Background: Although the typical "Dutch disease" phenomenon is not fully experienced in Armenia, as the country does not over-rely on large exports of a single commodity (mineral or agricultural), its symptoms are evident. From 2022 to 2023, Armenia reported high economic growth rates, which slowed during the first two quarters of 2024 compared to the same period in 2023. Armenia has become over-reliant on the re-exports of Russian gold, diamonds, and jewelry (after processing in Armenia), which has affected growth rates in manufacturing and the broader industry, neutralizing a decline that might have otherwise occurred. The significant appreciation of the Armenian dram (AMD) against the US dollar (USD) has made exports from traded goods sectors less price competitive. In contrast, non-traded goods sectors have reported strong growth. Transfers, including workers' remittances and transfers from non-resident households, have begun to decline due to the strong appreciation of the AMD against the Russian ruble, placing additional pressure on the Armenian economy's growth prospects. Moreover, Armenia has become increasingly vulnerable to trade shocks due to Western sanctions on Russia, resulting in foreign exchange volatility. Predicting the impact of a collapsing Russian economy on Armenia, including how long recovery may take, remains challenging.

Bilateral Trade with Russia and the Rest of the World under Western Sanctions

The influx of tourists and Russian immigrants allowed manufacturing to report significant growth of 12.5% year-on-year (y/y) in 2022 (see Table 1)—however, the return migration of Russian immigrants starting in the second half of 2023 affected manufacturing performance. The decline in agriculture, observed from 2021 to 2022, reversed in 2023, with a growth rate of 2.3%, though the sector's share of GDP fell to 8.5% from 11.3% in 2021. The surge in re-exports of products from HS Chapter 71 (including jewelry processed in Armenia) in the fourth quarter of 2023 nearly offset an 8.9% decline in manufacturing reported during the third quarter of 2023 compared to the same period in 2022.

Manufacturing Performance in 2024

During the first eight months of 2024, manufacturing output increased by 20.7% compared to the same period in 2023, driven largely by a threefold increase in the manufacture of basic metals, notably due to the re-exports of gold (including gold plated with platinum) imported mainly from Russia. During this period, gold exports to third countries increased by $4.4 billion, while imports rose by about $4.7 billion. 

However, gold imports slowed starting in May 2024, with imports from January to April totaling $3.8 billion, while imports between May and August amounted to $1.16 billion due to shrinking exports (re-exports) of gold following Western sanctions and actions taken by the authorities of the United Arab Emirates, which affected imports of Russian gold and increased imports by Hong Kong These factors also impacted the exports of jewelry articles (HS Code 7113).

The EU and G7 ban on Russian diamonds in January 2024, with further restrictions on diamonds processed in third countries from March 2024, is expected to affect Armenia's diamond exports starting in September 2024 unless proper certification is obtained. This, in turn, would impact exports of watches with diamonds to Europe. Armenia's manufacturing sector, particularly its re-exports of items under HS Chapter 71, remains vulnerable to the sanctions and subsequent actions by third countries.

Table 1.: GDP structure and growth rates (%)

Source: Statistical Committee of Armenia

Despite the projected decline in manufacturing in the fourth quarter of 2024 compared to the same quarter of 2023, overall annual growth is expected to remain positive. Growth will largely depend on the re-exports of items from HS Chapters 84 and 85 to Russia. During the first eight months of 2024, exports of Chapter 85 increased along with imports, whereas exports and imports of Chapters 84 and 87 declined.

Hence, Armenia's export performance remains vulnerable to Western sanctions and exchange rate volatility, particularly concerning exports to Russia that are sold in rubles. The appreciation of the Armenian dram negatively impacted exports to Russia in specific sectors (HS Chapters 3, 7, and 8), requiring Armenian exporters to increase physical export volumes to compensate for losses due to currency appreciation.

Table 2. Trade Statistics by leading trade partners (million USD)

Table 3. Exports and Imports of major HS chapters (million USD)

This puts additional pressure on exports of items of Armenian origin to Russia if the Armenian dram continues to appreciate against the Russian ruble. This trend began in the second half of 2022, and the dram also started appreciating against the U.S. dollar in the second quarter of 2022 (see Figure 1). This means that Armenian exporters, particularly those dealing with items covered in Chapters 3, 7, and 8, must prioritize diversifying their export markets and focus on complying with the stringent standards required by the European Union.

The appreciated dram has adversely affected the exports of two major services: travel and telecommunications and computer and information services. During the first two quarters of 2024, travel service exports declined by $396.2 million compared with the same period in 2023, amounting to $1.36 billion. This drop significantly slowed growth in the accommodation and food services sector during the first two quarters of 2024 compared with the same period in 2023. Telecommunications, computer, and information service exports also fell by $67 million, totaling $457.1 million, contributing to a slowdown in the information and communication sector during the first two quarters of 2024, relative to 2023.

Figure 1.: The exchange rate of the Armenian dram against the US dollar and the Russian ruble (monthly average)

Source: Central Bank of Armenia

If Armenia had not reported strong growth in the re-exports of items included in HS Chapter 71 starting in the fourth quarter of 2023 and continuing through April 2024, the manufacturing sector would have recorded a year-over-year decline in 2024, marking the second consecutive year of contraction (see Table 1). A further decline would be inevitable in 2025. The strategy to cope with the appreciated dram fueled growth in agriculture. However, the share of agriculture in the GDP structure consistently declined, falling to 8.5% in 2023, down from 11.3% in 2021. Further appreciation of the Armenian dram against the Russian ruble would likely cause a decline in agricultural performance in 2025. A contraction in manufacturing would also be expected in 2025, shrinking the sector’s share in the GDP to below 9%, down from 11% in 2021.

In contrast, non-traded sectors of the economy experienced significant growth, driven by an influx of capital (see Table 5) and immigrants from Russia in 2022, followed by the forced displacement of people from Nagorno-Karabakh beginning in September 2023. The wholesale and retail trade; repair of motor vehicles and motorcycles sector grew at an annual rate exceeding 15% from 2022 to 2023 and during the first two quarters of 2024, increasing its share in the GDP to 12.7% in 2023, up from 11% in 2021 (see Table 1). The accommodation and food services sector grew at an annual rate of approximately 30% from 2022 to 2023. Financial and insurance activities, which reported a 50.7% year-over-year increase in 2022, saw a 10.3% year-over-year decline in 2023, attributed to Western sanctions that imposed limits or constraints on commercial and banking transactions, slowing economic processes between countries. The transportation and warehousing sector, which reported strong year-over-year growth from 2022 to 2023, turned negative during the first two quarters of 2024 compared to the same period in 2023. Although the construction sector, another non-traded goods sector, reported solid performance, this was mainly due to personal income tax returns. This benefit will no longer be in effect starting in January 2025 in Yerevan.

Overall, it became clear that Armenia is currently experiencing symptoms of the “Dutch disease” syndrome. The export and export-oriented sectors—especially those serving the Russian economy—are showing signs of distress (see Tables 1-4). This contrasts with the earlier role of the mining and quarrying industry as the primary export sector, alongside foreign exchange inflows, particularly money transfers (see Tables 5-6).

Table 4.: Expenditure of GDP (by main consumption elements)

Money Transfers of Individuals: Armenia experienced a significant influx of foreign exchange—primarily through money transfers by individuals via commercial banks—both for commercial and non-commercial purposes, driven by the immigration of Russian nationals. However, this inflow slowed during the first eight months of 2024 compared with the same period in 2023 (see Tables 5 and 6). The slowdown can be attributed to the emigration of Russian migrants, either back to Russia or other countries, and the appreciation of the Armenian dram against the U.S. dollar and the Russian ruble.

Table 5. Money transfers of individuals through commercial banks of Armenia (million USD)

Source: Central Bank of Armenia

The appreciation of the Armenian dram, particularly against the Russian ruble, negatively affected personal remittances received by Armenian households. Compared with 2022, the net compensation of employees declined in 2023 and continued to drop during the first half of 2024. Personal transfers from non-resident households to Armenian households also significantly declined (see Table 6).

Table 6. The inflow of Personal Remittances by Balance of Payments (million USD)

Source: Statistical Committee of Armenia

Conclusion: The "Dutch disease" syndrome in Armenia has gone through various stages. Initially, Armenia's economy shifted towards focusing on bilateral trade with Russia, leading to export growth amid the Russian-Ukrainian conflict. In the second stage, the Armenian dram appreciated significantly compared to the USD and Russian ruble. Now, Armenia is approaching a third stage, which is likely to see declines in traded-goods sectors by 2025, while growth in non-traded sectors begins to slow. A potential fourth stage could involve socio-economic instability by the latter half of 2025.

Possible Scenarios

Status Quo: If the current "Dutch disease" symptoms continue, Armenia's economy may follow a path similar to Russia's, potentially leading to an economic crisis.

More Severe Sanctions on Russia: If Russia faces harsher sanctions, Armenia may be forced to sever ties with Russia, reshaping its financial and logistical networks. While this would cause a significant short-term decline, it might mitigate the risk of a severe economic crisis.

Diversification of Trade Partners: Armenia's government could lessen its vulnerability by taking proactive steps to reduce its dependence on Russia, focusing on the EU, Gulf regions, tourism, high-tech services, and domestic infrastructure.

Overall Outlook

The aftermath of Armenia's "Dutch disease" syndrome will be challenging to overcome, and the timeline for recovery remains uncertain.

Authors: Anna Makaryan, Ph.D., Hamlet Mkrtchyan, Verej Isanians, Ph.D., Nexus Intellect Research NGO