Do Geopolitical Tensions Affect Sovereign Spreads? Evidence from Armenia

Abstract This paper examines whether geopolitical risk affects sovereign borrowing costs in emerging markets, focusing on Armenia as a geopolitically exposed frontier economy. Sovereign spreads are measured as the difference between the yield on Armenia’s U.S. dollar–denominated Eurobond and the U.S. five-year Treasury yield. Using monthly data for the period 2021–2025, the analysis estimates a time-series regression model that relates sovereign spreads to global geopolitical risk, global financial conditions, and domestic macroeconomic variables. The results show that increases in geopolitical risk are associated with higher sovereign spreads. In particular, a 10-point increase in the geopolitical risk index raises Armenia’s sovereign spread by approximately 0.05 % points. These findings suggest that financial markets incorporate geopolitical developments into sovereign risk assessments, generating an additional risk premium for geopolitically exposed economies. The results highlight the importance of geopolitical stability and sound macroeconomic policies in maintaining favorable sovereign borrowing conditions.