CHAPTER 1

 
This Country Commercial Guide (CCG) presents a comprehensive look at Armenia’s commercial environment, using economic, political, and market analysis. The CCGs were established by recommendation of the Trade Promotion Coordinating Committee (TPCC), a multi-agency task force, to consolidate various reporting documents prepared for the U.S. business community. Country Commercial Guides are prepared annually at U.S. Embassies through the combined efforts of several U.S. government agencies.

Modern Armenia, a small, strategically important country located at the crossroads of Europe and Asia, is in the midst of transition from a Soviet-style planned economy to a democratic society with a market economy. A legal and regulatory framework for private sector development is steadily being put into place. Political reforms are under way, and an increasing number of private businesses have already changed the economic landscape.

The government privatization plan envisages all small enterprises and many medium to large enterprises will be privatized by the end of 1997. Armenia’s application to join the World Trade Organization (WTO) is in the final stages. It hopes to become a WTO member in 1998.

Economic development has been significantly impeded by the continuing embargo of Armenia's transportation routes by two of its four neighbors - Turkey and Azerbaijan. The potential for a renewed outbreak in the Nagorno Karabakh conflict also hinders economic growth. During the present transition period, Armenia remains highly dependent on humanitarian and technical assistance provided by the United States, the European Union and international organizations.

At the same time, the Armenia of today is politically stable, firmly market oriented, with some of the most liberal trade legislation in the NIS. Armenia adopted the first private property law in the NIS in February 1996, and there is significant progress underway in such areas as land registration, energy and banking reform. Armenia’s research and manufacturing industries, superior agricultural products, a large pool of underemployed, but highly qualified specialists, an inexpensive labor force, entrepreneurial spirit and close ties with the United States through the American-Armenian Diaspora combine to offer attractive prospects for U.S. businesses. There are emerging investment and partnership opportunities, particularly in power generation, aviation, gold mining, construction, electronics, apparel, tourism, food-processing, and industrial property acquisition.

The CCG for Armenia was written by FCS Commercial Specialist, Andranik Hovhannisyan, Commercial Section, American Embassy Yerevan, Department of State, Washington DC 20521-7020; tel:(374-2)151-551, 524-661, 521-611; fax: (374-2)151-550. Sources used in writing the CCG included: Ministry of Economy of Armenia, Armenian State Statistics Committee, Chamber of Commerce and Industry of Armenia, Foreign Investment Guide for Armenia prepared by the Ministry of Economy, Central Bank of Armenia, IMF and World Bank publications, and political and economic divisions of the American Embassy Yerevan.

Country Commercial Guides are available for U.S. exporters from the National Trade Data Bank’s CD-ROM or via the INTERNET. Please Contact STAT-USA at 1-800-STAT-USA for more information. Country Commercial Guides can be accessed via the World Wide Web at http://www.stat-usa.gov. and http://www.state.gov. They can also be ordered in hard copy or on diskette from the National Technical Information Service (NTIS) at 1-800-553-NTIS.

CHAPTER 2

2.1. MAJOR TRENDS AND OUTLOOK

Under the old Soviet central planning system, Armenia had developed a sophisticated industrial sector, supplying to the USSR and foreign markets machine building equipment, defense and space electronics and optics, chemicals, textiles, and other manufactured goods in exchange for raw materials and energy resources. Armenia today remains a large food importer. Its mineral deposits - copper, coal, molybdenum, and gold - appear so far to be relatively small.

The economic decline, which started with the 1988 earthquake and the disintegration of the USSR, was particularly severe in 1991-94 due to the ongoing conflict over the Armenian enclave of Nagorno-Karabakh in Azerbaijan. Azerbaijan and Turkey shut down pipeline and railroad traffic to Armenia in response to its support of the Karabakh Armenians. Georgia provided Armenia with its only means to receive deliveries of natural gas. Most industrial enterprises remain either shut down or operating at drastically reduced levels. The conflict over Nagorno-Karabakh has forced the government to militarize a number of its operating machinery manufacturers, thus putting additional non-productive burden on the weak economy. With IMF help, the Armenian economy stabilized in 1993-1995. Inflation was brought under control and negative growth bottomed out. It has remained stable since then.

The current Armenian government, since its formation in 1991, has demonstrated a firm commitment to changing Armenia from a centralized state with a planned economy into a democratic society with a free market economic system. The government is attempting through taxation and other means to improve export performance to reduce the large trade deficit. By the end of 1995, Armenia had reopened its nuclear power plant at Medzamor, which stabilized electricity supply. The Armenian and Iranian electricity grids were connected in May, 1997. The country has begun to modernize its entire telecommunications system. Modern switching equipment is being installed in Yerevan. With USAID and World Bank help, considerable resources and training are devoted to developing modern public and private banking and energy sectors. Parliament has been implementing an ambitious program of reforms to restructure the energy sector and other key areas, liberalize trade, attract foreign investment, establish a western accounting system, and implement a private property regime. Armenia has improved land transportation routes to its (currently only two) neighboring trade partners, Georgia and Iran. Iran has surpassed Russia as Armenia’s leading trade partner, although settlement of the Abkhazia and Chechya conflict and the opening of Russia-Caucasus North-South railroads could reverse that trend.

Privatization of industries started in 1994, following land privatization in 1991. Slow progress in privatization, advances in private property legislation and banking reform should give further impetus to economic development. Armenia was the first NIS state to register a positive GDP growth rate (in 1994). In 1996, IMF estimates the economy grew 6.8%. The current IMF estimate for 1997 is 6.0%. This progress has earned Armenia more support from international institutions. The IMF, World Bank, EBRD, as well as other financial institutions and foreign countries are extending considerable grants and loans. Total loans extended to Armenia in 1993-1997 are expected to exceed USD 580 million. These loans are targeted at eliminating the budget deficit, stabilizing the local currency, developing private businesses, energy generation, agricultural, food processing, land and air transportation and social sectors, as well as continuing rehabilitation works in the zone damaged by the 1988 earthquake. At the same time, Armenia remains heavily dependent on humanitarian aid. The main suppliers are the United States, EU, and the United Nations. In U.S. FY 1997, the United States extended to Armenia USD 150 million in aid; this figure is likely to be roughly the same in FY’98.

Long term resolution of the country's economic problems will depend on solving the Nagorno-Karabakh conflict, reestablishing normal relations with the neighboring countries of Turkey and Azerbaijan, and lifting the embargoes. A settlement would give full play to the country's existing industrial and agricultural potential, and highly educated and skilled human resources, while extending Armenia’s regional trade and supply links with Azerbaijan, Turkey and the Middle East..
 

2.2. PRINCIPAL GROWTH SECTORS

In 1996, according to the official Armenian statistics (highly unreliable), the total physical output of manufacturing industries (including machinery, energy, chemical, agricultural, and construction sectors) grew by only 1.2 % as compared with 1995. Production rates of 70 percent of 149 main types of products declined. Physical output in such industries, as metallurgical, electrical, machine-building, agri-machinery, car-building, textile, and agriculture declined by 10 percent on average as well. Production of consumer goods declined also, by 5-7 percent on average. Cargo transportation declined by 3.3 percent (aviation - by 49 percent).

The sectors that showed steady growth (5-10 percent) included energy generation, chemicals, telecommunications, gem cutting, construction and construction materials. At the same time significant growth in the overall number of businesses was observed in wholesale and retail trade (40 %, mainly food), restaurants (78%), passenger and cargo transportation (28%), real estate brokerage (37%), education (125%), health care and social services (313%), and electrical power distribution (49%).

In 1996, aside from telecom, there was no single institutional investment recorded. 1997 has witnessed USD 10 million investment in oil and gas exploration and more than USD 10 million investment in gold processing. The Embassy’s Commercial Section projects that if the political/military status quo is preserved, traditional and large Armenian manufacturing industries will continue to decline. They will be replaced by small new production companies which will emerge in the second half of 1997- beginning of 1988 as the proper financial environment improves. Foreign investments will continue to grow, mostly from Diasporan Armenians. At the same time, trade and services will continue their fast development.
 

2.3. GOVERNMENT ROLE IN THE ECONOMY

Government control over industry progressively diminishes as more and more enterprises are privatized. A few factories which the government considers as "strategic" will not be privatized in the near term. Privatization results in the elimination, reduction or merger of ministries and in the transition of their functions from direct management and control to policy making and special support. In June 1997, the Ministry of Industry and the Ministry of Trade and certain parts of the Ministry of Economy and the Ministry of Privatization and Foreign Investment were merged. Through the Central Bank, the government supervises the banking system and currency market. The National Assembly (Parliament) is steadily developing and passing laws which will create the framework for a free market oriented economy. However, concurrently with these reform measures, a greater number of government officials are engaged in private businesses and frequently use their influence to expand and protect their enterprises, often in an illegal way.

2.4 BALANCE OF PAYMENT SITUATION

In 1996, the chronic structural trade deficit further increased as registered imports grew by 27.8% , while exports grew only by 7.2 %. The imports, including USD 76.6 million worth of humanitarian assistance, totaled USD 861.5 million. Of these, 33.8% were food, 22.3% were in mineral products (fuel), and 9.3 % were machinery and equipment imports. Exports totaled USD 290.3 million , of which 48.3% were gems (cut diamonds), 18.3 % - metals (mostly scrap), and 11.8% - machinery and equipment. Thus, the trade deficit reached USD 571.2 million (or USD 494.6 million without humanitarian aid).
 

2.5 INFRASTRUCTURE SITUATION

Geography and Environment

Location: The Caucasus, between Turkey, Georgia, and Azerbaijan
Total area: 29,800 sq. km
Land area: 28,400 sq. km
Comparative area: slightly larger than Maryland
Land boundaries: total 1,254 km, Azerbaijan (east) 566 km, Azerbaijan (south) 221 km, Georgia 164 km, Iran 35 km, Turkey 268 km.
Coastline: 0 km (landlocked)
Maritime claims: none; landlocked
Climate: highland continental, hot summers, cold winters
Terrain: high Armenian Plateau with mountains; little forest land; fast flowing rivers; good soil in Arax River valley
Natural resources: deposits of gold, copper, molybdenum, zinc, aluminum and coal.
Land use: arable land - 17%; permanent crops - 3%; meadows and pastures - 20%; forest and woodland - 0%, other - 60%
Irrigated land: 3,050 sq. km (1990)
Current Environmental issues: soil pollution from toxic chemicals such as DDT; pollution of Hrazdan (Razdan) and Arax Rivers; the falling water level of Lake Sevan, a result of its use as a source for hydropower.
Natural hazards: the possibility of earthquakes (25,000 people killed in major quake in 1988); subject to occasional drought.

Industries

Traditionally diverse, including metal cutting machine tools, forging-pressing machines, electric motors, tires, knitted wear, hosiery, shoes, silk fabric, washing machines, chemicals, trucks, watches, instruments, mainframe computers and microelectronics (mostly defense oriented), and software. Currently, much of industry is either idle or operating at a fraction of its capacity. The defense industry is being partially converted for civilian purposes. Armenia’s international production code: 485.

Agriculture

Only 17% of land area is arable. Armenian fruits are superior in quality. The U.S. Department of Agriculture is implementing a horticulture export project. There is a minor livestock sector. Armenian vineyards are famous for cognac and other liqueurs.

Communications

Railroads: 840 km exist (does not include industrial lines); from four international rail connections (with/via Georgia, Azerbaijan, Turkey) but only the connection with Georgia (to Black Sea ports) is presently used.
Highways: total 11,300 km, paved 10,500 km, unpaved, earth 800 km (1990); road connections exist with all neighboring states (only ones with Georgia and Iran are used presently).
Pipelines: natural gas 900 km (1991)
Ports: none; landlocked
Airports: total 12, usable 10; with permanent-surface runways 6, with runways over 3,659 m - 1, with runways 2,440-3,659 m - 3
with runways 1,060-2,439 m - 2; note: a C-130 can land on a 1,060-m airstrip. From the six civil airports with artificial field surfacing only the largest ones - Zvartnots (in Yerevan), Erebuni (in Yerevan), and Shirak (in Gyumri) operate at present. Zvartnots is an international/domestic airport which can handle all types of planes, including the largest cargo aircraft. Shirak can handle IL-76 type cargo planes, and Erebuni - YAK-42 and similar small commuter aircraft. Besides regular flights to many NIS cities, including Moscow, regular weekly flights connect Armenia with Paris, Amsterdam, Athens, Frankfurt, Sofia, Beirut, Tehran, and Dubai (UAE). Armenian Airlines also operates a regular charter flight to Istanbul once a week.

Telecommunications

An American-Armenian project, ArmenTel, is underway for installation of fiber optic cable, digital telephone switches, and cellular and paging services. Siemens is providing over USD 100 million in credits for this project for procurement of equipment. Armenia has about 650,000 telephones; average telephone density is 17.7 per 100 persons; international connections to other former republics of the USSR are by landline or microwave, and to other countries by satellite and by leased connection through the Moscow international gateway switch. Broadcast stations: almost 100% of the population receives Armenian and Russian TV programs (some areas also receive Turkish, Iranian, Georgian, and Azerbaijani TV broadcasts). Private TV broadcasting stations, cable networks, and Internet providers are increasing number.