by Constantin Duhamel


A common Orthodox heritage

The closeness at the heart of Russia and Armenia stems from their interaction in Russia’s 18th Century expansion in the Caucasus. Like the Ossetians and to a lesser extent the Georgians, the oldest Christian church has looked sympathetically to Russia for support against its Turkish and Turkic neighbors as a Christian nation, along with Armenia.

A relationship tested by time

Armenia is therefore a natural candidate and enthusiastic member of the Eurasian Economic Union (EAEU) because a nation less than 3 million strong enjoys access to a market more than 50 times its size. The Armenian diaspora in the EAEU and Russia in particular—as large as its own population—can only be conducive to fruitful commerce. Armenia is also a member of the Collective Security Treaty Organization, a security bloc led by Russia.

A cold wind from the east?

The rise in trouble in Armenia’s unrecognized Karabagh region coincides with the start of the conflict in Ukraine and a period of tension in Russian-Armenian politics. Russia stepped in to end the bloodshed on the edge During the Armenia-Azerbaijan war of 2020 and Armenia invoked the CSTO’s joint security clause – similar to NATO’s Article 5 – not once but twice, most recently in the summer of 2021 where it was almost ignored. Although CSTO forces cannot deploy beyond internationally recognized borders, a perceived lack of support from Russia has left Armenian Prime Minister Nikol Pashinyan skeptical of the organization’s future prospects for support from Russia.

A flourishing economic relationship

The opposite is true for economic and trade relations. Part of the EAEU customs union and free trade area – marketed as a single-market – Armenia has become one of the main channels of trade with Russia, along with Turkey and Kazakhstan. Here comes the opportunism inherent in Russian-Armenian relations, as Armenia acts as a parallel import center and a safe haven for Russian cash and a 100,000-strong Russian labor force seeking relative stability. Stories related to sky-high rents and volatile banking fees in Yerevan are widespread among self-styled intellectuals who have exited Russia in the run-up to 2022.

Towards less friction with the EU?

Armenia has signed a comprehensive and sophisticated free trade agreement with the European Union, covering everything except customs and immigration (currently covered by Armenia’s EAEU status). Armenia will ultimately have to choose which market to move towards, whether to join the EU or the EAEU.

A dynamic market

Armenia boasts 11% GDP growth for 2022, while GDP rises from 4000 USD to 7000: Good growth obstacles are being overcome as Russia-Ukraine mediation benefits.

2022 Investment and Capital Markets Summary

Figure 1 Armenia FDI statistics

Russia tops Armenian FDI

By 2022, 40% of Armenia’s foreign direct investment is of Russian origin, worth about 2 billion USD in projects. Russia is the top bilateral partner for Armenia in the financial sector and as a purveyor of funds.

Good reasons to be bullish on Armenia’s FDI potential

Interestingly, the IMF noted that Armenian FDI was projected to grow by 25% YOY – bringing FDI to the USD 7 billion mark – by the end of the year. Although the data collected during this exercise could not confirm this and perhaps due to accounting reasons, few countries can boast of such YOY figures for FDI. There has certainly been a record number of FDI projects announced, which will be discussed in Section 4.

Figure 2 Armenian Bank Performance in USD Million, 2022

A record year for Armenian banks

The Armenian banking system held just under $3.2 billion in payments from Russia by year-end 2022 – a fourfold increase over 2021 figures. As a result, non-interest income (such as payment fees) increased by 267% as interest. Income increased by only 9 percent.

import export

Figure 3 Total Armenian trade in 2022, USD million

billion US dollars business import export Balance
Armenia 14.1 5.3 8.8 (3.4)

Source: Armstat

Russia remains the top trading partner – by far

As a landlocked country surrounded by larger nations, Armenia is surprisingly a structural importer, running a deficit as seen above. Its top trading partner is Russia, with twice as much trade with the EU and almost three times as much with China. This largely explains its political choices and desire to remain close to Moscow.

Fig.4 Armenia’s main trading partners (in descending order) 2022, USD billion

billion US dollars Business, 2022 Business, 2021 % change
Of which Russia
America China
5.3 2.7 49
5.0 2.6 48
2.3 1.6 30
1.7 1.2 29

Source: Armstat

2022 – a remarkable year

The YOY change in trade stuck around the +40% mark in terms of turnover – a testament to Armenia’s importance as a trading hub for the region. These are significant figures and only reflect supply chains for re-routing through Armenia to Russia. This is truly a testament to Armenia’s ability to leverage multiple levers and maximize its trade.

Figure 5 Selected trade balances

billion US dollars Balance, 2022 Balance, 2021 % change
Of which Russia
(0.2) (1.0) 80
(0.2) (0.9) 77
(0.7) (0.3) (130)
(1.0) (0.5) (100)

Source: Armstat

Deficit closes with EAEU and Russia, increases with EU and China

Due to the significant figure in Armenian exports to Russia, Armenia no longer acts as the only recipient of Russian resources. As a result of the actions in 2022, relations between the two parties have apparently leveled off. Armenia continues to source goods from the EU and China – increasing its deficit to meet Russian demand – and then sells to Russia at a mark-up.

Figure 6 Russia-Armenia trade, by category

USD mln Price, 2021
Hydrocarbons 685
Precious metals and stones 91
agricultural goods 83
Finished Goods (Machinery) 80

Source: Business Economics, per last available data.

A traditional business partner

In terms of trade by category, the trade mix between Russia and Armenia is typical: a vast majority of hydrocarbon products, followed by gold and precious stones (usually flowing to Armenia for processing and selling). Agriculture (such as wheat) and machinery from Russia and niche agricultural products from Armenia to Russia complete the picture.

Future trends

Figure 7 Key indicators

USD: AMD, official CB interest rate Inflation rate GDP growth GDP per capita (estimated)
392 12.25% 8% 11% USD 4000 (7000)

AMD = Armenian Dram. Source: IMF, valid as of 20/02/2022.

High growth is likely the mainstay – but at a cost

According to the IMF, the best performing sectors in the Armenian economy in 2022 were services, such as: housing, transport, banking (>35%), IT (>26%) and construction by about 20%. The government will certainly maintain these numbers and expect other countries to do the same. However, excessive demand has put pressure on prices in Armenia, especially by proxy Russian economic actors. The IMF notes that wages rose by around 14% YOY and that rents doubled in H12022 – something that local Armenians cannot look upon positively.

An elephant in the room

Again according to the IMF, $0.6 billion of deposits in Armenian banks in Russia are a risk to local consumers, with movements in capital risk affecting the liquidity of lenders who extend credit to Russia-linked collateral – if payments to these banks are to be made.

Silicon Valley for the Caucasus

According to fDi Intelligence, 21 foreign direct investment projects were announced in the first half of 2022 – a testament to Armenia’s attractiveness with its highly qualified labor force but (relatively) cheap cost of living. Technology is clearly the lead sector, but renewable energy is also part of the mix. Azerbaijan’s views on the Karabagh region remain the only real source of instability for investors considering the country.

Figure 2 Overview of FDI projects in Armenia

Name of the project area origin Comments
NVIDIA technician United States of America Open a center in Yerevan
Advanced Micro Devices (AMD) technician United States of America
Masdar Energy UAE 400 MW solar plant
Eurasian Development Bank Energy International 11 Solar plants in Armenian regions for c. USD 50 million, generating 65MW

Source: fDi Intelligence

Summary by Chris Devonshire-Ellis

Armenia is a member of the Eurasian Economic Union (EAEU) which gives it free trade status with Russia. As a result, despite the problems with Azerbaijan, the immediate outlook for Armenia remains positive. Now a strategic trade hub between the EU and Russia, its new capabilities are increased levels of imports from the EU and increased levels of exports to Russia as traders take advantage of Russia’s EU political exit. However, this is not equivalent to a trade exit, and it is important to understand Armenia in this context. Export producers of the European Union have directly withdrawn from the Russian market – a political will – this does not mean that they have withdrawn from the Russian market – a capitalist will. Russia was the EU’s first trading partner, accounting for 37.3% of the country’s total goods trade with the world in 2020. 36.5% of Russia’s imports came from the EU and 37.9% of its exports went to the EU.

That has changed in terms of the political angle, which takes its cues from direct trade, and will decrease by 45% in 2022. However, Russia’s imports from Armenia will triple to US$2.4 billion in 2022. Armenia – and particularly Georgia, Azerbaijan and Turkey, Kazakhstan and Uzbekistan all saw significant exports to Russia and significant import growth from the EU. EU export producers have not lost significant market share in Russia, they are instead selling through Armenian and neighboring middle-men. The EU is caught up Between a real political exit and an unrealistic export market Get out.

Armenia is and has been almost perfectly positioned to take advantage of this. The EU has been vocal about imposing secondary sanctions on countries like Armenia to allow it to develop this middle-man status to punish Armenian businessmen and the government. Yet at the same time, any pressure on Yerevan to do so would not sit well with other EU programs and inducements intended to entice the country to do more business with the EU. Armenia’s existing trade dynamics are therefore somewhat dependent on the continuation of Russian sanctions, and the EU is reluctant to impose penalties on third countries for serving Russia. Armenia’s resurgence is directly linked to the EU’s rift between its political actions and its corporate export community.

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