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DE RUEHYE #1014/01 3520756
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P 170756Z DEC 08
FM AMEMBASSY YEREVAN
TO RUEHC/SECSTATE WASHDC PRIORITY 8427
INFO RUCNCIS/CIS COLLECTIVE PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC PRIORITY
RHEHNSC/NSC WASHDC PRIORITY
RUEHLMC/MILLENNIUM CHALLENGE CORPORATION WASHINGTON DC PRIORITY

C O N F I D E N T I A L SECTION 01 OF 03 YEREVAN 001014 
 
SIPDIS 
 
E.O. 12958: DECL: 12/09/2018 
TAGS: PROV PREL ECON EFIN EINV AM RU
SUBJECT: AMBASSADOR'S INTRODUCTORY MEETING WITH CENTRAL 
BANK CHAIRMAN 
 
Classified By: Ambassador Marie L. Yovanovitch. Reasons 1.4 (b/d) 
 
SUMMARY 
 ------- 
¶1. (C) In their introductory meeting December 8, Central Bank 
of Armenia (CBA) Chairman Arthur Javadyan stressed to the 
Ambassador the high priority the CBA places on maintaining 
monetary stability and preventing panic among Armenian 
depositors.  He insisted that Armenia's banking system is in 
sound condition, due to conservative banking practices and 
low levels of debt in the Armenian economy.  Javadyan 
defended the CBA's revocation of Western Union's license over 
its withdrawal from Nagarno-Karabakh, which is reported 
septel.  End Summary. 
 
MONETARY STABILITY IS KEY 
------------------------- 
¶2. (C) During their introductory meeting December 9, CBA 
Chairman Arthur Javadyan told Ambassador that he is not 
concerned about the Armenian banking sector, as it is stable, 
liquid and well-capitalized, with liquidity and 
capital-adequacy ratios well within normal ranges and higher 
than in many western banks.  While this is not necessarily 
good for generating financial returns, most banks are in a 
good position to meet cash demands of their depositors, if 
necessary. 
 
¶3. (C) Asked about CBA intervention in the foreign exchange 
markets to support the Dram--the CBA spent USD 100 million in 
October and November doing so--Javadyan confirmed the CBA's 
support for floating exchange rates, but said the CBA is 
trying to smoothe fluctuations.  The CBA's target is not a 
particular exchange rate but accumulated foreign-currency 
reserves equal to the value of three months of imports; the 
reserve balance is now equal to 3.2 months of imports.  He 
noted that while the CBA has spent USD 170 million supporting 
the Dram during 2008, just two weeks ago the CBA purchased 
USD to maintain stability.  Javadyan acknowledged that there 
is not necessarily an economic rationale for tying financial 
stability to the exchange rate, but that a volatile exchange 
rate will likely generate panic among the public and provoke 
a run on deposits. 
 
DEPOSITS AND LOANS ARE UP 
------------------------- 
¶4. (C) Javadyan noted that in the first part of December, 
bank deposits, especially from households (as opposed to 
businesses with seasonally-based transactions) have been 
increasing, suggesting favorable trends for household 
savings and confidence in the banking system.  While deposits 
fell slightly in November, that was largely the result of 
some depositors needing to meet cash needs rather than a 
reflection of panic.  Lending in October and November also 
increased, though terms are becoming more stringent, 
especially for real estate transactions, where banks have in 
the past generally assumed prices would only increase. 
Personal loans and those for SMEs are on the increase, as 
well, and for the first ten months of 2008, year-to-year 
lending increased 58 percent over 2007, comparable to the 
increase during the same period in the prior year. 
 
¶5. (C) Decreased activity is coming largely from the real 
sector rather than the financial sector, with the mining and 
chemical industries particularly affected. (NOTE:  In a 
separate conversation December 9, the British CEO of HSBC 
Bank Armenia commented that the stock of bank deposits in the 
Armenian banking sector had declined three percent in 
October-November, in a seeming show of no-confidence.  He 
also said that HSBC's lending portfolio had reached record 
highs during the period, because most other banks in Armenian 
had dramatically curtailed lending, leaving the field to 
HSBC.  However, as a result, HSBC will soon run short of 
available capital to lend, with flat deposits lagging well 
behind the spike in loan applications.  END NOTE) 
 
CONCERN ABOUT RUSSIA 
-------------------- 
¶6. (C) Javadyan confirmed that Armenia remains highly 
vulnerable to developments in the Russian economy.  In 
addition to concern about declines in employment leading to a 
major reduction in remittances, Russian consumers carry much 
higher debt loads than Armenians, so a high level of credit 
defaults could further devastate the banking system, which 
already faced closure of hundreds of institutions. 
(According to Javadyan, in late November the Vice Governor of 
Russia's Central Bank announced plans to close 400 banks, and 
subsequently increased the figure to 900.  Also, Russian 
Prime Minister Putin met recently with bankers and 
businesspersons, and said that 200 banks should be enough for 
 
YEREVAN 00001014  002 OF 003 
 
 
Russia).  The CBA is concerned that while Armenian banks are 
in good condition, failure of Russian banks could create a 
panic among Armenians that could imperil healthy Armenian 
institutions.  Many Armenia workers in Russia also have 
accounts in Russian banks. 
 
¶7. (C) While the CBA has been projecting zero growth of 
remittances in 2009, Javadyan indicated that it is still 
difficult to make a realistic projection.  One factor is that 
the Russian government is considering potential stimulus 
programs, with one possibility a proposal to subsidize 
completion of buildings or roads already more than 50 percent 
finished.  Given the number of Armenians working in the 
Russian construction sector, such an initiative could blunt 
the job loss for Armenians and help keep remittances flowing. 
 
DRAM-DENOMINATED MORTGAGES 
-------------------------- 
¶8. (C) Javadyan said that the CBA is still considering the 
possibility of amending regulations under the Law on 
Currencies to require that all mortgage lending be done in 
AMD, as is already required for other types of loans.  While 
some financial institutions that receive funds from abroad 
are concerned about the impact of such a regulation on their 
business, Javadyan indicated that having a significant part 
of the economy denominated in other currencies can lead to 
problems with monetary policy and undermine the CBA's goal of 
ensuring monetary stability.  He noted that when Moody's and 
Fitch rated Armenia last year, both cited concerns about 
creeping dollarization or currency substitution. (Note: Our 
contacts at Fitch told EconOff that they do not identify 
specific policy actions as ratings triggers.  However, they 
confirm that a high level of dollarization can be problematic 
for sovereign credit, as it exposes the economy to sharp 
exchange-rate movements. End Note). 
 
¶9. Javadyan noted that only last year did AMD-denominated 
deposits exceed USD-denominated deposits (as of October 31, 
foreign currencies comprised 43 percent of bank deposits and 
39 percent of outstanding loans).  He stressed the importance 
of protecting consumers from long-term foreign exchange risks 
if they borrow in currencies other than AMD, particularly 
over a 15-year mortgage term.  He insisted, however, that the 
proposal is only being circulated at present, with a decision 
still several months away.  With inflation not a serious 
concern at present, the CBA just this week reduced the "repo" 
(overnight lending) rate by 50 basis points, to 7.25 percent. 
 Javadyan hopes that the rate will soon be reduced to 6.5 
percent, if the threat of inflation remains low.  This rate 
remains the lowest in the CIS region. 
 
LOSSES FROM RUSSIA-GEORGIA CONFLICT 
----------------------------------- 
¶10. (C) Javadyan reiterated the GOAM's estimates that losses 
to the Armenian economy--both direct and indirect--from the 
August conflict between Russia and Georgia were close to USD 
700 million.  He noted that the estimate--first undertaken by 
the Ministry of Finance and later reviewed and modified 
slightly by the CBA--employed the same methodology as the 
Georgian government had used its own estimates.  Javadyan 
noted that the global financial crisis began to take effect 
only in late September--when global commodity prices began to 
fall--and there is little likelihood that the GOAM is 
conflating the effects of the two crises in estimating its 
economic losses. (Comment: We are less certain that USD 700 
million is an accurate figure and IMF calculations do not 
support this amount of losses in Armenia. End Comment). 
 
ARMENIA'S FISCAL STIMULUS 
------------------------- 
¶11. (SBU) Javadyan outlined a number of projects the GOAM 
plans to undertake in order to spur economic activity.  These 
include completion of a long-discussed (since 2000) 
north-south railroad linking Russia to Iran (through Georgia 
and Armenia); replacement of the Armenian Nuclear Power Plant 
(ANPP) and construction of over 4,000 housing units in the 
areas most severely damaged by the 1988 earthquake, including 
Gyumri, Spitak and some villages. If there is no increase in 
commodity prices in the next 6-7 months, the GOAM will look 
to undertake other projects, as well. (Comment:  All of these 
are long-term projects that are unlikely--particularly in the 
case of the nuclear power plant--to be initiated within the 
next several months.  While they will also doubtless be of 
considerable economic benefit to Armenia in the future, they 
seem to be of little value in the short run.  End Comment). 
 
MONEY-LAUNDERING PROSECUTIONS 
------------------------------ 
¶12. (C) Ambassador praised the cooperation of the Financial 
 
YEREVAN 00001014  003 OF 003 
 
 
Monitoring Center (FMC) with Embassy staff, though expressed 
regret that there have not yet been any money-laundering 
prosecutions initiated.  Javadyan said a recent case had in 
fact been launched, which we are still attempting to verify. 
 
COMMENT 
------- 
¶13. (C) Javadyan's assessment of the economic situation seems 
largely on-target and the CBA has to-date engaged in prudent 
management of the economy and of the financial institutions 
under its jurisdiction.  The CBA--under both Javadyan and his 
predecessor, now-PM Tigran Sargsian--has a reputation as a 
competent, serious body.  We nevertheless believe that the 
CBA is painting a more positive picture of the road ahead 
than is likely warranted.  End Comment. 
YOVANOVITCH