Revitalizing Karabakh, Eastern Zangezur Azerbaijan’s comprehensive recovery strategy

EU Reporter has published an article by Colin Stevens highlighting Azerbaijan's large-scale efforts to restore the Karabakh region. Caliber.Az reprints the article.

The liberation of the Karabakh and Eastern Zangezur regions from nearly three decades of occupation represents a pivotal moment in Azerbaijan’s history. Following the end of hostilities in the region in November 2020, the Azerbaijani government has initiated extensive efforts to reconstruct and revitalize these territories. This article provides an in-depth overview of the ongoing recovery initiatives, the economic implications for the region, and the government’s strategic plans for the future.

Historical context: Occupation and liberation

The territorial dispute between Azerbaijan and Armenia has deep roots, with tensions dating back to the previous century. Following the dissolution of the Soviet Union, Armenia occupied 20% of Azerbaijan’s territory, leading to the displacement of around one million Azerbaijanis. But the 2020 war marked a significant turning point, resulting in Azerbaijan regaining control over its historic lands. This military success not only restored the country’s sovereignty but also set the stage for the “Great Return” of Azerbaijanis to their ancestral lands.

Government initiatives for reconstruction & the “Great Return” program

The reconstruction of the Karabakh and Eastern Zangezur regions, covering an extensive area of 17,000 sq. km (equivalent to the area of Kuwait), presents significant challenges due to the extensive destruction of their economy and infrastructure during the period of occupation. The devastation of residential zones, public buildings, industrial entities, and essential services has left the region in a state of ruin. Additionally, the widespread mining of territories poses a grave threat to both the returning population and the reconstruction efforts.

Although IDPs can now return to their homeland, the combination of obliterated economic foundations and perilous conditions underscores the complexity and magnitude of the reconstruction task facing the Azerbaijani government.

Building on the liberation, the Azerbaijani government has committed substantial resources to transform Karabakh and Eastern Zangezur into thriving economic hubs. The “2022-2026 Social and Economic Development Strategy of Azerbaijan” and “Azerbaijan 2030: National Priorities for Socio-Economic Development” programs outline a comprehensive framework for revitalizing these regions. Since 2021, the government has allocated more than $10 billion from the state budget for ongoing reconstruction projects.

A critical aspect of the reconstruction initiative is the implementation of the “I State Program on the Great Return to the territories liberated from occupation of the Republic of Azerbaijan.” This program underscores the government’s commitment to ensuring the sustainable resettlement and development of these areas. As the first step of the initiative, the government of Azerbaijan initiated demining activities, resulting in 1,536,652,787 square meters of territory being cleared of mines and unexploded ordnance from 2020 to 2024.

The “Great Return” program, which aims to facilitate he resettlement of IDPs back to their homes, is a cornerstone of the rehabilitation efforts. As of August, 2024, approximately 8,000 individuals, have returned to their native lands. The program is designed to rehabilitate and repopulate the liberated areas, with plans to accommodate up to 34,500 families (or 140,000 individuals) by the completion of the first stage in late 2026.

To sustain economic growth and support the resettlement efforts under the program, the Azerbaijani government has implemented comprehensive measures to ensure the development of workplaces, provision of decent living conditions, and sustainable regional development.

The returnees are being provided with modern housing, infrastructure, and essential services as part of Azerbaijan’s broader efforts to establish sustainable living conditions in the liberated territories. Beyond the basic infrastructure, the government is prioritizing the creation of economic opportunities for those resettling in the region. Initiatives in agriculture, small business development, and other economic projects are being implemented to support their reintegration and to stimulate the regional economy. This comprehensive strategy is designed to ensure that individuals returning to Karabakh can do so in a secure, stable, and prosperous environment.

Economic growth and industrial development

The revitalization strategy for Karabakh and Eastern Zangezur aims to stimulate substantial economic growth and attract significant foreign and domestic investments. Central to this strategy is the establishment of two industrial parks – Aghdam Industrial Park and the “Araz Valley Economic Zone” Industrial Park.

The “Araz Valley Economic Zone” Industrial Park hosts 12 residents and 2 non-residents as of now. The total planned investment in the park exceeds 94 million AZN, with the creation of over 800 permanent jobs anticipated. To date, more than 16.6 million AZN has already been invested, resulting in the creation of over 40 jobs. The businesses established in the park will produce fiber concrete and polystyrene concrete blocks, footwear, disinfectants, liquid detergents and bleaching products, various adhesive tapes, dry construction mixtures, paving stones, and other products.

In the Aghdam Industrial Park, there are currently 27 residents and 6 non-residents, collectively committing to a total investment of over 238 million AZN. These 33 business entities are expected to create approximately 2,045 jobs. So far, 72 million AZN has been invested in the park, leading to the creation of about 300 permanent jobs. The park’s residents will engage in the production of wallpapers, cement and concrete additives, plastic containers, soft furniture, various types of metal structures, and equipment, among other products.

To incentivize businesses to establish operations within these industrial parks, the government offers several key exemptions for a period of 10 years from the date of registration. These include exemptions from property tax, land tax, income tax, VAT for imported machinery, technological equipment, and devices, as well as customs duty on imported machinery, technological equipment, and devices.

Additionally, the infrastructure in these industrial parks follows the “Plug&Play” principle, with the state funding sewage, water supply, natural gas, power transmission, substations, roads, railways, and fiber optic cable lines.

The Azerbaijani government is creating a fertile ground for industrial development and economic growth. This approach not only aims to rebuild the region but also to transform it into a vibrant economic hub, contributing to the overall prosperity of Azerbaijan and the region.

Incentives for businesses

Azerbaijan’s commitment to revitalizing Karabakh and Eastern Zangezur goes beyond physical reconstruction. The government has introduced a comprehensive set of mechanisms aimed at fostering business development in these liberated territories. These incentives are designed to create an attractive and conducive environment for businesses, encouraging both local and foreign investments.

Key incentives include:

Tax Exemptions: A ten-year exemption from profit, property, land, and simplified taxes, starting January 1, 2023.

VAT and Customs Duty Exemptions: VAT and customs duties are waived for imported machinery, technological equipment, and raw materials for ten years.

Dividend Income Exemption: Taxation on dividend income is waived for a decade for shareholders of legal entities operating in these regions.

Loan Support: A state-guaranteed loan portfolio of AZN 500 million is available, with up to AZN 450 million for businesses. Loans feature a maximum annual interest rate of 15%, a grace period of up to 36 months, and interest subsidies of ten percentage points for the first three years.

Social Insurance Subsidies: Mandatory state social insurance fees are fully subsidized for the first three years, with gradual decreases afterward.

Support for Specialists: Additional paid leave, salary increases, and a one-time allowance are provided to incentivize skilled labor in the region.

As a direct result of the government’s incentives for businesses, the private sector has significantly contributed to the revitalization of Karabakh and Eastern Zangezur. By August 2024, private investments in these regions had reached 719.6 million AZN. These investments have been channeled into key industries such as agriculture, tourism, and manufacturing, fostering job creation and driving economic growth. The synergy between public and private investments is playing a crucial role in transforming these regions and establishing a solid foundation for their prosperous future.

Energy potential and renewable energy initiatives

Azerbaijan’s commitment to economic development extends to harnessing the energy potential of the liberated regions, particularly in renewable energy.

The country is actively investing in hydropower projects, recently inaugurating the Khudafarin and Giz Galasi hydroelectric complexes on the Araz River. These initiatives aim to boost the region’s hydropower capacity from 170 MW to 500 MW within three years. Additionally, Azerbaijan Investment Company OJSC and Türkiye’s Demirören Yatırım Holding A.Ş. have partnered with Arges Enerji Team LLC to develop five small hydropower plants on the Hakari and Tartar rivers, with a total capacity of 13.8 MW and an annual production volume of 39.7 GW. This project will be operational by 2025.

Furthermore, bp is actively involved in the renewable energy sector in the region through its “Sunrise” project, which aims to develop solar energy capabilities in the region. The PV solar power plant will cover an area of approximately 802 hectares and will have a capacity of 240 megawatts. This focus on renewable energy not only aims to meet local energy needs but also positions Azerbaijan as a leader in sustainable energy production in the South Caucasus.

The declaration of Karabakh and Eastern Zangezur as “green energy” zones further boosts their appeal to investors. This designation emphasizes the region’s focus on renewable energy, aligning with global climate goals and catering to the growing demand for sustainable investment opportunities.

Integrating smart concepts with economic growth strategies

As part of the broader strategy to ensure sustainable development, the Azerbaijani government is introducing innovative “smart village” and “smart city” concepts in the liberated territories. A prime example of this initiative is the Aghali village in the Zangilan district, which has been developed as a model smart village. The village includes advanced infrastructure such as smart utilities, automated irrigation systems, renewable energy sources, and high-speed internet connectivity.

Adoption of smart technologies in these areas aligns with global trends towards sustainability and digitalization, making Karabakh and Eastern Zangezur ideal locations for forward-thinking businesses. These initiatives not only enhance the quality of life for residents but also play a pivotal role in attracting investments and driving economic growth.

The new epicenter of culture and tourism                                                          

Karabakh and Eastern Zangezur, regions rich in history, culture, and natural beauty, are witnessing a remarkable cultural and tourism renaissance. With their scenic landscapes, ancient monuments, and vibrant traditions, these areas are rapidly becoming prime destinations for tourists worldwide. The Azerbaijani government, recognizing the immense potential of these regions, has undertaken extensive efforts to transform Karabakh and Eastern Zangezur into thriving cultural and tourism hubs.

At the heart of this transformation is Shusha, often referred to as the cultural capital of Azerbaijan. The city’s stunning architecture and rich historical significance have made it a focal point for cultural revival efforts.

The Shusha Hotel & Conference Center, constructed in just 11 months, stands as a testament to the region’s high standards in tourism development.

This luxurious hotel not only offers top-tier services and modern amenities but also embodies the essence of traditional Azerbaijani hospitality. Its prime location provides guests with breathtaking views of Shusha and easy access to the city’s historical sites, making it one of the premier accommodations in Azerbaijan. Additionally, the Center serves as a venue for large-scale local and international events and a cultural hub, showcasing paintings by artists inspired by the region.

Shusha Hotel & Conference Center

Another significant development in Karabakh’s tourism landscape is the City Hotel Aghdam, located in the city of Aghdam. As Aghdam undergoes reconstruction, the City Hotel Aghdam plays a crucial role in accommodating visitors, business travelers, and those involved in the region’s rebuilding efforts. 

Known for its modern design and comfortable accommodations, the hotel offers a range of amenities, including well-furnished rooms, conference facilities, and dining options that highlight Azerbaijani cuisine. Strategically positioned, the hotel provides guests with a comfortable base from which to explore the region’s emerging attractions and historical sites, contributing to Aghdam’s evolving identity as a center of business, culture and tourism.

In addition to these flagship developments, several other areas within Karabakh and Eastern Zangezur are experiencing a surge in tourism infrastructure. Numerous hotels are either under construction or already operational, catering to the growing number of visitors drawn to the region’s unique cultural and natural attractions. This surge in hospitality infrastructure is complemented by the restoration and promotion of historical sites, creating a comprehensive tourism experience that highlights the region’s rich heritage.

Transportation and logistics hubs

An integral part of the economic revitalization strategy involves enhancing transportation and logistics infrastructure in Karabakh and Eastern Zangezur. These regions are poised to become major transport and logistics hubs, facilitating East-West trade and bolstering Azerbaijan’s regional connectivity.

The development of the Zangezur corridor is central to this strategy, providing a direct route connecting Azerbaijan to its enclave Nakhchivan and Türkiye. This corridor will benefit Azerbaijan and neighboring countries, enhancing regional trade and economic cooperation.

Supporting these endeavors, the “Araz Valley Economic Zone” industrial park is focused on creating logistics centers essential for facilitating transport and logistics in the region. Over time, the park will integrate logistics and shopping centers, warehouses, wholesale and retail facilities, heavy vehicle fleets, customs, gas stations, and repair facilities for cars and other equipment. Additionally, the government is investing in airports, railways, and highways in Karabakh and Eastern Zangezur.

The recently launched Fuzuli and Zangilan International Airports, along with the developing Lachin International Airport, demonstrate Azerbaijan’s commitment to improving regional connectivity.

A vision for the future

Azerbaijan’s comprehensive strategy for revitalizing Karabakh and Eastern Zangazur reflects the country’s commitment to transforming these regions into thriving economic centers. By investing in reconstruction, attracting investment, and promoting sustainable development, the government is laying the groundwork for long-term growth and stability.

The successful implementation of these initiatives will not only benefit the people of Karabakh and Eastern Zangezur but also contribute to the economic growth and development of Azerbaijan as a whole. As the “Great Return” program continues to unfold, the return of IDPs and the establishment of a robust economic framework will position Azerbaijan as a regional leader in sustainable development and economic cooperation. 

The vision for the liberated lands as green zones and logistical hubs underscores their potential to play a pivotal role in the country’s economic future, ultimately benefiting not just Azerbaijan but the broader region.