Capital inflows lift dram as global investors eye Armenia, central bank says

By Lia Avagyan

Armenia's economy has weathered the country's June 7 parliamentary vote without disruption, with the dram strengthening on the back of strong capital inflows, the head of the Central Bank said, while cautioning that Russian export restrictions and instability in the Middle East continue to cloud the outlook.

In an interview with Armenia's Public Television aired on June 23, Central Bank Governor Martin Galstyan said he saw no signs of economic strain linked to the post-election period. Economic growth remained strong, he said, while inflation stood at 4.2%, slightly above the Central Bank's target.

Galstyan said the bank was closely monitoring Russia's mounting restrictions on Armenian exports, which he described as a potentially significant risk depending on their duration and scope. Exports to Russia account for about 6% of Armenia's GDP, he said, while the products currently facing Russian curbs amount to roughly 2%.

Also read: Russian restrictions could shave up to 2% off Armenia’s economy, Central bank warns

Under a downside scenario, those goods could remain shut out of the Russian market for an extended period, be partly redirected to the European Union if they meet its standards, or remain on the domestic market. In the latter case, Galstyan said the additional supply could reduce the overall price level by up to 0.6%, creating disinflationary pressure.

That risk was one reason the Central bank left its policy rate unchanged despite inflation remaining above target, he said. Asked whether the decision reflected political considerations, Galstyan rejected the notion, saying it was based entirely on economic assessments and had no connection to Armenia's completed electoral process.

The dram has continued to strengthen against both the dollar and the euro, a trend that is linked to capital inflows. Galstyan said international investors increasingly view Armenia favorably and that major financial institutions now actively monitor the country's economy. Foreign investors are buying not only Armenia's dollar-denominated eurobonds but also dram-denominated government bonds, he said. Global institutional investors now hold roughly 7% to 8% of Armenia's dram-denominated government debt.

The country's risk premium has also declined, Galstyan said, particularly since the initialing of the Armenia-Azerbaijan peace agreement in Washington in August 2025. The spread between Armenian and U.S. government bonds has narrowed significantly compared with one or two years ago, reflecting lower perceived geopolitical risks. Macroeconomic stability has become Armenia's calling card, he said.

Turning to the Middle East, Galstyan said uncertainty surrounding the Strait of Hormuz remained a major source of risk for global markets. Conditions had improved compared with two weeks earlier, with shipping resuming, albeit below pre-conflict volumes, but he said turbulence was likely to persist for at least the next 60 days because no final agreement had been signed and only a preliminary accord was in place.

Galstyan said he believed Washington and Tehran were negotiating in good faith, noting that a prolonged conflict would not serve U.S. President Donald Trump's administration ahead of the autumn midterm elections. He added that the objectives of a third actor in the conflict could differ from those of Washington and Tehran.

Oil prices remained below $80 per barrel and stood near $76 that morning, he said, down from levels that had approached $100 during the recent escalation and compared with roughly $60-$65 before it. If the United States and Iran reach an agreement and Gulf producers increase output, prices could fall below pre-conflict levels, he said. Without a deal, they could climb back toward $100.

Galstyan also addressed Armenia's construction boom and its role in driving mortgage lending, dismissing comparisons with the mid-2000s expansion that preceded the country's sharp economic contraction in 2009.

The economy is now more diversified, he said, with export-oriented sectors such as information technology and financial services contributing significantly to growth. While construction remains an important driver, its relative weight is far lower than before the global financial crisis.

The main risk would be a sharp correction in property prices, Galstyan said, which could leave some borrowers unable to service mortgages and put pressure on developers. The Central Bank previously highlighted such risks as a possibility when a state housing program linked to income-tax refunds was expanded from Yerevan to the regions.

Those concerns have largely failed to materialize, he said. Property prices have seen only modest adjustments, while the real estate market remains strong.

To prepare for potential shocks, the Central Bank has required lenders to build additional capital buffers totaling about 180 billion to 190 billion drams ($490 million to $515 million). Galstyan said rapid growth in consumer lending was a separate concern and that the Central bank could use macroprudential tools to slow lending growth if necessary.