CENTRAL BANK CHAIRMAN BEHIND THE SCENES ON

C O N F I D E N T I A L SECTION 01 OF 02 YEREVAN 000178 SIPDIS E.O. 12958: DECL: 03/12/2019 TAGS: PROV PREL ECON EFIN EINV ASEC RU AM SUBJECT: CENTRAL BANK CHAIRMAN BEHIND THE SCENES ON DEVALUATION Classified By: Ambassador Marie L. Yovanovitch. Reasons 1.4 (b/d) SUMMARY -------------- ¶1. (C) Central Bank Chairman Arthur Javadian told Ambassador the CBA's decision to sustain the Armenian Dram (AMD) since last fall had been the correct one, despite the significant depletion of Armenia's foreign reserves. Notwithstanding official independence, Javadian made clear that the President had been deeply involved in the CBA's strategy and eventual decision to let the AMD float again. The President instructed ministers to be publicly supportive of the CBA decision, and also convoked Javadian with the security service chiefs the night before the action to discuss possible unrest. The GOAM was also put on the lookout against oligarchs who might impose excessive price increases. Javadian was less than certain about the likelihood of the USD 500 million loan from Russia becoming a reality, or about the existence of preconditions surrounding it. END SUMMARY. THE PRESIDENT CALLS THE SHOTS -------------- ¶2. (C) Meeting with the Ambassador on March 10, CBA Chairman Arthur Javadian made clear that he had consulted frequently with President Sargsian about the CBA's policy of supporting the AMD and its decision on March 3 to end its support and allow the AMD to float. He insisted that Prime Minister Tigran Sargsian, his predecessor as CBA Chairman, had not been involved in this decision, and that the PM has been involved only in fiscal policy. He recounted that in the late evening of March 2, he met with the President, who called in the Prosecutor General and heads of the police and National Security Service (NSS) to discuss contingencies in the event of public unrest--or illegal currency speculation--when the CBA announced its new policy. They were also told to ensure that oligarchs--many with import monopolies--did not impose excessive price increases following the devaluation. ¶3. (C) Javadian mentioned that the economic situation is putting the Prime Minister under considerable pressure. (Note: There has again been rampant speculation in the press that the PM will resign imminently. End Note). The PM is being asked to provide guaranty letters to businesses experiencing economic difficulties, but Javadian noted that the President is the "only guarantee." Javadian hinted at other pressures being put on the PM by oligarchs and other powerful and shady figures, but declined to elaborate. IT WAS THE RIGHT APPROACH -------------- ¶4. (C) Javadian outlined three reasons for the CBA's decision to support the AMD: 1) preventing loss of confidence by depositors, which could prompt flight from the AMD; 2) Giving banks more time to adjust to a devalued AMD; and 3) Wanting banks to have time to build up more USD reserves. While acknowledging that the GOAM had lost a significant share of its foreign reserves supporting the AMD since last October--he reported that net international reserves now stand at USD 600 million--Javadian said it was the correct approach, as these goals were all accomplished. While the AMD dropped 25 percent after the CBA ended its forex intervention, it has held even at roughly AMD 375 per USD since March 3. In September, banks had USD 300-400 million on hand, and at present have closer to USD 700 million. He claimed that allowing a gradual decline of the AMD would have left Armenia even worse off; he noted that Russia had done this with the ruble and has lost half of its foreign exchange reserves, with more devaluation still likely. Despite Armenia's troubles, he claimed the country is still much better off than others, and that the CBA's policy of supporting the AMD should be highlighted as an example of sound economic management; even the IMF, which had for months pressured the GOAM to abandon its support of the AMD, has acknowledged that its actions had likely given the banks more time to prepare for an eventual devaluation. ¶5. (C) IMF and World Bank assistance packages were conditioned on the GOAM allowing the AMD to float again, and the devaluation was done in consultation with those institutions. The CBA henceforth plans to intervene only to prevent fluctuations of more than AMD 10 in either direction; from March 3-11 the CBA had sold about USD 2 million and bought about USD 6.5 million in order to prevent such fluctuations. World Bank Country Director Aristomene Varoudakis told DCM on the evening of March 12, however, that the CBA had sold around 8 million USD earlier that day, and predicted another near-term drop in the value of the Dram. Varoudakis said he believes the next phase of devaluation YEREVAN 00000178 002 OF 002 will reduce the value of the dram to around 420 ADM to the dollar. MONEY FROM IMF AND RUSSIA -------------- ¶6. (C) Javadian noted that the GOAM already has received approximately half of the USD 540 million StandBy package that was approved by the IMF on March 6. This money will be used to bolster the CBA's foreign reserves. Asked about the USD 500 million promised by Russia, Javadian said the GOR will be meeting on March 19 to approve the loan and the same day the National Asembly will need to approve the change to the budget, which Javadian thought might be too ambitious a program for one day. He believes the Russian funds will be used primarily for infrastructure and SME loans. He also noted he has told the GOAM that if it is lent to SMEs, the CBA should assume the foreign exchange risk and is in a position to do so. (Comment: NATO officials told Ambassador on March 13 that the Ministry of Defense expects a portion of the Russian loan will be used to buy weapons. If true, this would not reduce poverty or unemployment, which ostensibly was the goal of the Russian loan. End Comment.) ¶7. (C) Pressed by the Ambassador on the certainty of the Russian funding, however, Javadian at first said it was guaranteed, but became somewhat less certain as the discussion continued. He also insisted at first that besides the terms of the Russian loan (LIBOR plus three percent, 15-year repayment term with a five-year grace period),there were no other conditions attached. (Note: Press speculation weeks ago had included the possibility of Armenia having to adopt the Ruble. End Note). Later he indicated that there may be a separate agreement or set of conditions surrounding the Russian loan. INFLATION PROJECTIONS -------------- ¶8. (C) Javadian predicted that Armenia's inflation rate for 2009 would be approximately eight percent, in line with the IMF's projections, which assumes a 20 percent AMD depreciation and the import sector accounting for 40 percent of the economy. He noted, however, that the planned 20 percent increase in gas and electricity rates scheduled to take effect on April 1 will alone account for 2.7 percentage points of the 2009 inflation rate. A larger devaluation will likely result in a higher overall inflation rate for the year. A GOOD TIME TO INVEST IN ARMENIA? -------------- ¶9. (C) Javadian asserted that this is a good time for foreigners to invest in Armenia, and that the Prime Minister had recently met with approximately 300 Armenians in Russia in an effort to persuade them to invest in the country. COMMENT -------------- ¶10. (C) Javadian was unusually frank and candid in his one-on-one meeting with the Ambassador, not even making a pretense of the CBA's political independence and also criticizing the competence of many government officials. He was dismissive of the idea that the Prime Minister, his predecessor as CBA Chairman, would have been involved in the CBA's decision making. He seemed nearly radiant in describing the CBA's achievement in managing a relatively smooth devaluation of the AMD, which at least for the moment achieved a new equilibrium rate. It will take some time to determine whether his outlook is justified. End Comment. YOVANOVITCH