CAUCASUS BLOG: Now the hard part starts for Nikol Pashinian, Armenia’s Robin Hood

CAUCASUS BLOG: Now the hard part starts for Nikol Pashinian, Armenia’s Robin Hood
"Nikol, Prime Minister" reads the text on a poster in the window of a car in Yerevan.
By Will Conroy in Prague December 11, 2018

To say that ‘velvet revolutionary’ Nikol Pashinian is riding high right now would be to make what would have to go down as the understatement of the Armenian year. Having toppled the government back in the spring with massive, unrelenting street protests over cronyism and corruption, Pashinian on December 9 led the My Step Alliance bloc to a crushing victory that will reshape the composition of Armenia’s parliament. But, as he well knows, the hard part starts now.

The ‘old establishment’ Republican Party (HHK) has been well and truly vanquished. It picked up just short of the 5%-threshold of the vote that would have allowed it to enter the legislature, compared to the 70.4% won by My Step. Pashinian clearly managed to maintain the spring energy unleashed by the revolution right through to the wintry snap poll.

Perhaps a good deal of HHK diehards didn’t bother to vote, feeling resistance was useless? Whatever the truth behind the astonishing collapse of the HHK—it had ruled Armenia since the late 1990s, though its election victories were often tainted by allegations of vote-buying and other electoral malfeasance—there is no denying that a huge number of the poverty-stricken and others among Armenia’s 2.9mn people have bought into Pashinian’s plans for a national rejuvenation. And they will want to see results.

Economic matters to the fore
With one-third of Armenia’s populace mired in poverty according to the World Bank, economic matters will have to be to the fore, but first up is reassuring Russia that the feisty nation on its doorstep—also buoyed by international monitors describing its general election as having been absolutely fair and democratic—has not undergone a “colour revolution” that aims to shift the country’s allegiances to the West.

A former newspaper editor and activist, who was jailed for stirring up unrest during tumultuous days of 2008, Pashinian is no slouch when it comes to the value of fast messaging and after his stunning election triumph he was quick to reiterate to the Kremlin via press briefings that, essentially, ‘there is nothing to see here’. "Our country is not under any influence," were his actual words as he stated that Armenia would also continue its cooperation with the European Union, although it had no plans to join Nato.

Moscow in a quandary
It sometimes seems that Moscow is in a quandary, as yet not knowing what to make of the Robin Hood-like Pashinian and his band of merrymen. Back in mid-August, the ‘People’s Prime Minister’ marked his first 100 days in office with a spirited speech to tens of thousands in the capital Yerevan’s Republic Square during which he made the striking claim that his administration had established the kind of “people’s direct rule” that once existed in ancient Greece.

And with Pashinian and his ministers now on the cusp of controlling both the executive and the legislative branches of power, many of his words bear repeating now. “In Armenia, there is no coalition government. In Armenia, there is no parliamentary majority. In Armenia, supreme power directly belongs to the people and the people carry out direct rule. This is the key meaning of the revolution that took place in Armenia,” he declared, adding: that Republic Square was now the “supreme body of the people’s rule”.

“This means,” added Pashinian, “that from now on this government will be accountable to this square, will obey this square, and all key decisions must be made here at this square… In the future, the Republic of Armenia could be cited in the historical context just like ancient Greece is cited now and Yerevan could be cited like ancient Athens.”

Stirring stuff. But as this blog pointed out at the time, there’s the small matter of whether Vladimir Putin actually wants the new “ancient Greece” running its democratic experiment a short distance from his southern border. How many Russians might look on in envy? And as a landlocked country that can't exactly afford to be choosy when it comes to developing economic relations with its four neighbours—given the three-decade-old unresolved dispute over the Nagorno-Karabakh breakaway territory, Armenia has no diplomatic relations with either Azerbaijan or Turkey, has to tread carefully when it comes to the third neighbour, Georgia, which the Russians watch like a hawk because of its Western leanings, and knows any expansion of business with the fourth, Iran, will be closely watched by Tehran's foe, Washington—how much free will can it really have in securing prosperity?

“Not afraid of the challenge”
Shortly after the sweeping victory of My Step—a bloc that includes ex-MP Pashinian’s Civil Contract Party—was confirmed, Pashinian was back at it. Though more restrained this time in elaborating Armenia’s new political era, he told a news conference that his power would be restricted by "rule of law and free media". "We are not afraid of the challenge of having a constitutional majority at the parliament," he added.

Armenia, GDP growth (Source: IMF).

Getting down to economic brass tacks, Pashinian also stated that one of the first steps for the new parliament would be to make changes to the South Caucasus country's tax code. The changes should secure more freedom for local entrepreneurs and help attract foreign investment, he said.

Interestingly, Armenia’s population of less than three million is far outnumbered by the Armenian diaspora, said by some estimates to amount to more than eight million people. Since the old order was overthrown by the people power revolution, there has been anecdotal evidence and some sketchy statistical evidence of a substantial increase in the number of the members of that diaspora returning to the homeland. The government will hope a good many of them will bring capital to invest. On a related note, in mid-August Armenia’s then deputy minister for the diaspora, a native Californian of Armenian descent, pushed a plan for diaspora bonds.

As things stood around the time of the revolution, remittances from the diaspora were, according to a Bloomberg estimate, contributing around 14% of Armenian GDP. With unemployment calculated by the International Monetary Fund (IMF) at around 16%, many households rely on such cash to make ends meet. When Russia—Armenia’s main partner in trade and investment and a big provider of jobs to Armenians abroad—sneezes, Armenia catches a cold.

Indeed, Armenia’s economic growth prospects will in the coming year be very much at the mercy of the global economic trajectory and Russia’s progress against sanctions. Armenia's GDP growth is now expected by the European Bank for Reconstruction and Development (EBRD) to come in at 5.5% this year and 5% in 2019. The predictions are 2pp and 0.5pp higher than what the banks’ analysts predicted in May.

The EBRD said in the November edition of its Regional Economic Prospects report: “Armenia’s economy is growing rapidly. Following a near stagnation in 2016, real GDP growth accelerated from 7.5 per cent in 2017 to an estimated 8.3 per cent year-on-year in the first half of 2018.

“Household consumption, capital investment and exports all contributed strongly to economic growth. Capital investments increased by 7.7 per cent in 2017 after eight years of decline (with the exception of 2015) and picked up further to an estimated 14.7 per cent year-on-year growth in the first half of 2018.”

The main drivers behind growth have been private consumption and investment, the latter linked to the strengthening construction sector, a December report from Fitch Ratings noted. A buffeting from world economic headwinds, of course, could throw a spanner into the forecasting for next year.

Broadly positive
In early December, the IMF issued a broadly positive report on Armenia’s financial system stability. The financial system has been stable and financial soundness indicators were showing signs of improvement, it said. All of Armenia’s banks met the 12% minimum capital requirement, it added, saying: “Bank profitability has gradually recovered, although it is still below pre-crisis levels. Nonperforming loans (NPLs) have fallen, of which a substantial proportion is covered by provisions, although NPL ratios are still high in a few banks.” 

On the other hand, the Fund said, Armenia’s financial system was “relatively shallow” and continues to be dominated by banks, with the sector’s assets equal to around 78% of GDP. “Capital markets are thin, and external financing is important for long-term financing, given a small domestic investor base,” the report warned. “As illustrated by the stress tests, risks from a high degree of financial dollarisation are significant, including credit risks and limited liquidity cushions in foreign currency in the event of external shocks.”

In the report, IMF directors underlined that persistent vulnerabilities remain from high levels of dollarisation and insufficient liquidity cushions in foreign currency, and recommended that Armenian authorities adopt the planned capital conservation buffer and the surcharge for domestic systemically-important banks.

The diaspora bonds initiative, for instance, is another bright idea that’s shooting in the right direction, but Armenia’s problems are deep-seated and won’t be fixed overnight.

bne IntelliNews reported in early May, how Armenia placed 129th in Jeffrey Sachs’ World Happiness Report 2018, meaning Armenia was ranked as one of the unhappiest nations in the world. Corruption, low incomes and social injustice have plagued its people. Anti-graft watchdog Transparency International’s Corruption Perception Index 2016 assessed Armenia as 113th worst of 176 countries, while the Legatum Prosperity Index 2017’s sub-component of Economic Quality positioned Armenia 114th out of 149 countries. Dominated by the local strongmen, the corruption-enfeebled economy has underperformed and what’s widely seen as a vibrant youth has grown deeply frustrated that talented people have simply been unable to realise their potential. The hope, of course, is that Pashinian, a big user of social media in his political communications who has a look and manner that are informal and oriented to the younger generations, will change all that.

But Armenia is greatly reliant on Russian backing both economically and militarily and there may be business and economic ‘relationships’ with certain oligarchs and minigarchs that Moscow would be loath to see disrupted or dismantled. Pashinian has declared his enmity towards monopolies and a foretaste of business battles to come may have emerged in mid-November when Armenian tax officials accused their country’s national gas distribution company, Gazprom Armenia, of evading millions of dollars’ worth of taxes. The previous week Armenia announced it had gone into talks with Moscow and Gazprom Armenia’s owner, Russian state-owned energy giant Gazprom, to pursue price cuts on supplies of natural gas. Putin not long before had declared that Armenia receives some of the cheapest gas in the world.

Authentic new dawn?
Cynics might be tempted to see the gas moves as a pre-election ploy designed to curry favour with a patriotic electorate, but if Armenia really is in for an authentic new dawn under Pashinian one would hope not.

No doubt some optimism is misplaced, but far from all of it. Those with the rosier outlooks were given a lift, for instance, at the end of October when it was announced that Armenia had improved by six places to rank 41st out of 190 economies in the World Bank’s annual Doing Business survey.

The country’s ranking in Doing Business 2019, driven by the five reforms it made in the 12 analysed months, meant it was a “notable reformer” in the Europe and Central Asia region, the World Bank said. As it happens, those reforms appear to have been driven by the government that met an untidy end, but to conclude on an upbeat note there were some handsome placings in the global sub-categories on which the My Step government has every opportunity to build on. Armenia’s ranking in “Starting a business”, for example, was a handsome eighth. Let’s see how the Pashinian administration fares in ‘Restarting a country’.