Tweet
IHS Global Insight
December 6, 2013
Raft of commercial deals with Russia to help Armenian economy
Lilit Gevorgyan
Heading a nearly 600-strong official delegation, Russian president
Vladimir Putin visited Armenia on 2 December to emphasise the
commercial benefits Armenia would gain from joining the Moscow-led
Customs Union, as well as highlighting Russia's important role in
Armenia's defence infrastructure.
Rewards for Customs Union membership
Russian president Vladimir Putin's visit to Armenia on 2 December was
to map out Armenia's accession to the Russian-led Customs Union with
Belarus and Kazakhstan. The visit comes at the height of Russia's
diplomatic victory in its efforts to deter Armenia and Ukraine from
signing their long-negotiated and nearly finalised draft association
and free-trade agreements with the EU. Armenia was the first to make a
sharp turnaround on its integration deal with EU in early September
2013, and Ukraine followed suit a week before the 27-29 November EU
summit in Vilnius, where the Association Agreements were supposed to
be signed. While Ukraine's membership of the Customs Union remains
uncertain, Armenia is taking concrete steps in finalising the deal and
taking the rewards for it.
As was expected, security and energy issues dominated the packed
agenda of the Russian high-level delegation, which consisted of nearly
600 delegates. As well as top-level ministers, the Russian delegation
also included representatives from the country's regions and top
businesses. In a symbolic gesture, Putin landed in the northern
Armenian town of Gyumri, which hosts Russia's only military base in
South Caucasus.
Maintaining military parity with Russia's help remains Armenia's top
priority in its current unsettled conflicted with Azerbaijan. It was
also a leverage that Russia used on Armenia to dissuade it from
pursuing European integration, as it clearly spelt out when Armenian
president Serzh Sargsyan made his surprise announcement on 3 September
about joining the Customs bloc. Russia has promised to modernise the
No.102 military base in Armenia, and supply weapons and military
hardware at domestic rate. The lease of the base was extended in 2010
until 2044.
Armenia's price for energy imports
Another point of pressure for Armenia when choosing its partner was
the price of Russian energy imports. These significantly increased in
July, following an initial request from the Russian-controlled
ArmRusGazArd (ARG) to increase gas prices by nearly 60%. This resulted
in a 30% increase in domestic natural gas prices, eroding Armenian
households' real disposable income. Furthermore, the energy price
increase pushed consumer prices well above the 2.5-5.5% inflation
target band. Inflation peaked at 9.3% in August, gradually climbing
down to 8.2% in September and reaching 7.1% in October, but still well
above the target range triggering the Central Bank of Armenia to
increase its key refinancing rate in August by 50 basis points to
8.5%.
The latest round of negotiations saw Gazprom signing a new gas supply
agreement with Armenia to meet the country's entire gas demand for
2014-18. Armenia will receive 2.5 billion cubic metres (bcm) of gas
shipments every year, up from the 1.7 bcm that the country received in
2012. More importantly, the gas price for Armenia will be determined
by a formula linking domestic Russian domestic gas prices. According
to Russian media outlets, this will set the price for imported natural
gas at USD189 per 1,000 cubic metres, down from USD270. Joining the
Customs Union also will lead to scrapping the 30% duty on natural gas
exports to Armenia.
As expected, Russia also took full control over ARG. Russian Energy
Minister Alexander Novak and Armenian Energy and Natural Resources
Minister Armen Movsisyan signed an agreement on the terms of the sale
and purchase of the Armenian state's remaining 20% stake in the
monopoly gas importer and distributor in Armenia, thus giving Gazprom
full control over ARG. According to Armenian media reports, the
proceeds from the sale of the 20% stake in ARG will be used to pay off
outstanding Russian debt. However, in late September the government
stated that US700 million in Eurobonds would be used to cover the
USD500-million Russian debt loaned in 2009 ahead of schedule.
Russia's largest oil company Rosneft agreed to set up a joint venture
with Armenian Oil Techno JSC. According to Rosneft's statement, "The
main purpose of the joint venture will be a steady supply of quality
petroleum products in Armenia through wholesale and retail trade in
the country and the development of appropriate infrastructure for
storage and distribution of petroleum products in the Republic of
Armenia." In addition, as a prospective member of the Customs Union,
Armenia will benefit from Russia scrapping its 35% export duty on
petroleum products supplied to Armenia.
Close relations with EU to attract Russian capital
In his welcoming speech at the sizeable gathering hosting the Russian
delegation, Armenian prime minister Tigran Sarkisian highlighted the
commercial advantages that Armenia can offer to the members of the
Customs Union. Sarkisian pointed out that there are over 1450
companies in Armenia created with the involvement of Russian capital.
Considering that Armenia has a GPS Plus (General Preferential Scheme
Plus) regime with the EU, the Russian businesses operating in Armenia
could take advantage of Armenia's close commercial relations with EU.
GPS Plus is the EU's incentive scheme for vulnerable countries that
have been compliant with key international conventions on labour
rights and good governance, and it offers preferential market access
to cover over 7,200 products. According to the EU, GPS Plus is the
most generous preferential treatment systems when compared to similar
trade regimes currently in place across the developed economies.
Outlook and implications
In the short term, a partial reduction in energy prices could help the
Armenian monetary authorities to rein in the inflation that was
hurting already weak private consumption. Apart from the energy
agreements, Armenia's diamond industry will also see some benefits;
Russia will eliminate duties on uncut diamonds, cutting input costs
for Armenia's diamond-cutting firms. It is expected that customs
duties will be eliminated for a number of products. This is likely to
contribute to an increase in trade volumes, which stood at USD1.2
billion in 2012, rising by 22% in annual terms. This is likely to
increase, however the terms of trade for Armenia are likely to worsen
considering that thus far the ratio of Russian imports to Armenian
exports to its largest trading partner has been rising in favour of
Russia. Still, cheaper imports could partially help to restore
Armenian consumer confidence.
Russian capital already has a strong presence in Armenia, not least
due to the large Armenian community in Moscow as well as across the
country. Simplified customs regulations are expected to help to boost
co-operation between the two countries, as well as Kazakhstan and
Belarus. This is also likely to increase further the already strong
outflow of seasonal labour from Armenia to Russia, contributing to a
steady inflow of remittances, which remains an important contributor
to Armenia's overall foreign-exchange revenues.
Despite localised protests, Armenians support closer links with
Russia. Thus, the latest survey by Gallup International Association's
Armenian Office suggests that 64% of the respondents looked favourably
on Armenia's planned accession to the Customs Union. While military
dependence on Russia plays a significant role in determining this
mood, another contributing factor is the EU's failure to press Turkey
to open its borders with Armenia, which is a significant hindrance to
taking full advantage of trade with the EU. High transport costs due
to closure of shorter routes to Europe since 1993 by Turkey has been
and was going to remain a problem, even if Armenia opted for EU
Association Agreement. Conversely, the Armenian government has been
also seeking immediate gains when choosing between the EU and
Russian-led Customs Union.
On balance, the recent deals with Russia appear to have short-term
incentives for Armenia. However, in the long term it would need to
work away from its complete oil and gas dependence with Russia, a task
that Yerevan has tried to tackle before by launching co-operation with
Iran, but subsequent efforts had limited success. Meanwhile, with
handing over full control of ARG to Gazprom, Armenia has effectively
marked a setback in its earlier bid for energy supply diversification.
The Customs Union indeed offers a wider market for Armenian exports,
but it is not as large as the EU. However, considering security,
energy and political factors, it appears that for now Armenia has to
make the best out of its integration with the Customs Union, while
trying to improve its macroeconomic fundamentals and business
environment to attract Western capital as well, despite leaving behind
its Association Agreement offer from EU.
From: Baghdasarian
December 6, 2013
Raft of commercial deals with Russia to help Armenian economy
Lilit Gevorgyan
Heading a nearly 600-strong official delegation, Russian president
Vladimir Putin visited Armenia on 2 December to emphasise the
commercial benefits Armenia would gain from joining the Moscow-led
Customs Union, as well as highlighting Russia's important role in
Armenia's defence infrastructure.
Rewards for Customs Union membership
Russian president Vladimir Putin's visit to Armenia on 2 December was
to map out Armenia's accession to the Russian-led Customs Union with
Belarus and Kazakhstan. The visit comes at the height of Russia's
diplomatic victory in its efforts to deter Armenia and Ukraine from
signing their long-negotiated and nearly finalised draft association
and free-trade agreements with the EU. Armenia was the first to make a
sharp turnaround on its integration deal with EU in early September
2013, and Ukraine followed suit a week before the 27-29 November EU
summit in Vilnius, where the Association Agreements were supposed to
be signed. While Ukraine's membership of the Customs Union remains
uncertain, Armenia is taking concrete steps in finalising the deal and
taking the rewards for it.
As was expected, security and energy issues dominated the packed
agenda of the Russian high-level delegation, which consisted of nearly
600 delegates. As well as top-level ministers, the Russian delegation
also included representatives from the country's regions and top
businesses. In a symbolic gesture, Putin landed in the northern
Armenian town of Gyumri, which hosts Russia's only military base in
South Caucasus.
Maintaining military parity with Russia's help remains Armenia's top
priority in its current unsettled conflicted with Azerbaijan. It was
also a leverage that Russia used on Armenia to dissuade it from
pursuing European integration, as it clearly spelt out when Armenian
president Serzh Sargsyan made his surprise announcement on 3 September
about joining the Customs bloc. Russia has promised to modernise the
No.102 military base in Armenia, and supply weapons and military
hardware at domestic rate. The lease of the base was extended in 2010
until 2044.
Armenia's price for energy imports
Another point of pressure for Armenia when choosing its partner was
the price of Russian energy imports. These significantly increased in
July, following an initial request from the Russian-controlled
ArmRusGazArd (ARG) to increase gas prices by nearly 60%. This resulted
in a 30% increase in domestic natural gas prices, eroding Armenian
households' real disposable income. Furthermore, the energy price
increase pushed consumer prices well above the 2.5-5.5% inflation
target band. Inflation peaked at 9.3% in August, gradually climbing
down to 8.2% in September and reaching 7.1% in October, but still well
above the target range triggering the Central Bank of Armenia to
increase its key refinancing rate in August by 50 basis points to
8.5%.
The latest round of negotiations saw Gazprom signing a new gas supply
agreement with Armenia to meet the country's entire gas demand for
2014-18. Armenia will receive 2.5 billion cubic metres (bcm) of gas
shipments every year, up from the 1.7 bcm that the country received in
2012. More importantly, the gas price for Armenia will be determined
by a formula linking domestic Russian domestic gas prices. According
to Russian media outlets, this will set the price for imported natural
gas at USD189 per 1,000 cubic metres, down from USD270. Joining the
Customs Union also will lead to scrapping the 30% duty on natural gas
exports to Armenia.
As expected, Russia also took full control over ARG. Russian Energy
Minister Alexander Novak and Armenian Energy and Natural Resources
Minister Armen Movsisyan signed an agreement on the terms of the sale
and purchase of the Armenian state's remaining 20% stake in the
monopoly gas importer and distributor in Armenia, thus giving Gazprom
full control over ARG. According to Armenian media reports, the
proceeds from the sale of the 20% stake in ARG will be used to pay off
outstanding Russian debt. However, in late September the government
stated that US700 million in Eurobonds would be used to cover the
USD500-million Russian debt loaned in 2009 ahead of schedule.
Russia's largest oil company Rosneft agreed to set up a joint venture
with Armenian Oil Techno JSC. According to Rosneft's statement, "The
main purpose of the joint venture will be a steady supply of quality
petroleum products in Armenia through wholesale and retail trade in
the country and the development of appropriate infrastructure for
storage and distribution of petroleum products in the Republic of
Armenia." In addition, as a prospective member of the Customs Union,
Armenia will benefit from Russia scrapping its 35% export duty on
petroleum products supplied to Armenia.
Close relations with EU to attract Russian capital
In his welcoming speech at the sizeable gathering hosting the Russian
delegation, Armenian prime minister Tigran Sarkisian highlighted the
commercial advantages that Armenia can offer to the members of the
Customs Union. Sarkisian pointed out that there are over 1450
companies in Armenia created with the involvement of Russian capital.
Considering that Armenia has a GPS Plus (General Preferential Scheme
Plus) regime with the EU, the Russian businesses operating in Armenia
could take advantage of Armenia's close commercial relations with EU.
GPS Plus is the EU's incentive scheme for vulnerable countries that
have been compliant with key international conventions on labour
rights and good governance, and it offers preferential market access
to cover over 7,200 products. According to the EU, GPS Plus is the
most generous preferential treatment systems when compared to similar
trade regimes currently in place across the developed economies.
Outlook and implications
In the short term, a partial reduction in energy prices could help the
Armenian monetary authorities to rein in the inflation that was
hurting already weak private consumption. Apart from the energy
agreements, Armenia's diamond industry will also see some benefits;
Russia will eliminate duties on uncut diamonds, cutting input costs
for Armenia's diamond-cutting firms. It is expected that customs
duties will be eliminated for a number of products. This is likely to
contribute to an increase in trade volumes, which stood at USD1.2
billion in 2012, rising by 22% in annual terms. This is likely to
increase, however the terms of trade for Armenia are likely to worsen
considering that thus far the ratio of Russian imports to Armenian
exports to its largest trading partner has been rising in favour of
Russia. Still, cheaper imports could partially help to restore
Armenian consumer confidence.
Russian capital already has a strong presence in Armenia, not least
due to the large Armenian community in Moscow as well as across the
country. Simplified customs regulations are expected to help to boost
co-operation between the two countries, as well as Kazakhstan and
Belarus. This is also likely to increase further the already strong
outflow of seasonal labour from Armenia to Russia, contributing to a
steady inflow of remittances, which remains an important contributor
to Armenia's overall foreign-exchange revenues.
Despite localised protests, Armenians support closer links with
Russia. Thus, the latest survey by Gallup International Association's
Armenian Office suggests that 64% of the respondents looked favourably
on Armenia's planned accession to the Customs Union. While military
dependence on Russia plays a significant role in determining this
mood, another contributing factor is the EU's failure to press Turkey
to open its borders with Armenia, which is a significant hindrance to
taking full advantage of trade with the EU. High transport costs due
to closure of shorter routes to Europe since 1993 by Turkey has been
and was going to remain a problem, even if Armenia opted for EU
Association Agreement. Conversely, the Armenian government has been
also seeking immediate gains when choosing between the EU and
Russian-led Customs Union.
On balance, the recent deals with Russia appear to have short-term
incentives for Armenia. However, in the long term it would need to
work away from its complete oil and gas dependence with Russia, a task
that Yerevan has tried to tackle before by launching co-operation with
Iran, but subsequent efforts had limited success. Meanwhile, with
handing over full control of ARG to Gazprom, Armenia has effectively
marked a setback in its earlier bid for energy supply diversification.
The Customs Union indeed offers a wider market for Armenian exports,
but it is not as large as the EU. However, considering security,
energy and political factors, it appears that for now Armenia has to
make the best out of its integration with the Customs Union, while
trying to improve its macroeconomic fundamentals and business
environment to attract Western capital as well, despite leaving behind
its Association Agreement offer from EU.
From: Baghdasarian