WHAT TO EXPECT FROM THE ARMENIAN DRAM IN 2015
Lragir.am
Business – 29 December 2014, 12:59
Haypost and Russian Post signed an agreement to implement “Forsage”
money transfer system between Armenia and Russia
Chart A
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It is important to understand where the Armenian economy is headed
and what is going to be the effect on the Armenian economy due to the
sanctions imposed on Russia. Intelligently predicting the economy
will help to get better prepared for what is coming and hopefully
find ways to minimize the impact.
To evaluate possible movements of the Armenian Dram, unfortunately
we need to look closely at the Russian Ruble since historically the
Dram has closely followed the Ruble.
To understand correctly where the Russian Ruble is headed, we have
a perfect historical model that is not usually available to us in a
lot of cases. The Russian economy in many ways is very similar to the
Iranian economy in that the Iranian economy is heavily dependent on
oil. To make it a more usable model, interestingly enough it has gone
through the similar US and European Union sanctions as the Russian
economy is going through now.
Chart A
As the 5 year IRR (Iranian Rial) devaluation Chart (Chart A)
is showing, the IRR devaluated at around 150% during the peak of
sanctions against the Dollar; however at the same time lower oil
prices in 2014 are not showing Russian Ruble like devaluation due to
lower oil prices, which somewhat proves that primarily the sanctions
(and not oil prices) are the cause of the current Ruble devaluation.
Furthermore below is the chart comparing IRR to the Ruble.
Chart B
It is clear that the IRR regained its pre-sanction levels compared
to the Ruble, and is now trading even lower than the pre-sanctions era.
Basically Chart B is showing that after sanctions against Russia,
Iranian IRR and RUB reached pre-sanction level, oil prices being
the same for both countries, the chart is showing that the sanctions
(and not the oil prices) are the main cause of Ruble devaluation.
Chart C
To estimate the Russian Ruble devaluation, we can use Iranian analogy
to estimate where the Russian Ruble will end up. The Iranian Rial
jumped up to 150% in the midst of US and EU sanctions against Iran,
where the Russian Ruble’s initial jump was 185%. Even if after a few
days by drastically increasing interest rates to 17% in Russia, the
Ruble settled at 104% devaluation, which seems to be not the natural
devaluation equilibrium of the Ruble. It will be very interesting to
follow the next few weeks of developments of the exchange rate of
the Ruble against the dollar; if devaluation continues despite the
drastic measures, the Ruble will end up at around 150% devaluation
or about 70 Rubles per dollar, or even higher. It is costing too much
for Russia to keep the Ruble in the current levels; it would have been
wiser for Russia to let the dollar reach its natural 150% devaluated
level. From there on the devaluation would have continued at about 20%
for the next year reaching to around 85 Rubles per dollar. However
with decision to raise the interest rates and slow down the economy,
hoping that the oil prices will bounce back in the next 3 to 6 months,
Russia is taking a huge gamble in putting its economy in an extremely
and potentially unrecoverable state. The outlook of higher oil prices
is at best murky. The survey of 30 economists and analysts projected
Brent to average $74.00 a barrel next year and $80.30 in 2016. The
forecast for 2015 is $8.50 below the average projection in the previous
Reuters poll. The November poll number was down $11.20 from October,
marking the biggest downgrade in average forecasts since the 2008
economic downturn. With these numbers, Russia will most probably
default on its loans and the downgrade of Russian credit rating seems
to be highly possible.
Chart D
If Russia did not take drastic measures of spending reserves and
increasing the interest rate, we would have seen a devaluation curve
as shown in Chart D which is very similar to the IRR devaluation of
Chart A, ranging around 85 Rubles per Dollar exchange rate. Even with
the drastic measures, Russia is only postponing the devaluation of
the dollar, and we will most probably see the RUB following one of
the curves (A, B, C) in Chart D in the next 3 to 6 months to reach
its natural levels.
At the same time, with simple Chart analysis, it is noticeable that
stress levels are much higher on the Ruble than IRR. As is evident from
the yellow lines at the top of Chart E and blue lines on the bottom,
both the IRR and Ruble had similar devaluation correlations before
the sanctions kicked in against both countries. However, as it is
evident in the case of IRR at the top of Chart E, if the IRR moved
vertically to its devaluation level, the Ruble is fighting back with
steep upwards curve (shown in red lines in Chart E). Even with chart
analysis, it seems that the Ruble situation is much more critical and
if the Ruble will not be able to break out from this steep upward
movement within the next few months, we might see an unpredictably
high devaluation of the Ruble.
Chart E
If pre-sanction periods for both the RUB and IRR were devaluating at
a similar rate and the sanctions caused a somewhat similar jump in
devaluation with the only difference being that Iran did not fight
the devaluation while Russia is unwisely fighting by depleting its
economy from reserves and stagnating the economy. It is also safe
to assume that after the initial jump corrects itself at the 150%
level, the further devaluation of the Ruble will continue at the
same post-sanction levels of about 20% reaching around 170-180%
devaluation compared to pre-sanction periods.
Historically, the Armenian Dram has closely followed the Russian Ruble,
as seen on Chart F. At the current state, the Dram is 30% higher
compared to the Ruble, which is temporary, since Armenia has also
joined the EEU (Eurasian Economic Union) and the close relationship
between Ruble and Dram is going to be more correlated than ever.
Chart F
Taking that into consideration with the current Ruble levels, the
Armenian Dram should be at around 580 Drams per dollar, however the
Armenian economy is not as closely integrated with other countries,
and temporarily the Armenian government is able to keep the Dram from
devaluation. However it will take a very short time, in the next 3 to
4 weeks, where we will see the Dram reaching the 580 per dollar level.
Furthermore, closely following the Russian Ruble, in the next 3 to
6 months, the Russian Ruble reaching 85+/- 5 level, the Armenian
dram will reach 900+/- 50 level. This analysis assumes somewhat
flat or slightly improved oil prices in the market, in the case that
oil prices go slightly downwards or even stay at the current levels
for more than 12 months, we might see the Ruble reaching 120 per US
Dollar levels, in which case Dram levels of 1200 per Dollar is not
a farfetched prediction, if Armenia is not able to break away from
the EEU and continue to suffer from the indirect sanctions.
Aram Ter-Martirosyan
Geopolitical Club, Armenian Desk