From Capital Inflow to Outflow: The Inner Kitchen of Armenia's Economic Miracle

Analysis of International Money Transfers

The year 2022 was unprecedented regarding the growth of transfers from individuals to Armenian banks: they grew by 2.5 times, rising from 2.1 billion dollars to 5.2 billion dollars. In 2022, foreign currency inflows into the banking system grew by 2.5 times, and outflows by 2.1 times. Net inflows grew almost threefold in 2022, from 0.9 billion dollars to 2.9 billion dollars. This growth was primarily driven by bank transfers received from Russia, which quadrupled from 865 million dollars to 3.6 billion dollars. As a result, a significant amount of money was transferred to Armenia, mostly in dollars. This led to an increase in the dollar supply and contributed to the appreciation of the dram recorded in April-June 2022, when the dollar dropped from 480 drams to 405 drams.

Due to such a large influx of capital, Armenia’s commercial banks recorded a net profit of 255.6 billion drams in 2022, which is about 3 times more than the previous year. Ardshinbank recorded the highest profit at 62.2 billion drams. In other words, the banking system registered a profit of 0.58 billion dollars in 2022. Because the income tax return law is in effect in Armenia, the funds that entered the banking system were mainly invested in construction. As we demonstrated in the study 🐅🌆💸 Armenia: Caucasian Tiger or Expensive Dream?, almost half of the 12.6 percent economic growth in 2022 was driven by financial activities, which swelled like a bubble alongside capital inflows and subsequently declined as a result of the slowdown and outflow of capital.

Chart 1.

As seen in the first chart, over the first half of the year, the peak point of capital inflow was recorded in 2023, after which it experienced a decline. In the first half of 2024, capital inflow decreased by 13.7 percent, and from Russia by 23.0 percent.

In terms of 2023, bank transfers registered a 9.7 percent growth compared to the significant 2.5-fold growth of 2022. The 9.7 percent annual growth initially indicates an upward trend; however, if we look at the monthly breakdown (Chart 2), it becomes clear that the peak point of 12-month money transfers was recorded in May 2023 at 6.4 billion dollars, which is 11 percent less than the 5.7 billion dollars of monetary inflow by the end of the year. The funds leaving the banking system increased by 55 percent, reaching 4 billion dollars. Net inflow contracted by 36 percent, from 2.6 billion to 1.6 billion dollars. The reduction in capital inflow and the growth of outflow were recorded up until mid-2024. At present, the situation has stabilized. It is expected that capital inflow in 2024 will amount to about 5.4 billion dollars, which will be roughly 6 percent less than the previous year’s figure.

Chart 2.

As the chart illustrates, capital inflow has predominantly originated from the Russian Federation, with the US in second place. Capital outflow presents a more diversified picture. There is no single specific country where capital flows out of Armenia.

Within capital outflow, a significant growth toward the United Arab Emirates is noticeable. Currently, it occupies the top spot in terms of capital outflow from Armenia with a 17.5 percent share (393 million dollars as of January-July 2024). This is also consistent with the fact that nearly half of Armenia’s exports are currently going to the UAE, primarily consisting of the re-export of gold and diamonds from Russia to the UAE (read more: 💎🎭🔮️ Golden Illusion: The Real Picture of Armenia’s Exports). It can be assumed that revenues from gold re-exports are also leaving for the UAE, resulting in an increase in capital outflow in this direction. Since the re-export of gold is temporary in nature, the financial outflow in this direction may also have a temporary character.

As seen in the third chart, capital flows out to various states, including Switzerland, Monaco, Spain, Singapore, and the United Kingdom.

Chart 3.

In 2023, 69.3 percent (3,946 million dollars) of money transfers made by individuals through Armenia’s banking system were received from the Russian Federation, and 11.6 percent (663 million dollars) from the USA. In 2023, 81.4 percent of the money transfers received from Russia were for non-commercial purposes. Let us also examine bank transfers made specifically from the Russian Federation (Chart 4). As the chart reveals, prior to 2022, the vast majority of transfers were non-commercial remittances, whereas starting in 2022, the predominant share of transfers has taken on a commercial nature.

In fact, before 2022, most of the transfers received from Russia were the result of migrant labor. Since 2022, the situation has changed: a significant portion of transfers now has a commercial and investment nature, meaning they are not generated by the migrant workforce. The peak point of capital inflow from Russia was recorded in March 2023, after which a decline was registered. At present, the situation has stabilized.

Chart 4.

We also estimated the ratio of transfers made by individuals to GDP, which is presented in Chart 5. Since the data shown in the chart was estimated using our methodology, they may not match the official data, which is provided annually and does not include calculations for individual states. This indicator represents the share of migrant labor in GDP. Essentially, the larger it is, the more labor we export. This is not positive from the standpoint of overall economic development, because we are “exporting” the workforce instead of creating jobs. According to official data, this indicator reached its highest point in the last 15 years in 2013 at 19.7 percent. Driven mainly by the depreciation of the Russian ruble and the strengthening of the dram over recent years, this indicator has significantly decreased, which is positive from the perspective of labor outflow. In the first half of 2024, according to our estimation, the transfers/GDP ratio is about 4 percent, while the ratio of transfers from Russia to GDP is 2 percent.

Chart 5.

Many of the data points we have studied contain signs of a possible economic decline. One such indicator is the volume of monetary transfers from other countries made by individuals through the banking system. The continuation of capital outflow that began in mid-2023 poses a certain risk in terms of securing the net profit and health of the banking system. This, along with gold re-exports, is a challenge for our economy, and we must not allow the substantial economic growth driven mostly by capital inflows from Russia over the past two years to cloud the real picture. It is essential to realistically evaluate our economic capabilities.

* It should be noted that there is some terminological confusion between the concepts of “transfers” and “bank transfers”. Bank transfers encompass all types of transfers, including for commercial purposes. “Transfers” (often termed “remittances” in English) are strictly non-commercial transfers made by individuals. The confusion arises because the English term “transfers” refers to all types of commercial and non-commercial transfers. In the charts, the English term “transfers” represents all types of commercial and non-commercial monetary transfers. All data in this analysis are sourced from official channels, specifically data from the Central Bank. The calculations and forecasting code are fully available on GitHub and can be verified by visiting our GitHub page, where the data, calculation code, and charts are provided.