By Samantha Barnes, International Banker
According to figures announced in late March by its National Statistical Committee (NSC), Armenia’s economy grew by a stellar 10.9 percent during January and February compared with the same two-month period in 2022. February alone experienced a 6.5-percent expansion from January’s levels and 11.3-percent growth from 12 months earlier. And with this buoyant performance having already followed 2022’s bumper year of more than 11-percent growth, one may be inclined to conclude that the Armenian economy is proving to be an unmitigated success story. But with tensions with neighbouring Azerbaijan still decidedly heightened and no end in sight to the war in Ukraine, the outlook is still highly uncertain.
Much of Armenia’s economic success can be attributed to its proximity to Russia. Indeed, the diminutive former Soviet state located in the Caucasus region, bordering Turkey, experienced an economic boom as it took in hundreds of thousands of affluent Russian migrants escaping military conscription in their home country in both late February 2022 as the war commenced and September following Russia’s massive military-mobilisation drive. Indeed, Armenia ended up being among the chief recipients of Russian migrants, with data from the Migration Service of Armenia recording 372,086 Russian citizens arriving during the first half of 2022. A September survey of 2,000 Russian migrants by Eurasia-focused research and security organisation PONARS (Program on New Approaches to Research and Security) disclosed that of the initial wave of Russian migrants, 24.9 percent fled to Turkey, 23.4 percent to Georgia, and 15.1 percent ended up in Armenia.
As the International Monetary Fund (IMF) noted, these waves of Russian migrants invariably boosted domestic consumption in the recipient nations, with the Armenian economy among the most significant beneficiaries given the large influx relative to the local population of just 2.8 million people. “Guided by sound macroeconomic policies amid significant global and regional challenges, Armenia is on course to achieve growth of about 11 percent in 2022, in part driven by large inflows of external income, capital, and labor into the country,” the IMF stated in November, also citing fiscal overperformance and appreciation of the Armenian currency, the dram, as key factors in lowering Armenia’s public debt from 60.3 percent of gross domestic product (GDP) in 2021 to an expected 51 percent last year.
Inflation has been a concern as a result of this surprise injection into Armenia’s economy, however. OBC(Osservatorio Balcani e Caucaso) Transeuropa, a think tank co-funded by the Italian Ministry of Foreign Affairs and the European Union (EU) that is focused on Southeast Europe, Turkey and the Caucasus, noted in an October article that real-estate prices had sharply risen since the first wave of Russian migrants arrived shortly after the outbreak of war, with prices per square metre of apartment space in capital city Yerevan climbing over the previous year’s by an average of 109,000 drams (about €273). “Each human flow contributes to price fluctuations,” Armenian economist Samson Grigoryan noted, as quoted by OBC. “It also has its positive side—it contributes to the development of the regions—because Yerevan cannot accommodate everyone, so others will also go to other regions of the country.”
Armenia’s engagement with Russia is also the subject of growing consternation from Western countries intent on punishing Russia for its invasion of Ukraine, with US and European officials suggesting that it is being supported by former Soviet satellite states to bypass the economic sanctions levied against Moscow. A recent article from The Telegraph noted that the Eurasian Economic Union (EAEU) member nations are operating as transit points through which materials and technologies for weapons production are passing.
“The most absurd is Armenia, whose 13 percent economic expansion in only 12 months makes it a candidate for [the] third-fastest growing economy in the world,” the article contended, noting that exports from Germany to Armenia in 2022 increased from €178 million to €505 million. “That’s from just one EU country. Exports from Armenia to the EU in the same twelve months doubled from 753 million euros to 1.3 billion euros. With a population of barely three million and a GDP per capita of less than a tenth of the average Briton, these are impossible numbers. But they are real.”
The New York Times also reported on April 18 the findings of a document from the US Bureau of Industry and Security (BIS), which stated that Armenia imported 515 percent more chips and processors from the United States and 212 percent more from the European Union last year compared to 2021. But the document also noted that Armenia then exported 97 percent of those same products to Russia. And by mid-March, Armenia’s minister of the economy, Vahan Kerobyan, reportedly confirmed to Russian daily news outlet Vedomosti that the two countries had completely stopped mutual calculations in US dollars and euros, given the pronounced volatility the ruble has experienced against these currencies over the last year or so. Instead, the dram became the preferred currency for expanded Russian-Armenian trade during this period.
In its defence, Armenia insists that such moves are due to the two countries operating within the same customs and economic zone, which thus facilitates the free movement of goods between them. “We are talking with our American and European partners, explaining what the basis of trade of which products are and whether we will not violate the EAEU agreement,” Kerobyan recently explained to reporters. “In fact, we are able to explain that the actions taken by Armenian companies are not aimed at putting Armenia under secondary sanctions, but stem from the economic and labor interests of our country,” he added, insisting that Armenia is trying to maintain the provisions of the EAEU free-trade agreement that is in place between member nations of the Eurasian Economic Union and maximise opportunities for companies whilst ensuring that domestic companies do not fall foul of secondary sanctions.
Armenia may also point to Russia’s lack of material support in the ongoing conflict with neighbouring Azerbaijan as further evidence in its defence against accusations of improper collusion. Tensions have remained elevated over the pro-Armenia breakaway region of Nagorno-Karabakh since December, after Azerbaijan implemented a blockade on the road connecting Armenia to the disputed territory, which subsequently experienced significant shortages of essential goods. And despite a Russian-brokered ceasefire being agreed upon in 2020 following an outbreak of hostilities between the two parties, as well as the recent introduction of an EU monitoring mission to stabilise the region, unrest is likely to continue breaking out periodically—especially given Azerbaijan’s increasing importance as a natural-gas supplier to the EU—that could prove a significant downside risk to Armenia’s longer-term economic prospects.
Nonetheless, Armenia’s growth outlook remains positive on the whole, with the Central Bank of Armenia and Fitch Ratings both predicting recently that the economy will expand this year, albeit more modestly than in 2022, by 5.8 percent and 6.1 percent, respectively. Fitch also sees a further slowdown in 2024 to 4.7 percent. “Growth will be driven by personal consumption, relatively stable exports (notably to Russia as Armenia replaces import sources that have become disrupted by sanctions) and an expected increase in public investment,” the ratings agency stated on February 10.
The IMF similarly sees economic growth decelerating in 2023 to 4 to 5 percent due to “weaker external demand and tighter global financial conditions”, whilst also expecting CPI (Consumer Price Index) inflation to converge gradually to the central bank’s 4-percent target over the medium term with the support of tight monetary policy and the waning impact of external shocks. “The current account deficit, which has widened with the rapid growth of the economy, is expected to gradually narrow to around 5 percent of GDP. The risks to the outlook are mainly external,” the IMF added in its November outlook.
Beyond the raw numbers, moreover, it is also worth highlighting the efforts Armenia is making to improve the quality of its relatively modest economy, particularly regarding sustainability. On March 21, for example, the CirculUP! project was launched in the country, led by Impact Hub Network, which is a global network of locally run impact innovation incubators, accelerators, coworking spaces and non-profit organisations, along with Armenia’s own social-innovation incubator Impact Hub Yerevan and the Environment and Health NGO (ENVI&Health) that is funded by the European Union in Armenia. The project seeks to trigger a systemic shift within Armenia towards a circular economy, with the official press release noting that financial support of €525,000 will be provided to start-ups, small and medium-sized enterprises (SMEs) and community service organisations (CSOs) working towards circularity in Armenia over the next three years.