Worrying Economic News from Armenia

PRICE RISES BEGIN TO BITE IN ARMENIA
New president and government damaged by steep price hikes.
By Naira Melkumian in Yerevan

Armenia's new government is on the defensive following a 40 per cent rise in the price

of gas which will hit consumers hard.

The new price, 27 US cents per cubic metre compared with the previous 19 cents, is the

result of an end to two years of government subsidies, and together with rising food costs,

is hurting the poorest members of society.

Sixty-seven-year-old grandmother Hasmik falls into this vulnerable category. Every morning,

she sweeps the streets outside local shops in the capital Yerevan, so as to earn the money

she needs to supplement her meagre pension.

"Ah, my girl, when they put up my pension at the start of the year I was very happy that I was

getting 15,000 drams [around 50 dollars] rather than 9,350 drams," she told IWPR's contributor.

"But then food got more expensive, and now they say the price of gas is going up. Next it will

be electricity and water.

"No one needs me - my children aren't helping any more, nor is the government, so that's why

I'm sweeping the streets to support myself. But when winter comes, all my money will go on

heating."

Hasmik lowered her grey head and carried on sweeping.

According to Armenia's national statistics agency, the price of food products, alcohol and

tobacco has gone up seven per cent since the beginning of the year, non-food items have

seen 1.7 per cent inflation over that period, and utility prices have gone up 6.3 per cent.

In April 2006, the government introduced a temporary subsidy on natural gas to offset the

effect on consumers of a rise in the price of gas imported from Russia. The authorities

initially intended to keep the subsidy in place until the end of 2008, but the funds allocated

for it have run out as gas import volumes were higher than anticipated.

The end of the subsidy coincided with the start of the presidency of Serzh Sarkisian - who

came to power in a controversial election in February - and the appointment of a new government.

New prime minister Tigran Sarkisian (no relation of the president) was forced to announce

the news of the end of the subsidy and the consequent rise in gas prices at the first press

briefing he gave, in mid-April.

The public will not feel the full extent of the change until they get their winter heating bills. To

cushion the blow, Sarkisian announced that the government was to spend 3.9 million dollars

on alleviating the cost to 130,000 families currently on poverty benefits.

Vardan Bostanjian, a parliamentary deputy with the pro-government Prosperous Armenia party,

admitted the authorities found themselves in a difficult situation.

"Armenia doesn't have the financial or budgetary resources to mitigate the difficult situation

caused by the rise in prices," he said.

Economist Eduard Aghajanov argued that the gas subsidy was misconceived from the start because

it did not address the needs of the poor. "The main beneficiaries were the well-off because they

use more gas for their daily needs," he said.

Another economist, Tatul Manaserian, warned that the prices of other items were about to take off.

"The end of subsidies on gas rates is leading to a chain reaction, which is causing a rise in the price

of agricultural produce and transport fares," he explained.

Most of Yerevan's shared minibuses and taxis run on compressed natural gas, which has led to

predictions that the fares they charge will go up.

An inter-departmental commission in the capital is already discussing a possible fare rise. In

other areas of Armenia, fares have already risen by 50 per cent.

Prime Minister Sarkisian has commissioned a report on whether the country's 214 gas filling stations

are artificially inflating their prices in order to rake in profits.

The price rises could not have come at a worst time for the new government, which is trying to regain

the public's trust after the political crisis that hit the country in February and March.

"My salary has stayed exactly the same time and prices just keep on rising," said 35-year-old single

mother Marina. "Now we are waiting for gas prices to rise, then the price of everything else. I feel

completely unprotected in this state."

Economist Eduard Aghajanov predicted that annual inflation would reach nine or ten per cent as a

result of the price rises. It is already exceeding government forecasts.

Energy Minister Armen Movsisian said on Public Television that the government was doing everything

in its power to ensure electricity prices did not rise.

However, the worst may yet to be come.

Alexei Miller, head of the Russian gas monopoly Gazprom, Armenia's main supplier, is due in Yerevan

soon for negotiations on next year's price.

Gazprom has agreed not to put up its prices before then, but Armenians are bracing themselves for an

increase from next January that would inflict more pain on consumers.

Naira Melkumian is a freelance journalist in Yerevan.

Feeling the World’s Pain: Armenia part of international trend in food costs
International food market is in crisis
By Gayane Mkrtchyan, ArmeniaNow reporter
Published: 02 May, 2008

The rise in food prices on the world markets unavoidably provokes inflation in small countries like Armenia.

Prices for imported foodstuffs particularly grow here. According to Armenia’s National Statistical Service,

in the course of three months, from December 2007 to March 2008, prices for foodstuffs grew by 7.2 percent.

The results of a longer-term monitoring show that in the period from March 2007 to March 2008 the growth

of prices for baked products in Armenia increased 33.9 percent, animal and vegetable oils – 33.32 percent,

vegetable and potato – 5.6 percent, coffee, tea and cocoa – 9.6 percent.

Economist Tigran Jrbashyan thinks that one of the culprits of the world food crisis is the deformed agricultural

sector.

“Many of the developing countries today have a food problem and have found themselves on the verge of famine,”

he says. “The cost of wheat has increased by 130 percent during the past year, the cost of rice has grown by

80 percent.”

Rising oil prices as well as expensive fertilizers used in agriculture, according to the economist, have a

shorter-term impact.

“The world already went through this stage once in the late 1970s, early 1980s when the peak in oil prices led to

a high cost of agricultural products,” the economist explains.

Doctor of economics Zoya Tadevosyan describes the current situation of the world economy as critical. The rise

in prices for energy resources, according to her, “pushes forward” the world economy crisis the consequences

of which unavoidably affect all economies, especially those that lack energy resources and have to import them.

“If one barrel of oil sold for 40-45 USD on world commodity exchanges, then today one barrel of oil hits the level

of 118 USD. It is an unprecedented high price. The rise in fuel prices is accompanied with rising transportation

costs; consequently commodity prices, especially of imported goods, grow up.”

Tadevosyan says that the next cause of the lingering crisis is the gradual fall of the dollar’s exchange rate

[against the world’s major currencies].

Tadevosyan thinks Armenia cannot avoid the impact of such objective processes. “If we consider the circumstance

that our country fully imports fossil fuel and oil and, for example, in 2006 the share of import of that commodity group

in gross imports was 16 percent, then of course, Armenia cannot,” she says.

According to Jrbashyan, the state should offer mechanisms of subsidizing that won’t deform the market (as happened

with the gas subsidy), but will alleviate the first blow, i.e. it should clearly target socially vulnerable strata. In the

economist’s opinion, it is a fundamental issue.

“If a fall in prices is observed on the world market, it is not observed on our market and will not be observed. We lack

an effective link between our prices and international prices. It is a deformed link because of the uncompetitive price

formation,” he says.

Economist Eduard Aghajanov says that the rise of prices in Armenia is a gross result of the electoral processes.

“It is a typically Armenian phenomenon regardless of whether the price on the international market grows or not, in

Armenia after every election a hike in prices takes place. There is only one explanation to it – oligarchs who mainly

spend their own money participate in the election and they have the purpose of recovering the money they spend.”

The State Commission for the Protection of Economic Competition has conducted daily monitoring of prices for

consumer goods, including butter, cooking oil, rice, bread, flour, granulated sugar.

Commission Chairman Ashot Shahnazaryan says that there have been no illegal rises in prices. The highest price

growth in the recent period was observed on the pork market, reflecting world trends as a consequence of such

conditions as swine flu.

In connection with vegetable and animal oil markets Shahnazaryan says that prices have grown by 1-2 percent,

which is connected with fluctuations observed on the world market.

“Inflation pressure in Armenia is not higher than in the world, on the contrary, the rate of inflation here, if compared to

similar countries, has always been less, and it is registered both in international reports and regional analyses. In

this sense, inflation in Armenia has always been on a low level and I think that it will be continued,” said Prime

Minister Tigran Sargsyan.

Economist Tatul Manaseryan also thinks that objective causes of inflation should be sought in international markets,

but there are also causes that exist in the country’s internal market conditioned by monopolies and other tightly

restricted influences.

Aghajanov shares this opinion: “Those are monopolistic positions of certain producers and the clan-based economy

system. Add to these two the external factor and the ‘burden’ of our economy becomes heavier. For this reason,

if in Russia, for example, inflation is 20 percent, then in Armenia is it doubled,” he says.

Inflation in Armenia in 2008 is projected at 7-7.5 percent, however, prices for a number of staple food products,

such as breadstuff, flour, dairy products, animal and vegetable oil, granulated sugar have risen by 15-20 percent.

Challenge: Concern lingers over Millennium Account funding
By Gayane Abrahamyan
ArmeniaNow reporter
Published: 02 May, 2008

Among concerns since the February 19 presidential election has been whether Armenia can meet requirements

of the Millennium Challenge Account and earn the balance of $235 million earmarked for Armenia pending qualification.

The US-designated funds would be applied to programs aimed at reducing poverty and improving living conditions

in rural Armenia.

But as has been widely reported and infamously commented on by former president Robert Kocharyan doubts have

arisen over whether the funds will ever be released to Armenia, due to questionable impositions on human rights

during the 20-day state of emergency in March and other reasons.

“The program is seriously threatened and the damage will be quite significant. The problem is that because of the

closure of the program Armenia will both be deprived of millions of dollars and of a unique opportunity to develop

agriculture. It will also be defamed because of falling short of meeting those not so big requirements,” member of

the program beneficiaries’ council and the chairman of the Gyumri Asparez club Levon Barseghyan told ArmeniaNow.

Three of the program beneficiaries’ council members Levon Barseghyan, Seyran Martirosyan and Artur Sakunts have

disseminated a statement expressing their concerns over the future of the program. They underline they have been

concerned since the end of the last year “with the 17 items of the index of the situation in the Republic of Armenia that

the Millennium Challenge Corporation takes into account when financing countries: 9 of the 17 items are on the level

of ‘threatened’.”

The program became a matter of speculations before the parliamentary elections as the American side threatened

with its closure, and the opposition called for holding clean elections not to deprive the people of the program.

However, the program that overcame the challenge of the parliamentary elections and the dram appreciation faced a

challenge one after the latest election.

Defiantly, in response to an official “warning” that the funds were in jeopardy Kocharyan said, “We have much bigger

programs aimed at the development of provinces, rural areas; the Challenge is only part of them.”

However, at the meeting with Ambassador Danilovich on June 12 on the program launch occasion, the former President

stated: “The scale and efficiency of this program is unprecedented among the list of programs supporting agriculture

in Armenia.”

Barseghyan questions the argument saying if there were money, why didn’t authorities realize programs to achieve the

aims set out by the Challenge funds?

“If Armenia had alternative means, why would it wait for (Challenge Ambassador) Danilovich or anyone else to impose

pressure on it?”, says Barseghyan, underlining even if there are other means and the program is temporarily suspended,

a year or two are enough to harm the already realized programs.

In reality, though this is the largest grant program providing a large-scale development plans for rural communities like this.

Experts say this program is the most specialized and will both give an opportunity to raise the agriculture industry

deteriorated after the collapse of the Soviet Union and significantly improve the life of the rural population.

The US State Department has said it will withhold a decision on whether to disperse the funds, pending Armenia’s new

government’s behavior during it first 100 days in office (a traditional grace period that will expire around the middle of July).

“If the program is suspended, the rural population will once again feel disappointed giving way to a new wave of emigration,”

says Shoghik Arustamyan, expert of social monitoring and analysis of the Ararat province administration “The reason is

people from rural areas who used to leave their homes because of the lack of irrigation water and lack of any perspective

in agriculture, are at least hopeful today they will be able to cultivate soil and provide for themselves in several years.”

About three-fourths of the rural areas of Armenia would be beneficiaries to the program. It plans to restore 943 kilometers

of rural roads, 200 kilometers of main water canal, and 30,000 hectares of irrigation territory, 18 gravity flow systems,

7 reservoirs, and organizing special trainings for about 60,000 farmers. Farming entities will get $8.5 million loans, as well

as other support.

“The threat of droughts grows every year. Drought is expected also this year, which means the program is very important,

because the major part of the irrigation system in the republic was built in the Soviet times and is so exhausted that it causes

about 50 percent loss of water,” says member of the program council and chairman of the National Association of Farmers

Vanik Soghomonyan.

Rights activist Artur Sakunts qualifies the possibility of the program continuation 50/50. He underlines if the authorities do not

undertake real changes, do not meet the requirements of the PACE resolution, the suspension of the program will be

inevitable harming the people first of all.

The authorities are more optimistic. Gagik Minasyan, the chairman of the National Assembly Standing Committee for

Financial-Credit and Budgetary Affairs believes the program will not be withdrawn.

“The US is highly motivated to have a stable partner in the South Caucasus like Armenia. On the other hand, Armenia is

highly motivated to have normal relations with the US that stems directly from our principle of complementary [politics] and

I think this mutually beneficial cooperation will have its development.”

National Assembly member and former ombudswoman Larisa Alaverdyan, however, does not share this optimism: “the

authorities threaten the realization of the program and that may bring to serious losses, depriving the agriculture and the rural

population of a unique opportunity for development.”
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