Armenia is positioned between Europe and Asia in the Caspian region, a small landlocked nation in the Lesser Caucasus Mountains with a population of 3.8 million. Since attaining independence from the former Soviet Union in 1991, approximately 1 million Armenian’s have left to seek employment elsewhere including Southern California home to 800,000 Armenian’s and Russia. Over the last 15 years, the Republic of Armenia has battled one crisis from the next. In 1988, a devestating earthquake struck the nation, by 1989-90 the former Soviet empire collapsed. During 1991-94 Armenia was in the midst of a war with neighbouring Azberjaijan over the disputed border area of Nagorno-Karabakh of which it is currently in a cease fire. Many of Armenia’s transportation and energy links were blocked creating economic chaos for Armenia as hyperinflation took over during the war. Then by 1998, the Russian economy imploded with the Russian ruble crashing creating a regional economic shock impacting Armenia. And in late 1999, top political officials in Armenia were gunned down in a multiple murder assassination creating political instability. These unfortunate events have made economic opportunity in Armenia a difficult passion as many desperate for survival have left since 80 percent of the population live in poverty.
POLITICS: on February 19, 2003, Armenia held a Presidential election and no outright winner was achieved as President Robert Kocharyan failed to get 50 percent of the vote (48.3 percent). A 2nd round of voting will take place in early March 2003. Voter frustration is evident as President Kocharyan failed to get a peace deal with Azerbaijan as he promised when he swept into power in 1998. Opposition candidate Demirchyan has a fair chance of winning, but BI.C predicts Kocharyan will manage to hang on for a 2nd round victory. Political instability risk is high in Armenia noticed more recently in 1999 as Prime Minister Sarkisian and seven other top government officials were killed by ultra-nationalist gunmen. At present, President Kocharyan who supports Western reforms is seeking closer ties with Russia to increase Armenia’s standard of living.
ECONOMY: the Armenian economy is slowly moving towards a free market based system from the former Soviet central planning ideology. The overall Armenian economy remains fragile and vulnerable. During the Soviet era, Armenia was a large manufacturing centre for the former Soviet Union. The country is gradually returning to stability and growth, Armenia currently receives IMF support and United States aid have totalled $1.5 billion USD over the last 10 years. Over the last few years, the government has implemented several sound reforms in many areas including the pursuit of a tight credit policy, privatization, reducing dependence on foreign borrowing, etc.. The Armenian economy has experienced an economic blockade due to Armenia’s failure to find peace with Azerbaijan over the disputed territory Nagorno-Karabakh. Consequently, Turkey and Azerbaijan have shut their borders with Armenia and implemented a trade blockade which has impacted Armenia economy very negatively. This deadlock Nagorno-Karabakh dispute which has been in a cease fire since May 1994 has greatly impacted Armenia’s foreign direct investment ‘FDI’levels. Although Armenia has in essence won the war geographically by regaining most of the lands in dispute, Armenia has in fact lost the war to date economically. During the 1990’s, the massive restructuring of the Armenian economy has been painful, economic output has dropped significantly since 1990 when the economy started its shift to an open free market framework. It is expected that by year 2004, GDP in Armenia will equal its 1990 level after falling by 50 percent at its low during the 1990’s, a long 15 year adjustment. It has only been since year 2000 that the economy has shown signs of life with good economic growth and the current account deficit falling in half from its 1998 level.
Economic Statistics
GDP is at $11.2 billion USD (2001) or GDP/capita at $3,350 USD (2001) as measured by purchasing power parity. GDP market expenditure based is equivalent to $2.5 billion USD or $875 USD/person. GDP growth rate from 1997 - 2001 at 5.25 percent, 2001 at 7.50 percent. GDP 2002 at 10 percent, 2003 estimated at 6 percent. Fiscal budget deficit is at 4 percent of GDP for 2002 and forecasted at 2.3 percent of GDP for 2003. External debt is moderate to high. The current account deficit is high at 14 percent of GDP for year 2001, it would be in the range of a 30 percent deficit if it was not for foreign aid and remittances from Armenians abroad in the total approximate amount of $280 to $300 million USD/year. The current account deficit is forecasted at 8.7 percent of GDP for 2003. Net international asset position for Armenia is negative.
Inflation averaged 2.9 percent from 1997-2001, year 2002 came in at 2 percent, year 2003 forecasted at 3 percent. Armenia’s recent experience with hyperinflation was mostly attributed to its war with Azerbaijain from 1991-94. CPI inflation for 1991 came in at 100 percent, 1992 at 825 percent, 1993 at 3,732 percent, 1994 at 5,273 percent, 1999 fell to single digits with IMF stabilization program. Unemployment is one of Armenia’s biggest challenges as the official rate states 17 percent but the real rate is more like 50 percent of the work force when including underemployed. Agriculture has been privatized, it provides for 40 percent of GDP and employs 31.5 percent of the work force. Major exports markets include Belgium, Russia, United States and Iran.
POSITIVES: very high literacy rate, more hydroelectric power potential. CONCERN: Armenia has no oil reserves.
BANKING SYSTEM: government is committed to allowing the market to determine the value for Armenia’s interest and exchange rates. Central Bank of the Republic of Armenia (CBRA) is responsible for Armenia’s monetary policy. The banking system is small in market capitalization when compared to those in the West. As of January 2001, there were 31 registered commercial banks in Armenia. Cash in circulation exploded during the 1990’s increasing 50 times approximately. By 1999, the economy stabilized resulting in slower money circulation growth reflecting a more steadier dram. Year 2002 international reserves are at 3.5 months of imports or equivalent to $300 million USD.
REGIONAL: Turkey, Russia, Azerbaijan, Iran, Georgia
The border with Turkey remains closed due to the unresolved conflict over Nagorno-Karabakh dispute. Russia has it’s eye on the Caspian and Central Asian oil resources. Russia is a major trade partner to Armenia and historical military ally. Azerbaijan controls much of the Caspian oil reserves and have by-passed Armenia by re-routing oil pipelines via Georgia although it would be cheaper to route the oil through northern Armenia on its way to the Turkish port of Ceyhan. The Nogorno-Karabakh dispute with Azerbiajan is costing Armenia tremendously in lost oil transportation wealth, Armenia will not benefit from any of the regional benefits from the Caspian Sea oil projects until this issue is resolved. At present, Armenia has no major oil/gas pipelines as it currently imports its oil needs from Georgia. Armenia is looking to its friendly neighbour Iran for energy supply, particularly in natural gas and the potential to route gas pipelines via Armenia to markets in Europe. Overall regional risk is moderate to high.
KNOWLEDGE: Armenia is located in a high seismic zone of a history of large earthquakes as Armenia got hit hard by a 1988 shake that killed many. During the mid 1990’s, Armenia upgraded its nuclear reactor in 1996 at Metsamor and reactivated it for electrical energy use more out of desperation. There is widespread safety concerns for this nuclear reactor and it was shut down in 1989 due to its seismic vulnerability. Many in Europe have expressed outrage that it is operating again, but not unless Armenia can secure alternative sources for energy will it be closed down considering it supplies 30 percent of its energy needs. The risk to the dram again would be the economic fallout from a nuclear accident at the reactor.
CURRENCY: ISO symbol ‘AMD’, Armenian dram. At time of review on
February 20, 2003, the Armenian dram had an exchange value of 581.37 AMD to 1 USD.
Since year 1999, the dram has stabilized with IMF economic support resulting in a 20 percent real effective devaluation of the dram during this time frame. A floating currency exchange rate regime is in place.
CURRENCY HISTORY: the dram was introduced in Armenia on November 22, 1993. Before 1993, the Russian ruble was national currency. At the time of the dram’s inception, the dram was set at 1 AMD equivalent to 200 Russian rubles. For those Russian ruble certificates from year 1961 to 1992, the dram was accordingly set at 500 Russian rubles. In relation to the USD, the dram was set at 14.5 to the USD. In January 1994, the CBRA redenominated the dram by adding a zero, so 10 dram was now 100 dram. The Russian financial crisis of August 1998 did not impact the dram as seriously as it could resulting in a 10 percent depreciation of the dram. Historical valuations include year 1997 at 490 AMD to 1 USD, 1998 at 504, 1999 at 535, 2000 at 539, 2001 at 555 and January 2002 at 564. The dram has been surprisingly stable since IMF support in 1999.
CURRENCY FORECAST: inflation could take off gain if conflict develops again with Azerbaijan. Armenia has great economic potential, they must first resolve the Nagorno-Karabakh dispute with Azerbiajan and co-operate with its neighbours in order to benefit from the spinoffs of the wealthy Caspian Sea oil reserves. The long term forecast is favorable although short term risks are prevalent. UPDATED: February 20, 2003
