YEREVAN'S RESPONSE FOR INFORMATION ON POLITICAL

C O N F I D E N T I A L SECTION 01 OF 03 YEREVAN 000465

SIPDIS

E.O. 12958: DECL: 07/01/2019
TAGS: PINR ECON EFIN EINT AJ AM GG
SUBJECT: YEREVAN'S RESPONSE FOR INFORMATION ON POLITICAL
IMPLICATIONS OF GLOBAL FINANCIAL CRISIS IN CAUCASUS

REF: A) SECSTATE 41027 - C-RE9-00772 B) YEREVAN 178

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Classified By: CDA Joseph Pennington. Reason 1.4 (b/d).


1. (U) Following are post's responses to Ref A questions:


2. (C) WHICH NATIONAL LEADER AND/OR CABINET FIGURES ARE MOST
ACTIVELY INVOLVED IN ECONOMIC DECISIONMAKING? ARE THERE
DIFFERING OPINIONS WITHIN THE NATIONAL LEADERSHIP REGARDING
APPROPRIATE ACTIONS IN LIGHT OF THE ECONOMIC CRISIS?

The primary decision maker on economic matters is President
Serzh Sargsian. His closest advisors are Prime Minister
Tigran Sargsian (previously the Chairman of the Central Bank
of Armenia, orCBA),who is believed to play a significant
role in fiscal policy, but a lesser role in monetary policy,
CBA Chairman Arthur Javadian, Minister of Economy Nerses
Yeritsian and Minister of Finance Tigran Davtian. The GOAM's
most visible and consequential economic policy decision since
the start of the global financial crisis was the CBA's
intervention in support of the Armenian dram (AMD) from
October 2008 to March 3, 2009. CBA Chairman Arthur Javadian
acknowledged to Ambassador that this action--which was
undertaken against the advice of other governments,
international financial institutions and local banks, and
most probably against the judgment of the CBA's professional
staff -- resulted from a presidential decision (Ref B).


3. (C) WHAT ROLE DO OUTSIDE ADVISORS HAVE IN SHAPING ECONOMIC
POLICY? HOW DO NATIONAL LEADERS REGARD THEIR VIEWS?

While we are not aware of the GOAM relying formally on any
outside advisors, the World Bank and IMF have played
significant roles in the GOAM's economic policymaking by
virtue of conditionalities attached to the loans (roughly USD
1 billion) they have provided to the GOAM in response to the
crisis. Both institutions insisted that the CBA cease its
support of the Armenian dram (AMD) as a condition of
receiving these loans, which were approved shortly after the
CBA announced a return to a floating exchange rate on March

3.


4. (C) HOW DOES THE PUBLIC PERCEIVE THEIR COUNTRY'S ECONOMIC
SITUATION COMPARED TO OTHERS IN THE REGION?

The general public is clearly aware of the impact of the
financial crisis on their daily living and that none of their
neighbors has been spared. The greatest awareness likely
exists about the impact of the crisis in Russia, because
economic developments there have the greatest impact on
Armenia. Approximately half a million Armenians live and
work in Russia -- some permanently, some on a seasonal basis
-- and in recent years have sent back to Armenia remittances
equal to approximately 15 percent of Armenia's GDP. Due to
the economic crisis, most predictions are that these will
decline by about 30 percent in 2009. Tens of thousands of
seasonal workers are also not expected to return to work in
Russia this year due to the crisis and the decrease in
employment opportunities there.


5. (C) HOW DO LOCAL BANK OFFICIALS VIEW THE PERFORMANCE OF
NATIONAL OFFICIALS IN HANDLING THE CURRENT FINANCIAL
SITUATION?

Armenian banks generally believe that the banking regulator
-- the CBA -- has done a good job regulating the sector.
They were generally not supportive, however, of the CBA's
intervention in support of the AMD, and banks -- many with
open dram positions -- lost over USD 15 million (about 14
percent of 2008 profits) when the CBA announced a return to a
floating exchange rate on March 3. Most say regulation has
been prudent, with the CBA setting higher than normal capital
adequacy and liquidity ratios. No banks have failed during
the economic crisis, though the CBA is encouraging
consolidation of the banking sector -- which now consists of
23 institutions -- in order to create a smaller number of
better-capitalized banks. The CBA has for months floated a
proposal to require all mortgage lending -- which under
current rules can be denominated in foreign currencies -- to
be AMD-denominated. Several institutions that receive their
funds from abroad have opposed this proposal, as the lack of
hedging instruments would add several points to the interest
rates of their loans.


6. (C) WHAT PRECAUTIONS, IF ANY, ARE THE BANKS TAKING IN
LIGHT OF THE GLOBAL FINANCIAL CRISIS?

Banks have set tighter lending requirements and have
increased interest rates, with dram interest rates on
consumer loans now as high as 24 percent. Several banks have
stopped providing mortgages.

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7. (C) TO WHAT EXTENT ARE BANKS EXPRESSING CONCERN ABOUT
CURRENCY DEPRECIATION?

The dram depreciated by approximately 20 percent on March 3,
after the CBA announced that it would allow the AMD to float
freely again. Based on the very narrow buy-ask spreads at
banks and exchange facilities, banks do not appear to be
concerned about a significant devaluation in the near term.
While the AMD has since held steady in the 360-380 range,
there is considerable speculation about another major
devaluation.


8. (C) ARE INDIVIDUALS SWITCHING LOCAL CURRENCY BANK DEPOSITS
INTO DOLLAR OR EURO-DENOMINATED ACCOUNTS?

Before the economic crisis, approximately 70 percent of bank
deposits were in AMD and about 30 percent in USD. Those
ratios had largely reversed prior to the March 3 devaluation,
and at present approximately 80 percent of bank deposits in
Armenia are dollar-denominated.


9. (C) ARE BUSINESS OWNERS CURRENTLY ABLE TO OBTAIN BANK
LOANS? IF SO, ON WHAT TERMS?

It has been very difficult for businesses to obtain loans at
present, as banks have set interest rates as high as 24
percent, with high collateral requirements. Processing times
for loan requests have also increased.


10. (C) HAS THERE BEEN ANY RECENT CHANGE IN REMITTANCES FROM
ABROAD? ARE WORKERS RETURNING FROM RUSSIA, EUROPE AND OTHER
COUNTRIES DUE TO LACK OF WORK?

There are up to one million Armenians living and working
Abroad (mostly in Russia),some permanently, some seasonally.
In recent years, remittances have been equal to 15-20
percent of GDP, with 80 percent of those coming from Russia.
The global financial crisis, in particular the large drop in
oil prices, has led to significant job losses in Russia.
According to official statistics, remittances in the first
four months of 2009 fell by 32 percent compared to 2008, with
some regions reporting significantly larger declines. While
there are no reliable statistics as yet, anecdotal
information suggests that tens of thousands of seasonal
workers who returned last winter will not go abroad to work
this year.


11. (C) TO WHAT EXTENT ARE CONSTRUCTION PROJECTS BEING
DELAYED AND/OR FROZEN PRIOR TO COMPLETION? WHAT IS CAUSING
PROJECTS TO FALL SHORT OF COMPLETION?

Construction, which typically accounts for 25 percent of GDP
and has grown 30-35 percent annually in recent years,
declined by 56 percent in January-May 2009 compared to
January-May 2008. Much of this construction has been for
high-end residential buildings geared toward Diaspora
Armenians, and the global crisis has muted much of this
demand. During the winter, construction in Yerevan ground
almost entirely to a halt, with only two of at least a dozen
major construction sites still operating. Recently, the GOAM
introduced a program to guarantee construction financing to
any building project that was at least 75 percent complete.
It has allocated USD 54 million for this purpose. According
to Customs officers, imports via rail of construction
materials have all but ceased.


12. (C) WHAT DO NATIONAL OFFICIALS ASSESS WILL BE THE
IMMEDIATE ECONOMIC IMPACT OF REOPENING THE BORDER WITH
TURKEY? THE LONG-TERM IMPACT? HOW DO LOCAL BUSINESSES
ASSESS AN OPEN BORDER WILL HELP OR HURT ECONOMICALLY IN THE
NEAR-TERM?

It is generally believed, by GOAM officials and others, that
opening the border with Turkey will in the long run lead to a
significant economic benefit to Armenia, as it will promote
greater trade between the two countries, and ease the current
trade barriers posed by circuitous and expensive transit via
Georgia. The impact may be limited in the initial stages,
however, due to a limited number of road and rail connections
across the border. While the GOAM and others have claimed
that opening of the border will reduce the market power of
the small group of politically-influential businessmen who
dominate much of the economy -- particularly imports of food
and fuel -- many expect, whether or not they support a
reopened border, that any economic gains would ultimately end
up within that same small circle.

Business perception of the impact of a reopened border with
Turkey varies by industry and by region: Agriculture-related
businesses in border regions tend to believe they would

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benefit from access to a new market, while other businesses
-- textiles, as one example -- would likely suffer from
increased competition from Turkish exports. Strong mistrust
of Turkey in some regions also influences perceptions of the
economic impact on Armenia of a reopened border.
PENNINGTON