Armenia has an emerging free-market economy. It is the 116th-largest economy in the world, with an estimated gross domestic product (GDP) of almost $32 billion by nominal value and almost $83 billion in terms of purchasing power parity (PPP). The service sector is the largest in Armenia's economy, contributing 61.4% of the country's total GDP, followed by the industrial sector at 23.3%, and the agricultural sector at 7.9%. A smaller, but increasingly important piece of the economy is the IT sector, which makes up 6.25% of national GDP and was growing at an average yearly rate of 20% as of 2022.
As a former member of the Soviet Union, Armenia's economy was subjected to rigorous central planning, with the USSR driving large-scale industrialization efforts throughout the entire union. This greatly sped up the transition of Armenia's economy from primarily agrarian to a more modern, industrial economy. Some of the most prominent manufacturing industries during this time were chemicals, electronics, machinery, processed food, synthetic rubber and textiles. The Soviet period also saw a large expansion of Armenia's mining industry, exploiting domestic deposits of copper, zinc, gold, lead, and bauxite for export to other parts of the Soviet Union.
After gaining independence in 1991, the economy shifted heavily away from the state-run model and saw rapid privatization throughout the economy. The economic shock caused by the breakup of the Soviet Union, along with the conflict with Azerbaijan over the ethnic Armenian-dominated region of Nagorno-Karabakh, contributed to a severe economic decline in the early 1990s. Armenia recovered from this collapse in the decades that followed with a period of rapid economic growth; the size of the economy tripled by the end of the decade from the post-war low of 1994, and it grew an additional 500% in the 2000s. In 2015, Armenia joined the Eurasian Economic Union, which has expanded its international trade opportunities and made the economy more competitive. However, despite these tailwinds, geopolitical concerns—namely hostile relations with Azerbaijan and heavy reliance on Russia—continue to pose significant risks to Armenia's future economic prosperity.
Owing to a relative lack of domestic natural resources, Armenia needs to import large amounts of raw materials and energy resources to sustain its economy. This contributes to a large trade deficit, although this is somewhat offset by international aid, remittances from Armenians abroad, and foreign direct investment. The vast majority of energy is produced with imported fuel from Russia, including natural gas and nuclear fuel for Armenia's Metsamor nuclear power plant.
History At the beginning of the 20th century, the territory of present-day Armenia was an agricultural region with some copper mining and cognac production. From 1915 through 1921, Armenians in the region suffered from a genocide carried out by the Ottoman Empire, during which about 1.5 million Armenians were killed. This caused total property and financial collapse when all of their assets and belongings were forcibly taken away by the Turks, the consequences of which have still left their mark over a century later. Prior to the genocide, Armenians had been one of the most affluent ethnic groups within the Ottoman Empire, largely due to their involvement in highly productive sectors such as banking, architecture, and trade. However, after the genocide and the subsequent confiscation and pillaging of Armenian property, the people and the country were left in ruins. Contending with revolution, the influx of refugees from Western Armenia, disease, and starvation, Armenians went from relative wealth and prosperity to suffering from poverty and famine.
Armenian Soviet Socialist Republic
The first Soviet government stringently regulated economic activity—nationalizing economic enterprises, requisitioning grain from peasants, and suppressing almost all private market activity.Yurevich, Davydov Aleksandr (2020). Военный коммунизм: народ и власть в революционной России. Конец 1917 г. – начало 1921 г. [War Communism: The People and Power in Revolutionary Russia (Late 1917 – Early 1921)] (in Russian). Евразия. pp. 117–118.. This period of intense state control ended in 1921, with the implementation of Soviet leader Vladimir Lenin's New Economic Policy (NEP). This policy continued state control of larger enterprises and banks, but allowed for private ownership of small and medium-sized businesses. In Armenia, the NEP brought partial recovery from the economic disaster brought by the aftermath of the genocide. By 1926, agricultural production in Armenia had reached nearly three-quarters of its prewar level.
By the end of the 1920s, Stalin's regime had revoked the NEP and re-established the centralised state monopoly on all economic activity. Once this occurred, the main goal of the Soviet economic policy in Armenia was to turn a predominantly agrarian and rural republic into an industrial and urban one. Stalin's first five year plan focused heavily on getting rid of private owned farms and instead replace them with state owned farms, hundreds of collective farms called Kolkhozes were constructed during the first five years. Among other restrictions, peasants now were forced to sell nearly all of their output to state procurement agencies rather than at the open market. The first five year plan was often described as rapid industrialization, Armenia's main city Yerevan, was quickly transforming from a small city to an industrial giant. This was achieved by supplying electricity from nearby dam of Sevan-Hrazdan Cascade and establishing factories on the outskirts of the city.
From the 1930s through the 1960s, an industrial infrastructure has been constructed. Besides hydroelectric plants and canals, roads were built and gas pipelines were laid to bring fuel and food from Azerbaijan and Russia.
The state socialist command economy, in which market forces were suppressed and all orders for production and distribution came from the state authorities, survived in all its essential features until the fall of the Soviet regime in 1991. In the early stages of the communist economic revolution, Armenia underwent a fundamental transformation into a "proletarian" society. Between 1929 and 1939, the percentage of Armenia's work force categorised as industrial workers grew from 13% to 31%. By 1935 industry supplied 62% of Armenia's economic production. Highly integrated and sheltered within artificial barter economy of the Soviet system from the 1930s until the end of the communist era, the Armenian economy showed few signs of self-sufficiency at any time during that period. In 1988, Armenia produced only 0.9% of the net material product of the Soviet Union (1.2% of industry, 0.7% of agriculture). The republic retained 1.4% of total state budget revenue, delivered 63.7% of its NMP to other republics, and exported only 1.4% of what it produced to markets outside the Soviet Union.
Agriculture accounted for only 20% of net material product and 10% of employment before the breakup of the Soviet Union in 1991.
Armenia's industry was especially dependent on the Soviet military-industrial complex. About 40% of all enterprises in the republic were devoted to defense, and some factories lost 60% to 80% of their business in the last years of the Soviet Union, when massive cuts were made in the national defense expenditures. As the republic's economy faced the prospects of competing in world markets in the mid-1990s, the great liabilities of Armenia's industry were its outdated equipment and infrastructure and the pollution emitted by many of the country's heavy industrial plants.
The economic downturn that began in 1989 worsened dramatically in 1992. According to statistics, the GDP declined by 37.5 percent in 1991 compared to 1990, and all sectors contributing to the GDP decreased in production. The collapse of industry in favor of agriculture, whose products were mostly imported throughout the Soviet period, changed the structure of sectoral contributions to GDP.
In 1991, Armenia's last year as a Soviet republic, national income fell 12% from the previous year, while per capita gross national product was 4,920 rubles, only 68% of the Soviet average. In large part due to the earthquake of 1988, the Azerbaijani blockade that began in 1989 and the collapse of the international trading system of the Soviet Union, the Armenian economy of the early 1990s remained far below its 1980 production levels. In the first years of independence (1992–93), inflation was extremely high, productivity and national income dropped dramatically, and the national budget ran large deficits.
A period of chronic shortages, was the first stage of price deregulation, which allowed goods to stay in Armenia as opposed to being exported for better prices; the inflation rates were 10 percent in 1990, 100 percent in 1991, and 642.5 percent during the first four months of 1992, compared with the first four months of 1991. Thus, there were two opposing dynamics: price increases in response to shortages and falling incomes due to the recession and unemployment.
Post-communist economic reforms Armenia introduced elements of the free market and privatisation into their economic system in the late 1980s, when Mikhail Gorbachev began advocating economic reform. To supply the country's basic needs, the first decision was land reform and the privatization of land. This allowed for the emergence of small-parcel agriculture supplying markets and supporting self-sustenance during the period of shortages. Cooperatives were set up in the service sector, particularly in restaurants, although substantial resistance came from the Communist Party of Armenia (CPA) and other groups that had enjoyed privileged position in the old economy. In the late 1980s, much of Armenia's economy already was opening either semi-officially or illegally, with widespread corruption and bribery. The so-called mafia, made up of interconnected groups of powerful officials and their relatives and friends, sabotaged the efforts of reformers to create a lawful market system. When the December 1988 earthquake brought millions of dollars of foreign aid to the devastated regions of Armenia, much of the money went to corrupt and criminal elements.
Beginning in 1991, the democratically elected government pushed vigorously for privatisation and market relations, although its efforts were frustrated by the old ways of doing business in Armenia, the Azerbaijani blockade, and the costs of the First Nagorno-Karabakh War. In 1992, the Law on the Programme of Privatisation and Decentralisation of Incompletely Constructed Facilities established a state privatisation committee, with members from all political parties. In the middle of 1993, the committee announced a two-year privatisation programme, whose first stage would be privatisation of 30% of state enterprises, mostly services and light industries. The remaining 70%, including many bankrupt, nonfunctional enterprises, were to be privatised in a later stage with a minimum of government restriction, to encourage private initiative. For all enterprises, the workers would receive 20% of their firm's property free of charge; 30% would be distributed to all citizens by means of vouchers; and the remaining 50% was to be distributed by the government, with preference given to members of the labour organisations. A major problem of this system, however, was the lack of supporting legislation covering foreign investment protection, bankruptcy, monopoly policy, and consumer protection.