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2 November 2023

Russia's Powerful Economic Levers Over Armenia

As political relations deteriorate, Armenia's economy is more closely linked to Russia than ever.

Russia's Powerful Economic Levers Over Armenia

Image: rs.ge

(Eurasianet) Armenia's relations with its strategic partner Russia are getting worse and worse and its leaders seem to desire a shift in geopolitical orientation towards the West. 

But a look at Russia's powerful levers over the country makes that kind of thinking seem delusional. 

And Moscow has begun dropping hints of how much economic pain it can inflict on Armenians. 

Armenian officials offer assurances that all is fine on the economic front, but economists and businesspeople are increasingly worried about possible consequences of the political tensions.

About 40 percent of Armenia's exports go to Russia, and Yerevan's dependence on Russia for basic goods is overwhelming. 

Gazprom Armenia, the local subsidiary of the Russian state gas company, owns all of the country's gas distribution infrastructure. Imports from Russia of grain and petroleum products also enjoy a near monopoly. 

Armenia's economy is heavily dependent on migrant laborers sending their wages back home from Russia. In 2022 money transfers from Russia accounted for 3.6 billion dollars out of the total 5.1 billion entering the country.

Warning Shot Fired

On 24 October the lower house of the Russian legislature, the Duma, postponed debate on a bill that would have recognized Armenian driver's licenses for business and labor purposes. The move was widely seen in Armenia as politically motivated and a hint of the economic sanctions that Moscow could implement in a bid to bring its wayward junior partner to heel. 

 In fact, Duma Speaker Vyacheslav Volodin all but directly said that the decision was linked to what he called the Armenian government's failure to take steps toward granting official status to the Russian language.

 Many Armenian labor migrants find work in Russia in the service industry, including as taxi drivers. They have long sought relief from bureaucratic headaches through the recognition of Armenian driver's licenses. Now that seems less likely than ever. 

Economist Suren Parsyan believes the Russian MPs' decision amounts to a "warning shot."

"This is just a gesture for now, one that could be followed by harsher measures if political relations deteriorate," Parsyan told Eurasianet. 

Economic Dependency Grows

The steady worsening of political ties between Armenia and Russia has had an inverse relationship with the two countries' growing economic cooperation over the past year and half or so. (Eurasianet reported on the same trend in April.)

After the U.S. and EU imposed sanctions against Moscow over its war on Ukraine, Armenia became one of several countries through which Western products have been entering Russia. 

In 2022 the volume of trade between Armenia and Russia nearly doubled, reaching 5.3 billion dollars, according to Armenia's state statistics agency. Armenia's exports to Russia nearly tripled, from 850 million dollars in 2021 to 2.4 billion dollars the following year. Imports from Russia were up 151 percent, reaching 2.87 billion dollars. 

The trend continues apace. The total trade volume for January-August, 2023 surpassed 4.16 billion dollars, a record level since the collapse of the Soviet Union. Exports from Armenia to Russia in this period totaled 2.3 billion dollars and for the first time exceeded the import figure, which stood at 1.86  billion dollars.

Unsurprisingly, most of Armenia's exports to Russia these days are in fact re-exports of Western products that Moscow is no longer able to get directly. 

Armenian Finance Minister Vahe Hovhannisyan recently framed the centrality of re-export in the structure of trade with Russia in stark terms: He said that while exports to Russia were up 215 percent for the first half of 2023 compared to the same period last year, re-export accounted for 187 percentage points of this growth while exports of Armenian products accounted for just 28 percentage points. 

The overall effect is that, since its invasion of Ukraine, Russia has greatly strengthened its positions in Armenia's economy. And many worry that this growing dependence on Russia could greatly limit Armenia's room for maneuver in the political arena.

"The fact that 55-56 percent of exports to Russia are not raw materials but finished goods, speaks to Armenia's high degree of dependence. And in these conditions, if Moscow introduces sanctions, they will be very painful for Armenia," said Suren Parsyan, the economist, adding that there is little prospect for redirecting these goods to Western markets. 

"Quality standards are different there. It would require overhauling whole sectors of the economy, which is a complicated and time-consuming process. And during this time many businesses would close, which would cause growth in unemployment and a worsening of the overall social-economic situation," Parsyan said.

He added that he has not seen any real attempts by the Armenian authorities to diversify the country's economic relations and reduce its dependence on Russia. 

Economics Not Influencing Politics

There is no sign that Armenia's increased economic cooperation with Russia is having any influence on the growing political crisis between the two countries, according to analyst and director of the Caucasus Institute, Aleksandr Iskandaryan.

He pointed to Prime Minister Pashinyan's recent statement that Armenia does not intend to change its foreign policy vector despite its displeasure with Moscow's refusal to support Yerevan in the conflict with Azerbaijan as well as Pashinyan's recent remark to The Wall Street Journal that Armenia does not benefit from the presence of roughly 10,000 Russian soldiers on its territory. 

"The thing is that, so far, this crisis has not gone beyond the level of discourse. There have been no institutional changes in Armenian-Russian relations. They [such changes] are spoken about, they're discussed, but Armenia remains a member of the Russia-led Collective Security Treaty Organization, Commonwealth of Independent States and Eurasian Economic Union. If and when relations deteriorate at the institutional level, interactions will deteriorate at the institutional level as well," Iskandaryan told Eurasianet.