2024-04-05 12:21:18
Author: Alishir Mammad
Source: Trend
The unique Dutch syndrome of Armenia without resources
Currently, Armenia’s economy is chronically dependent on re-exports to Russia and foreign money transfers from Russia to the country.
Starting from 2022, the macroeconomic indicators in Armenia indicate positive trends in the economy, but it is interesting to know what is behind this change in a situation where investment, state spending and production, which are the main components of GDP, do not increase. This dubious economic development is mostly related to the economic impact of the Russia-Ukraine war, “favors” for Russia to avoid sanctions, funds brought by migrants and transfers from Russia. But what will happen in Armenia’s economy without them should be the main focus of attention. Thus, the lack of a real basis for the recorded economic growth and the presence of external factors behind it question the sustainability of development.
In modern economics, the Dutch syndrome is a term used to describe the relationship between growth in a specific sector of the economy (such as natural resources) and decline in other sectors (such as manufacturing or agriculture). But recent changes in Armenia’s economy show that sometimes resources are not needed to suffer from this “disease”. Thus, the inflated economic growth due to dependence on the economy of a foreign country can be the new “stamp” of this disease.
In recent years, the industry, agriculture, finance and insurance sectors, which are considered the main sectors of the economy in Armenia, have had a downward trend, but for now, the inflated indicators of other sectors provide an opportunity to fill the gap. Which shows the “Resource flow effect” of Holland’s syndrome. That is, resources are concentrated around a few sectors and away from other sectors. The main problem is that the value-goods created by the growing sectors are non-tradable products. For example, last year in Armenia, the largest growth was observed in the construction sector, consumption and re-export sector, none of these sectors produce tradable products.
The Armenian state is engaged in official smuggling
One of the main reasons for economic growth in Armenia in 2023 is the increase in trade turnover with Russia. Armenia’s largest trade partner is Russia. Thus, 40% of the country’s exports and 34% of its imports fall on the share of Russia. 78% of the consumed energy is imported from Russia. According to the information of the Armenian government, in January-November 2023, more than one third of Armenia’s foreign trade fell to Russia, bilateral trade increased by more than 40 percent and reached 6.3 billion dollars. Thus, the diversification of foreign trade in the country is at a very low level and depends on only one country.
Sanctions against Russia made it possible to re-export the products of western countries to Russia through Armenia. The fact that Armenia is a re-exporter of used cars, consumer electronics and other Western-made goods remains the main driver of economic growth. The total volume of re-export products included in Armenia’s total exports to Russia in 2023 was about 3.2 billion dollars, with an increase of 50% compared to last year.
Starting from 2022, serious changes have taken place in the export structure of Armenia. Thus, there is a large increase in the export of products that are not produced in the country or are not produced in a proportional volume to exports (for example, jewelry and diamond industry goods, etc.). Since Armenia does not have the production and labor force corresponding to the corresponding volume of exports, it is necessary to take into account the importance of the re-export factor here. In general statistical indicators of the country, re-export is given as simple export.
Compared to 2020, the volume of trade between Armenia and Russia increased 6 times in 2023. Although the direct exports of some European countries and the United States to Russia have decreased significantly due to the sanctions, the volume of exports from those countries to Russia’s allies, mainly to Armenia, has increased sharply. For example, in 2022, Germany’s exports to Russia decreased by 1.9 times compared to the average in 2017-2021, but such exports to Armenia increased by 2.4 times. Also, in 2022, Great Britain’s exports to Russia decreased by 2.7 times compared to the average in 2017-2021 (and to Belarus by 11 times), but such exports to Armenia increased by 2.6 times. In 2022, US exports to Russia decreased by 3.6 times compared to the 2017-2021 average (and to Belarus by 3.4 times), but such exports to Armenia increased by 4.3 times
Armenia is the “unseen hero” of the blood shed in the Ukrainian war
According to Bloomberg, in the geopolitical situation formed since 2022, Armenia has become one of the centers of re-export of semiconductors and other dual purpose goods to Russia, bypassing the US and European sanctions. In 2023, it became known that Armenia became the 4th largest exporter of semiconductor products for the Russian defense industry.
Also, according to the official information mentioned in the New York Times newspaper, in 2022, Armenia increased its import of chips and processors by 515% from the United States and 212% from the European Union, and then 97% of these goods were exported to Russia, where they were used for military purposes. has been used. Armenia also plays the role of a corridor for the transfer of military ammunition produced in Iran to Russia.
Armenia’s relationship with Russia also causes growing concern among Western countries, which want to punish Russia for its aggression in Ukraine. US and European officials believe Russia is being supported by former Soviet states such as Armenia to circumvent economic sanctions against Moscow. In a recently published article of “The Telegraph” newspaper, it was mentioned that the member countries of the Eurasian Economic Union (EAEU), especially Armenia, act as transit points through which materials and technologies for the production of weapons pass to Russia.
Pouring water into the well does not fill the well
This and other cash inflows from Russia are one of the main reasons for the growth of Armenia’s economy in 2023. According to the Chairman of the Central Bank of Armenia, the high growth of 12.6% in 2022 (mainly in tourism, finance and IT) was due to the influx of Russian migrants to the country due to the Russia-Ukraine war. Migrant flow also led to a 27.1% increase in the volume of services provided in Armenia in 2022, especially in the fields of finance, insurance, transport and communication, compared to the previous year. Russian migrants have fueled a more than 2-fold increase in prices in the country’s housing rental market.
In general, the influx of mostly Russian migrants into the country has stimulated economic growth by increasing inflation, due to a large increase in domestic demand for consumer goods, real estate and other goods and services, as well as financial capital, starting in 2022. This is a manifestation of the “spending effect”, which has a devastating effect on the economy of the “Dutch Syndrome”. As a result, the national currency unreasonably gains value and stimulates imports and raises inflation in the country.
Migration statistics show that the growth associated with the Russian factor is not a stable source of growth. Of the 786,000 Russians who came to Armenia in 10 months of 2022, about 110,000 remained at the beginning of 2023. Migrants who came to the country probably realized that it is not possible to live there for a long time in a short time…
Currently, remittances from foreign countries to Armenia constitute one of the main financial sources of the population and have created dependence on this source. The share of remittances to Armenia from abroad in 2019-2023 in GDP was 10-12%. Russia’s share in the transfers made in this direction is high. Thus, compared to the previous year (0.866 billion USD), the volume of remittances from Russia in 2022 will increase 4.2 times to 3.6 billion. amounted to USD. In 2022, approximately 70% of the total transfers from foreign countries to Armenia fell to Russia.
A hope for a neighbor remains without a candle
Armenia’s energy consumption is also dependent on Russia, as Armenia, which has no domestic resources, imports most of its energy needs (78.6% of total energy supply in 2020) mainly from Russia in the form of natural gas and oil.
The main gas supplier of Armenia (87.7% in 2021) is Russia. Gazprom Armenia, a Russian company, is the only company supplying natural gas to Armenian consumers. Since 2019, “Gazprom” has set the price of Russian gas for Armenia at 165 USD per 1000 cubic meters. This price is 3 times lower than the price Russia sells to Europe and Turkey, and 2 times lower than the price it sells to China. But what are Armenia’s services to Russia behind this low price, this remains one of the main questions….
He who rides another horse falls quickly
Finally, let’s note that according to the rating agency “Fitch”, Armenia’s economy will remain seriously dependent on Russia in the near future, which is a serious threat to the economic development of an independent state.
It is difficult to imagine what will happen to Armenia’s economy if Moscow imposes any sanctions on Armenia, whose foreign trade, basic remittances and even consumption depend on Russia. Today, Armenia cannot sell export products that it does not produce and will not be able to produce in the near future to any country except the Russian market. Because in fact, the countries that produce those products can easily sell them to other markets without the mediation of Armenia. But at whose blood will Armenia ensure its economic growth in the coming years…