The Drama of the Dram and the Bomb of the Ruble

During the last week, the appreciation of the dram caused some concern in the market. This analysis will explore the history of the change in the dram exchange rate and explain what drove the appreciation of the dram. First, let’s understand what caused the sharp depreciation and subsequent recovery of the Armenian dram. Armenia’s economy is significantly dependent on the Russian economy. As we have discussed in our analyses, economic growth in 2022 was driven by the outflow of capital and labor from Russia, and economic growth in 2023 was driven by the re-export of gold from Russia. The overwhelming majority of Armenia’s manufactured goods are exported to Russia. Against this background, the depreciation and subsequent recovery of the region’s currencies was mainly due to the depreciation of the ruble itself, which was driven by several circumstances:

1. On November 21, the US Treasury imposed sanctions on Gazprombank and took additional steps to restrict Russia’s use of the international financial system. This was the latest portion of sanctions applied to Russia. Currently, about 23 thousand sanctions are being applied to the Russian Federation. It should be noted that US President Biden’s administration did not apply this step until the last moment. This step could increase global inflation, as it complicates the movement of energy resources, making them more expensive.
2. President of the European Commission Ursula von der Leyen announced after her reelection that the European Union would no longer buy Russian gas, which also had an impact on the price of the ruble.
3. At the end of every year in Russia, the ruble has a tendency to depreciate, because Russian organizations that have taken a loan in foreign currency pay their obligations at the end of the year, which increases the demand for foreign currency, depreciating the ruble.
4. After US President Trump’s reelection, the dollar began to strengthen against all currencies, which signals an increase in global business environment confidence towards the US. As a result of these events, the Russian ruble depreciated from $1 = 100 rubles (November 17) to 115 rubles (November 27). Note that this effect was short-term; the market has already adjusted, and at this moment, as of December 9, 1 dollar is already 99 rubles. Let’s look at the exchange rates of the dollar, euro, and ruble in Armenian exchange points starting from October 1. Chart 1

Chart 2

Chart 3

As can be seen from the charts, the exchange rate fluctuation, which caused some concern in our market, has already calmed down. This is also shown by the market margin chart (Chart 4), which reflects the degree of uncertainty in the market towards each exchange rate. The chart depicts the difference in the margin of exchange points for the ruble, euro, and dollar (Formula: (sell - buy) / buy). The margin shows how much uncertainty the market sees in the given exchange rate. At this moment, the situation has calmed down, and the market expects that in all likelihood the situation is stabilizing. Chart 4

In order to understand what might be expected for the Armenian dram exchange rate, let’s look at the history of the US dollar’s value against the AMD starting from 2012. The chart shows 3 periods of stability, 3 shocks, 2 exchange rate crises in the Russian Federation, and the impact of the loss of Artsakh.

Chart 5

In 2012-2014, the US dollar exchange rate was stable at around 410 AMD. In the second half of 2014, the financial crisis that started in Russia, driven by falling oil prices and sanctions related to Crimea, led to the depreciation of regional currencies, including the euro and the dram. It is noteworthy that the depreciation of the euro was gradual, while the depreciation of the dram was sharp and destabilizing.

“Shock N1” depicted in the chart reflects the drop in the value of the dram from 410 to 480 drams per dollar. The Central Bank was no longer able to maintain the exchange rate through market interventions, and the dram depreciated in panic, reaching up to 580 drams. After a few days of panic, the situation stabilized around 480 drams. This stability was maintained for five and a half years until the autumn of 2020.

The value of paper money is based on the collective trust of society. After the 44-day war in 2020, as well as the loss of Artsakh in 2023, a part of society lost confidence in the economy and the dram. Because the dram is the only official means of payment in Armenia, the population cannot hold foreign currency for a long time, which leads to periodic revaluation of the dram.

At the beginning of the Russian-Ukrainian conflict in 2022, “Shock N2” took place. Although the market expected a depreciation of the dram, a significant inflow of foreign currency from Russia led to the opposite result: an appreciation of the dram. Transfers to the banking system grew by 2.5 times, and inflows from Russia grew by 4.5 times. This period was followed by the third period of stability, which lasted a relatively short time, until the capture of Artsakh.

You may also be interested in the following analysis: 💸🔚🏦 From Capital Influx to Outflow: The Inner Kitchen of Armenia’s Economic Miracle. Chart 6

Armenia has significant dependence on foreign financial markets, especially the Russian ruble market. Under these conditions, experience shows that a sharp depreciation of the Russian ruble can have a negative impact on our economy. Under these conditions, the possibility of another sharp shock to the Armenian dram cannot be ruled out, which could cause panic in the Armenian market. If this scenario materializes, the probability of GDP growth in 2025 will be quite low. This scenario will also lead to a sharp increase in the state debt and its exceeding the legally established permissible limit. The Central Bank must be very vigilant under these conditions and not allow excessive tension in the exchange rate market, which could lead to a sudden jump in the Armenian dram. Starting from 2022, the Armenian dram is the most appreciated currency among all convertible currencies, which negatively affects the export, tourism, and information technology sectors by making them more expensive. For example, in 2022, when 1 dollar was about 480 drams, the IT sector received 4.8 million drams from 10 thousand dollars, and now it receives about 3.8 million drams. In other words, due to the appreciation of the dram, the IT sector, as well as the tourism sector and exporters, have a loss of 1 million drams. Although the depreciation of the dram is beneficial for the real economy and can mitigate the likelihood of a sudden future shock to the dram, this step is not beneficial to the central bank and the government; from the CB’s perspective it is inflationary and can lead to capital outflow, and from the government’s perspective it will increase the state debt and its servicing, as well as shrink GDP figures in dollar terms.

You may also be interested in the following analysis: 💎🎭🔮️ Golden Illusion: The Real Picture of Armenia’s Exports.