Despite fears of a new war with neighboring Azerbaijan, Armenia’s economy performed remarkably well last year, with an influx of Russian migrants contributing to exceptional growth.
Armenia is home to 2.9 million people and is located in the South Caucasus. It has long benefited from remittances from its large diaspora while suffering from geopolitical uncertainty.
After a 1988 earthquake that destroyed 90 percent of Spitak and half of Armenia’s second-largest city, Gyumri (then known as Leninakan), Armenia suffered further damage in the First Karabakh War with its neighbor Azerbaijan.
Today, Armenia is a member of the Eurasian Economic Union and the Russian-led Collective Security Treaty Organization (CSTO) – although its relations with Moscow have become increasingly strained after the CSTO failed in clashes with Azerbaijan in 2022 and Russian peacekeepers Defending land failed to address an Azerbaijani blockade against Armenians in Nagorno-Karabakh.
Armenia is struggling to balance favorable economic and political relations with its southern neighbor Iran and with Western countries home to large Armenian diasporas such as France and the United States. The risk of another conflict with Azerbaijan over areas in southern Armenia that Baku covets as a land bridge to its Nakhichevan exclave remains high.
In addition, Armenia is currently struggling with the arrival of over 100,000 displaced Armenians from Nagorno-Karabakh, which represents a major challenge for the country.
Resistance to external shocks
Other geopolitical developments – particularly the war in Ukraine – have proven more beneficial. Western sanctions against Russia and the mobilization of many Russians to fight in Ukraine led to a mass influx of Russians into the South Caucasus, many of whom settled in Tbilisi and Yerevan.
Newly arrived Russians brought capital and led to an increase in consumption and services, which in turn boosted gross domestic product (GDP) growth to a whopping 12.6 percent in 2022. Remittance inflows increased reserve levels and reduced credit dollarization.
This positive momentum continued in the first half of 2023, with double-digit real GDP growth of 10.5 percent (year-on-year). As in 2022, the services sector, particularly in IT, trade and transport, played a key role in this growth.
The rise in inflation – 8.6 percent in 2022, up from 7.2 percent in 2021 – was caused by active inflation targeting, and the country was recognized by the World Bank for its adherence to prudent fiscal policies and sound supervision of the financial sector praised. The World Bank and the Asian Development Bank have also praised Armenia’s recent transparency and anti-corruption reforms.
“Recent economic shocks such as the Covid-19 pandemic have disrupted Armenia’s growth momentum, but the country has shown a remarkable commitment to reforms that has allowed it to maintain sustainable debt levels and the credibility of macroeconomic management,” the Director General said the Asian Development Bank for Central and West Asia, Yevgeny Zhukov.
Nevertheless, low investment rates, low foreign direct investment attraction, limited human capital, inadequate diversification and a narrow export base are serious structural challenges that limit the economy’s productivity.
Build growth
One of Armenia’s strongest sectors is the construction industry, which played an important role in the reconstruction of cities after the Spitak earthquake.
In 2005, the sector’s annual growth was about 40 percent – contributing significantly to the overall GDP growth of 13.9 percent that year. In 2009, construction accounted for 30 percent of Armenia’s economy, but construction volumes fell 37.4 percent that year as what former Armenian Prime Minister Tigran Sargsyan called a “construction bubble” burst.
The sector then declined for a decade but began to grow again.
Today, the outskirts of Yerevan are filled with new housing, and the construction sector accounted for 7.2 percent of GDP in 2022 – which, while well below its share in 2009, is still the eighth largest national construction sector in Europe and Central Asia. In line with the increase in public and private investments, construction activity increased about six times to 18.8 percent in 2022.
Armenia’s construction sector is expected to grow by 17.6 percent in 2023 before declining to 12.9 percent in 2024. Increased government spending – including planned major public investments in the country’s north-south road – will drive this growth.
However, overall GDP growth is expected to fall from the exceptional rate in 2022 to a still-robust but less unusual 6.5 percent in 2023 and 5.5 percent in 2024 – still largely due to that growth in the service sector. Lower growth, tightening monetary policy and a smaller budget deficit will contribute to a decline in average inflation to seven percent in 2023.
“Uranium is found in granite rocks and is mined in granite mines through block leaching, which significantly increases the cost of the products mined. In other countries, uranium is found in soft soils and is mined using the cheaper method of underground leaching.”
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