Inflation, devaluation of ruble, impact of sanctions: Central Bank of Armenia provides comments on likely problems caused by war in Ukraine

YEREVAN, March 2. /ARKA/. The Russian invasion of Ukraine and the sanctions slapped by the United States, the EU and some other counties on the Russian Federation have caused great instability in the financial markets of the region, the press service of the Central Bank of Armenia says in a comment, presenting answers to likely questions regarding the possible impact of this situation on the economy and financial system of Armenia. 

1. How will disconnecting Russia from the SWIFT system affect the banking system of Armenia? 

The SWIFT system is an international standard for the exchange of information on financial transactions. Disabling the SWIFT system does not apply to all Russian banks, targeting only large ones. Armenian commercial banks are free to carry out their transactions with other commercial banks in Russia. Armenian commercial banks can also exchange information on financial transactions in an alternative way, which can also ensure the smooth implementation of financial transactions. At the same time, it should be noted that the Central Bank has no information that sanctions may affect non-commercial money transfer systems. 

2. How will financial transactions between Russian and Armenian business entities carried out? 

The technical aspect of financial transactions is described above. Economic terms of transactions – such the currency, bank accounts, etc. - should be implemented on the basis of additional agreements with individual entrepreneurs, their foreign partners and relevant commercial banks. All commercial banks in Armenia are making efforts to identify and eliminate possible problems. The Central Bank of Armenia considers the above problems to be solvable and assesses them as insignificant risks for financial stability. 

3. How will the sanctions affect the Armenian economy? 

The impact of sanctions on the Armenian economy can be conditionally divided into two parts: the impact on economic transactions and the impact on financial transactions. The impact on financial transactions is described above. In the context of economic transactions, the impact on exports and remittances is presented below. At the same time, these impacts can be not only negative, but also open up some positive opportunities in terms of the inflow of human resources and capital from the region. 

4. How will the devaluation of the ruble affect Armenia's exports? 

The impact of the ruble exchange rate on exports to the Russian Federation in the short term will naturally be somewhat negative: external demand for goods and services produced in Armenia will slightly decrease. The size of the long-term impact depends on many factors: the currency of the transaction, the terms of payment, the flexibility of exporting companies, inflation rates in Russia, etc. One of the natural reactions will be the diversification of export operations by enterprises to reduce their risks.

5. How will the devaluation of the ruble affect remittances coming to Armenia? 

The devaluation of the ruble will not have a significant impact on money transfers in rubles. Instead, it will affect the dollar value of these transfers. Naturally, remittances in US dollars will decrease somewhat. Historically, the Armenian economy has experienced similar shocks several times. Unlike in the past, the Armenian economy is now much less dependent on the volume of remittances, and Russia's share in these money transfers is much lower. We believe that some drop in remittances will have a negative impact on Armenia's domestic demand; however, we assess this impact as insignificant. 

6. How will all these events affect inflation in Armenia? 

It is currently difficult to assess the impact of these events on inflation. There are many factors and their volatility is high. In order to assess the overall impact, it is necessary to sum up the impact of all these factors, and this will be possible only in the face of some drop in volatility. In conditions of high volatility, the Central Bank is guided by scenario programming, when various possible scenarios and the reaction of the Central Bank under different scenarios are developed. In any case, the Central Bank is committed to its mandate to ensure price stability in any development of the situation. 

7. How will these developments affect the physical movement of goods? 

The physical movement of goods is currently difficult in the Black Sea area, especially in trading with Ukraine. The Central Bank does not have additional information about the actual directions of the physical movement of goods in order to give a more professional assessment of the situation. 

8. How will these events affect the financial stability of Armenia? 

All the banks in the territory of Armenia operate within the legal framework of the Republic of Armenia; they are regulated and controlled by the Central Bank. All commercial banks operating in the territory of Armenia are liquid, highly capitalized and carry out their activities as usual. The Central Bank has already issued a specific statement on individual cases. The Central Bank is always ready to provide the necessary liquidity to the financial system for the proper fulfillment of its obligations. -0-