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Armenia: Heading towards crisis?, CU Issue 24, March 9, 2009

On March 3, Armenians scrambled to the shops to stock up on supplies as the government declared that Armenia’s currency would no longer be pegged to the dollar. Within a single day, the dram lost up to 30% of its value. The Central Bank made the move in an effort to preserve its shrinking currency reserves, which it had been spending in an attempt to stabilise the dram.  But the multiple effects of the financial crisis are now beginning to bite, and the costs of the fixed exchange rate became greater than the benefits. The dram has now stabilised, and some analysts think that the price readjustment was necessary, if painful.

As well as relieving pressure on Armenia’s reserves, the decision has also opened the way for a bailout by the International Monetary Fund (IMF). The IMF had been insisting that Armenia float its currency in exchange for financial assistance, and Yerevan could now be on track to receive up to $540 million. However, the bailout is not guaranteed, and the IMF is allegedly concerned by Yerevan’s plans to privatise its pension funds, arguing that not only does Armenia lack the administrative capacity, but that the middle of a severe recession is a dangerous time to do so.

Armenia is, clearly, not the only country in financial difficulty right now. But few other countries are in the middle of a domestic political stalemate and a delicate geopolitical peace process, as well as relying on remittances from a scattered diaspora and migrant workers who are rapidly losing their jobs. These elements could, given a certain set of circumstances, combine to lead Armenia to the edge of crisis.

March 1 saw the one-year anniversary of clashes which left ten dead, dozens wounded, and hundreds detained. The violence, between police and opposition supporters, followed a disputed presidential election in which Levon Ter-Petrosian, Armenia’s first post-independence president, came second to Serzh Sarkisian, the protégé of President Robert Kocharian. Claiming fraud, Mr. Ter-Petrosian and tens of thousands of supporters camped out in Yerevan until, after ten days, they were attacked by security forces. Since then, Armenian politics has been divided and fractious: Mr. Ter-Petrosian continues to lambast the government. However, at the anniversary rally he disappointed supporters by denouncing ‘radical action’ and the possibility of a revolution. He cited the financial crisis as a reason to hang back, claiming that the government would soon crumble anyway and ask his Armenian National Congress (ANC) to form ‘a national rescue government’.

Is this confidence real, or a bluff to hide fading support? Similar questions were asked after he halted his street protests in October 2008, declaring that the government, whatever its shortcomings, needed support in its discussions with Turkey and Azerbaijan over Karabakh. Then, as now, Mr Ter-Petrosian may simply feel that his opposition lacks the energy to force President Sarkisian into a showdown, especially when people are more concerned with exchanging currency than exchanging governments. The Sarkisian administration has been reaching out to the opposition in recent months, partly to avoid sanctions by the EU and the Council of Europe over political prisoners held since the March demonstrations.

However, it is plausible that Mr Ter-Petrosian genuinely expects the country’s government to collapse as the economic crisis intensifies, and is anticipating a wave of popular anger which he can appropriate. That depends on how badly you think the prospects for the economy are. In late 2008, Armenian officials repeatedly insisted that the country’s relative isolation from world financial markets was an asset, shielding it from the worst of the credit crunch. But with Russia - Armenia’s biggest trade partner - sliding deeper into economic turmoil, the slump in commodity prices slashing revenue from mining exports, and remittances from the diaspora and migrant workers heading for a decline, Armenia’s recent economic growth looks very fragile. GDP growth is likely to be stagnant this year, and unemployment is set to rise considerably – a major blow in an economy with such a small labour force (just 1.2 million in 2007).

Yerevan’s economic hopes rest on three things. Firstly, the IMF bailout and additional assistance from the World Bank. Secondly, an anticipated $500 million loan from Russia, announced in February. The nature of this loan remains murky, and some observers expect it to come with strings attached: similar financial assistance from Moscow in the past has involved the takeover of Armenian state assets by Russian companies. There is, however, no guarantee that Russia can even afford to help Armenia, as its own economic situation declines almost weekly.  Thirdly, there is hope that negotiations with Turkey could lead to the opening of the land border between the two countries, which would give Armenia a major new export route and trading partner. The formal re-opening of the border is expected to take place, according to this week’s Economist, sometime in late April or early May. However, it is plausible that new obstacles to the border opening could crop up between now and then, and in any case the restoration of ties with Ankara will not solve Yerevan’s problems. Turkey’s own economy is slowing, and Armenia may have very little to sell by that time, especially if commodity prices remain low.

The conflict with Azerbaijan over Karabakh remains an unpredictable quantity in Armenian politics. Concessions in the peace talks by Armenia, which look likely, will embolden nationalists and give the opposition another stick with which to beat the government. But if the gamble pays off – leading towards a durable peace, with tangible benefits for Armenia – the Sarkisian administration may be able to defuse some of the popular anger by arguing that political turmoil would undo all the delicate work of the negotiations and that, whilst the government may have been unable to stop economic turmoil, it can at least let Armenians live in peace.

Mr. Ter-Petrosian will no doubt be watching carefully. His next move could make all the difference: seizing on popular anger and nationalist disaffection, he could be able to re-mobilise the opposition and provoke political turmoil. Although he has rebuffed calls for revolution for now, he may soon start to feel that the government is not collapsing quickly enough for his liking. President Sarkisian, for his part, is relying on his gambles – with Turkey, with Azerbaijan, with the economy – paying off. If they do not, Armenia could be facing a serious crisis.

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