Armenia's Currency Troubles

The sharp fall in the value of Armenia’s currency over the last month has led to fears that the country could be heading for a repeat of the 2008 economic crisis.

Armenia’s currency showed signs of instability at the beginning of November, and since then it has lost 11 per cent of its value against the US dollar. On November 24 alone, the dram fell by four per cent against the US dollar, prompting the Armenian press to call the date "Black Monday".

By December 10, the exchange rate was 457 to the dollar, the dram’s lowest value for ten years.

In 2008, Armenia’s economic problems stemmed from the global financial meltdown, but this time round, economists argue the dram’s depreciation is mainly due to the steep decline of the Russian ruble. Russia is a major trading partner, the main source of natural gas, and crucially, provides work for hundreds of thousands of Armenian labour migrants who send money back.

Although Western sanctions have done some damage, it is falling oil prices that have led Russia to the brink of recession.

Bagrat Asatryan, an economist who headed Armenia’s Central Bank from 1994 to 1998, told journalists that the currency depreciation was partly attributable to economic slowdown in Armenia, but that was not the whole story.

“There is an external factor, and we’re talking about Russia above all,” he said. “Due to the poor state of the Russian economy compared with last year, we are seeing significantly reduced remittances to Armenia from people working in Russia, and Armenian exports to Russia have also fallen. As a result, there is a reduced flow of foreign currency into our country, and this has led to the devaluation of the dram.”

The Central Bank of Armenia confirms that slowing Russian growth accompanied by a sharp drop in the value of the ruble has caused a sharp fall in the money sent home by labour migrants.

Remittances, the money transferred by these migrants, account for most of the foreign currency flowing into Armenia. The 2.3 billion dollars they sent back last year was half as much again as Armenia earned from exports. Three-quarters of remittances came from Russia.

The central bank says that total money transfers from Russia to Armenia – and most of this sum is labour remittances – have fallen back at an accelerating rate over the course of 2014. The figure for May was one per cent down on the same month of 2013, but in August the year-on-year fall was nine per cent, doubling to 18 per cent in October.

International trade is the other main source of foreign currency. Russia is Armenia’s second largest trading partner after the European Union. Official figures indicate that exports to Russia fell by 6.2 per cent in value terms between January and September.

A third vulnerability is Armenia’s heavy reliance on imports, since paying for them eats up valuable foreign currency. Last year, the cost of imports was three times the value of export revenues, leaving a massive trade deficit.

As the dram loses its value, it will cost Armenians more and more to pay for goods imported from abroad. Economists and businessmen warn that higher prices for goods and services, combined with sluggish economic growth, can only increase the number of people living in poverty. The World Bank says that eight out of ten Armenians were earning under five dollars a day as of 2011.

"The Armenian economy relies on imports, and we need foreign currency – dollars and euro – to buy imports,” said Vardan Hakobyan, who owns a grocery store in the centre of the capital Yerevan. “If the exchange rate against the dollar rises, that will lead to higher prices for goods and especially food. People will be forced to reduce spending, and this will lead to a reduction in economic growth and in business receipts."

Arsen Ghazaryan, chairman of the Union of Manufacturers and Businessmen of Armenia, says the sharp currency depreciation is a threat to commercial activity.

"Predictability is an important factor for the market,” he said. “If, for example, the dram fell by one or two percentage points over three months, it wouldn’t be a problem, but this kind of sharp drop is very dangerous for business. We don’t want a repeat of March 3, 2009 when the dram depreciated by more than 20 per cent in one day and undermined confidence in the national currency.”

Parallels with the 2008-09 global economic crisis are a particular concern for Armenias, since the consequences of that recession have not yet been overcome. According to the International Monetary Fund (IMF), Armenia’s economy contracted by 14 per cent in 2009, making it the fourth hardest-hit in the world. Since then, neighbours Azerbaijan and Georgia have both managed to regain the ground that was lost – in 2010 and 2011 respectively – but the IMF does not expect Armenia to do so until 2016.

Vardan Bostanjyan, an economist and former parliamentarian, warns that the government is going to struggle to achieve its target of four per cent for economic growth, pointing out that the current rate is just 2.6 per cent.

"The current devaluation of the dram shows that the economy isn’t in great shape, to put it mildly,” he said. “How they’re going to deliver four per cent growth I cannot imagine. Just as in 2009, the state of the Russian economy may have a serious impact on us."

To make matters worse, the Russian economy is expected to contract further over the coming months. In mid-November, the Central Bank of Russia reduced its growth projection for 2014 from 0.4 to 0.3 per cent, and it is forecasting zero growth for next year. If oil prices fall to 60 dollars a barrel, the bank says the Russian economy could contract by 3.5 or four per cent in 2015.

Some economists have expressed concern about what they see as the failure of Armenia’s monetary policymakers to support the national currency.

Hayk Gevorgyan, an economic columnist for the Armenian Times, pointed out that in an effort to prevent the fall of the dram in the first three weeks of November, the central bank sold 92 million dollars from its foreign currency reserves, which total only 1.6 billion dollars.

“However, as we can see, this didn’t help, and the national currency depreciated sharply," Gevorgyan said.

In a statement released on the evening of Black Monday, November 24, the central bank rejected claims that it was unable to maintain stability.

"Adjustments to the exchange rate are being driven by recent developments on regional and international financial markets, and [are designed to] assist export competitiveness and economic growth. The Central Bank of Armenia has enough foreign reserves to prevent all possible artificial exchange rate fluctuations and to ensure financial stability," the statement said.

Armen Karapetyan is a freelance journalist in Armenia.