Wednesday, July 23, 2008

Crazy numbers.

Up until 1993 Armenia was using the Russian and Soviet Rubles. At the time, the conversion rate between these two Rubles was 1:1. It was a little strange at the time that the Russians were using both these banknotes but to an experienced financier it was clear that the Soviet currency would not survive for too long.

At the same time, there were debates in the parliament about bringing in more Soviet money as the supply of this currency increased when the Russians started taking it off of the market. It was called 'էմիսիա' and is literally translated as 'emission'. In practice, though, it was flooding of the marketplace with money without actually increasing economic output. For any country, and at the time Armenia was an independent country, that would mean disaster and inflation. But since the Soviet currency was used by Russia as well, and the Armenian economy was tiny, the danger of inflation was not that great. Through arbitrage the prices could be kept under control but that would increase the wealth of the people.

But this flooding could only be a short term policy - the Central Bank should have had a contingency plan to put out the fire if things went wrong. It was clear that this could not last long...

Well, the Armenian Central Bank did not have a contingency plan. Maybe there were not enough resources to come up with the plan. When it hit the fan, Armenia was unprepared. You can see the time-line of how things went wrong here. Hyperinflation ensued where the currency in use lost its meaning.

During the last couple of years Armenia and Zimbabwe have been brothers in arms. The political situation is remarkably the same (dictators, fraudulent elections, regimes killing their citizens, etc.) and both the countries top the list of the most unhappy people in the world. The only difference is that Zimbabwe is going through a hyper-inflationary period and Armenia is not. The picture on the left depicts a 100 billion dollar banknote that Zimbabwe plans to implement.


me said...

In that link to the CBA website there isn't much about how hyperinflation was contained: between '94 and '95 inflation was brought down from 5000% to around 175% (IMF #s), and by 1998-1999, it was down to 3%.

It's actually quite the story, one of few true successes in the region at the time, and it's unfortunate how this gets ignored because it doesn't quite fit the "cold, dark years" rhetoric.

nazarian said...

Yes, when they introduced Dram, its value dropped sharply. I believe the initial rate was 8 drams per US Dollar. Within a week or so it was 100+.

me said...

The dram did devalue like crazy immediately after it was introduced; I remember the price of everything just skyrocketing from week to week.

And the salaries stayed flat and were so meager that in some cases (like my father) the cost of gas that would be needed to drive to get one's paycheck was more than the paycheck itself. But it stabilized in a relatively short amount of time, which I think is nothing short of a miracle.