The thawing of relations with Azerbaijan and Turkey creates opportunities for Armenia to expand its economy and emerge as a regional investment hub.
The South Caucasus region has not seemed an ideal place for investment in recent years. Azerbaijan’s successful military campaign to control the Armenian-controlled Nagorno-Karabakh region within its borders in September 2023 forced about 110,000 residents to flee to Armenia. As for Georgia, which was once a model of reform thanks to its most diversified economy in the region, it has turned away from the West; Its application to join the European Union has been suspended, and tensions have risen since disputed elections last fall.
Unexpectedly, it is Armenia – a landlocked country with a population of three million that can only export through Georgia because its borders with Azerbaijan and Turkey are currently closed – that has emerged as the bright spot in the region.
Between 2022 and 2024, GDP grew by 9% annually, and although the pace has slowed, growth is still much higher than in most similar economies, with growth expected to be 5% this year and 4% next year, according to the European Bank for Reconstruction and Development (EBRD). Inflation is around 3.6%, controlled by cautious monetary policy, and foreign direct investment is on an upward trend, with the Armenian diaspora leading the way.
“Armenia has benefited from a large influx of highly-skilled migrants, especially from Russia, which has led to higher remittances, stronger activity in the financial and IT sectors, and generally increased domestic demand for consumer goods, services and real estate,” notes Dmitry Dolgin, chief economist covering Russia and the CIS countries at ING Bank. He says financials, IT, construction and consumer demand-driven sectors were the main drivers of growth.
The capital, Yerevan, has turned into a regional magnet for startups and digital professionals, driving demand across sectors and raising productivity, says George Akhalkatsi, head of the European Bank for Reconstruction and Development’s resident office there.
“The economic boom was shaped by a unique convergence of external shocks, internal resilience, strategic adaptation, and a marked uptick in growth resulting from a wave of migration,” he says, echoing Dolgin’s observation. “This influx brought not only people but also capital, skills and entrepreneurial energy, especially in technology and services.”
An unexpected thaw in relations with Muslim-majority Azerbaijan could have major economic consequences for Christian-majority Armenia, now that the three-decade conflict over Nagorno-Karabakh has been resolved.
Reducing tensions
A thaw in relations between Azerbaijani President Ilham Aliyev and Armenian Prime Minister Nikol Pashinyan, starting with the latter’s acknowledgment of the reality of Azerbaijan’s decisive military victory, led to the conclusion of a peace agreement earlier this year. On August 8, the two sides signed the resulting treaty, which President Donald Trump oversaw at the White House.
The agreement lays the foundation for the development of the Zangezur transport corridor linking Azerbaijan to the Nakhchivan enclave located between Armenia and Iran, which will be managed and developed by American companies working in cooperation with Yerevan. Dubbed the “Trump Path to Peace and Prosperity,” the transit route aims to encourage broader rapprochement between the two countries and create opportunities throughout the region. One analyst suggested that Armenia could “leverage the corridor to integrate into broader trade networks linking the Persian Gulf, Black Sea, and Eurasian corridors, (help) diversify its economy, attract foreign direct investment, and normalize relations with its neighbours.”
The potential for an upset remains high, not least because of Armenia’s concerns about its sovereignty, although the participation of US companies may partly allay Yerevan’s concerns. There are high sensitivities: when Aliyev used the term Zangezur – which has territorial implications for Armenia – at a press conference, Pashinyan’s spokesman said that “the narrative presented can in no way relate to the territory of the Republic of Armenia. The TRIPS and Crossroads of Peace projects are being implemented only, as clearly stipulated in international documents.”
Such sensitivities are of great importance, as parliamentary elections are scheduled to be held next year in Armenia. Also troubling is Russian concern about its ally getting too close to Washington. Moscow has a military base in Armenia and supplies it with most of its energy needs while the country remains an active member of the Moscow-led Eurasian Economic Union (EAEU).
However, observers are excited about the possibilities.
“Baku welcomed US participation, especially amid rising tensions with Moscow,” says Tinatin Japaridze, an analyst at Eurasia Group. “Meanwhile, Yerevan, which had previously expressed reservations about foreign oversight of its checkpoints, has reportedly received assurances that its sovereignty and territorial integrity will be fully respected. Discussions are now underway to select a private operator for the corridor.”
Arvind Ramakrishnan, director and principal ratings analyst at Fitch Ratings, which rates Armenia BB- with a stable outlook, points to improved relations between Yerevan and Turkey, an ally of Azerbaijan, as evidence of broader change within the region.
“The peace framework paves the way not only for a permanent settlement but also for improved relations with Türkiye,” he says. “Pashin and Turkish President Recep Erdogan held a summit in Ankara in June, and the Turkish market is a big opportunity for Armenia. The Turks are also keen to invest there.”
Sectors that could benefit from Turkish investment include information technology, construction, finance, and small manufacturing and retail are other potential areas of growth. Tourism may also benefit, with Turkish Airlines set to begin direct flights between the two countries.
ING’s Dolgin lays out a broader list of possibilities.
“If the peace process continues, logistics, warehousing, trucking/rail services, border services, and trade finance could gain, with positive spillover effects on SMEs along east-west supply chains,” he notes. “Reduced uncertainty could also help FDI in light industries and services that tap into Armenia’s skilled labor and diaspora links.” The reduced risk of hostilities may lead some Armenians living abroad to return to their homeland, with their capital in place.
The EBRD notes that shipping through Georgia – Armenia’s main transit route at present – is expensive and slow, and that access to Azerbaijani and Turkish ports via open borders with both countries would be beneficial.
“Armenia’s normalization of relations with its neighbors is key, and the opening of regional trade and energy routes should support this process,” Akhalkatsi says. “Armenia has great potential when it comes to renewable energy, and we could see significant foreign direct investment in solar generation once the electricity grid has capacity to export this surplus electricity.”
He points to the development of an AI supercomputing center in Armenia, a massive project announced in July and valued at more than $500 million, which could herald a significant increase in foreign direct investment while paving the way for further development of the technology sector in the country and the region as a whole.
The European Bank for Reconstruction and Development is one of the largest investors in Armenia, having committed around €2.5 billion (about $2.7 billion) across 231 projects, 84% of which support the private sector. Earlier this year, it launched a new strategy for the country focusing on sustainable infrastructure, green transformation and enhancing private sector competitiveness. The Bank is also deploying its flagship capital markets support programme, supported by the European Union, in Armenia.
“The goal is to strengthen local capital markets in Armenia by supporting companies issuing bonds and stocks,” says Akhalkatsi. “The program addresses key challenges such as limited capital market financing experience and high issuance costs.”
Challenges ahead
Aside from maximizing opportunities arising from rapprochement with its neighbours, the government faces other long-term challenges. Among them is unemployment of about 14%, a situation exacerbated by a skills mismatch caused by years of underinvestment in training and the influx of Armenians from Nagorno-Karabakh. Integrating these refugees remains a major financial and political challenge.
Energy dependence on Russia is another concern, although plans to replace the old Metsamor nuclear facility with a new nuclear plant, along with ongoing renewable energy projects, are intended to enhance long-term energy security.
Fitch believes that public finances are the main consideration in evaluating such plans. “Public debt could reach 60% of GDP by 2030, so any development that slows or reverses this situation is positive,” says Ramakrishnan. He expects that if current hopes are fulfilled, concerns such as unemployment, lack of investment and energy security will recede. Reduced defense spending would free money from the budget while improving relations with Azerbaijan and Turkey would boost trade and investment. Improving the financial resources of the public sector would enable greater focus on improving the business and governance environment, and enhancing foreign direct investment in various sectors of the economy in the long term.
