The Eurasian Economic Union and Armenia

The Eurasian Economic Union (EEU) is an economic union of states that was established in May 2014 by the leaders of Belarus, Kazakhstan, and Russia, and came into effect on Jan. 1, 2015. Armenia joined on Jan. 2, 2015, and Kyrgyzstan joined on Aug. 6, 2015.

The Eurasian Economic Union and ArmeniaIn 1994, the president of Kazakhstan first suggested the idea of creating a regional trading bloc. Numerous treaties were subsequently signed to establish the trading bloc gradually. Many politicians, philosophers, and political scientists have since called for further integration towards a political, military, and cultural union; however, Kazakhstan has insisted the union stay purely economic.

Tajikistan has been invited to join the union and membership negotiations are underway. Uzbekistan was hesitant to join the Economic Union; however, Uzbekistan began negotiations when Russia announced it would write off $865 million of debt owed if it were to join the EEU. Turkey was also extended an invitation to join the EEU by Kazakhstan’s president.

Former Ukraine President Viktor Yanukovych’s decision to abandon an association agreement with the European Union (EU) and exclusively pursue integration with the EEU was a key factor in triggering the protests that ended his term as president. The country’s membership in the EEU was seen by some analysts as the key to the success of the union, as Ukraine has the second largest economy of any of the former Soviet Union republics.

The EEU is significantly more unattractive and even less viable than it was first conceived by not having Ukraine as a member, which undermines the economic and trade potential of the union. In addition, the impact of Western sanctions on the Russian economy lessens the value and viability of the union. Moreover, in the wake of the fall in the value of the Russian ruble and the decline in world oil prices, Russia is no longer the economic powerhouse it once was.

The Eurasian Economic Union is designed to reach a number of macroeconomic objectives, such as reducing commodity prices by reducing the cost of transportation of raw materials, increasing return on new technologies and products due to the increased market volume. It is also designed to lower food prices, increase employment in industries, and increase production capacity.

The Eurasian Economic Union has approximately 175 million people and a gross domestic product of over $4 trillion. The EEU requires the free movement of goods, capital, services, and people, and provides for common transport, agriculture, and energy policies, with provisions for a single currency and greater integration in the future. The EEU institutions are the Eurasian Commission (the executive body), the Court of the EEU, and the Eurasian Development Bank.

 

Eurasian Development Bank

The mission of the Eurasian Development Bank is to facilitate the development of market economies, economic growth, and the expansion of trade among the member states through investments. The bank’s objectives also include financing projects that support Eurasian integration.

 

Court of the Eurasian Economic Union

The Court of the Eurasian Economic Union is in charge of dispute resolution and the interpretation of the legal order within the Eurasian Economic Union. Its headquarters is in Minsk. The court is comprised of two judges from each member state, appointed by the heads of government of the member states. Their term of office is nine years.

 

Budget

The approved budget of the Eurasian Economic Union for 2015 is 6.6 billion Russian rubles. The budget is formed from contributions by the union’s member states.

 

Internal Market

The core objective of the Single Economic Space is the development of a single market and achieving the “four freedoms,” namely the free movements of goods, capital, services, and people within the single market. The four freedoms came into effect on Jan. 1, 2015. The free movement of people means that citizens can move freely among member states to live, work, study, or retire. Citizens of the member states of the union may travel to other member states on an internal passport.

 

Energy

The EEU is producing approximately 21 percent of the world’s natural gas and 15 percent of oil and gas. It also produces 9 percent of the world’s electrical energy and 5.9 percent of coal, making it the third and fourth producer in the world, respectively.

Russia has the world’s largest natural gas reserves, the eighth largest oil reserves, and the second largest coal reserves. Russia is also the world’s leading natural gas exporter and the second largest natural gas producer.

 

Infrastructure

Railways have been the primary way of linking countries in the EEU since the 19th century. The union ranks second in the world in terms of railway.

 

Agriculture

The EEU is the top producer of sugar beet and sunflower, producing 19 percent of the world’s sugar beets and 23 percent of the world’s sunflowers in 2012, and is a top producer of rye, barley, buckwheat, oats, and sunflower seed. It is also a large producer of potatoes, wheat, and grain.

 

Economic Statistics of Armenia in 2015

In determining the effects of joining EEU, it will be beneficial to look at the trend of various economic indicators. Armenia’s foreign trade in the first 7 months of 2015 was down by almost 20 percent to $2.6 billion, according to the latest numbers by the National Statistical Service (NSS). Data also shows that exports in January-July 2015 were approximately $847 million, which was approximately same as the same period in 2014, while imports fell by 27% to about $1.8 billion.

Armenia’s trade with former Soviet Union countries fell by 16 percent to approximately $766 million, while trade with Russia was lower by 14 percent to $653 million; trade with Ukraine fell by 34 percent to $74 million, and trade with Belarus declined by 11 percent to about $18 million. At the same time trade with EU countries in January-July 2015 amounted to about $696 million, a decline of 26 percent, and trade with other countries dropped by 18 percent to $1,194 million.

(Graphic: Russia Today)
(Graphic: Russia Today)

In the first 7 months of 2015, the export of mining industry products grew by 24 percent to about $268 million, export of finished food products declined by 14 percent to $155 million, and export of basic metals and products fell by 20 percent to about $143 million. Also, the imports of mining industry products fell by 24 percent to about $373 million; import of machinery, equipment, and mechanisms was slashed by 30 percent to $224 million; and import of finished food products declined by 14 percent to $154 million.

International reserves formed $2.5 billion in 2012, but they were less than $1.5 billion in 2015, which is a decline of 40 percent.

The GDP formed $10.3 billion in 2014, but it is estimated that it will not exceed $9.3 billion in 2015, which is a decline of 10 percent. External debt formed $4.3 billion in August 2013, but in mid-2015 it was $4.7 billion.

Economic Growth by Sector (Source: NSS)
Economic Growth by Sector (Source: NSS)

The recent oil price shock and Western sanctions have battered the Russian economy and undermined growth prospects. The slowdown in Russia affects Armenia through foreign trade, remittances, and foreign investment. Russia is the destination for close to 25 percent of Armenia’s exports and the source of 40 percent of its foreign investment, as well as 80-90 percent of its remittances.

Foreign direct investment percent of GDP
Foreign direct investment percent of GDP

 

EEU Economic Implications for Armenia

More than 3 million Armenians live and work in Russia and other EEU member countries in an attempt to somehow meet the needs of their families in Armenia. Therefore, many Armenians back membership in the EEU, but there are also those who speak in favor of close cooperation with the European Union.

The most serious and immediate impact on Armenia’s economy is the need to adjust both its tariff rates and its trade orientation. The open and liberalized Armenian economy must adopt the higher tariffs and more protectionist policies of the other EEU members. This move may spark price increases, but will also mandate a serious renegotiation over Armenia’s membership in the World Trade Organization (WTO). Several years of an EU-dominated direction of trade will have to be adjusted and Armenia has to adapt to the markets of Russia, Belarus, and Kazakhstan.

One of the economic benefits for Armenia will be the allocation of customs duties and tariff revenues among the member states. However, Armenia’s share will be only 1.13 percent of the EEU’s total customs revenue. Since January 2015, Armenia has begun to receive customs duties from the EEU distribution, which contributed to the 6.2 percent growth of revenues from customs duties for the first quarter of 2015.

The EEU regulations may also affect the expansion of one of Armenia’s most important and fastest-growing sectors. The Armenian information technology (IT) sector accounted for roughly one-third of exports in 2013, and about 5 percent of the country’s GDP, up from 1.7 percent in 2010. The IT sector expanded by 25 percent in 2014, with a combined output from some 400 IT-related firms totaling nearly $475 million. But because much of the Armenian IT sector relies on investment from the United States, the new IT-related rules and poor intellectual property rights of the EEU and its members could adversely impact this strategically significant sector.

It is much more promising to cooperate with countries with more developed economies, but the European Union is not going to be a market for lower quality goods made in Armenia. Exporting to advanced countries requires that companies continually improve technology to stay competitive. The adverse effects of EEU accession could lower Armenia’s ability to upgrade products and move up the value chain because of the diversion of trade from the sophisticated EU markets to the less sophisticated markets of the EEU.

Armenia could attract considerable interest for market-seeking foreign direct investment because its investment climate is more attractive than those of other EEU members. Investors could use Armenia as a base to access the wider EEU market. If these investors could bring technology and know-how to Armenia, that would compensate for the disadvantages of the trade diversion.

Armenia can expect economic gains because customs-free access opens wide opportunities to a market of 175 million consumers. The country’s single most important import partner is Russia, with about as many goods arriving from Russia as from all of the countries in the EU. Russia is also a major receiver of exports from Armenia, but as a group EU members buy about 30 percent more from Armenia than Russia does.

Armenia imports more technologically advanced goods from the EU, but more energy and basic goods from Russia. While exports to the EU consist mostly of metals and minerals, Russia is the destination for higher-value-added goods, such as processed food and manufactured items. There is a small but rapidly growing high-tech export of both goods and services to Europe and the United States from Armenia’s information technology sector.

Armenia negotiated a number of concessions related to EEU accession: (1) Russia granted a unilateral waiver of export duties on natural gas, oil products, and unpolished diamonds. This had an immediate positive impact on external trade and mitigated poverty pressures; (2) Armenia started benefitting from higher proceeds from customs duties, as it receives 1.13 percent of the total pool of EEU customs revenues; and (3) Armenia obtained transition periods for harmonizing its tariffs to higher EEU levels for more than 800 types of goods, which allows for smoother adjustment to the new trade regime for Armenian businesses.

 

avatar

Areg Gharabegian

Areg Gharabegian has a B.S. in Mechanical Engineering and an M.S. in Energy, Resources, and Environment with more than 30 years of experience in the field of project management, environmental studies, and transportation engineering. Since 1990 he has visited Armenia numerous times to provide assistance in the development of Western-style management procedures and practices, and to provide training in various environmental issues and technical computer models.
avatar

Latest posts by Areg Gharabegian (see all)

9 Comments

  1. The biggest investment issue for the Armenia economy, according to USA diplomats, is the current corrupt system in Armenia. It seems its a mafia oligarchic type system and any outside investment needs to first grease some political hack. Maybe this should be addressed by all concerned?

    • {…according to USA diplomats,…}

      Yes, of course: US diplomats have nothing but good intentions for Armenia. Sure they do.

      How about we get a 2nd opinion from a non-biased source.
      Ah, I found one:

      [Doing business 2016 Armenia is one of best places to start new business] (…according to The World Bank)
      http://armenpress.am/eng/news/823579/doing-business-2016-armenia-is-one-of-best-places-to-start-new-business.html

      Well meaning Armenians repeating demoralizing disinformation and misinformation about Armenia are not helping anything or anyone in our homeland. Armenia has many enemies. Not all enemies are open about it.

    • Avery,

      You think Armenians living in Armenia are saying there is corruption in the country because of what the US diplomats are saying? I’ve talked with such Armenians and they base it on what they see and experience in Armenia itself and not parroting outside observers.

      You completely ignore that and latch on to “according to USA diplomats” in an attempt to distract from this important issue in Armenia.

      There is corruption in Armenia, fortunately not as bad as Russia, but it can be better. And less corruption in Armenia means even better business environment and an internal strength through the economy.

      And voicing criticism of such issues is the first step in improving the situation. The Armenian government, or any government for that matter, will not take action against corruption unless they see voices rising about it.

    • Avery,

      You might be interested in this article:

      http://asbarez.com/141167/world-bank-sees-further-improvement-of-armenias-business-climate/

      While there are bright spots to the business environment in Armenia, there are still important issues and areas to improve on:

      From the Asbarez article:
      “At the same time, Armenia again scored poorly in the “Paying taxes” category. In particular, the World Bank said that local firms spend an average of more than 400 hours each year on dealings with tax authorities.

      Harassment by tax and customs officials has long been a key source of complaints voiced by Armenian businesspeople. Corruption among those officials is believed to remain widespread.

      Economic activity in the country is also hampered by a lack of competition which translates into de facto business monopolies owned by government-linked entrepreneurs. Samson Grigorian, the vice-chairman of an Armenian small business association, cited this problem when he reacted with skepticism to the World Bank’s findings.”

      But of course this can’t possibly be true since Asbarez is funded by Soros or something, right? Or Asbarez has an ulterior motive to undermine Armenia by trashing it its reputation.

      Armenians don’t need US officials to tell them about the issues they face in Armenia. Reducing corruption will make Armenia an even better place to do business and increase tax revenues for the defense of the country. Those things go hand in hand.

    • { I’ve talked with such Armenians }

      I am sure you have.
      You have been digging up dirt on Armenia as far back as I can remember.
      You really think I am going to believe your personal anecdotes ?
      Are you serious ?

      On a different subject: how are you doing with your search of the long missing video of Prof. Lemkin that will back your contention that the Armenian Genocide played no role in Prof. Lemkin’s coining of the word ‘Genocide’.

    • Seriously?

      Armenians in Armenia are discussing and complaining about corruption. Are they digging up dirt too? Are they seeing things? Delusional? You ignore this and try to discredit what someone has to say by accusing them of digging up dirt. I wonder how many people take you seriously.

      You’re in denial of the issues in Armenia. Issues which need to be openly discussed and resolved. It’s not going to happen by ignoring them and sweeping them under the rug like you want to.

      “Economic activity in the country is also hampered by a lack of competition which translates into de facto business monopolies owned by government-linked entrepreneurs. Samson Grigorian, the vice-chairman of an Armenian small business association, cited this problem when he reacted with skepticism to the World Bank’s findings.”

      Do you have anything to say about what Mr. Grigorian is talking about? Is he digging up dirt? Or expressing concern and a desire to see things improve in Armenia? ANCA posted the Asbarez article on their site:

      https://anca.org/world-bank-sees-further-improvement-of-armenias-business-climate/

      They seem to think the content of that article is credible and worth spreading. The good and the bad.

      Discussing the real issues in Armenia is not digging up dirt. It’s a desire to see things improve in Armenia. You just can’t deal with anything negative going on in Armenia and don’t want anyone to talk about it.

  2. {[Doing business 2016 Armenia is one of best places to start new business] (…according to The World Bank)}

    The World Bank did NOT say Armenia is “one of best places to start new business.” Armenpress did. And Armenpress (Armenia’s government’s mouthpiece) is NOT a non-biased source.

    What the World Bank index states is that Armenia is ranked 35 in terms of “ease of doing business.” “Ease of doing business” does not mean Armenia is less corrupt, or that it is democratic. Far from it. What it means (in the context of a corrupt country like Armenia) is that businesses have an easy job ravaging the environment and trampling over people’s rights. Here are examples of “ease of doing business” in Armenia:

    “City of Dust: How an Ongoing Construction Boom Is Destroying Yerevan’s Architectural Heritage”
    http://www.ianyanmag.com/city-of-dust-how-an-ongoing-construction-boom-is-destroying-yerevans-architectural-heritage/

    “unchecked mining is polluting water sources and making parts of this mountainous country uninhabitable”
    http://www.huffingtonpost.com/christopher-atamian/mining-in-armenia-new-ind_b_5941766.html

    Unsurprisingly, “ease of construction” (read: ease of destroying Yerevan’s aesthetics) was one of the key aspects in Armenia’s rankings.

    Here are real numbers showing Armenia’s rankings in terms of perception of corruption (Armenia ranks lower than Saudi Arabia, Turkey, and Zambia!):

    Saudi Arabia: 55
    Turkey: 64
    Zambia: 85
    Armenia: 94
    http://www.transparency.org/cpi2014/results

    By the way, on World Bank’s “Ease of Doing Business” index, Georgia ranks higher than Armenia:

    Georgia: 24
    Armenia: 35
    http://www.doingbusiness.org/reports/global-reports/doing-business-2016

    So, perhaps Armenia needs to learn a few things from Georgia.

  3. Interesting article on the “Ease of Doing Business” ranking:

    “The World Bank’s Distorted Rankings”
    http://www.bloombergview.com/articles/2015-10-29/the-world-bank-s-distorted-rankings

    “For some governments, improving their country’s standing in the World Bank’s Doing Business survey has become a national priority. Yet the results of such efforts sometimes are deceptive.”

    “That’s because the annual ranking of business friendliness of regulatory systems isn’t based on surveys of businesses. Instead, it analyzes regulations and regulatory change, and awards points for pro-business measures and takes them away for anti-business ones. In practice, that means rating government policies without considering their real effect. ”

    In other words, Armenia got its ranking because of regulations on paper, which probably mean nothing in real life.

    Looks like Christmas is still far, far away for the Armenian government’s propaganda machine.

    PS: the author of the article, Leonid Bershidsky of Bloomberg’s Berlin office and a Russian-Jewish expatriate, is quite objective and informative, critical both Putin and the West on Ukraine and other issues. Highly recommended.

Leave a Reply

Your email address will not be published.


*