COLLAPSE OF A HOUSE OF CARDS

The economy of Armenia was the first to collapse in the CIS against the backdrop of the global crisis. One can only speculate as to how this process was held back until now. But the time has come - in any case the "long-suffering", but very enterprising, Armenian government chose the ideal moment to announce its decision to devalue the national currency. This almost coincided with statements by IMF and World Bank spokesmen about their readiness to make loans to Armenia to help them overcome the consequences of the global economic crisis. 

Devaluation Armenian-style

For some reason the Armenian authorities always produce nasty surprises for their people in March. Exactly one year after the authorities harshly repressed a popular revolt, the country's government has done the Armenians another disservice. In the morning on 3 March 2009 the chairman of the Armenian Central Bank, Artur Javadyan, unexpectedly told a press conference that the Central Bank would limit its participation the currency markets and would return to the policy of a "floating dram". Straight after the announcement the dollar rate soared from 305 to 370 drams and by evening had topped 400 drams. Panic began in Armenia: people rushed to buy foreign currency and produce in the shops at the old prices. In response a chain of the better known shops stopped operating while others hurried to raise prices which at times reached absurd levels. Only the next day did Prime Minister Tigran Sargsyan decide to say that the dram would float within the limits of 360-380 to the dollar and criticize the floating devaluation applied in Russia.

It has to be said that Armenia is not the first CIS country to be forced to take this step: as well as Russia, Belarus and Kazakhstan opted for a one-off fall in the currency to a fixed level. But Armenia had to be different this time too and left the dram to the will of the market, although a day later the rate returned, or was returned, to the 370 drams to the dollar mark.

"Basically, what happened on 3 March was what everyone was expecting," the chairman of the parliamentary commission on financial-credit and budget issues, Gagik Minasyan, said. Since the end of the year, the Central Bank had kept the dram rate within certain limits, diverting from its stated policy of a free rate in order to soften the transition for the public, he continued. "The banking system should be such that, if the need for a 100-per-cent deposit arises, the bank can meet the demands of depositors." Armenian Deputy Finance Minister Vardan Aramyan is also convinced that the devaluation of the dram is objective and accurately reflects three components of the financial and economic market: trading conditions, capital flow and productivity. When they changed, this led to a change in the exchange rate.

A logical domino effect of a fall in the exchange rate is a fall in GDP - a 1.5-per-cent fall in real GDP is a possibility over the year in Armenia, the country's finance minister, Tigran Davtyan, thinks. The Armenian government as a matter of urgency decided to switch to quarterly planning of the state budget for 2009 and strict economy and intends to cut non-social expenditure. For some reason, expenditure on defence and security is included in the social spending category, but what defence capability can a bankrupt country have?

A time for everything

Today many analysts are wondering why all this should happen now. After all it is no secret that the Armenian economy does not depend much on domestic factors, taking into account the low production volumes in the country and the even lower level of development of the financial and banking sector, and survives mainly on foreign loans and remittances. It is quite likely that remittances have shrunk during the crisis, but since the crisis began last year what made the Armenian government maintain the dram exchange rate?

"The already scarce external resources, sacrificed to maintain the stability of the dram, are gradually eroding, day by day, and production is shrinking. The moment is approaching when the real state of the Armenian economy can no longer be concealed," the newspaper Haikakan Zhamanak wrote earlier. "The world financial and economic crisis would have had a commensurate effect on the economy of Armenia if the government had resorted to equally commensurate steps to tackle it. The government's action has broken up the economy from within."

Even in Armenia itself many people think that the authorities artificially maintained the dram rate until 1 March. Bloody clashes occurred between the opposition and the security forces a year ago, after the presidential elections. Ten people died then. The authorities knew that this year Ter-Petrosyan's supporters were planning a big demonstration which did take place. The ex-president predicted at the rally what in fact happened two days later. "The country is heading for the abyss," he warned. "In the near future, the government will have to give up its policy of artificially supporting the exchange rate. And the dram will simply collapse."

Meanwhile, there is another, even more accurate and practical theory about the devaluation of the dram. Analysts from the American Stratfor (Strategic Forecast) research centre say that the step taken by Armenia's financial authorities shows that the Armenian economy is in a very bad state and that Yerevan was left with no other choice. It became obvious that the country's already sparse financial reserves were running out. "This reality forced the Armenian authorities to give up their practice of currency interventions on the market in order to receive financing from abroad, which triggered a sharp fall in the national currency in one day," experts say in an article. 

It is no coincidence that representatives of the International Monetary Fund and the World Bank spoke out at almost the same time as the Armenian Central Bank chief. The World Bank fully supported the decision of the Central Bank and confirmed its readiness to provide a credit of $525 million. For its part the IMF said that it was considering the possibility of providing $540 to Armenia to bolster its reserves, of which the republic could receive $239 million straightaway after confirmation of the programme. "These agreed actions by the Armenian Central Bank, on the one hand, and the World Bank and IMF on the other imply that the Armenian financial authorities' abandonment of support for the national currency was a condition of the provision of credits to the Armenian side," Armenia Today writes.

The Armenian government cannot say how long the country's economy can hold out. The only consolation for the people at present is the loans from international organizations and Russia. There is no other hope.

Manat under control

Armenia is inflating its foreign debt like a balloon, thereby increasing its dependence not only on Russia, which has bought up all the country's most valuable strategic assets, but on the USA too, which plays first violin in the IMF and World Bank. The situation is almost the same in Georgia: despite assurances from the government, Georgia's foreign debt grew 30 per cent by March 2009. The increase has several causes - the sale of government securities on the London market ($500 million), the fall in the lari exchange rate and the receipt of credits from various international organizations after the war in South Ossetia.

Today Azerbaijan can be considered the only sustainable and economically independent country in the region: in 2008 the country's foreign debt guaranteed by the government was 2.686 million manats or 7.1 per cent of GDP which is way below the permitted norm. With what is going on in our neighbouring countries, it is also interesting that the head of the Azerbaijani National Bank talks with absolute certainty about the impermissibility of a sharp devaluation of the national currency. This statement became a response to the persistent rumours over the past month about an imminent fall in the manat rate. There are instances of the conversion of manat deposit accounts to dollars, not only by individuals but by juridical persons too. The concern is entirely justified if you bear in mind that the world's most developed countries and economic systems could not withstand the crisis. However, the response of the National Bank chairman was direct and clear: devaluation is not on the agenda in Azerbaijan.

In the first two months of the year the National Bank sold $300 million worth of currency while the National Bank reserves are more than double the manat money supply. This is more than enough. This is why since the start of the year the national currency fell by only 0.5 per cent against the US dollar while it strengthened 9 per cent against the euro. If you bear in mind that most of the foreign trade deals are done in dollars, the strengthening of the manat against the European currency has had little effect on local exporters. So there's nothing to worry about.