Has Armenia's two year EAEU membership resulted in a rise or decline?

A round-table discussion in Yerevan summed up two years of Armenias’ membership in the European-Asian Economic Union.

Vache Gabrielyan, Vice-Premier and the Head of the International Integration and Reform Ministry, emphasized that mere statistics should not be the only factor to be considered, but, rather, that the context of the cooperation should also be taken into account. In his opinion, the overall result is as follows: after two years, Armenia’s resources increased and the prices for imported goods went down. The phrase was quoted by the national media, but meant little to ordinary Armenians.

JAMnews tried to find out the merits of the membership with all statistics and other factors taken into account. Here is the analysis from Babken Tounyan prepared for us earlier.

First published on 20.12.2016

This article was ready for publication when the Armenian President’s official site reported that on 16 December, Serzh Sargsyan had received Tigran Sargsyan, the  Chairman of the Board of the Eurasian Economic Commission (EAEC). Having omitted standard statements, typical for official reports, we will cite only the President’s words. Many have been surprised that they’ve turned out to be rather sincere.

“Together we all witnessed the beginning of the process of Armenia’s accession to the Eurasian Economic Union and expected a considerable improvement to Armenia’s economic situation by joining it. Regrettably, the accession timed to coincide with the international economic processes that negatively affected the country’s economy and our citizens’ attitude to the EAEU’s, to put it mildly, wait-and-see attitude. Though, I am sure, there would have been more negative approaches in case we’d refused to enter it. Surely, a tremendous amount of work has been carried out during that period and, in just 10 days, we will have a chance to summarize certain results,” Sargsyan stated at a meeting with the EAEC Board Chairman.

By saying ’10 days’, the President apparently referred to summarizing the annual economic indices. Of course, this data will be published only in January, but the country’s leadership will get them, so to say, first hand.

At the same time, in 10 days Armenia will mark 2 years since its accession to the EAEU. The Republic of Armenia became a full-fledged member of the EAEU on 1 January 2015. The Armenian President, Serzh Sargsyan, first officially announced the accession in September 2013.

Before that, everyone in Armenia (and not only there) were sure that the country was moving in the opposite direction – towards the European Union. Moreover, negotiations were successfully completed and the Association Agreement, including its significant component – the Deep and Comprehensive Free Trade Areas (DCFTA) Agreement, which was supposed to facilitate the export of Armenia’s locally-produced goods to the European market and bring Armenia one step closer to the EU, was ready for signing. Nevertheless, since September 2013, we forgot about DCFTA and started bringing our legislation in line with the EAEU standards.

 How has Armenia benefited from EAEU membership?

This question is voiced quite often, but it hasn’t been answered adequately so far.  It’s not surprising, given that the assessment of membership in EAEU (what impact it had and to what extent) requires serious analytical work. Similar work was carried out by order of the Armenian Government: the economic impact of integration in the HY1 2015 was assessed. However, we don’t have research covering the 2-year period.

The aforesaid allows the ‘European’ and ‘Eurasian’ course supporters to represent the EAEU impact the way that is most advantageous to them. For example, the pro-Europeans believe that intensification of ties with the EAEU, and Russia in particular, will further strengthen Armenia’s economic dependence on Russia, making it vulnerable against negative processes in the country (conditioned by Western sanctions and a drop in oil prices).

Others, on the contrary, claim that membership to the EAEU opened serious opportunities to Armenia: access to a 200-million market and a mediator’s role between the European market and the EAEU. They believe that if we can’t make comprehensive use of given opportunities, then the problem lies in ourselves. As far as the aggravation of Armenia’s economic situation is concerned, in their words, if we hadn’t joined the Union, the situation would have been even worse.

As is evident from the beginning of the article, the country’s President has a relatively balanced position.  On the one hand, Serzh Sargsyan hints that expectations have not been met or have been met partially, pointing out that the community is still in a ‘wait’ condition. On the other hand, he justifies the disappointed expectations by the ongoing international economic processes. At the same time, he is sure that there would have been more negative approaches if the country had refused to become a EAEU member.

Indeed, what would have happened to Armenia from an economic point of view if it hadn’t joined the EAEU?  For example, Karen Karapetyan, the newly appointed Prime Minister, stated on a number of occasions that there was no precise analysis of what our economic indices would have been in case of non-accession. Thus, it’s a more cautious position.

Whereas Russian President Vladimir Putin, for example, who met Armenian President Serzh Sargsyan a few months ago, stated at the meeting that Armenia’s GDP increased by 10% after it had joined the EAEU. Economists and statistics experts, together with journalists, still can’t figure out where this figure had come from.

 Not waiting until 10 days have passed  

Although the 10 days mentioned by Serzh Sargsyan have not passed yet, and the results for 2016 have not been summarized, the data for 10 months already allows for making certain conclusions.

It would be prudent to first present a number of key economic indices: what we had before joining the EAEU, at the moment of joining, what we have now and what are this year’s projections.

In 2014, the economic growth was 3,5%. In 2015, in the first year Armenia joined the EAEU, the growth dropped to 3%.

This year, the economic growth was initially projected at 2.1%, but the developments in recent months indicate that there won’t be such a rate. From January-October 2016, the level of Armenia’s economic activity (not to be confused with GDP growth) was 0.4%, as compared with the same period of 2015. Thus, during the first 10 months of the year, the economic activity increased just by 0.4%. Moreover, they were lower in October this year than in October last year. The country’s GDP dropped by 2.6% in Q3 2016, as compared with the same period of the last year.

We are not going to overburden the readers with economic terms, but will just note that Armenia hasn’t had such poor rates since the 2009 crisis. In view of the dynamics of these rates, the country will quite possibly have zero growth, or even face an economic recession, by year-end.

Although Armenia’s GDP has grown in AMD equivalent, in US Dollar equivalent it is less in 2015-2016 than in 2014.

Reduction of the volume of money transfers by natural persons to Armenia, that started in 2014, is still underway.

In 2015, the inflow of transfers dropped by 23.1%, or by USD 492 million as compared with 2014, including money inflow from Russia, which reduced by 35% ,or by USD 546 million. In 2016, the reduction pace slowed down, but a decline could still be observed. Between January-October 2016, USD 1 billion 336.1 million was transferred to natural persons in Armenia through the banking system. The transfers’ inflow had reduced by USD 138.4 million, or by 10.4% compared with January-October of last year.

If the decline has the same rate in November-December, the transfers’ inflow will not exceed USD 1.5 billion in 2016, that is, the inflow will be lower than in the crisis of 2009.

For comparison, USD 2.3 billion was transferred to Armenia in 2013. It means that there will be USD 800 million less in transfers this year. To better understand what USD 800 million means for Armenia, we should note that the country’s budget totals approximately USD 2.5 billion.

Interestingly, the amounts transferred this year to Armenia from EAEU member-states, Kazakhstan and Russia, reduced in percentage ration. On the contrary, transfers from Armenia to Russia and Kazakhstan increased more than to other countries.

In addition, foreign investments in Armenia’s real economy sector dropped by more than 70% in January-September 2016. In this case, the lion’s share of decline fell on Russian investments.

After all that, it’s no wonder that the national debt is the only thing rapidly increasing in Armenia.  In 2014, it totaled USD 4.4 billion, and in 2015 – USD 5.08 billion. At the end of 2016, it was officially projected at USD 5.8 billion. In 2017, the volume of the national debt will reach USD 6.3 billion and will total 54% of GDP.

The larger the national debt, the more money is spent on its service (interest). Therefore, it’s no surprise that in 2017, the budget funds allocated for the national debt service will increase, while pensions and benefits will not.

This list goes on endlessly. However, if Armenia’s membership to the EAEU is to be judged by economic indices, then the phrase ‘expectations have not been met’ sounds rather mild.

About Armenia-EAEU trade    

Armenia’s accession to the EAEU was supposed, first of all, to have a positive impact on trade turnover.  It’s rather difficult to make assessments in this particular case, as many factors influenced the trade. Namely, the devaluation of the Russian Ruble at the end of 2014 posed serious problems to Armenian exporters: Armenian products became expensive and noncompetitive.

In any case, it will be an exaggeration to speak about Armenia-EAEU trade relations, as the volumes of trade with the remaining three partners, excluding Russia, are too low.

For example, in January-October 2016, Armenia’s trade turnover with EAEU countries totaled USD 1.1 billion, including the share of trade turnover with Russia, amounting to USD 1.08 billion.

Trade turnover with Belarus was USD 29.8 million, and with Kazakhstan – USD 5.8 million. Trade turnover with Kyrgyzstan was so insignificant that it has not been specified as a separate item in Armenia’s official foreign trade statistics, which includes data on 40 countries (USD 10 worth goods were imported from Kyrgyzstan to Armenia this year).

In the first 10 months of 2016, trade turnover with EAEU countries in percentage ration totaled 27.3% of Armenia’s total trade turnover (for comparison, the specific weight of EU countries was 24.1%).

In particular, Russia accounts for 26.5% out of 27.3%, Belarus – 0.7% and Kazakhstan – 0.1%.

As can be seen from the chart, Russia’s share has increased by 1.7 percentage points, and that’s at the expense of export from Armenia to Russia. In 2016, export from Armenia to Russia increased by 52.8%, or by over USD 100 million and totaled USD 295 million while import increased by 3.3%.

It’s a positive dynamic for Armenia. However, the EAEU isn’t an indisputable leader among Armenia’s trading partners, in general, and it can’t be excluded that the EU’s share may increase again at some point. As for the other EAEU members – Kazakhstan, Belarus and Kyrgyzstan, we’ll just say that they aren’t among Armenia’s leading trading partners.

What would have happened if we hadn’t joined the EAEU?

This question has repeatedly been asked since 3 September 2013, when Armenia’s accession to the Eurasian Economic Union was officially announced. Of course, there have been many answers, but apparently they related to the political or geopolitical plane and have mostly focused on Armenia’s security-related issues.

For example, people who think that non-accession would have been economically disadvantageous, point to the gas prices as the major factor. That is to say gas would have been much more expensive.

As a matter of fact, serious analysis is required to evaluate this correlation, which has been performed. The Armenian Government, represented by the Ministry of International Economic Integration and Reforms, decided to figure out what impact  the accession to the EAEU had on Armenia in the HY1, 2015. The ‘Avag Solutions’ analytical center was commissioned to conduct the research.

The 46-page document evaluated the impact of the country’s accession to the EAEU by the following fields: exports, imports, investments and transfers. Namely, in the export field, experts were tasked to find out what the export’s condition would have been if the country had not been a EAEU member. To put it short, the conclusion was as follows: membership to the EAEU may be an important factor preventing more negative processes. In other words, exports haven’t benefited from joining the EAEU, though the situation would have been even more deplorable.

As for the import field, particular focus was made on natural gas. “If Armenia hadn’t been an EAEU member, the price on imported gas might have been be at the level of year 2013, that is, approximately USD 280 per 1000 cubic meters,” the document  pointed out.

As far as foreign investments are concerned, the document reads that integration into the EAEU had no positive impact. As of HY1 2015, there was a sharp drop in total foreign investments and Russia’s share in them. The authors sincerely admitted that the integration processes usually kindle additional interest in the country, bringing positive impact on investments as well. As for Armenia, after it joined the EAEU, such tendencies haven’t been observed in the country.

With regard to money transfers, it was pointed out that transfers to Armenia and Belarus, which are EAEU members, reduced more than money transfers to Azerbaijan and Kyrgyzstan. This allows for the assumption that EAEU membership has not formed a favorable environment in the transfers field.

Import customs duties is the only field where Armenia has benefited from joining the EAEU (approximately by 20% more than in case of it’s non-accession). At the risk of preempting ourselves, let us tell you that this field hasn’t given reasons for rejoicing either.

Despite the aforesaid, the authors of the analytical material tried not to criticize the EAEU too much and noted at the end of the section that, according to the results for the first 6 months, the economic situation under review was actually problematic, though the considered tendencies are unlikely to be conditioned by the integration processes. In short, the report hadn’t shown any positive progress and that’s probably the reason why similar research wasn’t conducted in the subsequent year.

What does the Armenian community expect from joining EAEU?

It is hard to say. Generally speaking, the importance of this issue is, so to say, exaggerated. Nobody was interested in the community’s opinion in 2013, when Armenia’s intention to join the EAEU was declared. The decision was made in its stead. One month before that, the authorities had persistently been trying to prove that accession to the EAEU was inexpedient because of the absence of common borders. After 3 September, they explained with the same enthusiasm, it was much more advantageous from an economic point of view and that a 180 million market was opening for Armenia (though, it seems that the market hadn’t been closed for it before either).

As of writing this, two weeks have passed since the only land route, Lars-Stepantsminda, linking Armenia to the EAEU countries, has been closed off for trucks because of bad weather conditions. Hundreds of trucks cannot move from Armenia to Russia and back. Thus, not only is the 180-million market closed for Armenia today, but its small 3-million market is also closed for the EAEU.

Against such a background, better weather is probably the highest expectation the Armenian community can look forward to.