Severing Yerevan-Moscow economic ties could destabilize Armenia -  report 

ArmInfo. The severance of economic ties between Yerevan and Moscow could lead to systemic destabilization of Armenia's food security. This is stated in the analytical report of the Primakov National Research Institute of  World Economy and International Relations of the Russian Academy of  Sciences "Armenia's Foreign Policy at a Crossroads: A Multi-Vector  Crisis".

The authors of the report note that Armenia's foreign trade relations  with Russia ensure the republic's food, energy and economic security.  Along with curtailing cooperation in the political and military  spheres, the Armenian leadership expressed its intention to diversify  trade and economic ties through partnership with Western countries.  The legal basis for the partnership between Armenia and the EU is the  Comprehensive and Enhanced Partnership Agreement, which was signed on  November 24, 2017. The agreement was provisionally applied from June  1, 2018 and entered into force on March 1, 2021. At the same time,  the government of the Prime Minister of the Republic of Armenia Nikol  Pashinyan prefers not to give up the economic benefits and privileges  for Armenia as a member of the Eurasian Economic Union (EAEU).  This  gives Armenia the opportunity to maintain a stable socio-economic  situation and minimize the costs of ensuring the reorientation of  Armenia's foreign policy vector to the West.

"The formation of the national economic model of Armenia took place  in the context of military conflicts, political instability and not  always well-thought-out market reforms. In this regard, economic  losses during the last 34 years of sovereign development were  aggravated not only by the degradation of the industrial sector and  the system of cooperative economic ties with other former republics  of the USSR, but also by the loss of the scientific and technological  base, competitive technologies, transport and logistics difficulties,  as well as the energy crisis. Another feature of the Armenian economy  is a stable surplus of labor resources, which causes a high level of  migration outflow - mainly to Russia, the EU countries and the United  States. The problem of excess labor resources in the Armenian economy  and migration outflow worsened after the Second Karabakh War in 2020.  The economic model of the Republic of Armenia maintains a high level  of risks due to the unstable military-political situation, a weak  resource base and dependence on external sources of financing  consumer demand, foreign investment, as well as other foreign  economic factors - labor exports, consumption oriented towards  imported goods, investment and financial support from the diaspora,"  the report notes.

It was noted that in 1990-1995, Armenia experienced an average 10%  decline in gross domestic product (GDP) per year. The economic  recovery in 1995-2000, when the average annual GDP growth rate was  4.6%, was replaced by dynamic growth in 2000-2005 - up to 11.5% on  average per year, which was due to a favorable foreign economic  situation, primarily the development of economic ties with Russia.  Since 2005, the average annual GDP growth rate has been decreasing by  periods: in 2005-2010 - up to 6% per year, in 2010-2015 - 4% and in  2015-2020 - 2.7%. The downward trend in Armenia's economic growth  rates was associated with unfavorable regional and global economic  conditions, a sharp deterioration in relations between Russia and the  West since 2014-2015, which caused a restructuring of the  international trade system, as well as the global economic recession  caused by the consequences of the COVID-19 pandemic in 2020.

"In 2021-2024, the recovery of the Armenian economy was based on  several factors. Firstly, the recovery growth of 2021 was due to the  low base of 2020. Secondly, accelerated growth in 2022 (12.6%) and  2023 (9.4%) was associated with the redistribution of part of the  income of Russian exporters and importers through the intermediary  participation of Armenian companies. Thirdly, the growth factor was a  sharp increase in migration transfers and receipts from Russian  individuals who moved to Armenia for permanent or temporary residence  - the so-called "relocators", including investments at the level of  small businesses and start-ups. Fourthly, an even more significant  contribution to the economic development of Armenia was made by the  transition of a number of Russian companies to Armenian jurisdiction  in order to avoid the "sanctions" of the US and EU. Due to these  factors, domestic demand and investment activity expanded in Armenia.  This contributed to the increase activity of small and medium-sized  businesses in the republic, mainly in the service sector. According  to the Eurasian Economic Commission (EEC), in terms of GDP growth  rates, Armenia remains the main beneficiary among the EAEU member  states. At the same time, Armenia achieves its outstripping rates of  economic growth by increasing foreign trade operations primarily with  Russia. In 2023, the volume of trade between Armenia and Russia  reached $ 7 billion - a significant increase compared to $ 5.3  billion in 2022. Armenia's imports from Russia grew to more than $ 3  billion, and Armenian exports increased from $ 850 million to $ 4  billion, with a significant part of this growth coming from transit  goods from third countries. But this is due not only to the growth of  Armenia's re-export capabilities. The departure of Western companies  from the Russian market allowed Armenian suppliers to expand their  presence there. In 2024, mutual trade between the Russian Federation  and Armenia for January-September reached $9.9 billion, or 41% of the  republic's foreign trade volume for 9 months (it will likely exceed  $12 billion by the end of the year), including $2.28 billion in  exports from Armenia and $7.64 billion in imports to the republic.  Armenia's total exports for 9 months of 2024 amounted to $10.59  billion, imports - $13.12 billion, of which Russia accounts for 21.5%  of exports and 58.2% of imports. The EU accounts for just over 6% of  Armenian exports and 9% of imports," the report says.

Its authors note that the most important export goods for Armenia  remain gold, unprocessed or semi- processed, or in powder form  (growth by 13.0 times) and jewelry and its parts (growth by 10.3  times), telephone and telegraph equipment (growth by 29.6%), diamonds  (growth by 4.3%), copper ore, concentrate (growth by 15.1%). The  total share of these export commodity groups amounted to 67.4% of the  total export volume, of which gold accounts for 46.9%.

"The expansion of Armenia's foreign trade occurred mainly due to the  re-export of products to Russia and from it to third countries.  Inclusion in the re-export system of Russian precious metals and  stones is ensured by the preferential trade regime within the EAEU.

A distinctive feature of Armenia's foreign trade for the period from  2022 to 2024 was its involvement in parallel import schemes after a  significant increase in anti-Russian sanctions by the US and the EU,  which led to a significant change in the commodity and geographic  structure of foreign trade. The relative share of exports of  domestically produced goods has significantly decreased - to 18-22%  of the total volume. At the same time, Russia is the only traditional  market for exports of domestically produced goods for Armenia. A wide  range of Armenian products - from fruits and vegetables, food, wine  and vodka to electrical equipment - enters the Russian market. It is  Armenia's foreign trade relations with Russia that ensure the food,  energy and economic security of the republic.

According to official data of the Republic of Armenia, imports from  Russia account for 98% of wheat, wheat flour, sunflower oil and other  grain crops, almost 35% of imports of all agricultural products and  39% of poultry meat, about 40% of fertilizers for agriculture. The  breakdown of these ties can lead to systemic destabilization of  Armenia's food security. More than 50% of exports of bakery and pasta  products, 96.7% of all fruit and vegetable products and agricultural  products (dairy products and cheeses) are sent to Russia," Russian  analysts believe.

They also pointed out a special article of mutual trade between  Armenia and Russia - the supply of energy resources from the Russian  Federation at preferential prices, which creates a low level of  inflation and provides more than 91.7% of the republic's energy  needs. Refusal to supply energy resources at prices much lower than  world prices would significantly affect the competitiveness of all  industries and would lead to a significant drop in the country's GDP.

"Russia remains the leading investor in the Armenian economy. The  accumulated volume of Russian investments in Armenia as of October  2024 amounts to $4 billion. Armenia receives significant investments  and assistance from Eurasian financial development institutions - the  Eurasian Development Bank (EDB) and the Eurasian Fund for  Stabilization and Development (EFSD). Their programs are aimed at  implementing projects in the fields of infrastructure, agriculture,  industry, digitalization of the service sector and public  administration, and tourism development. The accumulated investments  of the EDB in Armenia as of the end of 2024 amounted to $488 million.  In 2025-2026, the EDB plans to invest up to $250 million in the  Armenian economy," the IMEMO RAS analysts recalled.

In their opinion, the political decisions taken by Armenia to  "diversify" foreign economic relations in favor of Western partners  imply the development of integration with the EU. This goal is  officially declared by the Armenian leadership. On January 9, 2025,  the Armenian government approved the bill on the country's accession  to the EU and sent it to parliament. At the same time, the Armenian  side still insists on maintaining its full membership in the EAEU,  which, given Yerevan's orientation toward the EU and the  establishment of a system of maximally liberal trade regimes in  Armenian-European trade, contradicts the interests of the Russian  Federation. In the current international political conditions, a  normal settlement of trade disputes between the EAEU and the EU  related to Armenia's entry into an association with the European  Union and movement toward full membership is virtually impossible.  "Considering the dominance of Russian energy supplies to Armenia and  the monopoly position of Gazprom Armenia (100% of the shares belong  to Gazprom), the abolition of preferences on export duties on gas  will lead to a 20-30% increase in the price of Russian gas (under the  current agreement, gas is purchased at $165 per 1,000 m3).  In total,  Gazprom has allocated about $550 million to finance infrastructure  projects in Armenia. Fuel is supplied to Armenia in transit through  Georgia. Gas from Iran could be an alternative. However, there are  infrastructural limitations on the throughput capacity of the  Iran-Armenia gas pipeline, which is about 2.2 billion m3 per year,  while today Armenia imports about 2.7 billion m3 from Russia. In  addition, price increases are inevitable, and additional difficulties  are possible due to the fact that gas supplies from Iran could be  significantly limited or even blocked by the US and the EU, as  contradicting the anti-Iranian sanctions regimes. If the US and their  allies will be able to put pressure on Azerbaijan and make it the  main supplier of gas, oil and oil products to Armenia, then the  Azerbaijani leadership will naturally want to receive not only  economic, but also geopolitical benefits from such a deal. The  Armenian leadership will have to explain such a course of events to  the country's population. Armenia imports nuclear fuel from Russia,  which for technological reasons cannot be replaced with foreign fuel.  In accordance with the signed agreement with the EU, it is envisaged  to close the existing Metsamor NPP and replace it with the  construction of small hydroelectric power plants and the use of  renewable energy sources. The Armenian government announced that it  will give preference to American investors in the event of the need  to build new NPP power units, rather than Rosatom, the report says.

It also points to a significant problem for the RA economy associated  with dependence on migrant remittances and assistance from Armenian  diasporas in Russia, the United States, and the EU. Migrant  remittances averaged 14% of GDP per year in 1995-2020. The total  inflow of remittances from abroad in January-September 2024 reached  almost $ 4 billion, decreasing by 7% compared to the same period last  year. Most remittances were received from 2 countries, accounting for  78.0% of the total inflow. More than $ 2.57 billion were transferred  from Russia in 2024 (a 14.3% drop compared to the same period last  year due to a decrease in the number of relocators and financial  restrictions in Western countries). The second source of remittances  was the United States, from where $0.5 billion came. Even a 4.5%  increase compared to the same period last year did not allow to  reduce the fivefold gap that exists in favor of transfers from  Russia. Such a ratio of cross-border transfers speaks for itself and  should also prompt the RA government to make balanced decisions.

One of the arguments of supporters of integration with the EU is the  decline in foreign direct investment. In Armenia, this negative trend  is associated with membership in the EAEU and anti-Russian sanctions.   However, in the event of a rupture in economic relations with the  EAEU and Moscow, it is possible to expect an increase in investment  inflow only in the extractive industries, which will completely come  under the control of foreign investors. In terms of natural  resources, the most attractive for foreign investors are molybdenum  deposits (according to the World Bank, Armenia contains up to 7.6% of  the world's reserves) and copper. For large European mining  companies, investments in these deposits are complicated by transport  and logistics problems. "The principles of regulating trade and  economic relations within the EAEU do not imply the possibility of  member countries joining other integration associations that open  them to the free movement of goods, services and capital. The  establishment of closer ties between Armenia and the EU, and even  more so the prospect of its accession to the European Union, directly  contradict the economic interests of other EAEU members. If the  Pashinyan government continues to worsen Russian-Armenian relations,  trade and economic cooperation cannot remain outside the framework of  new emerging trends. A significant part of Armenian exports is  directed to the Russian market. The Russian Federation accounts for  more than 95% of all exported fish, potatoes, tomatoes, apricots,  cherries, peaches, plums, up to 87% of cheese and cottage cheese,  water and alcoholic beverages. Finding alternative markets will be  difficult. In this context, a revision of all currently existing  bilateral agreements with Armenia seems inevitable. In the event of  Armenia's withdrawal or exclusion from the EAEU, it will lose  preferential regime for gas and energy supplies. In trade with Russia  and other members of the EAEU, a revision of all customs duties and  tariffs, as well as all other preferences associated with membership  in the EAEU, will be inevitable. Given the significant positions of  Russian property holders in Armenia (up to 70% of the most  significant industrial and energy assets of the republic), the  actions of the Pashinyan government may cause significant shocks to  the economy of the Republic of Armenia. A possible forced sale of  these assets, under the so-called sanctions and other restrictions by  the US and the EU against Russian companies, would be difficult for  both Russian owners and the Armenian government. Attempts to  nationalize the property of Russian companies would be an act of  economic warfare against Russia and could lead to a deep crisis in  bilateral relations," the report says.

It also notes that the termination of trade regimes existing in the  EAEU may create significant risks for entire sectors of the Armenian  economy. For example, the rise in prices for grain, forage and  fertilizers exported to Armenia may be painful for the Armenian  economy. Such a development will create problems for the  agro-industrial sector of Armenia, complicate the situation of  leading agricultural companies and reduce the purchasing power of  households due to the high share of bread and other food products  imported from Russia in the consumer basket of the population.  Attempts to connect alternative suppliers will require a significant  revision of the entire system of foreign trade, transport and  logistics schemes and new political agreements with Georgia,  Azerbaijan and Turkey. "In the event of Armenia's withdrawal from the  EAEU and a change in trade regimes, even if Russia does not introduce  non-tariff restrictions that would result in a one-time restriction  of trade operations for a number of exported and imported goods, the  adaptation period could be long. It could take 3 to 5 years for the  Armenian economy to switch to alternative trading partners for  Russia, primarily the EU and Turkey, and the prospects for success  for Armenian goods and services in these markets do not look bright.  Losses from the curtailment of trade and economic ties with Russia  could amount to 20% of GDP, which would primarily affect the standard  of living and accelerate the outflow of the working population from  the republic, primarily leading to the loss of the most qualified  workers. Some will leave for EU countries for higher salaries and  greater opportunities, and some of the human capital will be  attracted by the Russian economy. For many Armenians, the choice  between life and work in Russia and the European Union will be not  only economic in nature, but also cultural and civilizational. Of  course, Armenia's withdrawal not only from the CSTO, but also from  the EAEU would be a sensitive blow not only to Armenian national  interests, but also to the interests of Russia and Russian business.  But the risks and additional costs for Russian companies that will be  forced to change their foreign economic operations and sever ties  with Armenian partners are incomparable in scale with the  consequences that such decisions by the Armenian government could  entail for all Armenian business and the country's economy," the  authors of the report believe.