Economic exposure to Russia: high, but stable
Armenia’s economic exposure to Russia – its main trading partner – has traditionally been high. In 2022, the war in Ukraine and Western sanctions have led to significant shifts in global economic relations with Russia. Against this backdrop, the question arises as to how Armenia’s exposure to Russia may have changed. An analysis of various macroeconomic indicators shows that overall structural dependence has not increased.
Although at first glance Russia’s share in Armenian exports, tourism and remittances has increased significantly, this can often be explained by temporary factors such as re-exports or migration. In some areas, such as public debt and banking, the exposure to Russia has even decreased. Nevertheless, policymakers should take advantage of the leeway currently offered by the good economic situation to further diversify the economy.
Exposure through structural dependency
Armenia’s economic exposure to Russia has been traditionally high. Firstly, the Russian market is usually the top destination for exports and imports alike. Especially in the energy sector, Armenia is heavily dependent on gas and oil imports from Russia. Moreover, remittances and FDI from Russia play an essential role in the Armenian economy. In addition, Russian tourists have traditionally been an important source of income for the service sector.
The factors mentioned above have a significant impact on the Armenian economy, making it difficult to replace them with other markets or sources of income in the short to medium term. In such a case, we speak of structural dependence (“exposure”) to another country. Against this background, the German Economic Team has analysed whether Armenia’s exposure to Russia has further increased in the wake of the war in Ukraine. However, it is important to distinguish whether a change in the various indicators is of a temporary nature or whether it has already taken on a structural character.
Goods exports: slight increase of exposure
Armenian goods exports to Russia almost tripled in 2022. As a result, Russia’s share also increased from 27% in 2021 to a stunning 45% in 2022. At first glance, these figures suggest that exposure may have increased as well. However, a more detailed analysis shows that re-exports to Russia via Armenia were responsible for most of the increase (76%). Since re-exports are goods that are not produced in Armenia, they have little structural impact on the local economy. Moreover, we assume that the re-export business will only have a temporary impact and thus should be regarded as a special factor rather than an increase in exposure to Russia.
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Looking only at exports of goods traditionally produced in Armenia, there was a slight overall increase in Russia’s share in 2022 (26%, +3 pp). The main driver here was (alcoholic) beverages (+8 pp), most of which were already exported to Russia (2021: 72%). In 2022, Armenian manufacturers were able to fill some of the gaps in the Russian market created by the absence of Western products with the help of already established logistics chains and a high level of brand awareness. For most other traditional goods, on the other hand, the share of exports to Russia has decreased, again indicating a slight decline in exposure.
Goods imports: mixed signals
In 2022, the value of goods imported from Russia increased significantly (47% yoy). At the same time, however, Russia’s share in Armenia’s total imports decreased (30%; -4 pp). This development is closely related to the booming business of re-exports, which entails substantial imports from other countries. The decline in Russia’s share in total imports is therefore not meaningful for the analysis of exposure. However, looking at individual commodities, there is a slight increase in exposure. Among other things, Russia’s already dominant share in Armenian gas imports (85% in 2021) grew by a further 3 pp in 2022. There has also been a significant increase in Russia’s share in gold (2022: 89%; +10 pp) and, in particular, diamond imports (2022: 46%; +33 pp). These are largely new businesses with value addition in Armenia (e.g. cutting of precious stones), which suggests an increase in exposure to Russia.
Tourism and money transfers: special factor migration
Tourism has traditionally been one of the most important sectors of the Armenian economy. Before the COVID pandemic, visitors from Russia accounted for about 20% of total tourists. This share increased to over 50% in 2022. However, one cannot directly attribute this to a higher exposure, as it is often difficult to distinguish between regular tourists and migrants from a statistical perspective. It is likely that the number of Russian tourists and the associated tourism revenues are somewhat overestimated for 2022. Therefore, no conclusive statement can be made about how the exposure in the tourism sector has developed.
Remittances, which are approximated by money transfers for statistical reasons, are also an important economic factor for Armenia (about 11% of GDP). Along with the United States, Russia has always been one of the most important source countries for remittances. In 2022, transfers from Russia more than quadrupled, bringing the share up to 69% (+28 pp). Once again, however, it is not possible to speak of a higher level of exposure to Russia. Temporary factors such as migration, capital flight and arbitrage opportunities were the main drivers behind the surge in money transfers.
Slight decline of exposure in some other areas
Other indicators were also analysed with regard to a change in exposure to Russia. In the case of FDI, there were no signs of higher exposure, as most of the investments made in 2022 were reinvested earnings. In the banking sector, exposure was already relatively low and declined further in 2022 as the market share of VTB – the only bank with Russian capital in Armenia – dropped by half. Nor did the debt (exposure) to Russia increase; here, the downward trend continued.
Regional comparison: similar results for Georgia
The German Economic Team also examined Georgia’s economic exposure to Russia. Here, too, special factors had a strong influence in 2022. For example, developments in trade were driven by re-exports; the price discount on Russian Urals oil led to higher imports to Georgia. The large influx of migrants from Russia also affected tourism and remittance statistics. However, leaving aside the impact of these special factors, the various economic indicators point to a stable and, in some cases, even declining role of Russia in the Georgian economy.
Outlook
Armenia’s economic exposure to Russia remained high in 2022. However, there was no significant increase in exposure either. Temporary special factors such as re-exports and migration have led to a higher share of Russia in some indicators, but this should not be interpreted as an increase in structural dependence. As the Armenian economy is currently in a strong growth phase, there is sufficient room for reform to further diversify the economy. In the energy sector in particular, dependence on Russian resources is very high.
