The war in Iran poses a political challenge for the Caucasus states, mainly due to increased energy and logistics costs, rather than the direct consequences of the conflict, Fitch Ratings said in a report.

Continued shocks are fraught with inflation and widening external deficits, especially for energy-importing Armenia (BB-/Positive) and Georgia (BB-/Stable).

However, rising international reserves, limited foreign exchange pressures, and relatively secure energy supplies limit near-term risks to sovereign ratings.

Fitch also expects relevant authorities to respond in the event of repeated inflationary pressures, exchange rate depreciation, or unfounded inflation expectations.

Rising global energy prices will weigh on transport costs, utilities and food, and could push inflation above moderate levels. The pressure could push up the cost of fertilizers and other imported materials.

Despite this, real interest rates in the region remain positive. This gives central banks some room or room to maneuver to contain broader inflationary effects. However, external accounts are particularly vulnerable.

As per Fitch, Armenia’s budget deficit is expected to reach 5% of GDP in 2026, a significant decrease from the seven-year high of 7.2% expected in 2025.

Armenia has a long-term unchanged gas tariff agreement with Russia’s Gazprom company. Exchange rate pressures also remain moderate. In the first month of the Iran war, the Armenian dram maintained its stability against the US dollar, Fitch Ratings adds.