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A blog about economics in the South Caucasus.

Why Armenia Is Not (Yet) Ukraine?

 
Yerevan is presently rife with protest. Dubbed “Electric Yerevan,” the protests are aptly named considering that they began as a result of Armenia’s government succumbing to demands by the country’s electricity distribution monopoly (Electric Network of Armenia (ENA)) to raise regulated tariffs by 16.7% as of 1 August, 2015.

ENA is owned by Inter RAO UES, a Russian energy giant, giving rise to suggestions that Armenian officials are effectively serving Russian interests. Yet, the hike in electricity prices, which the government had initially resisted, appears to be anchored in more objective circumstances. Since June 2014, Armenia’s currency, Dram, fell from 410 to about 475 to US$, losing 16% of its value and driving up the cost of thermal generation powered by imported gas. Moreover, ENA has been purchasing an ever increasing share of electricity from (more expensive) thermal plants because Armenia’s Metsamor nuclear plant is taking longer than expected to return into service, while hydropower generation declined for hydrological reasons. With regulated tariffs lagging behind electricity generation costs, ENA was pushed into massive debt (to the tune of $225mln), hampering its creditworthiness, and threatening the stability of electricity supply.

The Armenian government was aware of the political sensitivities involved in the decision to hike electricity prices. On the one hand, the 16.7% increase it has finally approved falls short of 40.8% initially demanded by ENA. On the other, the government announced plans to compensate more than 100,000 low-income families for the increase in tariffs. According to PM Abrahamian, monthly benefits for the poor will be raised by 2,000 drams ($4.2), which is more than 1,400 drams in extra monthly expenditures on electricity expected for the poorest households.

And yet, despite these precautions, Armenia’s youth took to the streets of Yerevan, with their protests evolving in violence, scale, and political impetus as a result of a June 22nd attempt by the authorities to break up the demonstrations. Marching under the “No To Plunder” slogan, these youth may have been put on the streets by the rate hike, but what seems to keep them there is Armenia’s greater social, economic and political difficulties.


MEANWHILE, IN UKRAINE… 

While the vast majority of observers are preoccupied with the question of whether #ElectricYerevan will evolve into Armenia’s Euromaidan, another relevant comparison has been lost from sight. In direct analogy to Armenia’s electricity tariff hike, in April 2015, Ukraine's new administration decided to raise the price of gas for domestic consumers more than 5.5 times (sic!). Moreover, domestic gas prices will continue to increase until 2018, bringing them in line with the price of imported gas.

Understandably, such a move could have been extremely unpopular with Ukrainian voters. According to available estimates, energy subsidies in Ukraine have accounted for 7½ percent of GDP in 2012. While relatively well-off households (and corrupt Naftogaz officials) may have been capturing a disproportionate share of the benefits, the populist subsidy policy was intended to please the population at large. And it did. Until very recently, Ukraine has been keeping domestic energy prices at exceptionally low levels. According to Reza Moghadam, Director of the IMF’s European Department, “The gas price for households in Ukraine is $85 for one thousand cubic meter. In Russia – a gas producing and exporting economy – the price is $158 for one thousand cubic meter. The regional differences are even larger with prices in Ukraine being 4 to 9 times lower than in neighboring gas-importing economies.”

In an effort to stave off potential protests and mitigate the impact on the poorest, the increase in tariffs will be accompanied by social assistance measures cushioning the impact on low-income families. According to Ukrainian government’s plan, explains Moghadam, “eligible families will receive a benefit equal to the difference between pre-and post-increase gas and heating bills. In total, 4.5 million families – about 27 percent of the total – will be receiving government support to shield them from tariff increases through existing and new social assistance schemes.”


LET THEM HAVE CHEAP ENERGY. LOTS OF CHEAP ENERGY!

The energy sectors of Ukraine and Armenia are suffering from the same malaise, and the treatments offered by the governments of both countries are quite similar. Yet, what is dramatically different is how people in both countries react to the painful reform measures. While #ElectricYerevan is rattling Armenia, no mass protests have been observed in Ukraine in the wake of a much more significant hike in gas prices.

Price hikes are presented – and grudgingly accepted – as a critical element of reforms in Ukraine’s battered energy sector, essential for the country’s battle against corruption, energy independence (from Russia), and efficiency. For #ElectricYerevan protest movement, the electricity price hike is the perfect opportunity to rally the otherwise weak and fragmented opposition groups against Armenia’s political and economic stalemate, helping electrify crowds and synchronize uncoordinated, spontaneous actions against a not particularly popular regime.

The role of prices in precipitating riots and revolutions is hardly a new theme in politics. The wave of “bread revolutions” that shook the Middle East in 2011-12 was triggered by a hike in the prices of basic staples, such as flour and olive oil, which served as a means of mobilizing the masses against deeply hated and corrupt dictatorships. In “Let Them Eat Bread” Annia Ciezadlo describes how riots erupted in Egypt back in 1977 when an already unpopular government tried to rescind food subsidies – implying massive price increases for staples like bread, rice, and cooking gas. “By the time they were over,” writes Ciezadlo, “hundreds of buildings were burned, 160 people were dead, and Egyptian President Anwar Sadat had learned an essential lesson for the modern Arab dictator: let them eat bread. Lots of cheap bread.” 

President Serzh Sargsyan’s decision on Saturday (June 28) to suspend the planned increase in household electricity rates (until an independent audit of Armenia’s electricity sector is completed) suggests that he has fully internalized Sadat’s lesson from almost 40 years ago. He is effectively telling the protesting crowds: Let them have cheap electricity. Lots of cheap electricity. The problem with Sargsyan’s delaying tactics is that the electricity crisis is not going to go anywhere (and, at least for now, the protesters are also not willing to go home). For a while, Armenia may be able to use its meager budget resources to cover ENA’s debts and otherwise subsidize domestic electricity consumption. But people in the know, including President Sargsyan, understand that energy subsidies cannot be sustained for much longer.


WINDS OF CHANGE ARE BLOWING IN THE FACE

Importantly, Armenia’s crisis might be a harbinger of change throughout the CIS. The strong economic headwinds blowing nowadays in the face of former Soviet (‘newly independent’) states are subjecting their illiberal regimes to one of the most serious ‘stress test’ in recent years. The ruling clans in most of these countries have been able to cling to power by restoring basic law & order conditions and engaging in expensive ‘cheap energy and circus’ policies. With oil prices falling and Russia not being able to provide as much help as previously, these regimes are quickly being pushed out of their comfort zone, resulting in nervousness and aggression directed at civil society activists at home, and real and imagined enemies abroad. 

Ukraine’s rotten political system has survived for more than 20 years by delaying painful reforms and spending billions on energy subsidies. Eventually, however, it has run out of gas. Literally and figuratively. A similar fate is awaiting other ‘cheap energy and circus’ regimes in the region. Lacking in internal legitimacy, they are ill positioned to implement painful reform measures involving cutbacks in energy subsidies. Sooner or later they will run out of oil, gas and luck, ending an era of cheap energy, extravagant architectural designs, lavish sports and music events.

Ironically, one lesson Russia could learn from its loss of Ukraine and the turmoil in Armenia is that propping up friendly dictatorships with cheap energy is a shortsighted policy: it is costly in the near term, and in the long run it does not even guarantee stability or friendship.

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Guest - David Lee on Monday, 29 June 2015 12:32

I think that there is a danger of viewing all political and economic problems in the wider region, let use the Eastern Partnership countries for simplicity, as being a Russian problem. This is a simplification.

A more relevent and common theme is corruption and weak democracy.

The largely leaderless and peaceful demonstration in Yerevan seems rooted in a "dissatisfaction with everything". It feels similar to a palpable sense of frustration in Geogia after 2007 that those in power were unaccountable and taking advatage of "everything" for personal enrichment.

I fear that this may be used as clampdown on NGOs, but it is clear that NGOs are hardly involved at all.

What happens in Armenia resonates in Georgia. In both countries, as we saw in Tbilisi after the floods, a new generation is finding it's voice.

Born after 1990 into independent countries, they are not predisposed to East versus West, EU versus Eurasia and America versus Russia arguments. They appear to be nationalistic, democratic and increasingly activist.

What is perhaps most interesting is that they are connected. Nurtured on the internet, typing at two, hands clasped permanently around a mobile. They do not need external political networks, they are already part of a live network of infomation that speads across the planet 24/7.

I hope that someone is listening to them. It will be hard to turn them off.

I think that there is a danger of viewing all political and economic problems in the wider region, let use the Eastern Partnership countries for simplicity, as being a Russian problem. This is a simplification. A more relevent and common theme is corruption and weak democracy. The largely leaderless and peaceful demonstration in Yerevan seems rooted in a "dissatisfaction with everything". It feels similar to a palpable sense of frustration in Geogia after 2007 that those in power were unaccountable and taking advatage of "everything" for personal enrichment. I fear that this may be used as clampdown on NGOs, but it is clear that NGOs are hardly involved at all. What happens in Armenia resonates in Georgia. In both countries, as we saw in Tbilisi after the floods, a new generation is finding it's voice. Born after 1990 into independent countries, they are not predisposed to East versus West, EU versus Eurasia and America versus Russia arguments. They appear to be nationalistic, democratic and increasingly activist. What is perhaps most interesting is that they are connected. Nurtured on the internet, typing at two, hands clasped permanently around a mobile. They do not need external political networks, they are already part of a live network of infomation that speads across the planet 24/7. I hope that someone is listening to them. It will be hard to turn them off.
Guest - Mikayel Badalyan on Monday, 29 June 2015 14:44

I would have deleted the word "yet" from the title and here is why:

Let's measure the prices in USD!!!

In Ukraine the gas price increased 5.5 times in ukraine hryvnia, while hryvnia itself depreciated against USD more than 4 times!!! May be the price for gas was really too law and the consumers are not price sensitive. In case of not corruptive state in Ukraine, may be, the government will relocate that extra resources in a more efficient way for the society!

In Armenia the electricity price increase took place not only in 2015, but also in 2014 and 2013! Earlier price change was in 2005 only. Hrant Bagratyan, currently parliamentarian and ex-vice president of Armenia, in his speech in parliament, said that the price elasticity for electricity is very high and the price changes in 2013 and 2014 made dramatic decrease of electricity consumption. He also said that electricity price in Armenia in 2014 is 1.75 times more than in Georgia, 2.5 more in Russia(I forgot Ukraine number, it is also cheap).

From economic point of view, it is clear that the real prices in Ukraine are lower than optimal level for the society, while in Armenia the prices are high and get even higher!

Political situation in two countries is also different.
Ukrainians like revolutions: in past 26 years they had 3! De facto, the country performance does not get better in the long run ( in short run everything gets worse). So, can one really call it revolution or we need to choose other word for Ukraine?

Armenians protested against price change and it worked! It was the first case among post-Soviet countries, when people could tell their will to government, when the political mechanisms did not work.

The conclusion is
Not always things can be solved using power for both government and people. First of all people need to have freedom of mind and the power to make changes inside of their minds, rather than obliging own will to others using rude power.
Armenia becomes a hot topic and most of news about Armenia is Armenian. ISET TEAM needs an Armenian insider urgently!

I would have deleted the word "yet" from the title and here is why: Let's measure the prices in USD!!! In Ukraine the gas price increased 5.5 times in ukraine hryvnia, while hryvnia itself depreciated against USD more than 4 times!!! May be the price for gas was really too law and the consumers are not price sensitive. In case of not corruptive state in Ukraine, may be, the government will relocate that extra resources in a more efficient way for the society! In Armenia the electricity price increase took place not only in 2015, but also in 2014 and 2013! Earlier price change was in 2005 only. Hrant Bagratyan, currently parliamentarian and ex-vice president of Armenia, in his speech in parliament, said that the price elasticity for electricity is very high and the price changes in 2013 and 2014 made dramatic decrease of electricity consumption. He also said that electricity price in Armenia in 2014 is 1.75 times more than in Georgia, 2.5 more in Russia(I forgot Ukraine number, it is also cheap). From economic point of view, it is clear that the real prices in Ukraine are lower than optimal level for the society, while in Armenia the prices are high and get even higher! Political situation in two countries is also different. Ukrainians like revolutions: in past 26 years they had 3! De facto, the country performance does not get better in the long run ( in short run everything gets worse). So, can one really call it revolution or we need to choose other word for Ukraine? Armenians protested against price change and it worked! It was the first case among post-Soviet countries, when people could tell their will to government, when the political mechanisms did not work. The conclusion is Not always things can be solved using power for both government and people. First of all people need to have freedom of mind and the power to make changes inside of their minds, rather than obliging own will to others using rude power. Armenia becomes a hot topic and most of news about Armenia is Armenian. ISET TEAM needs an Armenian insider urgently!
Guest - Eric Livny on Tuesday, 30 June 2015 13:41

Thanks, Michael, for your "Armenian insider" viewpoint. Just for me to understand better, you are saying that Armenia's electricity prices are already quite high relative to the region, and there is no economic justification for another hike. Correct? You are further saying that the protests are about nothing else but this -- economically unjustified - tariff hike. The protesting youth pursue a rather narrow economic agenda - to fix the broken "political mechanism" responsible for price regulation (and income redistribution). They are not interested in any kind of political revolution (=use of naked power by one part of society to force its will on everybody else, to rephrase you).

Thanks, Michael, for your "Armenian insider" viewpoint. Just for me to understand better, you are saying that Armenia's electricity prices are already quite high relative to the region, and there is no economic justification for another hike. Correct? You are further saying that the protests are about nothing else but this -- economically unjustified - tariff hike. The protesting youth pursue a rather narrow economic agenda - to fix the broken "political mechanism" responsible for price regulation (and income redistribution). They are not interested in any kind of political revolution (=use of naked power by one part of society to force its will on everybody else, to rephrase you).
Guest - Mikayel Badalyan on Tuesday, 30 June 2015 15:00

Of course, the price increases of 2013, 2014 and 2015 are full of mystery, secrets and corruption, but still, there is irrationality of ENA to increase the price of electricity, as the solution of problems the company faces. It is worst decision for all sides.

I would compare the youth protest, against the government, with the cry of the small baby who wants to eat milk. The babe does not have consciousness ( political will), does not understand who is his mother and how good mother she is, eventually, if the woman who is taking care of it is his mother. The baby only signals "Mom, you are doing something wrong! I am hungry, do something."

Of course, the price increases of 2013, 2014 and 2015 are full of mystery, secrets and corruption, but still, there is irrationality of ENA to increase the price of electricity, as the solution of problems the company faces. It is worst decision for all sides. I would compare the youth protest, against the government, with the cry of the small baby who wants to eat milk. The babe does not have consciousness ( political will), does not understand who is his mother and how good mother she is, eventually, if the woman who is taking care of it is his mother. The baby only signals "Mom, you are doing something wrong! I am hungry, do something."
Guest - Eric Livny on Tuesday, 30 June 2015 15:05

You know, babies typically love chocolate and new iPhones, and hate school, etc. Often they need to be disciplined. Now, some mothers (Type A) command a lot of respect and authority, and have not problem telling their babies that they have to eat less chocolate, wake up for school and do exercises. My wife is that kind of mother :-)

Type B mothers (and fathers), however, command no respect, and their children would not want to listen to them, whether they are right or wrong.

What I tried to argue in the article is that the current Armenian government is of type B. Whether the hike is justified or not, the government finds itself in a very weak position when it comes to demanding discipline, sacrifices and austerity from Armenia's youth. They seem to be fed up with the government's corruption and ineptitude.

Would you agree?

You know, babies typically love chocolate and new iPhones, and hate school, etc. Often they need to be disciplined. Now, some mothers (Type A) command a lot of respect and authority, and have not problem telling their babies that they have to eat less chocolate, wake up for school and do exercises. My wife is that kind of mother :-) Type B mothers (and fathers), however, command no respect, and their children would not want to listen to them, whether they are right or wrong. What I tried to argue in the article is that the current Armenian government is of type B. Whether the hike is justified or not, the government finds itself in a very weak position when it comes to demanding discipline, sacrifices and austerity from Armenia's youth. They seem to be fed up with the government's corruption and ineptitude. Would you agree?
Guest - Mikayel Badalyan on Tuesday, 30 June 2015 15:10

Thank you Eric, now I got exactly the point you mean.

I would not agree with You, as the mentality of each nation is different. In case of Armenia, I would say, having a bad mother is better than not having at all. The child has better to wait to grow up ( both in age and power) and only than to take matters into his own hands. The Ukrainian experience shows that the generation, born in Soviet Union, does not have potential and the will to evolve.
I think, Armenian child is wise beyond his age.

Thank you Eric, now I got exactly the point you mean. I would not agree with You, as the mentality of each nation is different. In case of Armenia, I would say, having a bad mother is better than not having at all. The child has better to wait to grow up ( both in age and power) and only than to take matters into his own hands. The Ukrainian experience shows that the generation, born in Soviet Union, does not have potential and the will to evolve. I think, Armenian child is wise beyond his age.
Guest - Mikayel Badalyan on Tuesday, 30 June 2015 15:09

Of course, the electricity price increases of 2013, 2014 and 2015 are full of secrets and corruption. But still it is irrational decision for ENA to increase the price for solving financial problems. Simple calculations show that this decisions harms consumers, ENA and the state.

I would compare the youth protest, against president, with the cry of baby who wants to eat milk. The baby does not have consciousness ( political will), he does not know who is his mother, if she is good person, eventually, the woman who takes care of baby may not be the mother. The baby just cries and signals " MOM, I am hungry, you are doing something wrong. Do something!"

Of course, the electricity price increases of 2013, 2014 and 2015 are full of secrets and corruption. But still it is irrational decision for ENA to increase the price for solving financial problems. Simple calculations show that this decisions harms consumers, ENA and the state. I would compare the youth protest, against president, with the cry of baby who wants to eat milk. The baby does not have consciousness ( political will), he does not know who is his mother, if she is good person, eventually, the woman who takes care of baby may not be the mother. The baby just cries and signals " MOM, I am hungry, you are doing something wrong. Do something!"
Guest - Kir Ank on Tuesday, 30 June 2015 17:15

I think that while speaking about the prices in general we forget a very importanat point: the salaries in Armenia. Even now the people is surviving miraculously in the situation that no Occidental can even imagine. In many cases the electricity bill will be higher than the income. So many paople are already economising the electricity severly. I have a frend of mine who doesn't hit her appartement in winter! We haven't central hitting system, and the gaz is expensive too... So I think that the indignation is linked to all that. Imagine an income of 100 dollars - and 100 dollar's electricity bill. It/s completely possible in Armenia, if people really use the electricity for its real needs. Not for luxury - just for the needs.

An example. Real example. My parents are living in a 2 rooms flat. They are hitting it with electricity, programmed devices. The temperature in winter is programmed on 20 degree (C). I payed for them (they cannot afford that0 100 -180 dollars every winter month. The question is - what are doind those who don't have that help from abroad? ... Tha answer - they are using too little electricity or even not using it at all. Beleive me, it's a reality.

Another question - how is living the government, the president - especially his brothers? All that also revolts the youth. A mother has to do herself what she is teaching her child, otherwhise she has no chances to be respected at all. And it's the case in Armenia.

I think that while speaking about the prices in general we forget a very importanat point: the salaries in Armenia. Even now the people is surviving miraculously in the situation that no Occidental can even imagine. In many cases the electricity bill will be higher than the income. So many paople are already economising the electricity severly. I have a frend of mine who doesn't hit her appartement in winter! We haven't central hitting system, and the gaz is expensive too... So I think that the indignation is linked to all that. Imagine an income of 100 dollars - and 100 dollar's electricity bill. It/s completely possible in Armenia, if people really use the electricity for its real needs. Not for luxury - just for the needs. An example. Real example. My parents are living in a 2 rooms flat. They are hitting it with electricity, programmed devices. The temperature in winter is programmed on 20 degree (C). I payed for them (they cannot afford that0 100 -180 dollars every winter month. The question is - what are doind those who don't have that help from abroad? ... Tha answer - they are using too little electricity or even not using it at all. Beleive me, it's a reality. Another question - how is living the government, the president - especially his brothers? All that also revolts the youth. A mother has to do herself what she is teaching her child, otherwhise she has no chances to be respected at all. And it's the case in Armenia.
Guest - Eric Livny on Wednesday, 01 July 2015 19:22

Dear Ann, thank you for your comment. I fully appreciate the plight of the Armenian people, especially the poor living on meager salaries, government pensions, or having no income at all. Unfortunately, the situation is not any better in Ukraine or Georgia. Electricity is also quite expensive in Georgia, and many rural households have no monetary income except the pension and welfare payments (less than $100 after the devaluation). They grow some fruit and vegetables in their gardens, but have almost no money. How do most rural Georgian households survive? They live with one bulb and a refrigerator, use wood for heating, and a little bit of gas for cooking. (Water is not metered and quite cheap here). And they drive carts, not cars. One pro-poor policy Georgia implemented is to make electricity tariffs steeply proportionate to the amount consumed. This really helps the poor as most of them consumer very little. Wealthy households would pay more than 100USD/month.

In many parts of Ukraine, especially close to the warfare zone, people have absolutely no jobs. New investment is not arriving, and much of the existing infrastructure is lying in ruins or disrepair. Still, people are willing, grudgingly, to accept the difficulties of the moment because they see them as the necessary price they have to pay for a better future, if not for them then for their children. They are willing to accept higher gas prices, and they are willing to accept no jobs. At least for now.

In Armenia, people apparently see no hope. And that's the whole difference.

Dear Ann, thank you for your comment. I fully appreciate the plight of the Armenian people, especially the poor living on meager salaries, government pensions, or having no income at all. Unfortunately, the situation is not any better in Ukraine or Georgia. Electricity is also quite expensive in Georgia, and many rural households have no monetary income except the pension and welfare payments (less than $100 after the devaluation). They grow some fruit and vegetables in their gardens, but have almost no money. How do most rural Georgian households survive? They live with one bulb and a refrigerator, use wood for heating, and a little bit of gas for cooking. (Water is not metered and quite cheap here). And they drive carts, not cars. One pro-poor policy Georgia implemented is to make electricity tariffs steeply proportionate to the amount consumed. This really helps the poor as most of them consumer very little. Wealthy households would pay more than 100USD/month. In many parts of Ukraine, especially close to the warfare zone, people have absolutely no jobs. New investment is not arriving, and much of the existing infrastructure is lying in ruins or disrepair. Still, people are willing, grudgingly, to accept the difficulties of the moment because they see them as the necessary price they have to pay for a better future, if not for them then for their children. They are willing to accept higher gas prices, and they are willing to accept no jobs. At least for now. In Armenia, people apparently see no hope. And that's the whole difference.
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