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Seda Hergnyan

Economist Says Uncertainty Following Border Fighting Threatens Armenia's Economy

In an interview with Hetq, Hayk Mnatsakanyan, who chairs Yerevan State University’s Department of Finances and Accounting, said last week’s fighting along the Armenia-Azerbaijan border will negatively impact Armenia’s economy in both the long and short term.

Mnatsakanyan said exports will suffer in the long-term and the trade and services sectors in the short-term.

“As the uncertainty increases, people start saving money for a rainy day or just for the future, doing less business today, less use of services, so that they can use that money later if necessary. And in the field of trade and services, it is mainly small and medium businesses that suffer in this situation,” the economist points out.

Regarding the 13.1% increase in Armenia’s Economic Activity Index, Mnatsakanyan said it was mostly fueled by the outflow of Russian capital to Armenia given the war in Ukraine.

He said that this capital can also flow out of Armenia if the country is perceived as becoming more unstable.

“This year, economic growth was affected by two main factors, both external. The first is the high inflation recorded all over the world, which, although it has a positive effect on GDP growth, has a negative impact on people's living standards. In other words, we can have economic growth, but on the other hand, a worsening of people's living standards, deepening of poverty,” Mnatsakanyan told Hetq.

He noted that while growth in the construction sector also contributed to overall economic growth, construction is not an exportable sector, and its increase cannot have a long-term positive impact on the development of the economy.

Regarding the unprecedented growth of remittances from Russia to Armenia this year, the economist said it wasn’t due to people leaving for Russia to work but an outflow of capital from Russia.

“The increase in remittances has not only a positive but also a negative connotation. It becomes a drug for the economy and instead of always looking for ways out if necessary, the government relies on remittances instead of developing the branches of the economy. It is necessary to develop not at the expense of remittances, but at the expense of work and professional activities. If the security issues are not resolved, the Russian capital, the money that the Russians have transferred to Armenia, may leave Armenia as well. As a result, the inflow of remittances will be reduced,” Mnatsakanyan said.

He also played down the recent increase in tourist numbers to Armenia that boosted the services and retail sectors.

“Should we build our economy only on tourism and trade? It is obvious that with such an approach we will only have a certain seasonal growth,” Mnatsakanyan said.

The economist stressed that attracting foreign investment to Armenia is based on two factors, profitability and security.

“If we do not ensure security, of course there will be no profitability either. “If this situation lasts for a long time, we will have a significant outflow of investments.”

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