Armenia's economy loses crutches - re-exports and business on relocators Review by Caliber.Az

The “economic miracle of 2022” promoted by the Armenian media turned out to be a banal soap bubble, inflated by the re-export of sanctioned goods to Russia, banking and tourist services for relocators. But soon the influence of these factors will decrease to a minimum, and the Armenian economy will shrink again in the manner of shagreen leather.

On June 13, the head of the Central Bank of Armenia, Martin Galstyan, announced a reduction in the turnover of intermediary trade through Armenia due to bans and tightened control by Western countries, as well as a collapse in banking operations involving Russian companies and citizens. The unjustifiably strengthened national currency, the dram, also causes tangible damage to the Armenian exporting farmers and the tourism sector.

The participation of Armenia in the re-export of foreign products and equipment to Russia, including dual-use goods, bypassing US and EU sanctions, has been repeatedly discussed in Western and post-Soviet media. Since the start of the Russian-Ukrainian war, exports from Armenia to Russia have unexpectedly almost tripled, from $841 million in 2021 to $2.411 billion last year.

The industrial production of Armenia's stagnating economy is simply not able to provide such a significant volume of supplies, not to mention agriculture, which has been declining for the second year in a row. The sharp increase in the Armenian-Russian trade turnover, including the share of Armenian exports, without any serious economic basis, is explained by most experts with only one thing - the re-export through Armenia of sanctioned or restricted goods for direct sale on the Russian market.

The impact of the re-export springboard and other speculative factors on the last year's growth in the economic indicators of the "country of stones" was once again confirmed by Minister of Finance Vahe Hovhannisyan at the recent meeting of the parliamentary commission on financial-credit and budgetary issues in the National Assembly of Armenia.

“Export from Armenia to Russia in 2022 increased by 187 per cent compared to the previous year, while about 140 per cent of the increase came from the re-export of foreign products, and only 47 per cent came from the supply of Armenian goods,” the finance minister said.

According to him, a 90.2 per cent increase in the number of tourists was also recorded last year, and Russian relocators played the main role in these dynamics.

“In 2023, we can expect a decrease in the turnover of intermediary trade through Armenia, and this year’s statistics indicate that last year’s peak of such trade has apparently passed,” said the head of the Central Bank of Armenia, Martin Galstyan, the other day.

According to him, one of the reasons for the decline is related to the reaction of equipment suppliers (including electronics) to the excessively increased volume of imports to the traditionally low-capacity Armenian market.

“According to world practice, in the electronics trade, suppliers always require buyers to provide an end-user statement of their product in order to understand whether it is resold to countries under sanctions. Today, this is monitored more strictly, which can limit trade in a certain way,” the head of the Central Bank noted, emphasizing that there were cases of circumvention of sanctions in Armenia, “but on a small scale, and these violations do not carry systemic risks.”

The results of investigations by the media and a number of international specialized structures indicate that in 2022 Armenia increased imports from the EU and the USA by 80 per cent and at the same time turned into a regional transshipment base for the supply of electronic goods and microcircuits, computers and peripheral IT equipment, machine tools and industrial equipment, cars and auto parts to the Russian Federation.

So, if in the first half of 2022, Armenian exports to the Russian Federation amounted to about $546 million, then in the second half of the year, after the implementation of the next, most stringent packages of anti-Russian sanctions, it more than tripled to $1.860 billion.

Most of the commodity groups listed above belong to dual-use products, and it was these products that, without unpacking the containers, after being cleared at the Armenian customs, already with new waybills, were reloaded onto trailers and ships bound for Russia.

Such a suspiciously high foreign trade activity of the Armenian business in the Russian direction attracted the attention of the relevant structures of the European Union and the United States, and the Armenian government was repeatedly warned at various levels about the threat of secondary sanctions against violators of trade operations with elements of re-export and smuggling.

Moreover, the demands are not limited to the suppression of re-export operations - Yerevan has been made an offer that cannot be refused: to stop operations bypassing sanctions in the financial sector.

“Last year, Armenian banks were reproached that they are too indiscriminately recruiting visiting clients from Russia in order to get maximum profit,” Galstyan said.

According to the Central Bank of Armenia, last year commissions on such transactions accounted for about 80 per cent of the growth in profits from banks, and only about 20 per cent of profits were provided by traditional sources of income, including loans.

The Central Bank believes that in 2023 the volume of commission income that Armenian banks receive from transactions with relaxants who arrived from the Russian Federation will sharply decrease.

Servicing of such transactions will be reduced as foreign banks impose stricter requirements on transactions involving Russians making transactions to third countries through Armenian banks.

Armenia's banking sector fears secondary sanctions and has to collect more documents from Russians and check them more carefully. All this increases transaction costs, and servicing Russians is not as profitable as before, and some transactions have to be weeded out altogether due to huge risks. Thus, today the credit sector of Armenia is forced to say goodbye to the “banking boom of 2022”, losing easy profits.

Among other things, the past year will be remembered for the sharp increase in the volume of money transfers from the Russian Federation to Armenia, which also affected the strengthening of the dram.

However, it turned out that there is nothing good in this, and the Ministry of Economy of Armenia considers last year's strengthening of the national currency a serious problem for exporters who incur considerable losses when exporting goods.

“The problem is not new, it has been persisting since 2022 - due to the devaluation of the dollar and the Russian ruble, there was a strengthening of the dram against the background of the transformations taking place in the market, and this problem is still relevant in 2023. The fact is that financial transactions under most of the concluded contracts are carried out in foreign currencies - dollars, rubles, euros, while the contracts were concluded when the dram exchange rate was higher, but now the picture is different, and the total amounts in drams are less than expected. This factor has already created problems in servicing bank loans borrowed in Armenian drams,” Gevorg Ghazaryan, head of the Department of Agro-Processing at the Ministry of Economy of Armenia, said recently.

Accordingly, the Ministry of Economy predicts an increase in the price of exports by the end of 2023, while the external supply of seasonal fruits and vegetables will decrease in volume.

All these factors significantly reduce the competitiveness of Armenian agricultural products in Russian and other markets. And the Armenian importers lose on the conversion of foreign currency into the national currency when buying goods abroad.

The strengthening of the dram had a very negative impact on the indicators of inbound tourism, as it led to an increase in prices for hotels, transport, and services, as well as prices in public catering and retail chains. Only air tickets to Armenia have risen in price by 20 per cent compared to last year.

In particular, as Mekhak Apresyan, the head of the country's Tourism Federation, recently noted, local tour operators suffered due to the strengthening of the dram: having sold tour packages for prepaid at the old rate, after the strengthening of the national currency, local travel companies had to cover the damage caused by themselves.

Moreover, representatives of the Armenian tourism industry this year expect a reduction in the flow of Russian tourists (their share exceeds 52 per cent of the total inbound volume), which is largely due to the restoration of direct flights between Georgia and Russia.

In the past, many Russian tourists used Armenia as a transit country, after which they continued their journey towards Georgia, but now, the Armenian tour operators believe that, given the rise in air travel in Armenia and the availability of direct flights to Tbilisi, the former advantages of the Armenian recreational sector are even more offset.

Moreover, there is practically no way out of this stalemate, since an artificial weakening of the dram is unlikely to help the country's economy.

According to the Minister of Economy Vahan Kerobyan, the Central Bank does not lower the exchange rate of the dram, fearing that buying dollars and throwing it into the market will only spin the flywheel of monetary inflation.