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 YEREVAN 00000465 001.3 OF 003 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. YEREVAN 00000465 002.2 OF 003 ¶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 YEREVAN 00000465 003 OF 003 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