Armenia's Export: Russia's Backdoor to Circumvent Sanctions

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ten data blog19-06-2023

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Armenia Doubles Exports with Russia

Because of its strategic geographical location, Armenia has become an important transit route for trade between the West and Russia since the imposition of Western sanctions on Moscow.

Russian Prime Minister Mikhail Mishuskin said during talks with Armenian President Nikol Pashinian in Kazakhstan on Feb. 2, 2023, that Russia's trade with Armenia grew significantly last year and surpassed the $4 billion mark.

"From January to November last year, our mutual trade increased by 77 percent compared to 2021," Mishustin told Pashinian. "This is an all-time high for our mutual trade."

Armenia's official statistics show even more dramatic growth. According to it, Russia's trade with Armenia has almost doubled year-on-year. This figure represents more than a third of Armenia's total foreign trade.

During the 11-month period, Armenia's exports to Russia almost tripled to just over $2 billion, accounting for 44 percent of the South Caucasus country's total export earnings. They most likely include goods manufactured in third countries and re-exported from Armenia to Russia as a result of Western economic sanctions against Moscow.

At a special session of the Standing Committee on Finance, Credit and Budgetary Affairs of the National Assembly, Armenian Finance Minister Vahe Hovhannisyan stressed that goods manufactured in Armenia account for 47% of total exports to Russia.

Hovhannisyan said tourism has increased by 90 percent, most of which comes from Russia.

"We had a significant increase in remittances, which also had an impact on the appreciation of the drams. As a result, we recorded 12.6 percent economic growth, despite the fact that in September, when the state budget for 2022 was prepared, we projected 11 percent growth, while our goal is to achieve 7 percent economic growth in 2022 according to the government plan," the minister said.

Armenia's economy is increasingly dependent on trade with Russia. Since Russia's invasion, Armenia's economy has grown strongly, with an impressive 12.6 percent growth last year. This growth exceeded initial forecasts as the state budget estimated 11 percent growth in 2022, while the government was targeting 7 percent the same year.

The services sector contributed the most to GDP growth, but industry and construction also grew, he said.

"The unemployment rate fell by 2.5 percent to 13 percent. Our real wages increased, by 6.3 percent against the backdrop of 8.6 percent inflation," he said.

Hovhannisyan further stressed that the unemployment rate fell by 2.5 percent to 13 percent. In addition, despite the 8.6 percent inflation rate, real wages achieved a positive growth of 6.3 percent.

Armenia is becoming Russia's "Backbone"

Since February 2022, Armenia has also become a preferred destination for Russians looking to relocate their businesses, especially in the information technology sector. the Pashinyan government is simplifying all registration, bureaucratic and housing issues related to the relocation of Russian businesses to Armenia. The Yerevan authorities are trying to actively attract wealthy Russians to Armenia. They have even published a guide for Russian businesses that covers everything from relocation to cryptocurrency transfers, apartment rentals and pet transportation.

Specifically, Armenia's exports to Russia are up about 37 times for electronics, 30 times for cars, 10 times for machinery and mechanical equipment, about 200% for precious metals and gems, and 400% for technology and medical equipment. These exponential growth trends indicate that, to some extent, Armenia is re-exporting these products to Russia, as they are the main category subject to Western sanctions and necessary for Moscow to continue its war against Ukraine. Moreover, Armenia does not have the economic capacity and infrastructure to increase domestic production of these products to the extent that it can increase exports several times. Traditionally, these product groups do not account for a significant share of Armenia's overall exports.

This situation has repeatedly drawn the attention of international media outlets such as Bloomberg, Financial Times, ABC News and New Eastern Europe. Ukrainian media is also very critical of Armenia's cooperation with Russia in evading Western sanctions and re-exporting sanctioned goods. While has raised many questions about this relationship, now refers to Armenia as "the economic backbone of Russia's aggression against Ukraine".

EU Pressure

The European Commission has proposed a new mechanism to target countries that are seen as not doing enough to prevent Russia from circumventing export restrictions. Countries that could come under scrutiny for possible EU sanctions include Armenia.

So far, the EU has been exerting diplomatic pressure to try to improve third-country sanctions enforcement in relation to trade with Russia, including dual-use goods - that is, goods that can be transferred from civilian industrial customers to use by military producers - a particular issue. The idea is that if such pressure proves ineffective, a mechanism would give EU member states the power to impose export restrictions on key commodities.

The United States also lists Armenia as one of five countries that face challenges in evading sanctions.

Western countries should take note of the strengthening Russian-Armenian-Iranian axis at the center of the broader Eurasian continent. If not approached with caution, it will only further undermine regional peace and stability in the long run.

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