The effect of "positive and negative shock" on Armenia's economy. Opinion
Impact of Russian capital on the Armenian economy
About 60% of Armenia’s economy is concentrated in the capital. The positive effect of “the shock caused by the flow of re-locations and capital inflows from Russia” is more pronounced in Yerevan. This is the opinion of economist Narek Karapetyan.
“At the same time, uneven territorial development across the country and income distribution is a serious problem. The bad news is that economists have no recipes on how to fight it either,” he says.
The expert analyzed the situation in the country’s economy, touched upon the distribution of labor force in Yerevan and regions, inflation, the size of salaries, economic activity in certain sectors and its causes.
Armenia’s economic activity index increased by 10.4% in January-July 2023 compared to the same period last year. According to the data published by the Statistical Committee
- the volume of industrial production increased by 0.5%,
- construction volumes increased by 17.2%,
- volumes of services provided increased by 14.9%.
The consumer price index increased by 3.6% compared to January-July 2022, while the price index of industrial products remained unchanged.
“Most of the labor force is concentrated in Yerevan”
According to economist Narek Karapetyan, an expert at the Amberd think tank, it is in the capital that new IT companies are opening, while important organizations of the financial sphere are located here, which ensured a significant increase in salaries last year.
He warns that the gap between Yerevan and the regions is getting deeper, but experts assess the situation differently:
“Some believe that more investments should be made in the regions. But there are also those who cite counterarguments and many examples that large investments have gone to zero because the regions turned out to be unattractive for economic activity.”
Karapetyan said that the Armenian government “will have a difficult homework” to find “the right recipes” and achieve an even territorial distribution of resources.
What are the problems of the areas
According to the expert’s assessment, this year’s agricultural products are slightly cheaper than last summer. But prices in general still remain at a “high level, as in 2019, 2020 and 2021”.
He reminds that the main sphere of activity in the regions is agriculture, as well as the public sector and industrial enterprises. According to Karapetyan, it is the rural population that faces economic problems due to regional security factors:
“For example, when there are problems with the operation of the Sotq mine [which is located in the zone bordering Azerbaijan and is subject to shelling], it is the regions that are affected, the people who work in Gegharkunik m and Ararat regions, where raw materials are processed.”
In the event of logistical problems at the Upper Lars checkpoint, the only land road connecting Armenia to Russia, once again the residents of the regions where agricultural products are produced and processed suffer.
What made wages rise
Narek Karapetyan said that the growth of the average salary was ensured by the index for paying new employees who appeared in the country, and this “significantly raised the index”. Speaking of “new employees,” he is referring in particular to IT specialists who moved to Armenia from Russia:
“We are talking about 10-15 thousand workers who are non-residents. Their average salary is 1-2 million drams [$2600-5200]”.
“The inflationary backdrop has yet to be overcome”
The economist notes a certain decrease in prices when considering the indicators of the last 12 months. But emphasizes that the factor of the “high bar” of the previous year should also be taken into account. Then the prices, for example, for agricultural products were unprecedentedly high:
“Prices continue to remain at a high level. Inflation in the services sector also continues. Compared to last year we have about 4% growth”.
Karapetyan says the Central Bank is in no hurry to lower prices, although it has the appropriate tools to do so:
“The Central Bank Council is cautiously approaching the issue. The structure believes that the reason for high prices is the inflationary pressure of the still persisting demand. Perhaps, some deflationary phenomena are caused by the underlying factor [refers to the unprecedented high prices of previous years]”.
“New Russian markets are a positive shock”
Commenting on the situation in the industrial sector, the expert notes the impact of “one positive and two negative shocks”. He considers the opening of new Russian markets as positive:
“These are markets of great demand. Some industrial organizations are working beyond their capabilities to take advantage of this demand and get additional income, as well as to strengthen their place in these markets in the future”.
But, given the fact that we are talking about exporting organizations, immediately declares a “negative shock” in the form of the exchange rate:
“It affects the competitiveness of industrial enterprises, especially in European markets. Last year the dram appreciated by 18% against the dollar and almost 40% against the euro”.
According to him, another negative factor was “the shock experienced by the mining industry due to the decline in prices and exchange rate fluctuations, as well as the situation in the regions bordering Azerbaijan. In this regard, he again recalls the events in Sotk.
Karapetyan believes that in certain cases, such as in the manufacturing industry, government intervention and policies are very important. In particular, he advises to direct certain resources to those spheres, which have long-term importance, in this case he speaks about the manufacturing industry.
Impact of Russian capital on the Armenian economy