Warning: This is a rush transcript generated automatically and may contain errors.
Asbed Bedrossian: Hello, everyone. We’ve always had an interest in how the economy is doing and how it is managed. And at the same time, we’re interested in the annual state budget. So for this Conversations on Groong, we have with us Dr.
Vache Gabrielyan, who is the Dean of the Manoogian Simone College of Business and Economics at the AUA, the American University of Armenia, and who has served as Vice Governor of the Central Bank of Armenia, Minister of Finance, Chief Advisor to the Prime Minister, as well as Deputy Prime Minister of Armenia and the Minister of International Economic Integration and Reforms. Dr. Gabrielyan, welcome back to the Groong podcast. Thanks for making time for us out of your busy schedule.
Vache Gabrielyan : Thank you for hosting me, Asbed. And I would like to do one thing from the beginning on, that I am here in my personal capacity, not in my official capacity of the university dean.
Asbed Bedrossian: Understood.
Vache Gabrielyan: This is opinions of mine and not of the university.
Hovik Manucharyan: Thank you for that and welcome back, Dr. Gabrielyan. It has been too long, so I’m hoping that we’ll have a very fruitful discussion and also hope that you come back to us in the future more frequently.
Hovik Manucharyan: Let’s begin with the economic performance of Armenia so far in 2026. On one side we see rosy headlines in government press that you know economy is doing good but on the other side critics are saying that the economy is full of structural imbalance and inefficient government execution that’s what we want to drill down upon, and you know some of the things that are known to everyone for instance is that construction in Armenia is booming suffered significant contraction, I would say due to ineffective state support programs arising also out of the well-known geopolitical issues with Russia.
But economic activity seems to be doing okay at least when you look at the macro numbers being heavily fueled by consumer credit expansion and rising wage bills even though critics would say that real gains in industrial productivity are lacking. Now mid-year the government showed a surplus but again not through efficiency I think or anything like that, but rather by failing to execute the planned capital and infrastructure projects. And by mid-year, capital spending was dropped by 50%, I believe. And then also we have the re-export issue from the war in Ukraine .
You know, it was artificial to begin with, and it seems to be in terms of the windfalls from that seem to be dissipating. You know, there are a lot of conflicting stories and it depends on what you look at this from. So what is your assessment of the Armenian economy in 2026 and the government’s performance running it?
Vache Gabrielyan: Well, you have touched upon all the topics that are worth pinpointing.
Hovik Manucharyan: Yeah, this is a whole podcast worth of questions, yes.
Vache Gabrielyan: And first of all, the economic growth is strong. It is about 7% up to now, but it is narrowing down. And it’s about 7% in January, August, and about 5% in August alone. Leading sectors are construction and services.
Trade is flat and we have a decline in agriculture. Now, the likely cause for agricultural decline is the bans that we have in our traditional markets in Russia. Those are going to impact the numbers, but generally the money is flowing in. There is financial interest and the service sector, IT sector, trade sector, construction are doing quite good.
This is a pattern that was set about five years ago, four years ago by the war, Russia-Ukraine war, when as a remaining pipelines that still connect the Russian economy to the rest of the world. And when I mean Russian economy, I don’t mean counterfeit things. For example, we have a significant growth in transportation and tourism. Why?
Because Yerevan is one of the few points that Russians can fly in and out to Russia. European airspace is closed. There is Istanbul, there is Yerevan, some of Georgia, some of Serbia, that Russians are traveling a lot. And this is flows.
There are banking services, et cetera, et cetera. Re-export and re-import operations. So this has given a tendency to an economy that has been growing by inflows into non-tradable sectors. Now, there is always a debate.
If you are making buildings and these buildings are bought by foreigners, Is it a non-tradable or is it export? I would still consider it’s non-tradable because it is not creating economic activity that is oriented competing in the foreign markets. It is not something that is capacity driven. In terms of competing, technologically driven, et cetera, et cetera.
Not that construction is being used in the same technology. Currently, they are building faster with more new materials, et cetera. So I’m not going to argue that there is no development in this field. But essentially, it’s non-tradable sectors, and we are not driving on exports.
As far as exports are concerned, it didn’t increase our exports to overseas. It increased our exports to Eurasian Economic Union countries and Russia. The reasons for that are, first of all, the re-export abilities. Second, easier competition within the Russian market.
And there is also impediments to it, which is the significant appreciation of the Armenian dram. Since 2022, the dram has appreciated significantly about 40% or so, which is having impact on the cost of Armenian goods produced in Armenia Based on these costs, we are not having good time in advancing our markets abroad. We are getting foothold in the traditional markets, which is basically, again, Eurasian Economic Union countries and Russia. I wouldn’t say that nothing else is happening, because there are some other markets that we are getting into, European markets, there is some development, etc.
But the overall trend is like that.
Hovik Manucharyan: Mm-hmm.
Vache Gabrielyan: So if you are looking from long-term productivity perspectives and structural balances, there is a need to worry. If you are looking in the near term whether the economy is going to collapse or so, it is nothing like that. Economy is growing, but it is driven by IT. It is driven by banking.
It is driven by trade. It is driven by tourism. And the last thing that is more tangible is construction.
Hovik Manucharyan: Let’s
Vache Gabrielyan: So this is on average the whole picture of how the economy is doing.
Hovik Manucharyan: Yeah, let’s double click on construction because we’re seeing a lot of new apartments being built in Armenia, but mostly I think in Yerevan and with a price tag that would rival some cities in Europe. given the substantive contribution of this sector to the Armenian economy and the fact that we’re still seeing significant poverty among the population commentators are highlighting the risks of this sector and that all this newly built housing will not have buyers so can you help us a little bit understand the structure of who are going to be the buyers that is coming online and are there any risks to this sector and what are the specific risks if possible?
Vache Gabrielyan: Well, there are definitely risks in this sector. And from time to time, warnings are aired by the central bank that there is overvaluation. The question is how significant this overvaluation is and if so-called the bubble is going to burst, what it’s going to do. We have once gone through this in 2008-9, and since then there are several developments that are making the development of a serious bust unlikely.
It doesn’t mean there is not going to be construction in the housing market, But let me first of all say that there are mechanisms now put in place that when you are building a building, then you have to have certain capital set aside. You can collect money from the buyers, but you are not going to spend it. That has gone through the banks, et cetera, et cetera. So the likely impact of banks’ exposure to it and the likely impact of it is creating contagion-wise large-scale effects for the economy if something happens is not going to be in place.
Second, most of the demand is coming from abroad. And very many buildings that are bought and sold, they don’t have justified market value in terms of earning income, but they have justified market value in terms of assets. It doesn’t make sense because they have to be tied together, but they are acting as separately,
Asbed Bedrossian: Dr.
Vache Gabrielyan: which means
Asbed Bedrossian: Gabrielyan, is that interest from abroad coming from the Armenian diaspora around the world, or are there specific niche areas?
Vache Gabrielyan: Largely from Armenian diaspora.
Asbed Bedrossian: Okay?
Vache Gabrielyan: I wouldn’t say only from Armenian diaspora. But Armenian diaspora has a significant driving impact on that demand.
Hovik Manucharyan: And do you know which diaspora? Is it spread around equally or is it more like Eurasian Economic Union or the West?
Vache Gabrielyan: Usually it is two countries dominating. It’s Russia and the United States. I’m not saying that there is no interest from Europe, but dominating forces are where the largest diaspora communities are. More interest is from Russia because they would like to have some property outside of Russia. because they don’t know what will happen tomorrow in terms of property rights, liquidity, etc.
There are many other issues. And there is also the interest from the United States that there are many people who would like to have assets outside of the United States. Again, as far as I’m telling about it, it’s a diaspora. Now, except for that, if the market is going, there is the third phenomenon here.
If you are seeing how much they are paying for it you are going to see that it is not going to be an income earning entity that is an asset that is going to pay back in a medium period of time even in a long period of time it’s hardly going to make the investment as investment Think about it as savings. There are many in Armenia who would like to diversify into savings, but they are not trusting or knowledgeable in financial instruments. As a result, they would like to have some savings in terms of tangible assets. And real estate is very likely to fulfill that function.
I’m not going to tell that there is no whatsoever demand for rented properties. There is demand. But economically, if you are putting the suicide, how much the rents are, how much the asset prices are, very often it doesn’t make sense. But from time to time, there is especially interest that is peaking coming from during the last four or five years, picking up interest from Russia.
Russians are moving. They are interested in renting. They are interested in buying. Then it subsides and prices come down to a worth.
Then it goes up, et cetera. So there is this type of dynamic. Foreign demand, mostly driven by diaspora, but not only by diaspora. Local demand because there are changing habits of families, not living traditional families together.
Younger ones want to live separately, have their own families, et cetera, et cetera. All these demographic changes are also happening. But overall, with all these factors factored in, most of the people believe that the market is overheated. At the same time, nobody believes hit it twice or three times more and that if the market prices plummet, there is going to be contagion effect.
Maybe there is 15% or what, 10%, 5%. This is not going to set up reactions because there are built-in mechanisms on the bank’s exposure and the buyer’s exposure is not as large as it used to be 20 years ago.
Hovik Manucharyan: Understood.
Asbed Bedrossian: Dr. Gabrielyan, what about other sectors? For example, you mentioned IT. I want to add also the mining sector.
How did they contribute to the 2026 economy?
Vache Gabrielyan: Mining sector is in plus. I don’t remember the exact number, but mining sector is contributing significantly because the copper prices are up and our main mining products are molybdenum and copper, mostly copper. But its share is not that high. IT sector is growing high in its services.
And we have a very interesting development in 2022. We saw very many Russians coming in, 40,000 to 60,000 by some estimates. And these companies came as part of a retreat from Russia by international companies. For example, NVIDIA Russia became NVIDIA Armenia.
Which is, it wasn’t that the Armenian IT sector has grown organically. It was that within the NVIDIA ecosystem, a part of NVIDIA relocated from Russia to Armenia. So that part with their incomes, et cetera, came into here. It didn’t have impact on IT industry per se in Armenia, except for a little bit impact on the wages.
But it had impact on capacity of spending power of a lot of well -paid professionals in Armenia. And they are mostly in Yerevan, some in adjacent cities. After 2023-24, some of them went to European countries, some of them went back. And we currently may have, by different estimates, about 25-30,000 IT people in Armenia that were relocated from Russia in 22.
They are growing quite high, paying a lot of taxes. And on average, they are high-paid jobs. On average, average salary or wages of IT industry is about three and half to four times of the country. If we are talking about IT industry, this is the impact that they are having.
Asbed Bedrossian: Okay.
Vache Gabrielyan: It is comparable a little bit more than mining.
Asbed Bedrossian: We will talk a little bit more about the IT sector in our discussion about the 2027
Asbed Bedrossian: budget. First, I’d like to talk just a little bit about this under-execution issue, which we mentioned earlier. We’ve been looking at the Luys Foundation macroeconomic reports, and they highlight these operational and structural shortcomings. Basically, a lot of money is allocated, for example, to the Ministry of High Tech.
And then you look at the reports, the quarterly reports that are released, and you see that it’s completed at 3%, 4%, 5%. And I’m taking an extreme example deep under execution to these things. What is basically the problem in these areas? Not just the Ministry of High-Tech, but just overall where projects are not getting completed.
Are the projections too aggressive and then they’re not met? Or is there a problem with personnel? Is there a quality of leadership? Where do you see these problems?
Vache Gabrielyan: A little bit of everything. There is no one single answer that one can pinpoint. But basically, we have not only high-tech industry, but we have capital construction under World Bank, Asian Development Bank, etc., that are also lagging.
Asbed Bedrossian: Everything is lagging, that’s right.
Vache Gabrielyan: Everything is lagging and it’s infrastructure. We had similar issues many years ago, then we solved it. Everything is lagging and it’s infrastructure. Which is SIGMA, a joint initiative of the European Union and OECD, they are looking in public administration and public affairs practices of Eastern European and former Soviet Union countries.
Recently there was the assessment of Armenia of public administration reforms in 2025 which is published on the SIGMA page and there was an issue that we have a lot of ambition but low ability of execution One of the reasons of low ability of execution is not only low capability of the government employees, but their desire of not taking responsibility. It is the byproduct of the efforts of corruption fighting. Now, if you are a public employee who is seeing that almost every public official has been under some type of investigation, you are taking it slow. You don’t want to take responsibility.
Except for that, there is low capacity and training geared towards execution per se. Now if I’m not mistaken this is what is going to happen we are going to have a lot of execution by December because there are a lot of projects that are going to be completed by December and they were waiting for the completion acts etc etc and our number is going to significantly jump in the last month whether it’s going to be 100% or not I wouldn’t argue I think they’re going to be below. But this execution capacity is problematic with the government, and the government should address those issues.
Unfortunately, for the last three, four years, we have chronic under-execution of public programs, particularly the ones that are capital intensive.
Asbed Bedrossian: When you say that there have been a lot of investigations, do you mean that there have been a lot of investigations about the lack of accountability because somebody might be corrupt? Or is it that there’s a lot of, my words, witch hunting, that is keeping people from taking responsibility and then being accountable?
Vache Gabrielyan: I would say both. If you are a public employee, you are thinking that it’s all the thing is going on and almost every project is being questioned from the past. And in that case, you play safe than sorry. It’s a rational behavior.
But I wouldn’t like to create an impression that it’s the only thing.
Hovik Manucharyan: Yeah.
Vache Gabrielyan: There is also lack of planning ability, lack of controls of execution, lack of project management abilities, etc.
Hovik Manucharyan: That’s very interesting. I mean, this issue is really mind-boggling to me because this regime in Armenia has multiplied the amount of compensation that state officials get based on the reasoning that, okay, we need to reduce corruption, we need to improve efficiency. they’ve been paying not just in increases in salary but also doubling, quadrupling bonuses and yet we’re seeing I mean at least, you know, I don’t know about the corruption I think that it still exists but even corruption itself is not gone but in terms of the ability to execute is it just that we don’t have the qualified expertise to run the country as well?
Is that a problem as well, you’re saying?
Vache Gabrielyan: What I’m saying is the SIGMA report is quite specific on that matter that country lacks execution capacity and it is not, I don’t believe it’s only because the people are bad. It’s also, it’s the culture that people wouldn’t like to take responsibility to go forward too much.
Asbed Bedrossian: Okay, let’s talk a little bit about the 2027 budget. When comparing the 2027 budget with 2026, it seems to me like the allocations look almost identical in structural proportion. Defense stays at 15%, social protection 23%, etc. We are going to put all of the top 10 in the budget in the show notes, so I don’t need to go through everything.
Essentially everything has been scaled up to spending 400 billion drams more and the debt goes up 468 billion drams more so that is actually an area that I want to talk a little bit more but first of all is this continuity in the way they make their budgets a sign of stable predictable governance or is Armenia essentially locked in a fiscal inertia where the state lacks the structural flexibility to fund major economic pivots or industrial breakthroughs.
Vache Gabrielyan: Well, usually budgets are very inertia-led events or processes. Most of the time, you don’t have drastic changes in budget. It’s a famous theory in the United States would say, they are incremental. In this year’s budget, there is one change.
Healthcare services are planned more. And this is due to government insurance program that is covering most of the population. And it is operational since January. It is not yet fully complete in my understanding because not all relationships governing the prices, not all the relationships about who are providers, who are the suppliers etc not all the systems work with the Ar Med system which is the medical system medical software system that everybody is working on so it is not yet completely settled system and they just stuffed the foundation that is going to run it so based there is this number that is significantly larger than this year.
Otherwise, as you correctly mentioned, there is inertia. I think this is more of an inertia and the inability, but it’s not a government inability per se. We don’t have a very large informal sector. People believed several years ago that there is a large shadow economy that is going untaxed and when you tax this you’ll have a lot of money and you can do pivoting here or there.
The shadow economy was not very large It’s not very large now. Shadow economy is decreasing steadily since 2014. Why 2014? It’s not a magic number.
Because of the pension reform enactment people started to file electronically every detail of it and became engrossed in the electronic filing system of taxes reporting etc etc which is making it more comprehensive and if you look at trends on the shadow economy it is decreasing since 2014 by more or less the same rate. There is no room and the government doesn’t like or doesn’t want to increase tax rates. I’m not sure whether tax rates are good or bad. I personally don’t like flat tax rates.
I believe in progressive tax rates. But even that progressive tax rates was not going to make systems significantly better. So there is no extra money that comes. If you compare the budget now with the budget 10 years ago, it’s much larger, twice larger, three times larger, or whatever.
But it’s not because the tax to GDP ratio become larger. It became larger only by two or three percentage points. It is becoming larger because the economy grew larger. And the economy growing larger, proportionately the things that should be addressed are remaining the same.
So you are in an inertia mode, which is very much peculiar to economic systems and budgetary systems. And there is no pivoting in any directions. It is more of incremental. Thank you.
Asbed Bedrossian: Dr.
Asbed Bedrossian: Gabrielyan, certainly since geopolitical situation has changed big time around Armenia, there are more risks around the country. The Iran war is going on. The Armenian-Azerbaijani situation is not settled. Artsakh is still a major issue for Armenia, even though the government doesn’t really want to talk about it.
Is this budget, which is essentially the same for the last few years with minor number changes, a safe budget? Is it a budget that can absorb shocks and risks to the economy if they were to happen? I mean, we’re hearing almost daily about the possible rift with the Eurasian Economic Union. What if something like that were to happen?
Can this budget absorb such a shock?
Vache Gabrielyan: No, the budget doesn’t address this issue. Yesterday, the Eurasian Economic Union released a report of experts. I don’t know who these experts are. Addressed to the leaders of Eurasian economic countries, except Armenia, because in May they raised an issue of dealing with it.
So they are addressing several issues. They are addressing the issue of so-called cessation or not cessation, of freezing Armenia’s membership in the Eurasian Economic Union based on Armenia’s parliament’s decision to join the EU. And while the argument has been between Putin and Pashinyan , whether it’s real or not real, etc., the formal quest was to go and do a referendum. Our authorities said we are not going to do a referendum.
So based on that, Eurasian Economic Union leaders, except for Armenia, raised this issue and the reporters are trying to address these questions. Number one, there is no mechanism in Eurasian Economic Union that has a freezing membership. But while there is no this type of reasoning, I don’t believe if Russia decides to freeze us, Eurasian Economic Union is going to decide that it’s not in the cards. So the second thing is about what the consequences are going to be.
The second thing, the most interesting thing is not the calculations, because the calculations are exaggerated in order to show how problematic will be the freezing. and it goes into a great detail. But the interesting thing is about the gas price level that the document cites, because we didn’t know exactly if Eurasian Economic Union or Russia basically is going to do so, what it would mean. Currently, the price is $177.5 per cubic meter. 1,000 cubic meters, and the report cites 300 US dollars. Technically, it can go up to 600, or it can go to 200, et cetera, et cetera.
So the interesting part of the report is naming the price. Well, it may be a price of $270 million more for gas, which is about 0.7% of GDP. Means it is going to have an impact and it is going to have an impact on particular industries. Now, the Eurasian Union’s report is discussing two types of industries. that are the traditional industries that we are exporting to Russia, vegetables, beverages, et cetera.
And there are other industries that are exporting, re-exporting, et cetera. And they predict that if Armenia’s membership is frozen, there can be 15% inflation, 14% downturn in economic performance, et cetera. I don’t believe the numbers are correct. I believe that we are going to have contraction and it’s going to be bad.
But I believe that the numbers that I just aired are exaggerated and they are not very accurate. If the contraction is going to be, it’s going to be much less. But in any case, it is going to be contraction and to this number, 270 million, how you are going to find this money, number one. Second, if you find this money for different means, aid, borrowing, cutting some expenditures, it is still going to have impact on prices.
And second round effects of prices are going to be also important. The industry that I believe is going to be hurt most is the industry that is already hurt most now, which is the agriculture. Because although European Union opened its markets and said that tariffs are not going to be applied for two years, it doesn’t mean that lack of tariffs is opening the markets because you need transportation, logistics, quality controls, good certification, etc, etc, that we lack.
And since then we have exported only a small portion of goods to European Union, although the tariffs were not existing at all. some other markets that agricultural goods have been found be exported, but these markets are not as familiar to our producers, and our goods are not as familiar to their consumers. So there is an uphill battle for agriculture, particularly for greenhouses, because gas share of all the economists, of all the economic agents that we are discussing.
The most exposed to energy prices, where the energy is very high in their numbers, in the cost structure, is basically greenhouses, cement production, lime production, et cetera. So this is going to have effects. And the budget is not discussing this as contingency. Whether this will happen or not, whether this will happen to what extent, is something to be learned in the future.
Because even if the report by the Eurasian Economic Union specified $300 per 1,000 cubic meters, this is not an official document. This is assessment, what it could be. It can be less, it can be more. Budget doesn’t address these issues.
Asbed Bedrossian: The public debt interest payments, the national debt payments,
Asbed Bedrossian: are the third largest item on the budget, and it’s now consuming over 10% of the whole budget. It’s more than education, science, culture, and youth, more than healthcare. It’s big. Is this signaling that we’re entering a cycle where borrowing is simply funding the previous debt, and we’re really kind of limited from it? productive economic capacity.
Vache Gabrielyan: Well, there are two issues. If you frame the issue like you just did, it is something to worry about because we don’t have problem with repaying the debt. We have problem of doing it or diversifying the use of debt or increasing capital spending or doing something. in new directions, etc. So from this perspective, it is problematic.
From the perspective, whether we can pay the debt or not, we are not problematic from that perspective. If national currency is going to be devalued, perhaps there may be an issue. The question how much is going to be devalued, etc., Currently, we cannot observe that trend coming in. If something bad happens, the likelihood that money is going to stop to coming to Armenia is not yet in the short-term prognosis because usually a lot of money is still coming to Armenia.
So likelihood that that is going to become significantly higher depreciation of the currency is a possibility, but it’s not very probable as an immediate development. Armenia’s interest in GDP is about 3%. As for budget, it’s about 11%, 11 and 12 or something like that. Government debt is about 45%, 47%.
And the Ministry of Finance has an ambitious plan of decreasing the deficit from 3% to 1.5%, from 4.5% to 1.5%, which is ambitious and talks about Ministry of Finance being worried with this situation and trying to address this. But at the same time, whether we can do that in a reliable manner, given our budgetary discipline and spending discipline and program doing discipline. This is something to be worried about. To give you a general picture of where the debt spending is, if you’re looking at low-income developing countries, interest as a percent of GDP is more than 2%.
United States is about 3.5%. It is very much comparable to Armenia. But we should never confuse United States with Armenia because it’s one thing that you are the country that issues world reserve currency and you are a thing that
Asbed Bedrossian: I was just going to say, we can print our way out of problems.
Vache Gabrielyan: if you are a country.
Asbed Bedrossian: Armenia can’t.
Vache Gabrielyan: So, if you are looking at neighboring Georgia, it is twice as less. It’s about 1.5% interest as percent of GDP and about 5% to 6% interest as percent of revenue. So we are doing comparably not as well as Georgia, but it is not a dire situation that the debt is unsustainable. But I would like to dwell more on your framing of the issue.
It is certainly constraining the capacity of the government of creating new assets and spending on some more important programs. Instead, we have seen increases in social programs 2026 that are continued and carried out in 2027. Now, this year was a specific year because it was election year. And you know that in all countries, social spending increases during the election years.
In the United States, people are promised refunds if they vote correctly. In Armenia, universal health insurance came in to aid people to make their choices.
Hovik Manucharyan: By the way, how is that universal health insurance going?
Vache Gabrielyan: Thank you.
Hovik Manucharyan: I mean, I heard that they spent up to a billion dollars on it just in the wake of the elections or maybe 600 million, I think is the number I heard. And then, have there been any studies on the performance of it?
Vache Gabrielyan: No, not yet.
Hovik Manucharyan: we’re hearing reports that yeah we’re hearing reports because that people
Vache Gabrielyan: I haven’t seen anything.
Hovik Manucharyan: are now being asked to reduce their claims because the funds are not there anymore so yeah what can you say about that
Vache Gabrielyan: The initial funding of requests were very generous, but I don’t have any systematic studies or report of that,
Hovik Manucharyan: Hmm.
Vache Gabrielyan: so I cannot prove or disprove it. I know just anecdotal evidence, but I wouldn’t like to make conclusions based on anecdotal evidence. There are no reports yet out. There are
Hovik Manucharyan: Okay.
Vache Gabrielyan: But whatever you just said is anecdotal evidence told by papers, that people now are asked to co-pay for services that they were getting for free in April or May.
Asbed Bedrossian: The total share of the state expenditures to GDP seems to have gone up from a
Asbed Bedrossian: traditional 25% to 31%. Does this healthcare expenditure and social expenditures during an election year explain that? Or are we in a different state right now where the government is driving the economy? And of course, what does this mean for the private sector if the government is the key driver of the economy?
Vache Gabrielyan: I wouldn’t say government is key driver of the economy, but spending is about 40% of GDP.
Asbed Bedrossian: Mm-hmm.
Vache Gabrielyan: Health, insurance, pensions, and interest are permanent additions. Together, roughly about 2-3 points of GDP, or about 1 billion per year. Capital spending and part of defense can be reversed, but not this spending. Georgia’s revenue is about 24% GDP and is that lower.
Armenian state is larger but spends a smaller share on education than all neighboring countries. So socially we are more spending than, say, neighboring Azerbaijan and Georgia, but at the same time education we are spending less by about 1% of GDP. I wouldn’t tell that government is the driver of the economy because government isn’t owning enterprises, etc., in order to do so. There are no state-owned enterprises.
There are government stakes in enterprises that we don’t know why there are, and we don’t know what they will be. For example, in compromise, the government has 10-15%. In telecoms, it has 15%. When the owners decided to give a gift to the government, Why exactly the owners decided it and why they decided to give the 15% and not 25% or not 5%?
Nobody knows. But this is sporadic and it is not a systemic feature. So I wouldn’t call government running the economy. But a government is very keen to have more social spending.
Although the government has fiscal rules that are adopted in 2017, that you are not going to increase the expenditures to address social issues if you have debt at this level, and if you are not going to do this if you have debt at another level, etc. So it is tying your capacity to increase non-capital expenditures the debt levels. Now, since the Armenian economy was growing, there was fiscal room to do so. And as a result, they took advantage of it.
And there is not a significant structural expansion in this matters, except for social health care, which is the significant pivot in this direction. There is also increasing pensions, but that’s not as significant as the health care. Thank you.
Hovik Manucharyan: I mean, we have so much to talk about. You just mentioned the spending on education, and we can all recall the recent educational scores that Armenian students received. So it seems like there’s a need to re-evaluate what we spend our public funds on.
Hovik Manucharyan: But I want to actually talk about a different sector. I want to pick on the high-tech sector. I think it applies across the board, but this government essentially frames high-tech and the domestic defense industry as a strategic pillar for Armenia’s future. Yet the Ministry of High-Tech receives only around AMD 37 billion, I think, in terms of state budget, which is less than 1% of state spending. and also even at that it is not able to execute that budget fully.
Do you believe that this type of allocation is sufficient for high tech if that industry is meant to be the strategic engine of self-reliance and sovereignty or is the sector expected to rely almost entirely on private capital?
Vache Gabrielyan: Well, I’m not sure about the general rationale of this ministry, because if it is armament, it’s a different story. If it is, it should be in the Ministry of Defense. If it is not armament, it should be Ministry of Economy. I think there are a lot of coordination issues within what the mandate is and within research, because even if the Ministry of High-Tech is going to do a lot of research, at the end of the day, when it comes to making armaments, etc., the decision is of the army.
It is not the Ministry of High-Tech. High-Tech Ministry is not going to approve weapons systems or so. It is going to create conditions for it. So overall setup of this ministry is still not very understandable for me.
For that reason, I’m not sure if it had more money, what it would do.
Hovik Manucharyan: Yeah, interesting.
Vache Gabrielyan: Huh.
Hovik Manucharyan: Now, as someone who has overseen state administration and finance, why do you believe that the money for this R&D is remaining unspent chronically? I mean we talked a little bit about it but I mean this is a brand, you mentioned that people are I guess afraid but this is a brand new ministry right, it has a new mission it should have a new culture so there should be less historical encumberment in spending aggressively for the right projects Let’s do this.
Vache Gabrielyan: I think it’s about a general framework about accountability. It’s a big issue philosophically, not only about Armenia.
Hovik Manucharyan: Mm-hmm.
Vache Gabrielyan: What is fear of failure? Can you afford to fail government money? It is something to be addressed. And I’m not talking about bribery and I’m not talking about misuse of money.
Can you make a bad bet? I think people are very much thinking in these terms of accountability and trying to do that in a manner that is more risk-averse. Let’s forget about punishment and forget about corruption, etc. We don’t have a system that the government can place bad bets among with good bets.
Hovik Manucharyan: Yeah.
Vache Gabrielyan: So I think this is a general issue for the governance. And most of the countries, again, haven’t solved this issue. Armenia didn’t solve this issue as well.
Hovik Manucharyan: Okay.
Hovik Manucharyan: Can we talk a little bit about Firebird? It is one of the chief achievements that this government is portraying in media in terms of the high-tech achievements. Firebird, of course, is a data center project, and it entails hundreds of millions of dollars in investment and importation of high-end AI chips, which are normally very much under export control by the United States. States.
Interestingly, most of the financing for this project came from Armenian banks, which was to be, you know, I mean, to me, it was a very big surprise. How would you, first of all, how would you evaluate the potential impact of this data center project on the Armenian economy in general? And then we can talk more about, you know.
Vache Gabrielyan: Firebird is a great business, not as great economics.
Hovik Manucharyan: Thank you.
Vache Gabrielyan: Imagine the following. It is the least labor-intensive industry in the world, around the world. And data centers are a lot of money and capital spent with the least amount of local suppliers engaged, with the least number of local employees employed. So the ripple effect that it is going to make and trickle down to the rest of the country is very low.
And whether you have an AI company in Armenia that is using good communication and using AI farm in the United States, in Europe or in Georgia, doesn’t make any difference.
Hovik Manucharyan: Yeah, it’s all commoditized.
Vache Gabrielyan: So from this perspective, you don’t even know Firebird or any other center. Is it run for OpenAI, Anthropic, Gemini? I don’t know. Nobody knows.
Exactly. And having a company in close proximity to there. We are not using an industry that is dealing with milliseconds and is calculating things. We are not the U.S.
Navy who is calculating with Anthropic what Iranian targets to hit. And you need to have your AI there or here. I don’t know. So from this perspective, the impact on the economy, very many people see this as an opening.
And the government actually has paid or agreed for Firebird to provide capacity of 10 or whatever million dollars for Armenian companies or Armenian government to engage in it. But the problem is that, again, economic-wise, it’s not an issue. It has at least trickle-down effect. Business-wise, it’s a wonderful business.
So I’m glad Armenian banks engaged in that because it is going to have demand. It is going to be a safe bet as far as industry is concerned. And they are going to earn a lot of money.
Hovik Manucharyan: Do you know if the Armenian government gave any tax breaks or any other concessions to make it more financially feasible for the Firebird project to happen in Armenia?
Vache Gabrielyan: I don’t have such an information. Maybe there is, maybe there is. When I say I don’t have, I really don’t have. I cannot prove or disprove it.
Hovik Manucharyan: Okay. You mentioned that it is a safe bet, but also we’ve heard many analysts predicting that generally all of AI industry is in a bubble. Now, do you agree with that? And if so, what would be the effect of this bubble bursting on Armenia since all of the Armenian banks seem to be heavily invested in this AI project?
Thank you.
Vache Gabrielyan: I don’t believe that’s a big issue because it’s not billions yet. It’s a couple of hundred millions and it’s not one bank, but it’s a consortium of banks. And they are in a risk-sharing mode and none of them has exposure that is going to make or break them. And I think it’s a safe bet in the near future because it is, I believe, profitable and works well the investment.
When they are speaking about bubble around the world, I don’t believe there are talks about bubble bursting in two days or in two years. We are not yet at this stage. So at the scale that Firebird is now, it’s good business.
If it is going to become a 5 billion company all financed by Armenian banks it is a different story And it is a different story how much banks will get exposed to it and how much they will have relative capital to it to the best of my understanding I don’t know the exact structure of the deal but I know that it is a consortium of lenders And it is done in a way that it’s not going to take anyone down in case something happens. They have enough capital to withstand that loss if anything happens. But again, all the forecasts that you hear about AI being bubble, it is not that it is going to be tomorrow.
Asbed Bedrossian: Dr. Gabrielyan, it’s often said that a budget is a statement of values. You’re actually putting your money where you believe, right? But in reality, in this case for Armenia, you have to look at how the budget was actually executed or spent.
There are, throughout the year, there are constant subvention fundings that we see. I don’t really keep a tab on every single one of them. I don’t write them down to understand where the money came from, where it’s going to, but there’s always stuff happening that was not necessarily planned in the budget. I personally have no evidence that the allocated budget amounts are actually spent in the areas that they are meant to.
For example, do we actually spend $1.5 billion in defense or do we transfer money through subvention funding somewhere else? So given that we have what we have. What does the 2026 budget and the outcome that we mostly know at this point tell us about the values of this government? And what kind of outcomes do you expect in the next budget, the 2027 budget?
Vache Gabrielyan: Well, I believe that most of the time the budgetary expenditures are reflected accurately. As far as defense budget is concerned, I don’t know exactly the composition of defense expenditures, but whatever is said to be executed under defense budget is in the defense ministry budget. Now, I cannot tell you how much is armaments, how much is buildings, how much is this or that, At least it is my experience that the budgetary systems are reflecting properly, and you can also look not only approved budget, but budgetary execution reports that is published by Ministry of Finance. They are quite accurately reflecting.
Again, not the nitty-gritty composition of defense budget. I’m talking about social expenditures, et cetera. You can exactly know where the money went. And all the subventions, et cetera, are reported in the execution report.
That usually comes out in May. Now, if I am going to label it, well, we still have a little bit decrease in defense, but defense is still high. It’s about 6% of GDP. slightly below what Azerbaijan does, but very comparable, maybe one or two percentage points. Not sheer size of it, but percentage-wise.
About or three times higher than neighboring Georgia is doing. And larger than average for the world. Although some countries like the United States, Russia, Israel, Ukraine have more percentages. This is not a deliberate choice of 2027 or 2026.
This is the inertia that we get from the earlier years because we were in a war, we got defeated, we bumped up. We are keeping more or less on the same level. But the question that you raise is a significant one, which I believe other people who are military experts should be answering. Whether this is going into armaments, this is going to the personnel, this is going to facilities, this is going to trainings.
I don’t know, and I’m not a military expert, to tell. overall budget number, I told you the proportion of it. Apart from that, this is definitely a social budget because the increases we saw were particularly in the field of pensions and healthcare. But you may call it a humanistic budget. Somebody else may call it an election year budget.
You choose your angle. The thing from in 2027 actually carries out in inertia what the budget was for 2026. It is increasing the emphasis on social things without adding anything new. The increases are keeping up the irreversible social commitments.
In the United States, they are called entitlements. In 2026, we enacted two entitlements in pensions and in healthcare. And in pensions, we enacted not through the budget, but through the prime minister’s announcements. After that the government incorporated it into the budget.
So this is the stance. That’s the reason I’m saying, depending on the angle,
Asbed Bedrossian: Mm-hmm.
Vache Gabrielyan: it is either a social policy budget or election year budget. But number-wise, it is healthcare and pensions that increased.
Asbed Bedrossian: Okay. Due to time, we’re going to leave it there today. Thank you so much, Dr. Gabrielyan, for spending your time with us.
We hope to talk with you again soon.
Vache Gabrielyan: Thank you for having me and good luck to all listeners.
Asbed Bedrossian: Thank you.
Hovik Manucharyan: Thank you, Dr. Gabrielyan.
Asbed Bedrossian: That’s our show today. The episode was recorded on October 23, 2026. We’ve been talking with Dr. Vache Gabrielyan, who is the Dean of the Manoogian Simone College of Business and Economics at the American University of Armenia, for a lot of his other specialties, because he is a specialist, he’s an expert, and he has done a lot of the positions in ministries of finance and the CBA, etc., etc.
Please go to our show notes, podcasts.groong.org slash episode number. Click on the link for any of the people who are listed in there and check us out. Hovik, any final words for the show?
Hovik Manucharyan: Thanks for watching, folks.
Hovik Manucharyan: Just help us financially because the only independent English language podcast on Armenia and we do this out of love and not because of any foreign influence. So if you’d like to keep that going, then podcasts.groong.org slash donate helps us pay some of the bills. I appreciate all your support.
Asbed Bedrossian: I’m Asbed Bedrossian.
Hovik Manucharyan: And I’m Hovik Manucharyan. Have a great week.
Asbed Bedrossian: We’ll talk to you soon.