Caucasus Business Forecast Report Q1 2013

Core Views

The Azerbaijani government is increasingly demonstrating its resolveto address the long-standing dispute over the breakaway Nagorno-Karabakh region, which is controlled by Armenia. With presidentialelections approaching in late 2013, changing the status quo overthe long-standing dispute will remain a key policy priority, meaningthat regional tensions could rapidly escalate into a full-blown war.

The surprise election of the opposition Georgian Dream movementin Georgia's parliamentary election on October 1 marks the biggestturning point in the country's political landscape since the 2003 RoseRevolution. This will significantly boost Georgia's international standingas a democracy in the former Soviet space, while substantiallyimproving the country's chances to thaw its relationship with Russia.

That said, we do not anticipate a radical departure from the policiespreviously pursued by President Mikheil Saakashvili.

Major Forecast Changes

We have raised our longer-term growth projections for Armenia'seconomy in line with our general outlook on the country's externalaccounts. Real GDP growth will peak at 5.1% in 2018.

Key Risk To Outlook

Concerns over tensions with neighbouring Armenia over the breakawayNagorno-Karabakh region are growing and we see diplomaticefforts to prevent a further escalation of the conflict increasingly beingexhausted. Indeed, we now believe that the risk of an escalationtowards a full-scale military confrontation is at its highest since thetwo countries signed a ceasefire in 1994. This would have devastatingconsequences for both the Azerbaijani and Armenian economyfor years to come.