Publication: Eurasia Daily Monitor Volume: 2 Issue: 27

Armenia’s national currency, the dram, has appreciated dramatically against the euro and especially against the U.S. dollar over the past year, hitting hard a large part of the country’s population. The real causes of this phenomenon have been a matter of serious contention in recent months, with the Armenian authorities citing objective factors and their political opponents alleging a high-level conspiracy to help government-connected importers of basic commodities.

The dram, which was introduced in November 1993, has gained almost 20% in its value, measured against the dollar, and 15% against the European Union’s common currency since the beginning of 2004. The chairman of Armenia’s Central Bank, Tigran Sarkisian, said February 7 that it could rise against the dollar by another 10% in the course of this year. He made it clear that the bank will not seek to counter the trend.

This was hardly good news for the scores of Armenians who are dependent on regular cash remittances from their relatives working abroad (mostly in Russia and the United States). An opinion poll conducted by the EU-funded Armenian-European Policy and Legal Advice Center (AEPLAC) found that nearly half of the country’s population has suffered financially from the dram’s strengthening. Only 27.6% of respondents said they are better off as a result.

The Armenian economy has been dollar-based ever since the hyperinflation of the early 1990s, which wiped out personal cash savings accumulated in Soviet times. Although the dram has proved remarkably stable over the past decade, most Armenians remain wary of their national currency, saving money and carrying out business transactions mainly in dollars. The exchange rate fluctuations do not seem to have undermined their faith in the greenback.

The Central Bank has insisted all along that the dram has been pushed up by an almost 50% surge last year in the predominantly dollar remittances sent to Armenia through banks and international wire transfer networks. Official estimates put their total amount at $740 million, a record-high figure comparable to the Armenian government’s annual budget. The influx of hard currency, which helps to offset Armenia’s huge trade deficit, is projected to surpass $1 billion this year.

Vladimir Badalian, executive director of the Armenian Bank Association, endorses this explanation. In an interview with the Yerevan daily Hayots Ashkhar published on February 4, Badalian also pointed to the dollar’s broader yearlong weakening against other major world currencies, notably the euro.

However, officials are silent on what might have caused the dram to gain ground against the EU’s increasingly strong common currency. Economists critical of the government say this mystery only lends credence to their belief that the dram’s value is kept artificially high at the behest of big fuel and food importers, virtually all of whom have close government connections. That, they say, allows them to earn extra profits without raising their prices.

“This is a game played by importers because it is importers that mainly benefit from the strengthening of the dram,” Eduard Aghajanov, the former head of Armenia’s National Statistical Service, told RFE/RL on January 31.

AEPLAC analysts, for their part, concluded in a recent study that the Armenian authorities’ monetary policy is disproportionately tight and restrictive. They argued that Armenia’s existing monetary base, or the amount of drams in circulation, equals only 17% of gross domestic product, compared to a rate near 40% registered in many developing nations.

Even President Robert Kocharian questioned the credibility of the Central Bank’s denials of any wrongdoing. Meeting with members of the bank’s ruling board on December 10, Kocharian demanded that they take “resolute actions” to curb “speculative activities” that he said contributed to the dramatic appreciation. The Central Bank responded by closing over two dozen private currency exchange offices in central Yerevan for allegedly violating trading regulations.

The meeting with Kocharian was called after the dram’s exchange rate hit a three-year high, trading at an average of 470 per dollar. The dollar rebounded to 500 drams immediately after the meeting. The dram’s appreciation resumed in late January, paradoxically coinciding with a brief dollar rally in the international financial markets.

The lack of transparency makes it hard to understand possible factors behind such fluctuations in Armenia’s tiny financial market. The dram’s floating exchange rate set by the Central Bank is supposedly based on the results of currency trading among local commercial banks. But few outsiders are aware of the practical modalities of the process.

Sarkisian, meanwhile, insists that the strong dram is good for the economy not least because it left Armenia largely unaffected by the worldwide surge in fuel prices and thereby helped to keep inflation within the 3% limit in 2004. Armenians, he says, must finally start to take their own currency seriously.

(RFE/RL Armenia Report, December 13, 2004, January 31, February 7; Hayots Ashkhar, February 4, 2005.)