ARMENIA IS ITS OWN ENEMY

Armenia's ‘crushing defeat’ is an expression often used in recent days to describe Azerbaijan's historic victory in the second Karabakh war. And it is very useful in this case... The political chaos in Armenia after the military capitulation is a lesser evil in comparison with the deep economic crisis. After the war in Karabakh, even the restoration of transport communications in the region will not help Armenia overcome the financial collapse.

Below the poverty line

After the occupation of Karabakh, Armenia has not been involved in any of the significant regional projects that provide the neighbouring countries with stable income. Interestingly, the study of some economic factors of Armenia in the post-Soviet period show that none of the leaders of the country has tried to determine a reasonable path for economic development in the past 30 years. On the contrary, Armenian authorities contributed to the development of corruption, lawlessness, the voluntary transfer of strategic spheres of the national economy to foreign countries, hence deliberately cutting off any opportunities for development. As a result, Armenia’s external debt has grown like a snowball with fewer real opportunities to repay it.

Indeed, Nikol Pashinyan made some attempts to pull the country out of poverty after coming to power back in 2018. But both the starting economic conditions, and, most importantly, Pashinyan's absurd political actions did not allow Armenia to leave the embryonic state of domestic affairs behind once and forever.

Even before the war and the COVID-19 pandemic, according to official data, every fourth citizen of Armenia lived below the poverty line. The net migration rate in Armenia (the difference between the inbound and outbound migrant flows) was -5.6 per thousand people. Armenia's current account deficit at 8.2% of GDP is a rather serious indicator of the crisis.

Today, the Armenian economy is in such a poor state that it is highly doubtful whether it is possible to solve even the most urgent socio-economic problems of the nation, let alone repaying foreign loans. The government admits that the decline in Armenia's GDP this year will not be 2.6%, as was initially assumed, but 6.8%. In other words, the deterioration of the forecast is certainly associated with the outbreak of hostilities in Karabakh.

In early October, Fitch downgraded Armenia's long-term issuer default ratings (IDRs) in foreign and national currencies from BB- to B+. The outlook on ratings is ‘stable’. Armenia's short-term IDRs remain at 'B', while the country rating ceiling was downgraded from BB to BB-.

Bankrupt country

But by far the biggest problem for Armenia is external debt. According to the Armenian Ministry of Finance, in the first half of this year, the country's total public debt reached $7.7 billion, the share of external debt is $6 billion. Moreover, 80% of the total public debt is in foreign currency, and a steady negative trend in this direction indicates how much Armenia’s financial security is fragile.

In terms of the structure of Armenia's external debt, the country mostly owes to international financial institutions (IFIs). Thus, almost 50% of Armenia’s external debt consists of multilateral loan programs with the participation of the World Bank (23%), Asian Development Bank (10%) and the International Monetary Fund (6.5%). The share of other IFIs does not exceed 1%.

Today, the Armenian government happily reports that in 2021 the national debt will be reduced to… 63.2% of GDP, while by the end of 2020 it will reach 65%! According to the estimates of international financial institutions, the red line for any economy is 40%. “This is due to exceptional situations (coronavirus pandemic and war). In 2021, the debt burden will begin to decrease,” Minister of Finance Atom Janjughazyan said at the parliamentary discussion of the draft state budget of Armenia for the next year.

At the same time, the Armenian government did not present any real program for the payment of the state debt, saying that this will be done through the "careful collection of taxes".

As mentioned above, over the past couple of years, the Armenian authorities have been trying to get the national economy out of the shadows, forcing the private sector to pay taxes to the state budget. In his Facebook address during the war, Pashinyan remarked with incredible joy about the "amazing" behavior of Armenian taxpayers. In his words, the Armenian budget in 2020 can be overfulfilled due to the consolidated policy of the Armenian business. "During the war, despite the difficult economic situation, the budget expects an additional $80 million, which will be spent on further military escalation," Pashinyan said.

He did not specify the sources that the business would take money from to pay taxes, given that the pandemic and the war did not leave them any sources of income.

In other words, the current real situation shows that Armenia is a bankrupt country, and in the near future, it should begin to beg its creditors to restructure or postpone debt payments.

Overestimated resources and business potential

Obviously, Armenia cannot live on its own. Firstly, despite the fairly good transit potential for the region, Armenia, due to the economic isolation and its occupation policy, remains marginilized from all the significant projects. Will something change in the country after the declaration of actual military capitulation? After all, all important transport routes in the region are already available or are under construction, and involve all the neighbouring states. New multimillion railway sections and hundreds of kilometers of automobile roads have been constructed. It is unlikely that something changes.

On the other hand, in all these projects, the participating country makes its contribution by implementing the projects on its territory using its own resources or attracted loans. Armenia has none of these resources currently. Nor are they expected to be available.

Until now, the Armenian economy relied mainly on the extraction and export of minerals and the sale of agricultural products. According to the State Statistics Committee of Armenia, in the first quarter of 2020, the main export commodity of Armenia were minerals (35.4 + 13.1% of precious and semi-precious stones) and food products (only 30%). Due to COVID-19, the first position has already lost its value, and the hostilities provoked by Armenia have completely deprived the country of ore resources. After all, most of these mines were located on the occupied territories of Azerbaijan. Even before the war, the official statistics did not reflect all the extracted resources, but this is a completely different topic.

The agricultural sector of Armenia is experiencing serious problems - the war and the pandemic have already prevented the autumn sowing of crops at the planned level, which, of course, will affect the final volume of production. According to the Armenian media, 1 kg of grapes costs the processing enterprises of the country ֏90 ($0.18), which is higher than its processing cost. For comparison, last year the Yerevan Brandy Factory purchased 1 kg of grapes for ֏140-150. Of course, this ultimately leads to the bankruptcy of the vineyards. In fact, 11% of Armenia's exports last year were alcoholic beverages, which shows the decaying state of processing enterprises. It is unlikely that this year they will be able to produce and supply products to the market in the same volume as in previous years.

As for business, given the country’s heavy reliance on the trade and service sectors, the economic decline in September exceeded 20-22% compared to the indicators at the beginning of the year. This is a rather heavy blow on the country's economy.

Due to the impact of COVID-19, 1,213 retail facilities were closed in Armenia in September, and 5,058 temporarily suspended their activities. This is about 50% of all retail facilities operating in the country. In addition, 23 enterprises were liquidated in the construction sector, 231 activities were temporarily suspended. The figures for the following months of 2020 will be clearly even worse.

Who is to blame?

All countries with more or less normal economies collect reserves in order to use them in such crisis situations to support social programs, at least. What has Armenia done? Let us show just a small detail, which clearly shows who is to blame for the current poverty-stricken state of the country. In 2003, the entire gold reserve of Armenia was completely liquidated. This decision was made by the Armenian Central Bank - only $17 million was received from the sale of 1.4 tons of gold reserves. As Armenian independent experts later pointed out, Armenia's losses from the sale of the gold reserves reach over $50 million. And most importantly, having lost its gold reserve, the country lost its chance to accumulate gold in the future, although gold is the main export product of Armenia.

For comparison, Azerbaijan uses part of the mined gold to replenish the country's gold reserves. By the end of 1H2020, the volume of gold at the disposal of the State Oil Fund (SOFAZ) reached 101.8 tons, which is 13.6% of all reserves of SOFAZ. Since the beginning of 2020, the fund has bought 600 kg of gold from local gold mining companies, and at the end of June the volume of gold was estimated at almost $6 billion.

In other words, it is the leaders of Armenia, who have destroyed the significant reserves of the country, its gold and foreign exchange reserves for all these 30 years. Therefore, they cannot be guarantors of the state's obligations to its people.

However, Armenia is a country with a consumer economy. For many years, the population has not relied on their own government, which mainly received money transfers and humanitarian aid from abroad. But the pandemic has changed the situation in this segment as well. Today, business is going through hard times in all countries of the world, and accordingly, very few people already have extra money to help ‘poor relatives’.

For example, according to the Ministry of Internal Affairs of Russia, in 2019, 303,000 citizens of Armenia were registered in the Russian Federation. And as the Armenian experts note, some of them were forced to return to Armenia due to the loss of jobs, and those who remained are barely making ends meet.

In a word, the completely depleted state budget of Armenia, a huge external debt with a virtual absence of reserves, a junk rating that scares away investors, and the critical state of food security are not the fault of some mythical external forces or Azerbaijan, which has started a just war to liberated its own lands. It's just that the people of Armenia should have understood long ago that hatred and aggression have never contributed to progress in any sphere. The image of an ‘eternally suffering’ country is miserable, but in no way serves as an incentive for investment. External aid is a temporary and fragile phenomenon, as the pandemic has demonstrated. Only by learning to coexist peacefully with other countries and nations, it is possible to avoid a complete financial and economic collapse in Armenia.