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Weathering the Storm: A commentary on Armenia’s Oligarchs

Several weeks since Armenia felt the impact of the global financial and economic crisis, the weakness of the Armenian economy has become all too apparent. Starting with a drastic reduction in the amount of money or remittances coming into Armenia from relatives working abroad, mainly in Russia, most Armenian families have already begun to feel the pinch from the larger global crisis.

Although most families are now coping with much less financial support from abroad, the crisis has only worsened matters, as massive layoffs throughout the country’s mining sector has left many Armenians without jobs.

And now, more recently, the sudden decision to “float” or let the market determine the value of the Armenian currency has sparked sharp price rises and fostered fear for the future.

What about the oligarchs?

Although these new economic problems pose new threats to social and economic stability, this new crisis is made only worse by the already serious disparities in wealth and income. These disparities, evident in a mounting social divide between the small wealthy elite and the much bigger proportion of ordinary Armenians, have magnified the rise of the so-called “oligarchs” in Armenia.

But with this new economic crisis, will Armenia’s oligarchs also feel the pain? Will the Armenian oligarchs follow the same path of their Russian counterparts, as the Russian state, under the strain of its own domestic crisis, has now moved against the Russian oligarchs?

In fact there is an interesting lesson from the case of the Russian oligarchs.

For Russia’s oligarchs, the economic crisis weakened them considerably, with most now begging the Russian state for loans and assistance. The underlying weakness of oligarchs--- any oligarchs, not just the Russian or the Armenian variety--- is that their “business empires” are based on state patronage and debt, and are not built on true business models or activities.

For many of the Russian oligarchs, the crisis exposed the fragile “house of cards” that underpinned their businesses, and revealed their vulnerability, as the top 25 richest Russian businessman have lost a collective $230 billion this year, as measured by an annual list compiled by Forbes magazine.

It is this vulnerability that is now spurring the Russian state to retake control over several key sectors of the Russian economy, as the oligarchs are being stripped of much of their economic clout and even political power during this crisis.

In the case of Armenia, however, the state seems to lack the will to adopt such tactics. Sadly, Armenia’s oligarchs have only consolidated their power through the control of several commodity-based cartels, controlling the imports of nearly all important commodities and exercising powerful influence over exports.

But like the Russian case, Armenia’s oligarchs are also vulnerable, with a sharp fall in commodity prices, a slump in demand and an end to easy credit, combining to pose new threats to their personal wealth and power. Although, unlike Russia, the Armenian state lacks the resources to rescue these failing businesses, it has also failed to seize the opportunity to take on the oligarchs.

Whether in terms of failing to pay their fair share of taxes, or due to their illegal cartels and semi-monopolies, the oligarchs represent one of the most serious threats to the state, flaunting their power and diminishing the authority of the government.

Equally troubling, the oligarchic structures are also obstacles to development, robbing the state as much as the population of economic opportunities and competition. This is especially crucial in light of the recent assessments of the Armenian economy by the International Monetary Fund (IMF), which show that Armenia is now entering a new phase of “zero-growth.” This means that the Armenian state will face declining revenue, dwindling investment and an end to even the mirage of economic growth that the previous government so effectively used to hide its political shortcomings.

Time to take on the oligarchs

What is needed is a serious campaign to regulate these oligarchic business interests, enforce and break up the illegal commodity-based cartels, and hold the oligarchs to account, forcing them to meet their tax obligations and respect existing laws and regulations. Only then can the Armenian government begin to address its already serious lack of legitimacy and crisis of confidence.

Such a state effort to target the oligarch’s stranglehold on business is the first step to meeting the government’s plans to develop small- and medium-sized business. And such a move would also send a serious message in support of the state’s effort to fight corruption, which has long been seen as too little, too late.

Although the Armenian government is increasingly coming to the realization that it is the economic crisis, even more than the current political stalemate in the country that poses the most serious threat to stability, the imperative now is to take on the oligarchic cartels.

And as the lessons from Russia reveal, the time to tackle the oligarchs is now, while they are weakened by the economic and financial crisis, otherwise, it will be too late—too late for the state, and much too late for the country.

The author, Richard Giragosian, is the director of the Yerevan-based Armenian Center for National and International Studies (ACNIS). “Weathering the Storm" is a weekly column exclusively for ArmeniaNow.