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Why Armenia Is Not (Yet) Ukraine?

Why Armenia Is Not (Yet) Ukraine?

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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.
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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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