Caucasus Report: August 26, 1998

The Akhalkalaki Standoff: A "Misunderstanding" or Russian Meddling? Armenian Foreign Minister Vartan Oskanian's two-day visit to Tbilisi last week was overshadowed by an incident that served to highlight one weak spot in what both sides term harmonious bilateral relations. On 13 August, Georgian army units en route for joint maneuvers at the Russian military base in Georgia's Akhalkalaki raion, bordering on Armenia, were halted by a group of armed local Armenian residents. Reports of the standoff are contradictory: the Georgian governor of the region, Gigla Baramidze, claimed that the Armenians threatened to attack the Georgian force if it proceeded further, whereas a Georgian Defense Ministry press release termed the standoff a "misunderstanding" that arose because the Armenian population had not been informed in advance of the planned exercises. (The approach of the Georgian force had apparently given rise to panic and rumors that Tbilisi intended to deport all ethnic Armenians from the region, according to an RFE/RL correspondent in the Georgian capital.)

Baramidze blamed the incident, which he characterized as a deliberate attempt to destabilize the situation in the region, on members of "Djavakhk," an unofficial organization founded several years ago to lobby for autonomy for the Armenian population of Akhalkalaki and three neighboring raions whose population is likewise predominantly ethnic Armenian. The entire area is already, to all intents and purposes, only formally a part of Georgia: the lingua franca is Armenian, and the Armenian dram is used as currency in place of the Georgian lari. The Armenian population refuses to serve in the Georgian armed forces, but provides up to two thirds of the personnel serving at the local Russian military base. But in a recent interview with Caucasus Press, one of the leaders of "Djavakhk," Yervand Sherinian, expressly denied that the organization aspires to unification with Armenia. Oskanian similarly termed the issue of autonomy for the region a Georgian domestic political issue.

The Georgian leadership has declined to comment on the incident pending the results of an official investigation, but both Gigla Baramidze and Abkhaz parliament in exile chairman Tamaz Nadareishvili have charged that it was orchestrated "from abroad," hinting that Russia may deliberately be using members of "Djavakhk" and local criminal mafias to instigate unrest. Such speculation, while reflecting many Georgians' inclination to blame all their country's misfortunes on Moscow, is not totally farfetched. Provoking an ethnic conflict in southern Georgia would not only weaken the country's leadership: Akhalkalaki also lies on the route of the planned Baku-Ceyhan export pipeline for Azerbaijan's Caspian oil. (Liz Fuller)

IMF Directors Urge Azerbaijan to Speed Reforms. The executive directors of the IMF have urged Azerbaijan to accelerate the pace of reforms to meet the "severe challenges" the country faces, especially in reducing high unemployment and dealing with poverty in the non-oil sector. In their annual review of Azerbaijan's economy, released on 17 August, the directors said they regretted the limited progress the government had made in restructuring its spending, but also cautioned that with lower oil prices cutting revenues, the government should avoid across-the-board budget cuts.

Coupled with strong reform programs, the fund staff said that inflation was brought down to near zero since late 1997, the manat has been strengthened, and GDP growth rose to around 9 percent in the first quarter of this year. The directors commended the Azerbaijani authorities for their success in stabilizing the economy through low inflation and strong growth.

But they added that progress on structural reforms has been mixed, with "significant differences" remaining between various sectors of the economy. That is why, the directors said, it is important that reform efforts be accelerated to deal with rising unemployment and poverty in all non-oil areas of the economy.

The IMF directors said they welcomed the revenue measures already taken to partially offset the impact of lower oil prices, but some directors encouraged Baku to consider additional measures to ensure falling oil prices do not raise the deficit.

The directors futher noted that large capital inflows being brought into the country by oil development place upward pressure on the value of the manat. They therefore urged the government to strengthen monetary policy and move to better develop domestic markets for credit and treasury bills.

The directors noted that further delays in solving the problems of four state-owned banks could hamper private sector development -- particularly small and medium sized enterprises -- and threaten the recovery of the non-oil economy. They warned that "It is essential that the privatization of both the International Bank and Savings Bank be completed on schedule." They advocated more stringent banking supervision, given that one-third of all banks in Azerbaijan are not in compliance with prudential regulations. Finally, the directors welcomed the government's plan to tackle governance issues forcefully, improve fiscal transparency and strengthen the country's legal framework. (Robert Lyle)

Russian Market Meltdown Has Little Effect On Armenia. The ongoing grave financial crisis in Russia is having little effect on Armenia, which reflects a declining economic interdependence and integration between the two countries following the disintegration of the Soviet Union. Russia has ceased to be Armenia's top trade partner. The bulk of external loans extended to and investments made in Armenia now comes from the West. The presence of Russian banks in the Armenian market is not sufficiently strong, which is apparently a consequence of declining bilateral trade. Similarly, the Russian currency, the ruble, is no longer circulated in Armenia.

It is thus quite natural that the Armenian economy is not being affected by Russia's tumbling stocks and devaluing currency. Apart from the macroeconomic stability and improved indicators, there are other important reasons for this. In fact, a financial market (in the full sense of the term) is virtually non-existent in Armenia. There is simply a limited currency market, where foreign importers of goods convert earned Armenian drams into US dollars. There is also a small market of short-term government bonds. It is not very significant as revenues from the bond sales are not vital for the government budget. The market for corporate stocks is still in its founding stage. Consequently, it is almost impossible to cause financial upheavals in Armenia.

There is, however, some room in the Armenian markets for foreign influence. This primarily concerns the government securities market, where Russian investors are very active. It is widely known that Armenian banks operate there mostly on orders from Russian investment companies like Renaissance-Capital, Alfa-Capital and Troika Dialog. The turmoil in Moscow means they urgently need foreign exchange. It is reasonable to predict that they will try to sell Armenian bonds to shore up their dollar reserves. In these conditions, the dram is bound to come under some pressure. But again, the small scale of the Armenian market will likely preclude any impact on the currency's exchange rate, let alone living standards.

The absence of a secondary market for securities in Armenia is widely believed to hinder foreign investment. At the same time, once money is invested in such an economy, it is more difficult to withdraw when needed. This structural deficiency becomes a sort of safeguard against a sudden flight of foreign capital, which hits developing countries hard. However, the credibility of this argument has yet to be finally proven. What is certain is that for the first time Armenia is watching a crisis in Russia from the position of a distant observer rather than a victim. (Vahan Hovannisian)

Quotes Of The Week. "Chechnya is of no use to anyone except Russia." -- Ivan Rybkin, Russian envoy to the CIS and former Russian Security Council secretary, interviewed by "Ekho Moskvy," 15 August, 1998.

"Russia has no alternative to erecting a Great Wall of the Caucasus." -- "Kommersant-vlast," No. 30, 11 August, 1998.

"Lionizing Heidar Aliyev is like adding sugar to honey." -- Azerbaijani Press and Information Minister Siruz Tabrizli, quoted by "Yeddi gun," 20 August, 1998.