Economic cooperation and energy were the focus of the Pashinyan-Putin negotiations held in Moscow on April 1. The statements of the Russian side about the supply of cheap gas to Armenia and uninterrupted consumption of Armenian agricultural products on the Russian market once again raised the topic of Armenia’s economic dependence. What do these messages mean in the language of numbers and facts, is the diversification of the economy and energy real in the current geopolitical conditions, and what shocks could the possible closure or restriction of the Russian market lead to?
Around these issues VERELQ– spoke to an economist, head of economic analysis site tvyal.com Agassi Tavadyan with. According to the analyst, the unprecedented economic growth of recent years is not the result of qualitative development, but of external factors and quantitative indicators, especially from Russia, which requires serious “homework” from the state and producers.
Agassi Tavadyan is in the photo, the source is ejc.am
VERELQ: Mr. Tavadyan, during the recent high-level Armenian-Russian meetings held in Moscow (in particular, between Prime Minister Pashinyan and President Putin), the issues of economy, gas prices and energy were especially emphasized. It was emphasized that Russia supplies gas to Armenia at an affordable price (in contrast to the European market, where prices are significantly higher), and that Armenian agricultural products are mainly consumed in the Russian market. What is the significance of these statements from an economic point of view? And if restrictions are suddenly introduced in those areas, how painful will it be for Armenia’s economy?
Agassi Tavadyan. Let’s approach the issue from a purely economic point of view and separate political statements, which often have to be considered in pre-election or situational logic, from reality.
The statistics document. Since 2018, Armenia’s exports to Russia and the Eurasian Economic Union (EEU) have increased five-fold or more, while the increase to the European Union (EU) was only 5 percent. In other words, regardless of political statements, our economy is now much closer to the Russian economy than it was years ago. If 10 years ago our exports were evenly distributed: about 30% to the EU, 30% to the EAEU and 30% to other countries, today the EAEU’s share exceeds 40%, and the share of the European Union has decreased to 7-8%. Therefore, giving up the Russian market at this stage will be much more painful for us.
In addition, one must understand the nature of the economic growth we have experienced. In 2022, we had 12.6% economic growth. It is necessary to clearly understand at what expense it was generated.
- Capital and labor flow. As a result of the Russian-Ukrainian conflict, a large amount of capital and labor left Russia, a significant part of which ended up in Armenia.
- Growth of IT and banking sectors. Half of the economic growth was ensured at the expense of these sectors, which grew dramatically due to the above-mentioned flows, also taking advantage of the opportunity of free movement of capital, labor and services within the EAEU.
- Tourism. The main driving force behind the growth of this sector is again those from Russia.
All this indicates that we should actively work to diversify our exports and export products with higher added value to the Russian market.
VERELQ: In other words, is diversification of the economy an urgent necessity today?
Agassi Tavadyan. Undoubtedly. But we must note that the five-fold increase recorded in recent years was mainly due to the quantity of exports, and not the quality. The Russian market is not so demanding, it is quite easy and affordable for Armenia, which is why we mostly export products there, which do not shine with their quality.
As a small economy with landlocked and closed borders, we have to focus on producing high value added and low weight products rather than quantity. A simple example: we should export not raw apricots, but dried apricots, jam or other processed products. Or, instead of exporting two-dollar wine to Russia, we should produce quality wine that will cost $20 and more. If we can build a strong brand reputation, other markets will open up for us, regardless of which economic associations we belong to.
VERELQ: It turns out that we have some serious “homework” to do.
Agassi Tavadyan. Undoubtedly. But as of now, the numbers show something else. we have become even more connected to the Russian economy. Let me repeat the numbers, if previously only one third of exports went to Russia, now that figure has reached 40-50 percent, and the share of the European Union has decreased to 7 percent.
VERELQ: It is clear. Mr. Tavadyan, let’s talk about energy, especially gas. What problems may Armenia face if the price of gas increases, and does Armenia have the opportunity to compensate for it?
Agassi Tavadyan. The global picture should be taken into account. In recent years, serious energy crises have been going on in the world, the full weight of which has not reached us yet. For example, in the USA and Australia, there were periods when the price of gasoline increased by up to 80 percent, and in some countries even shortages occurred. It was not felt acutely in Armenia for the simple reason that we get our oil products, gas and even agricultural fertilizers from Russia by land.
As for energy alternatives, one should be realistic. in today’s conditions, the search for alternatives has more political implications than purely economic or logistical logic.
VERELQ: In other words, do we currently have problems with alternatives? And Iran can’t be such an alternative in terms of gas? At least there are such discussions in Armenia.
Agassi Tavadyan. Iran is an important actor, but there are nuances here as well. First, the gas pipeline coming from Iran is also managed by a Russian company (Gazprom Armenia), which already raises some questions. Second, its diameter is small, so the volume of supplied gas will be limited.
But on the other hand, Iran really has a key role in our energy balance and security. We have a “gas for electricity” agreement with Iran. we receive Iranian gas, turn it into electricity and export it back to Iran. If our main gas supply fails, we will have serious problems in maintaining the energy frequency and stability of the country.
VERELQ: And in terms of export of agricultural products, how vital is the Russian market, and is there a possibility of replacing it? How painful will it be to apply restrictions, for example, due to the EATM GOST or other standards?
Agassi Tavadyan. The numbers are telling. most of our high-value-added products go to Russia. 80-90 percent of agricultural products, including brandy, are consumed in the Russian market (the exception is tobacco, which is mainly exported to the Middle East and Asian countries). In general, 70-80 percent of exports of locally produced goods go to Russia.
Therefore, if the Russian market suddenly starts to be closed or restricted, it will be an extremely painful blow. As I already mentioned, that market is understandable for our producers, and also “taught” them not to focus too much on quality. The unprecedented growth of our exports in recent years has been driven solely by emphasis on quantity rather than quality, which poses serious risks to the long-term stability of the economy.
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