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Osservatorio Caucaso: The Armenian Dram collapses

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Following on from a previous Frontline Club post on the recent collapse of the Armenian dram, my article on the same is now available on Osservatorio Caucaso. There will be more articles on various topics, including on the controversial subject of gender, coming over the next few weeks and months, but for now, this first article is available in English and Italian.

After years of economic growth that surprised many, the global financial crisis finally hit Armenia early last week forcing the Central Bank to devalue the local currency, the dram. As if in expectation, mobs of people were already becoming a frequent sight outside many banks in the Armenian capital, Yerevan, all frantically seeking to exchange drams into dollars. The authorities moved in swiftly to restrict such transactions. 

However, on 3 March, the inevitable happened and in the space of a few hours the dram traded as high as 380-400 drams against the dollar before dropping to 360-70. Banks and exchange booths continued to limit dollar transactions and many shops shut for a few hours while owners assessed the potential damage and saw an opportunity to increase profits. 

Despite stocks being purchased before the devaluation, prices on many imported goods increased when they reopened. Sugar, pasta, vegetable oil, rice, pharmaceuticals, cigarettes and petrol were particularly affected with prices increasing by 10-30 percent. Other items such as flour were marked up by over 50 percent while the price of butter jumped by 125 percent. 

Two days later, the dram stabilized at around 360 drams against the dollar, but the 20 percent depreciation from its previous rate of 305 drams to the dollar caused alarm among much of a population reliant on remittances abroad and salaries paid in the local currency. As the money in their pocket lost its value, citizens stocked up on essential items. 

The collapse of the dram soon became known as “Black Tuesday” as ripples of concern soon turned into waves of panic. Highlighting various deficiencies in a largely import-driven local economy, the main concern was speculative trading and other questions regarding the financial health of the nation resonated once again.

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Offshore Bankning | March 21, 2009 9:03 PM | Reply

Devaluation of dram is not a bit deal. The problem is that it caused a panic that resulted in the deterioration of normal economic relations among economic agents. I guess that was fault of Armenian authorities that did not realize in time that keeping exchange rate of dram with dollar fixed is the waste of money and human resuorces and allow this panic to happen.

Onnik Krikorian | March 21, 2009 10:07 PM | Reply

Offshore Banking, for sure many people realized that the dram was being kept unnaturally high against the dollar, and allegedly to favor government-connected businessmen and oligarchs who import, but many consider that it's also a sign that the global economic crisis has hit Armenia.

For example, the argument that it will help exporters and the local manufacturing base is all very well good, but if such a good thing why did it take so long to adopt a floating exchange rate mechanism? Moreover, remember that this argument is all very well and good if we actually had a large number of companies to export goods through multiple trade routes.

As it is, we don't. There is only Iran and Georgia, and specifically the latter. Anyway, as a sign that the government are getting a little edgy about how this will affect the domestic political situation, the president pretty much sent a message to the opposition ahead of what might be a very highly charged municipal election in May:

President Serzh Sarkisian urged public support for his government on Friday as he discussed the growing impact of the global economic crisis on Armenia with the leaders of nearly 50 parties mainly loyal to him.


In an apparent reference to the opposition, Sarkisian said that no Armenian party should not try to draw “political dividends” from the worsening socioeconomic situation in the country. “This is the moment when drawing political benefits, taking subversive steps would mean adding to the crisis, rather than fighting against its effects,” he said. link

True, the situation seems calm enough at present, but many reckoned on spring being just the start of Armenia's economic problems. Remember, with an average salary here at around $200 a month, looking out on the streets you can understand that not only is there a huge problem with how wealth is distributed, but that many are reliant on remittances sent from abroad.

If the global economic crisis affects the money sent back to families here, which it reportedly has, and if the prices have increased, which they also have, then there is a problem looming. Moreover, with work drying up in Russia, we're expecting some of those migrant workers to return to Armenia so a lot is going to depend on job creation.

Apparently much of the foreign aid recently received is going into large-scale infrastructure projects, which is fine, but the issue of an effectively closed economy controlled by government-linked businessmen in the context of a land-locked country with no natural resources and two closed borders still remains. And I haven't even mentioned the need for Armenia to increase defense spending in response to a spiraling military budget in Azerbaijan.

Well, some would say Tigran Sargsyan -- the prime minister and former chairperson of the Central Bank -- should now his economics, so let's see. Many suspect this is only the start of an economic decline, but a lot will depend on whether this now means the government tackles in earnest some of the many problems known to face the local economy.

Oligarchs, corruption, closed borders... there's a lot to sort out. Perhaps this present situation, and as the opposition are ready to make another attempt at regime change, could force them to finally do so? Let's see, but as someone who I assume is an economist, I'd like to hear more of your opinion on these points. Thanks in advance to anyone who can.

What do you think?