Dollar De-throned: Dram dramatically new king of cash in Armenia

The appreciation of the Armenian dram saw continued movement in August, dropping the value of the US dollar to less than 400 drams – lower than at any time in the dram’s active history.

The dram has been on a steady rise (and the dollar dropping) for nearly two years. But the first half of August saw a dip in the dollar of 25 drams – some 6.25 cents in a period of a couple weeks. Since, the dram has not risen above 400 and hardly above 395.

The dramatic movement – and the psychological impact of breaking the 400 dram level -- has left many individuals and local organizations funded from abroad counting their losses.

For many people the situation means that they can buy less with what they get from dollars sent by relatives living abroad. For charities and aid foundations budgeted by dollars, they now have less to spend.

Example: If a family received $100 a month one year ago, it had about 46,000 drams buying power. Today, that amount is down to 39,500. The drop means that the $100 is worth about $81.25 compared to a year ago.

It is half a year that the Hayastan All-Armenian Fund supported by donations of Diaspora Armenians submits its programs for financing estimating their cost in Armenian drams.

Deputy Executive Director Ara Vardanyan says the Fund is forced to respond to the drastic depreciation of the American currency.

Problems began about two years ago when great fluctuations in the dollar-dram rate first happened. Vardanyan says they would budget their programs in dollars then, as before that even their contractors estimated the cost of construction work in dollars as there were stable prices in dollars for construction materials in the market.

Now the dollar is weaker against the dram and prices for construction materials have gone up.

It usually takes two to five months after the Fund submits its program for it to be approved and provided with financing. “At one point we had several projects with estimated costs in dollars sent abroad for approval and after they received approval four months later, it turned out that the dollar cost 50-60 drams less,” Vardanyan said. “Construction specialists refused to work for dollars anymore and did estimations and wanted to be paid in drams. And it created problems for us.”

“Hayastan” faces even more re-figuring of its assets for its on-going projects, such as the North-South highway construction program in Nagorno Karabakh.

The Fund tries to solve the problem in two ways: asking donors to provide additional funding and keeping funds at different bank accounts in different currencies.

“It is difficult to persuade a benefactor who donated half a million dollars to add $200,000 more, because the dollar rate has dropped,” Vardanyan says.

“So now we estimate the cost of our programs in drams and in brackets we mention the exchange rate for a given day. Our donors know that they should try to cover the dram cost of the program,” Vardanyan says. “We usually get financing in installments and the same amount of money transferred to us in dollars may vary by its dram value.”

The Hayastan All-Armenian Fund raised $7.7 million in pledges during its nationwide telethon last fall. Vardanyan says it usually takes months to get that pledged money. He estimates that, as a result of the dollar depreciation the Fund may have lost $800,000 to $1 million in value since last November.

“Our Diaspora donors may not like the word ‘losing’, but in fact it means that we can do less with this money in Armenia.”

Vardanyan says that most of their benefactors understand the situation, but in Europe people understand it better.

“People in the U.S. feel the depreciation of the dollar to a lesser degree than in Europe where the euro is also gaining in value against the dollar,” Vardanyan says, adding that most of their donations are received in dollars.

Last year the Fund received $12,700,000 and in the first four months of 2006 it received $7.5 million.

The dollar that traded in Yerevan exchange offices for 580 drams three years ago (about 32 percent higher than now), has reached its lowest rate in 12 years.

The Central Bank of Armenia (CBA) routinely explains the situation with objective factors, such as the continuing fall of the dollar on the international market and also by the population’s stronger confidence in the Armenian dram.

During August, when the last fall of the U.S. dollar and other major currencies was registered in Armenia, the country’s chief banker Tigran Sargsyan on several occasions stated that “there is nothing artificial in this process” and reiterated that “the Central Bank cannot artificially raise or lower the dram rate.”

The CBA says that increased currency inflows from abroad are registered in Armenia and, with the depreciation of foreign currencies, people begin to trust more their national currency. “Now more people tend to keep their savings in drams, meanwhile only a short time ago they preferred keeping their savings in dollars,” Sargsyan said.

The CBA stresses that “stable prices are more important than a stable exchange rate of currencies” for the country’s economic development.

But household and office heads – especially in Yerevan – are keenly aware that “stable prices” have changed too, from real estate to bread.

Sargsyan says, though, that if CBA did manipulate the dram (by putting more drams into the system), it would lead to hyper-inflation.

At the same time, the CBA gives assurances that the situation is less dramatic for the population than generally thought to be.

Earlier in August the CBA published a study downplaying the impact of a strong dram on the Armenian population, in fact suggesting the opposite.

A household survey commissioned by the CBA found that 37 percent of Armenian families rely on regular remittances of their relatives living or working abroad and that most of these families are representatives of the middle case, contrary to the widely held belief that those getting money from abroad are mainly low-income families.

Thus, the CBA tried to show that poor families are mostly unaffected by depreciation of the dollar. On the contrary, the study suggests that a strong dram means low inflation, which is far more important for the poor.

Remittances from abroad totaled $940 million last year, and the CBA expects a 17 percent rise this year.

CBA Finance Department Head Artur Nakhshikyan thinks that Armenians are not yet ready to accept the fact that the Armenian dram can be gaining in value. “The appreciation of the Armenian currency has been observed for the third year, but this phenomenon is still taken by some as something new,” he said, for comparison reminding that within the same period the Euro gained about 60 percent in value against the U.S. dollar.

Interestingly, 88 out of 220 currency exchange offices have been closed in Yerevan since the beginning of this year. More are expected to wind up their operations after a new law licensing and regulating the work of exchange offices comes into effect later this year. Government critics say this situation will make it easier for the Central Bank to control the situation on the currency exchange market.

Meanwhile, one of the critical effects of the situation is that exporters find themselves in a highly unfavorable position, while large importers benefit from it.

According to recent statistics, exports in the last few months dropped by 5 percent, whereas imports drastically increased – by about 17 percent.

Ashot Yeghiazaryan of the Caucasus Analytical Center writes in his forecast: “Despite the fact that a great part of financial influxes (private remittances) is made in U.S. dollars, the main trade partners of Armenia are European Union countries and Russia, and with the latter Armenia has an agreement on the free movement of labor force and capital. The Armenian economy will lose its competitiveness and will face crisis phenomena if the dram continues to be strong against the dollar and the dollar in its turn starts rising against the euro or the ruble.”

Meanwhile, the think tank justifies the CBA policy of non-intervention as it suggests that measures to keep the dram rate down will result in the growth of the dram mass that will in turn affect the whole economy and will lead to a considerable growth of prices and credit resources will become more expensive.

But Armat NGO economist-expert Eduard Aghajanov says it is mainly large importers that are interested in the depreciation of the dollar.

“Our oligarchs that own large importing companies are known to be closely linked to politics. While it cost an oligarch only $150,000 to get a parliament seat in the last elections, now it may cost him as much as half a million,” Aghajanov told RFE/RL. Only in the first quarter of this year the trade deficit in Armenia totaled $500 million.

The MAP agricultural processing company, geared to assist export, says the situation greatly affects and in fact endangers their future.

In a recent interview company director Alik Petrosyan told Regnum news agency: “We purchase grapes in drams and export the brandy we produce for dollars and suffer considerable losses. We cannot stop our production. We continue to purchase raw materials. If the dollar rate drops to 350 drams, we will have to raise prices for our products, which will make them less competitive and will drive us out of business.”