Government Under Pressure On All Fronts

BMI View: Armenia's government will have to confront a number of obstacles in the coming months, with an 18% hike in consumer gas prices likely to increase political tensions as well as rile the impoverished Armenian public. In addition, deeper integration with the EU may progress at a slower pace, with Russo-Armenian military ties remaining strong in light of increasingly belligerent Azeri rhetoric.

The Armenian government faces a number of key challenges over the coming months, with each posing a substantial risk to the country's political stability. The primary risk in our view is the potential unrest caused by the decision of Russian energy giant Gazprom to increase wholesale gas prices in Armenia by 18% from July onward. Gazprom is the sole supplier of gas to the Armenian market, and has an 80% stake in ArmRusGazProm, a joint venture between Gazprom and the Armenian Ministry of Energy. ArmRusGazProm in June agreed a deal with the Armenian government where the country's consumer gas prices would rise from US$316.0/tcm to US$374.0/tcm. The government has had little scope for negotiation, given that ArmRusGazProm holds a monopoly on the provision of gas to Armenian households, with the government having stated that if there had been no negotiations, the price hikes would have been even steeper.

However, the public do not seem to have viewed these additional costs, which will force Armenian household energy bills higher than those in Western Europe, in the same light. There have been a number of protests in the capital, Yerevan, since the price hike was announced and we do not rule out an escalation in demonstrations. Armenia remains one of the poorest countries in Emerging Europe, and with roughly one-third of the population living below the poverty line and unemployment estimated to be in double-digits, the gas price hikes may prove to be too much for the Armenian public.

In addition to Russian domination of the Armenian energy market, the Kremlin announced in June that Russian Air Force bases in Armenia would be subject to significant upgrades over the coming years, with the lease on the two bases, one near the Turkish border and the other close to Yerevan, extending to 2044. This will perturb the European Union, which has been seeking to mitigate Russian influence in Armenia, with the potential offer of an Association Agreement in the pipeline ( see 'Advancing Further Down European Integration Path', April 19). This, like the negotiations with Gazprom, places the Armenian government in a difficult position. Armenia has traditionally relied on Russian military and financial support, not only to sustain the economy, but to ward off any potential threat from its arch-rival, Azerbaijan. However, the Armenian population has become increasingly frustrated by what it sees as the country's government submitting to the will of Moscow, and the EU is unlikely to pursue deeper relations with a country it views as beholden to Russia for financial and military support. Over the long term, we hold to our view that Armenia will pursue further integration with the EU. However, it must develop its own military capabilities, as well as securing an alternative source of energy, be it gas from the Middle East, nuclear power or renewable energy, before it steps out of Russia's shadow.

Armenia Remains Heavily Outgunned
Armenia and Azerbaijan - Military expenditure 2013, US$bn

The government will not oppose any Russian military expansion in Armenia in the short to medium term, however, as the government of Azerbaijan has become increasingly bellicose in its rhetoric toward Armenia in recent months in the run up to the Azerbaijani presidential election on October 16. Following a military parade in the Azerbaijani capital, Baku, on June 26, President Ilham Aliyev made note that Azerbaijan's 2013 military budget of US$3.7bn was far in excess of Armenia's total national budget of US$2.0bn. In response, Armenian Defence Minister Seyran Ohanyan stressed the importance of Russo-Armenian ties and stated that Armenia would not join "a regional arms race". Nevertheless, the Armenian government is likely to be concerned about the growing might of the Azerbaijani armed forces, and the country's long-held desire to take the Nagorno-Karabakh region, currently occupied by Armenian forces, but placed within Azerbaijan's borders.

Risks To Outlook

If the European Union deems the relationship between Moscow and Yerevan to be too close, it could step away from the potential offer of an Association Agreement, the first stage of accession to the EU, or the Deep and Comprehensive Free Trade agreement (DCFTA), which is due to be signed by the end of 2013. This would be a major blow to the Armenian government, which has been seeking to deepen ties with Europe for a number of years, with the aim of boosting economic growth through trade and investment, as well as obtaining a further theoretical impediment to Azerbaijani military action against Armenia.

Armenia Political Overview
System of Government Presidential Republic, Universal Suffrage: 131-seat Azgayin Zhogov (Five Year Term). Executive power rests with president.
Source: BMI
Head of State President Serzh Sargsyan, Second Five-Year Term, may only be re-elected once
Head of Government Prime Minister Tigran Sargsyan (Republican Party)
Last Election Parliamentary - May 12, 2007
Presidential - February 18 2013
Composition Of Current Government Prosperous Armenia, Republican Party of Armenia, Rule of Law and non-partisan ministers
Key Figures Finance - David Sargsyan, Foreign Affairs - Edward Nalbandian, Economy - Vahram Avanesyan, Defense - Seyran Ohanyan,
Main Political Parties (number of seats in parliament) Republican Party of Armenia Faction (70): Conservative, founded in 1990. Favours balanced relations with the US, Europe and other CIS countries. Led by Serzihik Sarksyan
Prosperous Armenia Faction (36): Pro-presidential party with limited ideological agenda. Established in 2004, led by businessman Gagik Tsarukyan
Armenian National Congress Faction (7): Centrist coalition led by former Prime Minister Levon Ter-Petrosyan
Rule of Law Faction (6): Centrist party. Led by Artur Baghdasarian.
Armenian Revolutionary Federation Faction (5): Left-wing nationalist party, member of ths socialist international. Led by Hrant Markarian.
Heritage Faction (4): Centrist, pro-Western party led by US-born former foreign minister Raffi Hovannisian.
Non-Affiliated Independents (3)
Extra-Parliamentary Opposition? None
Next Election Parliamentary - 2017
Presidential ? 2018
Ongoing Disputes Armenia remains formally at war with neighbouring Azerbaijan over Armenia's occupation of the Nagorno-Karabakh region in Azerbaijan. No official diplomatic contact or economic ties with Turkey due to long-standing disputes over Nagorno-Karabakh and historical interpretations of killings of ethnic Armenians by Ottoman troops in the World War I era.
Key Relations/ Treaties Russia maintains a number of military bases in Armenia. Member of the Commonwealth of Independent States, Collective Security Treaty Organisation (CSTO) and Organisation of the Black Sea Economic Cooperation (BSEC)
BMI Short-Term Political Risk Rating 57.1
BMI Structural Political Risk Rating 59.6
This article is tagged to:
Sector: Country Risk
Geography: Armenia, Armenia

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