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The Road Ahead
The Road Ahead

Under New Management

Hovik Abrahamyan Inherits Challenges of Eurasian Economic Union Membership and Pension Reform 


Not long after Armenia’s Parliament appointed him to lead the new government, Prime Minister Hovik Abrahamyan stepped out of his office to face a crowd of protesters opposed to the controversial pension reform act. If the public gesture was intended to show that the new prime minister was willing to listen to detractors, it also emphasized the contrast between Abrahamyan and his predecessor, former Prime Minister Tigran Sargsyan, who during his six years in office reportedly never confronted a protester. 

Unlike his predecessor, Abrahamyan comes to the post as an experienced political leader and consensus-builder.  As speaker of the parliament and deputy prime minister, Abrahamyan often found himself in the crosshairs of political wrangling among all parties. He had the duty to listen to arguments contrary to his own and to find a workable compromise when possible.  President Serzh Sargsyan described Abrahamyan as a “prime minister acceptable to all.” 

In the first few months of his tenure, he has promised to “continue reaching out for cooperation” and has already shown a willingness to put a new face on the position of prime minister. In May, he announced the creation of a “Prime Minister’s Club,” a conciliatory measure he declared would allow the government to consider our previous prime ministers’ experience and knowledge, which will help in realizing the reforms. President Sargsyan affirmed that the idea would “create a circle of trust among former heads of government, regardless of their differing political views.” 

In both the short and long-term, Abrahamyan’s government faces critical choices when it comes to the future of Armenia. After years of what critics contend added up to economic mismanagement and poor policymaking, there is a pressing need to implement social and economic reforms to reverse the country’s high rate of unemployment and ongoing brain drain in order to put Armenia on a path towards economic success. Abrahamyan, however, must first clear a more immediate hurdle: reforming the controversial pension law that has already cost one prime minister his job. 

 

Resigned or Pushed Out? 

After six years in office and months of speculation, Tigran Sargsyan resigned as prime minister on April 3, after his government’s pension reform was defeated in the Constitutional Court. While opinions vary as to why he resign with four years left in his term, many political observers concluded that Sargsyan was likely pressured to leave early.  

Some link Sargsyan’s resignation to his ongoing rivalry with former President Robert Kocharyan, who is rumored to be contemplating a return to politics. The Prosperous Armenia Party (PAP), led by business tycoon Gagik Tsarukyan, is believed to be Kocharyan’s main political support base. The party formed an informal coalition with three other minority factions in the National Assembly: The Armenian National Congress (ANC), led by Armenia’s first president Levon Ter-Petrosyan, the Armenian Revolutionary Federation (ARF Dashnaktsutyun) and the Heritage Party, led by U.S.-born former Minister of Foreign Affairs Raffi Hovannisian. This coalition, often referred to as the Quartet, criticized Prime Minister Sargsyan over his failed economic and social policies. Fueled by widespread protests, the Quartet vowed to initiate a vote of no confidence against Sargsyan at the end of April. 

As opposition to Sargsyan’s government gained more traction, some argue that the pressure to find a figure more acceptable to the pro-Kocharyan forces intensified, resulting in the appointment of then Parliament Speaker Abrahamyan as part of a power play to regain political control. At least two of the Quartet factions—the PAP and Dashnaktsutyun—have long been considered loyal to Kocharyan, who is believed to be closely linked to Abrahamyan.  

According to Armen Khanbabyan, writer for the Moscow-based Armenian newspaper Noyev Kovcheg: “Hovik Abrahamyan, who once was deputy prime minister, had long sought to take over the post of prime minister. Tigran Sargsyan was constantly aware of the threat posed by the parliament speaker, although this rivalry was carefully hidden from the public. Abrahamyan’s closeness to Tsarukyan and, therefore, his indirect communication with Robert Kocharyan, was an obstacle to the fulfillment of Sargsyan’s dreamÖone can say that the appointment of Abrahamyan became a sort of success for the pro-Kocharyan wing in power.” 

Sargsyan’s resignation has also been tied to his pro-Western foreign policy.  A longtime advocate of the Western economic system, Sargsyan increased lending to Yerevan on the part of international financial institutions. He published a number of Op-Eds—some in Russian newspapers—arguing against Armenia’s accession to the Russian-led Customs Union given differences in  
economic orientation, and the absence of shared borders with any of the Customs Union’s existing member states: Russia,  
Belarus and Kazakhstan. 

In what was seen as a landmark foreign policy reversal, however, Armenian President Serzh Sargsyan (no relation) announced last year that Armenia would instead join the Customs Union, cementing its ties to Russia on whom it depends for military and economic support. This may have proved too much to bear for former Prime Minister Tigran Sargsyan, who had spent the past four years negotiating an association agreement with the European Union that was now rendered incompatible by the accession talks with the Customs Union. 

Finally, Sargsyan made it a priority to develop Armenia’s banking system, and some analysts contend his Western-style reforms caused discontent among Armenia’s powerful oligarchs—wealthy businessmen who either hold political office or have strong ties to the political establishment. As a result of Sargsyan’s new policies, these oligarchs were forced to switch to an electronic reporting system, pay taxes and accept control mechanisms that did not exist before.  

In one of his first acts in office, Hovik Abrahamyan—an economist by training and successful businessman—abolished Sargsyan’s luxury tax, declared the ceremonial expenses of top officials confidential after they had been public information under Sargsyan, and revoked the statutory audit of large enterprises. All measures, some say, indicate the oligarchy may have also played a role in Sargsyan’s resignation. 

The Road Ahead  

In addition to grappling with Armenia’s economic challenges, Abrahamyan must negotiate Armenia’s smooth entry into the Customs Union and Eurasian Economic Union, all the while balancing political harmony with the interests of the country’s powerful business oligarchy.  

The government will be able to solve the first issue only if it can agree that its position on Nagorno-Karabakh is consistent with the stance of the Customs Union’s existing member states. To manage the second issue, Abrahamyan is also expected to temper any discord that may have arisen between the government and opposition parties.  Prior to Sargsyan’s resignation earlier this year, some parliamentary opposition forces considered impeaching him, largely making their case on the public discontent sparked by his policies. They pointed specifically to the pension reform act, which they claim exacerbated the brain drain of the most productive members of the society. In an already small nation of 3 million, every year another 70,000 people on average leave in search of better opportunities.  

To date however, Abrahamyan’s new policy initiatives have garnered little consensus.  On May 22, five of the six parliamentary parties boycotted voting on Abrahamyan’s new government program. Notwithstanding, it passed in the National Assembly as the ruling Republican Party of Armenia has a majority in the 131-seat body and mobilized all of its members to vote. The program that needed at least 66 “for” votes was approved by a vote of 70 to 1, with 2 abstentions. All minority factions, except for a few individual lawmakers, opted out of the vote.  

Abrahamyan described his program as “realistic, demanding, and attentive” and suggested that the opposition had boycotted out of fear of betraying its constituents rather than on principle. At the same time, Abrahamyan conceded that the government simply does not have the financial resources to implement some initiatives. Foreign investments fell last year by more than a third. The challenge of stimulating economic growth in a country with a 16.8 percent unemployment rate in 2013 is further compounded by the current pension system.   

 

Pension Reform 

Abrahamyan inherited the issue of pension reform from his predecessor and it remains the central source of social division in Armenia today. Former Prime Minister Sargsyan’s pension act, implemented in January, was ruled partly unconstitutional three months later. Both supporters of the controversial legislation and its numerous opponents agree that the current national pension system in Armenia needs to be reformed, but are unsure of what steps are needed. 

Before Armenia became independent in 1991, there were up to five working citizens for each pensioner, providing for generational solidarity. Over the years, however, that ratio changed dramatically due to a number of factors, including an outflow of the population, a decrease in the number of jobs and other demographic and social changes. As a result today, there are now only two workers to support one senior citizen, a ratio specialists deem too low to sustain the system in the long-term. 

To ensure the long-term viability of the pension system, government officials mandated that optional regular pension contributions would now have to be made compulsory. Under a series of laws passed in 2010, drastic changes were introduced in the pension system, including a mandatory cumulative retirement plan beginning in 2014 for all citizens of Armenia born after 1973.  

The reforms meant that all working citizens born after that year must contribute to their future pensions themselves. Five percent of their monthly salaries would be deducted and transferred to an individual account at one of several pension funds licensed by the state, with the government doubling the sum of the transferred money. Government leaders at the time—including Sargsyan—acknowledged that the change would be painful. 

According to a recent Gallup International Association survey, nearly 87 percent of respondents aged 18-41 were opposed to the pension reform, while only 7.5 percent said they supported the new plan.  The majority of people indicated a lack of trust in the government and pension funds, as the main reason why they did not want to participate in the system. 

A group of young professionals, including many with high-paying jobs in the information technology sector, staged the first protests against the funded pension law in late 2013. Instead of having to contribute 5 percent more to the pension scheme, they felt their money would be better spent repaying student loans or investing in homeownership.  

The main grievance of most protesters, however, revolved around their constitutional rights. The small group of protesters rapidly grew into a larger movement calling itself “Dem Em” or “Dem.am” (I’m Against). During several large protests in Yerevan between January and March, they argued that a salary constitutes personal property and as such it is unconstitutional to force people to give up their property.  

In early April, the Constitutional Court partially agreed, ruling that portions of the Law on Funded Pensions were indeed unconstitutional. The court gave the government and the National Assembly until September 30 to amend the law to conform to the Constitution. However, the court also convened that until that date, the provisions in question would be considered valid.  

The court’s unusual decision only added to the confusion among both employers and employees, until the government cancelled the penalties for not complying, thereby suspending the compulsory component of the pension regime.  

After consulting with political representatives, including the four minority factions in the National Assembly, Abrahamyan announced a shift toward what he called a new “compulsory, but not forced” formula he claimed would be acceptable to broad layers of society by providing what he called “maximum flexibility.”   

“I am confident that pension reform should have a mandatory component in our country,” he stated. “But we must find a way that will promote people’s participation in the process.”  

Davit Manukyan, one of the active members of the Dem.am movement, agreed with the prime minister on the point that any reform, even a painful one, should first of all be accepted and acknowledged by society as necessary. But he insisted the reform in its present form is unacceptable due to the element of compulsion.  

“We will continue to press for a solution that will exclude compulsion and not require people to make pension contributions against their will,” said Manukyan. “This is exactly what the Constitutional Court demands.”  

While far from resolving the issue, Abrahamyan has at least brought a measure of calm, as the complex matter of pension reform continues to fuel division and debate. 

 

Stimulating Economic Growth 

Since taking office, Abrahamyan has also taken measures aimed at strengthening small and medium-sized businesses. Specifically, in late June, the government dramatically cut revenue tax by more than half—from 3.5 percent to one percent.  

According to the National Statistic Service, there were 19,022 retail-trading centers in Armenia in 2012. In 2013 that number fell to 1,7091. In one year alone, more than 1,500 stores and 400 stands shut down, with the majority of owners complaining they could no longer afford to pay the taxes. 

“It’s a fact that many have closed their businesses and some have left,” said Karen Chilingaryan, head of Consumers Consulting Center. “However, there is now hope that this trend will decrease.” 

To help offset the rising cost of electricity, the Abrahamyan-led government also announced that it would raise social benefits for vulnerable families by 1,000 drams (about $2.50) to cover the expected 800-dram increase in electricity costs. The government is also planning to raise the minimum wage, as Armenians struggle against across-the-board price hikes for essentials. 

In the middle of implementing these social and economic reforms at home, the government is facing the added challenge of structuring itself against the unknown of how domestic and foreign relations might shift when Armenia becomes a Eurasian Economic Union member.  

Originally published in the September 2014 ​issue of AGBU Magazine. end character

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AGBU Magazine is of the most widely circulated English language Armenian magazines in the world, available in print and digital format. Each issue delivers insights and perspective on subjects and themes relating to the Armenian world, accompanied by original photography, exclusive high-profile interviews, fun facts and more.