When the economic situation requires immediate actions
In an attempt to create a positive information background, the Armenian government publishes positive economic forecasts. For this reason, the statements of representatives of the republic’s leadership do not inspire confidence.
Three factors will objectively influence the economic situation in Armenia in the foreseeable future. First, it is psychological moment. On the one hand, defeat in the war is hard enough to have a demoralizing effect, but on the other hand, it is not a complete defeat. The experience of history shows that the lost is painful, but without the surrender of the war, in the long term it can be useful and give an impetus to modernization. Secondly, it is unknown whether Nikol Pashinyan will stay in power and whether he will continue his liberal-technocratic reforms in the coming months. If Pashinyan fails, it is even more difficult to predict the content of the economic policy of his successors. Thirdly, it is the factor of a large number of refugees.
According to the official forecast of the Ministry of Finance of Armenia, voiced during the discussion of the country’s budget for 2021, by the end of this year, the national economy will lose 6.8%. Compared to the 2009 crisis, when the Armenian GDP collapsed by 14% at once, this may not be the most impressive failure, but in connection with the recent events in Nagorno-Karabakh, one certainly cannot count on a quick recovery. The previous forecast assumed that next year the current failure will be partially compensated, and the country’s economy will return to interrupted growth, but now the estimates will have to be revised.
Russia will also have to pay for the sudden escalation of the Karabakh conflict by Azerbaijan. The maintenance of the peacekeeping contingent is the tip of the iceberg of future expenses.
Initially, the Armenian authorities expected to stimulate economic recovery by increasing budget spending. In the draft budget presented in early November, next year it was supposed to increase capital expenditures by 215 billion drams, or 3.2% of GDP.
In a recent review of the prospects for the economies of Europe and Central Asia, the main creditor of Armenia, the World Bank, predicted an increase in the scale of the country’s public debt to 63.8% by the end of this year. It is noted that the direct consequences of the loss of territories for Armenia will be associated with the loss of access to the energy and mineral resources of Nagorno-Karabakh.
Armenia has a chronic trade deficit, which is likely to reach record levels this year, and will lead to pressure on the national currency. Since the beginning of hostilities in September, the dram has fallen by 4% against the US dollar, and the negative trend for the Armenian currency will continue to develop. By the end of the year, AMD may lose another 5–10%. Surely this will affect the general inflation rate in Armenia, and the flow of refugees from Karabakh will increase pressure on the labor market. The rise in energy prices on the world market also looks like a bad option for Armenia. In general, by the end of the year, we can expect a worsening of the macroeconomic situation in the country.
The diplomatic and economic sponsor of the semblance of peace achieved in Karabakh will be Russia, which itself is now experiencing an ever-growing socio-economic and political crisis. Gas tariffs may become the most obvious subject for donation.
Gazprom has kept the price of gas at the border for Armenia at $165 per thousand cubic meters, but with the onset of the coronavirus crisis, the topic of price reductions has predictably surfaced. Already at the end of March, the country’s government announced its intention to start negotiations on this topic. Pashinyan even persuaded Belarusian President Alexander Lukashenko to his side: following the results of their telephone conversations, a statement was made that the price of Russian gas did not correspond to “the world level and the current situation in general.” The Russian side refused to revise the terms of the contract for the current year, and since July 1, the tariffs of Gazprom Armenia for large consumers have increased by 10%.
The loss of a significant part of Nagorno-Karabakh carries large-scale risks to the Armenian economy. It’s not just the influx of thousands of refugees at a time when the republic’s budget can barely cope with the burden caused by the ongoing COVID-19 pandemic. In Nagorno-Karabakh, it was possible to create a completely effective economy, integrated with the “mainland”, and now its prospects are under a huge question. At the same time, the new configuration of forces in the region is unlikely to reduce the Karabakh component of Armenia’s budget, and may also require even greater military spending.
The leadership of the republic is using the available reserves, thar are not possible to intensify.