TOPIC OF THE WEEK: Diamond-turbocharged growth in Armenia

CAUCASUS / CENTRAL ASIA - Report 19 Apr 2024 by Ivan Tchakarov

Armenia was the fourth fastest-growing economy in the world last year (8.7 percent in 2023), but the heady pace of expansion had been slowing down to around 5-6 percent YoY by Sep/Oct last year when a sudden surge of economic activity resulted in much accelerated growth. Indeed, over Nov-Feb GDP growth has averaged about 12 percent YoY, with the Feb number alone impressing even more at 16.3 percent YoY. What is behind this performance?

We track it down to an exponential increase in diamond trade over the axis of Russia-Armenia-UAE/Hong Kong, which, in turn, is related to EU/G7 sanctions on the import of Russian diamonds. The sanctions were formally voted upon in Dec, but news about them first broke in Nov, which led to the creation of this meandering route of delivering Russian diamonds to other countries. While the direct ban on imports came into force from Jan 1st, the indirect one via third countries became operational from Mar 1st, although it will be phased in to a full ban over the next six months.

We present a detailed picture of diamond trading between Russia, Armenia, UAE/Hong Kong and calculate that this type of economic activity contributed 2.8 percent to 2023 GDP growth and a hefty 7 percent to the 13.5 percent GDP growth posted in the first two months of 2024. While we anticipate that the Mar trade data (to be released in May) will start showing an appreciable decline in this trade, 2024 GDP growth will clearly be facing upside risks to our current 6.0 percent forecast.

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