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European Council on Foreign Relations
Jan 8 2015
Armenia and the Eurasian Economic Union: The view from Yerevan
Commentary by Richard Giragosian
08th January, 2015
As the Eurasian Economic Union comes into force in January 2015, ECFR
has asked expert analysts from the current member states about their
hopes and fears for their country's future as part of this Union.
Yesterday, we featured Belarus, today we are focusing in on Armenia,
and Friday we will take a look at Kazakstan.
For most Armenians, ushering in the New Year was a painful exercise in
frugality and fortitude. As they faced the twin pressures of a serious
decline in the Armenian currency's value and a sweeping price rise on
essential foodstuffs, the final month of 2014 promised only more
economic pain. For the small and isolated Armenian economy, much of
this pressure was driven by the spillover from the economic downturn
in Russia, where the impact of the plummeting rouble and
Western-imposed sanctions was exacerbated by a sharp fall in the price
of oil. Yet for the longer-term future of the country, a much more
serious development for Armenia was taking place. New Year's Day also
marked the start of Armenia's membership in the Eurasian Economic
Union (EEU).
No looking back
Since 2013, the Armenian government has sought to put a brave face on
its surprising decision to sacrifice its Association Agreement with
the European Union in favour of joining the Russian-led EEU. Despite
the apparent setback presented by the "strategic U-turn", many in
Armenia have come to accept the reality of surrendering to Russia.
Even the Armenian business class, including many small- and
medium-sized enterprises, have expressed support for the change in
direction, largely due to their trepidation about conforming to the
EU's higher standards and investing in the necessary areas to make
good use of a free trade agreement with the EU. For many businessmen,
fear about and ignorance of navigating European market access makes
the old trade rules for dealing with Russia and other post-Soviet
markets more comfortable and familiar.
The economic implications for Armenia
For Armenia, the Russian-dominated EEU has always been defined more by
obstacles than opportunities. Among the many obstacles, the weakest
argument for Armenia to join the Eurasian bloc has always been the
economic impact. Beyond the structural impediment of the absence of
either a land connection or a functioning railway link to Russia or
other EEU members, the most serious and immediate impact on Armenia's
economy will be caused by the need to adjust both its tariff rates and
its trade orientation.
The traditionally open and liberalised Armenian economy must adopt the
higher tariffs and more protectionist policies of the other EEU
members. This move will not only likely spark price increases, but
will also mandate a serious renegotiation over Armenia's membership in
the World Trade Organization (WTO). On trade orientation, several
years of an EU-dominated direction of trade will have to be adjusted
and Armenia will have to prefer the markets of Russia, Belarus, and
Kazakhstan. And the paucity of economic benefits for Armenia from
these moves is perhaps most revealingly demonstrated in the allocation
of customs duties and tariff revenues among the member states. For
Armenia, the asymmetry is obvious: it has been granted a meagre 1.13
percent of the EEU's total customs revenue.
At the same time, new EEU regulations may also inhibit 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 a mere 1.7 percent in 2010. The IT sector expanded by 25
percent in 2014, with a combined output from some 400 IT-related firms
totalling 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 regime of the EEU and its
members could sink this strategically significant sector.
Visible, but not very viable
In the broader context, Armenia may be able to survive, withstanding
the pressure of being ever more firmly trapped in the Russian orbit.
Armenia may even be able to limit its mounting over-dependence on
Russia and to manage the economic fallout. However, any such survival
strategy rests less on any decisive move that Armenia can take and
more on the inherent weakness of the EEU.
Despite the ceremonial fanfare, the launch of the EEU marks the start
of a very different project than that originally envisioned. The union
is significantly more unattractive and even less viable than it was
first conceived to be, for three main reasons.
First, the "loss" of Ukraine as even a potential member seriously
undermines the economic and trade potential of such a union. Ukraine
has always been the "prize" for Moscow, and in spite of the seeming
"victory" of seizing Crimea, Russia's own aggression has triggered the
loss of the sizeable Ukrainian economy, making the Eurasian Union much
less viable as a project for regional (re)integration.
Secondly, the serious 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 rouble and the decline in
world oil prices, Russia is no longer the economic dynamo it once was
- and the supposed Russian role as the engine for the EEU has also
greatly diminished.
The third factor driving the loss of appeal and attraction of the
union is that the motivation for integration rests largely on coercion
and pressure, and an impressive backlash has already been demonstrated
by both Belarus and Kazakhstan. For tiny Armenia, this may offer an
opportunity to hide behind these much larger naysayers and find a way
out without unnecessarily confronting or challenging Russia.
Regaining a degree of balance
Although the outlook for Armenia is bleak, the country also has a
second opportunity - to regain a degree of balance by salvaging its
relationship with the EU. Reflecting the degree of sincerity about
this in both Brussels and Yerevan, the Armenian government has been
able to rebuild much of its lost credibility and has embarked on new
talks over a draft "legal framework" as a foundation for Armenia-EU
relations. At the same time, Armenia has also been cautious in how it
has presented its re-engagement with the EU, seeking to pre-empt any
Russian pressure by highlighting (and exaggerating) its role as a
"bridge" between the EEU and the EU. Given the combination of the
rising costs and meagre benefits of the EEU, Armenia's only real hope
at this point rests on containing the fallout from the economic
contagion and seeking to pursue a prudent but quiet "exit strategy."
Richard Giragosian is director of the Regional Studies Center (RSC) in
Yerevan, Armenia and the author of ECFR's 2014 publication on
Armenia's Strategic U-turn.
http://www.ecfr.eu/article/commentary_armenia_and_the_eurasian_economic_union _the_view_from_yerevan387
Jan 8 2015
Armenia and the Eurasian Economic Union: The view from Yerevan
Commentary by Richard Giragosian
08th January, 2015
As the Eurasian Economic Union comes into force in January 2015, ECFR
has asked expert analysts from the current member states about their
hopes and fears for their country's future as part of this Union.
Yesterday, we featured Belarus, today we are focusing in on Armenia,
and Friday we will take a look at Kazakstan.
For most Armenians, ushering in the New Year was a painful exercise in
frugality and fortitude. As they faced the twin pressures of a serious
decline in the Armenian currency's value and a sweeping price rise on
essential foodstuffs, the final month of 2014 promised only more
economic pain. For the small and isolated Armenian economy, much of
this pressure was driven by the spillover from the economic downturn
in Russia, where the impact of the plummeting rouble and
Western-imposed sanctions was exacerbated by a sharp fall in the price
of oil. Yet for the longer-term future of the country, a much more
serious development for Armenia was taking place. New Year's Day also
marked the start of Armenia's membership in the Eurasian Economic
Union (EEU).
No looking back
Since 2013, the Armenian government has sought to put a brave face on
its surprising decision to sacrifice its Association Agreement with
the European Union in favour of joining the Russian-led EEU. Despite
the apparent setback presented by the "strategic U-turn", many in
Armenia have come to accept the reality of surrendering to Russia.
Even the Armenian business class, including many small- and
medium-sized enterprises, have expressed support for the change in
direction, largely due to their trepidation about conforming to the
EU's higher standards and investing in the necessary areas to make
good use of a free trade agreement with the EU. For many businessmen,
fear about and ignorance of navigating European market access makes
the old trade rules for dealing with Russia and other post-Soviet
markets more comfortable and familiar.
The economic implications for Armenia
For Armenia, the Russian-dominated EEU has always been defined more by
obstacles than opportunities. Among the many obstacles, the weakest
argument for Armenia to join the Eurasian bloc has always been the
economic impact. Beyond the structural impediment of the absence of
either a land connection or a functioning railway link to Russia or
other EEU members, the most serious and immediate impact on Armenia's
economy will be caused by the need to adjust both its tariff rates and
its trade orientation.
The traditionally open and liberalised Armenian economy must adopt the
higher tariffs and more protectionist policies of the other EEU
members. This move will not only likely spark price increases, but
will also mandate a serious renegotiation over Armenia's membership in
the World Trade Organization (WTO). On trade orientation, several
years of an EU-dominated direction of trade will have to be adjusted
and Armenia will have to prefer the markets of Russia, Belarus, and
Kazakhstan. And the paucity of economic benefits for Armenia from
these moves is perhaps most revealingly demonstrated in the allocation
of customs duties and tariff revenues among the member states. For
Armenia, the asymmetry is obvious: it has been granted a meagre 1.13
percent of the EEU's total customs revenue.
At the same time, new EEU regulations may also inhibit 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 a mere 1.7 percent in 2010. The IT sector expanded by 25
percent in 2014, with a combined output from some 400 IT-related firms
totalling 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 regime of the EEU and its
members could sink this strategically significant sector.
Visible, but not very viable
In the broader context, Armenia may be able to survive, withstanding
the pressure of being ever more firmly trapped in the Russian orbit.
Armenia may even be able to limit its mounting over-dependence on
Russia and to manage the economic fallout. However, any such survival
strategy rests less on any decisive move that Armenia can take and
more on the inherent weakness of the EEU.
Despite the ceremonial fanfare, the launch of the EEU marks the start
of a very different project than that originally envisioned. The union
is significantly more unattractive and even less viable than it was
first conceived to be, for three main reasons.
First, the "loss" of Ukraine as even a potential member seriously
undermines the economic and trade potential of such a union. Ukraine
has always been the "prize" for Moscow, and in spite of the seeming
"victory" of seizing Crimea, Russia's own aggression has triggered the
loss of the sizeable Ukrainian economy, making the Eurasian Union much
less viable as a project for regional (re)integration.
Secondly, the serious 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 rouble and the decline in
world oil prices, Russia is no longer the economic dynamo it once was
- and the supposed Russian role as the engine for the EEU has also
greatly diminished.
The third factor driving the loss of appeal and attraction of the
union is that the motivation for integration rests largely on coercion
and pressure, and an impressive backlash has already been demonstrated
by both Belarus and Kazakhstan. For tiny Armenia, this may offer an
opportunity to hide behind these much larger naysayers and find a way
out without unnecessarily confronting or challenging Russia.
Regaining a degree of balance
Although the outlook for Armenia is bleak, the country also has a
second opportunity - to regain a degree of balance by salvaging its
relationship with the EU. Reflecting the degree of sincerity about
this in both Brussels and Yerevan, the Armenian government has been
able to rebuild much of its lost credibility and has embarked on new
talks over a draft "legal framework" as a foundation for Armenia-EU
relations. At the same time, Armenia has also been cautious in how it
has presented its re-engagement with the EU, seeking to pre-empt any
Russian pressure by highlighting (and exaggerating) its role as a
"bridge" between the EEU and the EU. Given the combination of the
rising costs and meagre benefits of the EEU, Armenia's only real hope
at this point rests on containing the fallout from the economic
contagion and seeking to pursue a prudent but quiet "exit strategy."
Richard Giragosian is director of the Regional Studies Center (RSC) in
Yerevan, Armenia and the author of ECFR's 2014 publication on
Armenia's Strategic U-turn.
http://www.ecfr.eu/article/commentary_armenia_and_the_eurasian_economic_union _the_view_from_yerevan387