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Economy of Armenia

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Through Gross domestic product, Real and nominal value and Tertiary sector

As a former member of the Soviet Union, Armenia's economy was subjected to rigorous central planning, with the USSR driving large-scale industrialization efforts throughout the entire union. This greatly sped up the transition of Armenia's economy from primarily agrarian to a more modern, industrial economy. Some of the most prominent manufacturing industries during this time were chemicals, electronics, machinery, processed food, synthetic rubber and textiles. The Soviet period also saw a large expansion of Armenia's mining industry, exploiting domestic deposits of copper, zinc, gold, lead, and bauxite for export to other parts of the Soviet Union.

After gaining independence in 1991, the economy shifted heavily away from the state-run model and saw rapid privatization throughout the economy. The economic shock caused by the breakup of the Soviet Union, along with the conflict with Azerbaijan over the ethnic Armenian-dominated region of Nagorno-Karabakh, contributed to a severe economic decline in the early 1990s. Armenia recovered from this collapse in the decades that followed with a period of rapid economic growth; the size of the economy tripled by the end of the decade from the post-war low of 1994, and it grew an additional 500% in the 2000s. In 2015, Armenia joined the Eurasian Economic Union, which has expanded its international trade opportunities and made the economy more competitive. However, despite these tailwinds, geopolitical concerns—namely hostile relations with Azerbaijan and heavy reliance on Russia—continue to pose significant risks to Armenia's future economic prosperity.

Owing to a relative lack of domestic natural resources, Armenia needs to import large amounts of raw materials and energy resources to sustain its economy. This contributes to a large trade deficit, although this is somewhat offset by international aid, remittances from Armenians abroad, and foreign direct investment. The vast majority of energy is produced with imported fuel from Russia, including natural gas and nuclear fuel for Armenia's Metsamor nuclear power plant.

History

At the beginning of the 20th century, the territory of present-day Armenia was an agricultural region with some copper mining and cognac production. From 1915 through 1921, Armenians in the region suffered from a genocide carried out by the Ottoman Empire, during which about 1.5 million Armenians were killed. This caused total property and financial collapse when all of their assets and belongings were forcibly taken away by the Turks, the consequences of which have still left their mark over a century later. Prior to the genocide, Armenians had been one of the most affluent ethnic groups within the Ottoman Empire, largely due to their involvement in highly productive sectors such as banking, architecture, and trade. However, after the genocide and the subsequent confiscation and pillaging of Armenian property, the people and the country were left in ruins. Contending with revolution, the influx of refugees from Western Armenia, disease, and starvation, Armenians went from relative wealth and prosperity to suffering from poverty and famine.

Armenian Soviet Socialist Republic

The first Soviet government stringently regulated economic activity—nationalizing economic enterprises, requisitioning grain from peasants, and suppressing almost all private market activity. This period of intense state control ended in 1921, with the implementation of Soviet leader Vladimir Lenin's New Economic Policy (NEP). This policy continued state control of larger enterprises and banks, but allowed for private ownership of small and medium-sized businesses. In Armenia, the NEP brought partial recovery from the economic disaster brought by the aftermath of the genocide. By 1926, agricultural production in Armenia had reached nearly three-quarters of its prewar level.

By the end of the 1920s, Stalin's regime had revoked the NEP and re-established the centralised state monopoly on all economic activity. Once this occurred, the main goal of the Soviet economic policy in Armenia was to turn a predominantly agrarian and rural republic into an industrial and urban one. Stalin's first five year plan focused heavily on getting rid of private owned farms and instead replace them with state owned farms, hundreds of collective farms called Kolkhozes were constructed during the first five years. Among other restrictions, peasants now were forced to sell nearly all of their output to state procurement agencies rather than at the open market. The first five year plan was often described as rapid industrialization, Armenia's main city Yerevan, was quickly transforming from a small city to an industrial giant. This was achieved by supplying electricity from nearby dam of Sevan-Hrazdan Cascade and establishing factories on the outskirts of the city.

From the 1930s through the 1960s, an industrial infrastructure has been constructed. Besides hydroelectric plants and canals, roads were built and gas pipelines were laid to bring fuel and food from Azerbaijan and Russia.

The state socialist command economy, in which market forces were suppressed and all orders for production and distribution came from the state authorities, survived in all its essential features until the fall of the Soviet regime in 1991. In the early stages of the communist economic revolution, Armenia underwent a fundamental transformation into a "proletarian" society. Between 1929 and 1939, the percentage of Armenia's work force categorised as industrial workers grew from 13% to 31%. By 1935 industry supplied 62% of Armenia's economic production. Highly integrated and sheltered within artificial barter economy of the Soviet system from the 1930s until the end of the communist era, the Armenian economy showed few signs of self-sufficiency at any time during that period. In 1988, Armenia produced only 0.9% of the net material product of the Soviet Union (1.2% of industry, 0.7% of agriculture). The republic retained 1.4% of total state budget revenue, delivered 63.7% of its NMP to other republics, and exported only 1.4% of what it produced to markets outside the Soviet Union.

Agriculture accounted for only 20% of net material product and 10% of employment before the breakup of the Soviet Union in 1991.

Armenia's industry was especially dependent on the Soviet military-industrial complex. About 40% of all enterprises in the republic were devoted to defense, and some factories lost 60% to 80% of their business in the last years of the Soviet Union, when massive cuts were made in the national defense expenditures. As the republic's economy faced the prospects of competing in world markets in the mid-1990s, the great liabilities of Armenia's industry were its outdated equipment and infrastructure and the pollution emitted by many of the country's heavy industrial plants.

The economic downturn that began in 1989 worsened dramatically in 1992. According to statistics, the GDP declined by 37.5 percent in 1991 compared to 1990, and all sectors contributing to the GDP decreased in production. The collapse of industry in favor of agriculture, whose products were mostly imported throughout the Soviet period, changed the structure of sectoral contributions to GDP.

In 1991, Armenia's last year as a Soviet republic, national income fell 12% from the previous year, while per capita gross national product was 4,920 rubles, only 68% of the Soviet average. In large part due to the earthquake of 1988, the Azerbaijani blockade that began in 1989 and the collapse of the international trading system of the Soviet Union, the Armenian economy of the early 1990s remained far below its 1980 production levels. In the first years of independence (1992–93), inflation was extremely high, productivity and national income dropped dramatically, and the national budget ran large deficits.

A period of chronic shortages, was the first stage of price deregulation, which allowed goods to stay in Armenia as opposed to being exported for better prices; the inflation rates were 10 percent in 1990, 100 percent in 1991, and 642.5 percent during the first four months of 1992, compared with the first four months of 1991. Thus, there were two opposing dynamics: price increases in response to shortages and falling incomes due to the recession and unemployment.

Post-communist economic reforms

Armenia introduced elements of the free market and privatisation into their economic system in the late 1980s, when Mikhail Gorbachev began advocating economic reform. To supply the country's basic needs, the first decision was land reform and the privatization of land. This allowed for the emergence of small-parcel agriculture supplying markets and supporting self-sustenance during the period of shortages. Cooperatives were set up in the service sector, particularly in restaurants, although substantial resistance came from the Communist Party of Armenia (CPA) and other groups that had enjoyed privileged position in the old economy. In the late 1980s, much of Armenia's economy already was opening either semi-officially or illegally, with widespread corruption and bribery. The so-called mafia, made up of interconnected groups of powerful officials and their relatives and friends, sabotaged the efforts of reformers to create a lawful market system. When the December 1988 earthquake brought millions of dollars of foreign aid to the devastated regions of Armenia, much of the money went to corrupt and criminal elements.

Beginning in 1991, the democratically elected government pushed vigorously for privatisation and market relations, although its efforts were frustrated by the old ways of doing business in Armenia, the Azerbaijani blockade, and the costs of the First Nagorno-Karabakh War. In 1992, the Law on the Programme of Privatisation and Decentralisation of Incompletely Constructed Facilities established a state privatisation committee, with members from all political parties. In the middle of 1993, the committee announced a two-year privatisation programme, whose first stage would be privatisation of 30% of state enterprises, mostly services and light industries. The remaining 70%, including many bankrupt, nonfunctional enterprises, were to be privatised in a later stage with a minimum of government restriction, to encourage private initiative. For all enterprises, the workers would receive 20% of their firm's property free of charge; 30% would be distributed to all citizens by means of vouchers; and the remaining 50% was to be distributed by the government, with preference given to members of the labour organisations. A major problem of this system, however, was the lack of supporting legislation covering foreign investment protection, bankruptcy, monopoly policy, and consumer protection.

In the first post-communist years, efforts to interest foreign investors in joint enterprises were only moderately successful because of the blockade and the energy shortage. Only in late 1993 was a department of foreign investment established in the Ministry of Economy, to spread information about Armenia's investment opportunities and improve the legal infrastructure for investment activity. A specific goal of this agency was creating a market for scientific and technical intellectual property.

A few Armenians living abroad made large-scale investments. Besides a toy factory and construction projects, diaspora Armenians built a cold storage plant (which in its first years had little produce to store) and established the American University of Armenia in Yerevan to teach the techniques necessary to run a market economy.

Armenia was admitted to the International Monetary Fund in May 1992 and to the World Bank in September. A year later, the government complained that those organisations were holding back financial assistance and announced its intention to move toward fuller price liberalisation, and the removal of all tariffs, quotas, and restrictions of foreign trade. Although privatisation had slowed because of catastrophic collapse of the economy, Prime Minister Hrant Bagratyan informed the United States officials in the fall of 1993 that plans had been made to embark on a renewed privatisation programme by the end of the year.

Like other former states, Armenia's economy suffers from the legacy of a centrally planned economy and the breakdown of former Soviet trading patterns. Soviet investment in and support of Armenian industry has virtually disappeared, so that few major enterprises are still able to function. In addition, the effects of the 1988 earthquake, which killed more than 25,000 people and made 500,000 homeless, are still being felt. Although a cease-fire has held since 1994, the conflict with Azerbaijan over Nagorno-Karabakh has not been resolved. The consequent blockade along both the Azerbaijani and Turkish borders has devastated the economy, because of Armenia's dependence on outside supplies of energy and most raw materials. Land routes through Azerbaijan and Turkey are closed; routes through Georgia and Iran are adequate and reliable. In 1992–93, the GDP had fallen nearly 60% from its 1989 level. The national currency, the dram, suffered hyperinflation for the first few years after its introduction in 1993.

Armenia has registered strong economic growth since 1995 and inflation has been negligible for the past several years. New sectors, such as precious stone processing and jewelry making and communication technology (primarily Armentel, which is left from the USSR era and is owned by external investors). This steady economic progress has earned Armenia increasing support from international institutions. The International Monetary Fund (IMF), World Bank, EBRD, as well as other international financial institutions (IFIs) and foreign countries are extending considerable grants and loans. Total loans extended to Armenia since 1993 exceed $800 million. These loans are targeted at reducing the budget deficit, stabilizing the local currency; developing private businesses; energy; the agriculture, food processing, transportation, and health and education sectors; and ongoing rehabilitation work in the earthquake zone.

By 1994, however, the Armenian government had launched an ambitious IMF-sponsored economic liberalization program that resulted in positive growth rates in 1995–2005. The economic growth of Armenia expressed in GDP per capita was one of strongest in the CIS. GDP went from $350 to more than $800 on average between 1995 and 2003. Three principal factors explain this result: the credibility of the macroeconomic policies of stabilization, the correction effect following the depression, and the importance of external transfers, in particular since 2000. Armenia became a member of the World Trade Organization (WTO) in January 2003. Armenia also has managed to slash inflation, stabilize its currency, and privatize most small- and medium-sized enterprises. Armenia's unemployment rate, however, remains high, despite strong economic growth.

The chronic energy shortages Armenia suffered in the early and mid-1990s have been offset by the energy supplied by one of its nuclear power plants at Metsamor. Armenia is now a net energy exporter, although it does not have sufficient generating capacity to replace the Metsamor nuclear plant, which is under international pressure to close due to its old design. The European Union had classified the VVER 440 Model V230 light-water-cooled reactors as the "oldest and least reliable" category of all the 66 Soviet reactors built in the former Eastern Bloc. However the IAEA has found that the Metsamor NPP has adequate safety and can function beyond its design lifespan.

The country's electricity distribution system was privatized in 2002.

2020 recession

The Armenian economy performed poorly in 2020, and contracted by 7.2% after years of consecutive growth. The two biggest contributing factors were the COVID-19 pandemic and the Second Nagorno-Karabakh War. In the first half of 2020, the Armenian economy was negatively impacted by the economic restrictions that were implemented in response to the pandemic. These restrictions included a stay-at-home order, an indoor social distancing requirement, and a mask mandate. These restrictions had a negative impact on businesses; according to the World Bank, individual consumption dropped by 9% in the first six months of 2020 due to the stay-at-home order.

The economy was further impacted by the war against Azerbaijan later in the year.

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