If Russia’s current restrictions affecting Armenia remain in place, the economy could lose around two percentage points of GDP. The economic impact would be manageable, but the social impact would not, former Finance Minister Vardan Aramyan said.
According to Aramyan, the restrictions mainly affect agricultural goods exported from Armenia, including fruit and vegetables, as well as beverages, fish and other products. “The economic effect for our economy is a loss of around two percentage points of GDP. It is painful and certainly not a small figure, but economically it is manageable. Socially, it is not,” he said.
The social consequences are more serious, he argued, because the main burden will fall on people working in agriculture. They may struggle to sell their produce, while many also have loans to repay. Restrictions affecting mining would likewise be a serious blow because it is a sector of systemic importance. Yet the number of people directly employed in mining is comparatively smaller.
Agriculture is different. It is a much broader sector comprising many small farms engaged in grape growing, fruit production, vegetable farming and other activities. Restrictions on selling their output could therefore become a widespread social problem, Aramyan said.
A higher gas price could amplify the problem
Aramyan said several other factors must be considered, including a possible increase in the price of gas. He noted that the Central Bank governor had also addressed the issue and said he shared that view.
“Today we import gas from the Russian Federation at $177.5 — approximately $177 — per 1,000 cubic metres. That is, of course, a subsidised price, and we all understand that,” the economist said.
In this context, he added, it is important to consider Russian support that does not appear as direct financial assistance. Armenia’s economy retains a substantial amount of money because of the preferential price of Russian gas.
“I do not want to be seen as a Russian propagandist, but I am stating economic facts. We pay around $520–560 million a year for gas imports from Russia. If the tariff doubles, for example, then, all else being equal, we would have to pay twice as much at the border for the same volume of gas,” Aramyan said.
Gas consumption is not flexible enough to fall by half simply because its price doubles, he stressed. People need gas to heat their homes, cook food and meet other daily needs. They cannot immediately cut consumption by the same proportion as the price increase.
“Gas consumption does not depend very strongly on price because people still have to heat their homes and prepare food. There is some flexibility, but not enough for consumption to halve immediately if the price doubles,” he said.
Consumers would feel the first impact
According to Aramyan, a higher gas price would affect the economy through several channels. The first is household spending. If families have to pay twice as much for the same amount of gas, they will have to reduce their spending on other goods and services.
“Suppose people allocate twice as much of their own money to the same volume of gas. That means they have to reduce demand for other goods and services by a corresponding amount. They may go to restaurants less often and spend less on clothes, shoes, food and other products,” he said.
That fall in demand would have economic consequences. “It will lead to economic decline. When demand shrinks, you may no longer be able to sell much of what you produce,” Aramyan said.
The effects of a higher gas price would thus extend beyond utility bills. Changes in household spending could spread to other sectors and reduce demand for their products and services.
Producers would face higher costs
The second channel is producers’ costs, Aramyan said. Sectors where gas is used directly in production are particularly exposed. He singled out agriculture and greenhouse businesses.
“The second channel is that the increase goes straight into producers’ costs. Agriculture and gas-powered greenhouses will be among the main sectors affected. Their production costs will rise,” he said.
Higher costs could leave some businesses unable to compete. “Quite a few businesses may find themselves, so to speak, facing bankruptcy because their products will no longer be competitive,” Aramyan warned.
He illustrated the risk with a small producer. Unlike a large company, such a business has little power to set market prices.
“Suppose it used to produce a particular item for 1,000 drams, while the market price was 1,200 drams. Once its production cost rises to 1,300 drams, it cannot simply say, ‘I am offering it for 1,300.’ It is a small player in the economy, and naturally consumers will not buy it at that price,” he said. Such producers could ultimately be pushed out of the market and close.
Exporters are already under pressure
Aramyan also pointed to the difficulties facing exporters. In his assessment, Armenia’s export sector has been in a difficult position since 2022.
“I have even used a rather harsh word, but it describes their condition: a death rattle. Exporters are in a very difficult position,” he said.
Several factors affect exporters at once, according to the economist. The first is the exchange rate: a stronger dram hurts their competitiveness. The second is relative prices. Producers of exportable goods also compete with imports at home, and exchange-rate movements can make imported products more competitive.
Aramyan used the drinks market as an example. “Suppose we have locally produced vodka. Those producers cannot cut their prices very much. Importers, whether of Beluga or other drinks, can lower prices thanks to the exchange rate. Our producers lose out,” he said.
The export sector’s problem is therefore not limited to competitiveness abroad. Local producers also compete with imported goods in the domestic market, where exchange-rate changes can make that competition harder.
Domestic sectors draw resources away from exporters
Aramyan identified another challenge: rapid growth in sectors whose output is mainly sold domestically rather than exported. “Our exporters also lose out to the non-tradable sector. That is another aspect of domestic relative prices,” he said.
He argued that the growth of these sectors is visible in economic activity indicators. “Look at the leading areas: they are non-tradable sectors — capital construction and services,” the economist said.
If returns rise in those sectors, they begin drawing resources away from businesses producing exportable goods. The key resources are labour and capital, for which both parts of the economy compete.
Aramyan gave an example involving wages. “Imagine the export sector pays 300,000 drams and the non-tradable sector pays 350,000. At 350,000, the latter wins that contest and draws workers over. Instead of remaining at a manufacturing company, a worker takes a job in services,” he said.
Export-oriented businesses therefore face more than foreign competition and exchange-rate pressures. At home, they also compete for workers and other resources with domestic sectors offering higher returns.
Direct and knock-on effects
Aramyan described the effects of Russia’s restrictions and a possible gas-price increase on two levels: direct and knock-on effects.
“The direct effect is that your costs rise immediately, whether you are a household or a producer. Costs go up for both,” he said.
For households, that means a larger share of unchanged income would go towards gas bills, leaving less to spend on other goods and services. For producers, rising costs would increase the cost of making their products. Small businesses and exporters could lose competitiveness.
The deeper issue, according to Aramyan, is the knock-on effect: the initial shock gradually spreads through other parts of the economy.
“There is a multiplier effect as the process continues. Exporters may gradually be pushed out of the market, while consumers gradually cut spending elsewhere. That leads to a deeper economic downturn,” the economist said.