Return to calm after an unprecedented wave of protest, the so-called Velvet revolution. Despite the election of the opposition leader, Nikol Pashinyan, as Prime Minister, the political situation remains fragile due to high tension in the Nagorno-Karabakh region and underlying social grievances related to rising cost of living and persistent corruption.


In 2015, the Armenian constitution was amended to transfer the executive power from the President to the Prime Minister. The change had to take effect at the end of President Serzh Sargsyan’s term of office in April 2018.

On 17 April 2018, Serzh Sargsyan – President from 2008 to 2018 and whose Republican party holds a majority of seats –- was swelled on as Prime Minister. This led to a wave of peaceful protest, organised by Nikol Pashinian and his Civil Contract party, across the country.

In order to stem protest, the Prime Minister resigned on 23 April 2018. On 1 May 2018, Parliament voted against the nomination of the sole candidate for Prime Minister –Nikol Pashinian. As a result, mass protests started again and only stopped at the Republican Party’s announcement that it would support Nikol Pashinian’s candidacy for the post of Prime Minister – what they did on 8 May 2018.

Impact on country risk

Even if protest has ceased, the situation remains fragile. On the one hand, there is a risk of conflict escalation over the Nagorno-Karabakh region, and on the other hand, underlying social grievances related to rising cost of living and persistent corruption have to be addressed – a difficult task for a new Prime Minister without majority in Parliament.

The Nagorno-Karabakh dispute with Azerbaijan dates back to 1991 when the region, dominated by Armenians, declared its independence from Azerbaijan. It was followed by an armed conflict between Armenia and Azerbaijan that ended with a UN ceasefire agreement in 1994. Since then, the negotiations with Azerbaijan on the status of the Armenia-supported breakaway republic of Nagorno-Karabakh have remained in a deadlock. Ceasefire violations have grown since 2012 and the clashes that occurred in 2016 were the worst since 1994. Hence, the risk of an armed conflict remains as Azerbaijan may try to benefit from the political situation in Armenia. Azerbaijan’s sharp increase in military capabilities over the past years and Russia’s military presence in Armenia are other factors.

Looking ahead, the new Prime Minister has already assured Moscow that Armenia will maintain good relations with Russia, a key ally and an important economic partner (via trade, remittances, bank flows and investment channels). In 2017, the authorities signed a deal – without antagonising Russia – aimed at replacing the Association Agreement (AA) with the EU that Yerevan refused to sign in 2013 in order to join the Russian led Eurasian Economic Union. However, the economic windfalls expected to result from an extra rapprochement with Russia in 2013 (such as lower export duties, low energy prices and contribution to infrastructure development) were lower than hoped for, partly due to the 2014 Russian economic woes.

On the economic side, despite relatively favourable growth figures during the last five years (on average 3.6% annually in the 2013-2017 period and 3.4% expected in 2018), poverty and unemployment remain high. In the medium term, Armenia’s growth potential remains impeded by its low (but rising) savings rate, its relative isolation, its reliance on low-value added commodity exports, shrinking labour forces (associated with migration and an aging population), the absence of strong growth drivers and the dominance of oligarchs.

With a large Armenian community abroad (8 million for 3 million inhabitants), remittances and labour income are key sources of current account receipts along with tourism and ores and metals (mainly copper). Even if the current account deficit is expected to increase to 2.8% of GDP in 2018 (from 2.6% in 2017), the deficit remains well below its 2010-2014 average level of almost 10% of GDP. This is partly due to lower energy prices but also to stronger private transfers and labour income and to strong rise in good exports supported by a favourable external environment.

Public finances have strongly deteriorated compared to 2013 as public debt surged to an estimated 53.5% of GDP in 2017 and the overall fiscal balance reached 4.8% of GDP in 2017. Most of the increase in public debt stemmed from external borrowing. Hence, public and private external debt surged to almost 95% of GDP in 2016 but is expected to decrease – a trend that has to be confirmed. The debt service ratios follow the same trend.

Since February 2015, the gross foreign exchange reserves have followed an upward trend. Based on latest observation from March 2018 – before the eruption of protest – liquidity is adequate with reserves covering about 4 months of imports and higher than the low short-term external debt. That being said, a large intervention by the central bank to stabilise the exchange rate – which has remained relatively stable over the last months – could put liquidity under pressure.

In this context, MLT political risk remains stable in category 6. It should be noted that the risk of civil unrest and the risk related to the Nagorno-Karabakh conflict were already incorporated in this classification.

Analyst: Pascaline della Faille -