It’s year-end, try-to-write-about-something-big-and-profound time. Luckily, I was provided with just such a topic courtesy of the juncture and clash of international conflicts with economics.
No doubt you’ve read about the fall-and-rise of the tram/dram (Western/Eastern Armenian pronunciation)—the money used in the Republic of Armenia (RoA) and the Nagorno Karabagh Republic (NKR). You might wonder what all the fuss is about, especially since you’ve probably also read about the “recovery” of the currency.
As with any other topic that falls in the realm of economics, and in some ways perhaps more so, the matter of a currency, its exchange rate, and most importantly, the latter’s impact on people’s lives, is messy. That’s probably why U.S. President Harry Truman once asked for a one-handed economist, since he was tired of the “on the one hand…and on the other” analysis his economic advisors were providing. In this case, it seems to me that we have hands on the order of how many might be found on an octopus’s arms, or even squid (with their additional two tentacles)!
Establishing even the range of the tram’s value over the past few weeks was difficult. Remember that the FEWER trams it takes to get a dollar, the HIGHER its value; and the MORE trams per dollar, the LOWER the tram’s value. It seems the highest it was ever valued was just under 298 trams to 1 dollar. The lowest was harder to determine. A news item reported 635 “on the street” among small exchanges during the height of the chaos. A table I found reported 459 as the recent lowest CLOSING value (which means it could have been different over the course of that day). Another had a value of 579, but that dates back to 2003. And, in recent times, basically prior to December, the exchange rate seemed to be around 430 trams to the dollar. Messy, right?
What causes values of currencies to rise and fall? Trade with other countries being imbalanced (more coming in or going out than the opposite); speculative buying/selling of currency simply to make money; fear about (or confidence in) the future value of the currency; the day-to-day needs of people and businesses to interact financially with the rest of the world. All of these could trigger fluctuations. Messy, right?
What happened in the tram’s case? In some ways, initially at least, none of the above. It was the RoA economy’s connection to Russia’s economy that was the trigger. The West is penalizing Russia for its activity in and around Ukraine using economic sanctions. Since the two economies are so connected, and Russia’s is overwhelmingly larger than the RoA’s, the old saying applies: If Moscow sneezes, Yerevan gets pneumonia. So with Russia’s economy taking the West’s hits and faltering, along with its currency (the ruble), people extrapolated and feared for the future of the tram. Otherwise, nothing really changed in the tram’s life. More wasn’t bought/sold, exported/imported, or produced/consumed in trams. Messy, right?
It turns out that in the short term, increasing or decreasing currency value doesn’t have much impact. It’s over the long-term where major changes can cause harm. So, all the fuss over the last few weeks about the “fall” of the tram’s value was unnecessary. That’s sad, because real people who are desperately hanging on to their standard of living were harmed in the rush to “buy dollars” for safety. Now, if they buy trams back, they will take a hit since its value has re-risen. Businesses with international connections that had to make payments in dollars were sometimes stuck. They couldn’t find dollars to buy! Messy, right?
Some of the craziness was no doubt driven by speculators wanting to make easy money. While this happens every day all over the world, it’s not on this scale and hurts most with struggling economies, such as the one using the tram. Also, what happens in times such as these is “overshooting,” which is the term economists use to describe when a change (up or down), even if understandable, is driven by fear and frenzy that take hold of the currency market and cause the value to go further up or down. Again, people get hurt. Messy, right?
Since the RoA economy imports more “stuff” than it exports, people get hurt by rising prices when the value of the tram falls (e.g. if a set of screwdrivers costs 10 dollars (4,350 trams) before the last few weeks, then at the current rate of exchange, roughly 460, that same 10-dollar screwdriver set would cost a buyer in Yerevan 4,600 trams. But that buyer’s income hasn’t increased, hence the harm).
Under normal economic circumstances, this might not matter too much because as the value of a currency settles back to where it was, prices would also drop. But, historically, in Armenia’s case, that has not happened. That’s because the “oligarchs” who hold monopolistic control over their chosen sectors of the economy take advantage of these currency fluctuations by (legitimately) raising the price of the goods they import when the tram’s value drops. BUT, when it rises, they do not readjust and lower their selling prices, and so make more money. They are in this way privatizing the benefits and socializing the costs of the tram’s fluctuations in value. They can do this because they also control the levers of political power, and make the rules to suit their own personal, not the country’s and broad population’s, interests. This is a more stark, extensive, and flagrant version of what the banks did in the U.S. when the crash hit in 2007-08. They had gamed the system (legally) and made lots of money by doing risky things. When those risks became real, U.S. taxpayers had to bail them out of the financial mess they’d gotten themselves into. Messy, right?
At the root of the problem are the extensive, overwhelming connections between the Russian and Armenian economies. Russian companies own almost all Armenian energy operations, and most of the country’s fuel comes from Russia. The largest source of remittances (people, usually men, leaving home to find work elsewhere and sending the money home to their families) is from Armenians working in Russia. Russia is key to defending the RoA against antagonistic neighbors to the east and west—meaning Russian troops stationed in Armenia, and the economic activity that entails.
The Eurasian Economic Union that Armenia was just formally accepted into means more economic integration with Russia. A huge number of Armenians work in Russia. If that country’s economy weakens, unemployment is likely to rise, meaning less work for Armenian migrant workers; they will be forced to return home, further exacerbating the bad socio-economic conditions prevailing in the RoA. Messy, right?
What can be done? One ARF Member of Parliament recently suggested conducting trade with Russia in rubles and trams, not dollars. This would eliminate an external factor that could severely impact the Armenian economy, as we saw in the last few weeks. This would probably also suit Russia’s political interests, since it would decrease the power of the dollar, as has been happening with various oil-producing countries switching away from the dollar to sell their oil. Of course, this can also be very dangerous. There are those who contend that at least one of the motivations behind the U.S. invading Iraq in 2003 was to punish Saddam Hussein for switching to the euro as the medium of exchange for Iraq’s oil. Oil NOT traded in dollars weakens the leverage the U.S. has over the world economy. Messy, right?
Another angle is diversification. Yerevan’s choices are limited by the rough neighborhood the Armenian plateau is located in. Yet there is Iran, which has offered to sell natural gas, a major part of the fuel used in the RoA, for significantly less than Russia. Not only would this save Yerevan money and diversify, but it would also make the statement to the West: “We are not against you. Nor are we just pro-Russia. We’re just looking out for our best interests under difficult circumstances not of our own making.”
Tourism, much touted already, is another potential bright spot. If the tram’s value drops against the dollar, visiting the RoA becomes more affordable for those outside the country who have dollars to spend. More infrastructure to support this relatively clean industry must be built. And that doesn’t mean just hotels and restaurants. Rather, it means that more of the countless archeological treasures our ancestors built over millennia have to be made safely, sustainably accessible so tourists have a greater variety of places to see, and therefore visit the country more often. Tourism also has the advantage of bringing in money that not only helps people’s livelihoods improve, but also re-strengthens the tram and is not dependent on outside political/economic forces.
Another, longer term path to greater economic independence is to rebuild Armenia’s intellectual industries. We have the example of the information technology sector that has been achieving international successes. Similarly, the Cosmic Ray Division and its research are bringing Armenia acclaim and scientific focus. Other such sectors can be built up, perhaps even the medical sector; if diasporan doctors, particularly specialized surgeons, do a stint each year in Yerevan, then people would go there for “medical tourism” (remember Serj Sarkissian’s Korea trip?).
Simultaneously, the stranglehold “oligarchs” have over Armenia’s economy has to be slowly eliminated. Not only would this bear economic benefits, but the political scene would be much improved and democratized.
This is the mess we’re in. It’s not so much the fluctuation, even radical, of the tram’s value, but everything else around it and undergirding it that should be our focus. If you can contribute in any way to developing the Armenian economy (which includes the NKR/Artsakh and Javakhk), please get on it, especially in sectors where the oligarchs do not and cannot have control/penetration, such as the examples cited above. Messy, right?
Garen Yegparian
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You’ve done us a great service, Garen. This subject is really timely, important, and yes messy.