Armenia: Does Russia's $500 Million Loan Come with Strings Attached for Yerevan?

A $500 million "stabilization" loan from the Kremlin is stoking debate in Armenia about the potential political ramifications of Russian assistance. Armenian leaders, however, are denying reports that Russia has set certain conditions in exchange for the financial assistance.

Details about the loan, announced on February 10, remain under wraps. The Ministry of Finance has announced only that the loan will have a term of 15 years, with a four-year grace period. A Ministry of Finance official, who asked not to be named, told EurasiaNet that many aspects of the loan are still being negotiated, meaning that it could be weeks before the full scope of the package is known.

Economics Minister Nerses Yeritsyan told reporters on February 14 that the government will discuss later how the money will be used.

The lack of detail has prompted skepticism among many analysts. "There is no information about the interest rate for this loan. Also the . . . schedule is unclear. When will Armenia get this money? Will it be provided as a lump sum or in several parts?" noted Bagrat Asatrian, a former chairman of the Central Bank. "Unless these details are known, one cannot estimate how good this credit is."

The loan has also sparked questions about what Russia expects for its money. Russia already dominates major sectors of the Armenian economy, such as energy, communications and railroads. [For background see the Eurasia Insight archive]. Concerns have been expressed that Armenia's economic dependence on Russia might become still stronger after loan payouts begin.

On February 11, the independent newspaper 168 Zham commented that "No one believes that Russia provides purely friendly help to its ally when Russia itself is not in a good state."

A February 10 report from the Ministry of Finance, however, stressed that "the agreement does not envisage fulfillment of any non-financial obligations by the Republic of Armenia."

One financial expert believes that the loan is a purely business decision. "If Armenia ever has to borrow money under commercial terms, now is the best time for such a loan. Armenia has a reputation as a good borrower and has a relatively small foreign debt," commented Tigran Jrbashian, development director of Ameria Bank, a commercial bank in Yerevan that is the country's 7th largest financial institution.

One concern expressed in the media is that Armenia may be encouraged to enter a "ruble zone" in exchange for Russia's $500 million loan.

In a February 11 interview with the Russian news agency Regnum, Prime Minister Tigran Sargsyan said that there is "a real chance" for such a move "if by ruble zone it is meant countries that use the ruble in their trade with Russia." The prime minister added that "if one means a union similar to the euro zone, so it is too early to speak about this."

Despite their being on opposite ends of the political spectrum, Asatrian largely concurred with Sargsyan on the ruble zone issue. "The issue of choosing a currency for foreign trade or even for bank reserves is a professional rather than a political matter. So, the Russian ruble can well be used in trade if the trading parties find it convenient," said Asatrian, who preceded Sargsyan as chairman of the Central Bank and who backs the opposition movement led by former President Levon Ter-Petrosian. [For background see the Eurasia Insight archive].

Apart from Armenia joining a potential ruble zone, experts are tending to focus on the question of whether the Central Bank might use the loan to let Armenia's currency, the dram, float against the dollar. Many experts criticize the bank for keeping the dram artificially stable against the dollar, thereby hindering Armenian exporters. Asatrian says that the policy wastes Central Bank foreign reserves.

Officials and other observers counter that maintaining a relatively stable exchange rate is needed to maintain financial stability and stave off the negative effects of the global economic crisis. So far, the damage inflicted by the worldwide downturn has not been severe in Armenia. But the crisis is expected to take a big bite out of the roughly $1.5 billion in remittances that are shipped back to Armenia each year, according to Central Bank estimates. That sum plays a key role in boosting living standards and stabilizing the dram. "[A]llowing the dollar to rise against the dram will bring an increase in the prices of exported goods, which is rather dangerous now," said economist Gagik Poghosian of Yerevan's Association for Foreign Investments and Cooperation.

Agreed banker Jrbashian: "Several Armenian governments and the Central Bank have succeeded in establishing financial stability, which has no analogy in the CIS. There is no obvious reason to destroy it now."