TOPIC OF THE WEEK: Armenia—is the diamond trade making a comeback?
I have over the last couple of years liked to compare the economic performance of Armenia and Georgia. My pithy conclusion has been that the soaring GDP growth that averaged 10 percent annually in 2022 and 2023 in both countries reflected similar underlying reasons related to the favorable effects of the Russia-Ukraine conflict, including positive net monetary transfers, IT, finance and trade—the "diamond trade" in the case of Armenia and the attendant benefits for Georgia of facilitating this trade through its territory. The growth divergence in favor of Georgia that followed in 2024 was, in turn, enabled by targeted fiscal spending as the political cycle took over.
I had conjectured then that Armenia might just take a leaf out of Georgia's book, ramp up public spending in 2025 as the June 2026 parliamentary vote drew near and catch up with Tbilisi's enviable growth performance. In the event, last year year's GDP growth in Armenia did very well at 7.2 percent, but not for the reason I anticipated. What's particularly intriguing about that 7.2 percent number is that it came as a surprise to everybody, not only your analyst, but, more meaningfully, to the Armenian authorities. It was only in mid-Dec that the central bank argued for 5.9 percent GDP growth, while literally weeks ago the Economy Minister pointed to a number (possibly) slightly above 6 percent. What caused this unanticipated growth surge?
I conjecture and prove by analyzing the just released data that the much higher-than-forecast GDP growth should be attributed to the surprise return of the so-called "diamond trade". I first addressed this issue about two years ago when I argued that there was an exponential increase in diamond trade over the axis of Russia-Armenia-UAE/Hong Kong/China, which, in turn, was related to EU/G7 sanctions on the import of Russian diamonds. The diamonds were shipped uncut to Armenia, which polished them and then re-exported them to Asia, presumably for final delivery to EU/G7 countries. However, Russian diamonds lost their shine for Armenia around mid-2024 and I declared that their positive contribution to economic activity (via higher value added in industry and trade) had all but dissipated by 2025. What makes the whole story even more intriguing is that the "diamond" effect only showed up in the last quarter of the year (which, I guess, explains why policy-makers were caught off-guard), and it was then that GDP growth accelerated to almost 10 percent YoY vs the 5.9 percent growth delivered during the first three quarters of the year.
Whether this is a one-off or the beginning of another spell of peripatetic diamonds I can not tell, but PM Pashinyan has never been one to miss an election-related opportunity. He already announced this week an appreciable pension increase, justifying it by last year's stronger-than-planned growth. I estimate that the total bill for this will come to around 0.6-0.7 percent of 2025 GDP.
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