Armenia's choked economy too weak for prolonged occupation
ver recent weeks, the world has started to wonder about the motives behind Armenia’s attack on its northern border with Azerbaijan, far away from the latter's Armenian-occupied Nagorno-Karabakh region. By escalating the situation on the state border with Azerbaijan, Armenia has posed a threat to regional security. By failing to involve the Collective Security Treaty Organization or Russia in the conflict, Yerevan has completely shaken up the situation.
The point is that Armenia's economy has been deprived of tourism revenues due to the pandemic and suffocated by declining exports of raw materials in the mining industry due to low prices and shrinking remittances.
Now that Armenia is descending into poverty, bankruptcy and collapse, it has been forced to obtain a standby loan from the International Monetary Fund (IMF) to prevent further economic downturn, especially in order to close the budget deficit and meet external obligations.
In fact, this credit line is 100% of Armenia's $128 million special drawing rights (SDR) quota in the IMF. In other words, Armenia attracts the highest debt it can get. Armenia, which is one of the worst countries in the world in terms of COVID-19 infections, will have a fiscal deficit of 5% of gross domestic product (GDP) this year, while its debt burden looks set to reach 64.1% of GDP.
Instead of solving internal problems, Armenia is diverting internal dissatisfaction in another direction by provoking skirmishes on its border with Azerbaijan.
Armenia is carrying out military provocations against Azerbaijan to disrupt several of the latter's major oil, gas, transport and information technology projects going to Europe – and thus acting against the interests of European countries and the United States, the main shareholders of the IMF and the World Bank.
The land-based Middle Corridor from China to Europe crosses through Azerbaijan, Georgia and Turkey. This Middle Corridor is 2,000 kilometers (1,243 miles) shorter than the Northern Corridor and takes one-third of the time as the sea route between China and Europe.
The Middle East, North Africa, Central Asia and Mediterranean region are all interested in the Middle Corridor, along with China and Europe. In this regard, the China-backed Belt and Road Initiative (BRI) supports the Middle Corridor, too.
Imagine Armenia challenging the world by threatening one of the main corridors of Eurasia, all while using foreign loans, remittances and military aid. The Azerbaijani army repelled the threat to one of its main Eurasian corridors by putting the Armenian army in its place. This time, Armenia's foreign supporters didn't dare offer open support.
The main driver of economic growth in Armenia is consumption. Consider that the contribution of consumption to economic growth in Armenia is 11 times greater than the impact of fixed capital on economic growth and 88 times the impact of net exports on economic growth.
But where does consumption come from? Of course, remittances from abroad and loans to households support consumption. For example, last year alone, household loans in Armenia increased by 32% and remittances by 1.5%.
Consumption-based economic growth constantly makes the country's national security and economic security dependent on outsiders, weakens the economy's immunity, increases the volatility of the Armenian drama and creates inequality in society. Today, according to official figures, one in four citizens of Armenia lives below the poverty line.
The net migration rate in Armenia (the difference between immigrants and emigrants) is 5.6 per 1,000 people in the negative. This means that the number of emigrants from Armenia is 5.6 times more per 1,000 immigrants.
The age of emigrants from Armenia varies from 15 to 65. This shows that both young people and the elderly, that is, citizens of a broader age range, have fewer opportunities to live and work in Armenia.
Emigrants from Armenia are from both urban and rural areas. Another fact is that Armenian emigrants are predominantly women. According to a study by the Asian Development Bank, only Armenia differs from the Commonwealth of Independent States (CIS) countries on this indicator – with a negative impact on the country's demographic growth.
In terms of the contribution of remittances from abroad to GDP, Armenia occupies the worst position in the world. Analyzing the statistics of the Global Knowledge Partnership on Migration and Development (KNOMAD), we can see that in 2019, remittances from abroad accounted for 11.4% of the Armenian economy.
This places Armenia 153rd place in the world – only in a "better" position than 25 countries. The external shocks in the wake of the coronavirus pandemic only compound the hardships for Armenian migrants, whose remittances to Armenia have been falling sharply.
High levels of consumption in Armenia have reduced the share of savings in its GDP from 16.3% in 2017 to 11% last year. Strategic reserves in Armenia will fall below $2.2 billion this year, and according to the IMF forecast, it will never reach the level of 2019 until 2025.
Along with savings, the share of investment in GDP in Armenia decreased by 2.9% in 2017-2020 and was forecasted to decrease further this year. Armenia's current account deficit came to 8.2% of GDP, and the chronic nature of this deficit reduces economic security to the line "below the plinth." The devaluation of the drama to finance the current account deficit has been increasing poverty in Armenia.
Attracting foreign debt to finance the current account deficit contradicts the fiscal rules and debt strategy adopted by the country. It is not possible to finance the current account deficit by attracting foreign investment.
The prospects of foreign investment are weak in Armenia, where two of the four borders are closed due to Yerevan's aggressive policies, while the other two offer limited opportunities.
The main strategic areas of the country – rail, electricity, gas, mining, telecommunications, etc. – have long been held by monopolistic owners. The Armenian economy is a "saturated market" for foreign investment, and this really lessens its regard to investors.
This year it has been forecast that Armenia's financial account will deteriorate sharply against the background of the withdrawal of deposits of non-residents. Some $1 billion a year of Armenia's export revenues are products from the mining industry in the form of raw materials. The Nikol Pashinian government's launch of investigations in this area is intended to cause a shift in owners, which undermines investor confidence.
Other sectors earning foreign currency for the country are the export of agricultural products and gambling. Even the turnover created from gambling in Armenia exceeds the country's military budget.
Armenia's dependence on agricultural products is based on one market – the Russian market, which is still distant and has limited access, making it an obstacle to the sustainable development of this sector.
Armenia's economic development now appears to be beholden to the territory it occupies that is internationally recognized as belonging to Azerbaijan.
Armenia compromised its political, economic and military independence to the great powers and the diaspora in order to continue the occupation policy against Azerbaijan, which has no prospects.
Today, Azerbaijan is four times larger than Armenia in terms of population, three times larger in terms of territory, six times larger in terms of economy and 25 times larger in terms of strategic foreign exchange reserves.
According to the Global Fire Power rating, the Azerbaijani army ranks 64th in the world and the Armenian army 111th. Armenia falls in an even more desperate situation by occupying the internationally recognized territories of such a strong neighbor, Azerbaijan, and occasionally provoking it.
Armenia's recent provocations, the financial and economic security of which are severely under the threat, go against not only Azerbaijan but also the wider region.
In order to ensure peace and security in the heart of Eurasia, it is time to stop Armenian aggression and release Azerbaijan’s Nagorno-Karabakh region and other adjacent regions in accordance with the international law, as well as, U.N. Security Council resolutions.
*Executive director of the Center for Analysis of Economic Reforms and Communication of the Republic of Azerbaijan
Sector director of the Monitoring of social-economic programs
Executive director of CAERC