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  • Eurasian Economic Union Likely To Reduce Armenian Trade With Non-Mem

    EURASIAN ECONOMIC UNION LIKELY TO REDUCE ARMENIAN TRADE WITH NON-MEMBER STATES, LIMIT CO-OPERATION WITH EU AND NATO

    IHS Global Insight
    November 4, 2014

    by Alex Melikishvili

    Accession to the Eurasian Economic Union will increase Armenian
    economic vulnerability to Russia's economic stagnation.

    On 17 November 2014, the National Assembly is scheduled to hold an
    extraordinary session to ratify the treaty on Armenia's accession to
    the Eurasian Economic Union (EEU), which includes Belarus, Kazakhstan
    and Russia. For the Russian leadership, Armenia's EEU accession
    primarily represents a political priority. Because Armenia is the only
    country that has agreed to join the EEU after successfully negotiating
    association and free-trade agreements with the European Union (EU), it
    demonstrates that Russia is still capable of preventing its satellites
    from leaving Russia's sphere of "privileged interests". The development
    is being presented by Russia's state-controlled media to the domestic
    Russian audience as a proof of success of President Vladimir Putin's
    integration policy. Armenia's unquestionable loyalty to Russia means
    that Russia practically gets a second vote within the EEU. This is
    very useful for Russia as both Belarus and Kazakhstan previously
    prevented adoption of some policies Russia wished approved.

    EEU accession's uncertain economic benefits for Armenia

    At the parliamentary hearings on 29 October focused on the 2015
    budget, Deputy Minister of Finance Pavel Safaryan acknowledged
    that the government had not evaluated the probable impact of EEU
    accession on the country's main macroeconomic parameters. In terms
    of trade with Georgia and Iran, EEU accession is very likely to
    have negative impacts. Armenia has been one of Georgia's 10 biggest
    trade partners, largely due to the re-export of used cars from the
    EU. Foreign vehicles re-exported from Georgia constitute about 70%
    of Armenia's car imports. A sharp increase in customs duties applied
    on cars imported from Georgia after Armenia joins EEU is very likely
    to reduce this trade sharply.

    Even more important is the question of how an across-the-board increase
    in customs tariffs, which will go into effect after Armenia's EEU
    accession, will affect the cargo transit between Armenia and Russia,
    which is transported via Georgia. Although both Armenian and Georgian
    officials have been straining in their public statements to assuage
    growing concerns over trade disruption, the inherent incompatibility
    between Georgia's integration into the EU through its Association
    Agreement and Armenia's move to join the EEU has yet to be addressed
    by the respective governments. Similar to Georgia, Iranian exports to
    Armenia are also likely to decline as they will become more expensive
    due to EEU-mandated customs tariff increases. In addition, as a result
    of EEU accession, Armenia's growing economic integration with Russia
    reduces the likelihood that Iranian offers to build a new gas pipeline
    and to supply gas on more favourable conditions than Russia's Gazprom
    will elicit interest in Armenia.

    Armenia's already small consumer market is likely to shrink further.

    Price increases will follow EEU-mandated imposition of higher tariffs
    on imports from non-member states. The higher degree of economic
    integration with Russia post-EEU accession will increase the impacts
    from the depreciation of the Russian rouble, declining oil prices
    and the impact of Western sanctions.

    "Belarusian" model for relations with EU

    Armenia's u-turn with regard to its EU Association Agreement is
    likely to lead to a limited co-operation framework similar to the EU's
    current arrangement with Belarus. After EEU accession, the Armenian
    government's relationship with Western structures in general will be
    more dependent on Russian guidance. If Russia loses voting rights
    in the Parliamentary Assembly of the Council of Europe, Moscow is
    likely to pressure Armenia to leave that forum in support. Armenia's
    nascent co-operation with NATO is also likely to end, especially if
    additional sanctions are imposed on Russia over Ukraine and a NATO
    training centre opens in Georgia, as promised in NATO's "enhanced
    co-operation" package for Georgia after its summit in Wales.

    Unclear "compromise" over Nagorno-Karabakh issue

    Prior to Armenia signing the EEU treaty, Kazakhstan sought
    clarification of the customs regime on the de-facto border between
    Azerbaijan's breakaway region of Nagorno-Karabakh and Armenia as a
    prerequisite of EEU accession. At the signing ceremony Kazakhstan's
    president Nursultan Nazarbayev referred to a "compromise" over the
    Nagorno-Karabakh issue, but did not elaborate except to note that
    Nagorno-Karabakh must remain outside the EEU. The Armenian government
    is likely to resist pressure to establish any type of customs regime
    against the Armenian-populated secessionist region which would be
    deeply unpopular in Armenia and likely to result in mass protests.

    Opposition largely supportive of EEU accession

    The driving force behind the opposition movement - the Prosperous
    Armenia Party (PAP) and the Armenian National Congress (ANC) - does not
    oppose the government's decision to join the EEU. Even as PAP and ANC
    prepare a nationwide campaign to demand the government's resignation,
    EEU accession does not appear in their list of grievances. In ANC EEU
    accession is seen as essential for Armenia given the geopolitical
    expediency dictated by the strategic dependence on Russia. For
    PAP leader and prominent Armenian businessman Gagik Tsarukyan, EEU
    accession is likely to bring tangible financial benefits. Tsarukyan's
    holding company Multi Group owns the franchise representing Lada and
    other Russian car manufacturers. At present the share of Russian cars
    in Armenia's car imports is only about 5%, but this will increase
    considerably after EEU accession as car imports from Georgia will
    decrease due to increased customs tariffs. Tsarukyan is also likely
    to promote imports of Belarusian textiles, furniture, household
    appliances and other goods as Western imports become more expensive.

    Anti-EEU forces are few in number and include about half a dozen MPs,
    some former government officials now representing political parties
    outside the parliament, as well as experts from think tanks and civil
    activists from non-governmental organisations, who lack financial
    resources and have little media access. A few anti-EEU protests
    held in Yerevan were all characterised by low attendance with an
    average turnout of only a few hundred participants. In the mainstream
    opposition only the leader of the Heritage Party Raffi Hovannisian
    openly voiced objections to EEU accession, but his support base is
    small and he is very unlikely to galvanise protests relying on that
    issue alone.

    Outlook and implications

    Lower customs duties introduced on fruits and vegetables after EEU
    accession are likely to lead to consolidation of farm land in Armenia
    as small farmers will be forced out by large agricultural companies
    owned by government officials or pro-government oligarchs. Potential
    beneficiaries will include Prime Minister Hovik Abrahamyan, whose
    food processing company Artfood is likely to increase its share on
    the Russian market, and government-connected Armenian oligarch Samvel
    Alexanyan, who controls imports of food products through his company
    Alex Grig. However, a handful of people profiting from EEU accession
    will not compensate for the far wider economic losses that Armenia
    is likely to incur from disrupted trade with Georgia and Iran and the
    indirect impact of Western sanctions which are causing a depreciating
    rouble and declining remittances from Russia. Entry into the EEU
    also will severely curtail Armenia's relations with EU and NATO,
    probably limiting the former and ending the latter.

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