Armenia in a Region of Change
Armenia in a Region of Change


by Haroutiun Khachatrian

Isolated in many ways from world trends, land- and border-locked Armenia has not been spared the international financial crisis. As late as last October—nearly half a year after the Western world had panicked, authorities in Armenia were assuring their keep that Armenia was in good shape and well-insulated.

Within a matter of weeks, though, those same officials had their hands out to institutional lenders and, specifically, to Russia, pleading for a "stabilizing" loan.

Authorities and independent experts agree that the world economic crisis contains the following dangers for Armenia:

Decline in private remittances from abroad.
Decline in the export capabilities of Armenia due to reduction in demand for Armenian exports and reduction in prices for Armenia's major export commodities.
Decline in foreign investments.
Private remittances have been an increasingly important factor of the Armenian economy since the economic crisis of 1993-1995, when around one quarter of the country's eligible working population left it in search of jobs, most (about 80 percent) to Russia.

Over the past 15 years, money sent home by those making up the new Diaspora (some migrant workers and some who relocated permanently) has had an increasing influence on the welfare of families in Armenia and on the financial well-being of the republic itself.

Reaching about $1.5 billion annually, transferred remittances represent about 14 percent of Armenia's Gross Domestic Product (GDP).

The potential of losing such an income resource reasonably alarms officials and citizens alike and is an unfortunate reality, especially as the Russian economy itself has hit a sharp decline.

The impact is twofold for Armenia. First, dependent families feel the immediate cash-flow drain. But secondly, and potentially of long-lasting effect, loss of jobs in Russia portends an influx of returning unemployed to Armenia. Migration experts estimate that as many as 800,000 who left when jobs were plentiful in Russia may be expected to return to homes already distressed by the loss of remittance income. The implication is that social conditions could worsen under the additional burden of the newly returned jobless.


Decline in Armenian exports—already in a drastic negative balance to imports—began late last year, as exports of copper and molybdenum, the major exporting commodities of Armenia, sharply fell in response to world market price decrease. This resulted in further deterioration of Armenia's trade balance, with imports exceeding exports more than fourfold.

The immediate impact on mineral processing was the closure of plants in Kapan and Agarak in the south and Alaverdi in the north, where 600 were left jobless by companies that had paid considerably above-average wages.

Foreign investments in Armenia were already on a decline since the Russia-Georgia war last August and have continued to drop off, the effect of which has been seen primarily in the construction industry.

In recent years the dramatic building boom centered in Yerevan and spreading to even smaller cities and towns has represented up to 27 percent of the country's GDP.

Industry observers now say, however, that construction has dropped by 28 percent, representing projects amounting to some $780 million.

Anti-crisis plan

In November, Prime Minister Tigran Sarkisian introduced a plan for combating the influence of the world economic crisis.

The plan included measures similar to those implemented by most other nations, in particular, subsidizing or providing loan guarantees to companies having difficulties, and even the government taking a stake in some. Another group of proposals included creating better conditions for small and medium companies, which usually create more jobs than the larger enterprises.

Finally, the government envisaged plans for several impressive infrastructural and other construction projects that include a large-scale housing construction in the zone of the 1988 Spitak earthquake and construction of motorways, including a new highway connecting the Batumi port on the Black Sea shore in Georgia with Gyumri in Armenia and further south to Iran and the Gulf region. The project of building a new railroad connecting the territory of Iran with Armenia (the existing railroad of the Soviet era passes through the Nakhichevan exclave of Azerbaijan and has been blocked since early 1990s) is the most ambitious construction initiative declared by the government, yet it is also the least likely due to its high cost for the country—estimated at $2 billion or more. On the whole, all elements of the government's anti-crisis program are aimed at preserving existing jobs and creating as many new ones as possible.

"It is very good that the government has revealed its policy and the measures listed are, in general, correct. But it remains to be seen how theses measures will be implemented when necessary," said economist Heghine Manasian of the Caucasus Research Resource Center.

Economists and others were skeptical of the plan, largely because it relied on measures that had no financial resource in the State Budget. In fact, the government expected to get the funds from foreign sources. An initial agreement on a $520 million loan from the World Bank was reached in January. In February, Russia announced its agreement to extend another $500 million.

This extensive borrowing is generally met positively by economic experts, despite some concerns that new credits would exact political costs.

"Whereas oil-rich countries have created a financial cushion which can be used during crisis, Armenia's only cushion is its good reputation as a reliable borrower," says Tigran Jrbashyan, Development Director of the Yerevan-based Ameria Bank. "So, it is a good time to use this opportunity and take the credits we need."

A radical feature of the plan presented by the prime minister was the expectation that, during the crisis, Armenia might benefit from the money of Diaspora Armenians, who, presumably, would deposit their money in Armenia.

This is the so-called All-Armenian Bank, a projected investment vehicle which was one of the novelties of the program of Sarkisian's government formed in April 2008. The prime minister also expressed a hope that Diaspora Armenians could be persuaded by his government to use the Armenian banks as safe haven for their savings.

His novel idea, though, was met with understood skepticism.

"The Armenian banks are in fact stable. But there are many other safe havens in the world, and it is unclear why the Armenians abroad will choose Armenia, which is not a very safe country," Bagrat Asatryan, a former chairman of the Central Bank and now a professor at Yerevan State University, said.

The crisis and tax reforms

The economic crisis has had a similar impact on countries worldwide and it is not surprising that measures the Armenian government declared in its anti-crisis program are similar to those adopted by many other governments, ranging from the US to Estonia.

Armenia has a peculiarity, though. On his very first day in office, April 10, 2008, Prime Minister Sarkisian stated that a principal goal of his government would be improving tax administration to reduce "the shadow sector," businesses not paying taxes properly, which, according to some estimates, makes up at least one-third of the Armenian economy. As the government has been unable to control exact turnover of big importing companies (mostly owned by so-called "oligarchs"), it chose a strategy to fix the real turnover of small traders, hoping that in the process the real turnover of big wholesale traders would also be disclosed. To that end, an energetic campaign aimed at improving the tax administration of small traders was initiated, including a nationwide campaign to encourage installation of cash registers, which were rarely seen in small shops earlier.

"These measures are targeted not against you, but against large traders," PM Sarkisian told protesters outside one of Yerevan's gold markets in January. The small traders said that their businesses were unfairly bearing the burden of problems created by larger enterprises.

Gagik Poghosyan, deputy chairman of the Foundation for Small and Medium Businesses, said that the government does its best to make the taxation reform comfortable for small business. In particular, the government routinely consults the business community about the details of its actions.

Nevertheless, these reforms cause multiple problems for small and medium businesses – problems that happened to coincide with the global economic crisis. Asatryan is among experts who believe that the government should postpone its reforms till after the crisis passes.

"We have had this situation for 15 years now. No catastrophe will happen if it continues for one more year," he said during a public discussion.

"It is good that the government is fighting the shadow economy, but they have been wrong to start with small and medium businesses," said Andranik Tevanian of the Politeconomy Institute. "Before they reach the big business, the small and medium may die altogether."

The government, though, is resolved in its approach, fearing that the revenues of the State Budget will deplete due to the crisis, and it avoids any steps which may cause their further decline.

So the dilemma remains: Need for better accountability is recognized on all sides, but the impact of measures to assure it remains unclear. "The success of the tax reform is not evident. The government should have the political courage to bring the oligarch out of the shadow and put an end to monopolies," economist Tatul Manaserian said.

First anti-crisis steps

Over the past several years Armenia was in a boom of consumer crediting, and small credits were available even to pensioners earning less than $100 a month. Since the dark cloud of the crisis began hovering, however, ads offering credit have disappeared and consumers now have to pay at least 50 percent of the cost of a television, for example, to get two years' credit on the balance.

Samvel Danielian, director of Noyan Tapan Publishing House, says that he has to spend three months to get a loan for his company. This delay creates additional difficulties for his otherwise successful enterprise. Danielian said that taking credits in Armenia suddenly became difficult starting last October when already-high interest rates of 14-16 percent jumped to 18-22 percent. Whereas previously getting a loan equivalent to 70 percent of the collateral was not a problem, now many banks refuse credit at even 50 percent of collateral value.

Such changes make the previous "foreign" crisis real for Armenian businesses.

Meanwhile, in early February, the government initiated what can demonstrably be seen as anti-crisis actions, when it extended its first bailouts for local companies, offering a total of $10 million in help to three companies out of the 70 that applied. In many ways it is a token gesture, but one that offers a needed dose of optimism, suggesting that the government is not apathetic to the hardships the Armenian business community unexpectedly faces.

In another step, the government moved to increase by 50 percent customs duties for imported consumer goods, while also giving two-year tax benefits to those businesses which buy modern equipment to improve their production. "This is a step that our governments should have made years ago. A small economy like ours cannot develop without some prudent protectionism," economist Manaserian said.

In fact, Sarkisian's government faces problems not seen by any Armenian government before. For the first time in independent Armenia the government will have to make commercial decisions, i.e., to determine which company and even which sphere of industry deserves the government's support. Mechanisms for making such decisions have not existed, and must be created and tested immediately. Moreover, Prime Minister Sarkisian made it clear that the government would try to use the crisis as a means of reaching some of the ambitious goals declared earlier, such as implementing the modern corporate governance standards and creating a regional financial center in Armenia.

The most immediate topic on the minds of businesspeople and consumers now, however, is the Central Bank's foreign exchange policy. The Armenian currency, the dram, has – until just this March – been uniquely protected against fluctuation.

But, with dramatic result, the dram fell by up to 30 percent within a matter of hours on March 3, following an announcement that the Central Bank would no longer keep the national currency at a fixed rate.

Whereas other currencies—the euro, the British pound, the Russian ruble, etc.—slipped against the dollar, the dram held at 305 drams per dollar until March, the rate it had had since early 2008.

The immediate result of the dram drop was a rush on basic consumer goods as panic shopping followed the currency news. Within hours, prices increased to match the rate of dram devaluation, leaving the public perplexed and anxious over just how severely average Armenians will feel the waves of a crisis started far from these borders.

Journalist Haroutiun Khachatrian specializes in economics and is editor of Noyan Tapan Highlights in Yerevan.

Originally published in the May 2009 ​issue of AGBU Magazine. Archived content may appear distorted on your screen. end character

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