Caucasus

Thawing relations with Azerbaijan and Turkey are creating opportunities for Armenia to expand its economy and emerge as a regional investment hub.

The South Caucasus has hardly seemed an ideal place for investment in recent years. Azerbaijan’s successful military campaign to gain control over the ethnic Armenian-controlled region of Nagorno-Karabakh within its borders in September 2023, forced about 110,000 residents to flee to Armenia. Georgia, once a poster child for reform with the area’s most diversified economy, has turned away from the west; its application to join the EU is suspended and tensions have run high since last fall’s disputed elections.

Unexpectedly, it is Armenia—landlocked, with 3 million people and able to export only through Georgia since its borders with Azerbaijan and Turkey are currently closed—that has emerged as the region’s bright spot.

Between 2022 and 2024, GDP grew by an annual 9%, and while the pace has slowed, growth remains well above most similar economies, with 5% expected this year and 4% next, according to the European Bank for Reconstruction and Development (EBRD). Inflation is running at around 3.6%, kept in check by a cautious monetary policy, and FDI is on a rising trend, with expatriate Armenians leading the way.

“Armenia has benefitted from a sizeable inflow of high-skilled immigrants, mainly from Russia,” notes Dmitri Dolgin, chief economist covering Russia and Commonwealth of Independent States (CIS) countries at ING Bank, “which has led to higher remittances, stronger activity in financial and IT sectors, and overall stronger domestic demand for consumer goods, services, and real estate.” Finance, IT, construction, and consumer demand-driven sectors have been the main growth drivers, he says.

The capital of Yerevan has been transformed into a regional magnet for startups and digital professionals, fuelling demand across sectors and lifting productivity, says George Akhalkatsi, head of the EBRD’s resident office there.

“The economic surge has been shaped by a unique convergence of external shocks, internal resilience, strategic adaptation, and a remarkable upswing in growth triggered by 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 tech and services.” 

An unexpected thaw in relations with Muslim-majority Azerbaijan could have major economic implications for Christian-majority Armenia, now that their three-decade conflict over Nagorno-Karabakh has been resolved.

Tensions ease

Thawing relations between Azerbaijan’s President Ilham Aliyev and Armenian Prime Minister Nikol Pashinian, beginning with the latter’s recognition of the reality of Azerbaijan’s decisive military victory, led to a peace agreement being concluded earlier this year. On August 8 the two signed the resulting treaty, overseen by President Donald Trump at the White House.

The accord lays the basis for development of the Zangezur transport corridor connecting Azerbaijan to its Nakhchivan exclave, sandwiched between Armenia and Iran, to be managed and developed by US companies working in conjunction with Yerevan. Dubbed TRIPP (Trump Route for Peace and Prosperity), the transit route aims to encourage a wider rapprochement between the two countries and throw open opportunities across the region. One analyst suggested that Armenia could “leverage the corridor to integrate into wider trade networks linking the Persian Gulf, Black Sea and Eurasian corridors, [helping)] diversify its economy, attract FDI, and normalize relations with its neighbors.”

The potential for an upset remains considerable, not least due to Armenia’s concerns about its sovereignty, although the involvement of US companies could partially assuage Yerevan’s fears. Sensitivities run high: when Aliyev used the term Zangezur—which has territorial implications for Armenia—in a press conference, Pashinian’s spokesperson said the “narrative presented cannot in any way pertain to the territory of the Republic of Armenia. Only the TRIPP and Crossroads of Peace projects are being implemented, as clearly stipulated in international documents.”

Such sensitivities matter, with parliamentary elections due next year in Armenia. Also of concern is Russian disquiet about its ally getting too close to Washington; Moscow has a military base in Armenia and supplies most of its energy while the country remains an active member of the Moscow-led Eurasian Economic Union (EAEU).

Observers nevertheless are excited about the possibilities.

“Baku has welcomed US involvement, particularly amid increased tensions with Moscow,” says Tinatin Japaridze, analyst at Eurasia Group. “Meanwhile Yerevan, which had previously expressed reservations about foreign oversight at 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 primary rating analyst at Fitch Ratings, which rates Armenia BB- with a stable outlook, points to warming relations between Yerevan and Turkey, an ally of Azerbaijan, as evidence of a wider change within the region.

“The peace framework sets the stage not just for lasting settlement but also improved relations with Turkey,” he argues. “Pashinian and Turkish President Recep Erdoğan held a summit in Ankara in June, and the Turkish market is a huge opportunity for Armenia. Turks are also keen to invest there.”

Sectors that could benefit from Turkish investment include IT, construction, and finance, and small manufacturing and retail are other likely growth areas. Tourism may also benefit, with Turkish Airlines due to start direct flights between the two countries.

ING’s Dolgin lays out a wider menu of possibilities.

“If the peace process holds,” he suggests, “then logistics, warehousing, trucking/rail services, border services, and trade finance could gain, with positive spillovers to SMEs along east-west supply chains. Reduced uncertainty could also help FDI in light manufacturing and services that leverage Armenia’s skilled labor and diaspora links.” A reduced risk of hostilities could lead some Armenians living abroad to repatriate, along with their capital.

The EBRD notes that shipping via Georgia—Armenia’s main transit route at present—is expensive and slow, and that access to Azeri and Turkish ports through open borders with both countries would be beneficial.

“Armenia’s normalization of relationships with its neighbours is key, and the unblocking of regional trade and energy routes should support this process,” says Akhalkatsi. “Armenia has a great potential when it comes to renewable energy, and we could see significant FDI in solar power generation once there is capacity in the electricity grid to export this excess electricity.”

He points to the development of an AI supercomputing hub in Armenia, a mega project announced in July and valued at over $500 million, which could presage a significant increase in FDI while preparing the ground for further tech-sector development in the country and the wider region.  

The EBRD is one of the largest investors in Armenia, with nearly €2.5 billion (about $2.7 billion) committed across 231 projects, 84% of which support the private sector. Earlier this year, it launched a new strategy for the country focused on sustainable infrastructure and the green transition and boosting private-sector competitiveness. The bank is also deploying its flagship Capital Markets Support Programme, supported by the EU, in Armenia.

“The aim is to strengthen Armenia’s local capital markets by supporting corporate issuers of bonds and equity,” says Akhalkatsi. “The program addresses key challenges such as limited expertise in capital market financing and high issuance costs.” 

Challenges Ahead

Aside from maximizing opportunities arising from rapprochement with its neighbors, the government faces other, longer term challenges. Among them is unemployment of around 14%, a situation compounded by a skills mismatch due to years of underinvestment in training and the influx of ethnic Armenians from Nagorno-Karabakh. Integration of these refugees remains a major financial and political challenge.  

Energy dependence on Russia is another concern, although plans to replace the aging Metsamor nuclear facility with a new nuclear plant, along with ongoing renewable projects, aim to bolster long-term energy security. 

Fitch sees public finances as the main consideration in assessing such plans. “Public debt could hit 60% of GDP by 2030, so any development that slows or reverses this is positive,” says Ramakrishnan. If current hopes are realized, concerns like unemployment, underinvestment, and energy security will recede, he predicts. Lower defense spending would free up monies from the budget while improved relations with Azerbaijan and Turkey bolster trade and investment. Improved public-sector finances would also enable a greater focus on improving the business environment and governance, bolstering FDI across the economy over the long term.