Economic News from Armenia

Looking Beyond Political Polarization: Armenia’s looming economic crisis
Commentary by Richard Giragosian
Special to ArmeniaNow
Published: 23 May, 2008

Even prior to Armenia’s recent post-election crisis, politics in Armenia have been marked by a pronounced polarization, largely defined by a division based on affiliations to a narrow set of political leaders and parties. For the past decade, this trend was manifested by a division between supporters of the ruling elite and a largely fractured and fragmented opposition.

In terms of national politics, neither camp demonstrated much more than a desire to simply attain or maintain power, offering little in terms of strategic vision or policy alternatives. At the same time, there has been an equally profound economic divide, driven by widening inequalities in wealth and income. But most importantly, it is the combination of this political polarization and economic division that has now resulted in deep fissures within Armenian society as a whole.

In terms of political polarization, Armenia remains challenged by a post-election crisis that has only widened since March. Against that backdrop, new president Serzh Sargsyan faces a serious “crisis of confidence” in an early and serious test of his new government.

A round of new cabinet appointments has produced no indication that new president’s hopes for an easing of tension have been realized. In fact, despite the obvious appeal of naming a non-partisan technocrat as premier, the appointment of former Armenian Central Bank Governor Tigran Sargsyan as the country’s new prime minister, the new government remains grounded in a coalition of power maintained by the retention of several former ministers and the reshuffling of several favorites of the former president.

There were exceptions, however, as the new ministers of economy and finance offer a sense of hope and fresh professionalism, bolstered by a degree of reliability and security with the naming of Seyran Ohanian, regarded as a career military officer, as the new defense minister. Yet overall, the lack of any significant or sweeping change in government personnel or policy has only fostered the perception that the Armenian authorities are either unable or unwilling to respond to the public’s demands for change.

And this perception that the authorities have ignored an imperative for change is especially dangerous since it is clear that the post-election crisis has demonstrated that a return to the pre-March political status quo is clearly out of the question. A related impediment is also rooted in the fact that both sides of the political divide, supporters of the government and opposition alike, are expecting some degree of change.

Yet even in the face of these political challenges and a crisis of confidence, the more serious threat to stability stems not from political polarization, but from mounting economic pressure. More specifically, with the new Armenian government weakened by internal discord and a lack of legitimacy, the onset of a new economic crisis represents one of the most significant threats
to security and stability in Armenia.

There are two elements of this looming economic crisis. First, as the new government seeks to
implement the next generation of economic reforms and trade liberalization, it must overcome
the accumulated burdens of entrenched corruption and increasingly serious budgetary constraints, exacerbated by deficiencies in the tax collection and customs systems.

Second, the government seems ill-prepared for the onset of the already pronounced rise i
n global food prices, which has already spread rapidly and broadly. The dramatic spike in food
prices has already sparked several incidents of serious socio-economic unrest in a wide range
of countries across several regions, from Africa to Asia. The impact of the price rises for basic
commodities and foodstuffs has fostered several Central Asian states to adopt new “food security” measures, including efforts to stockpile food supplies and prepare for the possible imposition of domestic price controls. Russia was also profoundly hit by the sharp spike in food prices, with a rate of increase roughly three times greater than that in the European Union.

For Armenia, the global crisis in food prices is no longer a possibility but a certainty. The only
reason that the impact has not yet been fully felt is because of the closed nature of several key
sectors of the economy and due to the market-distorting effects of the commodity-based cartels
that hold sway over much of Armenian imports and exports. And based on figures released by the World Bank and the UN last month, global price increases for food are likely to only continue, and even accelerate over the coming decade. But most threatening for Armenia, the coming food crisis will only exacerbate the existing socio-economic divide in the country, widening the gap between the haves and the have-nots in Armenia to dangerous levels.

The economic impact may also be much more serious than simply a dampening of Armenia’s
usual, but still inadequate double-digit economic growth, especially in light of recent warnings from the International Monetary Fund (IMF) that Armenia may need to tighten monetary policy significantly in light of rising global food and energy prices. Thus, it seems that even beyond the context of Armenia’s current political crisis, the new Armenian government faces an even more challenging economic crisis that is certain to impact the country in the coming months and that has sparked little concern and even less preparation by the Armenian authorities.

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Government Vows To Curb Rising Inflation
By Shakeh Avoyan

Prime Minister Tigran Sarkisian on Thursday raised the alarm over rising inflation in Armenia and instructed the government to crack down on local companies abusing their de facto monopoly on imports of wheat and other basic foodstuffs.

According to official statistics, Armenian consumer prices rose by an average of 6 percent in the first four months of 2008, surpassing the government's full-year target of 4 percent. The government and the Central Bank of Armenia already failed to meet that target last year,
even if Armenia posted one of the lowest inflation rates in the former Soviet Union.

The consumer price index appears to have been primarily pushed up by the increased cost of key food products such as wheat, cooking oil and butter in world markets. Armenia is heavily reliant on imports of those products which have been monopolized by a handful of companies belonging to wealthy government-connected businessmen.

Echoing the opinion of many independent analysts, Sarkisian implied that the existence of those monopolies has been responsible for `very high' inflation in addition to global market trends. `Prices in the Republic of Armenia go up quite drastically but their subsequent decrease takes
place slowly,' he told a weekly meeting of his cabinet. `Unfortunately, we have been unable to restrain inflation without state intervention.'

In particular, Sarkisian pointed out that the international prices of wheat and rice have fallen significantly over the past four weeks after months of rapid rise. He said government bodies must now make sure that there are corresponding reductions in their retail prices in Armenia.

`The government will keep this issue at the center of its attention, and we will in the first instance investigate and inspect those companies where the price level does not reflect international trends,' Sarkisian told ministers. `Especially when it comes to those commodities that are fully or partly imported from international markets.' He said that should be done not only by the State Committee on the Protection of Economic Competition but also tax authorities.

The committee already stepped in earlier this month to limit the knock-on effects of a 50 percent surge in the price of Russian natural gas for Armenian households and corporate consumers. Gas is widely used, liquefied and pressurized forms, by public transportation means and personal cars. The few companies selling it in the local market are also owned by government-linked entrepreneurs.

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