Micro-credit And Its Effect On Developing Economies

Micro-credit or micro-finance refers to nothing but small or micro loans lent to the poorer section of the society. The amount can either be given to individuals or a group of people to help them fund any sort of a business. Micro-credit is a way of providing very poor people with the required amount of capital to get self-employed. It is expected to alleviate poverty. Another of its principle is to lend to women because conventional loans don’t always reach them. Impoverished and illiterate women are often unable to do the required paperwork for the traditional loans which is why microcredit is considered ideal for them.

The Beginnings of Micro-Finance

In developed nations such as the US and UK, even the lower-income individuals have capability to borrow money at reasonable rates, and it can be considered good credit, as long as they don’t default or otherwise languish in debt.  However in poorer nations with essentially destitute populations, this is not the case.  There was no finance system to speak of for the very poor.

The present concept of Microcredit is said to have first developed with Grameen Bank, a modern micro-finance institution in Bangladesh in the year 1983. Muhammad Yunus, the founder of Grameen Bank started this project in a town, Jobra lending his own money to the locals there. He later won the Nobel Peace Prize for his work in this field in 2006. The year 2005 was declared the International Year of Microcredit by the United Nations.

According to available data, 38 billion US Dollars are held by around 74 million people as micro-loans as of 2009. And Grameen Bank reports that the success rates of repayment lie between 95 to 98 percent.

Impact of Micro-Finance Systems

The arguments put forward with regards the impact of the micro-credit system on developing economies are rather controversial. Proponents of the idea state that this system does reduce poverty by increasing incomes and employment. And in the process results in better health and education conditions of the entire community involved. They say it also leads to female empowerment, one of its chief goals. On the other hand, the opponents argue that the micro-finance system has led the poor people into a vicious debt cycle. The money lent is often used up in buying personal durable goods instead of proper business investment.

Microfinance in South Sudan
In South Sudan, micro-financing has helped spur businesses such as this one.

It’s well known that micro-finance did indeed generate employment and new business. However, it did not necessarily increase the wages of the people after paying the interests, as claimed by the proponents. Neither did it have such negative effects as stated by the opponents. The micro-loan system has often been directed towards women for their upliftment. But, based on two rigorous research work carried out in India and Manila, the micro-credit system has been found to have no credible effect on women empowerment. While this system has evidently led to more hiring in the US, it has also been blamed for suicides of people driven into debt in Andhra Pradesh (India). However, one major problem is that the micro-finance system is rarely studied objectively. Lack of adequate data or rigorous research or use of improper methodologies often results in data which is not truly representative of the present situation.

Comparing of the Ergonomics Standards in India, US and Developing Countries

Workplace satisfaction is gradually attaining higher levels to be in par with the growing work pressure in the industry. Workplace ergonomics is important to ensure employee productivity, decrease attrition rate and develop better work-life balance of the individuals. Yet each and every design has it’s flaws and we couldn’t go to the extent of actually naming a country or company with the perfect workplace ergonomics. Ergonomics basically means the study of the efficiency of an employee or individual at his or her workplace.

Varies from Country to Country

Every country has it’s own style of work culture and their workplace ergonomics has been tuned accordingly. As for India, the country’s main workforce is into information technology or core sector or service based industry. Combined, they can boast of having a pretty strong workforce. To sustain the productivity of their employees under growing pressure based work culture, Indian companies and start ups are coming up with well meant solutions but whether these policies or facilities actually doing any justice to the cause is a big question. The employee management in India is still largely unorganized and HR policies are often loose with many loop holes.

Organizational Activities

Many large organizations actively promote workplace politics to attain growth and thus decreasing the efficiency level of the employees. After all, who works without rewards? Yet many companies in India are coming up with solutions like mandatory health insurance policies, paid leaves, ergonomic office chairs and other equipment for computer workers, appraisals and paid vacations and also basic facilities like complementary meal during the office hours, conveyance etc. This is gradually increasing the job satisfaction level among Indian employees. But this needs to be promoted effectively to actually achieve large scale results and in turn build a highly efficient workforce in India. Another sector that India could do better in is better salary standards.

The average Indian salaries for various roles are much lesser compared to their foreign counterparts yet the work load is almost same or often more. An individual can only work happily if he/she receives adequate returns/rewards for their good work and the salary drawn by most are not enough to reach the satisfaction levels of most.

U.S. Standards

The ergonomics standards in the United States is an altogether different story. Though certain events in history point otherwise, the US have always promoted high ergonomic standards to ensure best possible workforce efficiency and have built a reputation in the same along with a few other countries like Japan, Germany etc. Work-life balance and workplace satisfaction are two of the key aspects that the companies in US religiously invest to attain better satisfaction level among their employees. Fun is an important aspect in their work curriculum and to ensure effectiveness most US companies are extensively investing into entertainment resources for their work places. Ensuring good compensation by the companies also ensures that the employees are always away from their financial jolts and focus on creating more quality work. Many companies go to the extent of providing full family medical coverage, pension and paid vacation as well to create highest levels of work life balance amongst their workforce.


From the accumulated facts and information we can conclude that though having loopholes, the companies are gradually adopting global ergonomic practices to promote employee satisfaction and in turn, build a more stable and efficient workforce.

Discrimination against the Russophone Minority in Estonia and Latvia

Issue Number: 02/2005
Issue Title: Migration and Minorities

Author: James Hughes

Estonia and Latvia have been described as cases of ‘ethnic democracy’, where the state has been captured by the titular ethnic group and then used to promote ‘nationalising’ (see box) policies and discrimination against Russophone minorities. The ‘rationality’ of such policy regimes is often stressed, as exclusivist citizenship and language policies allow the reproduction of power by titular ethnic groups through a near-monopoly of career opportunities in government, public administration, the professions, and the economy – especially through privatisation. In Lithuania, where the titular nationality was an overwhelming majority, a so-called ‘zero-option’ of a civic and inclusive citizenship for all Soviet citizens resident in the state was implemented. In contrast, in Estonia and Latvia where the ethnic balance was much closer, and the perception of threat for the titular nationalists was much greater, citizenship was reconstructed along ethno-national lines.

The Russophones of Estonia and Latvia are one of the largest minority groups in Europe. Many Russophones have been denied citizenship and are stateless (Table 1 and Table 2). According to EU data, just prior to the enlargement of May 2004 over 523,00 (22.4 per cent) of the 2.34 million population of Latvia were stateless, and in Estonia the corresponding figure was 172,000 (12.5 per cent) of a population of 1.37 million (EU, 2002). While many Russophones migrated to Estonia and Latvia in the decade after 1945, in Latvia in particular there is a much longer settled Russophone population. While the Soviet-era migration was planned and reflected a different systemic logic, migrants were attracted by the better than average socio-economic conditions in Estonia and Latvia, and the cultural proximity to Europe. Significant numbers of Russophones also originated as pensioners from the Soviet military.

What is a ‘nationalising’ state?

The term ‘nationalising’ state, as coined by Brubaker, means ‘a state of and for a particular ethnocultural ‘core nation’ whose language, culture, demographic position, economic welfare, and political hegemony must be protected and promoted by the state’ (Brubaker, 1996, 105).

Sophisticated and extensive policy regimes of discrimination have been established in both states based on restrictions under three policy pillars – citizenship, language, and participation. These policies are constrained only by economic dependence on Russophone labour, and international criticism. Such ethnic privileging and discrimination must be understood in the context of two important factors. Firstly, both titular ethnic groups experienced a half century of Soviet repression and occupation. Secondly, the influx of large numbers of Russophone migrants in the first decades of occupation, partly as an attempt to ‘sovietise’ Estonia and Latvia, dramatically shifted the ethnic balance. By the time of independence in 1991, and despite widespread Russophone support for independence, the political mood among the titular ethnic groups was dominated by nationalists who were against a Lithuanian-style ‘zero option’, as such a policy, assuming an ethnification of politics, would have meant that ethnic Estonian and Latvian elites would have been compelled to share decision-making on the political, economic and nation-building aspects of transition with Russophones. In effect, the policies of discrimination were a kind of collective punishment, as the Russophone minority was blamed and mistrusted because of Soviet policies.

Who are the ‘Russophones’?
The term ‘Russophone’ is often erroneously used interchangeably with the term ‘ethnic Russian’. Here ‘Russophone’ denotes all those citizens and residents (permanent and temporary) in Estonia and Latvia whose primary language is Russian (including Russians, Belorussians, Ukrainians, Jews and others). It does not refer to members of titular ethnic groups who are bilingual or other

Some categories of Russophones were forced to out-migrate in the first half of the 1990s, for example, serving Soviet military personnel and their families, former KGB employees, and those classified as politically undesirable. Recent official data for Latvia for the period 1991-5 estimates this migration at over 168,000 (Central Statistical Bureau of Latvia, 2005). The bulk of the Russophones in both states were compelled to overcome complex legal, bureaucratic, financial, and linguistic hurdles to obtain citizenship.

These policies have fragmented the Russophones into three main sub-groups: i. citizens, ii. permanent residents, and iii. temporary residents. The latter two categories, de facto, are an imposed condition of statelessness if persons have not been granted the citizenship of a third country, such as the Russian Federation. One of the resulting ironies of the discrimination was that in the elections to the European Parliament in June 2004 hundreds of thousands of long-term Russophone residents were disenfranchised, while recently arrived foreigners who were EU citizens were allowed to vote.

Non-citizens cannot form political parties, run for political office or vote in national elections, vote in local elections (Latvia), and rights to free movement, employment and private property are limited. The right to use minority languages in private and public, in education, business and the mass media is controlled by law. The legal framework for discrimination is most developed in Latvia, where there are more than 33 separate categories of employment barred for non-citizens, and numerous restrictions on their rights. Burgeoning state agencies have been created to manage the citizenship and cultural policies, for example the Estonian Citizenship and Migration Board and the Latvian Naturalisation Board, and language inspectorates. There is a tension within such agencies between the demands of nationalist political elites for the control of Russophones, and pressures from international organisations such as the OSCE and EU (in the latter 1990s), for their inclusion.

Two main explanations are often advanced in discussions of the nationalising policies in Estonia and Latvia: the continuity thesis and the conditionality thesis. The continuity thesis stresses the international acceptance of the restorative character of the states of Estonia and Latvia. Estonia promulgated a new constitution in 1992, and restored its 1938 law on citizenship (as amended in 1940), thus restricting citizenship to those citizens, and their descendants, of the pre-1940 period. In Latvia, the 1922 constitution and 1919 citizenship law (as amended in 1927), were reinstated more gradually and in an amended form. The ‘legal’ basis for the ‘restored citizenship’, which effectively limited citizenship to those who had been citizens of pre-1940 Latvia and their descendants, came in an ‘extra-constitutional’ act when in October 1991 the Supreme Council adopted the Resolution on the Renewal of the Body of Citizens of the Republic of Latvia and the Main Principles of Naturalisation. The so-called ‘Citizenship law’, which permitted Naturalisation, was adopted only in July 1994 and entered into force in February 1995.

Thus, a person born in, for example, Toronto to a Latvian or Estonian parent who had the right to citizenship under the pre-1940 criteria could claim citizenship, whereas a person born in Tallinn or Riga who did not meet the pre-1940 criteria, could not claim citizenship. Nationalist governments in Estonia and Latvia justified their refusal to widen citizenship to the Russophone ‘settler colonists’ by their lack of obligation under international law. However, international recognition of ‘continuity’ came in late 1991, before the discriminatory policies were evident, and at a time when the international community was promoting a ‘group’ rights norm for minority protection in line with the paradigm developed by the Paris Charter (1990) and the Badinter Commission (1991-2) for dealing with conflict in the Yugoslav successor states. International expectations of inclusive politics in Estonia and Latvia were not met.

The second approach stresses the role of international conditionality in forcing Estonia and Latvia to soften the policies of discrimination. The need for democratic states to guarantee human rights and protect the rights of minority groups was encapsulated in the EU’s conditions for new members established by the June 1993

Copenhagen Council (the ‘Copenhagen criteria’). Unfortunately, this approach suffers from the absence of an agreed legal, or indeed conceptual, definition of what
constitutes a national ‘minority’ (see Sasse in this issue). The EU’s annual reports on accession countries demonstrated that the political concepts and standards prescribed by the Copenhagen criteria were not easily benchmarked or readily translatable into recommendations for ‘implementation’. The reports were also often inconsistent and contradictory.
Funding is a robust measure of how committed a government is to a given policy. In Estonia and Latvia the use of public funds to promote integration and language training is minimal – currently less than one euro per Russophone per annum, and the bulk of the funds are paid by the EU. Moreover, current rates of Naturalisation, despite the easing of restrictive practices as a result of OSCE and EU pressure, remain very low. In Estonia, where laws and procedures for Naturalisation are by far much easier than in Latvia, at current rates the process will take two generations (sixty years) to complete. In Latvia, where modifications to the citizenship law to remove Naturalisation ‘windows’ (i.e. quotas) were approved by a narrow margin in a referendum in October 1998, the process will take at least thirty years.

Since the late 1990s, citizenship restrictions have been diluted in both countries. nationalising projects have therefore focussed more on cultural hegemony, and in particular on promoting the titular ethnic groups’ language as the only ‘official’ languages and controlling the use of the Russian language (in public and private activities) and in particular in education. The concept of ‘public interest’ was introduced in the Estonian language law of 1995 (as amended in 1999 and 2000), and the Law on the State Language in Latvia, adopted in December 1999. These laws make good knowledge of Estonian and Latvian compulsory in many public sector posts and even privilege their use in private activities. In Estonia, it is legally possible only for municipalities where Russophones account for more than 50 per cent of the local population to make a request to use Russian as a language of public administrative in parallel to Estonian. This compares very unfavourably with the European standard 20 per cent population threshold for minority language use in public administration, a standard that has been institutionalised in many Central European and Balkan states. The Estonian Law on Basic and Upper Secondary Schools, as amended in April 2000, will impose after 2007 a national curriculum on all state secondary schools which will consist of a minimum 60:40 ratio in favour of the Estonian language. The same ratio was established by the Latvian Education Law (as amended in June 1999 and February 2004) for implementation from September 2004. There is ongoing controversy over the extent to which these policies (a) infringe the rights of national minorities, and (b) are viable, even with transitional periods, given the lack of bilingualism among Russophones, and inadequate state funding and infrastructure for language training.

It is generally argued that in the second half of the 1990s international pressure helped bring Estonia and Latvia into compliance with international standards on minority issues. The OSCE Missions (established in both states by the OSCE in October 1993 with a mandate to ‘promote stability, dialogue and understanding between the communities’), and the High Commissioner on National Minorities (HCNM), Max Van der Stoel, in tandem with EU accession conditionality, did bring about speedier and easier Naturalisation processes for non-citizens. The HCNM has popularised the view that its ‘quiet diplomacy’ of ‘behind-the-scenes’ prodding and cajoling was exceptionally successful. Its critics argue that the HCNM’s role was more akin to short-term ‘firefighting’ that sought to moderate citizenship laws, rather than addressing more fundamental problems of discrimination per se. Crucially, ‘quiet diplomacy’ by definition is a non-institutionalised, personalised form of informing policy making. Once actors have moved on, there is little institutional trace.

The closure of the OSCE Missions in both states in December 2001, these countries’ entry into NATO in April 2004, and their accession to the EU in May 2004 could be interpreted as signals from the West to Estonia and Latvia that their respective policies towards the Russophones had passed an international litmus test. Alternatively, it could be argued that Western interests in the accession of both states to EU and NATO trumped concerns about discrimination. The titular nationalist elites in both states saw the ‘long term’ Missions as degrading to their democratic respectability on the international scene. OSCE ‘Guidelines’ for the closure of the missions issued under the Austrian Chair in October 2000, had patently not been satisfied in the case of Latvia, specifically with regard to changes in legal impediments to Russophone political participation. Consequently, the Russian Federation complained about double standards from the OSCE and EU, given the attention that these institutions paid to securing human rights and institutional arrangements for decentralisation and autonomy for minority groups in the Former Yugoslavia (in Bosnia and Herzegovina, Kosovo, and Macedonia).

Table 1
Population of Estonia by Ethnicity and Citizenship, 2000
Nationality Citizens of Estonia Citizens of Russia Citizens of Other Countries Undetermin ed Citizenship Unknown
Total 1095743 86 067 8941 170 349 8952
Estonians 922 204 692 165 4896 2262
Russians 141 907 73 379 1048 133 346 1498
other 29 774 11 581 7560 31 554 267
unknown 1858 415 168 553 4925
Per cent
Estonians 84.2 0.8 1.8 2.9 25.3
Russians 12.9 85.3 11.7 78.3 16.7
other 2.7 13.4 84.6 18.5 3
unknown 0.2 0.5 1.9 0.3 55
Source: Ministry of Foreign Affairs of Estonia, 2002 http://www.vm.ee/estonia/kat_399/pea_172/2868.html

Utility theory and ‘push-pull’ models of migration stress the relative socio-economic conditions of individuals and their expectations. A strong economy, where benefits are distributed across all sections of society, even if unequally, can be expected to make discrimination more bearable than an economy in decline, where the minority is likely to suffer disproportionately. Out-migration also depends on options such as the proximity and openness of other countries. Reliable data on the ethnic aspects of the economy are sparse. A recent World Bank study revealed labour market discrimination against Russophones in Latvia, and biases in their treatment if unemployed and non-citizens (Chase, 2000). It is argued that Russophones accept the costs of discrimination and remain in Estonia and Latvia because of the benefits of the stronger economies relative to the Russian Federation, Belarus and Ukraine. Some argue there is no discrimination at all. Some go further and even argue that Russophones are likely to opt for ‘cumulative assimilation’, whereby they will be transformed into ‘Balts’ (sic!) (Laitin, 1998). This assumes that policies in Estonia and Latvia are designed to promote integration or assimilation, and that the majority and minority are committed to cooperate on this strategy. Currently, the evidence for this assumption is questionable.

Table 2
Residents of Latvia by Nationality on July 1, 2005
Citizens of Latvia Non-citizens Aliens In total
Latvians 1 349 539 2 120 1 033 1 352 692 58.90%
Lithuanians 17 655 12 263 1 571 31 489 1.40%
Estonians 1 522 658 349 2 529 0.10%
Belorussians 28 551 56 829 2 024 87 404 3.80%
Russians 346 746 288 207 21 084 656 037 28.60%
Ukrainians 13 812 40 952 3 813 58 577 2.60%
Poles 40 642 14 885 556 56 083 2.40%
Jews 6 418 2 796 360 9 574 0.40%
Others 21 919 14 159 5 599 41 677 1.80%
In total 1 826 804 432 869 36 389 2 296 062 100,00%
Source: Board for Citizenship and Migration Affairs, Latvia

It is difficult to reconcile claims of successful international conditionality with outcomes that have left some 700,000 persons stateless and without fundamental political and economic rights because of their ethno-linguistic status. Politically, it is very difficult for the EU and international organisations such as the OSCE to openly revisit this issue, as doing so would question their earlier judgements. Current Russophone passivity is due to their alienation and marginalisation from key public policy-making. Comparative experience of deeply divided societies suggests that in conditions where one ethnic group seeks to control another, the oppressed group may seek justice through violence. Severely discontented individuals and groups may simply, as Hirschman argued, ‘exit’ the polity, along a spectrum from withdrawing from participation to out-migration. The paradox of policies towards the Russophone minority in Estonia and Latvia is that for much of the 1990s, the titular ethnic groups sought to promote their ‘exit’, with the result that although policies have now eased in a more integrationist direction, many Russophones have been driven into a self-‘exit’. The right to free movement within the EU, not only for citizens, but also for residents and third country nationals, once the transitional provisions end in 2009 may lead to many of the younger Russophones taking the opportunity to permanently exit, unless their alienation is addressed by policy changes.

James Hughes (j.hughes@lse.ac.uk), Editor of this newsletter, is a Reader in Comparative Politics, specialising in national and ethnic conflicts, at the London School of Economics and Political Science. This paper is a synopsis of an article that will be published in a special issue of the Journal of Common Market Studies (November 2005) on the theme of ‘Migrants and Minorities in Europe’.


Brubaker, R. (1996), Nationalism Reframed. Nationhood and the National Question in the New Europe, (Cambridge: Cambridge University Press).

Central Statistical Bureau of Latvia, 2005

Chase, R.S. (2000), Labour Market Discrimination During Post-Communist Transition: A Monopsony Approach to the Status of Latvia’s Russian Minority, Working Paper, World Bank. http://poverty.worldbank.org/library/region/6/95/

European Commission (2000-2003), Regular Reports on Estonia, 2000-2003; Regular Reports on Latvia, 2000-2003

Laitin, D. (1998), Identity in Formation. The Russian Speaking Populations in the Near Abroad (Ithaca: Cornell University Press).

A number of useful studies of the role of the OSCE in Estonia and Latvia may be found on the European Centre for Minority Issues website http://www.ecmi.de

© Witold Krassowski/Panos Pictures


While deep transformations of economic and political institutions have occurred in many regions, they have usually occurred within the framework of pre-existing nation states. Institutions were recast, but borders were not. By contrast, the post-communist transitions of Europe and Central Asia have come with profound geographic and spatial changes. For most countries in this region, everything changed in the early 1990s—including states and state borders.

The subsequent two decades have underscored the continuing importance of the spatial and geographic dimensions of development, and of the region’s new borders. For countries that joined the European Union, EU accession redefined the spatial dimensions of development and statehood. Border posts (with other EU countries) that were constructed upon the acquisition of statehood in the early 1990s were dismantled with these countries’ accession to the EU’s Schengen zone. Large shares of post-accession EU funding take the form of regional development monies (cohesion funding) which reflect a spatial, rather than sectoral, approach to development. Ethnic communities divided by Europe’s new borders have used Euro-regions and other cross-border cooperation modalities to address the challenges created by these borders. Spatial issues likewise remain at the heart of many of the development challenges facing other European and Central Asian countries, be these border management, frozen conflicts, trade integration, or management of trans-boundary ecosystems.

This issue of Development and Transition is therefore devoted to questions of ‘borders’, and the geographic and spatial dimensions of the region’s development challenges. Philip Peirce opens the issue with an overview of the accomplishments, challenges, and lessons learned from the large portfolio of EU border management projects in the former Soviet Union that are implemented by UNDP. Neil Melvin follows with a critical assessment of the state of borders in Central Asia’s Fergana Valley. Talaibek Koichumanov provides an analysis of what the Eurasian Economic Community’s recently introduced customs union could mean for Kyrgyzstan. The challenges of remediating cross-border environmental hot spots in the Western Balkans, and lessons learned from UNDP programming, are described by Snezana Dragojevic. Jens Bastian follows with an analysis of EU-funded cross-border cooperation programmes in the Western Balkans, while Robert Leonardi concludes the issue by exploring the implications of the EU’s cohesion policies for its southern and eastern neighbours.

To watch a video on the EU’s Border Management Programme for Central Asia (BOMCA), please click here.


The movement of goods across the inner borders of the EurasEC countries requires no customs clearance or declarations. ©Ministry of Foreign Affairs of Kazakhstan

What does the EurasEC customs union give us?

On 1 July 2010, the Republic of Belarus, Kazakhstan, and the Russian Federation created a customs union within the framework of the Eurasian Economic Community (EurasEC). This was done on the basis of more than twenty international legal instruments previously signed by these countries. State borders within this territory are preserved, but customs borders are eliminated, so that customs borders move to the outer perimeter of the three states. From now on, the movement of goods across the inner borders of the three countries requires no customs clearance or declarations.

This will generate considerable savings for importers and exporters within the customs union. For example, in the past, companies engaging in import-export operations to and from the Russian Federation had to issue about 160 cargo customs manifests per year. These are no longer required. Since the costs of customs broker services for issuing a single cargo manifest were in the range of 10,000 to 22,000 tenge ($66-$146), considerable savings will result. In addition, it is no longer necessary to pay 3000 tenge ($20) per day (at least) for temporarily storing goods while awaiting customs clearance. Likewise, payment of customs duties—€50 and €20 for each additional page—for issuing a cargo manifest is no longer required.

Trade between these three countries had been restricted by such licenses, quotas, and other non-tariff barriers. Many of these restrictions, such as limitation on the export of foreign exchange, have now been removed. As a result, the movement of goods from Russia to Belarus today is now similar to the movement of goods and food products from one region of Kazakhstan to another. However, non-fiscal customs control will be temporally preserved at Kazakhstani-Russian border until 1 July 2011.

Licensing has always been one of the barriers in the development of external trade. With the customs union, most of these barriers have been removed. The significance of this is apparent in the fact that, prior to the customs union, some 115 warehouses, 56 duty-free warehouses, more than 200 temporary storage warehouses, and 10 duty-free stores were licensed. Revenues accruing from licensing fees were considerable, in the €5-20 thousand range. Licensing has been replaced by registration with the customs authorities. If a company meets the requirements, it is automatically registered without a license.

Although customs clearance does not exist within the customs union, the obligation to pay indirect taxes remains. For entrepreneurs from these countries, payment of these duties will be delayed for at least a month (compared with the situation before the customs union). VAT and excise tax must be paid not when imports cross the border, but instead by the 20th day of the next month. This reduces the costs of tax compliance and frees up working capital.

Prior to the customs union, shuttle traders crossed Kazakhstan’s borders under a simplified customs regime. From 1 July 2010 this is no longer the case; shuttle traders must now submit cargo customs manifests when crossing the border. At first glance, this looks like a violation of economic rights. But this is not true. Goods worth some $4 billion are annually imported into Kazakhstan by individuals; practically each time they had to issue a cargo customs manifest. According to statistics, the simplified customs regime allowed them to only import goods worth $100 million, less than 3 percent of total imports. The cargo customs manifest regime was the most popular framework for expediting shuttle imports through customs, and so it remains.


Marat Aldangorovich Sarsembaev is a professor of the Daneker Academy of International Law, Astana, Kazakhstan.

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A boy injured by a hand grenade sits on the front porch of his home in Nagorno-Karabakh, Azerbaijan. © UN Photo/Armineh Johannes

Losing the peace: The Armenian-Azerbaijani stalemate in Nagorno-Karabakh

“If the occupier, Armenia, does not liberate our lands, a great war in the South Caucasus is inevitable.”

(Azerbaijani Defence Minister Safar Abiyev, February 25, 2010)

The Armenian-Azerbaijani ceasefire agreement and the internationally mediated Minsk Group negotiations have maintained an unsteady peace in Nagorno-Karabakh for 16 years.1 This summer, the International Institute for Strategic Studies, the International Crisis Group and other respected observers highlighted the rising risk that the military stalemate between Armenia and Azerbaijan might degenerate into crisis or even renewed war.

By all accounts, the status quo greatly disadvantages Azerbaijan, which has in effect lost control of some 20 percent of its internationally recognized territory. However, both sides have steadily ratcheted up their rhetoric regarding renewed conflict. Much of this has to do with appealing to or appeasing domestic political constituencies who might favour a military resolution to the Nagorno-Karabakh stalemate. Yet in Baku, the militarist discourse has been accompanied by a dramatic increase in defence procurement spending. From 2003 to 2009, the Azerbaijani authorities increased armaments expenditure by nearly 500 percent;2 in mid-October, the Finance Minister announced that 2011 defence spending would be almost 90 percent higher than in 2010.3 With Baku planning to spend 3 billion dollars next year on its armed forces, the risk of recidivism appears to be rising.

While an increase in military capabilities is not predictive of state intentions, it is safe to assume that the risk of war initiation is higher for Baku than for Yerevan. In an ideal world, Armenian officials would like an internationally legitimized settlement that partitions Nagorno-Karabakh from Azerbaijan, and Karabakhi leaders—perhaps cheered by the International Court of Justice’s ruling on the secession of Kosovo4 from Serbia—aspire to international recognition of their region’s independent status. However, these aspirations are deeply unrealistic, and in comparison with Azerbaijan, Armenia is relatively satisfied with the status quo.

For Azerbaijan, the fundamental concern is the inviolability of its territorial integrity. As long as Nagorno-Karabakh exists as a de facto autonomous statelet, and as long as Armenian forces continue to occupy seven other regions of Azerbaijan, its territorial integrity and unity as a state remain deeply undermined. However, the use of military force to reintegrate Nagorno-Karabakh with the rest of Azerbaijan is neither the only nor the most likely resolution. On the contrary, the ideal solution for the Azerbaijani authorities would be the peaceful reintegration of a semi-autonomous Nagorno-Karabakh under Baku’s authority. This would buoy the tremendously solid popular support for President Ilham Aliyev, while potentially facilitating a solution for the nearly 1 million Azerbaijanis directly or indirectly displaced by the 1992-94 conflict. Yet even as Azerbaijan’s global profile rises thanks to its relative macroeconomic stability and centrality to Caspian energy exports, confidence in the probability of a favourable negotiated settlement may be waning—understandably, given that talks have yielded little progress since their inception.

Russia and the military balance

Russia is the one outside state actor with sufficient leverage to help prevent a military escalation, as well as sufficient national interests in the South Caucasus to motivate this kind of intervention. Moscow regards the maintenance of its wide-ranging political and economic initiatives in the region as essential to the security of the former Soviet space, and is highly anxious about the impact of a hypothetical conflict in Nagorno-Karabakh on its own national security. With an estimated 3,000 troops stationed in Armenia on a near-permanent basis, the Russian authorities are well aware that in the event of a new Nagorno-Karabakh war, they would face international pressure to deploy a peace-keeping force to quell the conflict—and heightened international scrutiny as to whether these forces might be used to assist actively the Armenian side.

Aside from direct security interests, Russia’s commercial ties with both Azerbaijan and Armenia are robust: Russia is Yerevan’s single-largest foreign trade partner in value terms, and among Baku’s largest. With public and private energy giants including Gazprom, Rosatom, Inter RAO UES and Lukoil heavily invested in Armenia and Azerbaijan—not to mention growing trade and investment in agriculture, manufacturing, telecommunications—Russia also has compelling reasons for ensuring that commerce is not disrupted by renewed violence.

For these reasons, Russian President Dmitry Medvedev has stepped up attempts to mediate between the Armenian and Azerbaijani heads of state, hosting trilateral talks seven times since he took office in May 2008. In what may have reflected Russia’s perception that these negotiations did not yield the desired results, Medvedev shifted strategies in late summer 2010. Moscow’s new approach has focused not on economic ties and ‘soft’ power, but instead on maintaining a military balance between Armenia and Azerbaijan. Its strategy for reducing the risk of conflict is simple but potentially powerful: by maintaining a balance of military capabilities between the Armenian and Azerbaijani armed forces, the costs of prospective war will (in theory) rise to a level sufficient to deter either side from provoking or launching offensive operations:

  • Armenia’s defence agreement. In August 2010, Medvedev signed a new defence agreement with Yerevan that (among other things) pledges support for Armenia’s ‘territorial integrity’ and guarantees the presence of Russia’s 102nd Military Base near Gyumri until 2044. Allies of Armenian President Serzh Sargsyan have claimed that the new accord obliges Russia to support Armenia in the event of a second Nagorno-Karabakh war. The crucial question is not whether they are correct. To deter a hypothetical Azerbaijani offensive, decision makers in Baku must be convinced that Russian military involvement in such a conflict is a realistic and highly undesirable possibility. The signature of such a far-reaching defence accord with Russia was also facilitated by the breakdown in the Turkish-Armenian diplomatic rapprochement in late 2009. Moscow had been anxious that the once much-vaunted normalization of ties between Turkey and Armenia would diminish the importance of the latter’s alliance with Russia. Now that this normalization is off the table, the case for Russian-Armenian defence cooperation has only been strengthened.
  • Azerbaijan’s air defence systems. Less than a month after the signature of the Russian-Armenian defence accord, respected Moscow media outlets reported the sale of two batteries of Russian S-300 air defence systems to Azerbaijan. The aim of the apparent sale is to send a warning signal to Armenia, which has little interest in restarting a war. However, in a hypothetical conflict, Armenian forces could try to expand the theatre of operations beyond Nagorno-Karabakh and the other territories they currently occupy. For international interlocutors and investors in the South Caucasus, the ‘nightmare scenario’ is that an Armenia in danger of losing control of Nagorno-Karabakh would retaliate via ballistic missile strikes on critical civilian infrastructure—for example, pipeline pumping or compressor stations, or the Mingacevir reservoir—in Azerbaijan proper. The transfer of highly capable S-300 systems to Azerbaijan would significantly complicate any Armenian contingency plans for strikes on these targets.

Is military balancing enough?

Are efforts to maintain the military balance in the South Caucasus sufficient to prevent a new war, and is this the right approach to convince both sides to maintain the status quo? The answer requires an inquiry into why states start wars in general, and what Azerbaijan’s longer-term interests might be in restarting this particular war.

One argument often deployed against conflict re-initiation is the potential for such a war to hinder long-term economic development prospects. The logic is that, in addition to the direct financial, material and human costs of war, a new Nagorno-Karabakh conflict would seriously reduce foreign direct investment (FDI) inflows to Azerbaijan, divert state resources away from infrastructure and other long-term investments, and thus hinder the country’s long-term development prospects. Regarding FDI, the assumption is that international investors in the hydrocarbons sector and elsewhere would be deterred from expanding existing projects or launching new ones if war is raging on Azerbaijani territory. With inward FDI reaching 7.4 percent of GDP in 2008, these calculations would suggest that the economic consequences of a renewed Nagorno-Karabakh conflict are a significant deterrent to such a conflict actually transpiring.

The costs of civil and inter-state wars

Yet the calculations are not as simple as they may appear. In addition to the difficulty of assessing foreign investors’ aversion to an open versus a ‘frozen’ conflict—that is, a prospective war versus the already politically uncomfortable status quo—there is reason to question the conventional assumption that a new Nagorno-Karabakh war would dent Azerbaijan’s development prospects. Paul Collier’s seminal study of civil wars indicated that while conflict itself reduces GDP by an average of 2.2 percent per capita (compared to a counterfactual model in which such a war had never happened), there is a substantial ‘peace dividend’ in the years following a protracted war, wherein ‘war-vulnerable activities experience very rapid growth’.5 Of course, it is far from clear that a future conflict in Nagorno-Karabakh could be best classed as a civil war—even though the region has never been recognized as a sovereign entity by any state (including Armenia), and even though the 1992-94 war appears to meet the Geneva Conventions’ four criteria for ‘conflict not of an international character.’

On the other hand, it is evident that the primary combatants in any realistic future conflict would be the armed forces of Armenia and Azerbaijan.6 Though the next war would be fought within Azerbaijan’s internationally recognized territory and would centre on the fundamental question of Nagorno-Karabakh’s status, combat operations and any post-war settlement talks would be inter-state in nature. Yet as with civil wars, cross-border conflicts also appear not to dent economic prosperity over the long term. Indeed, most scholars of the relationship between economic growth and inter-state war suggest that such conflicts actually bolster per capita GDP expansion in the post-war years, thanks mostly to the need to rebuild infrastructure and other resources, technological innovation and an increase in corporate and personal savings rates.7 The so-called ‘phoenix effect’ is particularly pronounced for the losing side.

While it is difficult to disentangle effects directly attributable to the cessation of the 1992-94 war from the remarkable increase in output and exports from Azerbaijan’s oil and gas fields, the country’s reported per-capita GDP increased more than ten-fold between 1998 and 2008. This suggests—at a minimum—that the conflict did not do lasting damage to prospects for economic prosperity. For neighbouring Georgia, international pledges of 4.55 billion dollars in aid have undoubtedly mitigated the damage from the August 2008 war with Russia; GDP in 2010 is expected to grow by 5 percent—a higher growth rate than what is projected for Armenia, Azerbaijan, or Russia.


From 2004 to 2009, Azerbaijan underwent one of the world’s most dramatic economic expansions. Oil wealth did not resolve entrenched problems of rural poverty, income inequality or inadequate fixed investment, but it did provide the basis for the emergence of a small middle class in the public sector, and served as a bulwark for the continued popularity of President Aliyev. Rapid growth has come to an end: the economy is expected to expand by a modest 1.8 percent in 2011, and it is not likely to return to double-digit growth until the second phase of the Shah Deniz Caspian gas field comes on stream in 2017.

This suggests that the risk of Nagorno-Karabakh reigniting is particularly acute in the next several years—when defence expenditure in Azerbaijan is at record levels (thanks in part to robust fiscal capacity), but overall GDP growth remains moderate or non-existent. Russian-led efforts to balance between Armenia and Azerbaijan’s military forces may have staved off a crisis this autumn, but Moscow’s ability to mediate between the two sides will always be hampered by its support for Yerevan during the 1992-1994 war—and understandable perceptions in Baku that Russia is far from a neutral arbiter. Multilateral talks are one helpful approach, but a longer-term strategy must focus on the need for Azerbaijan to diversify economically and to find a new, non-hydrocarbon-based engine for growth. Absent such reforms, the risk is that the authorities in Baku will bank on the ‘phoenix effect’—the expected revival of Azerbaijan’s economic development trajectory following a renewed conflict in the South Caucasus.

Sarah Michaels is the Senior Editor, Russia/CIS at Oxford Analytica and a PhD candidate in the War Studies Department, King’s College London. The views expressed herein are the author’s alone, and do not reflect those of Oxford Analytica.

1 In addition to the Minsk Process, which is conducted under auspices of the Organization for Security and Cooperation in Europe, Nagorno-Karabakh has been the subject of numerous resolutions of the United Nations General Assembly (most recently UNGA resolution 62/243 of 2008), as well as of the UN Security Council (e.g., UNSC resolutions 822, 853, 874, and 884, of 1993).

2 Stockholm International Peace Research Institute, SIPRI Yearbook 2009: Armaments, Disarmament and International Security, Oxford: Oxford University Press, 2009. pp. 193, 227.

3  TREND News Agency, ‘Azerbaijan to double defence expenditure in 2011 – state budget’, October 12, 2010.  Accessed on 15 October 2010.

4 Hereafter referred to in the context of the UN Security Council Resolution 1244 (1999).

5 Paul Collier, ‘On the economic consequences of civil war,’ Oxford Economic Papers 51 (1999), pp. 168-183.

6 The Nagorno-Karabakh Self-Defence Forces would certainly participate, but the Armenian armed forces are numerically larger, possess more sophisticated equipment and have superior training.

7 The best empirical study is Vally Koubi, ‘War and Economic Performance,’ Journal of Peace Research 41:1 (2005), pp. 67-82.

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