Azeri-Armenian conflict because of its slightly different configuration. In any case, I fully concur with your view that this conflict also deserves to be put behind, resulting in trade and cooperation between all nations and communities involved. In fact, one could apply exactly the same logic to the entire framework of regional inter-relations and inter-dependencies. Why not open the Armenian-Turkish border?
Guest - RT on Tuesday, 16 September 2014 20:42

Maka, it is a great topic, and I was puzzled there were no comments so far, glad to see the discussion starting. Like I said, it is a great topic, but I felt the blog was thin on arguments and/or historical examples.

Would Cyprus story be relevant? Even though the two parts did not reach an agreement on reunification, there was a major change in reasons that did not happen. While Turkish Cypriots used to object to it until 2004, they changed their collective mind because of benefits expected from integration of Cyprus into the EU.

Another possible example could be Northern Ireland. The relationship betwen Ulster and the UK on the one hand and the Irish republic on the other is currently at 'an all time high' according to the leadership of the two countries in spite of a rather bloody recent history.

Going back to Ergneti, I believe one of the reasons why it was shut down was [a belief] that the leadership of South Ossetia, rather than the population of the region, was mostly benefiting from its functioning. If that is indeed the case, do you think it weakens your argument?

Finally, I fully agree with Y. I would like to agree with Eric, being a proponent of free trade and cross-broder economic cooperation, but there are quite a few examples of developing but politically not very mature countries attempting some sort of regional integration. Those do not go very far for reasons, which are not irrelevant in our region. I would expect the same outcome.

Maka, it is a great topic, and I was puzzled there were no comments so far, glad to see the discussion starting. Like I said, it is a great topic, but I felt the blog was thin on arguments and/or historical examples. Would Cyprus story be relevant? Even though the two parts did not reach an agreement on reunification, there was a major change in reasons that did not happen. While Turkish Cypriots used to object to it until 2004, they changed their collective mind because of benefits expected from integration of Cyprus into the EU. Another possible example could be Northern Ireland. The relationship betwen Ulster and the UK on the one hand and the Irish republic on the other is currently at 'an all time high' according to the leadership of the two countries in spite of a rather bloody recent history. Going back to Ergneti, I believe one of the reasons why it was shut down was [a belief] that the leadership of South Ossetia, rather than the population of the region, was mostly benefiting from its functioning. If that is indeed the case, do you think it weakens your argument? Finally, I fully agree with Y. I would like to agree with Eric, being a proponent of free trade and cross-broder economic cooperation, but there are quite a few examples of developing but politically not very mature countries attempting some sort of regional integration. Those do not go very far for reasons, which are not irrelevant in our region. I would expect the same outcome.
Guest - RT on Tuesday, 16 September 2014 20:43

P.S. And where can we see the Divided in full?

P.S. And where can we see the Divided in full?
Guest - Florian Biermann on Tuesday, 16 September 2014 20:52

I fully agree that if Georgia wants to have these regions back, it should not choose a strategy of confrontation, but a strategy of communication and friendly integration. A big part of that is economics. On the other hand, if I was the Georgian government, with the plethora of problems lurking at home, I would be glad not to have to govern these corrupt and economically backward regions full of secessionists. I would wait for South Ossetia and Abkhazia to knock at Georgia's door and kindly ask for entry ... and if they do not do that, so be it.

I fully agree that if Georgia wants to have these regions back, it should not choose a strategy of confrontation, but a strategy of communication and friendly integration. A big part of that is economics. On the other hand, if I was the Georgian government, with the plethora of problems lurking at home, I would be glad not to have to govern these corrupt and economically backward regions full of secessionists. I would wait for South Ossetia and Abkhazia to knock at Georgia's door and kindly ask for entry ... and if they do not do that, so be it.
Guest - Eric Livny on Tuesday, 16 September 2014 21:30

Florian, what undermines the prospect of "communication and friendly integration" is this very insistence of "having these regions" back. The focus should not be on getting something back but on communication and friendly integration.

Florian, what undermines the prospect of "communication and friendly integration" is this very insistence of "having these regions" back. The focus should not be on getting something back but on communication and friendly integration.
Guest - makachitanava on Wednesday, 17 September 2014 15:11

Robert,

Thank you for you comments and for those examples. You are right, we could have incorporated them in the blog. You can watch full movie on youtube: http://www.youtube.com/watch?v=Dbd5Vdbe_AY

I do not think that the belief that money benefits were mostly going to the leadership of the Ossetia, is weakening my argument. One has to compare those money benefits to all other social benefits associated with interaction, cooperation and increased trust levels of the two ethnic groups.

Robert, Thank you for you comments and for those examples. You are right, we could have incorporated them in the blog. You can watch full movie on youtube: http://www.youtube.com/watch?v=Dbd5Vdbe_AY I do not think that the belief that money benefits were mostly going to the leadership of the Ossetia, is weakening my argument. One has to compare those money benefits to all other social benefits associated with interaction, cooperation and increased trust levels of the two ethnic groups.
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