Fitch Ratings does not expect sustained military escalation of Armenian-Azerbaijani conflict

Fitch Ratings has affirmed Armenia’s Long-Term (LT) Foreign-Currency (FC) Issuer Default Rating (IDR) at ‘BB-‘ with a Stable Outlook.

Armenia’s ‘BB-‘ rating reflects per-capita income and governance indicators that are in line with peers, stable growth prospects and a robust macroeconomic policy framework.

Set against these strengths are the small size of the economy, large fiscal deficits relative to peers, relatively weak external finances, high financial sector dollarization and geopolitical risks. Armenia and Azerbaijan have reportedly reached an agreement on certain key points for an eventual peace treaty, including border delimitation. The flexibility and willingness from both parties to resolve the outstanding issues and the timing for a potential resolution remain uncertain. Fitch does not expect a sustained military re-escalation of the conflict. A comprehensive peace treaty could potentially unlock trade routes to Turkey and benefit Armenia’s long-term growth potential, experts think.

As noted, Armenia’s relations with Russia appear to be worsening, as Armenia is considering EU membership, which may be incompatible with its membership in the Russian-led Eurasian Economic Union. Prime Minister Nikol Pashinyan has reportedly expressed his desire to leave the Russia-led Collective Security Treaty Organization. In our view, a fundamental breakdown in relations is unlikely, given Armenia’s dependence on Russia for energy and trade (24% of exports and 56% of imports). “We expect Armenian banks to continue to comply with Western sanctions on Russia,” experts note.

They estimate the economy to have grown by 6% in 2024 (vs. 8.3% in 2023; 12.6% in 2022) as the spillovers of the large increase in migration from Russia and Ukraine, as well as the refugee influx from Nagorno-Karabakh, have abated.