Most of the republics of the former Soviet Union were faced with a major economic downturn after the collapse of the Soviet Union. In Armenia, that process started a few years earlier. This was due to an economic blockade that was raised by the Azerbaijans in 1989 as a result of the Nagorno-Karabakh war. This also made the importation of gas and oil impossible. The energy shortage that arose was disastrous for Armenia, partly because a devastating earthquake had taken place in 1988. In that earthquake, both the most important hydroelectric power station and the only nuclear plant in Armenia, in Medzamor, were hit.
Armenia produced only 1% of its own energy needs in 1990 and had to import the rest, especially from Russia (50%). Today, Armenia still imports a lot of oil and gas: more than 16 million barrels of oil, and almost 2 billion cubic meters of gas per year. However, the refurbished nuclear power plant in Medzamor provides so much energy that Armenia is now even a net exporter of energy. Also the dependence on Russia is decreasing, because a pipeline from Iran to Syria has just started, so that not all oil has to come from Russia anymore.
The disintegration of the Soviet Union had disastrous economic consequences for the former Soviet republics. During the rule of the Soviet Union, Armenia had developed a large industrial sector. It fell away when the Soviet Union collapsed and Armenia lost many trading partners. The main source of income for most Armenians was agriculture. These were not, as in the time of the Soviet Union, large companies, but small farmhouses, often led by entire families.
With the disappearance of the communist infrastructure of extensive social services and a lack of financial means, social security also disappeared. A large part of Armenia’s budget went to help the victims of the earthquake in 1988. The enormous number of homeless people is a striking consequence of this disaster (a quarter of the population in 1991). Due to the economic crisis and the breakdown of trade relations with other republics, many factories had to close, people were fired and the number of unemployed people rose to more than 20%. It was estimated that in 1993 90% of the population lived below the poverty line. In 2002 this was estimated at 50%. In 2011, this percentage was 26.5.
Although it initially experienced one of the most serious economic setbacks, Armenia was the first country in the Caucasus where the economy improved remarkably in the second half of the 1990s.
This was, firstly, the result of the Armenian diaspora. Because of strong Armenian interest groups in the West, especially in the United States and Canada, Armenia received the most financial assistance and loans from the IMF and the World Bank of all countries in the Caucasus. There was and is also significant investment in Armenian companies of Armenians living in the West.
Secondly, Armenia, where many Russian troops are stationed, was and is a political and military protégé of Russia. This forms the basis for economic cooperation treaties with and financial aid from Russia (in 1994, Armenia received 25% of Russian aid to all former Soviet republics). The result of these developments is a growth in GNP and an increase in industrial production. Inflation came under control and there was a stabilization of consumer prices.
Armenia, however, was hit hard by the growing global unrest in the economic field. For example, the economy contracted by no less than 15% in 2009. In 2010, the country was second on the Forbes ‘worst economies’ ranking in the world, partly due to growing inflation and low GDP per capita. Yet the economy of Armenia has been catching up again recently. For example, the IMF expects a growth of 4 percent of GNP in 2012.