EURASIAN ECONOMIC UNION LIKELY TO REDUCE ARMENIAN TRADE WITH NON-MEMBER STATES, LIMIT CO-OPERATION WITH EU AND NATO
IHS Global Insight
November 4, 2014
by Alex Melikishvili
Accession to the Eurasian Economic Union will increase Armenian
economic vulnerability to Russia’s economic stagnation.
On 17 November 2014, the National Assembly is scheduled to hold an
extraordinary session to ratify the treaty on Armenia’s accession to
the Eurasian Economic Union (EEU), which includes Belarus, Kazakhstan
and Russia. For the Russian leadership, Armenia’s EEU accession
primarily represents a political priority. Because Armenia is the only
country that has agreed to join the EEU after successfully negotiating
association and free-trade agreements with the European Union (EU), it
demonstrates that Russia is still capable of preventing its satellites
from leaving Russia’s sphere of “privileged interests”. The development
is being presented by Russia’s state-controlled media to the domestic
Russian audience as a proof of success of President Vladimir Putin’s
integration policy. Armenia’s unquestionable loyalty to Russia means
that Russia practically gets a second vote within the EEU. This is
very useful for Russia as both Belarus and Kazakhstan previously
prevented adoption of some policies Russia wished approved.
EEU accession’s uncertain economic benefits for Armenia
At the parliamentary hearings on 29 October focused on the 2015
budget, Deputy Minister of Finance Pavel Safaryan acknowledged
that the government had not evaluated the probable impact of EEU
accession on the country’s main macroeconomic parameters. In terms
of trade with Georgia and Iran, EEU accession is very likely to
have negative impacts. Armenia has been one of Georgia’s 10 biggest
trade partners, largely due to the re-export of used cars from the
EU. Foreign vehicles re-exported from Georgia constitute about 70%
of Armenia’s car imports. A sharp increase in customs duties applied
on cars imported from Georgia after Armenia joins EEU is very likely
to reduce this trade sharply.
Even more important is the question of how an across-the-board increase
in customs tariffs, which will go into effect after Armenia’s EEU
accession, will affect the cargo transit between Armenia and Russia,
which is transported via Georgia. Although both Armenian and Georgian
officials have been straining in their public statements to assuage
growing concerns over trade disruption, the inherent incompatibility
between Georgia’s integration into the EU through its Association
Agreement and Armenia’s move to join the EEU has yet to be addressed
by the respective governments. Similar to Georgia, Iranian exports to
Armenia are also likely to decline as they will become more expensive
due to EEU-mandated customs tariff increases. In addition, as a result
of EEU accession, Armenia’s growing economic integration with Russia
reduces the likelihood that Iranian offers to build a new gas pipeline
and to supply gas on more favourable conditions than Russia’s Gazprom
will elicit interest in Armenia.
Armenia’s already small consumer market is likely to shrink further.
Price increases will follow EEU-mandated imposition of higher tariffs
on imports from non-member states. The higher degree of economic
integration with Russia post-EEU accession will increase the impacts
from the depreciation of the Russian rouble, declining oil prices
and the impact of Western sanctions.
“Belarusian” model for relations with EU
Armenia’s u-turn with regard to its EU Association Agreement is
likely to lead to a limited co-operation framework similar to the EU’s
current arrangement with Belarus. After EEU accession, the Armenian
government’s relationship with Western structures in general will be
more dependent on Russian guidance. If Russia loses voting rights
in the Parliamentary Assembly of the Council of Europe, Moscow is
likely to pressure Armenia to leave that forum in support. Armenia’s
nascent co-operation with NATO is also likely to end, especially if
additional sanctions are imposed on Russia over Ukraine and a NATO
training centre opens in Georgia, as promised in NATO’s “enhanced
co-operation” package for Georgia after its summit in Wales.
Unclear “compromise” over Nagorno-Karabakh issue
Prior to Armenia signing the EEU treaty, Kazakhstan sought
clarification of the customs regime on the de-facto border between
Azerbaijan’s breakaway region of Nagorno-Karabakh and Armenia as a
prerequisite of EEU accession. At the signing ceremony Kazakhstan’s
president Nursultan Nazarbayev referred to a “compromise” over the
Nagorno-Karabakh issue, but did not elaborate except to note that
Nagorno-Karabakh must remain outside the EEU. The Armenian government
is likely to resist pressure to establish any type of customs regime
against the Armenian-populated secessionist region which would be
deeply unpopular in Armenia and likely to result in mass protests.
Opposition largely supportive of EEU accession
The driving force behind the opposition movement – the Prosperous
Armenia Party (PAP) and the Armenian National Congress (ANC) – does not
oppose the government’s decision to join the EEU. Even as PAP and ANC
prepare a nationwide campaign to demand the government’s resignation,
EEU accession does not appear in their list of grievances. In ANC EEU
accession is seen as essential for Armenia given the geopolitical
expediency dictated by the strategic dependence on Russia. For
PAP leader and prominent Armenian businessman Gagik Tsarukyan, EEU
accession is likely to bring tangible financial benefits. Tsarukyan’s
holding company Multi Group owns the franchise representing Lada and
other Russian car manufacturers. At present the share of Russian cars
in Armenia’s car imports is only about 5%, but this will increase
considerably after EEU accession as car imports from Georgia will
decrease due to increased customs tariffs. Tsarukyan is also likely
to promote imports of Belarusian textiles, furniture, household
appliances and other goods as Western imports become more expensive.
Anti-EEU forces are few in number and include about half a dozen MPs,
some former government officials now representing political parties
outside the parliament, as well as experts from think tanks and civil
activists from non-governmental organisations, who lack financial
resources and have little media access. A few anti-EEU protests
held in Yerevan were all characterised by low attendance with an
average turnout of only a few hundred participants. In the mainstream
opposition only the leader of the Heritage Party Raffi Hovannisian
openly voiced objections to EEU accession, but his support base is
small and he is very unlikely to galvanise protests relying on that
issue alone.
Outlook and implications
Lower customs duties introduced on fruits and vegetables after EEU
accession are likely to lead to consolidation of farm land in Armenia
as small farmers will be forced out by large agricultural companies
owned by government officials or pro-government oligarchs. Potential
beneficiaries will include Prime Minister Hovik Abrahamyan, whose
food processing company Artfood is likely to increase its share on
the Russian market, and government-connected Armenian oligarch Samvel
Alexanyan, who controls imports of food products through his company
Alex Grig. However, a handful of people profiting from EEU accession
will not compensate for the far wider economic losses that Armenia
is likely to incur from disrupted trade with Georgia and Iran and the
indirect impact of Western sanctions which are causing a depreciating
rouble and declining remittances from Russia. Entry into the EEU
also will severely curtail Armenia’s relations with EU and NATO,
probably limiting the former and ending the latter.