What Impact Will the Russia-Ukraine War Have on Armenia?

In recent months, the geopolitical tensions between the West and Russia have led to a large-scale war, which will undoubtedly have a significant impact on the global economy. Armenia is not exempt from this situation.

News.am reports: "Since 2014, Armenia has been a member of the Eurasian Economic Union, which is centered around the Russian Federation. The economic crisis caused by the pandemic dealt a heavy blow to all EAEU member countries: Russia's economy contracted by 3 percent, Armenia's by 7.4 percent, Belarus's by 0.9 percent, Kazakhstan's by 2.5 percent, and Kyrgyzstan's by 8.6 percent. The year 2021 became a recovery year for the Russian economy, with a growth of 4.4 percent, supported by the increase in natural gas prices on the global market and the rise in exports to EU countries.

Notably, in 2021, the Russian economy fully recovered, while Armenia's did not. The year 2021 was marked by achievements in Armenian-Russian economic relations: Armenia's exports to Russia amounted to $847 million, an increase of 24.5 percent compared to the previous year. Imports from Russia also registered a growth of 19.2 percent, totaling $1.9 billion in 2021.

Armenia's exports to Russia make up 28 percent of its total exports, while imports account for 33.3 percent. The main exports to Russia consist of ready-made and consumer products (preserves, wine, brandy, agricultural products, jewelry, etc.), which bring greater benefits to the Armenian economy. Imports from Russia include energy resources, metals, construction materials, and consumer goods.

Western economic sanctions will slow down the development of the Russian economy. A reduction in investments and negative expectations will sharply devalue the Russian ruble, resulting in an increase in the prices of imported goods, including Armenian products, amid falling incomes in the Russian market. This means that the continuing devaluation of the Russian ruble could lead to a decrease in exports from Armenia.

Since the independence of Armenia, the Russian Federation has been the main destination for labor migration. Every year, tens of thousands of Armenian citizens go to the RF for work, enabling significant remittances into the country. In particular, in 2021, individuals transferred $865 million from Russia to Armenia through banks, which accounted for approximately 41 percent of total remittances. Without this financial support, many people living in Armenia would find it impossible to survive.

Moreover, Russia is considered the largest investor in the Armenian economy. Specifically, from January to September 2021, the net inflow of investments from Russia amounted to 52.4 billion drams, nearly double compared to the previous year. Numerous large companies in Armenia operate with Russian capital, some of which are subsidiaries of Russian parent companies, for example, Gazprom Armenia.

Direct sanctions imposed by Western countries on Russian companies could also affect the subsidiaries operating in Armenia. Five of the top ten largest tax-paying companies in Armenia are Russian-capital companies, which have created thousands of jobs and contributed billions to the state budget. Possible restrictions on Russian companies' operations could significantly impact Armenia's investment environment. Currently, the sharp drop in the stock prices of Russian companies is impossible to halt, and foreign investors are rushing to divest from them.

In summary, the economic risks in Armenia are quite high, and the Armenian government needs to adopt a comprehensive approach to cope with these challenges without waiting for damages to manifest.