President Serzh Sargsyan said the government would bear the burden of the higher electricity costs until an audit of the Russian-owned power company could be completed. At least some of the money appeared to be coming from Moscow, where the protests have caused great concern.
Some of the protest organizers called for demonstrators to remain on the street until the rate hikes were completely annulled.
Thousands of protesters have blocked Yerevan's main avenue since Monday, their numbers steadily increasing throughout the week to a peak of about 15,000. In recent days, the protest has looked more like a street party, with the mostly young demonstrators dancing and singing national songs.
Armenia is closely allied with Russia, which maintains a military base in the former Soviet nation. Russian companies control most of its major industries, including the power grid, which the protesters claim is riddled with corruption.
Sargsyan's announcement followed a meeting the night before with Russian Transport Minister Maxim Sokolov, who co-chairs a Russian-Armenian economic commission. During the meeting, they agreed to a joint audit of the electricity company, but this didn't satisfy the protesters.
Sargsyan said Saturday the 17-per cent electricity hike was necessary to support the power grid and therefore he was ordering the government to cover the cost. He said this wouldn't be done at the expense of social payments, a sensitive issue in a country where one third of the population of 3 million is below the official poverty line.
Instead, the president said the money would come from the security budget.
"Of course our security problems are far from being resolved, and that's an understatement, but today's atmosphere of suspicion and distrust I also see as a problem of security and a very serious problem," he said in a statement released by his office. "It needs to be resolved."
Also as a result of the meeting with Sokolov, Russia agreed to loan Armenia $200 million to help modernize its military, according to Sargsyan's office.
In another concession, Russia agreed to allow Armenia to try a Russian soldier accused of killing seven members of an Armenian family in January.
Armenia remains locked in a conflict with Azerbaijan over the Nagorno-Karabakh region. A cease-fire in 1994 ended a six-year war, but attempts to negotiate a peaceful settlement have stalled and fatal shootings occur frequently along the buffer zone.
The conflict also resulted in the closure of Armenia's borders with Azerbaijan and its ally Turkey, which has hobbled the economy of the landlocked country.
Angered by the electricity hikes, about 5,000 protesters marched on the presidential residence on Monday evening. When they were blocked by police, they sat down on the road for the night, taking police by surprise. In the early hours of Tuesday, riot police used water cannons to disperse them and arrested nearly 240 people, but by that evening even more protesters had gathered. Since then, the police have stood by peacefully.
The protests, organized largely through social media, have become popular on Twitter with the hashtag #ElectricYerevan.