Armenia's economy plunges into prolonged recession
Review by Caliber.Az

ANALYTICS  09 March 2023 - 16:05

According to the macroeconomic forecast for 2023 published by the Eurasian Development Bank (EDB) on March 6, Armenia expects a decline of the dram, a reduction of exports, and, conversely, growth of imports, whose value in monetary terms will increase. At the same time, according to Armenian experts, the effect observed last year from the inflow of Russian tourists and newcomers, as well as the participation of Armenian intermediary companies in re-exporting foreign products and equipment to Russia, bypassing Western sanctions, will not have the same effect in 2023. In particular, due to a combination of factors, EDB experts expect a tangible decline in Armenia's GDP.

Armenia's non-involvement in the regional division of labour, its lack of access to key transport hubs and low-cost energy sources, and its difficulties in accessing raw materials and components have been the Achilles' heel of the Armenian economy for more than three decades. According to the "Index of Economic Complexity", an international rating system for evaluating macroeconomic performance, which covers 134 countries worldwide, Armenia has slid from 32nd to 79th place over the past 20 years. While in 2000, the level of diversification of Armenia's economy was close to that of some Balkan countries, by 2020 it has fallen to the level of African countries. In terms of market dominance, Armenia has dropped to the penultimate 133rd place, and in terms of the density of internal competition, Armenia today ranks 132nd, surpassing only Bosnia and Chad. In short, the "apricot" republic is a classic example of a small underdeveloped country, dominated by imports and lacking an attractive economic environment for portfolio investors.

These negative factors inevitably lead to lower profitability and higher production costs, which deprive the republic of any prospect of becoming a prominent regional exporter. In fact, Armenia has never been an export-oriented country: between 2000 and 2022 its aggregate exports (mainly of copper, gold, molybdenum, canned fruits, and vegetables, as well as cigarettes and alcohol) did not exceed 17 per cent of GDP on average which is lower than in most post-Soviet countries.

It is quite obvious that the processes taking place in the Armenian economy do not provide objective grounds for counting on a significant increase in domestic production and exports in the future. Accordingly, the last year's growth in economic activity, which was "touted" by the Armenian government, and which was allegedly based on an increase in exports, can be explained by completely different factors. Four external factors influenced the growth of business dynamics in Armenia in 2022: two of them were an unprecedented increase in donor aid from the EU, as well as a multiple increases in remittances from individuals - mainly Armenian guest workers working in Russia. According to Tadevos Avetisyan, MP from the opposition "Armenia" faction, the volume of transactions through the banking system alone amounted to about $3.6 billion, which is 4.2 times more than in 2021. The Armenian MP emphasized that only the mentioned remittances are equivalent to 20 per cent of the annual GDP of Armenia. And that is not counting the cash inflows brought in by guest workers, which cannot be counted at all.

Two other factors are directly related to the processes triggered by the Russian-Ukrainian war: a significant influx of tourists and relocators to Armenia from sanctioned Russia, as well as an increase in trade operations with same Russia. According to Avetisyan, about three-quarters of the 14.2 per cent growth in economic activity announced by the National Statistical Committee (NSC) in Armenia was related to several sectors (hospitality and tourism, catering, services, and real estate rental), which are somehow linked to serving the huge influx of Russian citizens. Finally, another area that rose on the wave of global conflicts was export services: the latter is associated with Armenia's transformation into a regional transshipment base for re-exports of foreign products and equipment to Russia, circumventing Western sanctions. In particular, in January-November 2022, Armenian-Russian trade turnover amounted to $4.1 billion, having increased by an unprecedented 76.8 per cent compared to the same period in 2021. Obviously, Armenia's industrial production is simply unable to provide such a significant volume of product deliveries, let alone agriculture, which has been in decline for the second year in a row.

As it turns out, such high foreign trade activity by Armenian businesses in the Russian direction has attracted the attention of the relevant EU structures. As David O'Sullivan, the newly appointed EU sanctions envoy, told the Financial Times, the EU and its allies are investigating a sharp increase in exports from Russia's post-Soviet trading partners. At the end of February this year, EU countries signed a tenth package of sanctions that includes a series of measures aimed at closing loopholes in the existing regime, including a ban on the transit through Russia of goods that could be repurposed for military use. In particular, common household goods - TV sets, washing machines, computers, office equipment, etc. - could be dual-use: months after the war began, the Ukrainian army began to report that some microchips they found in captured or shot-down Russian military equipment had been soldered from the microchips of household appliances.

According to the European media, Armenia and Kyrgyzstan, and partly Kazakhstan, appear on the list of "suspects", but it is the "country of stones" that may be the most suspicious in the former Soviet Union because of the incompatibility of its foreign trade activities with the comparatively small size of its domestic economy. Last year, for example, Armenia increased its imports from the EU and the USA by 80 per cent, while its exports to the Russian Federation more than doubled.

In this respect, we can only hope that EU countries, especially "sister" France, will not turn a blind eye this year to Yerevan's violations of international restrictions on trade with Moscow, including re-exports of dual-use goods.

This or that way, but in 2023, most of the factors of external character, which boosted the economic activity in the "apricot" republic last year, will not keep the hollow Armenian undereconomics afloat any longer. As noted in the macroeconomic forecast published recently by the Eurasian Development Bank for 2023, the growth of exports from Armenia will be restrained by the inflow of foreign currency into the country (at the expense of Russian relocates), as a result, the prices of Armenian goods in terms of foreign currency will still be relatively high, and as a consequence uncompetitive. Imports, on the contrary, will become more profitable and grow faster, creating a balance of payments deficit. According to EDB expectations, the overvaluation of the dram in 2023 will persist, but will gradually decline. While in the past two or three months, the exchange rate of the dram against the dollar was at 395-400, the average value of the exchange rate of dollar/dram by the end of this year is expected to reach 438, and in 2024 - 465. Also, according to EDB, the trend of a gradual slowdown in economic activity in Armenia continued in January-February of this year, this decline was recorded mainly in the services and trade sectors, partly in construction.

Caliber.Az