Armenia hopes to benefit from Russia-U.S. rivalry

Feb 23, 2016, 1:58 PM EST
Armenian flags.
Source: young shanahan/flickr

Economic activity fell by nearly 50% in Armenia this January, compared to the previous month, local media reported on Wednesday. The government claims that all sectors of the economy contributed to the country's 3.1% GDP growth in 2015, but the population's purchasing power has been falling.

The average monthly salary fell by 19.5% in nominal terms in January 2016 compared to December 2015. This came amidst inflation of 3.7% last year, which would not be so bad had wages remained constant. Concerns are growing over the depreciation of Armenia’s currency, the dram, after about a year of stability. The worst-case scenario would be the dram returning to its volatile past, like when it lost about 20% of its value within several days in December 2014. Another depreciation like that would wreak havoc on the import-dependent country.

One way forward is to try to attract more foreign investment to diversify the economy. Here Armenia is already succeeding in playing Russia and the U.S. off each other in competing for geostrategic influence. Yerevan is in the Russian camp by virtue of its proximity, Soviet history, and its current membership in the Moscow-centered Eurasian Economic Union. The Kremlin, alarmed by protests against the Russian-owned electricity company of Armenia last June (see Blouin News’ coverage), wants to keep Yerevan a solid ally, and thus conceded it a $200 million credit to buy Russian weapons. Additionally, over the last 27 years one third of all FDI into Armenia came from Russia, more than from any other country. But Moscow’s FDI to Armenia shrank last year and will continue to do so this year, as the government scales back its foreign investment in light of its own troubled finances.

On the other hand, the U.S. is stepping up its economic courtship of Armenia. Last August, American firm ContourGlobal made the largest single U.S. private investment in Armenia’s history, and the first U.S. investment in Armenia’s energy sector, by purchasing the country’s largest hydroelectric complex, on the Vorotan river. The price tag was $180 million, and the firm promised to invest another $70 million in its modernization. The fact that the three power plants comprising the complex were built by the Soviet Union made the deal all the more symbolic, with Washington’s full support. Furthermore, the U.S. draft budget for 2017 allots $22.4 million to Armenia via the Economic Support Fund, up from $18.36 million this year.

According to Armenia’s National Statistical Service, some $286 million of foreign investments were made in the economy during the first 9 months of 2015, up 36.6% compared to the same period of 2014. This year may see even more as the jousting between Russia and the U.S. continues over Armenia.