INSUFFICIENCY SYNDROME

Armenia is on the brink of economic default. Unlike the situation in the war zone in the occupied territories of Azerbaijan, the country's government is unable to cover up this reality with fake statements. Even before the start of the escalation provoked by Armenia in Karabakh, the country was rapidly falling to the very bottom of a debt pit, losing its position in foreign trade with the state budget collapsing and the volatility of the local currency making the businesses and investment attractiveness hopeless.

Having provoked a military confrontation with Azerbaijan, Armenia committed economic hara-kiri. Even the “ancient Armenian” way of managing the economy – every little bit helps - is unlikely to help the Armenian government to feed its population in the near future.

The weakest link of the region

On October 6, Fitch downgraded Armenia's long-term issuer default ratings (IDRs) in foreign and national currencies from BB- to B+. Armenia's short-term IDRs were affirmed at B, the country rating ceiling downgraded to BB- from BB.

But Azerbaijan has repeatedly warned: having occupied 20% of our lands, it was Armenia and its present regime that isolated itself economically, remained aloof from all important and large regional projects. All these years, the country was barely making ends meet, the population mainly survived through remittances from abroad. In the same year, the coronavirus pandemic finally plunged the Armenian economy into hopeless darkness. In the second quarter, the sharpest decline since 2009 (13.7%) was recorded, and in general, the decline since the beginning of the year was 5.7%.

Today, Armenia's balance of payments is one of the worst in the post-Soviet space. Its indicators reflect the deep economic crisis in the country. Over the past 6 years, only $1.6 billion in foreign direct investment has been attracted to the country, which is the lowest indicator in the region.

“Armenia experiences an insufficiency syndrome,” Nijat Hajizade, economist, head of department at the Center for Analysis of Economic Reforms and Communications of Azerbaijan (CAERCA) said. According to the Statistical Committee of Armenia, the country has never had a positive balance in foreign trade balance since the date of independence from the USSR. “Over the past five years, the negative balance reached almost $3 billion, which, along with other economic indicators, clearly shows the country's clear dependence on imports and the absence of any serious export positions,” Hajizade said. As of July 2020, the trade deficit of Armenia reached $1 billion.

Armenia has always been and remains the most economically weak country of the region. Its share in total exports of the South Caucasus countries barely reaches 15%, and in trade turnover - 17%.

At the same time, over 8 months of 2020, the volume of Armenia's foreign trade turnover has already decreased by 10.2%.

According to the Statistical Committee of Armenia, in 1Q2020, the main export commodities were copper and other minerals (35.4% + 13.1% of precious and semi-precious stones in total exports), 30% are food products.

Most of the mines with minerals, due to which Armenia feeds its economy, is located in the Azerbaijani Kalbajar occupied by Armenia and in the districts bordering with Armenia, which are also under Armenian occupation. All these years, despite the repeated protests of Azerbaijan voiced through international organizations, Armenia has been actively plundering 155 mineral deposits of Azerbaijan. Including five gold-bearing, six mercury, two copper and other mining sites, 12 of which are classified as rich ore deposits. Unfortunately, various foreign investors mostly of Armenian origin assisted Armenia in committing this crime. They extracted gold, copper, mercury from the depths of the Azerbaijani lands... According to the Armenian media, on the very first day of the outbreak of hostilities in Karabakh, work at all mines was suspended. Considering that the Armenians are unlikely to return back, the investors who have invested in these projects left the projects, since they have no legal guarantees for the safety and return of their investments.

But even more damage has been done to the budget of Armenia, which has lost its main income. Now it only has to trade in agricultural products. But even then, the most fertile lands are located on the border with Azerbaijan. Consequently, it is hardly possible today to use them as before the fighting in Karabakh.

According to official data, Armenia is unable to provide even its own citizens with food. According to the UN Food and Agriculture Organization (FAO), the share of food imports in the country's total exports is 24%, which indicates a low level of its food security. In more detail, Armenia imports 67% of grain and cereals, 78% of poultry meat, 50% of meat products, 96% of vegetable oil. At the same time, FAO points to the high volatility of the price index for local food products: the fact is that the Armenian government has joined various programs on customs benefits between the countries. Accordingly, the prices for imported goods are low, and their quality is significantly higher.

Therefore, even that small volume of exports of agricultural products (mainly vegetables and fruits) is essentially raw material. Moreover, the geography of supplies is mainly limited to a couple of three countries and the first in the list is Russia. And it is not difficult to imagine what this means, remembering the hysterical panic caused in Armenia by the short-term boycott of Armenian products in the Moscow markets headed by businessmen from Azerbaijan.

Debt pit

In January-August 2020, the budget revenues of Armenia have already decreased by 6% compared to last year. And amid a deficit in the balance of payments and a low volume of foreign exchange reserves, Armenia's public debt is growing by leaps and bounds and has already reached almost $6.5 billion. Even before the start of the war, the Ministry of Finance predicted an increase in public debt to 60% of GDP in 2020.

It should be noted that, according to the accepted international methodology, an indicator above 40% is considered dangerous for the financial and economic security of the country. Official forecasts of the Armenian government argue that the country will not get out of this debt pit until 2025 and will have a public debt of at least 50% of GDP.

In summer, Public Debt Management Network published an article that Armenia faced a threat to financial security.

Due to the outbreak of hostilities, Armenia's external debt will, of course, grow by an order of magnitude - otherwise the country simply will not survive. According to the updated forecast of the Armenian Ministry of Finance, due to the growth of military spending, the state budget deficit will reach 7.4% of GDP, and it is planned to finance it through external borrowings, as there are no other resources to cover the deficit. There is another scenario for further cheapening of the local currency - if this figure reaches 30%, this will lead to an increase in the share of external debt in GDP to 115%.

According to the head of CAERCA Vusal Gasimly, such dangerous indicators in the near future may prevent Armenia from attracting new loans - lenders will simply strongly doubt the solvency of the country. Moreover, the country has once again shown itself as an aggressor, is fighting on the territory of another state, and internal socio-political stability has been completely destroyed. What creditor would want to deal with such an unreliable client?

Meanwhile, the volume of Armenia's own foreign exchange reserves in August reached only $2.6 billion (there is no trace of gold reserves), which is equal to the country's three-month import income. For comparison, the volume of Azerbaijan's foreign exchange reserves, according to Moody’s estimates, will reach about $39 billion (without gold reserves) by the end of this year.

Elephant and pug

Obviously, Armenia began military operations against Azerbaijan in a complete economic crisis. Then why would she want to provoke an expensive military operation? The answer is simple: Armenian authorities tried to distract the population from the impending bankruptcy and hunger. Apparently, they naively believed that the military equipment donated to them would be enough for the war with Azerbaijan. And... they made a mistake so much that they are now begging the entire world community to help them, but in vain.

“As the analysis shows, from an economic point of view, Armenia is incapable of even conducting short-term hostilities. Every day millions of dollars are required to fight. And Armenia does not have such economic power,” Tahir Mirkishili, chairman of the Milli Majlis Committee on Economic Policy, Industry and Entrepreneurship said.

According to official statistics, the economy of Azerbaijan is three times larger than the economy of Armenia, and almost four times in terms of the volume of the military budget: $2.3 billion and $658 million, respectively.

According to Vusal Gasimli, as a result of the Azerbaijani counter-offensive, Azerbaijani Armed Forced destroyed military equipment and ammunition of Armenia worth billions of dollars. “The most important thing is that the military infrastructure of Armenia has been destroyed, while they spent decades to create it. The financial capacity of the losses of military equipment and ammunition in Armenia is twice the volume of military expenditures envisaged in the state budget. At the same time, the cost of destroyed military equipment and ammunition ($1.2 billion) in just the first four days is half of Armenia's strategic foreign exchange reserves and a third of the state budget,” economist added.

Gasimly noted that the state budget of Armenia is not enough to finance such a resource-intensive war: “Defeat in a resource-intensive war of a country with a national debt within 60% of GDP and a budget deficit within 5% of GDP is inevitable in a short time. Azerbaijan surpasses Armenia by more than 20 times in foreign exchange reserves, and 5 times in terms of the state budget”.

What will Armenia get as a result of the war? A definitely wrecked economy. The announced full mobilization has drawn a large part of the labor force on the battlefield; given the losses at the front, it is unlikely to be restored to its previous volume. This, in turn, already affects the activities of already barely existing business entities.

In addition, another blow to entrepreneurship will be the deterioration of the financial situation of the citizens of Armenia, a quarter of the population of which suffered from poverty even in a stable time: during the war (due to untimely payment of salaries and benefits), demand will rapidly fall given the decreasing purchasing power of the Armenian population.

According to official statistics published by Armenia for September, 1,213 retail facilities were closed only due to the influence of the coronavirus, and 5,058 were temporarily suspended. This is about 50% of all retail facilities operating in the country. In addition, 23 enterprises were liquidated in the construction sector, 231 enterprises were temporarily suspended. The activities of 205 companies operating in the real estate sector were temporarily suspended, and five of them were liquidated. The list is long and covers almost all areas of the Armenian economy.

According to International Monetary Fund (IMF), in 2020 the Armenian economy will downgrade by 4.5%. In April, IMF World Economic Outlook forecasted a 1.5% decline in GDP this year.

In a sum, getting into the war with the elephant, the pug clearly miscalculated not only its military and combat capabilities, but also found itself in a hopeless situation with no money to continue hostilities. The sooner the Armenian authorities get sober and deal with internal economic problems, the more are the chances that they need to save their civilians from famine in the near future.