Recent geopolitical developments around Ukraine, the Russia-Ukraine war that started on February 24, 2022, have generated considerable risks for the Republic of Armenia as well. Large financial-economic, communication and trade sanctions, imposed on Russia by the European countries and the USA, have almost isolated the country. The point is that the Russian Federation is Armenia’s No 1 trade partner; every year Russian Federation is the main place of livelihood for dozens of thousands of Armenian migrant workers; the volume of remittances from the Russian Federation to the Republic of Armenia is significant.
Armenia’s No 1 trade partner Russian Federation, with which it’s in the Common Economic Zone, accounts for 28% of Armenia’s export, moreover, main market for export of local finished product is the Russian Federation, where in 2021 production amounting USD 847.3 million was sold, which is more by 24.5%, compared to the same period of the previous year.
It’s anticipated that as a result of Russian ruble devaluation, expected economic downturn and high inflation Armenian exporters may suffer rather serious financial losses in the Russian market. Large and medium-sized companies with large exports to the Russian market are already facing a rather serious problem. As of late 2021 they owed receivables of about AMD 85 billion from Russian counterparts, and if we take into account devaluation of Russian ruble by 30% compared to the pre-war period, only on this basis Armenian exporters can suffer losses amounting AMD 20 billion. One of the main reasons of this situation is that Armenian companies have signed around 61% percent of mutual agreements with their Russian partners with Russian ruble, and agreements signed by dollar and euro comprised respectively 34.2% and 3.7%.
The next point is that as a result of devaluation of Russian ruble Armenian finished production may lose its competitiveness particularly in those market segments, where main concurrent are Russian companies, which in this case gain price privilege toward Armenian producers.
Export volumes from Armenia to Russia may decrease also due to the reason that, based on preliminary assessments, at least 8% economic downturn is anticipated and rise in price by 20%, as a result of which serious decrease of consumption is expected in the Russian market. However, even if physical volumes of previous sales are maintained, the profit margin of Armenian companies will decrease, the probability, that in case of Russian ruble devaluation products of Armenian enterprises will record rise in price, is little. On the other hand, other Armenian companies may take the part of Russian product market, from where producers of EU, USA and other countries will withdraw as a result of mutual economic sanctions imposed by the Russian Federation.
Alcoholic beverages are perhaps among the most serious problems of Armenian export to the Russian Federation, as more than 80% of export of that field is addressed to that country. The priority here is sale of brandy, as it accounts for 82% of export of alcoholic beverages to the Russian Federation. In general, more than 95% exports of Armenian brandy go to Russia, Ukraine, Belarus and Kazakhstan, countries, which are involved in or are somewhat related to the Russia-Ukraine war. 10% of brandy produced in Armenia is exported only to Ukraine and Belarus, and its greater part—to Ukraine.
This issue isn’t new, as export of brandy and wine isn’t sufficiently diversified. Similar issues were recorded both during 2009-2010 global crisis, and after the developments of 2014 around the Crimea, as a result of which serious conclusions weren’t made and sufficient work wasn’t carried out toward export to other markets.
Decrease of brandy and wine export volumes is full of other threats as well, viticulture will face a serious problem, which began to rise. Yet in 2020, conditioned by the Covid pandemic, grape procurement faced serious problems, the process was rather hard in 2021, too. Naturally, issues will emerge this year as well and if the farmer is not able to sell his produce to the procurement factories, the consequences can be very serious. Similar problems may arise in the export of fresh fruits and vegetables and other agricultural crops.
Almost all Armenian factories producing and exporting brandy and wine, canned food, juices have large loans, and respectively, they fulfil their obligations to the banks with the money they received for the sale of the goods. However, now, when the export is stopped, there is no payment, they can’t repay their loans and will be fined. Banks, not having the payments for loans from the business, will face issues as well.
Among possible negative impacts of Russia-Ukraine crisis may be considered the decrease in the volume of remittances from Russia. Although the dependency of the Republic of Armenia on transfers of the Russian Federation has considerably decreased in recent years (USD 1 billion 727 million in 2013, or 75% of total, USD 865 million in 2021, or 41% of total), it is still the leading country in remittances. Sharp fall of ruble cost, as well as reduction of trade, services and construction—crucial working fields for our both short-term and long-term migrant workers—may in this case significantly decrease volume of remittances from the Russian Federation.
Against the background of reduced export and transfers losses can be recorded for the state budget of the Republic of Armenia. International Monetary Fund (IMF) has already reduced its forecast for Armenia’s economic growth to 1.5% from 4.5%. In its turn, Central Bank of Armenia (CBA) has reduced its forecast for economic growth from 5.6% to 1.6%.
In this case the Government of the Republic of Armenia should have a certain role and alleviate the difficulties caused by the temporary shock of our businesses engaged in the production of brandy and wine, as well as food processing. To mitigate these difficulties the Government of the Republic of Armenia may apply certain tax tools and, simultaneously cooperating with the banks, to implement loan reconstruction measures, so that the temporary burden on businesses is reduced and they can work normally with recovery of markets, also fulfill their credit and tax obligations. At the same time, it is necessary to look for alternative markets for brandy and wine consumption, as implications of the Russia-Ukraine crisis may still have a long-term impact on our exports of alcoholic beverages to the Russian market.
