Hardship on the horizon: Armenia amid sanctions against Russia

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According to recent analyses and opinions in the international media and amongst experts, Russia has less tools to counteract the long-term impact of these sanctions. As reported by The Economist, restrictions on technology exports will gradually hit the country’s economic growth, causing great inconvenience to Russian consumers. Financial constraints will also strike immediately, causing capital outflows and halting external finance. Jason Furman, a former chair of President Barack Obama’s Council of Economic Advisers and current professor of the practice of economic policy at Harvard University, believes that in the longer term Russia will likely be the conflict’s biggest economic loser. This position is of course after Ukraine, whose losses will go well beyond what can be measured in the national accounts. Furman believes these sanctions will be much heavier than the sanctions of 2014, as Russia will be almost wholly separated from the entire international financial system. The professor has stated that “Russia’s economy, and the well-being of its population, have been stagnant since the Kremlin’s 2014 annexation of Crimea. The fallout from its current, large-scale invasion will almost certainly be more severe over time. Sanctions will increasingly take a toll, and Russia’s growing isolation, as well as heightened investor uncertainty, will weaken trade and other economic links.”

Effect on Armenia

According to analysis published by Al Jazeera, the devaluation of the rouble, potential problems with imports and general political uncertainty may undermine any business’s desire to take risks. This would result in lower growth in agriculture, lower overall supply and even higher food inflation. In addition, disruptions to payment systems may lead to issues regarding the supply of imported goods to Russia, further accelerating inflation. Disconnecting the country’s largest banks from making customer payments will also disrupt the flow of goods and encourage a consumer market deficit. Some companies that focus on importing goods to Russia or selling imported goods in the country may go bankrupt. The average Russian citizen will pay the price for this, as real household incomes shrink. As usual, inflation will hit the poor hardest.

Armenia, which is not only a strategic ally but also a significant trading partner of Russia, is already facing economic trouble due to the large-scale sanctions against Moscow. First of all, this is clear in terms of the devaluation of the rouble. According to the website Rate.am, the maximum rouble price in Armenian banks as of March 5th is 4.61 Armenian drams (AMD). In parallel with the Russian rouble, the Armenian dram has been depreciating in value against the dollar and the euro. For instance, banks are now already selling one dollar for 525 drams.

Armenian economists, entrepreneurs and private business representatives are already warning about such hardships and the possible risks and consequences for the economy. According to them, this situation has already led and will lead in the near future to a sharp rise in prices for the whole assortment of food and goods imported to Armenia. According to official statistics, prices in Armenia increased by 6.5 per cent last year. This year we are only in spring but the prices of gas, water and electricity have already risen.

The chairman of the Consumers’ Union of Armenia, Armen Poghosyan, is confident that inflation will continue to increase given the current logic of events. After all, economic pressure on Russia cannot but affect Armenia. Poghosyan has stated that the only way to cope with this situation is to manage the economy so that the balance of imports and exports changes at least slightly towards exports. “Exports are now three times smaller than imports. This means that we pay the workers of another country, i.e. workers of Turkey or other countries. We need to increase our exports as much as possible. Of course, imports cannot be absolutely zero, but the balance must be shifted to exports.”

The chairman of the Consumers’ Union also expressed concern over the cessation of transfers from Russia. “There is a high risk that there will be issues connected to both the two types of comparative values, the dram-rouble, and that imposed by the West. Both are likely to have a negative impact on our living standard.”

Remittances

Several economists in Armenia are arguing that the issue of current exports and imports in the country is also a matter of serious concern. According to Bagrat Asatryan, the former chairman of the Central Bank of Armenia, these sanctions will naturally have a significant impact on Armenia. He stated that the banking system is relatively more “isolated” than the economy. “The Russian rouble does not play a big role in our financial system, our export and import opportunities are more important here, this should be the matter of concern and we have to think in this direction.”

As it can be seen, the biggest blow comes from foreign direct investments and remittances to Armenia, the largest source of which is the Russian Federation. According to Central Bank data, more than 40 per cent of money transfers to Armenia come from Russia. Last year, out of about 2.1 billion US dollars transferred to Armenia, 865 million was sent from Russia. Economists also express concern over the export of goods from Armenia and warn that as a result of all this it could suffer significantly.

Narek Karapetyan, an expert at the AMBERD Research Centre at the Armenian State University of Economics, is sure that the devaluation of the rouble will inevitably affect exports from Armenia to Russia. The relative prices of goods in the two countries are changing. As a result, the competitiveness of Armenian goods in Russia will decrease to some extent. “If in the past our exporters in Russia used to sell at X price, now they will sell at a higher price. In this regard, the devaluation of the rouble has a negative impact on us.”

Karen Sargsyan, an economist and management expert, also thinks that the revenues from the goods exported from Armenia will be devalued if the fluctuations in the rouble-dollar exchange rate last more than a month. After all, their fair value will decrease, as well as the number of remittances received by the overwhelming majority of our population. On average, remittances have made up 15 per cent of the country’s GDP. Solvency could become a key issue if the devaluation of the rouble is long-lasting.

The sharp recession of the rouble due to western sanctions has exposed serious troubles and hardships amongst representatives of the Armenian business sector and companies providing services or producing goods. They are worried about an uncertain future due to financial instability. Some even compare this period to the 1990s, warning that this situation could lead to extreme poverty for Armenia.

Entrepreneur Karen Nersisyan, who is involved in the restaurant business in Armenia, specifically mentions that “Most of the work abroad is from Armenia to Russia. Armenians in Russia earn a rouble and pass it on to their family and relatives in Armenia. Whereas, in these war conditions, there was a moment when a thousand roubles became about three thousand drams, which was a historical decline and absurd. People who have a limited income, e.g., 30,000 roubles, which is equivalent to about 400 US dollars, now find they have 100 today. And it turns out that those who worked for five months for a certain amount of money and planned to solve some specific issues in Armenia can no longer do that. Whatever you want to do, the dram does not have that power in our country and the rouble and the dollar dominate, moreover, no one keeps the dram. And as of today, one of the ruling currencies in Armenia has become nothing. This can even lead to extreme poverty for Armenia. In other words, if there were any attempts to form a middle class, now there is not even a hope for it. It seems we are going back to the 1990s: the period of anarchy, from extreme poverty to extreme wealth.”

Economic war

Nersisyan believes that Armenian businesses already face serious problems to make transfers from Russia to Armenia. This is also due to the partial suspension of the SWIFT international financial messaging service. “People from Russia make transfers via this or that system, for which the fees have risen sharply both for the sender and the receiver. Quite a lot of money has been stolen from people’s accounts through Ukrainian cyber-attacks as well. Not to mention that people in Russia can now deposit money in their accounts, but they cannot withdraw money because a number of systems are frozen. Roughly speaking, there is money, but you cannot use it to solve your everyday problems. Moreover, there is no cash in Russia, people want to withdraw at least a thousand roubles, but the ATMs are empty. In the last two weeks, people have cashed in 1.6 trillion US dollars, and now Vladimir Putin does not allow any currency to go out of the country, due to that, a number of ATMs are closed. In my opinion, the best option now is to get into cryptocurrency, which many did not take seriously, but in the last two to three years it has become quite a serious platform for investing in finance.”

In these war conditions, according to Nersisyan, we must first realise that this situation will not last just a month or a year but could last quite a long time. “World War III has already kicked off and it differs from the previous two because it is an economic war, not a shootout”, he concluded.

Robert Muradyan, a store owner who imports and exports clothes in Armenia, believes that the biggest problem in business activity now is the significant increase in the dollar exchange rate due to the fall of the rouble. “We buy most of the printed materials and raw materials at the dollar exchange rate,” he says. “And in the last seven days, everything has become about 20 per cent more expensive. We exported our products to Russia. It was work clothes worn at festivals and events, Armenian businessmen there also ordered the clothes of their employees from Armenia. But due to the current situation, all the orders have been frozen.”

According to Muradyan, the only way to survive in these conditions is to work even harder. “I was going to make new investments, open new jobs. Unfortunately, at this point I have stopped all this activity in order to strengthen what is available and evade the risks, and due to the rising prices around the world and declining sales. Even the prices of sewing machines have risen due to the dollar exchange rate.” He argues that this war will definitely have an impact on the entire economy of Armenia in a rather negative sense. “But what is important at the moment is peace and its entrenchment for long-term perspectives,” he concludes.

Armenia as a haven from sanctions?

Despite unofficial reports of ongoing difficulties and pessimistic forecasts (mostly encountered in the pages of local media outlets), a flow of business from abroad to Armenia has started. Most of the groups involved are Russian-Belarusian companies that are fleeing sanctions against their countries. Overall, they are predominantly IT companies that want to work with the United States and Europe from Armenia.

Nonetheless, representatives of the economic and business community are still puzzled as to what extent this tendency can be a basis for optimistic forecasts. For instance, Armen Poghosyan, the chairman of the Consumers’ Union, does not share such optimism. “Of course, it is definitely positive if some businesses move to Armenia and it is an ongoing process, but it will be temporary,” he says.

Karen Nersisyan has deep suspicions in this regard. He argues that “Armenia should, first and foremost, be capable of solving its own problems, and only then think about admitting Russian businessmen here.” Nersisyan concludes that “We are not even a developing country so the Russians cannot bring some of their financial assets and be confident in success for a short time. There are a number of other post-Soviet countries more favourable for them. So no matter how swamped the Armenian press is with such views and predictions, I do not think that any serious businessman will transfer his financial assets in the hope that he will be capable of withstanding the economic crisis. Even if some ten businessmen decide to move their businesses to Armenia, this is not a matter to be solved in a day or even a month, so there is no need to set off fireworks prematurely on this occasion.”

Anna Vardanyan is a journalist and political analyst based in Armenia.

Armenia, economy, Russia, sanctions, Ukraine at war