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Bogged down in a financial crisis, the Kremlin offers money to its former satellites

Kyrgyzstan is expected to receive $2.15 billion, Belarus $2 billion, Armenia $500 million

Ukraine is in line

by Tatul Hakobyan

Published: Friday February 13, 2009

Dmitry Medvedev. kremlin.ru.

Yerevan - Even though the international economic crisis has hit Russia hard, and is expected to have a deeper impact on the world's largest country in the coming months, the Kremlin is being generous in granting loans to several of its neighbors.

Armenia expects to receive $500 million from its strategic ally. Russia has never been so generous in the past. A few years ago, during Robert Kocharian's presidency, for only $100 million the Kremlin acquired several of Armenia's enterprises. Later on, in exchange for cheap Russian gas, Mr. Kocharian agreed to hand over energy structures of strategic importance to the Russians.

Russia will provide Kyrgyzstan with a $2.15 billion loan and Belarus will get $2 billion. According to the BBC, the Ukrainian government is negotiating with Russia and expects a $5 billion loan to cover its budget deficit. Under the present difficult economic conditions for Russia, it is not only the magnitude and terms of the loans to Ukraine, Kyrgyzstan, Belarus, and Armenia that is remarkable, but also the political price Moscow appears to be extracting from the four former Soviet Republics, two of which, Ukraine and Kyrgyzstan, seemed to have shifted orientation toward the West after their "colored revolutions."

Moderate but unspecified terms

On Monday, February 2, after a long silence, Armenia officially confirmed that it is expecting a $500 million loan. The announcement disseminated by the Finance Ministry states: "The previously signed financial agreement does not assume the fulfillment of any other non­financial obligation on the part of Armenia and the loan will be given under relatively moderate terms compared to the terms for loans in the present international financial market."

There are, however, no details on the "moderate terms." Irina Ayvazian, the press secretary of the Finance Ministry told the Armenian Reporter that the agreement will be signed "in two to three weeks and the details of the loan will become clear later."

The announcement states, "As a result of the negotiations between Armenia and Russia, the agreement on ‘the granting of a state loan to Armenia between the governments of Armenia and Russia' was signed between the two countries. According to this, Russia will grant 500 million US dollars to Armenia in order to help eliminate the negative results of the international financial crisis on Armenia's economy. The loan will be granted for 15 years, 4 years of which is privileged."

No answer from China

Prime Minister Tigran Sarkisian has declared several times that Armenia has withstood the first wave of the international financial crisis. The government nonetheless has looked in three directions for loans to minimize the effects of the crisis. One is China, which has not yet responded to Armenia's request. The others, Russia and the World Bank, have promised to grant loans.

The World Bank will grant Armenia $525 million over the next four years, until 2012, said Shigeo Katsu, vice president of the bank, in Yerevan in late January. "In this time of unprecedented global crisis, which has already affected Armenia, we are looking for assistance solutions so that Armenia will overcome the crisis and its consequences," Mr. Katsu said. He noted that this amount is 2.5 times more than the previous financial support granted by the World Bank in 2004-2008, which amounted to about $220 million.

Russia's vital interests

At a recent press conference, Nicolay Pavlov, the Russian ambassador to Armenia, announced, "Russia never abandons its closest friends in hard times. If it has the financial ability, then, of course, it will support Armenia."

The international media takes the point of view that Russia, which is in itself in crisis, is using money to restore (in the case of Kyrgyzstan and Ukraine) or strengthen (in the case of Belarus and Armenia) its political presence in the former Soviet countries, which the Kremlin views as its vital zone of interest.

A February 5 article in The Times of London by Tony Halpin was titled, "Russia builds its new empire with finance, not fear: From Belarus to the Caucasus and Central Asia, Russian power and influence is at its greatest height since the Soviet collapse." In the section on Armenian-Russian relations, Mr. Halpin writes, "Armenia is little more than a vassal state, having sold most of its economic infrastructure to Russian companies. The ‘frozen conflict' between Armenia and neighbouring Azerbaijan over the disputed territory of Nagorno­-­Karabakh gives the Kremlin further leverage.

"Moscow denied Azeri claims last month that it had funnelled arms worth $800 million to Armenia, which is host to a Russian military base. But both sides understand that Russia could tip the balance of power in either direction if it chooses. "

In its February 9 issue, the German Der Standard wrote, "By pledging billions of sums Russia is bringing its neighbors, the former Soviet Republics, under its influence."

In reality, Russia itself is in need of financial aid.

Moscow's tumbling revenues

Finance Minister Alexei Kudrin said Russian budget revenue this year may tumble by $125 billion, or 40 percent, as the slump in oil prices reduces tax revenue for the world's largest energy exporter, Bloomberg reported. Quoting Mr. Kudrin the BBC adds that in 2009 instead of the expected $300 billion, the budget will receive $180 billion.

"These are the real challenges we face for our economy and the budget system," Mr. Kudrin said.