Economy of Armenia: challenges and prospects

Economy of Armenia: challenges and prospects

YEREVAN, June 13. /ARKA/. Vladislav Inozemtsev, Professor of Economics and founder and Director of the Centre for Post-Industrial Studies, shares his views on Armenia’s post-Soviet development in an article published by The Armenian Interest.
He says throughout its post-Soviet history, Armenia was to become an industrial growth point in the Caucasus, «luring» European companies with low costs and tax breaks. Considering the Armenian Diaspora in the EU and the USA, such a policy could be crowned with success.

What are the reasons for economic problems in Armenia?

In my opinion, what is happening today in the Armenian economy (the rate of GDP growth has fallen from average values of 2011-2014 from 4.7% to 0.2% in 2016, and in the III and IV quarters of last year, there was a decline — by 2.6 and 1.0%, respectively) is not an accidental phenomenon, but is due to economic policy, which the authorities of the country conducted throughout the last decade.

After becoming an independent state, the authorities of Armenia (as well as those in Russia) chose a relatively simple way of using the country’s natural resources. Since the mid-1990s, the share of copper, ferroalloys, gold, aluminum and other non-ferrous metals in exports has consistently been about 60%. The crisis of 2009 when GDP collapsed by 14.2% could not but force the authorities to ponder. However, I think that there was no special conclusion made. Thus, when commodity prices began to decline again, economic growth also started to «dampen».

However, this is only the most general moment that indicates the government’s passivity. A more significant point was to neglect the tasks of changing the economic structure. For 25 years, neighboring Turkey has increased its industrial exports by 13.8 times, attracting European companies that created their own manufacturies around the country. Throughout its post-Soviet history, Armenia was to become an industrial growth point in the Caucasus, «luring» European companies with low costs and tax breaks. Considering the Armenian Diaspora in the EU and the USA, such a policy could be crowned with success.

However, nothing was done, and it resulted in a new vicious circle: approximately 950,000 citizens of Armenia left the country and together with other compatriots began to provide up to $ 2.3 billion annual cash flow (18% of GDP). For a long time, this allowed to level the dreadful deficit of foreign trade (60-65% of imports, or up to 27% of GDP) and not to take any measures for industrialization.  It turned out that the higher the level of unemployment was in Armenia (according to the recent data, it accounts for 18.5% of working-age population), the better it was: more people left the country, more money came from the outside.

However, this is a way to nowhere — to the full dependence on the outside world and to the nation’s destruction. Nowadays, Armenia is reaping the results: crisis and devaluation in Russia, rigid migration policy in Europe. As a result, in 2015-2016, the amount of transfers decreased by 31%, exports grew in physical volume rather than in value judgments, and the public debt reached 51.6% of nominal GDP. It is necessary to take urgent anti-crisis measures. Moreover, they must be not only short-term oriented, but also must be aimed at gradual and radical changes of the entire economic course.
Without complex reforms in the field of competitiveness as well as without simplification of access to the capital and functioning of the Armenian tax system, it is unlikely that the results of 2002-2007 will be replicated. In addition, fighting against corruption should become a priority as, according to the majority of both foreign and local entrepreneurs, it has become a real scourge of Armenia, spreading to the highest echelons of state power.

Economic potential of Armenia given the factor of Diaspora

It is not easy to attract Armenian investments to Armenia, and I would not be consoled by the statements of Prime Minister K. Karapetyan about the imminent flow of investments from the Armenian Diaspora of Russia.

I believe that Diaspora has a chance to become a powerful engine of economic development in case two conditions are met. On the one hand, Diaspora should perceive the country’s development as a «national project» and an element of its own identity (for instance, it fully responds to Israel and can be partly related to China during the period of launching economic reforms). On the other hand, the authorities should create conditions in which the representatives of foreign Armenian business would not be afraid for their investments and projects, realizing that participation in development of Armenia’s economy is not only patriotic, but also beneficial. The very fact of Diaspora is only a potential, but not necessarily an actual advantage. One can compare Israel that receives billions of dollars of investments from its compatriots to Russia, whose «compatriots» seek to raise funds from their historical homeland for the sake of their own projects. 

At first glance, Armenia does not use the factor of its Diaspora sufficiently: in 2015-2016, the country received 268 million dollars of foreign direct investments compared to 3.16 billion dollars of money transfers (this means that Armenia is backed by laborers that left it, not by people that made a fortune abroad). However, this statement, probably, is too categorical. Most of successful Armenians living outside the historical homeland are engaged in real estate, trade, investments in stock markets and etc. 

They are involved in those businesses that are difficult to develop in Armenia. The two richest Armenian entrepreneurs — Kik Kerkoryan and Samvel Karapetyan — together own wealth that exceeds Armenia’s GDP at market prices. Thus, it is not surprising that their projects in the country relate to charity rather than investments. Therefore, it is not easy to attract Armenian investments to Armenia, and I would not be consoled by the statements of Prime Minister K. Karapetyan about the imminent flow of investments from the Armenian Diaspora of Russia.

It seems to me that relying on the representatives of Diaspora can become a  threat regarding the necessity to develop an optimal economic course (primarily, because now a significant part of the Armenian Diaspora is represented by «newcomers» — people that left independent Armenia and its problems. It will be an extremely difficult task to return them or their capitals to the homeland. The following points are urgently required: «new industrialization», production of elements and components for international companies, inclusion of Armenian enterprises in global manufacturing chains and increasing exports of goods. 

Consequently, this will result in decreasing an unemployment level, returning of well-qualified workers as well as in forming of a civilized business environment. If the authorities accomplish in these tasks, Diaspora will function. However, regardless of our desire, patriotism does not play a fundamental role in economics. To make money return to the country, it has to be more than just a homeland for the entrepreneur; it must provide appropriate conditions for business. As E. Burke once said: «To make us love our country, our country ought to be lovely». This applies to businessmen par excellence.  

 Did Armenia benefit economically from joining the Eurasian Economic Union and Customs Union?

 I do not presume to assert that Armenia’s export to the EU countries would increase with further rapprochement with the European Union, but the failure in the post-Soviet markets would have happened regardless of its membership in the Eurasian Economic Union.

 The haste and pressure, under which Armenia had to take the decision on joining to the Eurasian Union is well known. In 2013-2014, that step of Armenia was considered by Russia as a symbolic victory over the EU, especially after Ukraine’s retreat to the West. For this reason, in the first months of integration, Russia provided Armenia with loans and military assistance, which was to convince the partner of usefulness of that Union.  However, reality was not so colorful (I will not touch upon political issues; I will only focus on the economy instead).

The Eurasian Economic Union includes states whose exports mostly consist of primary or marginally processed natural resources. Therefore, on the one hand, the synergy from integration can not be as significant as in the context of unification of highly specialized industrial economies. On the other hand, in case of a change in the commodity market conditions, crisis can equally affect almost all the countries of the Union.

This explains the fact that for the first two years of Armenia’s stay at the Union, the Republic did not gain any profit in trade: Armenian exports to the member countries decreased by more than 26% from 2013 to 2016. Apparently, a sharp surge in the supply of goods from Armenia to Russia during the first three quarters of last year was a consequence of re-export wave of Turkish goods, which dropped after normalization of Russian-Turkish relations. I do not presume to assert that Armenia’s export to the EU countries would increase with further rapprochement with the European Union, but the failure in the post-Soviet markets would have happened regardless of its membership in the Eurasian Economic Union. It should also be assumed that in the nearest future, the crisis in Russia and other countries of the Union will not end. Oil prices may fall below $ 50 per barrel while domestic demand keeps falling too. Therefore, I believe that resumption of interrupted negotiations on a new treaty between Armenia and the EU is quite a positive step.

It is believed that entering the Eurasian Economic Union Armenia took a number of obligations that limited its economic freedom. I am convinced that it would be more correct to say that these limits arise from building special relations with Russia dating back to the 1990s (today Russia accounts for about 96.5% of Armenia’s trade turnover among the member countries of the EAEU). As a result, it will not be an exaggeration to say that Armenia’s economy is largely controlled by Russia.

In fact, the following Russian daughter-companies function in Armenia: the «South Caucasus Railroad», to which Armenia’s railways are concessioned, «Gazprom Armenia», which ensures the supply and sale of natural gas in the domestic market, «ArmenTel» and its communication networks, «Electricity Networks of Armenia» (up to the end of 2015), «Rosneft-Armenia» and etc.

A significant number of energy and industrial objects also belong to Russian investors. Therefore, I can not be surprised when Russian companies dominate the tenders for the supply of goods and services for state needs as well as when Gazprom opposes the construction of a gas pipeline from Iran while Russian Railways are against the construction of a railway from Iran to Georgia.

In many respects, dominance and lawlessness of Russian companies led to a protest movement against increasing electricity tariffs in summer 2015. Therefore, it seems to me that given the degree of Russia’s economic control over Armenia, not a single Union like EAEU can make the situation worse.

Recommendations

Armenia needs to reconsider the opportunities that it has given its unenviable geographical location. The events of recent years — lifting of Iran’s economic sanctions and its return to global geopolitics, Turkey’s switch to authoritarianism and anti-Westernism, China’s projects of «silk roads», including those suggesting to bypass the Caspian Sea from the south — make it absolutely necessary to establish close ties with Iran. Moreover, there is an urgent need to construct infrastructure that would connect Iran with the coast of the Black Sea. Possibly, this may be done with participation of international investor consortia.

Given that energy, infrastructure and large companies are controlled by Russian investors, an obvious solution is liberalization of process of creating new enterprises from the very beginning. This would eventually provide «new industrialization» and «multi-vector policy» of Armenia. It is necessary to introduce zero-rate taxes for 10-15 years for the enterprises created by foreign and domestic investors as greenfield projects. Their main task should not be replenishment of the treasury, but creation of jobs, increasing exports, providing continuing education for local specialists and establishing ties with European and American business. I would recommend the Armenian leadership to authorize full private ownership of infrastructure facilities that are built after, for example, the 1st of January in 2017, including pipelines, roads and railways or airports (later I will explain why this should be done).

Considerable attention should be paid to the special measures to support small and medium-sized businesses. First of all, this should be done because during the period of independence, Armenia has not been able to form stable middle class of owners that would work at their enterprises and provide local employment. This «emptiness» in the depths of Armenian society, which is divided exclusively into the super-rich and the poor, is a potential source of social instability. In addition, without forming stable middle class, it is impossible to achieve any domestic demand expansion, which is the basis of any modern economy. I would like to emphasize that in such a society as the Armenian one with its traditions of entrepreneurship, middle class can not and should not consist primarily of officials and civil servants. It should be composed of active owners and businessmen.

Armenia needs to reconsider the opportunities that it has given its unenviable geographical location. The events of recent years — lifting of Iran’s economic sanctions and its return to global geopolitics, Turkey’s switch to authoritarianism and anti-Westernism, China’s projects of «silk roads», including those suggesting to bypass the Caspian Sea from the south — make it absolutely necessary to establish close ties with Iran. Moreover, there is an urgent need to construct infrastructure that would connect Iran with the coast of the Black Sea. Possibly, this may be done with participation of international investor consortia. If that project had a success, Armenia would become a regional transit power and would have a direct access to additional energy sources. This would almost certainly make Russia more flexible on a wide range of economic and other issues. At the same time, connecting Iran with Europe instead of EAEU could also serve as a «bridge». Anyway, this topic is actively discussed by Russian political analysts.

Developing all forms of transit seems extremely important from economic and socio-psychological points of view. It would help to overcome the sense of «closed space» as Armenia does not have access to the seas and is deprived of large-scale cargo and passenger traffic. Besides that, it would be worthwhile to think about developing aviation transit. Zvartnots Airport is more than a thousand miles away from major regional air hubs and the largest one is Ataturk Airport in Istanbul. Therefore, Armenia may lose its transit attractiveness due to certain changes in Turkish policy. The experience of Dubai and Sharjah shows that powerful hubs and large airlines are not necessarily formed in countries with large and internationalized economies. I am convinced that such a large-scale project could unite the authorities of Armenia, the representatives of Diaspora and some of the national entrepreneurs. It is noteworthy that the largest taxpayers in the UAE are not oil companies, but Al Maktoum International Airport and Emirates Airline.

Undoubtedly, Armenia’s economic prospects are determined and will be determined by military and political climate in Transcaucasia, and, first of all, by relations with Azerbaijan. Today, Russia seeks to balance between two rivals, maintaining mutually beneficial relations with both countries. Given that in its energy and investment policy Azerbaijan is much more active in turning to the United States and Europe than to Russia, I would advise the Armenian leadership also to focus more on America and Europe than on Moscow: in case of aggravation of the conflict, European countries and Washington will have more opportunities to influence Baku than Moscow. In general, my main recommendations for Armenia are reduced to three basic principles of industrialization, Europeanization and globalization. Everything that corresponds to them should be welcomed. On the contrary, everything that can create obstacles should be treated with certain skepticism. -0---

18:58 13.06.2017





 

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