In recent months, excessive appreciation of the dram against the US dollar has been observed in Armenia. If this process has objective reasons and leads to positive shifts in the economy, an increase in the standard of living of the population, and curbing inflation, then it could only be welcomed, Armenian expert Tigran Vardanyan wrote.

He noted that the incomprehensible collapse of the US dollar in Armenia didn’t lead to positive events. Inflation did not slow down, but accelerated, amounting to 9% in May. Double-digit inflation could not be contained either by the strengthening of the dram or by the increase in the refinancing rate by the Central Bank of Armenia. Everything is getting more expensive - food and non-food products. By the way, the rise in prices for automobile fuel threatens to increase tariffs for freight transportation. The increased costs of farmers for diesel fuel will lead to an increase in the cost of agricultural products.

Faktyoxla Lab. has tried to find out what the Armenian expert means and why the collapse of the US dollar in Armenia did not lead to positive events.

Let’s start with the fact that the Armenian expert notes that the family budget of recipients of transfers in US dollars has suffered significant damage from the “strengthening” of the dram. Compared to February, in June, for the same amount in dollars, citizens receive 20% less drams than in February. That is, one fifth of this type of income of many Armenian families is lost.

Entrepreneurs, especially exporters, are also dissatisfied with the “strengthening” of the dram. The revaluation of the dram, both in the short and long term, has a huge negative impact on the Armenian economy. This is stated in an open letter addressed to the Central Bank, the Ministry of Economy, the Ministry of Finance of Armenia, distributed by the Mantashyants Union of Entrepreneurs, the Union of Advanced Technology Enterprises, the Armenian Association of Developers and the Export Armenia Association.

The sale of locally produced goods abroad becomes unprofitable. Some exporters, in order to maintain their positions in foreign markets, are forced to reduce prices for goods, and even sell them at their prime cost.

In Armenia, many IT companies work for external orders. That is, this is the same export for which such a “strengthening” of the dram leads to predictable consequences. Under these conditions, Armenian IT enterprises are left to either abandon their activities or reduce the number of staff. The exodus of these companies to other countries is also not ruled out.

The tourism sector is also affected. A foreigner who has no idea about the current situation in Armenia will be quite surprised at the sight of high prices (especially for housing rent, as well as for food), against the background of a relatively low purchasing power of the dollar.

But most importantly, the decline and volatility of the US dollar in Armenia may have a negative impact on the intentions of foreign investors.

Graphically, the dynamics of the US dollar in Armenia and Russia are practically the same.

However, there are cardinal differences in the conditions under which the Armenian currency strengthens. Both purely economic in nature, and in terms of the methods and rigidity of currency restrictions. Here is just one difference: Russia, despite the sanctions, has a huge foreign trade surplus, while Armenia has a huge deficit.

In early May, the head of the Central Bank of Armenia stated that “some” strengthening of the dram against the US dollar was due to an increase in the supply of foreign currency. This meant the mass arrival of Russian citizens, who, of course, brought with them (or received by transfers) rubles or dollars.

But, the first, rather large-scale, wave of migration of Russians began to wane. Moreover, a significant part of visitors from Russia quickly moved to other countries. So, this factor has already lost its significance in the Armenian currency market. However, the dram continued to strengthen against the US dollar. At the same time, the exchange rate of the Russian ruble against the dram has noticeably increased.

The cross-rate of the Russian ruble against the US dollar in Armenia had an effect here.

According to the expert, in fact, the objectively unjustified strengthening of the dram against the US dollar may well turn into crisis phenomena in the Armenian economy in the future.

According to Artur Khachatryan, deputy of the Hayastan faction, Pashinyan and his team are manipulating economic indicators. The authorities are speculating on average wage growth and low inflation, he said.

“The increase in the average wage without raising the minimum wage suggests that the wages of those who already received a large salary have increased. This will inevitably lead to a social gap between the poor and the rich. The authorities present an inflation rate of 8.5% as a success, but this the indicator is formed on the basis of 450 items. The main consumer products have risen in price by 10-20%. The authorities are manipulating, including in the calculation, for example, a 1% increase in the price of carpets,” the deputy noted.

He also criticized the authorities for not taking measures to contain the dollar, which has fallen in price by almost 20% since the beginning of the year. “The dollar fell, but prices remained unchanged, moreover, in some cases they increased. And this is an internal problem that has nothing to do with international price increases. The whole problem is monopolies. Oligarchs profit from imports, and the authorities will not touch this source of income. But the exporter suffers from the fall of the dollar, and if the authorities do not take action, local companies will go bankrupt, which will lead to an increase in unemployment,” Khachatryan emphasized.

According to economist Suren Parsyan, the devaluation of the dollar in the Armenian foreign exchange market is due to various external and internal factors.

He noted that external factors, first of all, include the US policy aimed at reducing the cost of the national currency and increasing the volume of foreign aid financing. The appearance of "cheap money" contributed to the activation of exports of goods and services from the United States. In the first quarter of this year, the US increased its exports sharply compared to last year. Against the background of the Russian-Ukrainian crisis, as Parsyan noted, the United States has significantly increased the export of oil and gas at relatively cheap prices. As a result of this policy, "dollar inflation" began to be observed in international markets, which began to affect Armenia as well. As part of the US international assistance, Armenia received significant amounts of dollars, which began to affect the national currency and contributed to the appreciation of the dram.

In addition, as the economist emphasized, there are also internal reasons, among which he singled out the preservation by the Central Bank of the refinancing interest rate at the level of 9.25%. The Central Bank at this stage is guided by the policy of "expensive money", thereby trying to contain even greater inflation. If the exchange rate of the dram against the US dollar remained at the level of 500 drams, inflation in the country would not be 9%, but 15% - 16%. "The government and the Central Bank are trying to restrain such a development of the situation by raising the value of the national currency," Parsyan said, adding that the increase in transfers contributed to the revaluation of the dram to a large extent. In April alone, the country received about $350 million, mainly from Russia. The influx of visitors from Russia, Ukraine and Belarus led to the filling of the market with foreign currency.

Parsyan also noted that a decrease in interest in the US dollar was recorded in the domestic market. If last year the Armenian side paid for gas and oil supplies in US currency, now it is done in rubles. The same Gazprom Armenia company buys rubles for drams on the domestic market and sends them to the Russian fuel supplier to pay for the gas supplied to the country. As a result, demand against the dollar is reduced, which, in turn, leads to its redundancy in the market.

“The Central Bank is unlikely to be able to maintain this rate for a long period of time, since in the face of a reduction or cessation of the flow of Russian visitors and visitors from other countries, the exchange rate of the dram against foreign currencies will sharply increase,” the expert believes, adding that before this growth, Armenian exporters suffer significant losses. They will need to increase the cost of their goods by at least 15% to get profit.

The current situation on the market will also have a negative impact on travel companies, whose leaders, concluding contracts with foreign partners in US dollars, pay salaries to their employees in drams, which leads to the fact that the employer must additionally finance 15% of the salary from his own pocket, because they have to sell dollars to finance the payroll.

In this whole story, as Parsyan noted, the winners are monopolists - importers, who, taking advantage of the moment, increase prices and make super profits. This issue, as Parsyan emphasized, should be a subject for consideration by the Commission for the Protection of Economic Competition in order to protect the population, and especially its socially unprotected part, which today cannot afford to purchase even basic necessities - flour, vegetable oil, etc.

International consultant on public finances, ex-Minister of Finance of Armenia Vardan Aramyan notes that if the factors determining the revaluation of the dram are temporary, then Armenia will face significant difficulties.

"The strengthening of the Armenian dram is primarily due to structural changes in the foreign trade of Armenia," the expert notes. Thus, as a result of Western sanctions, Russia was forced to switch to trade in rubles, which naturally affected trade with Armenia. "Russian exports to Armenia amount to about $1.3 billion. Armenia pays the Russian Federation about $460-480 million a year for gas alone. It turns out that huge funds have been released against the backdrop of these events," he said.

The second factor determining the appreciation of the national currency is associated with a significant increase in visitors against the background of the Russian-Ukrainian aggravation by 2.7 times (only from the Russian Federation - more than four times). They have either rubles or dollars in their hands, which are exchanged for Armenian drams, increasing the demand for the local currency. In addition, the volume of transfers from the US and Russia also increased.

At the same time, according to the ex-head of the Armenian Ministry of Finance, it is impossible to give an unambiguously positive or negative assessment in this situation. The issue needs to be considered from the perspective of all the "beneficiaries" of the process.

Thus, the strengthening of the dram is good for consumers, because it keeps the prices of imported goods in check. A favorable situation has also developed for the non-exportable sector and importers - they have reduced dollar expenses, and since the latter's sales are in drams, they benefit from this.

But for exporters, on the contrary, this is bad, since the latter's incomes are significantly reduced against the backdrop of an increase in dram expenses. Only about 30% of them (exporting to the Russian Federation) are in a relatively favorable position, since the dram has not grown against the ruble.

According to Vardan Aramyan, if the factors that determine the revaluation of the dram are not permanent, the country will face significant difficulties (for example, those that were in 2008-2009, when Armenia recorded an almost 14% decline).

Finally, Armenian experts suggest, in order to correctly and fairly assess the socio-economic situation in Armenia, to compare inflation in Armenia with other EAEU countries.

Judging by the data of the Eurasian Economic Commission (EEC), it turns out that the unemployment rate in Armenia is higher than in other countries of the EAEU. Specifically, as of April 2022:

    Inflation in Armenia was 8.4%, while the unemployment rate was 13.2%.

    Inflation in Belarus was 16.8%, and the unemployment rate was 0.2%.

    Inflation in Russia amounted to 17.8%, and the unemployment rate - 0.9%.

    Inflation in Kazakhstan was 13.2%, and the unemployment rate was 2.1%.

    Inflation in Kyrgyzstan was 14.5%, and the unemployment rate was 3%.

According to the Armenian Statistical Data, inflation in Armenia in May 2022 compared to May 2021 amounted to 9%, and for the month - 0.1%.

This is a clear example on the basis of which one can truly judge the situation in Armenia.