Armenia gradualy readjusting its economic orientation

Armenia is grappling with the complexities of breaking free from economic bonds with Russia. The small nation's economy, once heavily reliant on Russia, is showing signs of shedding its reliance—albeit slowly and with a hefty dose of caution.

In a bold move, Armenian banks decided to snub Russian bank cards earlier this year, aligning themselves with Western sanctions against Russia. This decision, while throwing a spanner in the works, was met with disapproval from Russian officials, who accused Yerevan of succumbing to Western pressure. Foreign Ministry Spokesperson Maria Zakharova even predicted that Armenians residing in Russia would find it more difficult to send money home.

Indeed, data reveals that the ban may well be impacting remittances. Bank officials announced that remittances from Russia – which once contributed as much as 5% of Armenia's GDP – were plummeting. Remittances from Russia during the first quarter of 2024 totaled $657 million, a significant drop from $1.1 billion during the same period in the previous year.

The decline in remittances was attributed to changes in the "settlement and payment system" by the head of the Armenian Central Bank, Martin Galstyan. However, he hinted that "geopolitical" forces might be at play, potentially changing the long-standing labor migration dynamic between the two countries.

Russian control over critical infrastructure is another factor Armenia must consider. As for trade, while Armenia's desire to shift its geo-economic center of gravity westward, Euractiv reported that Russia still accounted for almost 36 percent of Armenia’s overall trade turnover in 2023, with the European Union trailing behind at 13 percent.

Despite the slow progress, Armenia's Prime Minister Nikol Pashinyan has been touting a plan called "Crossroads of Peace" which aims to enhance Armenia's role as a hub for East-West trade. The EU and US recently agreed to provide Armenia with over $350 million in funding to help it recover from the war in Karabakh and reduce economic dependence on Russia.

Navigating a sudden shift away from the Russian market could be devastating for Armenia's economy, according to economist Suren Parsyan. He advocated for buying time, strengthening the economy, and diversifying connections before taking any drastic steps. Politics, Parsyan argued, must be balanced with numbers that don't lie—demonstrating Armenia's significant dependence on Russia.

Armenia's economic relationship with Russia is an intricate web of energy control, remittances, trade, and institutional integration. Yet, the tiny nation is taking cautious steps to reduce its over-dependence, seeking engagement from the EU for a more stable future. Yet, managing this delicate transition without facing sudden shocks to the economy remains a significant challenge.

A Glimpse into Armenia’s Economic Dependence on Russia

Control of Critical Infrastructure: Russia retains significant control over Armenia's energy sector through Gazprom Armenia.
Remittances: The Armenian diaspora in Russia sends substantial remittances back home, playing a crucial role in household income and macroeconomic stability.
Trade: Bilateral trade between Armenia and Russia has seen significant growth, underscoring the ongoing importance of economic ties.
Institutional Integration: Armenia's membership in the Eurasian Economic Union deepens its economic integration with Russia.

The Shifts and Challenges

Attempts at Diversification: Armenia is exploring avenues to reduce over-dependence, particularly in defense, after realizing the inadequacies of relying solely on Russian arms.
EU Engagement: The EU is emerging as a potential partner for reducing structural vulnerabilities. Proposals include tariff-free access for Armenian products and technical assistance for export-oriented sectors.
Volatility of Remittances and Trade: While remittances remain vital, they are subject to geopolitical and economic fluctuations. Trade growth with Russia could be offset by future developments or sanctions affecting the Russian economy.

The Fickle Balance: Between Russia and the EU

Dual Identity: Armenia must navigate a delicate balance as a member of the Eurasian Economic Union and an increasingly engaged EU partner.
Strategic Realignment: Analysts believe that Armenia's long-term economic sovereignty depends on strategic diversification, gradual reduction of reliance on Russian infrastructure, and sustained EU engagement.

The Consequences

Remittances: Any significant reduction in Russia's economic stability or changes in migration patterns could negatively impact remittance flows.
Trade: Existing trade with Russia leaves Armenia exposed to Russian economic shocks or geopolitical shifts. Diversification efforts could help mitigate this risk.
Geo-Economic Orientation: Armenia's future may involve a gradual shift toward the EU, but this must be managed carefully to avoid abrupt economic shocks. EU support, such as financial assistance, technical expertise, and market access, will be crucial for a successful reorientation.
The decline in remittances from Russia, once contributing significantly to Armenia's GDP, has become a concern in the wake of the ban on Russian bank cards, possibly signaling a shift in the geopolitical dynamics between the two countries.
The Armenian economy, currently facing challenges in reducing its over-dependence on Russia, may need to consider diversifying connections and strengthening its economy, as suggested by economist Suren Parsyan.
Despite Russian officials' disapproval, Armenia's moves towards partial disengagement from the Russian market, including its snub of Russian bank cards, have highlighted the need for a more balanced approach to politics and finance, aiming for a stable partnership with both the EU and Russia.