Commentary by Masuma Talibova,
Chief Analyst at the Center for Analysis of Economic Reforms and Communication (CAERC)

Armenia’s economic indicators continue to deteriorate. This has now been confirmed by international credit rating agencies. In particular, the international rating agency Fitch has downgraded Armenia’s Long-Term Foreign-Currency Issuer Default Rating (IDR) from “BB-” to “B+”. The main reasons cited include the deepening of internal imbalances, an increase in net external debt and the current account deficit, as well as a rising interest burden. In addition, it is noted that the continuation of the Nagorno-Karabakh conflict has a significantly negative impact on the country’s financial, fiscal, and overall macroeconomic stability.

In Armenia, where demographic indicators were already weak, the introduction of full mobilization under wartime conditions and the conscription of men up to the age of 55 have imposed serious constraints on the operation of many labor-intensive sectors. Many local entrepreneurs report that they have been forced to suspend production. Micro-entrepreneurs have gone to the front lines and completely withdrawn from business activity, while small and medium-sized enterprises are experiencing a sharp decline in productivity due to the mobilization of business owners themselves or the majority of their employees and the resulting labor shortages. Large businesses are also suffering from the negative effects of the overall economic contraction.

Due to the impact of the pandemic, economic activity as of August had already declined by 17.4 percent compared to the beginning of the year, according to official data from the Armenian Statistical Committee, which was in itself a heavy blow to the economy. In addition, Armenia’s heavy losses in the frontline areas and the transfer of labor from the real sector are expected to further exacerbate this negative trend. Armenian entrepreneurs are no longer reluctant to publicly speak about the difficulties they face. According to them, the partial or complete suspension of production is severely reducing their revenues, and they already anticipate a sharp decline in tax payments in the coming months. This, in turn, will negatively affect the financing of the Armenian state budget. Indeed, according to information released by Armenia’s Ministry of Finance, this year’s tax revenue targets will not be met.

According to Armenian entrepreneurs, it is essential for labor resources in key economic sectors—the main drivers of the economy—to continue their activities. They argue that individuals with a large role in production and employees in strategic sectors would be more beneficial to the country as a whole, and indirectly to the army, by remaining in their fields of activity rather than being sent to the front. However, due to its aggressive policies, Armenia has forcibly mobilized all men of eligible age. By way of comparison, during World War II, individuals engaged in production were not mobilized, ensuring that military operations had minimal impact on the national economy.

It should also be noted that for Armenian citizens—one quarter of whom were already living in poverty during stable periods—their financial situation has further deteriorated under wartime conditions due to delayed social payments and wages. This has reduced purchasing power, led to declining consumer demand, and delivered severe blows to the development of the business sector. Moreover, the state’s military losses and proximity to defeat require additional resources. The government’s efforts to extract the last remaining funds from an already impoverished population through the creation of army support funds further worsen the welfare of Armenian citizens. The Armenian state, acting irrationally and recklessly, has yet to fully realize that this marks the beginning of the end for itself. At the same time, some Armenian citizens, particularly entrepreneurs, have begun to issue appeals stating that “there is life after the war,” expressing protest against the current course of events.

As of September, based solely on the impact of the coronavirus and according to Armenia’s latest official statistics, 1,213 commercial establishments have closed permanently, while 5,058 have temporarily suspended their operations. This accounts for nearly 50 percent of all commercial establishments in the country. In addition, 23 companies in the construction sector have been liquidated and 231 have temporarily suspended operations. In the real estate sector, 205 companies have temporarily closed and 5 have been liquidated. In the “other services” sector, 234 companies have been liquidated and 1,057 have temporarily suspended operations. In professional and scientific-technical activities, 67 enterprises have been liquidated and 493 have temporarily suspended operations. In administrative and support services, the registrations of 39 companies have been canceled and 449 have temporarily suspended operations. In education, 21 companies have been liquidated and 136 have temporarily suspended operations. In healthcare and social services, 10 enterprises have been liquidated and 120 have temporarily suspended operations. With the outbreak of hostilities, many additional businesses operating in these sectors have also been forced to close.

Under such conditions, in a country with a high negative net migration rate (minus 5.6 per 1,000 people), the deterioration of the economic situation will further intensify the outflow of labor resources abroad. It cannot be ruled out that, in the medium to long term, citizens will be unable to withstand prolonged social hardships and may turn against the state. Indeed, some business entities have already claimed that they will demand compensation from the government after the war.

The agricultural sector, which supplies raw materials to many businesses, is also facing restrictions due to mobilization, particularly during the autumn sowing period. This will lead to a decline in productivity, negatively affecting both business activity and food supply. A reduction in supply, in turn, will likely result in a sharp increase in food prices. Armenia, which already imports a large share of its food products—on average 66.7 percent according to data from the UN World Food Programme—and is now facing constraints in this process, is simultaneously experiencing declining domestic production, further confirming the onset of the previously forecast food crisis.

The new war launched by the Armenian government to divert public attention from the country’s severe socio-economic situation, combined with the heavy losses suffered as a result of Azerbaijan’s strong counteroffensive operations, has added military defeat and losses within the army to Armenia’s already grave socio-economic problems. Prime Minister Pashinyan now hopes to overcome this situation through external loans, donations, and aid, particularly relying on support from Russia and the Eurasian Union. However, Armenia’s current leadership’s disloyal stance toward Russia, including pressure on Russian investments and businessmen, suggests that such assistance is unlikely. Neither the Eurasian Union nor Russia is expected to be interested in bearing the burden of an unreliable country such as Armenia.