Armenia Sinks Deeper into Debt as Conflict Rages with Azerbaijan

Amid the Nagorno-Karabakh conflict, Azerbaijani dollar bonds outperformed Armenian ones, indicating that Baku economy, with its rich resources, could do better during the disputed enclave crisis.

Bond prices of the two Caucasus neighbors fell as the fighting broke out on September 27 over an internationally recognized part of Azerbaijan, yet, inhabited by Armenians.

The case for Armenia, a less per capita income nation, have been worse as the 2024-29 bond issues have decreased by 4.5% and 3.5%, respectively, while in Azerbaijan issues have dropped by 1% only.

Azerbaijani state oil company (SOCAR) bonds remained stable even as Baku accused Armenia of attacking oil and gas pipelines, while, Armenia's 2025 bonds fell 0.6 cents in the dollar.

ING Bank strategist Trio Pham said that Azerbaijani bonds are better off as the conflict and the pandemic have less impact on a country that hold external reserves and around $3 billion in Eurobonds.

Fitch rated Azerbaijan’s outlook at BB+, while Armenia’s rating was set at B+ this month. Moreover, Azerbaijan’s sovereign wealth fund is 85% of its Gross Domestic Product (GDP) at $43.2 billion, while Armenia’s economy is more likely to contract by 6.2%, with an expected government debt ratio to GDP at 63.9% by the end of this year.

Affected by the drop in oil prices and the pandemic, the Azerbaijani economy is also expected to contract in 2020, yet, with a lower debt ratio to GDP at 38% by the end of 2020.

The conflict threatens to stoke tension outside the region, given Turkey's support for Azerbaijan and the Russian defense agreement with Armenia, however, Moscow has shown no interest in any escalation, but Turkish sales of military equipment to Baku this year have shown a sixfold increase.