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  • Dram Drama

    Dram Drama

    Friday, January 2nd, 2015
    http://asbarez.com/130360/dram-drama/

    Garen Yegparian


    It's year-end, try-to-write-about-something-big-and-profound, time.
    Luckily, I was provided with just such a topic courtesy of the
    juncture and clash of international conflicts with economics.

    No doubt you've read about the fall-and-rise of the tram/dram
    (Western/Eastern Armenian pronunciation), the money used in the
    Republic of Armenia (RoA) and the Nagorno-Karabakh Republic. You might
    wonder what all the fuss is about, especially since you've probably
    also read about the "recovery" of the currency.

    As with any other topic that falls in the realm of economics, and in
    some ways perhaps more so, the matter of a currency, its exchange
    rate, and most importantly, the latter's impact on people's lives, is
    messy. That's probably why U.S. President Harry Truman once asked for
    a one-handed economist, since he was tired of the "on the one hand...
    and on the other" analysis his economic advisors were providing. In
    this case, it seems to me that we have hands on the order of how many
    might be found on an octopus's arms, or even squid (with their
    additional two tentacles)!

    Establishing even the range of the tram's value over the past few
    weeks was difficult. Remember the FEWER trams it takes to get a
    dollar, the HIGHER its value, and the MORE trams per dollar, the LOWER
    is the tram's value. It seems the highest it was ever valued was just
    under 298 trams to one dollar. The lowest was harder to determine. A
    news item reported 635 "on the street" among small exchanges during
    the height of the chaos. A table I found reported 459 as the recent
    lowest CLOSING value (which means it could have been different over
    the course of that day. Another had a value of 579, but that dates
    back to 2003. And, in recent times, basically prior to December, the
    exchange rate seemed to be around 430 trams to the dollar. Messy,
    right?

    What causes values of currencies to rise and fall? Trade with other
    countries being imbalanced (more coming in or going out than the
    opposite); speculative buying/selling of currency simply to make
    money; fear about (or confidence in) the future value of the currency;
    day to day needs of people and businesses to interact financially with
    the rest of the world; all of these could trigger fluctuations. Messy,
    right?

    What happened in the tram's case? In some ways, initially at least,
    none of the above. It was the RoA economy's connection to Russia's
    economy that was the trigger. The West is penalizing Russia for its
    activity in and around Ukraine using economic sanctions. Since the two
    economies are so connected, and Russia's is overwhelmingly larger than
    RoA's, the old saying applies: if Moscow sneezes, Yerevan gets
    pneumonia. So with Russia's economy taking the West's hits and
    faltering, along with its currency - the ruble, people extrapolated
    and feared for the future of the tram. Otherwise, nothing really
    changed in the tram's life. More wasn't bought/sold,
    exported/imported, or produced/consumed in trams. Messy, right?

    It turns out that in the short-term increasing or decreasing currency
    value doesn't have much impact. It's over the long-term where major
    changes can cause harm. So, all the fuss over the last few weeks about
    the "fall" of the tram's value was unnecessary. That's sad, because
    real people who are desperately hanging on to their standard of living
    were harmed in the rush to "buy dollars" for safety. Now, if they buy
    trams back, they will take a hit since its value has re-risen.
    Businesses with international connections that had to make payments in
    dollars were sometimes stuck. They couldn't find dollars to buy!
    Messy, right?

    Some of the craziness was no doubt driven by speculators wanting to
    make easy money. While this happens every day all over the world, it's
    not on this scale and hurts most with struggling economies such as the
    one using the tram. Also, what happens in times such as these is
    "overshooting" which is the term economists use to describe when a
    change (up or down), even if understandable, is driven by fear and
    frenzy that enter the currency market and cause the value to go
    further up or down than the underlying economic factors would support.
    Again, people get hurt. Messy, right?

    Since the RoA economy imports more "stuff" than it exports, people get
    hurt by rising prices when the value of the tram falls. E.g. if a set
    of screwdrivers cost ten dollars (4350 trams) before the last few
    weeks, then at the current rate of exchange, roughly 460, that same
    ten-dollar screwdriver set would cost a buyer in Yerevan 4600 trams.
    But that buyer's income hasn't increased, hence the harm.

    Under normal economic circumstances, this might not matter too much
    because as the value of a currency settles back to where it was,
    prices would also drop. But, historically, in Armenia's case, that has
    not happened. That's because the "oligarchs" who hold monopolistic
    control over their chosen sectors of the economy, take advantage of
    these currency fluctuations by (legitimately) raising the price of the
    goods they import when the tram's value drops, BUT, when it rises,
    they do not readjust and lower their selling prices, and so make more
    money. They are in this way privatizing the benefits and socializing
    the costs of the tram's fluctuations in value. They can do this
    because they also control the levers of political power, and make the
    rules to suit their own personal, not the country's and broad
    population's, interests. This is a more stark, extensive, and flagrant
    version of what the banks did in the U.S. when the crash hit in
    2007-2008. They had gamed the system (legally) and made lots of money
    by doing risky things. When those risks became real, U.S. taxpayers
    had to bail them out of the financial mess they'd gotten themselves
    into. Messy, right?

    The root of the problem is the extensive, overwhelming, connections of
    the Russian and Armenian economies. Russian companies own almost all
    Armenian energy operations, and most of the country's fuel comes from
    Russia. The largest source of remittances (people, usually men,
    leaving home to find work elsewhere and sending the money home to
    their families) is from Armenians working in Russia. Russia is key to
    defending against antagonistic neighbors to the east and west, meaning
    Russian troops stationed in the RoA, and the economic activity that
    entails. The Eurasian Economic Union that Armenia was just formally
    accepted into means more economic integration with Russia. A huge
    number of Armenians work in Russia. If that country's economy weakens,
    unemployment is likely to rise, meaning less work for Armenian migrant
    workers. These will be forced to return home, further exacerbating the
    bad socio-economic conditions prevailing in the RoA. Messy, right?

    What can be done? One ARF Member of Parliament recently suggested
    conducting trade with Russia in rubles and trams, not dollars. This
    would eliminate an external factor that could severely impact the
    Armenian economy, as we saw in the last few weeks. This would probably
    also suit Russia's political interests since it would decrease the
    power of the dollar, as has been happening with various oil-producing
    countries switching away from the dollar to sell their oil. Of course
    this can also be very dangerous. There are those who contend that at
    least one of the motivations for the U.S. invading Iraq in 2003 was to
    punish Saddam Hussein for switching to the Euro as the medium of
    exchange for Iraq's oil. Oil NOT traded in dollars weakens the
    leverage the U.S. has over the world economy. Messy, right?

    Another angle is diversification. Yerevan's choices are limited by the
    rough neighborhood the Armenian plateau is located in. Yet there is
    Iran which has offered to sell natural gas, a major part of the fuel
    used in the RoA for significantly less than Russia. Not only would
    this save Yerevan money and diversify, but it would also make the
    statement to the West, "We are not against you. Nor are we just
    pro-Russia. We're just looking out for our best interests under
    difficult circumstances not of our own making.

    Tourism, much touted already, is another potential bright spot. If the
    tram's value drops against the dollar, visiting the RoA becomes more
    affordable for those outside the country who have dollars to spend.
    More infrastructure to support this relatively clean industry must be
    built. And that doesn't mean just hotels and restaurants. Rather, it
    means more of the countless archeological treasures our ancestors have
    built over the millennia have to be made safely, sustainably,
    accessible so tourists have a greater variety of places to see, and
    therefore visit the country more often. Tourism also has the advantage
    of bringing in money which not only helps people's livelihoods
    improve, but also re-strengthens the tram and is not dependent on
    outside political/economic forces.

    Another, longer term, path to greater economic independence is to
    rebuild Armenia's intellectual industries. We have the example of the
    information technology sector that has been achieving international
    successes. Similarly, the Cosmic Ray Division and its research bring
    Armenia acclaim and scientific focus. Other such sectors can be built
    up, perhaps even the medical sector, if Disaporan doctors,
    particularly specialized surgeons, do a stint each year in Yerevan,
    then people would go there for "medical tourism" (remember Serj
    Sarkissian's Korea trip?).
    Simultaneously, the stranglehold "oligarchs" have over Armenia's
    economy has to be slowly eliminated. Not only would this bear economic
    benefits, but the political scene would be much improved and
    democratized.

    This is the mess we're in. It's not so much the fluctuation, even
    radical, of the tram's value, but everything else around it and
    undergirding it that should be our focus. If you can contribute in any
    way to developing the Armenian economy (meaning including Artzakh and
    Javakhk), please get on it, especially in sectors where the oligarchs
    do not and cannot have control/penetration such as the examples cited
    above. Messy, right?

    http://asbarez.com/130360/dram-drama/

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