EurasiaNet Business & Economics - Armenia: Gas Price Hike Poses Challenge for Government

BUSINESS & ECONOMICS

ARMENIA: GAS PRICE HIKE POSES CHALLENGE FOR GOVERNMENT
Marianna Grigoryan 4/24/08

While striving to repair the rift created by the March 1 political violence in Yerevan, Armenia’s new government is confronting a new challenge over rising natural gas prices.

In his first press conference as prime minister, Tigran Sarkisian announced on April 18 that the government will lift natural gas subsidies beginning May 1, meaning retail gas prices will increase from the current 59 drams per cubic meter (about 19 cents) to 84 drams (about 27 cents).

In April 2006, the government opted to subsidize prices for imported gas in a bid to soften the burden placed on private consumers and companies. Officials indicated that roughly $190 million dollars from the 2006 sale of Unit No. 5 of the Hrazdan Thermal Power Plant would be allocated to cover the subsidy for three years. But now, almost a year ahead of schedule, the government is saying that funds for the subsidy have run out.

In April 18 remarks on Public Television, Energy Minister Armen Movsisian told viewers that "an unprecedented growth in gas consumption meant that just under $2 million from that amount remained by the beginning of this year.

"As a result, the compensation was to have been discontinued in January, but on [then] Prime Minister Serzh Sarkisian’s immediate instruction, measures were taken to ensure the continuation of the compensation until the end of the heating season," Movsisian said.

Measures are reportedly in the works to provide compensation to 130,000 families "to protect the socially vulnerable strata [of society] from rising prices," according to Prime Minister Tigran Sarkisian. How these families will be defined is not yet known in detail.

Some economists say that the higher gas prices could carry heavy consequences for many Armenians. Over 26 percent of the population still lives beneath the poverty line, according to official figures. "No matter how much authorities speak about �targeted measures’, the increase in gas prices will badly hit people’s wallets," pro-opposition analyst Aghasi Yenokian commented. Increased political tensions will be the result, he added.

Slavonic University economist Eduard Aghajanov fears a domino effect. "The increase in the gas price will entail a sharp increase in prices for consumer goods, building materials [and] cargo transportation," Aghajanov said. "People, especially pensioners and needy people, will find themselves in quite a hard situation."

Yerevan State University professor of economics Tatul Manaserian believes there will be an adverse impact on agricultural product prices and the competitiveness of those products geared for export. A value-added tax on agricultural products which goes into effect in 2009 will add to the burden, he says. "[I]t becomes clear what the future holds in store both for village farmers and town residents," Manaserian said.

Government officials were not available on April 24, a national holiday in Armenia, to respond to the criticism.

Prime Minister Sarkisian, however, has stated that it is impossible to protect against increases in energy price, since Russia has adopted a clear policy of liberalizing the market. Russian company Gazprom, which supplies Armenia with gas, recently agreed to raise the prices it pays for imported natural gas from Central Asia to "European" levels. [For background see the Eurasia Insight archive].

Many pensioners are having a hard time coming to grips with the new reality. Pensions were increased the month before Armenia’s February presidential elections, but many elderly Armenians complain that they are still scrambling to keep up with steadily rising prices for food and utilities. "Inflation is so high that at present . . . we simply run up big debts," complained Yerevan pensioner Gayane Hakobian, who receives a pension of 13,000 drams (about $42) per month.

The International Monetary Fund in February announced that Armenia’s 6.6 percent inflation rate was the lowest of any country in the Commonwealth of Independent States. The IMF’s Armenia representative Nienke Oomes noted, though, that if gas subsidies were removed, inflation would likely take a big jump. Armenia’s economy grew by 13.8 percent in 2007, according to official figures, but wages have not managed to keep up with price increases. The average monthly wage stands at just over $242, or about 75,000 drams.

Individuals interviewed by EurasiaNet complained bitterly about the move. For example, Hasmik Harutiunian, who lives in western Armenia’s Armavir region, said that her family installed gas heating in their home last winter thinking that they would be able to heat their house at a more affordable price. With the subsidies gone, so are the potential savings, she said. The family now faces potential costs of 40,000 dram (about $146) on a monthly budget of 110,000 drams ($356). "[I]t is not clear why the authorities could not keep their promise and subsidize people for another year."

Despite the broad gulf that divides the government from opposition political forces, exacerbated by the March 1 events, some administration critics nevertheless applauded the move to lift subsidies. Suren Sureniants, a member of the Republic Party’s political council, described the subsidies as "artificial assistance from the state, and mostly unrealistic from the point of view of economic development."

Editor�s Note: Marianna Grigoryan is a writer for the ArmeniaNow.com weekly in Yerevan.

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