This article is part of ECFR's Wider Europe Forum

With the EEU presenting more obstacles than opportunities, Armenia’s best hope is a prudent exit strategy.

As the Eurasian Economic Union comes into force in January 2015, ECFR has asked expert analysts from the current member states about their hopes and fears for their country’s future as part of this Union. Yesterday, we featured Belarus, today we are focusing in on Armenia, and Friday we will take a look at Kazakstan.

For most Armenians, ushering in the New Year was a painful exercise in frugality and fortitude. As they faced the twin pressures of a serious decline in the Armenian currency’s value and a sweeping price rise on essential foodstuffs, the final month of 2014 promised only more economic pain. For the small and isolated Armenian economy, much of this pressure was driven by the spillover from the economic downturn in Russia, where the impact of the plummeting rouble and Western-imposed sanctions was exacerbated by a sharp fall in the price of oil. Yet for the longer-term future of the country, a much more serious development for Armenia was taking place. New Year’s Day also marked the start of Armenia’s membership in the Eurasian Economic Union (EEU).

No looking back

Since 2013, the Armenian government has sought to put a brave face on its surprising decision to sacrifice its Association Agreement with the European Union in favour of joining the Russian-led EEU. Despite the apparent setback presented by the “strategic U-turn”, many in Armenia have come to accept the reality of surrendering to Russia. Even the Armenian business class, including many small- and medium-sized enterprises, have expressed support for the change in direction, largely due to their trepidation about conforming to the EU’s higher standards and investing in the necessary areas to make good use of a free trade agreement with the EU. For many businessmen, fear about and ignorance of navigating European market access makes the old trade rules for dealing with Russia and other post-Soviet markets more comfortable and familiar.

The economic implications for Armenia

For Armenia, the Russian-dominated EEU has always been defined more by obstacles than opportunities. Among the many obstacles, the weakest argument for Armenia to join the Eurasian bloc has always been the economic impact. Beyond the structural impediment of the absence of either a land connection or a functioning railway link to Russia or other EEU members, the most serious and immediate impact on Armenia’s economy will be caused by the need to adjust both its tariff rates and its trade orientation.

The traditionally open and liberalised Armenian economy must adopt the higher tariffs and more protectionist policies of the other EEU members. This move will not only likely spark price increases, but will also mandate a serious renegotiation over Armenia’s membership in the World Trade Organization (WTO). On trade orientation, several years of an EU-dominated direction of trade will have to be adjusted and Armenia will have to prefer the markets of Russia, Belarus, and Kazakhstan. And the paucity of economic benefits for Armenia from these moves is perhaps most revealingly demonstrated in the allocation of customs duties and tariff revenues among the member states. For Armenia, the asymmetry is obvious: it has been granted a meagre 1.13 percent of the EEU’s total customs revenue.

At the same time, new EEU regulations may also inhibit the expansion of one of Armenia’s most important and fastest-growing sectors. The Armenian information technology (IT) sector accounted for roughly one-third of exports in 2013, and about 5 percent of the country’s GDP, up from a mere 1.7 percent in 2010. The IT sector expanded by 25 percent in 2014, with a combined output from some 400 IT-related firms totalling nearly $475 million. But because much of the Armenian IT sector relies on investment from the United States, the new IT-related rules and poor intellectual property rights regime of the EEU and its members could sink this strategically significant sector.

Visible, but not very viable

In the broader context, Armenia may be able to survive, withstanding the pressure of being ever more firmly trapped in the Russian orbit. Armenia may even be able to limit its mounting over-dependence on Russia and to manage the economic fallout. However, any such survival strategy rests less on any decisive move that Armenia can take and more on the inherent weakness of the EEU.

Despite the ceremonial fanfare, the launch of the EEU marks the start of a very different project than that originally envisioned. The union is significantly more unattractive and even less viable than it was first conceived to be, for three main reasons.

First, the “loss” of Ukraine as even a potential member seriously undermines the economic and trade potential of such a union. Ukraine has always been the “prize” for Moscow, and in spite of the seeming “victory” of seizing Crimea, Russia’s own aggression has triggered the loss of the sizeable Ukrainian economy, making the Eurasian Union much less viable as a project for regional (re)integration.

Secondly, the serious impact of Western sanctions on the Russian economy lessens the value and viability of the union. Moreover, in the wake of the fall in the value of the Russian rouble and the decline in world oil prices, Russia is no longer the economic dynamo it once was – and the supposed Russian role as the engine for the EEU has also greatly diminished.

The third factor driving the loss of appeal and attraction of the union is that the motivation for integration rests largely on coercion and pressure, and an impressive backlash has already been demonstrated by both Belarus and Kazakhstan. For tiny Armenia, this may offer an opportunity to hide behind these much larger naysayers and find a way out without unnecessarily confronting or challenging Russia.

Regaining a degree of balance

Although the outlook for Armenia is bleak, the country also has a second opportunity – to regain a degree of balance by salvaging its relationship with the EU. Reflecting the degree of sincerity about this in both Brussels and Yerevan, the Armenian government has been able to rebuild much of its lost credibility and has embarked on new talks over a draft “legal framework” as a foundation for Armenia-EU relations. At the same time, Armenia has also been cautious in how it has presented its re-engagement with the EU, seeking to pre-empt any Russian pressure by highlighting (and exaggerating) its role as a “bridge” between the EEU and the EU. Given the combination of the rising costs and meagre benefits of the EEU, Armenia’s only real hope at this point rests on containing the fallout from the economic contagion and seeking to pursue a prudent but quiet “exit strategy.”

Richard Giragosian is director of the Regional Studies Center (RSC) in Yerevan, Armenia and the author of ECFR’s 2014 publication on Armenia’s Strategic U-turn.

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