Armenian banks record mega profits, but economy suffers

The Armenian banking sector is booming thanks to the influx of Russian capital due to the crisis in Ukraine. But only a paltry amount is entering the Armenian economy.

Armenian commercial banks recorded record profits in 2022, the sector profiting handsomely on the back of the Ukraine crisis, Eurasianet writes. Russian citizens relocated to Armenia since last February, are actively using the services of Armenian banks and receiving remittances from back home. According to Central Bank data, transfers from Russia increased to total $3.5 billion in 2022, up from $865 million in 2021 and accounting for 70 percent of all transfers. The U.S. ranked a distant second as the source of $670 million in transfers.

Banking system riding high 

This cash influx has allowed banks to boost investments outside the country. Between January and September, foreign investments held by the Armenian banking sector jumped from just under $1 billion to $2.58 billion, according to Modex, a financial research consultancy. Meanwhile, the total volume of deposits and other money in the accounts of Armenian bank clients increased by $980 million in the first three quarters of 2022, according to Modex, which calculates that bank net profits were three times higher in 2022 than 2021. Most of this growth is attributed to the large numbers of Russians moving their business and capital to Armenia. According to a representative of the Migration Service, forthcoming data will say some 65,000 Russian citizens moved to Armenia in 2022.

Financial sector's problems

While the banking system and the economy are riding high, and while the government expects 13-14 percent growth for 2022, problems lurk in the shadows for the financial sector. For example, the volume of lending to the Armenian economy (loans issued by Armenian banks to Armenian citizens and enterprises), which in 2022 reached $11.8 billion, increased by only 4.5 percent year-on-year. The director of the ArmInfo economic news portal, Emmanuil Mkrtchyan, cites several reasons for the stagnation in lending:

Increasing interest rates designed to curb inflation. Low business activity in the real sector [goods and services] of the economy, as a result of which the volume of lending to this sector is declining. The banks already made such mega profits last year that they are not at all motivated to come up with or find liquid investment projects in Armenia, which are associated with many risks and costs

Business withhold investment 

The Central Bank rejects the idea that its moves to raise the key refinancing rate from 4.25 to 10.75 percent since the end of 2020 have slowed the pace of lending, arguing that businesses are holding onto their cash for other reasons. "During the year, deposits by legal entities in banks increased by more than 44 percent. Businesses have funds, it's just that entrepreneurs have chosen not to invest them, but to increase their deposits in banks," Central Bank Chairman Martin Galstyan told journalists on January 31. Galstayn did not, however, address the possibility that the high interest rates could be prompting businesses to hold money as deposits rather than direct them to investments.

From the point of view of the Central Bank, two closely linked risks are pushing businesses to withhold investment. The first is uncertainty for the future, as the planning horizon is greatly reduced due to concerns about global recession and instability on Armenia's borders. The second is the understanding that the present situation offers exceptional opportunities for accumulating capital, one that won't last. Businesses therefore are incentivized to create financial buffers instead of investing these funds in risky projects.