Re-export deadlock: Armenia's speculative economy A fragile future ahead

Armenia’s economy has become heavily reliant on the re-export of sanctioned goods to Russia and the resale of Russian gold over the past three years, significantly driving the country’s economic growth.

According to data from the Russian diplomatic mission in Armenia, trade turnover is expected to reach a record $14–16 billion by the end of this year. However, speculative factors in foreign trade present serious long-term risks to Armenia's domestic production. Furthermore, former Finance Minister Vardan Aramyan has warned that the Armenian government’s 2025 budget is precarious and full of risks, as its revenue growth depends on the unpredictable trajectory of global geopolitical developments and other external factors.

The re-export factor has become the main component of Armenian-Russian foreign trade relations since the spring of 2022, amid the escalation of the Russia-Ukraine conflict and the intensification of anti-Russian sanctions by the collective West. Against this backdrop, Armenian intermediaries—freight forwarding and transportation companies—began widely ordering consumer electronics, electrical equipment, machinery, industrial equipment, and various components from the EU, the US, Southeast Asia, and the UAE.

Most of these products are dual-use items, and after changing the customs documentation to Armenian records, they were rerouted to Russia with new invoices. According to last year’s report by Fitch Ratings, shipments from Armenia to Russia have increased by 300% since 2021, with Armenian re-exports to the Russian market accounting for 80.6% of the total external shipments last year.

Until recently, these questionable operations were openly facilitated by Armenian banks and insurers for processing payments and ensuring the safe transfer of sanctioned goods. However, due to clear pressure from the Western bloc, Yerevan has been forced to limit the intensity of financial transactions bypassing sanctions since the end of last year, which has impacted the flow of dual-use goods and equipment to Russia.

Specifically, in the first three quarters of 2024, re-exports of machinery, equipment, and mechanisms from Armenia decreased by 1.1%, compared to a 2.2-fold increase during the same period last year. At the same time, Armenia has been steadily diversifying the geography of its export operations, increasing the "shipping leg" for the sake of concealment. For example, exports of equipment under Armenian orders to the sanctioned Belarus have grown sevenfold over the past three years, and similar shipments to Kyrgyzstan have surged by 80 times (!).

"Russia expects to reach a record trade turnover with Armenia of $14–16 billion by the end of this year," noted Sergey Kopyrkin, the Russian Ambassador to Armenia, in an interview with Izvestia. "By the first half of 2024, trade turnover between the two countries exceeded $8.3 billion, surpassing last year’s total of $7.4 billion."

However, the Russian diplomat did not specify the key sectors of the Armenian economy that are expected to drive such a significant increase in bilateral trade. Yet, the answer is not hard to find: after the imposition of the embargo on Russian gold exports in 2022, aimed at limiting foreign currency inflows to Russia, there has been a notable rise in the share of precious metals in the Russian-Armenian trade structure.

In 2022, Armenia imported 89 tons of Russian gold worth $5.2 billion, and by the start of 2023, this increased to 111 tons valued at $6.2 billion. Almost the entire volume of Russian gold is re-exported to the United Arab Emirates (UAE) and partially to Hong Kong, from where large amounts of cash and securities are sent back to Armenia as part of settlement transactions. According to Armenia's Statistical Committee, the majority (82.7%) of diamonds imported from Russia were also exported to the UAE. The scale of these operations is confirmed by the flow of cash and securities from the UAE to Armenia, which totalled $1.45 billion in 2022 alone.

"The volumes of re-exported gold from Armenia remain significant, but now this gold is also processed within the country: gold bars imported into Armenia are being processed, which frees businesses from duties and creates new jobs," said Armenia's Minister of Economy, Gevorg Papoyan, in late October during a parliamentary speech.

However, in reality, Armenia’s jewellery industry is minimally involved in these operations and, in essence, does not participate in adding value through the production of gold jewellery or diamond cutting. In the vast majority of cases, the operations consist of simply stamping Armenian assay hallmarks on Russian-made products, which automatically removes these items from the sanctions list. Among the largest importers of Russian gold are companies affiliated with Armenian politicians and businessmen.

One of the key players is the Yerevan Jewelry Factory, linked to Khachatur Sukiasyan, a deputy from the ruling Civil Contract party. The company purchases gold from dozens of Russian firms and ensures its re-export under the guise of Armenian jewellery products. Other major participants in the re-export of jewellery and gold bullion include companies like Diamond Standard, TB Arm, and Win-Gold. Thanks to these straightforward schemes involving the change of assay markings, Armenia's jewellery industry has shown significant growth, increasing its exports from $26 million in 2020 to $499 million in 2023. Overall, between January and September 2024, the share of precious metals and diamonds in Armenia’s total foreign trade reached 55.5%, compared to just 15.4% the previous year.

The actual volumes and profits in the gold and gemstone speculation sector are tightly concealed. According to Armenian media reports, this remains a closely guarded secret, both from the public and from attempts by individual members of parliament to bring transparency to the sector. The true, undeclared profits of Armenian jewellery traders can only be speculated upon.

However, it is quite evident that the influx of foreign currency into Armenia from re-exporting goods, gold speculation, or the arrival of Russian relocants has had minimal impact on the real sector of the economy in the "land of stones."

One of the key sources of income for the "apricot republic" in the past two years has been the influx of Russian relocants and the provision of tourism services. However, while Armenia welcomed 2.317 million tourists in 2023, a 39% increase, the number of tourists has declined by 14% in the first three quarters of 2024. Profits from the hospitality sector are concentrated in narrow niche segments of the economy, while ordinary citizens of Armenia suffer from rising prices. Over the past three years, the country has seen unprecedented price increases for apartment rentals, hotels, air transport, service industries, and even food, retail, and dining services.

"Excluding the re-export of gold, the growth rate of exports of goods directly produced in Armenia was only 1.4%," reported Armenia's Minister of Finance, Vahagn Khachatryan, during a budget discussion in the parliamentary commission on financial-credit and budgetary issues. "Imports during the same period grew by 56.5%, but excluding re-exports, it declined by 5.2%. Overall, in 2025, the growth in export figures driven by re-export operations is likely to gradually decrease."

According to the minister, excluding the re-export of gold, Armenia's economic activity from January to August of this year was barely 6.4%, compared to the 9% recorded by the Statistical Committee.

According to Dr. Karen Adonts, an economist and expert, Armenia maintains relative stability solely due to its external demand-dependent model. However, it remains an agrarian-trading economy with limited sectors and no significant industrial potential. The expert emphasized that any external or internal factor could negatively impact both price levels and the dynamics of economic growth in Armenia.

A similar view is held by former Minister of Finance and international public finance management consultant Vardan Aramyan: "The 2025 budget is a reflection of 2024: the same risks and issues present this year remain and have even deepened, because our economic growth potential is weakening."

The expert pointed out that the upcoming budget year in Armenia is projected to have a significant deficit of around $1.5 billion, which will be covered by increasing public debt. While in 2024, the national debt accounted for 49.8% of the budget, by 2025, it is expected to reach 53.5%.

These views are supported by the majority of both international and Armenian experts, who believe that the effect of speculative GDP growth in Armenia is entirely dependent on re-export operations with EAEU countries. If the external situation changes due to shifts in the relationship between the West and Russia, Armenia could quickly lose all its trade advantages, resulting in a catastrophic collapse of its economy. Ultimately, after the short-term influx of foreign currency, Armenia will be left with only inflationary risks, a growing national debt, a budget deficit, and the need to sharply devalue its national currency. The latter is inevitable, as the current high exchange rate of the dram has already caused a "Dutch disease" effect, making investments in Armenia’s real economy unappealing.