The Economic Implications Of Russia-Ukraine War For Armenia – OpEd

20 April 2022 - 15:06

The Russia-Ukraine war that started on February 24 was accompanied by harsh reactions and comprehensive economic sanctions from the countries of NATO and the European Union. Tensions over the Ukraine-Russia crisis have been intensified in late 2021 when Russia began deploying large numbers of troops close to Ukraine’s borders.

As part of counteractions against Russia, western states imposed heavy sanctions on Russia in different sectors, such as energy, finance, and trade. While the US has banned all imports of Russian oil and gas, Germany has already put on hold permission for the Nord Stream 2 gas pipeline. In the financial sector, the assets of Russia’s central bank have been frozen, and several Russian banks have been removed from the international financial messaging system of SWIFT. The US, EU, and UK have also banned people and businesses from working with Russia’s central bank, finance ministry, and wealth fund and limited their trade relations with Russia. As a result of the sanctions, the national currency of Russia (the ruble) fell 30% against the US dollar. Also, new sanctions are planned to punish Russia over civilian killings in Ukraine.

Although the main goal of these sanctions is to punish Russia, they will also have indirect effects on the economies that have close economic relations with Russia, especially on members of the Russian-led Eurasian Economic Union. Thus, the already struggling economy of Armenia, which is heavily dependent on Russia, will also be significantly affected. These expectations have already negatively affected the economic growth forecasts for Armenia for 2022. The Central Bank of Armenia decreased its GDP growth forecast from 5.3% to 1.6%. The International Monetary Fund (IMF) has revised its forecast for Armenia’s economic growth from 4.5% to 1.5% for the current year. According to the IMF, higher food and fuel prices, lower remittances from Russia, increased global financial market volatility, and a widened current account will reduce economic growth in the coming months. On the other hand, Fitch Ratings revised down Armenia’s growth projection for 2022 sharply to 1.3% from 5.3%.

Despite the mentioned changes in forecasts, the Armenian government maintains the previously announced growth forecast of 7% for 2022. According to the Minister of Economy of Armenia, the government still sees enough potential to achieve this target by implementing the current economic policy. However, taking into account the current economic conditions formed by the sanctions and the substantial dependence of the Armenian economy on Russia, it seems unrealistic to achieve a high growth level. It seems that by showing confidence in the realization of the current economic policy, the Armenian government is trying to avoid social discontent.

The sanctions are also having a significant impact on Armenia’s trade relations with Russia, its main trade partner, which accounted for 31% of the total trade turnover in 2021. After the start of the war, all Armenian exporters to Russia are experiencing a decline. Even though Armenian export to Russia grew by 25–27% in February of 2022, it decreased by 30% in March. Despite these negative changes in bilateral trade, the Armenian government thinks that the deficit that has emerged in the Russian market because of the departure of many Western companies gives them new chances to increase their share in the Russian market. However, taking into account the declining demand in the Russian market, the limited production abilities of Armenia and quality differences, it would be impossible to substitute western products in the Russian market. Therefore, as long as the sanctions remain in force, it is going to be difficult for Armenia to recover trade levels with Russia.

Russia is also the main source of remittances to Armenia, even though its level has decreased significantly since 2014 because of the imposed sanctions by the European Union and the U.S. on Russia for violating Ukraine’s territorial integrity. In 2015, the level of remittances decreased from $1.55 billion to $1 billion, and in 2021, it was about $866 million. As the new sanctions are more comprehensive and severe, they are going to have a greater impact on the levels of the remittances. The reduced potential of Armenian workers to earn money and the cheap ruble will play an important role in this process. According to the Armenian Finance Minister, due to the situation in Russia, the level of remittances could drop by around 40%. It will directly impact the welfare of families in Armenia who rely on this source of income.

Due to sanction-related economic problems, the Armenian workers in Russia will not only lose their ability to send money back to their families, most of them will also lose their jobs and will return to Armenia, deepening the unemployment problem. Despite some developments in 2021, the unemployment rate in Armenia is among the highest in the Commonwealth of Independent States countries, at 15.3%. Therefore, the returning work force from Russia will put noticeable pressure on the labor market of Armenia by raising unemployment to more dangerous levels.

Expected economic problems will also affect the debt-to-GDP ratio, one of the main indicators of the economic security of the country. At the end of 2020, the debt-to-GDP ratio of Armenia reached a dangerous level of 63.5%. After that, the Armenian government planned to significantly improve this figure in the next five years and was able to decrease it to 60.3% in 2021. However, because of the expected effects of the war, it will be impossible to continue this trend as the mentioned economic problems will negatively affect economic activity and will be accompanied by lower tax revenue performance than expected. This in turn will increase the debt-to-GDP ratio of Armenia.

All the mentioned factors demonstrate that the sanctions imposed against Russia will have a comprehensive and long-lasting impact on the Armenian economy, which was already damaged by the implications of the 44-Day War and pandemic in recent years. The new economic problems will significantly decrease the purchasing power of the population and will further increase social tensions within the country. Therefore, the Armenian government could face serious pressure from the Armenian society if it is not able to manage the upcoming economic problems efficiently. This situation also shows how risky non-independent economic policy can be when geopolitical crises arise.

https://www.eurasiareview.com/20042022-the-economic-implications-of-russia-ukraine-war-for-armenia-oped/