Karabakh Braces for Impact of Global Crisis

As unrecognised republic prepares for downturn, government promises measures to ease credit and increase national self-sufficiency.

Karabakh Braces for Impact of Global Crisis

As unrecognised republic prepares for downturn, government promises measures to ease credit and increase national self-sufficiency.

Father-of-two Ashot Babaian is out of work and facing a grim future. “I lost my job two months ago and barely eke out a living,” the 29-year-old said.



“My wife doesn’t work either, we have two children and now we have to depend on my father’s earnings.”



Babaian used to work at Perfect Setting, a firm specialising in the production of parts for Swiss watches.



He was laid off when the company, partner to a major European watch manufacturer, cut staffing levels in response to the world financial crisis, which has reduced demand.



The company management refused to tell IWPR how many, or what percentage of, staff they had shed.



They were “sorry for this unfortunate situation and for the necessity of depriving their labour force of high salaries”, the firm said.



The first wave of the crisis in Nagorny Karabakh has mainly affected companies financed from abroad, or which have partnership arrangements with foreign corporations.



But it has also hit the pockets of ordinary people who now find salaries can’t keep up with sudden price rises.



The self-proclaimed republic has remained unrecognised by the wider world for more than 15 years.



Formerly an autonomous region of Azerbaijan, it declared independence after the collapse of the Soviet Union, becoming a conflict zone between Armenians and Azeris.



But since a ceasefire entered into force on May 1994, Karabakh has experienced economic recovery.



The economy of the region, which has a population of about 138,000 and where monthly salaries average about 220 US dollars – a little les than Armenia – revolves around agriculture and small and medium-sized businesses.



Much of the budget depends on Armenian subsidies, however. Yerevan supplies most of the 55 billion drams (about 146 million dollars) set aside for this year.



Karabakh shares a common economic space with Armenia. For this reason, product prices and economic trends in Armenia impact directly on prices and employment levels in Karabakh.



After the recent sharp devaluation of the dram on March 3, the panic felt in Armenia spread to Karabakh.



Owners closed many stores while in some others, the prices of goods doubled instantly. Panicked consumers swept staples such as vegetable oil, sugar and flour off the shelves.



“I went to the shop to buy some sugar and rice but to my surprise, all the shops were closed,” Liana Sargsian, a housewife in the capital, Stepanakert, said.



“My neighbours said only one supermarket was still open in the centre but long lines had already formed at the doors. I had nothing to do, but go there.”



Fear of a second wave of price hikes prompted shoppers to rush out and buy household appliances such as washing machines and cell phones.



Although the prices of these goods had already gone up, many people reasoned that in a few days they would cost even more.



“The prices for some goods soared by up to 20 or 25 per cent in only hours,” Fatima Grigorian, a housewife, told IWPR.



“On March 3, vegetable oil went up to 1,000 dram from 550 dram, but only two days later the price went down to 700 dram.



“In one day, I spent almost half of my [monthly] salary stocking up on essential goods!”



The entity’s premier, Ara Harutyunyan, called a press conference on March 4 to calm fears about the sudden rises.



“We share the same economic space with Armenia and everything that happens there impacts on our economy,” he said. “If there are price increases in Armenia, we will have to react the same way.”



Karabakh has already experienced economic jitters recently. In November 2008, the largest taxpaying business, Base Metals, which develops gold and copper mines, cut production after suffering severe losses.



The move sparked worries as the company cut wages by between 7 and 15 per cent, blaming the decline in world copper prices. As a result, the company also paid less tax, depriving the budget of 2 billion dram, equivalent to 5.3 million dollars.



The government’s 2009 budget envisages cuts in the administration of 10 to 15 per cent and setting aside a reserve fund of up to 150 million dram.



Commercial banks are to be drawn into state programmes to ease access to mortgages and credit for small and medium-sized businesses.



“The country is provided with enough fuel and essential goods,” Harutiunian assured at the press conference.



He insisted that prices of basic goods would now remain stable. “Bread prices haven’t changed so far and are unlikely to go up now,” he said, “bearing in mind that we not only supply our internal needs but export grain.



“Of course, people’s incomes are not always satisfying, and we have to find ways of increasing earnings.”



But pensions had gone up at the beginning of the year, he noted, compensating for much of the rise in prices. No cuts to welfare were envisaged.



However, outrage over the consequences of the crisis, especially the currency devaluation, is still common among many people.



“We bought a car after borrowing 9,000 dollars but then the dram fell from 300 to a dollar to 375,” Fatima Grigorian complained. “Imagine how much money we lost because of devaluation!”



The government’s anti-crisis measures have included moves to increase self-sufficiency in food production and power.



Earlier in March, the authorities unveiled a novel investment project to encourage consumers to buy shares in new, small hydro-electric power stations.



The joint-stock company, ArtsakhGES (Artsakh hydro-electric power station), is inviting potential investors to buy shares, priced at 1,000 dram (three dollars) each.



At the presentation ceremony, the manager, Vahram Beglarian, urged people and companies to join the project. “Participation gives you the opportunity to become joint-owners of the company and earn a profit,” he said.



Economist Svetlana Danielian said the project was an excellent idea.



“The project to build and exploit mini hydro-electric power stations will fulfill all Karabakh’s own power needs and enable it to export power and so earn revenue in a tough economic climate,” she said.



Meanwhile, the wave of panic in Armenia has also hit savers in Karabakh, some of whom have started to exchange dram for dollars and euro while others try to get rid of foreign currency.



As worries have rippled through the business and banking sector, the inflow of foreign currency has fallen, hitting banks’ assets and undermining their willingness and ability to lend money for mortgages.



“From the start of the crisis in autumn, some banks tightened credit conditions, raising service fees and insisting on steep terms for credit,” Danielan said.



“Since the currency devaluation, they have further reduced mortgage activity and business loans.”



The world crisis has also hit the pockets of Karabakh residents who rely on remittances sent from relatives in Russia.



“My father had three stalls in a market where he used to sell menswear but since the beginning of the crisis, trade has been bad, so he had to join the three stalls into one,” said Gayane Egiazarian whose father, working in St Petersburg, used to send her regular funds.



“Now there’s no work at all, the market is at risk – and so is my father’s business.”



Ani Azatian, a shop assistant, said her fiancé, Vazgen, used to make a living by working seasonally in the construction business in Russia.



When he came home last October, he was hoping to go back to Russia and earn money for their wedding. But today he is jobless.



“Now he has to look for work here, but it’s very hard to find employment here,” Azatian said.



Unemployment, however, has yet to rise significantly. Last December, 3,724 Karabakh residents were registered as unemployed. By March 1, the number had crept up to 3,769.



One other element of the government’s anti-crisis package is tightening up the tax collection rate.



Karabakh’s tax revenues were already 25 per cent higher in 2008 than in 2007 as a result of existing improvements in this sphere.



The government also intends to boost local agriculture, with a view to cutting imports.



“We still import most agricultural goods, though the conditions to develop our own agricultural sector are good,” Bako Sahakian, the president of Karabakh, told a meeting of students in Stepanakert on February 26.



“Karabakh has every chance to serve not only the [food] needs of the domestic market but to provide the market abroad with competitive organic products.”



Sahakian’s opponent in the last elections, in 2007, Masis Mailian, told IWPR that the authorities were right to concentrate on agriculture.



“The emphasis on the agricultural sector is just what will help us survive the global financial crisis with minimal losses,” he said.



Karine Ohanyan is a member of IWPR's CCJN project.
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