How Turkey Can Help the Economies of the South Caucasus to Diversify

finchannel.com · Feb 23, 2026 · Collected from GDELT

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Russia’s declining influence in the South Caucasus since the start of the war in Ukraine has opened a window of opportunity to reshape the region’s security and economic landscape. Today, countries in the South Caucasus have a chance to diversify their economies by linking up to the EU’s advanced value chains. This prospect is strategically important, as economic diversification and competitiveness are closely tied to regional stability, resilience, and security. Recent cooperation initiatives could become game changers in this regard if pursued in tandem with national economic diversification and development strategies in the countries of the region. By Feride İnan, Güven Sak, Berat Yücel CARNEGIE EUROPE Turkey can play a unique role in these efforts. Opening the Turkey-Armenia border and upgrading Soviet-era rail connections could create the foundations of a South Caucasus connectivity hub crisscrossed by energy projects and a nexus for climate cooperation, security collaboration, and tourism-based development. Turkish companies could spearhead this regional transformation on multiple fronts: manufacturing, logistics, and transportation. A comprehensive, forward-looking strategy for the South Caucasus that also factors in the potential of Central Asia is critical to help the South Caucasus strengthen its competitiveness, diversify its economic relations, and move beyond its traditional path dependencies. One key step would be to establish a regional cooperation framework that leverages the industrial potential of countries such as Uzbekistan by linking them more closely with EU technology and Turkey’s commercialization capacity. This would make envisaged connectivity projects meaningful and truly transformative. At the same time, smaller South Caucasus economies could benefit from targeted sectoral transformation in areas such as cultural exchanges, ecotourism, and IT, which offer opportunities for inclusive job creation. Weak Regional Integration and Persistent Political Tensions After the collapse of the Soviet Union, the economic trajectories of the South Caucasus and Central Asia diverged sharply from those of former Soviet republics and socialist countries in Central Europe. South Caucasus and Central Asian states experienced marked declines in their levels of economic complexity—a key indicator of productive capacity (see figure 1). Eastern European countries, including Belarus, Moldova, and Ukraine, which did not join the EU, also recorded declines. By contrast, Central European countries—Bulgaria, the Czech Republic, Hungary, Poland, Romania, and Slovakia—and the Baltic states of Estonia, Latvia, and Lithuania, all of which became EU members, managed to preserve (and, in some cases, even increase) their productive capacity. The divergence between these two blocs may be explained by their differing economic orientations after the fall of the Soviet Union. The exports of the Central European countries and the Baltic states are destined primarily for elsewhere in the EU. These countries have benefited significantly from their integration into EU markets and the union’s advanced value chains—whether through trade or foreign direct investment (FDI). As a result, they have absorbed productive capacity that has contributed to their growth and development. By contrast, most countries in the South Caucasus and Central Asia are largely embedded in Russian trade and investment networks. The EU’s share in these countries’ exports is limited (see figure 2). The exceptions are Azerbaijan and Kazakhstan, which export large portions of their petroleum products to the EU. When oil, gas, and gold are excluded from the analysis, Russia’s prominence as an export partner becomes even more pronounced for all countries, including Azerbaijan and Kazakhstan (see figure 3). Intraregional trade patterns also highlight a sharp contrast between the two groups of former socialist countries. The Central European and Baltic states direct most of their exports to their own regions. For instance, an average of 59 percent of the Czech Republic’s exports other than oil, gas, and gold in 2016–2021 went to EU markets beyond Central Europe; when trade with other Central European EU members is included, this figure rises to 76 percent. By comparison, intraregional exports in the South Caucasus and Central Asia are limited, with the exceptions of Kyrgyzstan, Tajikistan, and, to some extent, Uzbekistan, which maintain notable export links with one another. Overall, regional integration in the South Caucasus and Central Asia is very low, for example compared with intraregional trade in the Economic Community of West African States (ECOWAS) or Mercosur (see figure 4). This can be partly explained by the hub-and-spoke design of the Soviet Union, which prioritized links between the center (Moscow) and the periphery, not between different Soviet republics. A 2010 Asian Development Bank report highlighted Central Asia’s limited intraregional trade and weak value-chain integration, noting that trade in parts and components within the region accounted for only 1.2 percent of total trade in this sector in 2008—compared with 56.3 percent in East Asia. Despite their geographic proximity to China, Central Asian countries remain heavily dependent on energy exports, with minimal intraregional industrial linkages. In addition to the Soviet legacy, closed borders and frozen conflicts in the South Caucasus have contributed to economic stagnation. The conflict between Armenia and Azerbaijan, the closed frontier between Armenia and Turkey, and tensions between Georgia and Russia over the breakaway regions of Abkhazia and South Ossetia have all hindered the free flow of goods and people. Turkey’s Economic Transformation and Regional Role The EU-Turkey Customs Union has been a pivotal force in transforming Turkey’s economy into one that is industrialized and deeply integrated into European value chains. Since the 1990s, this integration has significantly increased the global competitiveness of the country’s exports. Turkey’s role as a regional production hub had become firmly established by 2023 (see figures 5 and 6). Since 1995, Turkey has achieved a dual success by expanding both the variety of its competitive export products and the number of markets to which it exports its products competitively. Turkey has emerged as a key global supplier—a transformation driven largely by the customs union framework. Turkey now outperforms Central European countries in terms of both product diversity and market reach. Turkey is among the top five trading partners of many countries in the South Caucasus and Central Asia (see table 1). Even Armenia counted Turkey as its tenth-largest import partner in 2023, with imports from Turkey amounting to $341 million—via Georgia, as the land border between Armenia and Turkey is closed. However, the actual volume of Turkish exports to Armenia may be higher, as some are likely reexported as Georgian goods. According to the UN Comtrade database, which provides data on reexports, Georgia’s exports to Armenia totaled $787 million in 2023, of which $621 million were reexports that could include Turkish goods. Turkey’s Strategic Interests Turkey’s first strategic objective in its neighborhood is to expand the trading and investment activities of Turkish companies in Central Asia. It will be critical for Turkey to establish independent value chains free from Russian influence and, increasingly, from China, which has emerged as a competitor to Turkish goods. In this context, Central Asia is an investment destination for Turkish firms, while the South Caucasus is a vital transit hub. Turkey’s diversification across products and markets has reshaped its strategic economic position. With its experience and productive capacity, Turkey has also positioned itself as a critical connector for integrating its eastern neighbors into EU value chains. At the same time, Ankara places a strong emphasis on regional stability as a prerequisite for the security of its companies’ trade and investments. This emphasis is linked to Turkey’s position as a country that faces cross-border security and migration challenges while maintaining an export-oriented economy that depends on stable relations and reliable market access. In short, economic resilience and diversification in Turkey’s neighborhood are essential components of the regional stability that Turkey requires. Curbing migration induced by climate change will also be a priority. By 2070, large parts of Southeast Asia, the Middle East, and Africa are projected to face the pressures of extreme heat, potentially making them uninhabitable. In contrast, temperature increases in the EU, Turkey, the South Caucasus, and Central Asia are expected to be less severe. Given this disparity, significant waves of migration from heavily populated heat-affected countries in the Global South toward the EU and Turkey will become more likely. At the same time, the relatively low population densities and substantial land resources of the South Caucasus and Central Asia make these regions potential alternative destinations for climate-related migration. To manage this prospect effectively, the South Caucasus and Central Asia must strengthen their economic resilience and institutional capacity, particularly by fostering job creation through economic diversification. Countries in Turkey’s neighborhood risk losing their resource-based economic models under the pressures of the global green transition. Some of these countries, such as Azerbaijan and Kazakhstan, are already pursuing diversification strategies, while others, like Iran and Iraq, also face security and political risks beyond resource dependence. Still, from the perspectives of both the EU and Turkey, economic diversification in the South Caucasus and Central Asia will be essential to mitigate migration pressures and safeguard political stability. In the past decade, a