International rating agency Fitch revised its outlook on Armenia's long-term foreign currency issuer default rating (IDR) from stable to positive and affirmed the IDR at B+.

An influx of immigrants (estimated by the authorities at around 65,000) from Russia, Ukraine, and Belarus, representing an annual population growth of 2.2%, contributed to the improvement in external as well as macroeconomic and fiscal performance. A very large influx of immigrants and capital from Russia in 2022 improved external as well as macroeconomic and fiscal indicators, the agency noted.

The exact scale of immigration is difficult to quantify, given the open migration regime for Russians in Armenia, and the duration of this positive shock is still uncertain. However, it has led to a 140% increase in remittances, and Fitch expects a large proportion of new immigrants to remain in Armenia for at least two to three years, and sees a significant likelihood that some positive effects will persist, Fitch said in its report.

External inflows have led to a marked improvement in Armenia's external balance sheet. Fitch estimates a small surplus on the current account in 2022, based on Q1-3 results, the first annual surplus on record, and helped boost foreign exchange reserves by $880 million to $4.1 billion in 2022. The agency said it expects to return to a moderate deficit in 2023 and 2024.

Tensions with Azerbaijan escalated in 2020-2022 with renewed hostilities in the disputed Nagorno-Karabakh region, as well as Azerbaijan's territorial incursions into Armenia's border regions, which it continues to hold. Azerbaijani protesters have been blocking Armenia's access to Nagorno-Karabakh since December, and negotiations for a peace agreement have stalled. While full-scale conflict is not our base case scenario, the potential for renewed hostilities remains, although any broader macroeconomic impact is likely to be limited. Russia's peacekeeping role in the region has complicated Armenia's relations with it, given Russia's perceived lack of support for Armenia's position in the territorial dispute.

Armenia is solely dependent on energy supplies from Russia, and there are few credible signs of diversification. Russia is also Armenia's largest export market and source of imports, as well as an important source of remittances, the international rating agency's report noted, among other things.