by Suren Musayelyan and Sara Khojoyan
Political upheavals never do good to an economy, an axiom that Armenia's authorities may have already felt in some way in the wake of the post-election political crisis, and surely will have to deal with in the months or even years to come.
Armenia, which has seen six straight years of double-digit economic growth and was, according to all projections, well on track for another year of robust growth in 2008, is facing a prospect of possible economic slowdown on the heels of this spring's troubled post-election developments.
The 20-day state of emergency imposed by President Robert Kocharian on March 1 after bloody battles between civil protesters and riot police in downtown Yerevan and the ensuing allegations of abuse by Armenian authorities elicited a choir of criticism from the international community. Among the voices of unhappy allies was that of the United States, on whom Armenia has expected a monetary infusion of millions that would take its economy further.
In a letter addressed to President Kocharian on March 11—in the middle of the emergency rule—John Danilovich, CEO of the Millennium Challenge Corporation (MCC), officially warned that "recent events could have negative effects on Armenia's eligibility for MCC funding"—a $235.6 million compact with the people of Armenia to help rebuild its rural infrastructures.
"MCC is reviewing operational aspects of its ongoing work in Armenia in light of these events, including the suspension of media freedoms and the imposition of a state of emergency, and is closely monitoring the situation with U.S. Government and donor colleagues," Danilovich wrote.
Later, US Charge d'Affaires Joseph Pennington said his government would take a "wait-and-see" approach to the new administration of Serge Sargsyan, allowing it at least the customary "100 days" to determine if Armenia would right itself on a democratic path, thus earning the MCC support.
Speaking to reporters soon after the Danilovich letter, Kocharian said it would be regrettable if the MCC withheld its funding, but added that Armenia would "seek alternative sources of funding" to complete the programs if this decision was taken.
In his remarks on March 20, Kocharian reiterated that the MCC was the only program in Armenia that could be terminated any moment for reasons that did not concern economics. That is to say that other money expected to be injected into the economy is not bound to expectations of human rights performance, etc.
Acknowledging that the post-election developments in Armenia had influenced the economic life of the country, Kocharian still sounded optimistic, saying that the country would recover quickly and things would soon return to normal.
"We were heading for a 10 percent economic growth this year on the record of the first two months, but, of course, the impact of these developments will be reflected on the indexes of economic growth in the next months," Kocharian said. "But I don't think that this impact is irreversible. People may rest assured that there is and will be stability in the country.
Businesspeople can be confident that economic policies will not undergo any drastic changes. The rules of the game in the economic field will be stable and this is the best guarantee for the investment policy, for [Armenia's] attractiveness for investments."
Even as the president spoke, however, several influential businessmen were among those either arrested or in hiding over their alleged roles in the March 1 unrest and preceding unsanctioned protest rallies. The impact of their disengagement from local business is practically impossible to gauge.
Chief among those who've found themselves on the wrong side of authorities is Khachatur Sukiasian, a Member of Parliament and owner of the powerful Sil Group Company, and among Armenia's top 10 wealthiest businessmen. (As of this report, Sukiasian has been in hiding and his whereabouts unknown.)
Damaged, but not destroyed
The retiring president cited the example of the major crisis following October 27, 1999 when Armenia's prime minister, parliament speaker and six other senior officials and lawmakers were killed by gunmen who stormed the parliament chamber.
He said that the first six months that followed the tragedy were marked by "great uncertainties" resulting in a zero economic growth in that period. "But after clear decision-making in May, we managed to close the year with an economic growth at above six percent, achieved in the second half alone," Kocharian said. "I believe that if there are no new provocations, if stable and consistent steps are taken by the state, this factor will have some impact for one or two months, but after that we will repair the losses, and will close the year with significant (growth) indexes. And if it is done, then our pensioners may expect one more raise in pensions and all our social programs will be realized. Prolongation of this situation simply hits every citizen, especially the socially vulnerable stratum. And the sooner we get onto a normal course, the more all citizens will gain."
In an earlier media interview, on March 12, President Kocharian mentioned one of the sectors that suffered immediately—tourism.
"Such events first of all affect the area of tourism. The flow of tourists to our country these days has significantly decreased. Travel agencies are alarmed that many customers who have booked visits to Armenia many months ago are now canceling their trips," he said. "Last year Armenia welcomed 510,000 tourists. All those working in areas relevant to the economy benefit from the development of tourism in Armenia. In addition, the revenues from tourism are evenly distributed all over the country. Recent events adversely affected the income of the population. It means that those who instigated disturbances pickpocketed each of our citizens."
Economists say business activity always decreases when countries see stormy political processes such as elections, and agree that the post-election crisis in Armenia will surely leave a trace on the country's economy.
An economist, Dr. Tatoul Manaserian says what happened in Armenia has been "a deterrent for both foreign investments and local businessmen."
"There is no alternative to forming a professional government that will take the processes in the right direction. And I am optimistic in this sense," Manaserian says. "What we have today is the consequence of errant personnel policies conducted by the two successive administrations since the 1990s. As a result, we don't have a national economy and lack competitiveness. And the authorities also realize this."
Manaserian predicts "no positive move" in the next several months, but gives the new administration a chance to succeed if it shows political will and manages to form a skillful team to achieve drastic improvements—like it was, he says, under the short-lived 1999 government of assassinated PM Vazgen Sarkisian that "achieved considerable results within five months."
Despite the outgoing president's assurances of a speedy recovery, regaining investor credibility is likely to be high on the agenda of his successor's administration.
Foreign and domestic investments are crucial to any country, especially one that relies heavily on them because of the absence of vast natural resources and export opportunities.
Armenia posted a 13.8 percent GDP growth in 2007 (standing at some $9 billion in total). But official statistics also reveal that the booming investment-driven construction sector and other foreign investments, including growing private remittances, accounted for a sizable portion of that end result. The money transferred to Armenians by relatives who live or work abroad also allows Armenia to underwrite its growing trade deficit. A United Nations report released in April says that the "current-account deficit rose from US$78 million (equivalent to 1.9 per cent of GDP) in the first nine months of 2006 to US$327 million (5.7 per cent of GDP) in the first nine months of 2007." Remittances close the trade-deficit gap. According to the same UN report (by its Economic and Social Commission for Asia and the Pacific), remittances accounted for 14 percent of Armenia's GDP in 2007.
Dr. Zoya Tadevosian, State Economics University of Armenia professor, takes issue with optimistic views as she predicts uneasy times for foreign investors, who will be more inclined to look outside Armenia for investment.
"A country that lacks resources and needs investments badly must create a favorable investment climate. The current political situation in Armenia hardly provides such an environment and there is a great sense of mistrust [among investors]," Tadevosian says.
This economist contends that the only way for the government to fulfill its ambitious $2.5 billion state budget is to employ administrative means (i.e., additional taxes), which, in turn, will put off businesses and add to their uncertainty.
"Our economy is not a functioning organism as it primarily rests on services and construction. The state pays little attention to such spheres as industry and agriculture," Tadevosian says.
In a country where more than a quarter of the population officially lives below the poverty line, solving economic and social problems is a top priority for any government.
Armenia's newly elected president Serge Sargsyan appears determined to tackle issues on the economic front and even promised, after signing a political coalition between his governing Republican Party and three other leading parties of the country, that the reforms they plan could be "painful" for some. Apparently he was referring to the much-talked-about clampdown on corruption and monopolistic practices.
Kocharian's successor is taking the helm of the country at a time when its society faces a widening political divide, but political problems still cannot overshadow the economic and social woes experienced by a large part of Armenia's population.
It is not a surprise that the newly formed political coalition, which besides Sargsyan's party also includes pro-government Prosperous Armenia and two parties noted for their criticism of the government throughout the recent election campaign—Orinats Yerkir (Rule of Law) and the Armenian Revolutionary Federation (ARF)—has taken a serious stance on major economic issues facing the country.
But Sargsyan also took a number of steps still as prime minister to assure the public of his commitment to improve the economy.
Shortly after opposition street protests and ensuing riots were put to an end with the use of force, the incumbent prime minister and president-in-waiting Sargsyan chaired several cabinet meetings, giving instructions to his ministers, including how to tackle major economic and social issues.
A growth in prices for staple products on the market stemming from rising prices on the world market features prominently on the government's agenda.
In particular, Armenia's authorities intend to ensure Armenia's food production security through the introduction of a number of preferential terms for agents in the agricultural sector, which they expect will result in Armenia being able to secure itself from drastic price changes in the world's grain and meat markets. Support for local producers, creation of jobs and stimulating exports are other measures to which the government is giving serious thought.
In March, in a rare televised question-and-answer interview where Sargsyan answered questions taken online from ordinary citizens, he mentioned agriculture among spheres of particular attention. He said it would be one of the targets of so-called national projects to focus on—analogous to national projects that, for example, Russia has been carrying out in the last several years.
Understanding the need to ensure that the economy does not get derailed, the government appears to have mobilized efforts on all fronts, including diplomatic, to assure the continuity of its relations with key Western donors and strategic partners.
To ensure its political, economic and military stability, Armenia traditionally is also looking to the north.
No wonder, then, that Sargsyan's first trip abroad after winning the February 19 election was to Russia to meet outgoing President Vladimir Putin, President-elect Dmitri Medvedev, Prime Minister Victor Zubkov, and Mayor of Moscow Yuri Luzhkov, as well as representatives of the local Armenian business elite.
The sides exchanged affirmations of their commitment to further developing ties in all areas, including trade and economy.
Russia is a key economic partner for Armenia. According to official sources, the trade between the two countries increased by about 65 percent in the course of 2007 to reach some $800 million a year, with both sides saying there is room for a further increase in trade volumes. Russia is also a key investor in Armenia's economy, with its total investments standing at about $1 billion.
There is a large presence of state-owned and private Russian companies in Armenia, including those in the realms of banking, telecommunications, transportation, energy, and others.
During the high-level meetings in Moscow, Sargsyan appeared to have received fresh assurances of Russia's commitment to further expand trade and economic cooperation, including what both countries' official sources reported as "the realization of joint large infrastructure projects in energy, transport, and telecommunications." (This may include the construction of an oil refinery in Armenia.)
To maintain investor activity, Armenian leaders have also had periodic meetings with businesspeople, both local and foreign.
And in a rare show of cooperative spirit, Sargsyan also met with representatives of medium-sized and small businesses to discuss issues that emerged after changes were introduced in the law on simplified tax.
These and other measures are primarily aimed at ensuring businesses that the state of Armenia still remains a reliable partner, that those having businesses in Armenia have no reason to leave and those who have been contemplating setting up a business here have no reasons to delay it.
But economist Eduard Aghajanov, known to be critical of the government, downplays the impact of the latest political developments on Armenia's economy, which he says is abnormal as it is.
"Armenia is a 'unique' country which seems to be immune to unstable political situations," Aghajanov says, citing the experience of previous years, including 2003 when the country saw parliamentary and presidential elections, protest rallies and other events not conducive to economic strengthening, but still managed to end the year with a record-high growth of 13.9 percent.
"Since our economy is abnormal, political situations traditionally have no effect on it. And the budget performance or economic growth will be 'drawn' as appropriate," says Aghajanov, former head of Armenia's National Statistical Service.
Despite the skepticism that some may feel, fulfilling an ambitious budget of $2.5 billion for 2008 still appears to be a no-nonsense challenge to the Armenian government.
Professor Manaserian says that the fulfillment of the budget will again depend on who the team fulfilling it is: "Everything will depend on how tax collection is administered, on whether an environment for fair competition is guaranteed, and the shadow segment of the economy is removed or not."
In the meantime, Sargsyan gives assurances that the budget fulfillment will proceed as planned. In proof of this, the government also approved amendments to the law on pensions, stipulating by legislation that senior citizens must be paid their pensions (increased by 60 percent since January 1) in the month for which this pension is designated.
Sargsyan also reassures the public of his government's plan to carry out consistent policies aimed at improving social conditions of the population. In particular, answering questions during his televised talk, he spoke of accessible loans for young families:
"I think that if we manage to stabilize the situation, in 2008 there will be certain improvements. In 2007, five large banks entered Armenia's financial market. This means that in the course of time there will be less expensive loans than there were yesterday or there are today. Accessible loans, normally paid jobs, the rest will come by itself," he concluded.