Last week, Armenia publicly announced it would join the Russian-led customs union in a move that stunned EU officials, who already had completed negotiations on comprehensive free trade and political agreements. Those agreements were all set to be signed at an EU Eastern Partnership summit in Vilnius, Lithuania.
Armenia has been a WTO member since 2003, and adapting its trade infrastructure to mesh with the customs union will probably take some time. However, a top EU official has already stated that the bloc will now be unlikely to sign a free trade agreement with Armenia in November because the customs union’s rules and structure are incompatible with EU free trade deals.
Politically, it should not come as too much of a surprise that Armenia seems to be moving closer to Russia. The country wants to continue its close military relationship with Russia to ensure protection in case its frozen conflict with Azerbaijan heats up again. Some view Armenia’s decision as another attempt by Russia to intimidate its smaller neighbors into coming back into Russia’s sphere of influence.
The EU’s free trade deals, meanwhile, come with political reform commitments, so Western-leaning parties want Armenia to move towards Europe. And of course, there is always the energy issue: Russia supplies Armenia with natural gas and bristles at what it sees as EU attempts to interfere with its energy investments in other European countries.
But how will future investments in Armenia be affected by membership in the customs union?
In 2011, Armenia adopted a new industrial strategy to enhance its competitiveness on the international market. Agribusiness, tourism and information and communications technology (ICT) were among the 11 sectors targeted by this strategy based on their export potential.
The ICT sector could get a boost once Armenia is granted full access to the large Russian market. Armenia has a long-standing technology-oriented strategy and a highly skilled, young work force. As a member of the WTO, Armenia has signed the TRIPS (Agreement on Trade Related Aspects of Intellectual Property Rights) agreement, which means that foreign investors should worry less about intellectual property rights (IPR) protection when beginning or expanding operations in the country.
Agribusiness is another key sector to watch if Armenia’s customs union membership is finalized, especially given the example of Kazakhstan. To harmonize with the policies of its customs union neighbors, Kazakhstan was forced to impose tariff increases on numerous products, including agricultural machinery, which hurt the country’s agribusiness trade and the foreign companies operating in this sector.
For the time being, Kazakhstan has successfully managed to block the tariff hike. If the country winds up having Armenia on its side during future negotiations on this issue, Armenia’s growing agribusiness sector will not flounder in the face of large Russian companies.
Russia is by far Armenia’s largest foreign investor, with Russian capital investment totaling over $3 billion, or almost half of Armenia’s foreign investment, in 2012. Remittances from migrant Armenians abroad (mainly in Russia) are also a significant contributor to Armenia’s GDP. Increased remittances could increase domestic demand and consumption, thus boosting business and economic growth.
Drivers of economic growth change as countries develop and modernize, however, and if Armenia continues to make progress on improving its business and investment climate, trade and economic priorities could shift.
