Armenia's national currency, the dram, has gone into free fall after the Central Bank stopped intervening to support it.
In the space of a few hours on March 3, the dram went from 305 to the dollar to as low as 400 to the dollar, a loss of up to 30 percent of the currency's value.
Until recently, many Armenians felt relatively untouched by the economic crisis sweeping the world, largely because much of the country's income is supplied by remittances from the Armenian diaspora abroad.
But as the economic situation in Russia has worsened, remittances from that direction have steadily dried up. And the same thing, at a slower rate, has been happening with remittances of dollars from the United States.
Now, the decline of remittances has made its impact fully felt.
The Central Bank, which for years has relied upon remittances to fund its policy of supporting the dram against the dollar, decided it could no longer sustain
RFE/RL's Armenian Service says that over the past several months alone, the Central Bank has spent $360 million to buy up drams and support an exchange rate hovering around 305 to the dollar.
But finally, with just an estimated $1 billion of hard currency left in its reserves, the bank had to move to a floating exchange rate instead.
The bank says it sees the new window for the dram at 360 to 380 to the dollar. And, as the currency free-floated for its first full day, it rapidly shot to that level and higher -- sometimes as high as 400.
Richard Giragosian, an independent analyst in Yerevan, says that many local economists believe the dram could lose still more of its value in the weeks ahead.
"The Central Bank seems to be in the early stages of actually overshooting the goal," Giragosian said. "We now see macro-economic trends suggesting that the Central Bank, by suddenly allowing the currency to float, may actually overshoot the target and there may be a speculative run on deposits, banks, and dollars.... It seems that this is a trend in which some economists here predict the currency will decline by a further 30 percent."
Now that the currency rate is floating, international economists expect inflation to accelerate.
The IMF says that inflation in Armenia this year is likely to reach 8 percent and that GDP will contract by one and-a-half percent. Armenia's copper mining industry has already been hard hit by the collapse of commodity prices in the global downturn.
RFE/RL's Armenian Service reports that the country's main supermarket chain, Star, closed for two hours on March 3 before re-opening with higher prices.
At the same time, panic buying broke out in Yerevan as customers fearful of a further devaluation bought up staples foods from sugar to flour to olive oil. In some cases, shop owners stopped the cashier from giving the goods to the consumers until the prices could be hiked.Last-Ditch Efforts
The currency free fall comes after the Central Bank took desperate steps last week to avoid the inevitable.
RFE/RL's Armenian Service reports that the government tried to keep the currency artificially stable last week by restricting the retail sale of dollars. But that drove business to the black market, threatening to create exactly the precipitous devaluation of the dram the Central Bank hoped to avoid.
The government has denied that it was trying to keep the dram stable by heavy currency intervention and restricting the currency exchange.
Analysts say that the national currency has long been overvalued, drawing criticism from the IMF, among others, because it weakened prospects for developing a stronger export sector.
Giragosian says the pressure for a strong dram came mostly from Armenia's powerful business cartels, which dominate the import of everything from gasoline via Georgia and natural gas via Russia, as well as many foods and all luxury goods.
"When the national currency was first introduced back in the 1990s, it was bolstered by two things: remittances from the diaspora -- unlike other post-Soviet countries -- and secondly by one of the most impressive at the time land reform programs which involved faster privatization," Giragosian said. "This also increased investor and institutional confidence."
"But what we have seen over the past several years, almost tied to the trend of political authoritarianism, is the emergence of oligarchic commodity-based cartels and monopolies that seem to benefit from almost artificial constraints on the value" of the currency, he said.
With the free float of the currency, Armenia now enters a period of economic change which, in the long-run, could help create a more balanced and productive economy.
Some analysts even believe that could provide new reasons for re-opening the long-closed Turkish-Armenia border, which would provide a shorter land-route to Europe that could increase exports while reducing import prices.
Turkey could also benefit, because its closure of the border since 1993 in solidarity with Azerbaijan over Nagorno-Karabakh has made its own border region destitute.Dependent On Aid
But in the short run, the de-facto devaluation of the dram is only likely to increase Armenia's need for outside financial assistance to weather the global economic downturn.
Armenia is already in the process of securing millions of dollars worth of loans from international lenders and from Russia.
IMF Managing Director Dominique Strauss-Kahn said on March 3 that he will propose approving a $540 million loan to Armenia when the fund's governing board meets at the end of this week. If the loan is approved, Armenia would be immediately eligible to draw $239 million of that amount over the next 28 months.
The World Bank said last week it would grant Armenia $85 million to ease the effects of the financial crisis.
And last week, Yerevan and Moscow finalized a Russian loan worth another $500 million.
But some of the loans may come with strings attached.
Giragosian says that if precedent is any guide, the price for Russia's loan to Armenia could be high.
"The details are still not released and I am concerned because several years ago Russia wrote off $100 million worth of debt that Armenia owed Russia for gas purchases," he said. "And in exchange, Russia acquired several strategic assets in Armenia, including dominant positions over several sectors of the economy, from energy to telecommunications to the railway. And this is five times larger, and under a more pressing crisis."
That means Armenia, which has been among the last countries in the former Soviet Union to feel the direct result of the global financial crisis, could also be among those which become most indebted by it.
The country's best hope for not sinking further into debt remains what has always been Armenia's greatest advantage: a wealthy and committed diaspora, particularly in the United States.
Now, with the United States hard hit by recession, the fortune of the two economies -- which share few trade ties -- are even more closely linked than before.