ECONOMY
Armenia is the second most densely populated of the former Soviet republics. It is a landlocked country between the Black and the Caspian Seas, bordered on the north by Georgia, to the east by Azerbaijan, on the south by Iran, and to the west by Turkey. Up until independence, Armenia's economy was based largely on industry--chemicals, electronic products, machinery, processed food, synthetic rubber, and textiles--and highly dependent on outside resources. Agriculture accounted for only 20% of net material product and 10% of employment before the breakup of the Soviet Union in 1991. In recent years, the construction sector has taken off, fueled by an ambitious government-backed construction project in the capital, and remittances to relatives by ethnic Armenians living in Russia and the United States.
Like other New Independent States of the former Soviet Union, Armenia's economy still suffers from the legacy of a centrally planned economy and the breakdown of former Soviet trading networks. While investment from these states in support of Armenian industry has virtually disappeared, and few major enterprises are still able to function, Russian entities have nevertheless increased their exposure in the mining, energy, telecommunications, and transportation sectors. In addition, the effects of the 1988 earthquake, which killed more than 25,000 people and made 500,000 homeless, are still being felt, though international donors and diaspora Armenian groups continue to fund reconstruction efforts in the earthquake zone. Although a cease-fire has held since 1994, the 20-year-old conflict with Azerbaijan over Nagorno-Karabakh has not been resolved, in spite of intensive efforts by the OSCE Minsk group to reach a settlement. The consequent closure of both the Azerbaijani and Turkish borders resulting from the war has prevented Armenian from realizing its economic potential, because of Armenia's dependence on outside supplies of energy and most raw materials. Land routes through Azerbaijan and Turkey are closed, though air connections to Turkey exist; land routes through Georgia and Iran are inadequate or unreliable. In 1992-93, GDP fell nearly 60% from its 1989 level. The national currency, the dram, suffered hyperinflation for the first few years after its introduction in 1993. Since 2005, however, the dram has continued to appreciate versus the dollar, going from an annual average of 458 drams in 2005 to 342 in 2007. The currency's appreciation stems largely from growing remittances by diaspora Armenians in Russia and the United States, a weakening dollar, and gradual increase in the productivity of Armenian industry.
In spite of the Nagorno-Karabakh conflict, where a cease-fire has been in effect since 1994, the Government of Armenia has been able to carry out wide-ranging economic reforms that have paid off in dramatically lower inflation and steady growth. Armenia has registered strong economic growth since 1995, with double-digit growth rates in the past 6 years.
The structure of Armenia's economy has changed substantially since 1991, with sectors such as construction and services replacing agriculture and industry as the main contributors to the economic growth. The diamond processing industry, which was one of the leading export sectors in 2000-2004 and also a major recipient of foreign investment, faced a dramatic decrease in output since 2005 due to raw material supply problems with Russia and overall decline in international diamond markets. Other industrial sectors driving industrial growth include energy, metallurgy, and food processing.
Armenia maintains a floating exchange rate regime with no explicit exchange rate target. The nominal exchange rate of the Armenian dram with major currencies was fairly stable between 1998 and 2003; however, it has strengthened sharply starting in 2004, recording around 46% nominal appreciation against the U.S. dollar compared to January 2004. The main causes of the appreciation of the dram are the global weakening of the U.S. dollar, a large inflow of foreign currency to Armenia from remittances, as well as increases in domestic productivity and incomes. The sharp appreciation of the dram has already affected negatively the external competitiveness of the Armenian products.
Armenia is highly dependent on import of energy fuel, mainly from Russia. The Armenia Nuclear Power Plant (ANPP) provides around 40% of electricity generation for the country, and hydro and thermal plants provide roughly 30% each.
Steady economic progress has earned Armenia increasing support from international institutions. The International Monetary Fund (IMF), World Bank, European Bank for Reconstruction and Development (EBRD), as well as other international financial institutions (IFIs) and foreign countries are extending considerable grants and loans. These loans are targeted at reducing the budget deficit, stabilizing the local currency; developing private businesses; energy; the agriculture, food processing, transportation, and health and education sectors. In December 2005, the U.S. Millennium Challenge Corporation approved a 5-year $235 million Compact with the Government of Armenia, which focuses on rehabilitation of irrigation networks and upgrading of rural transport infrastructure.
Continued progress will depend on the ability of the government to strengthen its macroeconomic management, including increasing revenue collection, improving the investment climate, and making strides against corruption. A liberal foreign investment law was approved in June 1994, and a Law on Privatization was adopted in 1997, as well as a program on state property privatization. The government joined the World Trade Organization on February 5, 2003.
Environmental
Issues
Armenia is trying to address its environmental problems. It has established a Ministry of Nature Protection and has introduced a pollution fee system by which taxes are levied on air and water emissions and solid waste disposal, with the resulting revenues used for environmental protection activities. Deforestation by mining concerns in certain parts of the country have resulted in periodic protests by environmental non-governmental organizations (NGOs), and stirred controversy over government policies to support investment in the mining sector. Armenia is interested in cooperating with other members of the Commonwealth of Independent States (CIS--a group of 12 former Soviet republics) and with members of the international community on environmental issues. Despite strong pressure from the international community, the Armenian Government has often reiterated its reluctance to decommission the existing nuclear power plant unless there is a reliable alternative source of energy which could become a decent substitute for Metsamor. Armenia has signed a statement of cooperation with the U.S. to conduct a preliminary Environmental Impact Assessment (EIA) and Feasibility Study for a new nuclear power generation unit in Armenia.
Economy (2007)
GDP: $9.18 billion.
GDP growth rate: 13.8%.
Per capita GDP (2006): $1,989.
Inflation: 6.6%.
Natural resources: Copper, molybdenum, zinc, gold, silver, lead, marble, granite, mineral spring water.
Agriculture: Products--fruits and vegetables, wines, dairy, some livestock.
Industry: Types--mining, information technology (IT), processed food, chemicals, synthetic rubber, textiles.
Trade: Exports--$1,218.5 million: precious and semi-precious stones and metals, mining products, foodstuffs, brandy. Export partners (2006)--Germany 14.7%, Netherlands 12.6%, Russia 12.1%, Israel 10.6%, Switzerland 7.2%, U.S. 6.5%. Imports--$3,281.8 million: natural gas, petroleum, precious stones and metals, tobacco products, foodstuffs, textiles. Import partners (2006)--Russia 13.9%, Ukraine 7.5%, Turkmenistan 7.7%, Germany 6.6%, Belgium 5.5%, Iran 5.2%.
