Overview

Armenia is a landlocked country in the south of the Caucasus region bordering Georgia, Azerbaijan, Türkiye, and Iran, with a population of approximately 2.9 million. Its capital, Yerevan, is home to more than a third of the population, and is situated in the relatively flat south of the country, as opposed to the mountainous north. It is also the centre of a successfully developing and relatively resilient economy.

Historically a minority people within other territories, the Armenians have largely survived in diasporas in territories of present-day Türkiye, Greece, and later Russia. Present-day Armenia only achieved formal statehood with the dissolution of the Soviet Union in 1991, however, a war with Azerbaijan broke out shortly after, in 1992, over the ceded territory of Nagorno-Karabakh/Artsakh, originally incorporated into Azerbaijan under Soviet control.

More recently, Armenia has undergone a number of political, economic, and security shifts, including a ‘Velvet Revolution’ into a parliamentary system in 2018, the shocks of the COVID-19 pandemic, and a war in Nagorno-Karabakh in 2020, as well as a large influx of refugees from the territory following its final incorporation into Azerbaijan in September 2023. Despite these shocks, the country’s economy is projected to grow by 6% in 2024 and 2025, one of the best scores in the region, and its GDP currently stands at $24.21 billion. In its latest report published in 2024, Freedom House classified Armenia as ‘partly free’ with a score of 54/100.

Political risk

Armenia is currently governed by a stable majority (71%) of the Civil Contract Party, with Prime Minister Nikol Pashinyan at its head, and two opposition parties, Armenian Revolutionary Foundation (ARF) and Republican Party of Armenia (With Honour), occupying the rest of the parliamentary seats. Pashinyan’s government was elected in June 2021, in what have been recognized as free and fair elections by international observers, after a tumultuous year marked by a succession of political crises. A constitutional amendment in 2015 gave strong executive powers to the Prime Minister and Cabinet, which gave then-Prime Minister Serzh Sargsyan an impetus for expanding his powers after his third election in 2017. This sparked nation-wide protests by individuals mobilised through grassroots organisation by Pashinyan, the opposition leader at the time. Following this ‘Velvet Revolution’, popular support for Pashinyan’s government was cemented in a snap election in December 2018.

Political crises, 2020-2021

Following the Second Nagorno-Karabakh war with Azerbaijan in 2020, and the signing of a ceasefire on 10th November spelling Armenia’s defeat, Pashinyan’s government faced strong criticism and public discontent. This provided the impetus for consolidation of the political opposition, and culminated in multiple attempts to storm the parliamentary building and the Prime Minister’s office. Significant in this context was the siding of the Armenian Apostolic Church, the largest religious body of great societal importance, as well as one of the ‘founding fathers’ of independent Armenia, Vazgen Manukyan, with the opposition. The crisis continued into the new year, with an attempted coup d’état and a formal call for Pashinyan’s resignation in February 2021. Popular support, although more divided, nevertheless remained with Pashinyan, and was once again confirmed in the June 2021 snap parliamentary elections.

Political stability

Recent political developments show further discontent, once again related to Pashinyan’s foreign policy, including the nature of Armenia’s relations with Russia. The latest victory of Azerbaijan in Nagorno-Karabakh, prompting a mass exodus of over 100,000 ethnically Armenian refugees into the territories of Armenia has put further strain on an already stressed political situation. The country has been dealing with a humanitarian crisis of previously unseen proportions, characterised by constant movement of refugees, as prospects of returning to their previously inhabited territory remain obscure. The country is starting to face systemic challenges with overwhelmed service provision, low community resilience, and social cohesion. Public perception that Pashinyan’s government did not react to Azerbaijan’s takeover of the region forcefully enough continues to exacerbate domestic tensions.

Corruption and civil liberties

Based on the 2023 Corruption Perceptions Index report, Armenia’s score is 47/100, the second highest in the region after Georgia. It has moreover shown steady improvement, by 11 points, since the ‘Velvet Revolution’ in 2018, making it the most significant improver in the region. The country has, nevertheless, seen some backsliding in maintaining checks and balances, law enforcement integrity, and judicial independence.

Armenia’s World Press Freedom Index has improved in 2024, though the media remains polarised. Largely a result of successive political crises, the recent conflict, and dire humanitarian situation, Armenian media have been subjected to increasing restrictions in the political sphere. In July 2021, defamation was briefly criminalised, until the law was removed the following year due to a strong backlash from media associations and human rights organisations. Media independence has also declined, especially in print media. Generally, laws on media freedom and disinformation are not considered strong enough, with many controlled by influential political and corporate elements. Journalists do not face overwhelming persecution, but reporting around the Nagorno-Karabakh region can be unsafe.

Economic risk

Despite a number of political, health, and geopolitical shocks in recent years, the Armenian economy has remained surprisingly resilient, registering the highest growth in the region in both 2022 and 2023. In 2023 especially, Armenia’s fast-growing economy owes its resilience largely to the fallout of Russia’s war against Ukraine. The conflict, while hitting the region’s economies swiftly, also facilitated the movement of Russian migrants, businesses, and capital into the country. At the same time, this spur of growth can be seen as a double-edged sword. With geopolitical tensions often getting in the way of trade with two of its neighbours, Azerbaijan and Türkiye, Armenia exports more than 30% of its production to Russia, making it its largest export destination. All of these economic developments therefore point to a need for the Armenian economy to diversify away from Russia. Fortunately, the country’s economic sectoral make-up helps with this aim.

Mining and technology

Armenia is home to a significant amount and diversity of important mineral resources, including gold, copper, molybdenum, and zinc. The mining sector thus presents investment and business development opportunities, despite its somewhat outdated equipment and environmental practices. This is, furthermore, evident from the potential seen in the sector by international players, including the European Union (EU). For instance, the European Bank for Reconstruction and Development (EBRD) is working to support the sector’s financial, institutional, and regulatory frameworks. At the same time, any advantages that Armenia is able to obtain in this sector depend strongly on creating more diversified market opportunities and competition.

A sector which looks more promising is technology, in which Armenia has been a leading player in the region since before the dissolution of the Soviet Union. The sector has continued to experience impressive growth over the last couple of decades, and there is an increasing appetite for scaling up domestic industries to access the international market. The sector also shows reliance on foreign investment and material imports, which pose some challenges to its resilience. Balancing these needs with a diversified investment portfolio is key to ensure its longer-term success.

Business climate

Armenia is consistently ranked as having an improving business climate year-on-year, with overall risks for businesses relatively low. Investment opportunities in the country are numerous, and restrictions on foreign investment and general business involvement are few. Nevertheless, a few challenges remain. The first is Armenia’s small market, given the closed borders with two of its neighbours. This renders business opportunities slightly more limited compared to the rest of the region. The second are security and geopolitical risks.

Security risk

Armenia is considered a relatively safe country in terms of crime and domestic security. The Fragile States Index has recorded an improvement in domestic security compared to 2022, although the situation has worsened slightly over the past five-ten years. In 2023, possibly as a result of the conclusion of the conflict over Nagorno-Karabakh, group grievance in the country showed further rise, which has been the trend since 2020.

The conflict over Nagorno-Karabakh has been the chief security risk in Armenia since its start in the 1990s, and a recent reignition in 2020. Its speedy conclusion in September 2023 resulted in the reincorporation of the territory into Azerbaijan. Nevertheless, Pashinyan’s unpopular decision to refrain from further intervention, as well as the arrival of Armenian refugees, comprising more than 80% of the population of the Nagorno-Karabakh region, threaten to destabilise domestic politics. Future conflict between Armenia and Azerbaijan, even as the territory with its remaining population gets incorporated into the latter, cannot be completely ruled out. The stability of the region is further dependent on geopolitical concerns, with multiple actors, including the EU, Russia, Türkiye, and China, weighing in.

Geopolitical risk

Armenia is located in a strategically important position in the Caucasus region, making it a crucial player in wider geopolitical issues. The country’s foreign policy tilted towards the West due to Russia’s unwillingness to intervene in the 2023 Armenia-Azerbaijan war. Moreover, in 2024 Armenia started its de-integration process from the CSTO, though it has not formally done so. Armenia also receives substantial humanitarian aid from Western countries, including members of the EU. In September 2024, as part of the Democracy Delivers Initiative, the U.S. Department of State announced more than $20 million in aid for Armenia to bolster progress in cyber, border, and energy sectors and assist independent media. Azerbaijan, on the other hand, geopolitically sides with Türkiye, with Russia also exerting a particular amount of influence, given its shared Soviet past. Finally, the region is increasingly turning towards China in connection with its Belt and Road Initiative (BRI), especially Armenia, given its position on the eastern border of Türkiye.

European Union

Like its regional neighbours, Georgia and Azerbaijan, Armenia’s relations with the EU are governed primarily through the joint initiative of the Eastern Partnership (EaP), established in 2009. In addition, the EU signed a Comprehensive and Enhanced Partnership Agreement (CEPA) with Armenia in 2021, strengthening the bloc’s bilateral framework towards the country. Armenian citizens maintain a mostly positive (47%) attitude towards the EU, although a substantial portion of the population (38%) remains neutral on its policies and relations with their country. Nevertheless, in the present conflict-induced crisis, the EU has consistently supported Armenia, with a number of MEPs even calling for a review of the bloc’s relations with Azerbaijan. In September 2024, the EU also started negotiations with Armenia on the visa liberalisation process. At the same time, the EU cannot afford alienating Armenia’s neighbour completely, given the former’s need to diversify its energy sources in light of the sanctions imposed on Russia. The EU is also aware of potential drawbacks for Armenia of its plans to construct the Middle Corridor, an alternative land-based trade route between Europe and China, which would, however, likely bypass Armenia completely, cutting it off from present-day benefits of trade passing through its territory.

Russia

As a historical security guarantor and neutral peacekeeping force in Nagorno-Karabakh, Russian ties to Armenia have been strong, as is still reflected in the latter’s economy. At the same time, relations have been on the decline since 2018, when Armenians elected the government of Pashinyan. Bilateral ties and diplomacy continued to further deteriorate with the 2020 war in Nagorno-Karabakh, when Armenia did not perceive the level of Russian support that was expected, and further at the conflict’s conclusion in October 2023. These expectations were not unfounded, given the country’s membership of the Collective Security Treaty Organization (CSTO) led by Russia, which includes provisions for “immediate necessary help, including military one” by its members. Russia’s invasion of Ukraine in 2022 further exacerbated what Armenians perceived as a worsening security situation in the region. With Russia’s gaze turned towards its western neighbours, Armenia will likely be forced to continue looking elsewhere for stronger allies and security guarantees.

China

China became Armenia’s second largest trading partner (after Russia) following the Covid-19 pandemic, and bilateral ties between the two countries have been growing for the past two decades since Armenia’s independence. China considers Armenia an important partner in both the economic sense, and in terms of its soft-power and cultural diplomacy. China established its first Confucius Institute in the region in Armenia’s capital, Yerevan. The Asian Development Bank also helps finance the North-South Road Corridor project, which envisions improved transport infrastructure between Armenia, Iran, and Georgia. China has also signed a number of economic and technical cooperation agreements with Armenia, most recently in June 2023. Armenia thus attaches great importance to continued strengthening of bilateral ties with China, while also looking towards the EU, and, albeit decreasingly, Russia.

Conclusion and forecast

Armenia’s political and security situation is complex and constantly evolving, even as its economic growth and outlook remain positive. In the coming months and years, it will be crucial for the government to address the consequences of recent crises, especially the fallout from the conclusion of the conflict over Nagorno-Karabakh. Domestically, the political and media landscape appears to show a trend of increasing polarisation, which has the potential to inflame further public discontent and exacerbate existing security and geopolitical crises in the region.

Armenia is also undertaking careful balancing strategies in the geopolitical sphere by pursuing various economic initiatives with the EU and China, notably moving away from its historical security guarantor, Russia. At the same time, a complete reversal of relations is very unlikely; Russia remains one of Armenia’s largest trading partners.

Economically, the country’s growth is projected to slow in 2024, while remaining relatively strong in the region. As the government continues to diversify its business and trade, there is an outlook of greater potential in its market as well, although the Middle Corridor project is also likely to have substantial impact. The improvement of Armenia’s economic and market conditions will thus continue to be heavily dependent on its geopolitical calculations, and the security situation of the region.