ARMENIA: DOES RUSSIA’S $500 MILLION LOAN COME WITH STRINGS ATTACHED FOR YEREVAN?
Haroutiun Khachatrian

EurasiaNet
Feb 17 2009
NY

A $500 million "stabilization" loan from the Kremlin is stoking debate
in Armenia about the potential political ramifications of Russian
assistance. Armenian leaders, however, are denying reports that Russia
has set certain conditions in exchange for the financial assistance.

Details about the loan, announced on February 10, remain under
wraps. The Ministry of Finance has announced only that the loan will
have a term of 15 years, with a four-year grace period. A Ministry
of Finance official, who asked not to be named, told EurasiaNet that
many aspects of the loan are still being negotiated, meaning that it
could be weeks before the full scope of the package is known.

Economics Minister Nerses Yeritsyan told reporters on February 14
that the government will discuss later how the money will be used.

The lack of detail has prompted skepticism among many analysts. "There
is no information about the interest rate for this loan. Also the
. . . schedule is unclear. When will Armenia get this money? Will it
be provided as a lump sum or in several parts?" noted Bagrat Asatrian,
a former chairman of the Central Bank. "Unless these details are known,
one cannot estimate how good this credit is."

The loan has also sparked questions about what Russia expects for its
money. Russia already dominates major sectors of the Armenian economy,
such as energy, communications and railroads. [For background see the
Eurasia Insight archive]. Concerns have been expressed that Armenia’s
economic dependence on Russia might become still stronger after loan
payouts begin.

On February 11, the independent newspaper 168 Zham commented that
"No one believes that Russia provides purely friendly help to its
ally when Russia itself is not in a good state."

A February 10 report from the Ministry of Finance, however, stressed
that "the agreement does not envisage fulfillment of any non-financial
obligations by the Republic of Armenia."

One financial expert believes that the loan is a purely business
decision. "If Armenia ever has to borrow money under commercial terms,
now is the best time for such a loan. Armenia has a reputation
as a good borrower and has a relatively small foreign debt,"
commented Tigran Jrbashian, development director of Ameria Bank,
a commercial bank in Yerevan that is the country’s 7th largest
financial institution.

One concern expressed in the media is that Armenia may be encouraged
to enter a "ruble zone" in exchange for Russia’s $500 million loan.

In a February 11 interview with the Russian news agency Regnum,
Prime Minister Tigran Sargsyan said that there is "a real chance"
for such a move "if by ruble zone it is meant countries that use
the ruble in their trade with Russia." The prime minister added that
"if one means a union similar to the euro zone, so it is too early
to speak about this."

Despite their being on opposite ends of the political spectrum,
Asatrian largely concurred with Sargsyan on the ruble zone issue. "The
issue of choosing a currency for foreign trade or even for bank
reserves is a professional rather than a political matter. So, the
Russian ruble can well be used in trade if the trading parties find
it convenient," said Asatrian, who preceded Sargsyan as chairman
of the Central Bank and who backs the opposition movement led by
former President Levon Ter-Petrosian. [For background see the Eurasia
Insight archive].

Apart from Armenia joining a potential ruble zone, experts are tending
to focus on the question of whether the Central Bank might use the loan
to let Armenia’s currency, the dram, float against the dollar. Many
experts criticize the bank for keeping the dram artificially stable
against the dollar, thereby hindering Armenian exporters. Asatrian
says that the policy wastes Central Bank foreign reserves.

Officials and other observers counter that maintaining a relatively
stable exchange rate is needed to maintain financial stability and
stave off the negative effects of the global economic crisis. So far,
the damage inflicted by the worldwide downturn has not been severe
in Armenia. But the crisis is expected to take a big bite out of
the roughly $1.5 billion in remittances that are shipped back to
Armenia each year, according to Central Bank estimates. That sum
plays a key role in boosting living standards and stabilizing the
dram. "[A]llowing the dollar to rise against the dram will bring an
increase in the prices of exported goods, which is rather dangerous
now," said economist Gagik Poghosian of Yerevan’s Association for
Foreign Investments and Cooperation.

Agreed banker Jrbashian: "Several Armenian governments and the Central
Bank have succeeded in establishing financial stability, which has
no analogy in the CIS. There is no obvious reason to destroy it now."