TOPIC OF THE WEEK: Russian diamonds lose their shine for Armenia

CAUCASUS / CENTRAL ASIA - Report 12 Jul 2024 by Ivan Tchakarov

We argued recently that the heady GDP growth that Armenia has been posting since last Nov can be almost exclusively attributed to the trade in Russian diamonds. In particular, we tracked it down to the 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 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 into a full ban by Sep.

Indeed, over Nov-Apr, GDP growth has averaged about 12.3 percent YoY. At the same time, we conjectured that, given that the phasing-in of restrictions on the import of Russian diamonds from third countries starting from Mar 1st, we expected to see some moderation of this "crazy" trade in the post Mar-Apr trade data. The channel that the market has found of shipping Russian diamonds to the Europe using Armenia, Hong Kong and UAE as intermediaries should become thinner with the full closure of the loop by Sep 1st.

This is indeed what has happened, as May trade activity in diamonds between Russia, Armenia and Asia has collapsed. GDP growth also moderated to "only" 5.2 percent YoY in May. In any case, the Jan-to-Apr GDP outperformance will have an influence on full-year economic growth, which we currently assess at 7.5 percent. This is still higher than what the IFIs currently forecast.

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