Hrant Bagratyan: Sanctions will have tangible impact on Armenia

ArmInfo's interview with Hrant Bagratyan, well-known economist,
liberal-reformist, former prime minister of Armenia

by Emmanuil Lazarian

Saturday, August 2, 11:08


Mr. Bargatyan, how much will the West's sectoral sanctions affect the
economy of Russia, a country having close economic ties and strategic
partnership with Armenia?

Well, the economic growth in Russia in Q1 of the current year was
0.9%, while in May, there was no growth at all. GDP for the second
quarter was not published. Actually, the Russian economy is shrinking.
Speaking of the direct impact of the sectoral sanctions of the U.S.
and Europe on the GDP, by different assessments it starts from a 0.2%
growth up to tangible decline. At the same time, share index may
decline by up to 25%. Although oil prices are so far stable and make
up some $100 dollars per barrel, a budget deficit is quite probable.
In this light, both the president and the government are reluctant to
use the National Prosperity Fund. And the worst thing in this
situation is the predicted capital flight that may reach 150-200
billion US dollars by the end of the year. These are mainly the funds
of foreign investors that will be taken off the Russian assets.
Foreign investor will be getting rid of the shares of the Russian
companies that are affected by the Western sanctions. As sanctions
pile up, the Russian economy loses sources of financing and technical
development.

I am sure that Russia gave the West a handle to affect and even
destroy the Russian economy. Russia fell short thinking that it
depends on the West as much as the West depends on it. The West went
on more measures even against its own companies operating in Russia.
I'd like to reiterate that the major problem for Russia would be the
capital flight and restricted access to technologies.

Some Russian analysts have other arguments. They say every dark cloud
has a silver lining, and the sanctions will stimulate Russia towards
import substitution. They often bring the example of Iran's economic
improvement.

As a professional economist and a man that occupied the post of the
prime minister for several years, I'd say that any talks about import
substitution are pure and unadulterated speculations and even
nonsense. We live in the world where there is cooperation and division
of labor. If you are involved in these processes, you will keep
developing. If you are not involved, you will develop on the model of
the USSR, and everything will collapse one day. Iran, of course,
showed rather good economic growth from time to time, but its economy
failed to sustain the global competition and began shattering. Believe
me, economy must be reproduced in a bigger area. For instance, economy
of such big state as Russia ought to be reproduced in the global
economy to either prove its efficiency or not. If the economy develops
locally, like it was in the Soviet Union, it will inevitably lead to
empty stores and deficit, despite the economic growth. Sure, import
substitution may have a short-term effect, but it will be a very much
expensive reproduction. In the Soviet Union construction of a square
meter of housing ate up more resources than in the West, because no
one even thought of introducing more effective construction
technologies that existed at that moment.

Well, but there is another argument that Russian experts bring calling
not to be afraid of the sanctions. I mean the oil and gas incomes of
the country. Isolation of Russia's energy facilities will lead to
price hikes in the market of energy resources. Russia as a supplier of
energy resources to the world markets will manage to recompense its
losses from the sanctions.

Over half of Russia's budget revenues are from the oil and gas sector.
However, there is not so much oil in Russia. There have been many
talks lately about the need to develop new deposits. In the West they
are well aware of that and it was for a reason that the sanctions
applied to the technological field i.e. the supply of equipment for
development of deposits and for the processing industry has been
restricted. Generally, Russia's share in the global oil production is
significant, but not major. A significant part of it is used to
produce fuel oil and aviation kerosene. In the given segment Russia's
place is also modest enough. As regards the gas field, the situation
may be even worse there. Shale gas recovery has been intensified both
in Europe and the USA. Moreover, western countries began actively
using alternative sources of energy. By 2020 over 20% of energy in
Europe will be based on alternative sources.

In addition, the Trans-Anatolian gas pipeline (TANAP) construction
will be launched intensively. The pipeline will cover over 1/4 of
Europe's demand for gas...

You are quite right, new projects of energy pipelines passing by
Russia are being developed. Some big European countries that very much
depend on the Russian gas, for instance Germany and Italy, may demand
a guaranteed access to certain energy resources from the U.S. There
are enough possibilities for their replacement i.e. Qatar, Norway,
Scotland, Northern Sea. I am sure that the trend towards rapprochement
with Iran pursues the same goal.

One more argument: if the West turns back on us, we will go to the
East. What do you think of the idea to get closer with China and form
a huge common market with it - something like a global power center?

It is impossible. China will always be limiting its relations with
Russia. China is a country that built the Chinese Wall, don't forget
about that. Moreover, Russia is wary of China. These countries have
very different demographic situations. Russia will not open its
borders to China and will not increase the share of the Chinese ethnos
in the Far East, for the known reasons. Hypothetically, I have thought
of a triumvirate China-Japan-Russia that could dominate in the global
economy, but I realize that such triumvirate is impossible. The
Chinese will never have good relations with the Japanese. The
relations with the Russians will never be good enough either.



In addition, a 'blow' on Russia is in favor of China. But for the
situation with Ukraine, the West would have to make blows on China, as
the latter has almost achieved as high level of development as Europe.
Furthermore, in such situation, if China gets closer with Russia, the
West, and the U.S. first of all, will impose sanctions on China.
Taking a deeper look, there are many fields where China and Russia
compete. For instance, China seeks to flood the world with its
technologies, solar stations, but Russia with its traditional energy
is an obstacle on that way. A closer cooperation and partnership is
possible, of course, in some fields, but no more. Therefore, it is not
within the interests of China to make Russia stronger and act against
the West. China is more than the U.S. interested in weakening Russia's
economy. China has 4 trillion dollars currency reserves in the USA. A
weaker economy in the U.S. and Europe is not in favor of China. These
countries are the main sales markets of the Chinese products. That is
why it is obvious that China will be waging a very cautious policy. No
Russian-Chinese tandem is possible. It is senseless.

How much will the sanctions against Russia affect the Customs Union?
Don't you think that the U.S. seeks to kill two birds with one stone?
They seek to weaken Russia, on the one hand, and create a mess in the
CU and prevent formation of the EAEU, on the other hand. May Russia's
allies in the EAEU face any informal sanctions by the West?

I think the West does not plan to hit the Customs Union. The U.S. will
not affect the economy of Kazakhstan. They need that country as an
energy partner. However, they may make Belarus suffer with Russia. As
for Armenia, I am sure they don't care for us. However, if it turns
out that Armenia uses Russian companies to get out off the blockade,
Armenia will sure get a serious warning.

In the same way as the U.S. regularly closed our possibilities of
cooperation with Iran in some fields. At least, remember the situation
with re-export of the so-call double purpose equipment.



Sure. I mean 17% of Armenia's economy is in the hands of Russian
companies. Some of them have already been affected by the sanctions.
It is very bad. I am sure that the leaderships of those Russian
companies have already demanded their subsidiaries, including the
Armenian ones, to reduce capital expenses. I would do the same, if I
headed one of those companies.

Do you suppose that sanctions will affect also our economy?

These sanctions will affect us, whether we want it or not. As for the
Customs Union, it is not favorable for Russia to see Armenia as its
member at present. Figuratively speaking, if I were in the Kremlin, I
would not do that. Armenia is a chance for Russia to open a small
window to the world in conditions of the sanctions. Armenia must not
hurry to the CU either. Our country with its liberal regime of WTO
membership may still be useful, at least, for the relations with Iran.
The U.S. will not punish Armenia. Don't forget about the strong
Armenian lobby in the USA that will stand up for Armenia. After all,
why should they punish us? What is our guilt? I think Armenia must not
join any union now, even if there were no crisis in Ukraine. Another
matter that they in Russia may not understand that. It seems to me
sometimes that the Kremlin governs very crudely, without any
constructive and impartial analysis of the situation. They do not
think of the consequences of their steps.



What consequences it will have for our economy? I think, first of all,
transfers will decrease. This may affect macro-stability.

Consequences of the sanction will affect Armenia much. As for the
transfers, I think they will not decrease, as on the one hand, they
should decrease because of falling of the Russian economy and incomes
of the population, but on the other hand, it is necessary to take into
consideration the growth of the migration flow to Russia. The number
of the Armenians which transfer money from Russia to Armenia have been
growing every year. This may compensate losses, and everything depends
on the falling rate of the Russian economy. About 50 thsd people that
left Armenia last year, are not yet able to transfer money, buy in a
year or two, they will start transferring money to their native land.
However, we are not aware about the specific situation in this sphere,
as we have no serious analysis of the situation by Central Bank.
Nevertheless, I should say that we shall not have the expected further
growth of transfers. I see risks in the energy sector, the great
majority of the assets of which belong to Russian companies. There
will be no new investments and development. The contracts between
Armenia and Russia on energy resources delivery do not let us develop
alternative sources. And it is not ruled out that Russian energy
companies may again apply for raising of tariffs for consumers. There
are certain risks in the financial sphere too, especially in the
context of limitation of sources of the Armenian business crediting.
There are also risks in the context of narrowing of the export
potential of Armenia at the Russian market because of decrease of the
consumer demand there. We should not wait for the Russian aid to
Armenia in the form of stabilizing credits either, like in 2009. The
sanctions may also affect the needed level of preferences when Armenia
joins the Customs Union. And finally, if US's approach to the
sanctions is extremely harsh, they can also warn us in a harsh way. As
you know, US ambassador to Armenia has already made a statement on the
matter.

But it is no secret that something useful may be taken from any
complex situation. If we take into consideration that Russia may need
import substitution, in that case, Armenian companies will have a
limitless market for the export of agriculture produce, diary
products, mineral water, etc. But unfortunately, experience showed
that we are rather unbusinesslike when using such opportunities.
Perhaps, Armenian building companies will make use of the open niche
at the building market of Russia, where Moldavians and Ukrainians have
been actively working now. But the innovation level of our building
branch is quite low and lags behind our opponents. Will the Russians
seriously take it and how will the West react?

Another positive thing is that in this context, we have to wait for
sharp growth of the economic relations with Iran. Iran's role will
grow, and the trend of Iran's rapprochement with external world
continues, Iranian capitals may inflow into Armenia, including such
braches of economy, as engineering, machine tool building, etc, that
were earlier non-available because of sanctions. Fortunately, the
staff potential of Armenia has not been exhausted yet.

The new geopolitical situation will enhance Azerbaijan's role but may
also enhance the demand for Armenia. Therefore, no wonder the West has
started speeding up the settlement of the Armenian-Azeri conflict,
which should be transformed into an Azeri-Karabakh one. But it is
already another matter.


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From: Baghdasarian