Institute for War and Peace Reporting, UK
Saturday, October 11, 2008

Caucasus Reporting Service

Armenia: Economy Hit by Georgian War

Authorities say country suffered substantial economic losses as a
result of August conflict.

By Naira Melkumian in Yerevan (CRS 463, 10-Oct-08)

The war between Russia and Georgia has cost the Armenian economy
nearly 700 million US dollars, the Yerevan authorities believe.

They say the economy was hit by severe blows to foreign trade, tax
collection and international investment. `The conflict [has been] a
serious test for the sustainability of the Armenian economy,’ said
Prime Minister Tigran Sargsian.

Commentators say foreign trade plunged largely because of war-related
damage to the principal transportation routes between Armenia and
Georgia, through which much of the country’s imports and exports pass.

As a result, Georgian imports were cut by an estimated 121 million
dollars, slashing import tax revenue. At the same time, exports losses
amounted to about 52 million dollars.

The regional turmoil has also curbed the government’s ambitious plans
to boost income tax collection by 30 per cent this year. `Tension in
the area as a result of the South Ossetian conflict meant Armenia did
not collect the levels of income from tax anticipated in the budget,’
said Gagik Minasian, the head of parliament’s financial, credit and
budgetary issues commission.

But experts say the greatest damage caused to Armenia by the war has
been the temporary suspension of foreign investments, totaling about
300 million dollars.

`The region itself is not very attractive in terms of investment, and,
today, it has become way too insecure,’ said Heghine Manasian,
director of the Caucasus Research and Resource Centre, CRRC.

Manasian said the situation in Georgia had increased inflation and
curbed economic growth.

`If prices go up and people’s income remains the same, consumption is
likely to decline, meaning that traders won’t be able to sell their
goods. A difficult situation aggravated by the world financial crisis
might emerge,’ said Manasian.

However, the authorities denied that consumers had been hit by the
conflict, insisting that any price increases were caused by panic
buying.

`People queued for petrol for two days ` because they panicked [that
supplies were going to run dry],’ said Sargsian, noting that state
reserves of fuel had not been touched.

In the wake of the conflict ` which officials believe has cost the
economy 680 million dollars ` analysts say it is important Armenia
does not rely so heavily on the import and export of goods through
Georgia in future.

`Two-thirds of foreign goods are coming through Georgian territory,’
said Andranik Tevanian, the director of the Institute for Political,
Economic and Legal Research. `This is why the Georgian conflict caused
delays to and even suspended the transportation of cargo.’

While an alternative transport route through Iran has been proposed as
a solution, Tevanian believes it would be a prohibitively expensive
option.

There are also indications that Armenia is looking at alternative ways
of transporting goods through Georgia.

On a recent visit to Georgia, Armenian president Serzh Sargsian raised
the prospect of the building a new highway linking Yerevan with the
city of Batumi, the capital of the autonomous republic of Adjara in
southwest Georgia ` cutting the current 700 kilometre route by about a
third.

Previously, much of Armenian exports were ferried through Georgia’s
land border with Russia, but the conflict has meant that Yerevan will
become more reliant on its neighbour’s Black Sea port.

`If we start working [on the Yerevan-Batumi route] today, in two
years’ time, we’ll have a transport route that is very important for
Armenian economy,’ Armenian transport and communications minister
Gurgen Sargsian told journalists recently.

Experts have also cited the importance of developing alternative trade
partners, emphasising the role Turkey could play. They say that the
continued closure of the land border between Turkey and Armenia costs
the economy around 500 million dollars annually.

The Armenian government hopes that the recent thawing of relations
with its western neighbour might offer new trading opportunities.

A direct electricity supply from Armenia to Turkey will start in 2009,
following the signing of an energy agreement during the visit of the
Turkish president Abdullah Gul to Yerevan in September.

`Developing closer political and economic relations with Turkey could
be a precursor for¦developing Armenia’s economy,’ said Minasian.

But other analysts remain sceptical. While Tevanian acknowledged that
normalising relations with Ankara was important for the economy, he
pointed out that Armenia had so far gleaned few benefits from the
rapprochement.

`We’ve made a step towards Turkey, but it is Turkey that had so far
reaped political dividends in Europe ` we see no tangible results from
the so-called warming yet,’ he said.

Naira Melkumian is an IWPR-trained journalist.