Despite refugee influx, Armenia economy coping relatively well

So far, the 100,000 people who were displaced into the country have helped growth in some sectors, and there are hopes that the lack of a significant negative impact could last

Despite refugee influx, Armenia economy coping relatively well

Nazareth Seferian

last update on 23 Dec 2023

The ethnic Armenian population of Nagorno-Karabakh heard bombings and explosions around lunchtime on 19 September 2023.

It was the sound confirming that one of the world’s so-called “frozen conflicts” had reignited after decades, following on from all the suffering in the disputed territory, both during the last round of violence and in its long shadow.

Less than a week later, almost all of the Armenians in the enclave had abandoned their homes for an uncertain future back over the border.

The story of this disputed territory speaks of much of the political upheaval of the 20th century, and perhaps now, it has come to some end. Perhaps it also points to a new chance for properly lasting peace. Here, we look at how it started and what might happen next.

An enclave in the shadows of history

When the Soviet Union was organising itself into various republics in the early 1920s, its leaders decided that the Republic of Azerbaijan would have within it a region called the Nagorno-Karabakh Autonomous Oblast, where more than 80% of the population was ethnically Armenian.

Majalla/Agencies

Armenia was formed into a separate Soviet republic across an internal border. Armenians and Azerbaijanis lived together in Nagorno-Karabakh in relative peace for several decades.

It even seemed to some that the historical conflicts between the Armenians and the Muslims that had constantly existed in Nagorno-Karabakh — with each group dominating over the other in various periods — had been consigned to history.

Even during the Soviet period, there were various appeals for the Nagorno-Karabakh Autonomous Republic to be structured as part of the Armenian Soviet Social Republic, given the ethnic identity of most of its population.

The Soviet leadership regularly rejected these requests, but the movement gained momentum in the late 1980s, a time when the Soviet Union itself was growing weaker.

The story of this disputed territory speaks of much of the political upheaval of the 20th century, and perhaps now, it has come to some end. Perhaps it also points to a new chance for properly lasting peace.

Referendum

The local population organised a referendum and seceded, but Azerbaijan did not recognise this move.

A war ensued between the Armenians and Azerbaijanis that lasted from 1992 to 1994 and ended with the Armenians gaining control of the region and seven territories around it, linking Nagorno-Karabakh, which had now declared itself an independent republic, with the Republic of Armenia, which had gained its independence from the Soviet Union. Azerbaijan and Turkey closed their borders with Armenia in retaliation, hoping to isolate and weaken the Armenian economy.

In 1994, this was one of several "frozen" conflicts on post-Soviet territory, with regular meetings and negotiations between Armenia and Azerbaijan failing to lead to any durable solution.

It reignited in the fall of 2020 when Azerbaijan, bolstered by major military spending over two decades fuelled by its oil wealth, gained a strategic partner in Turkey and launched a major military offensive, regaining control over most of the territory in what became known as the 44-Day War.

Russian peacekeepers were stationed in the area that continued to have an Armenian population, which now numbered around 100,000 people, some of whom had returned to their homes after the 2020 War.

Mass exodus

From December 2022, Azerbaijan blocked the only road connecting Nagorno-Karabakh to Armenia, and the population was gradually deprived of basic essentials like food and medicine. It lasted more than nine months.

Then came Azerbaijan's September offensive, which brought the remaining population to its knees. Russian peacekeepers did not intervene, seeking only to help Armenians evacuate.

A day after the brutal offensive, the leadership of the Nagorno-Karabakh Armenians signed a document agreeing to dismantle their self-defence units, giving in to every demand that Azerbaijan had made.

Armenian refugees wait in a square of Goris city centre on September 29, 2023 as the exodus from the Nagorno-Karabakh ethnic Armenian enclave following its fall to Azerbaijani forces continued unabated.

The blockade was lifted to allow safe passage to those Armenians who chose to leave the territory for the Republic of Armenia. It is estimated that only 1,000 stayed behind, with 100,000 leaving their homes in Nagorno-Karabakh.

Nagorno-Karabakh was one of several "frozen" conflicts on post-Soviet territory, with regular meetings and negotiations between Armenia and Azerbaijan failing to lead to any durable solution.

Armenian impact

Before the mass exodus from Nagorno-Karabakh, Armenia's economy was gaining momentum.

Despite the continuing impact of the 44-Day War in 2020 and the regional ripple effect following Russia's invasion of Ukraine two years later, Armenia enjoyed a phenomenal year in 2022, with the size of the economy as tracked by its gross domestic product (GDP) growing by 12.6% in 2022.

And projected growth for 2023 was expected to remain healthy at 5.5% or more. In fact, the Central Bank of Armenia had recently raised its projections for GDP growth for the year to 7.2%. But that was before the events of 19 September. For a country with a population of only around 2.6 million people, the influx of more than 100,000 refugees from Nagorno-Karabakh presents serious challenges.

The international community has been quick to respond with international aid packages to help alleviate the burden, at least in the short term.

The United States announced $11.5mn in humanitarian assistance, and the European Union doubled its initially announced support to reach more than €10mn. There were also aid packages from several other European and non-European countries, including Canada, Japan, and Australia.

But it remains unclear whether this will be enough to fully meet the needs that will arise on the ground.

Armenia's Prime Minister Nikol Pashinyan said this to the European Parliament in October: "Our urgent issue today is to focus on improving the humanitarian situation … I want us all to understand the situation well – 100,000 people have been urgently displaced, within just a week, subjected to ethnic cleansing and forced to come to Armenia.

"Our government is now focused on the most immediate needs those people face, starting with food, shelter, clothing, etc. We are extremely focused on this and expect the support of the international community and Europe, including budget allocations".

Economic strain

Analysis from ING points to the risk of increased public spending and a bigger deficit.

The Deutsche Bank's chief economist for the region, Dmitry Dolgin, and sovereign strategist for emerging markets, James Wilson, warn that the implications go beyond the immediate cost of humanitarian support for the refugees, not least because political relations with Azerbaijan remain strained, and the possibility of a new conflict looms.

"Currently, Armenian spending on defence and social support accounts for 13% of GDP and 50% of total spending. We estimate that additional social spending because of the refugees could total at least 1% of GDP. In contrast, military spending will have to remain elevated given Azerbaijan's pressure to create a land bridge to its Nakhchivan exclave through Armenian territory," they warn.

Nonetheless, they also pointed out that Armenia's recent upgrade as an issuer of sovereign debt – by rating agency Fitch to BB minus – could potentially be favourable to portfolio flows.

The events of September have also led to the mobilisation of several community and non-profit groups, including those who have been fundraising for various purposes and offering their own homes and items to the refugees. Corporations also participate through various charitable contributions.

Armenian spending on defence and social support accounts for 13% of GDP and 50% of total spending. Additional social spending because of the refugees could total at least 1% of GDP.

Dmitry Dolgin, Deutsche Bank chief economist

Uncertainty and resilience

Some sectors have actually benefited from the crisis in the short term, and such effects could last.

The government paid hotels and guesthouses to house the refugees in the first days and weeks after they arrived in the country, giving them extra revenue just as the traditional tourism season was ending. In the meantime, the country is aware that the security risks associated with the crisis could damage tourism.

The head of Armenia's Tourism Committee, Sisian Boghossian, drew a distinction in an interview with CivilNet earlier in October:

"It's important that we have the right messaging out there… The first thing people say is, 'We're so sorry about what's happening in Armenia,' I have to tell them, 'It's not happening in the Republic of Armenia; it's important for them to understand the difference."

Coping for now, with an eye on public spending

Banks also benefit from increased numbers of customers, particularly with direct financial aid coming from the government only after refugees set up a local bank account. This is on top of significant growth in the sector so far this year already.

The State Revenue Service reported that the total taxes paid by Armenian banks in the first three quarters of 2023 had increased by more than 140% year on year. Tax revenues overall had increased by 17% year on year for the first quarters of 2023.

This economic growth will doubtless fuel the social support expenditures that will continue well into 2024. Additionally, the Republic of Armenia used to provide an interstate loan to the Armenian authorities in Nagorno-Karabakh, which amounted to approximately $360mn in 2022. This money will also be directed to support the displaced population through various programmes in 2024.

In this light, government officials have stated that the medium-to-longer-term support required for the refugees from Nagorno-Karabakh will not cause an additional fiscal burden to Armenia.

While the future remains uncertain, it seems that Armenia will absorb the economic consequences of the Nagorno-Karabakh crisis in the short term, and some even have hopes — perhaps optimistic — of a lasting peace in the region.

If that happens, it could truly provide a new economic boost to the country and its neighbours.

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