Will Armenia remain under collapsed Russian economy?
Armenians usually do not pay much attention to processes happening in other countries (especially economic processes). However, now the Armenian society is worried about negative processes with Russia’s economy. Yesterday the Russian RTS stock exchange collapsed, followed by a 10-20 per cent slump in the price of stocks of largest Russian companies such as GazProm, SberBank, RosNeft, etc. Stock exchange markets lost at an average 13 per cent. Experts estimate that the skyfall of the amount of capitalization of Russian companies was more than 2 trillion Russian rubles.
The Russian ruble drastically fell down to a record mark. The price of Euro exceeded 50 rubles, and the exchange rate of dollar reached 36.4 rubles. In response to these processes, the Russian Central Bank increased the refinancing rate from 5.5% to 7%. In Normal situations the refinancing rate is usually changed by 0.25 points, and in extremely urgent situations – by 0.5 points. The fact that the refinancing rate was increased by 1.5% says that what is happening in the Russian economy is very serious. “The reason is the pressure on the ruble, and the panic generated by it,” said economic development minister Andrey Klepach.
Some experts forecast that banks that are fully involved in stock exchange transactions may burn as their risks are continuously growing.
The crisis in Crimea has affected not only stock exchange markets in Russia but the entire economy. Even though there is no current statistics, it is expected that the capital outflow will continue growing in March, and the economy will become passive.
There are no signs of optimism yet. The situation may become even worse if there is military intervention in Crimea, and if the West imposes sanctions on Russia.
Experts of Bank of America Merrill Lynch and Credit Suisse have calculated how sanctions may affect Russia, if the situation becomes worse and there are military conflicts (the possibility is estimated 15-20%). In such situation the European Union may halt the construction of Western Flow project and stop buying Russian gas.
Europe may also close its doors for Russian Eurobonds. This will limit sources of financing and will increase the price of Russia’s debt as investors will revise the level of risks related to investing in Russian actives (many investors may even refuse to buy actives of a country that is subjected to sanctions).
The Russian ruble will continue falling. The devaluation of the national currency will increase the nominal inflow of money into the budget, however the risk of not collecting enough money may still exist as a result of slower economy and potential fall of oil prices. According to the experts of Bank of America Merrill Lynch, military actions will cost Russia a price of 3% of its GDP.
How these processes may relate to Armenia? Unfortunately these processes will directly relate to Armenia, and we are not optimistic in relation to this. As the officials of the government that are responsible for the economy like to say, Armenia is a small economy that is open, which makes it vulnerable to external threats and risks.
These risks were predicted last year, in the government’s message in the budget 2014. “According to international experts, European crisis may, as a domino effect, pass on to countries that have bilateral trade with the European Union. This includes Russia as well, which is the main source of capital and financial transfer into Armenia. This may make the impact on Armenia’s economy even more sensitive. Such influence on Armenian economy may be more serious. Processes in the EU economy may influence the economy of Russia mainly through reduction of oil prices, mostly as a result of reduced demand in the world. As a result of reduced prices of oil, the Russian economy will become passive, which will reduce the inflow of financial transfers and direct investments in Armenia. This will reduce the domestic demand, economic activity, as well as will affect currency exchange rates.”
As we see here, Armenians have never been skeptic about the Russian economy and have relied much on it. The government people say that processes in Europe may influence on the Russian economy, which may have secondary effect on the Armenian economy. However, it is more realistic that Armenia will suffer as a result of joining the Customs Union, if after joining the Union there are sanctions against the union.
It is not more that Europe is creating problems for the Russian economy, but it is more like Russia is creating problems for its own economy.
By the way, it is noteworthy that even before the recent events Russian officials said from time to time that the country’s economic situation is not good. Specifically, in November 2013 the Russian economic development ministry disseminated a forecast, according to which Russia’s GDP annual growth will be around 3.1% by 2020, 2.5% by 2020-2025, and less than 1.8% by 2026-2030. In answer to journalists’ comments that minister Ulyakov was pessimistic, he said, “To be happy is good, but people should be happy like that somewhere else.” Even more, the minister said to a group of Russian parliamentarians that the Russian economy is in the worst state since 2008 crisis.
Is there light in the end of the tunnel? In answer to this question the Russian minister said that there can be hope if there are systematic reforms. Our government officials and decision makers know about this, and they event discuss this issue in private conversations as they are not confident in Russia and they don’t believe that there may be significant systematic reforms in Russia.
The most significant challenge from Russia can be reduced money transfers into Armenia. However, officials from the Armenian Central Bank assure that there will be no significant change in money transfer volumes. They do not say why they are so optimistic about it because the fact is that even if money transfers are not reduced, it will not be due to better situation in the Russian economy but due to increased emigration from Armenia to Russia.
By Babken Tunyan
