Identifier
Created
Classification
Origin
09YEREVAN178
2009-03-13 13:58:00
CONFIDENTIAL
Embassy Yerevan
Cable title:  

CENTRAL BANK CHAIRMAN BEHIND THE SCENES ON

Tags:  PROV PREL ECON EFIN EINV ASEC RU AM 
pdf how-to read a cable
VZCZCXRO9137
PP RUEHDBU
DE RUEHYE #0178/01 0721358
ZNY CCCCC ZZH
P 131358Z MAR 09
FM AMEMBASSY YEREVAN
TO RUEHC/SECSTATE WASHDC PRIORITY 8809
INFO RUCNCIS/CIS COLLECTIVE PRIORITY
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
-------

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