VZCZCXRO9137
PP RUEHDBU
DE RUEHYE #0178/01 0721358
ZNY CCCCC ZZH
P 131358Z MAR 09
FM AMEMBASSY YEREVAN
TO RUEHC/SECSTATE WASHDC PRIORITY 8809
INFO RUCNCIS/CIS COLLECTIVE PRIORITY

C O N F I D E N T I A L SECTION 01 OF 02 YEREVAN 000178 
 
SIPDIS 
 
E.O. 12958: DECL: 03/12/2019 
TAGS: PROV PREL ECON EFIN EINV ASEC RU AM
SUBJECT: CENTRAL BANK CHAIRMAN BEHIND THE SCENES ON 
DEVALUATION 
 
Classified By: Ambassador Marie L. Yovanovitch. Reasons 1.4 (b/d) 
 
  SUMMARY 
------- 
 
¶1. (C) Central Bank Chairman Arthur Javadian told Ambassador 
the CBA's decision to sustain the Armenian Dram (AMD) since 
last fall had been the correct one, despite the significant 
depletion of Armenia's foreign reserves.  Notwithstanding 
official independence, Javadian made clear that the President 
had been deeply involved in the CBA's strategy and eventual 
decision to let the AMD float again.  The President 
instructed ministers to be publicly supportive of the CBA 
decision, and also convoked Javadian with the security 
service chiefs the night before the action to discuss 
possible unrest.  The GOAM was also put on the lookout 
against oligarchs who might impose excessive price increases. 
 Javadian was less than certain about the likelihood of the 
USD 500 million loan from Russia becoming a reality, or about 
the existence of preconditions surrounding it.  END SUMMARY. 
 
THE PRESIDENT CALLS THE SHOTS 
----------------------------- 
 
¶2. (C) Meeting with the Ambassador on March 10, CBA Chairman 
Arthur Javadian made clear that he had consulted frequently 
with President Sargsian about the CBA's policy of supporting 
the AMD and its decision on March 3 to end its support and 
allow the AMD to float.  He insisted that Prime Minister 
Tigran Sargsian, his predecessor as CBA Chairman, had not 
been involved in this decision, and that the PM has been 
involved only in fiscal policy.  He recounted that in the 
late evening of March 2, he met with the President, who 
called in the Prosecutor General and heads of the police and 
National Security Service (NSS) to discuss contingencies in 
the event of public unrest--or 
illegal currency speculation--when the CBA announced its new 
policy. They were also told to ensure that oligarchs--many 
with import monopolies--did not impose excessive price 
increases following the devaluation. 
 
¶3. (C) Javadian mentioned that the economic situation is 
putting the Prime Minister under considerable pressure. 
(Note: There has again been rampant speculation in the press 
that the PM will resign imminently.  End Note).  The PM is 
being asked to provide guaranty letters to businesses 
experiencing economic difficulties, but Javadian noted that 
the President is the "only guarantee." Javadian hinted at 
other pressures being put on the PM by oligarchs and other 
powerful and shady figures, but declined to elaborate. 
 
IT WAS THE RIGHT APPROACH 
------------------------- 
 
¶4. (C) Javadian outlined three reasons for the CBA's decision 
to support the AMD:  1) preventing loss of confidence by 
depositors, which could prompt flight from the AMD; 2) Giving 
banks more time to adjust to a devalued AMD; and 3) Wanting 
banks to have time to build up more USD reserves.  While 
acknowledging that the GOAM had lost a significant share of 
its foreign reserves supporting the AMD since last 
October--he reported that net international reserves now 
stand at USD 600 million--Javadian said it was the correct 
approach, as these goals were all accomplished.  While the 
AMD dropped 25 percent after the CBA ended its forex 
intervention, it has held even at roughly AMD 375 per USD 
since March 3.  In September, banks had USD 300-400 million 
on hand, and at present have closer to USD 700 million.  He 
claimed that allowing a gradual decline of the AMD would have 
left Armenia even worse off; he noted that Russia had done 
this with the ruble and has lost half of its foreign exchange 
reserves, with more devaluation still likely.  Despite 
Armenia's troubles, he claimed the country is still much 
better off than others, and that the CBA's policy of 
supporting the AMD should be highlighted as an example of 
sound economic management; even the IMF, which had for months 
pressured the GOAM to abandon its support of the AMD, has 
acknowledged that its actions had likely given the banks more 
time to prepare for an eventual devaluation. 
 
¶5. (C) IMF and World Bank assistance packages were 
conditioned on the GOAM allowing the AMD to float again, and 
the devaluation was done in consultation with those 
institutions.  The CBA henceforth plans to intervene only to 
prevent fluctuations of more than AMD 10 in either direction; 
from March 3-11 the CBA had sold about USD 2 million and 
bought about USD 6.5 million in order to prevent such 
fluctuations. World Bank Country Director Aristomene 
Varoudakis told DCM on the evening of March 12, however, that 
the CBA had sold around 8 million USD earlier that day, and 
predicted another near-term drop in the value of the Dram. 
Varoudakis said he believes the next phase of devaluation 
 
YEREVAN 00000178  002 OF 002 
 
 
will reduce the value of the dram to around 420 ADM to the 
dollar. 
MONEY FROM IMF AND RUSSIA 
------------------------- 
 
¶6. (C) Javadian noted that the GOAM already has received 
approximately half of the USD 540 million StandBy package 
that was approved by the IMF on March 6.  This money will be 
used to bolster the CBA's foreign reserves.  Asked about the 
USD 500 million promised by Russia, Javadian said the GOR 
will be meeting on March 19 to approve the loan and the same 
day the National Asembly will need to approve the change to 
the budget, which Javadian thought might be too ambitious a 
program for one day.  He believes the Russian funds will be 
used primarily for infrastructure and SME loans.  He also 
noted he has told the GOAM that if it is lent to SMEs, the 
CBA should assume the foreign exchange risk and is in a 
position to do so.  (Comment: NATO officials told Ambassador 
on March 13 that the Ministry of Defense expects a portion of 
the Russian loan will be used to buy weapons.  If true, this 
would not reduce poverty or unemployment, which ostensibly 
was the goal of the Russian loan.  End Comment.) 
 
¶7. (C) Pressed by the Ambassador on the certainty of the 
Russian funding, however, Javadian at first said it was 
guaranteed, but became somewhat less certain as the 
discussion continued.  He also insisted at first that besides 
the terms of the Russian loan (LIBOR plus three percent, 
15-year repayment term with a five-year grace period), there 
were no other conditions attached. (Note: Press speculation 
weeks ago had included the possibility of Armenia having to 
adopt the Ruble. End Note).  Later he indicated that there 
may be a separate agreement or set of conditions surrounding 
the Russian loan. 
 
INFLATION PROJECTIONS 
--------------------- 
 
¶8. (C) Javadian predicted that Armenia's inflation rate for 
2009 would be approximately eight percent, in line with the 
IMF's projections, which assumes a 20 percent AMD 
depreciation and the import sector accounting for 40 percent 
of the economy.  He noted, however, that the planned 20 
percent increase in gas and electricity rates scheduled to 
take effect on April 1 will alone account for 2.7 percentage 
points of the 2009 inflation rate.  A larger devaluation will 
likely result in a higher overall inflation rate for the year. 
 
A GOOD TIME TO INVEST IN ARMENIA? 
------------------------------------- 
 
¶9. (C) Javadian asserted that this is a good time for 
foreigners to invest in Armenia, and that the Prime Minister 
had recently met with approximately 300 Armenians in Russia 
in an effort to persuade them to invest in the country. 
 
COMMENT 
------- 
 
¶10. (C) Javadian was unusually frank and candid in his 
one-on-one meeting with the Ambassador, not even making a 
pretense of the CBA's political independence and also 
criticizing the competence of many government officials.  He 
was dismissive of the idea that the Prime Minister, his 
predecessor as CBA Chairman, would have been involved in the 
CBA's decision making.  He seemed nearly radiant in 
describing the CBA's achievement in managing a relatively 
smooth devaluation of the AMD, which at least for the moment 
achieved a new equilibrium rate.  It will take some time to 
determine whether his outlook is justified.  End Comment. 
YOVANOVITCH