KRUSCHEV'S "VIRGIN LANDS" ALL OVER AGAIN?: NEW

C O N F I D E N T I A L SECTION 01 OF 02 YEREVAN 000316

SIPDIS

SIPDIS

E.O. 12958: DECL: 04/01/2018
TAGS: EAGR ECON ETRD AM
SUBJECT: KRUSCHEV'S "VIRGIN LANDS" ALL OVER AGAIN?: NEW
ARMENIAN PRESIDENT PUSHING IMPORT SUBSTITUTION PLANS FOR
GRAIN

YEREVAN 00000316 001.2 OF 002


Classified By: CDA JOSEPH PENNINGTON. REASON 1.4 (B/D)

SUMMARY
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1. (C) President Serzh Sargsian has been calling for a new
national program to make Armenia self-sufficient in the
production of wheat and corn. Emboff's discussions since
mid-March with senior Agriculture Ministry, regional, and
local officials have made clear that the GOAM is already
actively developing plans and looking for new lands where
these grains could be grown. This suggests that Sargsian has
reached first for a statist, command-and-control government
solution to the political problem of recent increases in
grain and other commodity prices that have delivered a
significant shock to the Armenian economy. GOAM officials
have indicated they would seek assistance from aid agencies
and multilateral lending institutions. This proposal is
worrisome on two levels: on purely economic grounds and for
what it says about the new president's policy instincts and
intellectual toolbox. END SUMMARY.

THE RETURN OF CENTRAL PLANNING?
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2. (C) In mid-March then Prime Minister (and President-Elect)
Serzh Sargsian reportedly proposed that the GOAM should
finance a project to make Armenia self-sufficient in the
production of wheat and corn. Called the "Increased Wheat
and Corn Production in Armenia" initiative and originally
expected to fade into oblivion, it is an idea that has thus
far refused to die. Minister of Agriculture Lokian confirmed
in late March to the resident USDA director that Sargsian is
very serious about pursuing it, but provided no estimate of
its likely cost. Lokian inquired, however, about possible USG
assistance to bring it into being.


3. (C) In the last week of March several local officials told
emboffs that they had been occupied in recent weeks with
identifying "suitable" plots of land where wheat and corn
could be grown. It is not clear whether the GOAM plans to
divert land from other agricultural uses, would cultivate
fallow land, or might clear other acreage for this purpose
(in a country with just eight percent forest cover).


4. (C) Beyond the question of whether a state should
intervene so directly in the economy, there are other serious
drawbacks to this plan. Armenia simply lacks sufficient
arable land to produce adequate amounts of wheat and corn.
Any major expansion of wheat and corn production would
require intensive irrigation, further straining available
water resources. Also, Armenia is a country of small
subsistence farms, while wheat and corn production requires
large farms to be cost-effective. Armenia's rocky and
mountainous topography leaves comparatively little land area
that seems suitable for large-scale commercial grain farming.
This initiative would also work directly against USDA's CARD,
MCC's ACDI/VOCA and other donor-funded rural-development
programs that seek to encourage cultivation of higher-margin
fruits and vegetables rather than low-margin commodity crops.


RESPONSE TO WORLD PRICES?
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5. (C) Recent increases in world prices of wheat and corn
have had a significant impact on the Armenian economy,
particularly in the price of bread. This self-sufficiency
initiative appears to be Sargsian's response to the
destabilizing effects of price increases on the world market.
Sargsian may also view current market prices as presenting
an opportunity for growers to benefit from those prices.
Nonetheless, Armenian agricultural contacts have described
the proposal as seriously flawed and a potential disaster for
Armenian agriculture and the economy.


6. (C) The plan also overlooks a potentially greater
influence on domestic food prices: government-protected
monopolies on the import of many food items. A single
oligarch (and MP),Samvel "LFik Samo" Alexanian, holds a de
facto monopoly on the import of sugar and wheat, and controls
an estimated 80 percent of the market for sunflower-seed oil
and butter. While world prices for wheat and corn are
currently at historic highs, the lack of competition in the
provision of these staples on the domestic market clearly
does not help
to keep prices down.


YEREVAN 00000316 002.2 OF 002


COMMENT
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7. (C) Among independent Armenia's early economic
achievements in the 1990s -- well ahead of most of its fellow
former Soviet Republics -- was the complete privatization of
state-owned agricultural lands. Sargsian's proposal appears
aimed at putting state direction back into the heart of the
agricultural economy. While Sargsian and his advisers
typically say most of the right things about political and
economic reform, a move to seek self-sufficiency in the
production of nearly any commodity - especially of such
low-margin ones as wheat and corn - would be a major retreat
from those promises. It is unlikely that Armenia could
produce sufficient amounts of these staples, and an attempted
effort could come at a high cost to the Armenian economy,
especially if government mandates divert producers away from
other critical and higher-margin crops. Aside from the
economic lunacy of this "back to the future" proposal, this
initiative serves as a pointed reminder of the deficiencies
of Sargsian's professional background as preparation for
running the Armenian government. We hope that this will
prove a short-lived "rookie mistake," and that more
economically literate advisers will soon steer Sargsian's
policy impulses in a more constructive direction. Otherwise,
we fear Sargsian runs the risk of compounding his political
crisis with misguided economic management.
FRAZIER