VZCZCXRO8099
RR RUEHLN RUEHVK RUEHYG
DE RUEHYE #0357/01 1161254
ZNR UUUUU ZZH
R 251254Z APR 08
FM AMEMBASSY YEREVAN
TO RUEHC/SECSTATE WASHDC 7445
INFO RUCNCIS/CIS COLLECTIVE

UNCLAS SECTION 01 OF 03 YEREVAN 000357 
 
SIPDIS 
 
STATE FOR EEB/TPP/ABT/ATP Janet Speck 
 
SENSITIVE 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: EAGR EAID ECON PGOV AM
SUBJECT: RESPONSE: IMPACT OF RISING FOOD/AGRICULTURAL COMMODITY 
PRICES - ARMENIA 
 
REF: A) STATE 39410 B) 2007 YEREVAN 1324  C) YEREVAN 316 
 
SUMMARY 
 
¶1. (SBU) Food prices have risen significantly in Armenia over the 
past year.  Despite some public discontent over those increases, 
there have been no reports of food shortages or food-related 
political disturbances. While prices have increased largely in step 
with world markets, food import monopolies have also likely played a 
role. Despite some recent proposals by the GOAM to encourage 
agricultural development, Armenia is likely to remain a net food 
importer.  It lacks the arable land, infrastructure and professional 
expertise necessary to increase production significantly or to 
achieve any degree of self-sufficiency.  End Summary. 
 
 
FOOD AND AGRICULTURAL COMMODITY DEMAND 
-------------------------------------- 
 
¶2. (SBU) Staples of Armenian diets include bread, pasta, potatoes, 
meat, dairy products, fruit and vegetables. While Armenia is largely 
self-sufficient in the production of fruit and vegetables - at least 
in-season - Armenia is a net importer of agricultural products. 
Primary exports are fresh and processed fruits, wine and brandy, 
while primary imports are meats, sugar, grain and dairy products. 
While exports are increasing, and domestic production of meat and 
dairy is improving, Armenia still has a slightly negative 
agricultural trade balance. 
 
¶3. (SBU) Wheat is Armenia's leading agricultural import, as domestic 
production covers only 35-40 percent of domestic demand of about 
30,000 metric tons per month. Russia, Kazakhstan and Ukraine are the 
primary suppliers.  However, Ukraine's poor recent harvest 
eliminated most of their exportable supplies while Russia and 
Kazakhstan have restricted wheat exports through prohibitive export 
tariffs and export bans. 
 
 
SUPPLY 
------ 
 
¶4. (SBU) Domestic agricultural production has been increasing in 
recent years, as the country recovers from economic hardship 
resulting from the breakup of the Soviet Union.  Domestic and 
foreign investment are contributing to agricultural growth, but are 
unrelated to rising food prices.  However, domestic production is 
unlikely to respond significantly to rising food prices in the 
short-to-medium term, as the country lacks basic inputs and 
appropriate agronomic conditions to implement sudden shifts in 
production.  Arable land accounts for less than 17 percent of total 
area, and only two percent of the country's land is dedicated to 
crop cultivation. Although agriculture will remain important to the 
Armenian economy, it will not be the engine for growth over the long 
term.  Armenia also has no obvious comparative or competitive 
advantage in any crop or product. Exports will largely serve "niche" 
markets. 
 
¶5. (SBU) While new President Serzh Sargsian in March proposed a 
self-sufficiency program in wheat and corn production (Ref C), the 
situation with regard to agricultural production is unlikely to 
change:  While high market prices may encourage some additional 
grain production, suitable land, inputs and storage are limited, and 
producers in some traditional wheat-producing areas are beginning to 
cultivate (often with assistance from USDA/CARD, USAID, MCC, and 
other international donor agencies) high-value crops such as fruits 
and vegetables, which offer greater potential returns. 
 
¶6. (SBU) The development of the agriculture and agribusiness sector 
in Armenia is limited due to a variety of factors including: 
 
- The average plot size is between one to three hectares. Such small 
farm plots are inefficient and unable to realize any economies of 
scale; 
 
- Armenia's rocky, mountainous topography and arid climate are 
poorly suited to large-scale, commercial grain cultivation. 
 
- Investment in agricultural technology and equipment is lacking; 
 
- Food processing, one of the more promising sectors, suffers from 
dilapidated equipment and needs capital investment; 
 
- Lack of adequate transportation infrastructure and the high cost 
of transportation; 
 
- Structural financial market impediments hinder development of 
suitable financial instruments; credit term lengths are largely 
insufficient and interest rates too high; 
 
YEREVAN 00000357  002 OF 003 
 
 
 
- The relatively high cost of inputs at both the farm and the 
processing levels; 
 
- The lack of sufficient grain storage and cold chain systems; 
 
- Shortage of experienced managers in the agribusiness sector; 
 
- Lack of governmental support (including a lack of applied research 
information); 
 
- Poor quality control at the farm and processing levels; 
 
- A shortage of qualified farm managers; and 
 
- Minimal domestic demand as a function of low per capita incomes 
and a declining population. 
 
DOMESTIC POLITICS 
----------------- 
 
¶7. (SBU) There have been no reported food shortages or food-related 
disturbances.  Recent public unrest in Armenia has been related to 
the disputed February 19 Presidential election.  The unrest, while 
prompted by a disputed election, also had its roots in general 
dissatisfaction with the government.  Food price inflation is an 
often-mentioned element of that popular discontent, exacerbated by 
exchange rate changes.  A high percentage of Armenian household 
income, especially at the lower end of the economic scale, comes 
from remittances from family members abroad.  The steady 
appreciation of the Armenian Dram has added to consumer discontent, 
because foreign currency remittances have lost purchasing power. 
Consumers have been hit by an anomalous double-whammy:  at the same 
time that the Armenian dram has appreciated (roughly 40 percent in 
the past two years against the USD; about 10 percent against the 
Euro), the dram prices of imported staple foodstuffs have also 
risen. 
 
¶8. (SBU) One possible explanation for this anomaly (a rising dram at 
the same time as rising dram prices of imported foods) is that the 
importation of many basic foodstuffs - in particular wheat, flour, 
sugar, cooking oil and butter - is monopolized by a small group of 
politically-connected businessmen (the so-called "oligarchs").  Many 
are either elected officials themselves or enjoy considerable 
political influence, and to date they have managed to forestall the 
entry of competition into these markets. In late 2007 there was a 
brief spike in sugar prices seemingly uncorrelated with any increase 
in world market prices, although for the year sugar prices actually 
fell. (NOTE:  An otherwise passive government commission launched a 
highly-publicized inquiry into sugar prices after a public outcry, 
which may have induced the monopoly sugar-importer to reduce prices 
(Ref B).  END NOTE) 
 
ECONOMIC IMPACT 
--------------- 
 
¶9. (SBU) According to IMF data, food prices increased overall by 
13.1 percent between March 2007 and March 2008, in AMD terms.  This 
included a 33.4 percent increase in prices for bread and cereals 
(grains or products derived from grains) and 32.1 percent for oil 
and fats (butter increased 41 percent year-on-year).  Furthermore, 
consumers complain that bread products today are often inferior to 
those of previous years as the base ingredients seem to have been 
cut or reduced as the price of inputs has risen.  The same may be 
true for cereals. During the same period, prices for sugar decreased 
13.8 percent. 
 
¶10. (SBU) Overall inflation from March 2007 to March 2008 was 9.6 
percent.  Of that, 7.1 percentage points were accounted for by food 
price increases, 5.0 percentage points of which were caused by 
increased prices for bread and cereals.  While most food prices have 
increased in step with international prices, the State Customs 
Committee reports that import prices of sugar, vegetable oil and 
butter did not change in March 2008, while those of flour increased 
by five percent.  This suggests that local importers may be 
anticipating higher world market prices in the coming months. 
 
¶11. (SBU) Surprisingly, while certain staples, including sugar, 
flour and oils/fats are imported largely by informally 
government-protected monopolies, the impact of monopolies on recent 
food price increases is somewhat mixed.  Armenian sugar prices have 
exceeded world market prices for approximately the past 18 months, 
but they have recently converged, and prices fell over the past 
year.  Butter prices have significantly lagged behind European Union 
prices over the past year.  One exception is sunflower oil, import 
of which is 80 percent controlled by oligarch (and member of 
parliament) Samvel "LFik Samo" Alexanian.  Its price over the past 
five years has typically exceeded the U.S. price. 
 
YEREVAN 00000357  003 OF 003 
 
 
 
 
ENVIRONMENTAL ISSUES 
-------------------- 
 
¶12. (SBU) Thus far there have been no visible environmental impacts 
as a result of increased food prices. However, efforts to produce 
more food (particularly wheat and corn) could result in 
environmental impacts related to the use of unsuitable land or the 
introduction or expanded use of fuel, pesticides, irrigation or 
other inputs that might have environmental consequences. 
 
HOST GOVERNMENT POLICIES 
------------------------ 
 
¶13. (SBU) The GOAM plays a relatively limited role in agricultural 
production, as the Ministry of Agriculture's scarce funding limits 
its effectiveness. Its most extensive activity is providing seeds 
and fertilizers to farmers. The GOAM also does not register farms or 
require that they be incorporated; consequently, most farms do not 
pay the 20 percent value-added-tax on the sale of their production. 
This is due to change by 2009, in accordance with WTO requirements. 
However, the GOAM seems unlikely to meet this deadline. 
 
¶13. (SBU) Armenia maintains import-friendly regulations, and does 
not ban GMOs or impose significant sanitary or phytosanitary 
barriers.  However, as alluded above, government agencies are 
complicit in enforcing de facto monopolies for many imports, 
including foodstuffs.  In the face of soaring world market prices 
for corn and wheat, new President Serzh Sargsian in March proposed a 
program to make Armenia self-sufficient in wheat and corn production 
(Ref C). 
 
 
POST PROGRAMS 
------------- 
 
¶14. (SBU) There is likely to be a direct impact on USDA/CADI 
projects as a result of recent political developments.  Post expects 
to have USD five million in FSA Performance Funds cut for FY09. USDA 
was expected to receive part of this money to enhance their FY09 
projects.  This affects the GOAM as they rely heavily on foreign 
intervention to meet their strategic goals in agriculture. 
 
POLICY PROPOSALS 
---------------- 
 
¶15. (SBU) The GOAM's agricultural situation would benefit 
considerably were it able to resolve political disputes with 
neighboring Azerbaijan and Turkey, thereby opening the countries to 
trade.  If the situation in Armenia deteriorates significantly, USG 
may want to consider humanitarian assistance, preferably through 
NGOs. 
 
PENNINGTON