Economic Development as a Challenge for “De Facto States”: Post-Conflict Dynamics and Perspectives in South Ossetia

Abstract

Abstract The significance of economic factors in the emergence and development of “de facto states” remains insufficiently studied and debatable. This article deals with the case of South Ossetia, one of the six unrecognized republics that emerged in the post-Soviet space. Based on the study of statistical data, secondary sources and expert interviews with representatives of local authorities, business, and the academic community, the authors analyzed structural changes and the state of the economy of South Ossetia and views on development prospects in the context of state building. It has been shown that as a result of large-scale assistance from Russia, a structurally weak hyperservice economy has formed, whose key industries depend on government demand and Russian investments. Limited economic self-sufficiency, cross-border settlement of Ossetians and Georgians, as well as numerous family ties contribute to the emergence of a variety of cross-border practices (shuttle trade, smuggling, and peculiar payment systems) that reduce social tensions. The case of South Ossetia confirms that unrecognized status is not in itself an obstacle to economic development, but the lack of external legitimacy limits access to markets and creates difficulties for financial and trade transactions. As a result, Eurasian integration has become rather a source of problems for this republic, creating obstacles difficult to overcome for local businesses in trade with Russia, the only EAEU country that recognizes the Republic of South Ossetia as a sovereign state. As a result, economic problems, along with security issues, serve as a key argument for South Ossetia’s support for the idea of joining the republic to Russia.