Foreign Exchange Regulation in Armenia: Current Status and the Need for Revision in the Context of Eurasian Integration Initiatives

Abstract

With the acceleration of economic globalization more and more countries begin
to look for effective ways of deepening of integration processes with the regional neighbors. At the same time, each country, depending on the specific structural features of the domestic economy, in addition to the expected positive effects of trade and economic relations and increase of the level of welfare, has to deal also with the impact of certain negative effects, which in some cases are able to nullify all the favorable expectations. Recent developments in the integration processes in the Eurasian space point to the inevitability of sophistication of integration levels between countries. Despite the fact that it is in the short term the currency or financial integration, however, clear that this possibility is not far off. And, given the seriousness of such a step, the preparation of the financial integration should start long before the actual financial integration. At the same time, it should be said that one of the most instructive examples of financial and monetary integration is an example of the Eurozone. However, as has shown experience, many aspects of integration were poorly thought out and resulted in negative consequences for the individual member countries. One of the key mistakes was the lack of effective harmonization of markets, regulatory institutions, financial intermediation and fiscal policy. At the same time, taking into account the impact of the Russian economy on the economies of EAEC, should be taken to the issue of harmonization of monetary policies very carefully in the generated integration association. The events of the past year revealed the close dependence of economies of Eurasia as well and other post-Soviet countries, on the volatility, in particular, on the Russian currency market. The choice of currency regulation strategy by the Central bank always was and is one of the most complex challenges for “the monetary authorities” in emerging markets. On the one hand, to achieve effective interaction of market mechanisms in the economy must be accompanied by the presence of a floating exchange rate of the national currency. On the other hand, emerging markets are always characterized by significant risks associated with inflationary pressures; undeveloped financial system that denies, in fact, “the monetary authorities’ ability to apply more market-based mechanisms of undoubtedly affects the very high volatility of the exchange rate, which is also a negative impact on the real sector, etc. All these things together force the central banks of developing countries to resort to non-market mechanisms of regulation of the exchange rate. Armenia in this sense is no exception. Events of the last two years have shown that the policy of soft regulation of the exchange rate, combined with monetary inflation containment mechanisms, is used as a shortterm anti-crisis mechanism for balancing state budgets and stimulate economic growth in the majority of the EAEC countries. At the same time, all the Union’s members are implementing uncoordinated monetary and foreign exchange policy. The dissonance in the policy of currencies exchange rate regulation was most shown between the Russian Federation and Armenia. It is only enough to compare levels of devaluation of national currencies in relation to the US dollar.

So, if in the period from 1 January 1 2014 to 1 January 2016 the Russian ruble depreciated 123.3% against the US dollar (the Central Bank of the Russian exchange rate as follows: As of 01.01.2016 - 72.9299 rubles for 1 US dollar, and as of 01.01.2014 - 32.6587 rubles per 1 US dollar), only 19.3% against the Armenian dram in the same period of time (the Central Bank of the Republic of Armenia exchange rate as follows: as of 01.01.2016 - 483,75 AMD per 1 US dollar, as of 01.01.2014 - 405,64 AMD per 1 US dollar)2. This discrepancy is also observed in the level of inflation (if the CPI in 2015 relative to 2014 in Russia amounted to 12.9%, in the Republic of Armenia, respectively- 4.1%3). In other words, the monetary authorities in the Russian Federation and the Republic of Armenia for the past two years used the opposite approach to “protect” their markets and stimulate economic growth, including in the field of expansion of exports and import substitution. In the context of the above, considered topic is relevant and requires more detailed study.