Worries Loom for Sargsyan at Home

Serzh Sargsyan, the handpicked successor of outgoing Armenian President Robert Kocharyan, is to be sworn in Wednesday as the next president of the South Caucasus republic.

Like his predecessor, Sargsyan is likely to anchor Armenia to Russia while cooperating with alternative players in the region, such as the EU and NATO, and promoting a peaceful resolution of the Nagorno-Karabakh conflict, his supporters and experts said.

But while Sargsyan plans no major changes in Armenia's foreign policy, he must act immediately to address several looming challenges on the domestic front that threaten to seriously undermine his presidency, according to experts.

"The biggest challenge is establishing society's trust in the new government by initiating real and immediate reforms," said Tevan Poghosyan, head of the International Center for Human Development, a leading Armenian NGO.

Sargsyan must also stabilize the republic of 3 million after the turmoil following his February election, as well as tackle longer-term issues, such as public discontent over the predominance of politically connected oligarchs in the economy and the often arbitrary rule of regional leaders, experts and insiders said.

"Economic development will crumble if the economy stays in the hands of few oligarchs," said Arthur Martirosyan, senior program manager at the Mercy Corps' renowned Conflict Management Group. "Armenia's very existence will depend on how Sargsyan tackles this issue."

Public anger over poor governance and a lack of economic opportunities boiled over after Sargsyan's first-round victory in the Feb. 19 presidential election, with thousands of protesters taking to the streets. Official results gave Sargsyan nearly 53 percent of the vote, while runner-up Levon Ter-Petrosyan -- Armenia's first president -- captured only 21 percent. OSCE observers gave the election an overall positive assessment.

Numerous protesters came out to support Ter-Petrosyan's claim that the election was rigged. But many joined the protests to vent their frustration with poor economic prospects and abuse of power by regional authorities, one local businessman said.

"I spoke to quite a few, and almost everyone, especially the young guys, said they came out not because they didn't like how the elections went, but because they saw no opportunities for themselves in this economy," the businessman said on condition of anonymity, citing concerns that commenting on politics could affect his business. "Others said they were unhappy with local administration bosses, who acted as if they were gods and tsars in their districts and whose security details roamed the streets, beating whomever they didn't like."

A majority of the protesters, however, were led by supporters of Ter-Petrosyan, whose bid was partially financed by business moguls who sensed that they might lose the advantages they gained as part of a tacit agreement between Ter-Petrosyan and Kocharyan during the transfer of power in 1998, the businessman and Martirosyan said.

"The tycoons saw a threat to their positions on the Armenian market with the redistribution of political power and subsequent introduction of new players, possibly -- but not necessarily -- from Sargsyan's entourage," Martirosyan said.

Levon Zurabyan, a campaign official for Ter-Petrosyan, dismissed the claims as "delirium."

The standoff between Ter-Petrosyan's supporters and authorities culminated in violence in Yerevan on March 1-2 that left several protesters and a senior police officer dead. Ter-Petrosyan and his key supporters were placed under arrest while Kocharyan -- under whom Sargsyan served as prime minister -- introduced a state of emergency, banning all rallies for several weeks.

In an interview, Zurabyan said the "outrageous falsification of the vote" and the violent crackdown on protesters had brought into Ter-Petrosyan's camp many who did not even vote for the former president.

The opposition is planning protests during Wednesday's inauguration, and the "popular struggle against banditocracy" will continue, Zurabyan said. "[Sargsyan's] biggest challenge will be his own people who do not perceive him as a legitimate leader," Zurabyan said.

Planned Reforms

Sargsyan is planning major reshuffles in regional administrations to get rid of controversial officials, said the businessman interviewed for this report.

He is also planning measures to end the predominance of oligarchs in the economy -- including many who rose to commanding heights thanks to Ter-Petrosyan -- and facilitate fair economic competition, said the businessman, who has close connections to the ruling elite.

Asked if Sargsyan plans to break the hold local administration bosses have on certain parts of the economy, a key member of the president-elect's Republican Party of Armenia answered broadly.

"I am confident that big reforms will take place in all spheres, related not only to economic, but also to political domains," senior party official Artak Zakaryan said. "It will have to be a persistent, goal-oriented policy, and Mr. Sargsyan will be able to achieve this."

Sargsyan has no choice but to break up "the patron-client paradigm" that Ter-Petrosyan established and Kocharyan failed to dismantle, said Martirosyan of the Mercy Corps' Conflict Management Group.

Liberalization of the economy, with a focus on developing the service sector and small and medium-sized businesses, is particularly vital for land-locked Armenia, given embargoes maintained by two of its neighbors and the scarcity of key natural resources, including fossil fuels, in the republic, experts said.

Small and medium businesses accounted for 40 percent of the country's GDP as of 2006, according to Karen Chshmarityan, the republic's minister of trade and economic development at the time. Armenia, which has a GDP of less than $10 billion, also fares well in the Index of Economic Freedom, compiled annually by the Heritage Foundation think tank. The 2008 index put Armenia at No. 28 out of the 157 countries surveyed -- the top ranking among CIS countries, including neighboring Georgia and Azerbaijan.

But Armenia also suffers from "unnatural monopolies" in some sectors, including certain food imports, the businessman with connections to top Armenian officials said.

Apart from dismantling the economy's oligarchic structure, fair domestic competition must be established, and the political landscape must be restructured, Martirosyan and other experts said.

"Politically, Sargsyan needs to allow the emergence of new political parties representing a loyal opposition, enforce equality before the law, and nurture confidence in the state and government by implementing reforms that can produce immediate gains," Martirosyan said.

Sargsyan's party received 32.82 percent of the vote in the May 2007 parliamentary elections, capturing 64 out of 131 seats. In March, the party entered into an alliance with the pro-government Prosperous Armenia Party and two other parties that criticized Sargsyan's government during his presidential campaign: the influential Armenian Revolutionary Federation and the Country of Law party. The alliance formed a coalition government in an attempt to stabilize the political situation following the postelection turmoil.

The coalition was established to "form an effective, functioning authority, depending on democratic reforms and perfecting mechanisms to improve human rights," Sargsyan said in an interview published Monday in the Russian daily Noviye Izvestia.

Foreign Policy Future

While expected to reform domestic policies, Sargsyan will likely make few changes in Armenia's foreign policy, relying on Russia as a strategic partner while pushing for a peaceful resolution of the Nagorno-Karabakh conflict, insiders and experts said. Sargsyan's foreign policy foresees cooperation with other important internal and external players in the South Caucasus, including the United States, the EU and NATO, they said.

"The character and potential of relations with Russia ... are not limited to the region only," said Zakaryan of the Republican Party of Armenia. "They have a strategic character because of Russia's role in ensuring Armenia's security, traditional friendly relations between Armenia and Russia, large-scale economic cooperation, Russia's role in solving the Karabakh conflict and the presence of a large Armenian diaspora in Russia."

In the economic sphere, Russian state-controlled companies have snapped up several key assets as either owners or operators in Armenia, including railways, power plants and metals companies. Russian state gas giant Gazprom is co-owner of Armenia's national gas distributor and even acquired control of the gas pipeline from Iran to Armenia, giving it full control of gas supplies into the republic.

Russian direct investment in Armenia totaled $293 million last year, making Russia the single largest source of foreign investment, according to the Armenian government. Trade between the two countries totaled $800 million last year, according to the Kremlin.

Armenia has actively participated in most Russian-led integration projects among former Soviet republics, including not only the CIS, but also the Collective Security Treaty Organization, which Moscow hopes will evolve into a full-fledged military bloc.

Russian border guards patrol Armenia's border with Turkey and man the checkpoint at Armenia's main airport, while Armenia hosts a large Russian military base. Russia is also one of the OSCE-empowered mediators in negotiations between Armenia and Azerbaijan over the status of Nagorno-Karabakh.

Any attempt to diversify away from security arrangements with Russia "would be detrimental to Armenian national interests," Martirosyan said.

"Armenia needs alternatives, but only for a rainy day, i.e. for the unlikely scenario of Russia reneging on its security commitments or pulling out of the Caucasus entirely," he said. "But the probability of that scenario is currently close to zero."

Indeed, landlocked Armenia has few options but to rely on Russia, despite the fact the two countries share no border.

Armenia has fought a war with neighboring Azerbaijan and has no diplomatic relations with another neighbor, Turkey. Both Azerbaijan and Turkey closed off their borders with Armenia over the conflict in Nagorno-Karabakh, where an ethnic Armenian majority first voted to secede from Azerbaijan and then fought a war, together with Armenian forces, to form a self-styled Nagorno-Karabakh republic.

Relations with Turkey are also strained because Ankara refuses to recognize the World War I-era massive and organized killings of Armenians by Ottoman Turks as genocide.

Sargsyan will likely continue negotiations over Nagorno-Karabakh with Azeri president Ilham Aliyev but will not agree to any deals that would hand control of the self-proclaimed republic, which has enjoyed de facto independence for more than a decade, to Azerbaijan, experts said.

Short of international recognition, Nagorno-Karabakh "enjoys all the symbolic and substantive attributes of a nation-state," and Sargsyan will accept nothing less than that status, Martirosyan said.

"If and when Azerbaijan is ready to accept that reality, Nagorno-Karabakh and Armenia should be ready to satisfy other Azeri interests in exchange for a new security system and other necessary arrangements," Martirosyan said.

Azerbaijan has repeatedly threatened to use force to retake both Nagorno-Karabakh and surrounding districts controlled by Armenian forces. Both Kocharyan and Sargsyan are natives of Nagorno-Karabakh.

Meanwhile, Armenia has enjoyed mutually beneficial ties with its other two neighbors, Georgia and Iran. Cooperation with Iran has been facilitated by Tehran's perception of Armenia as a natural ally in countering Turkey's influence in the region.

Sargsyan could also seek further cooperation with the EU, NATO and the United States, which is home to the second-largest Armenian diaspora -- after Russia.

Armenia is not seeking membership in NATO or the EU, but it does participate in NATO's Partnership for Peace Program and the EU's New Neighborhood programs. Armenia has also contributed troops to the U.S.-led coalition in Iraq.

Like his predecessor, Sargsyan should avoid keeping all his eggs in one Russian basket, experts said.

"The Armenia-Russia security alliance has proved its viability, and there is no reason why this cooperation should be changed," said Poghosyan of the International Center for Human Development. "This doesn't mean, however, that Armenia should refrain from cooperation with other countries and organizations for strengthening its security."