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Armenia's unhappy New Year

Gyumri march - Vahan Stepanyan PAN photo Demotix.jpg

Armenia is now a member of the Eurasian Economic Union. But with the economy in trouble, does membership have any benefits?

 

Kristine Aghalaryan
23 January 2015

In 2013, after four years of talks, Armenia was on the brink of concluding an Association Agreement with the EU. But then its president, Serzh Sargsyan, suddenly signed a document making his country, instead, a full member of the Russia-led Eurasian Economic Union (EEU), triggering protests in the capital, Yerevan, as Armenians worried that this might mean an end to their country’s sovereignty.

The remaining countries of the EEU – Russia, Belarus, and Kazakhstan – ratified the Treaty, and on 2 January 2015 Armenia officially became its fifth member.

The declared aim of the EEU is to strengthen the economies of its member states, develop closer relations between them and modernise their economies to increase their competitiveness in global markets. The Armenian opposition, however, believes the Union was forced on the country by Russia, and will undermine its independence.

Armenia’s National Assembly ratified the treaty by a majority of 103 to seven, with one abstention, although this was hardly unexpected, since the ruling conservative Republican Party has an overall majority, and the vote would have gone through even if other parties’ deputies had opposed it.

The Armenian opposition believes the Union was forced on the country by Russia and will undermine its independence

For and against

‘In its first year of EEU membership, Armenia will receive an additional $150-200m  in customs duties,’ argued Vardan Aivazyan, chair of the Assembly’s Permanent Economics Commission, during the debate on the measure. He also confidently predicted that Armenia’s consumer spending would increase, creating the possibility of duty-free trade.

Not everyone, however, was convinced. Ruben Akopyan, a member of the liberal Zharangutyun (Heritage) opposition party, urged his parliamentary colleagues to vote against the treaty, arguing that ‘claims that membership of the EEU is a purely economic matter are nonsense: economics and politics can’t be separated’.

Armenian dram - shutterstock_0.jpg

On 17 December, the dram fell to its lowest level in ten years. (c) ShutterStock.

Alexander Arzumanyan, another opposition deputy and former Minister for Foreign Affairs, called government insistence on presenting the treaty as strictly economic, an attempt to pull the wool over the public’s eyes. ‘The creation of the EEU is a bid on the part of the Russian government to reincarnate the Soviet Empire. We are yet again being forced, as we have been throughout our history, into choosing one direction over another. And throughout our history this has only brought us trouble.’

Arzumanyan also questioned how the EEU could guarantee the economic security of its members if Russia’s own economy was collapsing under the weight of sanctions, and how anyone could talk about a good climate for business if the rouble was falling, taking with it the Armenian dram.

The value of a dram

Russia is Armenia’s largest trading partner, and the destination of over 90% of its labour migration. According to 2012-2013 figures, 85% of money transfers into Armenia came from Armenians working in Russia. But the figures for 2014 show a fall in this revenue: in May 2014, transfers were 1.1% down on those from the same month a year earlier, and by August and September they were down about 9% compared with 2013.

According to the Russian press, US sanctions against Russia have also contributed to a devaluation of the rouble on a scale not seen since 1998. In March 2014, a US dollar was worth 36 roubles; it has since risen to a record value of over 66 roubles (as of 23 January). And with the Armenian economy so closely linked with Russia’s, this drop in the value of the rouble has inevitably had an effect on both ordinary Armenians and their country as a whole.

43-year-old Andranik Avetisyan recently returned from Russia with earnings of 300,000 roubles. ‘When I came back in November 2013 those 300,000 roubles were worth $9000’, he told me. ‘I paid an instalment of a bank loan for agricultural equipment; supplied my family with whatever they needed and bought a car. This year I earned the same amount, but it was worth just $5500. I paid another instalment of the loan and we celebrated New Year, but I’ll have to sell the car to pay for my fare back to Russia in two months time.’

Armenia’s central bank lost control of the accelerating devaluation as people tried to turn all their cash into dollars

On 17 December, the dram fell to its lowest level in ten years: the official dollar rate rose 36.86 points and stood at 527.2 drams. Some commercial banks were charging 550 drams for a dollar, and 609 for a euro. Armenia’s central bank lost control of the accelerating devaluation as people tried to exchange all their money for dollars, and banks and bureaux de change ran out of US currency. Some banks required a passport for any exchange, and dollars were going for as much as 600 drams on the black market. The Central Bank urged Armenians not to exchange cash unless it was absolutely necessary.

On 9 December, Artur Dzhabadyan, president of the Central Bank, held a press conference at which he spoke of several reasons behind the fall of the dram. He noted, for example, that the US’s programme of quantitative easing to boost its own economy had meant a devaluation of the currencies of other countries, both developed and developing.

Dzhabadyan also stressed the regional processes that have been increasing the impact of global ones. ‘The effect on the CIS area has been intensified by regional geopolitical difficulties and the fall in oil prices, which have led to a steep drop in Russia’s economic growth and a collapse in the value of the rouble.’

The bank chief then went on to point the finger at internal factors affecting Armenia’s economy, notably those companies that had begun to transfer any spare credit funds into foreign currency in the hope of making extra profit on drams.

‘International experience shows that any panic creates a larger gap between currency buying and selling prices', said Dzhabadyan. ‘In such moments of instability we advise people not to change money unless it’s unavoidable’. He was, however, optimistic about the dram’s devaluation ending soon, since Armenia had a sensible macroeconomic policy, and indicators such as retail prices, the government’s budget deficit, foreign currency reserves and national debt, and the country’s banking system were all running at a stable and controllable level.

Growing poverty

Economists, meanwhile, are sounding the alarm: the devaluation of the rouble is increasing poverty in Armenia. According to opposition deputy and former PM Hrant Bagratyan, an economist by profession, ‘our standard of living will fall by 30% and poverty indicators will rise to 45-50% (the official figure currently stands at 35%). This is a disaster; everything is collapsing.'

Bagratyan blames the dram’s devaluation on three factors. The first is the inexplicable rise in its value over 2004-2005 and 2007-2008, when the dollar rate fell from 595 to 305 drams. This rise in the value of the dram led to artificial growth in consumer spending as money sent home by Armenians working abroad strengthened the currency and people’s standard of living rose to an unsustainable level.

The second factor, Bagratyan believes, is oil prices. ‘Or rather,' he explains, ‘the problem isn’t so much with oil prices as the fact that the international economy has been globalised, but the currency has been nationalised. The market mainly services the dollar, and to some extent the euro.’

One important factor is the lack of professionalism in Armenia’s financial institutions

And the third factor, according to the former prime minister, is the lack of professionalism in Armenia’s Central Bank and other financial institutions. ‘As I said, the flow of money transfers and Russia’s financial situation are the main reasons for the increase in the dollar rate. But we expected it to rise in a steady, controllable fashion, which the Central Bank is evidently incapable of managing.’

The bank’s former chief, Bagrat Asatryan, believes, however, that there are objective reasons for the fall in the dram – the unfavourable economic situation, low growth in the economy, and also external factors. The present situation, he thinks, is the result of a fall in the inward flow of cash and investment.

An unhappy New Year

December is usually a high point for commercial activity, as people prepare to celebrate the New Year. This time, however, takings were down as the rouble devaluation and rise in prices left Armenians with less disposable cash. From 15 December, when the dollar reached its peak, certain goods began to disappear from the shops.

National Assembly deputy Samyel Aleksanyan, whose company has a monopoly on sugar, withdrew his products from the shelves in his supermarket chain. Sugar also started to vanish from small shops, and where it remained on sale, the price doubled. Small and medium shops and other businesses closed their doors as they waited for the dram to stabilise, although most reopened within a couple of days.

From 15 December, when the dollar reached its peak, certain goods began to disappear from the shops

As Armenians did their New Year shopping, the National Statistics Service compiled its December figures. Food prices were up by 5.6%, with the highest rises in dairy products (5.8%); coffee, tea, and cocoa (6.1%); fruit (8.3%); sugar (9.6%), potatoes, and vegetables (18.2%). Bread and other grain products also showed a rise of up to 6.4%, and meat products of up to 3.8%.

Siranush Hakopian, who has been selling flowers in her small shop in Yerevan for 23 years, knows nothing about statistics, but she does know that people were simply not buying flowers for New Year: ‘Our prices are very reasonable. We buy wholesale at high prices but sell at a low mark-up, so as not to lose our clients, only this year everything was more expensive. Last year we were buying home-grown roses for 10,000 drams; this year they were up to 12,000 and it was the same for everything – prices up by 20-25%’. The florist blames the hikes not only on the devaluation of the dram, but also on rising prices for the gas used to heat the greenhouses where the flowers are grown in winter.

Siranush-Hakobyan_0.jpg

The devaluation of the rouble is increasing poverty in Armenia. (c) Kristine Aghalaryan.The gas is, of course, also imported from Russia. In spring 2013, Gazprom, the partly state-owned corporation that is the largest natural gas producer in the world, decided to raise its prices by 67%, although after talks the price hike to the public was reduced to around 18%.

Unsurprisingly, Russian political and economic pressure has led to anti-Russian feelings in Armenian opposition circles. Tension in the country has also risen in the last weeks, after the murder on 12 January, of six members of one family, with a seventh, a six-month-old baby, dying of his wounds a week later. The suspected killer is a soldier stationed at a Russian army base in Armenia, and there have been protests over where he should be tried and by whom.

It remains to be seen if Armenia’s accession to the EEU will see any improvements.

Standfirst image: March towards Russian Consulate in Gyumri, Armenia, following the murder of an Armenian family. (c) Vahan Stepanyan (PAN Photo) / Demotix.

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