Armenia-Russia Trade and Investment summary, 2023
By Constantin Duhamel
A Shared Orthodox Heritage
Russia and Armenia’s proximity at heart stems from their interaction in Russia’s 18th century expansion in the Caucasus. Similar to the Ossetians and to a lesser extent the Georgians, as a fellow Christian nation with the oldest Christian Church Armenia has long sympathetically looked at Russia for support against its Turkish and Turkic neighbours.
A Relationship Tested by Time
Armenia has therefore been a natural candidate and enthusiastic member of the Eurasian Economic Union (EAEU) as the less than 3 million-strong nation gains access to a market more than 50 times its size. The Armenian diaspora across the EAEU and in Russia particularly is almost as large as its own population – something that can only be conducive to fruitful commerce. Armenia is also a member of the Collective Security Treaty Organisation, a Russia-led security bloc.
Cold Winds from the East?
An uptick in troubles in Armenia’s unrecognised Karabagh region have coincided with the start of conflict in Ukraine and set in a period of tension in Russian-Armenian politics. Russia stepped in to end bloodshed in extremis during the Armenian-Azerbaijani war of 2020 and Armenia called upon the CSTO’s joint security clause – something akin to NATO Article 5 – not once but twice, most recently in the Summer of 2021 where it was almost ignored. Though CSTO forces could hardly deploy beyond internationally recognised borders, perceived lack of support from Russia has left Armenian Prime Minister Nikol Pashinyan sceptical of the potential of support from the Organisation and Russia in the future.
Flourishing Economic Relations
The opposite is true for economic and commercial relations. Part of the EAEU Customs Union and Free-Trade Area – marketed as a single-market-to-be – Armenia has been one of the main conduits of trade with Russia along with Turkey and Kazakhstan. The opportunism present in Russian-Armenian relations has here come bare, with Armenia acting as a parallel import hub and safe haven for Russian cash and a 100,000-strong Russian labour force seeking relative stability. Stories relating to sky-high rents in Erevan and volatile banking fees are widespread amongst the self-styled intelligentsia that has poured out of Russia over the course of 2022.
Towards Less Friction with the EU?
Armenia has also signed a Comprehensive and Enhanced Free Trade agreement with the European Union, including everything but customs and migration (currently covered by Armenia’s EAEU status). Armenia will eventually have to choose towards which market it will gravitate, whether cozing up to the EU or EAEU.
A Dynamic Market
Armenia boasts a 11% GDP growth for 2022, while GDP to capita to rise from USD 4000 to 7000: good development hurdles are being overcome as it benefits from the Russia-Ukraine arbitrage.
2022 Investment & Capital Markets Summary
Fig. 1 Armenia FDI statistics
Russia Holds Top Spot in Armenian-bound FDI
As of 2022, 40% of Armenia’s Foreign Direct Investment is of Russian origin, worth some USD 2 billion 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 has noted that Armenian FDI was projected to grow by 25% YOY – leading to a USD 7 billion figure in FDI – by year-end. Although statistics collected during this exercise were not able to confirm this and perhaps for accounting reasons, few countries can boast such YOY figures for FDI. There have certainly been a record number of FDI projects announced, as will be discussed in 4.
Fig. 2 Armenian Bank Performance in USD million, 2022
A Record year for Armenian Banks
The Armenian banking system by year-end of 2022 processed no less than USD 3.2 billion in payments from Russia – a four-fold increase in the figures from 2021. Consequently, non-interest income (such as payment fees) rose 267% as interest income increased only 9 %.
Fig. 3 Total Armenian Trade in 2022, USD millions
Russia Remains Top Trade Partner – By Far
As a landlocked country surrounded by larger nations, Armenia is unsurprisingly a structural importer, running a deficit as visible above. Its top trade partner is by far Russia, equally over twice trade with the EU and nearly three times that with China. This is large part explains its political choices and the wish to remain close to Moscow.
Fig.4 Armenia’s Main Trade Ppartners (in decreasing order) 2022, USD billion
|USD billion||Turnover, 2022||Turnover, 2021||% change|
of which Russia
2022 – A Notable Year
YOY change in trade stuck around the +40% mark in terms of turnover – a testament to the importance of Armenia as a trading hub for the region. These are remarkable figures and reflect more than just supply chains for Russia re-routing via Armenia. It is really a testament to Armenia’s ability to use several levers and maximise its trade.
Fig. 5 Selected Trade Balances
|USD billion||Balance, 2022||Balance, 2021||% change|
of which Russia
Deficit Closed with EAEU and Russia, increases with EU and China
On account of the important figures in Armenian exports to Russia, Armenia no longer acts merely as a recipient of Russian resources. The relationship between the two parties has clearly levelled as a result of actions in 2022. Armenia continues to source goods from the EU and China – increasing its deficit to cater for Russian demand – and then sells this on to Russia at a mark-up.
Fig. 6 Russia-Armenia trade, by Category
|USD mln||Value, 2021|
|Precious metals and stones||91|
|Finished goods (machinery)||80|
Source: Trading Economics, per last available statistics.
A Traditional Trade Partner
In terms of trade by category, Russia and Armenia’s trade mix is typical: a vast majority of hydrocarbon products, followed by gold and precious stones (typically flowing into Armenia to be processed and sold). Agriculture (e.g. wheat) and machinery from Russia and niche agricultural products from Armenia to Russia complete the picture.
Fig. 7 Key Indicators
|USD:AMD, official||CB Interest rate||Inflation rate||GDP Growth||GDP per capita (predicted)|
|392||12.25%||8%||11%||USD 4000 (7000)|
AMD = Armenian Dram. Source: IMF, valid as of 20/02/2022.
High-Growth Likely A Mainstay – But At A Cost
According to the IMF, the best performing sectors in the Armenian economy in 2022 were services, namely: accommodation, transport, banking (>35%), IT (>26%) and construction by circa 20%. The government certainly expects to keep these numbers up and court other countries to do so. Excess demand, however, has put pressure on prices in Armenia, especially by proxy Russian economic actors. The IMF notes that salaries grew by around 14% YOY and rents double that in H12022 – something local Armenians cannot view positively.
An Elephant in the Room
Again according to the IMF, Russia’s USD 0.6 billion deposits in Armenian banks are a risk to local consumers, as movements in capital risk impacting the liquidity of lenders expanding credit on Russia-related collateral – should there be a payment run on these banks.
A 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 attractivity with a highly-qualified labour 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 remains the only real source of instability for investors considering the country.
Fig. 2 Overview of FDI projects in Armenia
|Name of Project||Sector||Origin||Comments|
|NVIDIA||Tech||USA||Open centre in Yerevan|
|Advanced Micro Devices (AMD)||Tech||USA|
|Masdar||Energy||UAE||400MW 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, Armenia’s immediate prognosis, despite problems with Azerbaijan, remains positive. Now a strategic trade hub between the EU and Russia, its new capabilities are a increased level of imports from the EU, and an increased level of exports to Russia as traders take advantage of the EU political exit from the Russia. However that does not equate to a trade exit, and it is important to understand Armenia in this context. That EU export manufacturers have pulled out of the Russian market directly – a political desire – this does not mean they have exited the Russian market – a capitalist desire. Russia was the EU’s first trade partner, accounting for 37.3% of the country’s total trade in goods 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 cue from direct trade, and slumped by 45% in 2022. However, Russia’s imports from Armenia tripled in 2022, to US$2.4 billion. Armenia – and specifically Georgia, Azerbaijan and Turkiye, together with Kazakhstan and Uzbekistan all saw significant exports to Russia and significant import increases from the EU. European Union export manufacturers have not necessarily lost significant market share in Russia, they are instead selling via Armenian and neighbouring middle-men. The EU is caught between a real political exit and an unreal export market exit.
Armenia is almost perfectly positioned to take advantage of this and has been. The EU has been making noises about imposing secondary sanctions on countries such as Armenia to punish Armenian traders and the Government for allowing this middle-man status to develop. Yet at the same time, any pressure upon Yerevan to do so would not sit well with other EU programmes and enticements it wishes to place on the country to entice it to trade more with the EU. Armenia’s existing trade dynamic therefore is somewhat dependent upon the Russian sanctions continuing, and the EU reluctant to impose penalties on third countries for serving Russia. Armenia’s resurgence is directly linked to the EU’s fracturing between its political actions and those of its corporate export community.
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