Armenian President Serzh Sargsyan made waves in September when he cast aside a slated European accord in favor of deepening ties with Moscow through the rival Eurasian Customs Union.
It was a major foreign policy shift for a country that has sought to maintain rock-solid relations with Russia, while deepening its institutional ties with Europe. At the time, the country was weeks away from signing the European Union Association Agreement containing a Deep and Comprehensive Free Trade Area at the 3rd Eastern Partnership Summit, held in Vilnius, Lithuania.
While neighboring Georgia and Moldova initialed agreements, Sargsyan detoured from four years of negotiations with the EU, instead joining the Russian-led Eurasian Customs Union, which currently includes Belarus and Kazakhstan as members. The Armenian leader went a step further, vowing to support Moscow's efforts to "integrate" the former Soviet Union states into the rival pact.
If there were any doubts about the Kremlin's objectives regarding the former Soviet states, they were dismissed by President Putin during his state visit to Armenia on December 2.
"Russia has never intended to go away from here," Putin said, addressing the third Russian-Armenian Interregional Forum in Gyumri, which hosts Russia's 102nd military base.
He continued: "We will be strengthening our positions in the Transcaucasus, drawing upon all the best that we have inherited from our ancestors [and] our good relationship with all the countries of the region, including Armenia."
The Customs Union is viewed as the precursor to a broader Eurasian Economic Union to be formed in 2015. While Armenia shares no common borders with the Customs Union member states, Putin has said he hopes to incorporate all former Soviet republics—excluding the European Union (EU) - member Baltic nations—into the new bloc. The long-term vision extends as far as India and Turkey and is viewed as key to the Russian leader's legacy.
Sargsyan voiced his support for the project following talks with Putin, highlighting the role of the Collective Security Treaty Organization—which includes Russia and Customs Union members Kazakhstan and Belarus—in securing Armenia's security over the past two decades.
"Since we share a system of military security, it is impossible and inefficient to isolate ourselves from the corresponding geo-economical space," the president said.
Oiling The Wheels
Armenia’s decision to join the Customs Union has more to do with mounting Russian pressure than economic benefit, some analysts say. On January 17, the Armenian government sold the remaining 20 percent of its stake in ArmRosGazprom—the country's natural gas distribution company—to Russian giant Gazprom. Moscow now has full ownership of the vital utility, and the company name has been changed to reflect the new order: Gazprom Armenia.
Richard Giragosian, Director of the Yerevan-based Regional Studies Center, says the relationship between Armenia and Russia has become more lopsided than ever and further pronounced by comprehensive business deals in the gas sector.
Rauf Baker, a Dubai-based journalist specializing in Eastern European affairs, agrees that Russia is using the natural gas card to exert its political will.
"Russia is trying to control the former Soviet republics through gas deals. We have witnessed this in Armenia and Ukraine," he said. But according to Baker, "the deal was sweetened for Armenia, by a preferential gas agreement."
Armenia's rate of $189 USD per 1,000 cubic meters was a bargain compared to $268 USD for Ukraine, where fierce protests erupted when the government of Viktor Yanukovych rejected the same EU partnership in favor of the Customs Union last November. Yanukovych has since fled to Russia, paving the way for an interim government to take the helm in Kiev. Armenia also experienced limited protests against Sargsyan's decision, but they lacked the numbers to make a dent in policy.
Armenia's energy agreement was signed during Putin's December visit to Armenia and will be in effect for five years. Gazprom, in exchange for paying off $300 million USD of Armenian government debt, was also granted exclusive rights over the Armenian energy market for three decades.
In the early 2000s, a controversial asset-for-debt agreement was penned between the two countries, granting Moscow control of several strategic Armenian assets. This included full control of its energy sector and its sole nuclear power plant. In recent years, Russia has further acquired a large share in the country's mining and telecommunications sectors.
Putin has offered bilateral privileges to seal Armenia's entry into the Customs Union, namely that Yerevan may purchase Russian arms at domestic prices and be exempt from the 30 percent export customs normally levied on Russian petroleum products as well as duties on diamonds. But Russia's gas monopoly puts the country in a precarious position with no room for fielding alternative offers for the coming 30 years.
A Western Vacuum
President Sargsyan has tried to downplay the obvious clash between Moscow and Brussels, but the implications are clear: Should Armenia accede as a full-fledged member of the Customs Union, it cannot also sign the European agreement.
"This decision is not a rejection of our dialogue with European institutions. During recent years, Armenia, with the support of European partners, has undertaken a number of important institutional reforms. Today's Armenia, in this sense, is a considerably more effective and competitive state than years ago. We intend to continue these reforms," he said.
Yet a joint statement issued at the Vilnius summit was clear: "The EU and Armenia acknowledge that they have completed negotiations on an Association Agreement, including a Deep and Comprehensive Free Trade Area, but will not proceed with its ratification due to Armenia's new international commitments. They agree on the need to update the EU-Armenia Action Plan," it read.
Analysts say Armenia had scarce room or incentive to maneuver when faced with massive pressure from Moscow and scant reassurance from the EU.
"Through Gazprom, [the Russians] are managing assets in a political way," said Baker. "They didn't have that much choice as to whether they could go to Iran or the West."
Russia is Armenia's top foreign investor and trading partner, with bilateral trade between the two nations topping $1 billion USD in the first nine months of 2013. Armenian exports to Russia are meanwhile on the rise—increasing 24 percent in 2012—as Sargsyan was keen to point out following talks with Putin.
Analysts also point out that Europe had little concrete benefits to offer Armenia in the face of Russia's forceful courtship.
Moscow, according to Regional Studies Center's Giragosian, gained the upper hand due to Western "benign neglect".
"Unlike in the 1990s, when Western policies toward the region were dominated by the development and export of Caspian energy resources, there is no longer any clear or coherent policy. Rather, the Western, and especially the US approach has devolved into a subset of broader US or EU relations with Russia, and a secondary component of Western policies toward Turkey and Iran," the analyst said.
Such an approach leaves a "strategic vacuum" for Russia to exert its influence on countries such as Armenia and Ukraine.
The West, Giragosian wrote in a policy brief for the Brussels-based EU Policy Centre, "has largely recognized the projection of greater Russian power and presence in the region after the 2008 war with Georgia. At the same time, the South Caucasus has also become a trade-off, sacrificed to Russia in return for airspace access through the Caspian region to reach Western bases in Central Asia and Afghanistan."
On October 31, while addressing journalists from a number of post-Soviet countries visiting Washington, US Secretary of State John Kerry said he hoped to see Russia encourage other countries to interact with a wide range of states and not just a narrow group.
But while the West has worked to extend trade invitations to Armenia, Russia has aggressively pushed to "institutionalize" its sphere of influence, hedging its periphery against EU advances.
For the Armenian authorities, Baker says, the deal also made economic sense regarding energy and trade: "The EU is facing economic difficulties, and Armenians started to ask themselves, 'what are the benefits from trade deals with Brussels?' The EU didn't attract the Armenians and Ukrainians into signing deals with them," he said.
Some Armenians questioned why the government did not pursue the Iranian option right next door when it came to gas, but Baker argues this was not necessarily viable. "Iran has its own difficulties," he said. "They are aiding the Iraqi government and Syrian regime. They have this nuclear issue being discussed in Geneva."
As it stands, the pipeline between Armenia and Iran is too small to allow for further exports to Europe. Many believe the diameter of the pipe was reduced from its planned dimensions under pressure from Russia.
But while Moscow works to keep Yerevan's foreign policy in check, entry into the Customs Union is neither assured, nor easy, according to analysts and Armenian leaders.
"There are serious obstacles hindering possible membership in the Customs Union. More specifically, the absence of common borders with Russia, or with Belarus and Kazakhstan, poses a logical impediment to such a move," wrote Giragosian.
Prime Minister Tigran Sargsyan admits that customs duties between Armenia and third countries will double under Customs Union regulations. Ascension to the union will be "very complicated, if not impossible," he has stated.
"Armenia's economy, with its lower customs duties, is far more liberalized than the other member states," said economist Ashot Yeghiazaryan, who believes the country could become "dragged into the zone of Russian influence, forced to import only what is available."
But there may be room for flexibility; Armenia will ask for an exception on customs duties for a number of key commodities, Minister of Economy Vahram Avanesyan told Parliament in early February.
But Yeghiazaiyan sees the issue as more profound than dollars and cents.
"The Eurasian initiative is unable to raise the level of technological development of member states. On the contrary, it will lead to isolation, and leave the primitive structure of the member-country economies unchanged," he said.
Moscow's goal, Giragosian believes, was not to persuade Armenia to join the Customs Union, but rather to reject institutional EU integration.
There is little doubt among analysts that the impact of Armenia's foreign policy U-turn will be far reaching.
"This move only bolsters Armenia's pronounced over-dependence on Russia, while threatening to derail Armenia's hard-won success in maximizing its strategic options, based on the imperative to overcome a deeper threat of isolation," wrote Giragosian.
The move, for Giragosian, confirms that Armenia's "strategic partnership" with Russia has become skewed.
In recent years, Armenia has pursued a foreign policy of "complementarity" expanding its room to maneuver diplomatically through increased cooperation with the West and Iran. The trick was to avoid a direct challenge to Moscow, according to Giragosian.
Snubbing the EU risks alienating Brussels and may limit Armenia's future options, according to Giragosian.
He continued: "the danger for Armenia stems from greater isolation, as closed borders remain sealed, and from a newly-enhanced degree of insignificance, as the strategic importance of Armenia may only dramatically decrease."
Most distressing, Armenia also faces the threat of becoming little more than a "small, subservient Russian garrison state."
Stepan Grigoryan, director of the Yerevan-based Analytical Center on Globalization and Regional Cooperation, does not mince words: "Russia exports natural gas, oil and corruption. And this is the system to which we are acceding."
Baker says that the effects of a far-reaching pact with Russia "will absolutely make Armenia more dependent. Now Russia has full control of Armenia's natural gas distribution company."
Under the deal, "Russia will also control Armenia's gas imports until 2043," he emphasized.
The argued advantage (or necessity), observers and laymen say, is the military-security relationship—critical to the security of the Nagomo Karabakh Republic, still locked in a frozen conflict with Azerbaijan.
Sargsyan's U-turn was made in the context of this security issue, which continues to be a regional tinderbox for the Southern Caucasus, with Armenian soldiers killed regularly on the border, despite a 20-year ceasefire.
Russia is Armenia's main security guarantor in its frozen conflict with Azerbaijan, with a base in the northern city of Gyumri. As Edward Kirakosyan, Managing Director of the Union of Manufacturers and Businessmen (Employers) of Armenia points out, the EU agreements would have differentiated between Armenia and Karabakh—a boundary that could be blurred as a member of the Customs Union.
But over-dependence on Russia comes with serious risks. Last summer, Armenians were shocked when Moscow sold $1 billion USD worth of tanks, artillery and rocket launchers to Azerbaijan.
For some it was a warning—a message that Armenia must fall in line. Others argued that Russia was simply double dipping.
Giragosian believes that while a "veiled threat" exists that Moscow could pull the rug out from under Karabakh, Armenia also "underestimates its strategic value to Russia." He believes Yerevan made a major blunder by rejecting the West, leaving Armenia's loyalty taken for granted and Russia free to expand ties with oil-rich Baku. "Hence, Russia is now the number one arms provider to both Armenia and Azerbaijan."
Baker believes that Armenia will gain key security and financial benefits from deepened relations with Russia, but he also sees Armenia's future with the EU.
"Armenians should always look at other countries who have been under former Soviet influence, like Moldova, Romania and Poland, that are now part of the EU."