TOPIC OF THE WEEK: Are the clouds darkening over Armenia?
I argued in mid-2024 that Armenia's Eurobond outperformance (in particular relative to its higher-rated neighbor Georgia) was explicitly driven by perceptions of sharply reduced political and geopolitical risk premia. Internal challenges to PM Pashinyan failed to materialize over the course of 2024, and the PM looked safe enough to sail through to the 2026 parliamentary elections. Armenia's conscientious decision to lower its geopolitical guard vis-a-vis Azerbaijan was also delivering benefits in terms of risk perception as the prospects of a peace deal between Yerevan and Baku grew ever greater. Ultimately, I found that political/geopolitical boons were trumping more standard macro challenges.
Two recent events from early 2025 are, however, forcing me to re-evaluate that benign view. First, the President of Azerbaijan delivered a very war-like and extremely aggressive TV interview to local channels, arguing that Armenia is a fascist state. While Ilham Aliyev has not been foreign to such bellicose statements vis-a-vis Armenia in the past, the tone of the message appeared more hard-hitting than usual, especially in the context of the unfolding geopolitical events in the Middle East and the US. Second, Armenia's decisions to move ahead with providing the requisite requirements for eventually joining the EU has elicited an angry reaction from Moscow, which has argued that membership in the EU and EEU are mutually incompatible.
Given the outsize economic dependence of Armenia on Russia, we seem to be gradually moving to a situation in which higher geopolitical risks may need to be considered alongside a potentially worsening economic backdrop. While I in any case anticipated a post-2026 environment with a much wider distribution of risk scenarios (given the significant probability that political uncertainty joins macroeconomic vulnerability after the 2026 parliamentary elections), 2025 may mark an earlier beginning of these challenges.
While I am not arguing in favor of an imminent Azeri attack, I think that markets would be well-advised to take notice and, at a minimum, assign a fatter risk premium to Armenian assets at this juncture.
Now read on...
Register to sample a report