Politics
What a stupendous year 2018 was for Armenia’s ‘velvet revolutionary’ Nikol Pashinian. First the former anti-corruption activist and newspaper editor led massive street protests that toppled the government. Then his My Step Alliance scored a stunning triumph in December’s parliamentary elections, taking more than 70% of the vote and crushing the ‘old establishment’ Republican Party (HHK) to the point where it could not attract enough support to retain representation in the legislature. But, as bne IntelliNews has noted, the hard part starts now.

If Pashinian and his movement remain just as popular by the end of 2019, it will be astonishing. So complete is Pashinian’s victory that it will be tempting to coast—his enemies already accuse him of developing a cult of personality and The Economist’s mid-December naming of Armenia as its “country of the year” could add to a feeling of complacency among officials. But the small, impoverished nation of 2.9mn should be in a hurry to meet a desperate need for inclusive progress, and the post-revolution government’s battle against cronyism, corruption and cozy business monopolies is nothing if not a formidable task.

There are few signs of any comeback for the HHK, at least in the near future, but Moscow is keeping a watchful eye on Pashinian’s democratic experiment and any leanings the ‘people’s PM’ might show towards the West; Armenia’s new order would be well advised to tread carefully when it comes to prosecuting figures of previous administrations for past misdeeds, especially those who were close to the Kremlin or various Russian oligarchs and minigarchs.

Pashinian says the world has still not realised the unprecedented nature of Armenia’s revolution. “In Armenia, there is no coalition government. In Armenia, there is no parliamentary majority. In Armenia, supreme power directly belongs to the people and the people carry out direct rule. This is the key meaning of the revolution that took place in Armenia,” he declared to a crowd after 100 days in office, adding that Yerevan’s Republic Square, where government critics and supporters traditionally gather, was now the “supreme body of the people’s rule”.

The My Step government, suggests Pashinian, will be held accountable by the "rule of law and free media", but such statements might be seen as somewhat blithe when it comes to gauging just how much influence Russia will continue to exert on its rather junior ally. Apart from Armenia’s reliance on Russian gas, there are two other particular reasons for this.

One, Armenia is still locked in a frozen conflict (with occasional flare-ups) with Azerbaijan over the breakaway Nagorno-Karabakh breakaway territory over which the two countries fought a hot war three decades ago. Russia, which maintains military bases in Armenia but sells arms to both sides, is crucial to Yerevan’s defence policy given the better equipped armed forces maintained by Baku.

Two, Armenia is a landlocked nation that is enduring a ‘unsplendid isolation’. It has no diplomatic relations with either Azerbaijan or its close ally Turkey, can only forge relations with Georgia while paying careful heed to Russia’s sensitivities towards Tbilisi as regards Georgian breakaway territories and Georgian aspirations for joining Nato, and has Washington’s feelings to consider when it comes to building up trade and investment with the big market of 81mn that lies to its south, namely that of Iran.

Economics
For a true national rejuvenation, Armenia has a long way to go. One-third of its population live in poverty, according to the World Bank. The nation, meanwhile, only managed 129th place in Jeffrey Sachs’ World Happiness Report 2018, while the Legatum Prosperity Index 2017’s sub-component of Economic Quality positioned Armenia 114th out of 149 countries. 

Armenia, GDP growth. Source: World Economic Outlook, IMF.

Armenia’s economic growth prospects will in the coming year be very much at the mercy of the global economic trajectory and major trade partner Russia’s progress against sanctions. Armenia's GDP growth is now expected by the European Bank for Reconstruction and Development (EBRD) to come in at 5.5% this year and 5% in 2019, while the Armenian central bank is expecting 4.6%-5.1% for 2018 and 4.4%-5.5% for 2019. The predictions are 2pp and 0.5pp higher than what the banks’ analysts predicted in May. GDP growth was 8.3% in the first half of 2018, the development bank calculated.

Unemployment in Armenia stands at around 16%, according to the IMF. Underemployment is also a big problems, with remittances from family members working in Russia or other countries important to so many households in making up the shortfall.

Pashinian has stated that one of the first steps for the new parliament will be to make changes to the South Caucasus country's tax code. The changes should secure more freedom for local entrepreneurs and help attract foreign investment, he said.

Armenia does in fact do well in the World Bank’s annual Doing Business rankings. In the latest survey, Armenia  improved by six places to rank 41st out of 190 economies. It was seen as a “notable reformer” in the Europe and Central Asia region and in the “Starting a business” sub-category it was listed as the eighth best in the world.

Finance
In terms of sourcing investment capital, some efforts have been made to work through the Armenian diaspora, which by some estimates numbers more than eight million people. As things stood around the time of the revolution, remittances from the diaspora were, according to a Bloomberg estimate, contributing around 14% of Armenian GDP. Yerevan is issuing ‘diaspora bonds’ to try and capitalise on the spirit of renaissance engendered by the country’s new era.

In early December, the IMF issued a broadly positive report on Armenia’s financial system stability. The financial system has been stable and financial soundness indicators were showing signs of improvement, it said. All of Armenia’s banks met the 12% minimum capital requirement, it added, saying: “Bank profitability has gradually recovered, although it is still below pre-crisis levels. Nonperforming loans (NPLs) have fallen, of which a substantial proportion is covered by provisions, although NPL ratios are still high in a few banks.” 

On the other hand, the Fund said, Armenia’s financial system was “relatively shallow” and continues to be dominated by banks, with the sector’s assets equal to around 78% of GDP. “Capital markets are thin, and external financing is important for long-term financing, given a small domestic investor base,” the report warned.

On December 18, the Central Bank of Armenia (CBA) issued a strong denial of newspaper rumours that the country could be heading for a default, saying it “has nothing to do with the reality”. The statement followed reports that the Armenian dram was heading for a devaluation. “Today the financial system of Armenia is a stable and well-established system, and the fictitious reflection of all [these] issues can cause undue expectations that are inappropriate for the country's long-term development,” the CBA said in a statement.

Business
Prime Minister Pashinian has talked of a "new technological revolution” in the country, restoring the important technological and scientific role it held in the Soviet era. The country’s high-tech sector, while small, is growing considerably faster than the economy as a whole.

The country is seen as having a vibrant, tech savvy youth and, looking to capture energy of the past for the way ahead, Pashinian reminded that “Soviet Armenia had a technological and scientific role in the USSR, such as the Silicon Valley in the modern world [and] we want to make Armenia the same technologically advanced country as it was in the years and conditions of the USSR”.

In energy, tax officials in Armenia have accused the country’s national gas distribution company, owned by Russia’s Gazprom giant, of evading millions of dollars’ worth of taxes. At the same time, Armenia is pushing for cheaper gas from Russia, even though Vladimir Putin says it already receives some of the cheapest there is.

In a latest ranking, Armenia jumped nine places to rank 43rd in the World Energy Trilemma Index 2018. Produced by the World Energy Council (WEC) in partnership with Oliver Wyman, it ranks countries for energy security, energy equity and environmental sustainability. Armenia is strengthening regional energy ties with neighbouring Iran and Georgia. It is building a high-voltage 400 KV power line with Iran and a similar programme is being developed with Georgia. Rapid solar energy development in Armenia was also noted by the report.

In nuclear power, Armenia is hoping Moscow will extend the repayment period for the Russian loan extended to finance the modernisation of Armenia’s sole nuclear power station at Metsamor. Work at the NPP is being carried out by Russia’s Rusatom Service, part of Rosatom.

Turning to Armenian energy prospects in working with gas and oil-rich Iran, Tehran and Yerevan have announced they are to jointly build an oil refinery by the border between Iran’s Aras Free Zone (AFZ) and Armenia’s Meghri Free Economic Zone (MFEZ). Iran and Armenia are looking for more integration between their economies as the Iranians gradually move towards an initial free trade agreement with the Moscow-led Eurasian Economic Union (EEU).

Armenia’s new government has promised more transparency in gold mining and an international team of experts from environmental consultancy Elard Group have been carrying out an independent survey of Armenia’s Amulsar gold mine. Lydian International, whose subsidiary is developing the mine, was forced to suspend work after the launch of a criminal case over alleged environmental contractual breaches.