Impact of Financial Turmoil on Armenia‏

RFE/RL Armenia Report

Tuesday 24, March 2009
Armenian Recession Deepens In February
By Ruben Meloyan

Armenia's economy appears to be plunging deeper into a recession,
contracting by 3.7 percent in the first two months of this year,
according to official statistics released on Tuesday.

The bulk of the drop, the first since the early 1990s, was registered by
the National Statistical Service (NSS) in February 2009. The country's
Gross Domestic Product (GDP) shrunk by only 0.7 percent in January.

The latest macroeconomic data is a further indication of the growing
impact of the global economic crisis on the Armenian economy. Its
already modest exports tumbled by as much as 45 percent year on year in
January-February 2009. The recent fall in international prices for base
metals, Armenia's number one export item, was clearly a key factor.

The fall in Armenian imports was more modest: just over 21 percent. The
NSS is expected to report more detailed export-import data next week.

Industry, the most underperforming sector of the economy in recent
years, contracted by about 10 percent year on year during the two-month
period. Industrial output was dragged down, among other factors, by a 20
percent reduction in electricity production. Whether that was caused by
decreased domestic consumption or electricity exports to neighboring
Georgia and Iran is not yet clear.

Construction and services other than trade, sectors that together
accounted for almost 44 percent of GDP in January-February, fared
better. According to the NSS, the construction sector shrunk by 1.5
percent after years of rapid growth driven by strong demand in expensive
housing and office space. The construction boom ended with the onset of
the global downturn late last year.

The NSS also reported 5 percent growth in retail trade turnover,
something which contrasted with strong anecdotal evidence of dwindling
sales in shops and markets across the country. The surprise increase may
have been the result of recent months' introduction of cash registers
aimed at reducing widespread tax evasion in the sector.

Gagik Minasian, chairman of the Armenian parliament's committee on
finance and budgetary affairs, downplayed the worsening economic
situation in the country, saying that it is following a worldwide
pattern. `This is just one of the manifestations of the global economic
crisis,' he told RFE/RL. `I don't think that we should feel disheartened
when comparing our macroeconomic indicators to those of other
countries.'

But Bagrat Asatrian, a former Central Bank critical of the Armenian
government, was far more concerned about the latest macroeconomic data.
`If things continue like this, we will face an economic decline of 10
percent or even more this year,' said Asatrian. The sharp fall in
Armenian exports is particularly alarming, he added.

According to Minasian, the government is doing its best to shore up the
exports by helping large mining and chemical enterprises hit hard by the
crisis kick-start their operations and providing financial assistance to
smaller export-oriented companies. Prime Minister Tigran Sarkisian said
on Friday that the government will invest 25 billion drams ($68 million)
in 18 such companies that have come up with concrete business plans.

Another, more important element of the government's anti-crisis strategy
is the implementation of large-scale road, housing and other
infrastructure projects mainly financed by foreign donors. The
government also plans to use external loans and grants for providing
credit to small and medium-sized enterprises.

Asatrian was skeptical about these measures, calling for a sweeping
revision of economic policies pursued by the Armenian authorities. He
also said government policies will be ineffectual unless they also
address what he called a lack of public trust in the country's
leadership.

RFE/RL Armenia Report

Thursday 26, March 2009
Government Delays Spending Amid Revenue Shortfall
By Hovannes Shoghikian

Faced with a shortfall in revenues resulting from a deepening
economic crisis, Armenia's government rescheduled on Thursday 131
billion drams ($359 million) in planned expenditures to the fourth
quarter of this year.

The figure is equivalent to almost 14 percent of total government
spending envisaged by the Armenian state budget for 2009. The
government was supposed to meet this record-high spending target by
ensuring a 21 percent rise in its tax and other revenues. However,
those revenues fell by about 11 percent in January as the country's
Gross Domestic Product shrunk for the first time since the early 1990s.

`Given the current difficulties with the collection of taxes, the
government shifted expenditures scheduled for the first, second and
third quarters to the fourth quarter,' Deputy Finance Pavel Safarian
told reporters after a weekly cabinet meeting held in the Aghveran
holiday resort in central Armenia. `This allows us to spend as much
money as we have at our disposal and to avoid accumulating
liabilities,' he said.

The measure, which was proposed by the Finance Ministry, needs to be
endorsed by parliament. It is widely seen as a prelude to budgetary
cuts expected later this year.

Safarian did not rule out such possibility. `We wouldn't be able to
make the envisaged expenditures with fewer revenues,' he said. He
added that the government will likely use some of the hundreds of
dollars in emergency loans promised by foreign governments and
lending institutions to partly make up for the revenue shortfall.

Safarian also made clear that the government will not cut pensions,
public sector salaries and other social spending. He said the delayed
expenditures were mainly earmarked for procurements for various state
agencies.

Prime Minister Tigran Sarkisian said earlier this month that those
agencies must operate in a `regime of strict economy' until Armenia
overcomes the effects of the global economic slump.

TAX RECEIPTS OF STATE BUDGET REDUCE 18.7% IN JANUARY AND FEBRUARY
ARKA
March 24, 2009

YEREVAN, March 24. /ARKA/. Armenian State Revenue Committee's tax
agency says tax receipts of the stat budget shrank 18.7% in January
and February 2009, compared with the same months of the previous year,
to AMD 49207.8 million.

Tax inflow for February totaled AMD 27258 million and for January
AMD 21949.8 million.

VAT receipts amounted to AMD 10850 million in January and February
2009.

This result is 32.9% worse than that that of the same months a year
earlier.

Profit tax inflow amounted to AMD 8841.1 million, 21.4% less than a
year earlier.

Excise tax receipts reduced 67.9% to AMD 657 million. Other tax
receipts reduced 17.1% to AMD 8488 million.

Instead, income tax receipts grew 15.8% to AMD 7590.1 million.

Arrears grew 2.1% in February reaching AMD 90622.5 million. Aharon
Chilingaryan, deputy chairman of the State Revenue Committee, said
that the reduction was due to the global financial crisis.

"It is clear that our economy is impacted by outside factors, and
import reduction resulted in reduction in tax collection", he said.

But it absolutely doesn't mean that tax agencies work defectively,
Chilingaryan said adding that tax agencies do their job properly. ($1 =
AMD 370.61).

KARABAKH BRACES FOR IMPACT OF GLOBAL CRISIS
By Karine Ohanian
Institute for War and Peace Reporting
March 26 3009
UK

As unrecognised republic prepares for downturn, government promises
measures to ease credit and increase national self-sufficiency.

Father-of-two Ashot Babaian is out of work and facing a grim
future. "I lost my job two months ago and barely eke out a living,"
the 29-year-old said.

"My wife doesn't work either, we have two children and now we have
to depend on my father's earnings."

Babaian used to work at Perfect Setting, a firm specialising in the
production of parts for Swiss watches.

He was laid off when the company, partner to a major European watch
manufacturer, cut staffing levels in response to the world financial
crisis, which has reduced demand.

The company management refused to tell IWPR how many, or what
percentage of, staff they had shed.

They were "sorry for this unfortunate situation and for the necessity
of depriving their labour force of high salaries", the firm said.

The first wave of the crisis in Nagorny Karabakh has mainly affected
companies financed from abroad, or which have partnership arrangements
with foreign corporations.

But it has also hit the pockets of ordinary people who now find
salaries can't keep up with sudden price rises.

The self-proclaimed republic has remained unrecognised by the wider
world for more than 15 years.

Formerly an autonomous region of Azerbaijan, it declared independence
after the collapse of the Soviet Union, becoming a conflict zone
between Armenians and Azeris.

But since a ceasefire entered into force on May 1994, Karabakh has
experienced economic recovery.

The economy of the region, which has a population of about 138,000
and where monthly salaries average about 220 US dollars - a little les
than Armenia - revolves around agriculture and small and medium-sized
businesses.

Much of the budget depends on Armenian subsidies, however. Yerevan
supplies most of the 55 billion drams (about 146 million dollars)
set aside for this year.

Karabakh shares a common economic space with Armenia. For this reason,
product prices and economic trends in Armenia impact directly on
prices and employment levels in Karabakh.

After the recent sharp devaluation of the dram on March 3, the panic
felt in Armenia spread to Karabakh.

Owners closed many stores while in some others, the prices of goods
doubled instantly. Panicked consumers swept staples such as vegetable
oil, sugar and flour off the shelves.

"I went to the shop to buy some sugar and rice but to my surprise,
all the shops were closed," Liana Sargsian, a housewife in the capital,
Stepanakert, said.

"My neighbours said only one supermarket was still open in the centre
but long lines had already formed at the doors. I had nothing to do,
but go there."

Fear of a second wave of price hikes prompted shoppers to rush out
and buy household appliances such as washing machines and cell phones.

Although the prices of these goods had already gone up, many people
reasoned that in a few days they would cost even more.

"The prices for some goods soared by up to 20 or 25 per cent in only
hours," Fatima Grigorian, a housewife, told IWPR.

"On March 3, vegetable oil went up to 1,000 dram from 550 dram,
but only two days later the price went down to 700 dram.

"In one day, I spent almost half of my [monthly] salary stocking up
on essential goods!"

The entity's premier, Ara Harutyunyan, called a press conference on
March 4 to calm fears about the sudden rises.

"We share the same economic space with Armenia and everything that
happens there impacts on our economy," he said. "If there are price
increases in Armenia, we will have to react the same way."

Karabakh has already experienced economic jitters recently. In November
2008, the largest taxpaying business, Base Metals, which develops
gold and copper mines, cut production after suffering severe losses.

The move sparked worries as the company cut wages by between 7 and
15 per cent, blaming the decline in world copper prices. As a result,
the company also paid less tax, depriving the budget of 2 billion dram,
equivalent to 5.3 million dollars.

The government's 2009 budget envisages cuts in the administration
of 10 to 15 per cent and setting aside a reserve fund of up to 150
million dram.

Commercial banks are to be drawn into state programmes to ease access
to mortgages and credit for small and medium-sized businesses.

"The country is provided with enough fuel and essential goods,"
Harutiunian assured at the press conference.

He insisted that prices of basic goods would now remain stable. "Bread
prices haven't changed so far and are unlikely to go up now," he
said, "bearing in mind that we not only supply our internal needs
but export grain.

"Of course, people's incomes are not always satisfying, and we have
to find ways of increasing earnings."

But pensions had gone up at the beginning of the year, he noted,
compensating for much of the rise in prices. No cuts to welfare
were envisaged.

However, outrage over the consequences of the crisis, especially the
currency devaluation, is still common among many people.

"We bought a car after borrowing 9,000 dollars but then the dram fell
from 300 to a dollar to 375," Fatima Grigorian complained. "Imagine
how much money we lost because of devaluation!"

The government's anti-crisis measures have included moves to increase
self-sufficiency in food production and power.

Earlier in March, the authorities unveiled a novel investment project
to encourage consumers to buy shares in new, small hydro-electric
power stations.

The joint-stock company, ArtsakhGES (Artsakh hydro-electric power
station), is inviting potential investors to buy shares, priced at
1,000 dram (three dollars) each.

At the presentation ceremony, the manager, Vahram Beglarian, urged
people and companies to join the project. "Participation gives you the
opportunity to become joint-owners of the company and earn a profit,"
he said.

Economist Svetlana Danielian said the project was an excellent idea.

"The project to build and exploit mini hydro-electric power stations
will fulfill all Karabakh's own power needs and enable it to export
power and so earn revenue in a tough economic climate," she said.

Meanwhile, the wave of panic in Armenia has also hit savers in
Karabakh, some of whom have started to exchange dram for dollars and
euro while others try to get rid of foreign currency.

As worries have rippled through the business and banking sector,
the inflow of foreign currency has fallen, hitting banks' assets and
undermining their willingness and ability to lend money for mortgages.

"From the start of the crisis in autumn, some banks tightened credit
conditions, raising service fees and insisting on steep terms for
credit," Danielan said.

"Since the currency devaluation, they have further reduced mortgage
activity and business loans."

The world crisis has also hit the pockets of Karabakh residents who
rely on remittances sent from relatives in Russia.

"My father had three stalls in a market where he used to sell menswear
but since the beginning of the crisis, trade has been bad, so he had to
join the three stalls into one," said Gayane Egiazarian whose father,
working in St Petersburg, used to send her regular funds.

"Now there's no work at all, the market is at risk - and so is my
father's business."

Ani Azatian, a shop assistant, said her fiancé, Vazgen, used to make
a living by working seasonally in the construction business in Russia.

When he came home last October, he was hoping to go back to Russia
and earn money for their wedding. But today he is jobless.

"Now he has to look for work here, but it's very hard to find
employment here," Azatian said.

Unemployment, however, has yet to rise significantly. Last December,
3,724 Karabakh residents were registered as unemployed. By March 1,
the number had crept up to 3,769.

One other element of the government's anti-crisis package is tightening
up the tax collection rate.

Karabakh's tax revenues were already 25 per cent higher in 2008 than
in 2007 as a result of existing improvements in this sphere.

The government also intends to boost local agriculture, with a view
to cutting imports.

"We still import most agricultural goods, though the conditions to
develop our own agricultural sector are good," Bako Sahakian, the
president of Karabakh, told a meeting of students in Stepanakert on
February 26.

"Karabakh has every chance to serve not only the [food] needs of the
domestic market but to provide the market abroad with competitive
organic products."

Sahakian's opponent in the last elections, in 2007, Masis Mailian, told
IWPR that the authorities were right to concentrate on agriculture.

"The emphasis on the agricultural sector is just what will help us
survive the global financial crisis with minimal losses," he said.
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