How2B · Let’s Talk Numbers #3 · 24 minutes

🔘 What factors does the value of the Armenian dram depend on?
🔘 What phases has the dram-dollar exchange rate had in recent decades?
🔘 What lessons can be drawn from past experience?
🔘 How will the dollar exchange rate change in the near future?

On How2B we “talk in numbers” with economist Aghasi Tavadyan.

The dram has been unusually strong for a while, and it is also volatile over the longer term. That volatility has roots in how the dram trades against the dollar. The dollar has been a reference point since Armenia moved to a floating exchange rate.

Armenia’s exchange rate has been officially floating since 2012. Floating since 2012 makes it different from neighbors like Azerbaijan, whose manat has been pegged to the dollar. The dollar is not the only reference, though: under the float the dram has moved against the euro too.

The first big shock came in late 2014. The Russian ruble collapsed, oil prices fell sharply, and Russia came under new sanctions. New sanctions hit a major source of income for Armenia, namely remittances and trade with Russia, so the dram weakened quickly, and a short burst of speculation followed. The euro moved too, but more gradually than the dram did, and the dram’s sudden jump is what stands out.

After the 2020 war, the dram weakened again, and the central bank had to act in the market to keep it from falling further. Many households and businesses had held dollars for years, and when confidence wobbled, they sold them. In 2022, much of the money arriving from Russia came as large capital inflows. Capital inflows of that size made the dram stronger for a time, and banks profited from the currency operations that came with them.

When dollars are plentiful in the market, the dollar’s price falls and the dram strengthens. The dram strengthens in that way, which is the basic mechanism behind its current strength. The same logic works in reverse: when dollars become scarce, the dram weakens.

The loss of Artsakh in 2023 produced another round of this pattern. Confidence dropped, people rushed to exchange offices, and the central bank intervened, sometimes at a cost to the operators who had bet on the dollar rising. The rate then settled at a level that was held in place mainly by those interventions. Interventions of that kind hold only while the market believes the bank will keep acting.

He sees a risk in the current calm. The central bank’s main job is to keep inflation under control, and a weaker dram would raise the cost of imported fuel. Imported fuel is the clearest example, and a strong dram does the opposite. In the long term, he expects the dram to move with the dollar and the euro, rather than to hold any fixed level.

His short-term view is cautious. He says plainly that the rate could stay near its current level for a while, and he does not expect a sharp move in the coming months unless there is a new shock. A new shock, in his view, comes as much from confidence as from trade and capital flows.

Topic Analysis: The Dram’s Drama: Why the Dram Depreciates and Appreciates