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Facing the Storm: Is Armenia ready for financial fallout?

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Thursday, 15 January 2009

Image Richard Giragosian, Research Associate of the Institute of Global Security (IAGS)

Already weakened by a continuing domestic political crisis of confidence, the Armenian government is facing a new challenge as the global financial and economic crisis threatens to destabilize Armenia’s economy. The vulnerability of the Armenian economy, despite the cushion of closed borders and limited links to the broader global economy, is rooted in its inherent structural fragility.

This structural fragility is composed of three elements: a dangerous dependence on the influx of remittances, or money from Armenians working abroad, a weak and declining economy that is supported by the superficial dominance of the country’s service, commodity and construction sectors, and, most distressing, a closed oligarchic economic network centered on several commodity-based cartels or monopolies.

But even more troubling is the Armenian government’s rather short-sighted refusal to even recognize the country’s vulnerability to the global economic crisis. Although government officials admit that economic activity has already contracted considerably, they have tended to downplay the significance of the downturn in construction and the shortfall in the amount of remittance flows, the latter providing an essential cash influx for most Armenians.

Such unfounded optimism was most recent expressed by Armenian Prime Minister Tigran Sarkisian, whose recent year-end press interviews reflected his desire to deflect criticism and reassure an already worried public.

According to the prime minister, the Armenian government plans to embark on large projects involving an “aggressive spending policy by the state” to “neutralize” the impact of the global economic crisis by creating jobs and proving expanded credit to small- and medium-sized businesses.

Sarkisian asserted that the planned increase in public spending on road and housing construction, which is to include some $250 million for infrastructure projects in the earthquake damaged areas of northern Armenia, will create more than 5,000 new jobs. In addition, the government also plans to seek some $250 million in new loans from the World Bank for the planned expansion of business credit.

Sarkisian also noted that Armenia would need more than $1 billion in additional foreign funding to finance the construction of a new nuclear power plant to replace the aging, Soviet-era Medzamor plant, and for the planned railway link to Iran. But in the wake of a global credit crunch, with lenders much more reluctant to take on such new financing, it remains unclear from where Armenia can obtain such foreign assistance.

Echoing the prime minister’s optimism, Armenian Economy Minister Nerses Yeritsyan argued that “Armenia overcame the first wave” of the global financial-economic crisis because Armenia’s banking system remained untouched by the financial crisis and free from global risk. He added that the Armenian government was taking “every measure to over come the negative impacts of the crisis.”

For his part, Finance Minister Tigran Davitian dismissed worries about a subsequent reduction in the amount of tax revenue, arguing that the “economic crisis has not affected tax collection in Armenia as yet.” Nevertheless, the Armenian government needs a minimum 20 percent increase in tax collection simply to meet the recently adopted 2009 state budget. With an over-reliance on the value-added tax (VAT) as the single largest source of budgetary revenue in the country, there is a real danger that the state will be unable to meet its revenue targets, especially given recent promises of a 40 percent rise in salaries for customs and tax officials.

Despite these official claims, the Armenian public remains concerned, however. As a recent public opinion survey conducted by the Armenian Marketing Association revealed, some 47 percent of those polled felt that the economic crisis will impact Armenia, with 43 percent believing that the impact will financially harm their families.

Mounting Job Losses

The most significant demonstration of Armenia’s vulnerability to the global economic crisis has been in the sudden closure of several key firms. Tied to the related downturn in global commodity markets, the recent decline in prices for non-ferrous metals, Armenia’s number one export item, has sparked the loss of several hundred mining jobs and the suspension of operations at Armenia’s two largest chemical enterprises, including the Nairit plant, which has forced almost three thousand workers to be abruptly laid off.

In addition to the job losses from these closures, the budget implications are also serious. For example, one of the largest mining companies to downscale operations was the German-owned Zangezur Copper and Molybdenum Plant, which is one of Armenia’s leading corporate taxpayers. According to the company’s chief executive, Maxim Hakobian, the firm now projects a 20 percent cut in its contributions to the state budget in 2009.

The Link between Armenian Politics & Economics

Just as there are serious political repercussions to the impact of the global economic crisis on Armenia, political considerations have also played a role in the Armenian government’s handling of its economic reform program.

For one of the more obvious examples, the closure of several Armenian businesses by tax officials was linked more to their owner’s political activities than to any overt tax violations. The inspection and subsequent closure of the Bjni mineral water company, owned by millionaire businessman Khachatur Sukiasian, an open supporter of the opposition, raised questions over the government’s arbitrary use of the law, seemingly used more to punish than to regulate business activity. The rare decision to close and auction the company for allegedly engaging in tax evasion was additionally dubious due to the obvious discrepancies with other even more notorious business interests owned by other wealthy “businessmen” with openly close ties to the government.

The closure of the Bjni bottling, one of the country’s largest such enterprises, also deals a serious blow to the local economy. Located in Charentsavan, a generally impoverished and unemployment-ridden town outside of Yerevan, the decision now threatens the livelihood of more than 400 local employees.

Two other Sukiasian-owned firms, elements of his larger SIL Group, were also targeted by the authorities, as the executives of both a pizza restaurant chain and a printing house were arrested on tax evasion charges. A third Sukiasian-owned firm, which held the exclusive distribution rights for Phillip Morris cigarettes in Armenia, was also forced out of business in 2008 after state customs officials reportedly held up several large shipments of its imported products.

The linkage between Armenia’s domestic political instability and economics was further demonstrated by the decision last month by the U.S. Millennium Challenge Corporation (MCC) to maintain its suspension of $236.5 million in economic assistance on the grounds that the Armenian government has failed to address its concerns about “the status of democratic governance” in the country. The decision followed a similar move in May 2008, when the latest installment in the five-year Millennium Challenge Account (MCA) program was frozen in the wake of Armenia’s post-election political crisis.

The most recent suspension was justified by the U.S. because of “concerns” and unmet “expectations that the government of Armenia fulfill commitments to implement substantive reforms.” Commenting on the freeze, U.S. Deputy Assistant Secretary of State Matthew Bryza noted last month that Washington was “seriously worried” about the continuing imprisonment of dozens of opposition members arrested during the post-election crisis.

A Worrisome Prognosis

Beyond the limited parameters of the Armenian government’s optimism and public apprehension, a recent report by a leading diaspora group has highlighted the dangers of the implications of the global crisis for Armenia. In a report issued last month (available online at: www.pf-armenia.org), the “Policy Forum Armenia” group warned that “the ongoing financial crisis will have a deep and prolonged impact on a wide range of economies” and noted that such a negative impact would “also likely to be true for a peripheral economy like Armenia’s, regardless of how isolated its relevant sectors are from the rest of the world.”

As an independent professional non-profit association, the Policy Forum Armenia group seeks to “strengthen discourse on Armenia’s economic development and national security and through that helping to shape public policy,” with a main objective of offering “alternative views and professional analysis containing innovative and practical recommendations for public policy design and implementation.”

The Policy Forum Armenia report confirmed that “there is ample evidence of a serious crisis in the making,” and added that “in this context, Armenia’s economy is likely to be significantly affected.”

The report provided a set of several policy recommendations, going well beyond the limited scope of the Armenian government’s seemingly inadequate preparations and reflecting a more realistic recognition of the need to take action now to better protect the Armenian economy for the most severe effects of the economic crisis.

The report adds new policy recommendations that have been disappointingly absent from public policy debate to date. And in this light, the Armenian government should, most of all. incorporate the report’s call for an enhanced and expanded “social safety net” through the adoption of measures to review poverty guidelines, targeting the next layer of the country’s socially vulnerable strata of population, taking “credible steps” in eliminating corruption, and enhancing existing unemployment insurance and providing assistance to employees that have lost jobs due to crisis-related closures and downsizings.”

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http://www.armenianow.com/?action=viewArticle&AID=3491&CID=3352&IID=1217&lng=eng  

 
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