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It’s Only “Politicized” Capital That’s Entering Armenia

An interview with Doctor of Economics, Professor Tatul Manaseryan

[September 10, 2007]

– The rise in value of the Armenian Dram relative to the U.S. Dollar continues to worry citizens of Armenia, importers and charitable organizations. No one seems able to provide the explanations they desire for this phenomenon. A mass outflow of capital from Armenia has begun and exporters find themselves in a hopeless situation. Who exactly profits from this? In your estimation, what are the factors involved in the appreciation of the Dram?

– When a country's economy manifests serious signs of foreign stimulation and becomes dependent on it, turning certain economic sectors dominant by incentivizing them, then you will notice the presence of serious export stimuli and the consequences that follow. Who profits from such U.S. Dollar and Armenian Dram currency rate fluctuations. It would be advantageous for exporters if the situation were similar to what occurred in the United States when the dollar's value artificially dropped but so did prices. Thus goods became relatively more competitive. This works to the advantage of the government, exporters and consumers.

When a government doesn't take an interest in the matter it signifies that the leaders of many government circles are engaged in the import business, a sphere that is growing at a faster clip than exports. Here, we are not only talking about legal imports but contraband as well. Imports become even more profitable when the currency has been artificially appreciated. That's why imports in our country, in comparison to overseas, not only increase in general volumes but according to growth rates as well. That's to say imports have exponential growth rates. In essence, we are strangling what is produced domestically. Why is this taking place? There are several reasons why and more than one hundred factors involved. If we assess the issue objectively we see that with the introduction of the Euro into circulation the global economy became bipolar. Value fluctuations between the U.S. Dollar and the Euro impact all currencies, as there is not one national economy that exists in a total vacuum. Even communist-ruled Cuba and China are subject to such influences. The world situation is not as it once was. Like it or not, it's the Dollar and Euro that ultimately decide the fate of the global economy. If we take a look at the Dollar-Euro fluctuation figures, at most what we see are fractional rates of change. Rarely have changes been registered in one or two digit numbers and thus shaken the financial markets. Look what's happening here in Armenia. None of these tendencies come into play here. For example, concurrent with a fall in the Dollar we see a one or two digit rise in the appreciation rate of the Dram. Opposing processes take place in Armenia at the end of the year. For instance when the Dollar depreciates globally but appreciates in Armenia. In that instance, it should approach the number fixed in the budget. Such paradoxes also occur. Or on the contrary, when the Dollar appreciates overseas but falls in Armenia.

The other factor, let's say when the economy hasn't stirred, is that there can be sharp appreciation of the Dram during the winter. What type of business can such an occurrence be linked to? If exports haven't risen, what's the reason for such an appreciation? Such signals in the economy don't exist to result in such an appreciation. In other words, there must be economic growth to cause such appreciation.

In the political arena, during pre-election years in any country, including those like ours, a large, uneven, development of the economy cannot occur. Here, 2006-2007 was a pre-election year. There will not be such large-scale economic growth in the first half of 2008. Certain developments are now taking place as the present government attempts to make good on its pre-election promises in the run-up to the presidential elections. I believe this will be good for the economy but its effect will be quite minimal. Absent a favorable investment environment much needed serious foreign investment will not occur. Thus I don't foresee even single-digit rates of growth being attained. Many other factors come into play but these are the main ones that lead us to conclude that there are no natural bases for this appreciation of the Dram. Thus the interest remains sector-wide – maintain an artificially inflated Dram so that imports cost less.

What can the government do? If importers do not voluntarily lower prices then the government must step in and do so in order that consumers and charitable organizations don't suffer. Both the private and public sectors are involved in this matter. The private sector is somewhat complicated but it's possible to regulate prices and index currency fluctuations. The government is obliged to do just that in the case of public utilities through the appropriate regulatory commission. This commission is obligated to automatically index those prices, especially the ones tied to the dollar, and bring them in line with domestic norms. Since this doesn't happen here, it signifies that the government itself is behind the price rises. The government is mandated to take these steps as prescribed by law.

For the past two years I've presented proposals regarding what can be down in the private sector. The authorities haven't reviewed them since it's not in their interest to do so. The government must tax super-profits. Both importers and exporters are in the business to make a profit. But if normal profit levels turn into super-profits based solely on currency fluctuations, and not on sound business practices or other factors, then the government must tax those profits and redistribute them to consumers. Presently, the government isn't doing this.

– In your opinion, are these companies declaring such super-profits? These companies owned by the oligarchs aren't even obligated to pay taxes on normal profits.

– That's easy to calculate, especially given present conditions when they boast of the new technologies they're importing. Custom officials can record what merchandise is being brought in, its value and quantity. The government is obligated to step in when companies import goods into Armenia and sell them at prices totally unaffordable to the average consumer. In any given country, the government performs two essential functions – regulatory and supervisory. It regulates according to the law and, as I've noted, it supervises by way of the public regulatory commission. If it doesn't take such measures, it simply isn't a government in the true sense of the word.

– In essence, then, a market-economy doesn't exist in Armenia.

– A market-economy, as traditionally defined, can't exist in Armenia. Such an economy must first pass through a series of stages such as the initial stage of capital accumulation. Until the accumulation of domestic capital there can be no investment, sales or reinvestments. All this took place in Armenia in a very unrefined manner and occurred contrary to economic standards. Now, we are witnessing an outflow of capital, not its accumulation, investment or utilization. Presently, only “politicized” capital is entering Armenia from various countries, especially Russia, in order to create monopolies and expand dependency. It would be absolutely incorrect to conclude that this is advantageous for the business sector as there are more attractive locales for business globally. This can be anywhere in Eastern Europe or China where the environment for doing business is much more favorable; but not in Armenia. The biggest problem facing domestic and foreign investors is that the future of Armenia cannot be predicted to any certain degree. This also poses a looming threat in an economic security sense as well. It is my firm conviction that for as long as internal investment levels don't grow, the economy will not develop. I don't consider foreign investment as business but rather as “politicized” investments.

– Why don't internal investments increase?

– Because there's a lack of confidence.

– In other words, our businessmen lack faith in the country.

– They lack trust. Our country's future cannot be predicted. Try to start a business with no mandate. You'll reach a certain level after which you either have to voluntarily surrender to a larger mandate or else abandon the business altogether since there's no natural growth. There comes a point where you can't cross over to the other side.

– Why is Hrant Vardanyan withdrawing his capital? It would seem that he doesn't face such a problem.

– Other businessmen besides Hrant Vardanyan are also withdrawing, and have withdrawn, their capital. This flight of capital from Armenian appeared on the radar screen quite a while ago. There are more favorable locations to invest in, such as the United Arab Emirates. Our oligarchs own factories there. They operate mini-cities in Russia. It doesn't matter if they're production or trade oriented. These oligarchs operate in other countries as well. They are invetsting in real estate along the Spanish coast and in the United States. All this is part of the business-mix. We are confronted with a real paradox. Armenia is in desperate need of investments, but we're witnessing an outflow of capital. Confidence isn't a catchword that others or I have come up with. It's a real fact of business life. If the right environment existed those sums would undergo partial reinvestment and accumulate. The tax system is the other calamity our economy faces. I'm referring to the distribution of taxes and not because the system is imperfect. People don't know, or rather tax department heads don't know, which tax collectors are pocketing half of what they collect. I've always suggested, and still do, that until this is rectified no benefit to the economy will accrue, especially when it comes to developing the marzes (provinces) of Armenia. Taxes levied outside of Yerevan must be decreased, reaching a level of around zero. In the “disaster zone”, Tavush and elsewhere, it's vital to proportionally develop the countryside and not have underdevelopment. One only has to travel 10-15 kilometers outside Yerevan to see how terrible the situation is. There are scientific and economic bases for all this but the desire to practically apply them is absent.

– Do you think that it's because the government doesn't want to or rather that it doesn't perceive the real issue?

– There's an important question to be answered. Is there a demand for “ intellectual prowess “ in Armenia? The answer is no. The keys needed to improve the situation exist. I don't claim they are absolutely correct but they can set us on the right path. But if the desire to do so doesn't exist we're merely treading water. Seven years ago a law was passed to create an economic free zone in Gyumri but to date it hasn't been implemented. Some argue that if it is implemented it would allow businessmen to register there and thus evade the need to declare any profits. The law clearly lists those companies registered and operating there. It's an easy matter to check. Any large-scale embezzlement would be difficult to get away with. It's merely an excuse to do nothing. If serious steps aren't taken neither domestic nor foreign investors will be motivated to invest in areas like Tavush, for example. Why would they be? There's no normal operating infrastructure or any other factors to attract investment.

– Let's talk about economic growth. Hrant Bagratyan says those double-digit numbers are pure fiction, that no such growth rates exist.

– I don't agree with Bagratyan as the growth is there. I realize that manipulation of the statistics takes place. Numbers don't always necessarily reflect the truth. The growth simply isn't economic; rather we can describe it as rehabilitative or restorative. Double-digit restorative growth is a normal occurrence, but here the rates aren't double-digit. We must delve more deeply into the matter to reach a better understanding of “restorative growth” and how countries like Armenia go about rehabilitating their economies and at what rates. Germany is a good case study of the postwar economic situation. The destroyed German economy was rehabilitated at 30-40% yearly rates. The “German miracle” was based upon a specific program with a clear orientation. It was devised by Ludwig Erhard. But while we're groping about the world around us is advancing. Domestic and foreign business is stubbornly looking for locales to hang their hat and expand. This will not be sufficient for us since at these rates we'll always lag behind. We can't wait in the hope that 10, 20 or 30 years later we'll solve these issues. Others are developing at much quicker rates for us to wait even ten years. There is growth but it is restorative growth. As I see things, in the U.S. and the European Union countries, 1 – 3% growth rates are being registered. It's ridiculous to compare our 13-14% rates with theirs. Their numbers reflect stable development rates, actual economic growth, while our numbers are purely restorative rates.

– What about money sent from abroad, that's to say money transfers? If these sums are not invested in the economy and are only used to purchase the basics of life, can they be considered “lost” assets?

– That's the wrong approach to take. Whenever a sum of money enters Armenia, whatever the case, it plays a role in and influences the economy. It enters into circulation; it's not placed under the pillow. Those sums are predestined for consumer usage. They can also be spent to obtain property, but only partially. These sums are designated to sustain life. If the dram continues to appreciate the following scenario will probably result by year's end or the start of next year. Those making the transfers will do their utmost in order to relocate their relatives in Armenia to where they reside. It will be to their advantage for this to happen. It's simple arithmetic. Why should they have to work 3-4 times as much abroad in order to transfer money to relatives in Armenia? Such transfers are already on the decline. People are moving their relatives out of Armenia. It's a fact. The money sent isn't only used to feed people but for medical services as well. Such services are supposedly free here but we know that's not the case. It costs 31,677 drams to obtain a 2,200 caloric intake, the minimum needed to sustain life. These are the official statistics of the Ministry of Health. Today, the minimum monthly salary is 20,000 drams. You be the judge. Can one survive on this amount? How does one get by? It's these money transfers that are bridging the gap. Transfers really solve a huge problem in Armenia.

Parenthetically, the Central Bank in Armenia also states that these transfers play a role in the appreciation of the dram. It's an opinion I don't share. More money is leaving Armenia than these transfers bring in. Amounts being sent in are quite minimal when compared to currency outflows. Money is being taken out for investment purposes, to build new factories and to purchase real estate. These sums are estimated to be in the billions of drams.

One other factor remains which can have an impact on the dram's appreciation – the laundering of dirty money. I've presented a detailed analysis regarding the issue. In response, I was told that such a viewpoint is pure personal speculation. A seven billion dollar money laundering operation was uncovered in Georgia. I ask myself whether safeguards exist in Armenia to prevent such occurrences here? Of course not. Whilst Georgia is taking decisive steps to ensure the rule of law, here in Armenia such measures aren't being implemented, to put it mildly.

– So you are linking money laundering to the appreciation of the dram?

– That's the only alternate theory remaining if you exclude other factors.

– What's the role of the Central Bank in the rise of the dram?

– All the control levers are in the hands of the Central Bank. No other body possesses those mechanisms. Conclusions? Who else is capable of exercising such authority? The Central Bank is responsible for monetary policy, to guarantee stable prices. The Central Bank can present firsthand commentary and analysis on the matter. But it either evades the issue or presents incompatible arguments. I'd like to point out one thing. The Bank itself has initiated all legislation regarding Central Bank policy and practice. No other institution has made such proposals. The Central Bank is making up its own set of rules; rules that best suit the Bank. There's a serious group of technocrats at the Bank who know exactly what they are doing and why. You can't make the same claim regarding other government bodies, especially when it comes to the “mental prowess” existent in the National Assembly. This concentration of mental talent allows the Bank to take control of the situation and to present it in a light that best suits its own needs.

– What's the way out of the current morass?

– There are certain economic prerequisites and necessary factors that can lead us out of the present situation. But there exist a series of psychological issues that I view as highly problematic. These are linked to the Armenian mentality. I can't recall a time in our history when we Armenians have risen up in rebellion in the name of social issues. We believe that it's shameful to revolt and raise our voices just to get a loaf of bread. Armenians, it appears, can only get stirred-up over national issues. It's the absence of such rightful indignation and a demand for accountability that permits the current situation to be maintained. Unlike us, the taxpayers of other nations, even Russia, keep their leaders on a fairly tight leash. When it comes to foreign policy, these citizens demand that their representatives reconcile their policies with the will of the people. Why have you gone into Iraq? Why are you adopting such a political orientation towards this country? Why have you entered a military alliance with that government?

Nothing similar exists here. What we have here is a kingdom of “crooked mirrors”. We want to solve our problems on a personal level. More serious issues can be taken on with the help of friends and “helpful contacts”. If we continue to approach issues in the same manner our lives will not change. As a first step the government must introduce minimum salary and pension levels to guarantee the 31,677 drams necessary to sustain basic nutritional intake, despite the fact that in reality more than 60,000 drams are necessary to do so. Until these issues are rectified it would be impossible to speak of a “social government” as defined in the country's constitution and laws. This is the absolute minimum that the government must safeguard. To argue that huge sums of money would be required to implement such a program would be incorrect. Much larger sums are being squandered from the budget and spent on a variety of extravagances and other irrational items. If properly used, these sums could make a serious dent in expenditures related to social needs.

We haven't yet discussed the fact that the professional resources of the diaspora aren't being utilized. The diaspora is still waiting for the Armenian government to formulate a concrete plan of action. If a clear definition of the issues involved were to be drawn-up, that in itself would solve half the problem. Let me add that Armenia's diplomatic institutions are basically empty shells. Without naming names, there are more than a handful of ambassadors who have no idea what their mission is. Since they have no clue regarding the specific problems facing Armenia they're not equipped to engage with either the Armenian community or the respective government of the nation in which they serve and enter into a cooperative working relationship aimed at solving some of Armenia's ills. This matter must be given the attention it rightly deserves. But so far it hasn't.

Firstly, the desire to diagnose the problem must exist. Where do we as a nation stand economically? What are our weak points and in what sectors are we competitive. Let's first analyze the issues and formulate possible solutions. Later on we can begin to think about their implementation.

Interview by Edik Baghdasaryan
Translated by Hrant Gadarigian