Economy of Armenia

Economy of Armenia

Yerevan
Currency	Armenian dram
Fiscal year	Calendar year
Trade organisations	CISFTA, EEU, WTO
Statistics
GDP	$10.529 billion (nominal, 2015)[1] $25.395 billion (PPP, 2015)[1]
GDP rank	132nd (nominal, 2015)[2] 129th (PPP, 2015)[3]
GDP growth	3% (2015 est.)[4]
GDP per capita	$3,520 (nominal, 2015 est.)[1] $8,492 (PPP, 2015 est.)[1]
GDP by sector	services (51.9%); industry (28.7%); agriculture (19.4%) (2015 est.)
Inflation (CPI)	3.7% (2015 est.)[4]
Population below poverty line	32% (2013 est.)[4]
Gini coefficient	30.3 (2012)[4]
Labour force	1.56 million (2015 est.)[4]
Labour force by occupation	services (44%); industry (17%); agriculture (39%) (2011 est.)[4]
Unemployment	18.5% (2015 est.)[4]
Main industries	diamond processing, metal-cutting machine tools, forging and pressing machines, electric motors, knitted wear, hosiery, shoes, silk fabric, chemicals, trucks, instruments, microelectronics, jewelry, software, food processing, brandy, mining[4]
Ease-of-doing-business rank	38th[5]
External
Exports	$1.626 billion (2015 est.)[4]
Export goods	pig iron, unwrought copper, nonferrous metals, gold, diamonds, mineral products, foodstuffs, energy[4]
Main export partners	Russia 15.2%  China 11.1%  Germany 9.8%  Iraq 8.8%  Georgia 7.8%  Canada 7.6%  Bulgaria 5.3%  Iran 5.3% (2015)[4]
Imports	$2.78 billion (2015 est.)[4]
Import goods	natural gas, petroleum, tobacco products, foodstuffs, diamonds[4]
Main import partners	Russia 29.1%  China 9.7%  Germany 6.2%  Iran 6.1%  Italy 4.6%  Turkey 4.2% (2015)[4]
FDI stock	$4.817 billion (2013)
Gross external debt	$8.554 billion (31 December 2015 est.)[4]
Public finances
Public debt	48.8% of GDP (2015 est.)
Revenues	$2.471 billion
Expenses	$2.957 billion (2015 est.)[4]
Economic aid	$302 million (ODA) (2008)
Foreign reserves	$1.775 billion (31 December 2015 est.)[4]
Main data source: CIA World Fact Book All values, unless otherwise stated, are in US dollars.

The economy of Armenia is ranked 132nd in the world, with a nominal gross domestic product (GDP) of $10.561 billion per annum.^[2] It is also the 129th largest in the world by purchasing power parity (PPP), at $25.329 billion per annum.^[3] Armenia is the second-most densely populated of the post-Soviet states because of its small size. It is situated between the Black Sea and the Caspian Sea, bordered on the north and east by Georgia and Azerbaijan and on the south and west by Iran and Turkey.

Until independence, Armenia's economy was based largely on industry—chemicals, electronic products, machinery, processed food, synthetic rubber and textiles; it was highly dependent on outside resources. Agriculture accounted for only 20% of net material product and 10% of employment before the breakup of the Soviet Union in 1991. Armenian mines produce copper, zinc, gold and lead. The vast majority of energy is produced with imported fuel, including gas and nuclear fuel from Russia (for its one nuclear power plant.) The main domestic energy source is hydroelectric. Small amounts of coal, gas and petroleum have not yet been developed.

Like other former states, Armenia's economy suffers from the legacy of a centrally planned economy and the breakdown of former Soviet trading patterns. Soviet investment in and support of Armenian industry has virtually disappeared, so that few major enterprises are still able to function. In addition, the effects of the 1988 earthquake, which killed more than 25,000 people and made 500,000 homeless, are still being felt. Although a cease-fire has held since 1994, the conflict with Azerbaijan over Nagorno-Karabakh has not been resolved. The consequent blockade along both the Azerbaijani and Turkish borders has devastated the economy, because of Armenia's dependence on outside supplies of energy and most raw materials. Land routes through Azerbaijan and Turkey are closed; routes through Georgia and Iran are adequate and reliable. In 1992-93, the GDP had fallen nearly 60% from its 1989 level. The national currency, the dram, suffered hyperinflation for the first few years after its introduction in 1993.

Armenia has registered strong economic growth since 1995 and inflation has been negligible for the past several years. New sectors, such as precious stone processing and jewelry making and communication technology (primarily Armentel, which is left from the USSR era and is owned by external investors). This steady economic progress has earned Armenia increasing support from international institutions. The International Monetary Fund (IMF), World Bank, EBRD, as well as other international financial institutions (IFIs) and foreign countries are extending considerable grants and loans. Total loans extended to Armenia since 1993 exceed $800 million. These loans are targeted at reducing the budget deficit, stabilizing the local currency; developing private businesses; energy; the agriculture, food processing, transportation, and health and education sectors; and ongoing rehabilitation work in the earthquake zone.

Continued progress will depend on the ability of the government to strengthen its macroeconomic management, including increasing revenue collection, improving the investment climate, and accelerating privatization. A liberal foreign investment law was approved in June 1994, and a law on privatization was adopted in 1997, as well as a program on state property privatization. The government has made major strides toward joining the World Trade Organization. By 1994, however, the Armenian government had launched an ambitious IMF-sponsored economic liberalization program that resulted in positive growth rates in 1995-2005. Armenia joined the World Trade Organization (WTO) in January 2003. Armenia also has managed to slash inflation, stabilize its currency, and privatize most small- and medium-sized enterprises. Armenia's unemployment rate, however, remains high, despite strong economic growth. The chronic energy shortages Armenia suffered in the early and mid-1990s have been offset by the energy supplied by one of its nuclear power plants at Metsamor. Armenia is now a net energy exporter, although it does not have sufficient generating capacity to replace Metsamor, which is under international pressure to close. The electricity distribution system was privatized in 2002. Armenia's severe trade imbalance has been offset somewhat by international aid, remittances from Armenians working abroad, and foreign direct investment. Economic ties with Russia remain close, especially in the energy sector. The government has made some improvements in tax and customs administration in recent years, but anti-corruption measures have been more difficult to implement.

Overview

Under the old Soviet central planning system, Armenia had developed a modern industrial sector, supplying machine tools, textiles, and other manufactured goods to sister republics in exchange for raw materials and energy. Since the implosion of the USSR in December 1991, Armenia has switched to small-scale agriculture away from the large agroindustrial complexes of the Soviet era. The agricultural sector has long-term needs for more investment and updated technology. The privatization of industry has been at a slower pace, but has been given renewed emphasis by the current administration. Armenia is a food importer, and its mineral deposits (gold and bauxite) are small. The ongoing conflict with Azerbaijan over the ethnic Armenian-dominated region of Nagorno-Karabakh (which was part of Soviet Azerbaijan) and the breakup of the centrally directed economic system of the former Soviet Union contributed to a severe economic decline in the early 1990s. By 1994, however, the Armenian Government had launched an ambitious IMF-sponsored economic program that has resulted in positive growth rates in 1995-99. Armenia also managed to slash inflation and to privatize most small- and medium-sized enterprises. The chronic energy shortages Armenia suffered in recent years have been largely offset by the energy supplied by one of its nuclear power plants at Metsamor. Continued Russian financial difficulties have hurt the trade sector especially, but have been offset by international aid, domestic restructuring and foreign direct investment.

History of the modern Armenian economy

At the beginning of the 20th century, the territory of present-day Armenia was a backward agricultural region with some copper mining and cognac production. From 1914 through 1921, Caucasian Armenia suffered from war, revolution, the influx of refugees from Turkish Armenia, disease, hunger and economic misery. About 200,000 people died in 1919 alone. At that point, only American relief efforts saved Armenia from total collapse.^[6]

The first Soviet Armenian government regulated economic activity stringently, nationalising all economic enterprises, requisitioning grain from peasants, and suppressing most private market activity. This first experiment of state control ended with the advent of Soviet leader Vladimir Lenin's New Economic Policy (NEP) of 1921–27. This policy continued state control of the large enterprises and banks, but peasants could market much of their grain, and small businesses could function. In Armenia, the NEP years brought partial recovery from the economic disaster of the post-World War I period. By 1926 agricultural production in Armenia had reached nearly three-quarters of its prewar level.^[6]

By the end of the 1920s, Stalin's regime had revoked the NEP and established a state monopoly on all economic activity. Once this occurred, the main goal of Soviet economic policy in Armenia was to turn a predominantly agrarian and rural republic into an industrial and urban one. Amongst other restrictions, peasants now were forced to sell nearly all their output to state procurement agencies rather than at the market. From the 1930s through the 1960s, an industrial infrastructure was constructed. Besides hydroelectric plants and canals, roads were built and gas pipelines were laid to bring fuel and food from Azerbaijan and Russia.^[6]

The Stalinist command economy, in which market forces were suppressed and all orders for production and distribution came from state authorities, survived in all its essential features until the fall of the Soviet regime in 1991. In the early stages of the communist economic revolution, Armenia underwent a fundamental transformation into a "proletarian" society. Between 1929 and 1939, the percentage of Armenia's work force categorised as industrial workers grew from 13% to 31%. By 1935 industry supplied 62% of Armenia's economic production. Highly integrated and sheltered within artificial barter economy of the Soviet system from the 1930s until the end of the communist era, the Armenian economy showed few signs of self-sufficiency at any time during that period. In 1988 Armenia produced only 0.9% of the net material product of the Soviet Union (1.2% of industry, 0.7% of agriculture). The republic retained 1.4% of total state budget revenue, delivered 63.7% of its NMP to other republics, and exported only 1.4% of what it produced to markets outside the Soviet Union.^[7]

Armenia's industry was especially dependent on the Soviet military-industrial complex. About 40% of all enterprises in the republic were devoted to defence, and some factories lost 60% to 80% of their business in the last years of the Soviet Union, when massive cuts were made in national defence expenditures. As the republic's economy faced the prospects of competing in world markets in the mid 1990s, the great liabilities of Armenia's industry are its outdated equipment and infrastructure and the pollution emitted by many of the country's heavy industrial plants.^[8]

In 1991, Armenia's last year as a Soviet republic, national income fell 12% from the previous year, while per capita gross national product was 4,920 rubles, only 68% of the Soviet average. In large part due to the earthquake of 1988, the Azerbaijani blockade that began in 1989 and the collapse of the international trading system of the Soviet Union, the Armenian economy of the early 1990s remained far below its 1980 production levels. In the first years of independence (1992–93), inflation was extremely high, productivity and national income dropped dramatically, and the national budget ran large deficits.^[9]

Post-communist economic reform

Armenia introduced elements of the free market and privatisation into their economic system in the late 1980s, when Mikhail Gorbachov began advocating economic reform. Cooperatives were set up in the service sector, particularly in restaurants, although substantial resistance came from the Communist Party of Armenia (CPA) and other groups that had enjoyed privileged position in the old economy. In the late 1980s, much of Armenia's economy already was opening either semi-officially or illegally, with widespread corruption and bribery. The so-called mafia, made up of interconnected groups of powerful officials and their relatives and friends, sabotaged the efforts of reformers to create a lawful market system. When the December 1988 earthquake brought millions of dollars of foreign aid to the devastated regions of Armenia, much of the money went to corrupt and criminal elements.^[10]

Beginning in 1991, the democratically elected government pushed vigorously for privatisation and market relations, although its efforts were frustrated by the old ways of doing business in Armenia, the Azerbaijani blockade, and the costs of the Nagorno-Karabakh War. In 1992, the Law on the Programme of Privatisation and Decentralisation of Incompletely Constructed Facilities established a state privatisation committee, with members from all political parties. In middle 1993, the committee announced a two-year privatisation programme, whose first stage would be privatisation of 30% of state enterprises, mostly services and light industries. The remaining 70%, including many bankrupt, nonfunctional enterprises, were to be privatised in a later stage with a minimum of government restriction, to encourage private initiative. For all enterprises, the workers would receive 20% of their firm's property free of charge; 30% would be distributed to all citizens by means of vouchers; and the remaining 50% was to be distributed by the government, with preference given to members of the labour organisations. A major problem of this system, however, was the lack of supporting legislation covering foreign investment protection, bankruptcy, monopoly policy, and consumer protection.^[11]

In the first post-communist years, efforts to interest foreign investors in joint enterprises were only moderately successful because of the blockade and the energy shortage. Only in late 1993 was a department of foreign investment established in the Ministry of Economy, to spread information about Armenia's investment opportunities and improve the legal infrastructure for investment activity. A specific goal of this agency was creating a market for scientific and technical intellectual property.^[11]

A few Armenians living abroad made large-scale investments. Besides a toy factory and construction projects, diaspora Armenians built a cold storage plant (which in its first years had little produce to store) and established the American University of Armenia in Yerevan to teach the techniques necessary to run a market economy.^[11]

Armenia was admitted to the International Monetary Fund in May 1992 and to the World Bank in September. A year later, the government complained that those organisations were holding back financial assistance and announced its intention to move toward fuller price liberalisation, and the removal of all tariffs, quotas, and restrictions of foreign trade. Although privatisation had slowed because of catastrophic collapse of the economy, Prime Minister Hrant Bagratyan informed the United States officials in the fall of 1993 that plans had been made to embark on a renewed privatisation programme by the end of the year.^[12]

Global competitiveness

The Armenian economy's competitiveness is low and stagnating according to the Global Competitiveness Index, in which Armenia's ranking slipped from 80th out of 132 countries in 2006-2007 index to 93rd out of 131 countries in the 2007-2008 index (just below Libya, Namibia, Georgia, Serbia and Pakistan).^[13] Armenia ranks 82nd out of 144 economies according to the 2012-2013 Global Competitiveness Index.^[14]

Index of Economic Freedom

Armenia ranks 39th out of 179 economies according to the 2012 Index of Economic Freedom. Armenia is ranked 19th freest among the 43 countries in the Europe region, putting it above the world and regional averages.^[15]

Domestic business environment

Armenia ranks 32nd out of 185 economies according to the 2013 ease of doing business index.^[16]

Armenia's economy is competitive to a few extent with government-connected individuals enjoying de facto monopolies over the import and distribution of basic commodities and foodstuffs, and under-reporting revenue to avoid paying taxes.

Despite pronouncements at the highest levels of government on the importance of free competition, Armenia is next to last in the effectiveness of its anti-monopoly policy according to the 2010 results of the World Economic Forum Global Competitiveness Report.^[17]

According to Vahram Nercissiantz, President Serzh Sargsyan's chief economic adviser, "Businessmen holding state positions have turned into oligarchs who have avoided paying sufficient taxes by abusing their state positions, distorted markets with unequal conditions, breached the rules of competition, impeded or prevented small and medium-sized business’ entry into manufacturing and thereby sharply deepened social polarization in the republic.^[18]

Following the advice of economic advisors who cautioned Armenia's leadership against the consolidation of economic power in the hands of a few, in January 2001, the Government of Armenia established the State Commission for the Protection of Economic Competition. Its members cannot be dismissed by the government.^[19]

Monopolies

According to one analyst, Armenia's economic system is anticompetitive due to the structure of the economy being a type of "monopoly or oligopoly". "The result is the prices with us do not drop even if they do on international market, or they do quite belated and not to the size of the international market."^[20]

According to the estimate of a former prime minister, Hrant Bagratian, 55 percent of Armenia's GDP is controlled by 44 families.^[19]

In early 2008, the State Commission for the Protection of Economic Competition named 60 companies having "dominant positions" in Armenia.^[19]

In October 2009, when visiting Yerevan, the World Bank’s managing director, Ngozi Okonjo-Iweala, warned that Armenia will not reach a higher level of development unless its leadership changes the "oligopolistic" structure of the national economy, bolsters the rule of law and shows "zero tolerance" towards corruption.^[21] "I think you can only go so far with this economic model," Ngozi Okonjo-Iweala told a news conference in Yerevan. "Armenia is a lower middle-income country. If it wants to become a high-income or upper middle-income country, it can not do so with this kind of economic structure. That is clear." She also called for a sweeping reform of tax and customs administration, the creation of a "strong and independent judicial system" as well as a tough fight against government corruption.^[21] The warning was echoed by the International Monetary Fund.^[22]

Major monopolies in Armenia include:

1. Natural gas import and distribution, held by ArmRosGazprom (ARG) (controlled by Russian monopoly Gazprom)^[23]
2. Armenia's railway, held by the Russian-owned South Caucasus Railway (SCR) (formerly Russia’s state-run rail company, RZD)^[24]
3. Oilimport and distribution (claimed by Armenian opposition parties to belonging to a handful of government-linked individuals,^[25] one of which - "Mika Limited" - is owned by Mikhail Baghdasarian,^[26] while the other - "Flash" - is owned by Barsegh Beglarian, a "prominent representative of the Karabakh clan"^[27])
   1. Aviation kerosene (supplying to Zvartnots airport), held by Mika Limited^[28]
4. Various basic foodstuffs such as rice, sugar, wheat, cooking oil and butter^[29][30] (the Salex Group enjoys a de facto monopoly on imports of wheat, sugar, flour, butter and cooking oil. Its owner is parliament deputy Samvel Aleksanian (a.k.a. "Lfik Samo") a figure close to the country’s leadership.^[31][32])
5. Newspaper distribution, held by Haymamul (some newspaper editors believe that Haymamul deliberately refuses to print more newspaper copies in order to minimize the impact of unfavorable press coverage of the government)^[33]

Former major monopolies in Armenia include:

1. Wireless (mobile) telephony, held by Armentel until 2004^[34]
2. Internet access, held by Armentel until September 2006^[35]
3. Fixed-line telephony, held by Armentel until August 2007^[36]

GDP

The Gross Domestic Product of Armenia stood at 8.8 billion US dollars in 2010; with a population of 3.2 million, this amounts to a GDP per capita of $2,676 (purchasing power parity $5,178).^[17] GDP growth for 2010 was at 2.9 percent, and inflation was at 8 percent.^[17]

GDP growth is expected to be around 3 percent in 2011, with inflation returning to 4-5 percent.^[17]

In comparison, in 2006, the GDP was estimated to be 6.6 billion USD per calendar year and the GDP per capita (purchasing power parity) was estimated at $5,400 US. The growth rate was high at 13.4%, but the relatively low base must be considered. Low inflation was maintained around 2.6% annually.^[37]

Growth

After a decade of double-digit growth, Armenia's economy declined by 14.4 percent in 2009.^[17] The year-to-date growth as of October 2010 was 2.8 percent.^[17] In 2010, the main macro deficiencies of the Armenian economy — namely, unsustainable growth drivers, a narrow and resource-dominated export base, and overdependence on private transfers — were still prevalent.^[17]

According to official figures, Armenia’s economy grew by 13.8 percent in 2007.^[38] According to research funded by the USAID CAPS project, Armenia's exceptionally high rate of economic growth during the last decade has been largely dependent on external factors (e.g., remittances, assistance from international financial and donor organization). Furthermore, the study concluded that despite its record growth on most macro-economic metrics, Armenia is "low and lagging" in competitiveness.^[39]

According to the National Statistical Service, the booming construction and service sectors remain the driving forces of the high growth rate of GDP.^[40]

Year	GDP ( millions of drams)[41]	Growth [41]	GDP per capita [42]	GDP deflator [43]
2000	1,031,338.3	+5.9%	320,182	−1.4 %
2001	1,175,876.8	+9.6%	365,849	+4.1%
2002	1,362,471.7	+13.2%	424,234	+0.7%
2003	1,624,642.7	+14.0%	505,914	+4.6%
2004	1,907,945.4	+10.5%	593,635	+6.3%
2005	2,242,880.9	+13.9%	697,088	+3.2%
2006	2,656,189.8	+13.2%	824,621	+4.6%
2007	3,149,283.4	+13.7%	976,067	+4.2%
2008	3,568,227.6	+6.9%	1,103,348	+5.9%
2009	3,141,651.0	−14.1 %	968,539	+2.6%
2010	3,460,202.7	+2.2%	1,062,683	+7.8%
2011	3,776,443.0	+4.7%	1,155,405	+4.2%
2012	4,000,722.0	+7.2%	1,322,946	-1.2%
2013	4,555,638.2	+3.3%	1,507,491	+3.4%
2014	4,828,626.3	+3.6%	1,602,172	+2.3%
2015	5,032,089.0	+3.0%	1,674,795	+1.2%

Cash remittances

Cash remittances sent back home from Armenians working abroad—mostly in Russia and the United States—are growing and contribute significantly to Armenia's Gross Domestic Product (between 15 and 30 percent). They help Armenia sustain double-digit economic growth and finance its massive trade deficit.

According to the Central Bank of Armenia, during the first half of 2008, cash remittances sent back to Armenia by Armenians working abroad rose by 57.5 percent and totaled $668.6 million USD, equivalent to 15 percent of the country's first-half Gross Domestic Product.^[44] However, the latter figures only represent cash remittances processed through Armenian commercial banks. According to RFE/RL, comparable sums are believed to be transferred through non-bank systems, implying that cash remittances make up approximately 30 percent of Armenia's GDP in the first half of 2008.^[44]

In 2007, cash remittances through bank transfers rose by 37 percent to a record-high level of $1.32 billion USD.^[44] According to the Central Bank of Armenia, in 2005, cash remittances from Armenians working abroad reached a record-high level of $1 billion, which is worth more than one fifth of the country’s 2005 Gross Domestic Product.^[45]

Net private transfers decreased in 2009, but saw a continuous increase during the first six months of 2010. Since private transfers from the Diaspora tend to be mostly injected into consumption of imports and not in high value-added sectors, the transfers have not resulted in sizeable increases in productivity.^[17]

Secondary sector

Armenia experienced a construction boom during the latter part of the 2000s. According to the National Statistical Service, Armenia's booming construction sector generated about 20 percent of Armenia's GDP during the first eight months of 2007.^[40] According to a World Bank official, 30 percent of Armenia's economy in 2009 came from the construction sector.^[22]

However, during the January to September 2010 period, the sector experienced a 5.2 percent year-on-year decrease, which according to the Civilitas Foundation is an indication of the unsustainability of a sector based on an elite market, with few products for the median or low budgets.^[17] This decrease comes despite the fact that an important component of the government stimulus package was to support the completion of ongoing construction projects.^[17]

Retail trade

In 2010, retail trade turnover was largely unaltered compared to 2009.^[17] The existing monopolies throughout the retail sector have made the sector non-responsive to the crisis and resulted in near zero growth. The aftermath of the crisis has started to shift the structure in the retail sector in favor of food products.^[17]

Services sector

In the 2000s, along with the construction sector, the services sector was the driving force behind Armenia's recent high economic growth rate.^[40] In 2010, the volume of services increased as much as 7.4 percent from January to September, over the same period in 2009.^[17]

Tourism

According to official data, in 2007, a record-high 500,000 tourists visited Armenia — most of them ethnic Armenians from Europe, Russia and the United States.^[46] 2010 saw a noticeable increase in the number of Iranian tourists visiting Armenia – estimated to be 80,000.^[17]

However, according to private tour operators and other individuals familiar with the country’s tourism industry, government claims that hundreds of thousands of foreign tourists visit Armenia each year are inflated.^[47] Official statistics show that as many 575,000 tourists visited Armenia from abroad in 2009; the government stated earlier in 2010 that the figure will surpass 620,000 in 2010.^[47] However, data from the National Statistical Service shows that there were only 65,000 foreigners staying in Armenian hotels in 2009. Ara Vartanian, the chairman of the Armenian Trade and Industry Chamber, thinks that this measure is a far more objective indicator of the tourist influx into the country.^[47] In 2012, as many as 843'330 tourists visited Armenia.^[48]

Industrial sector

Industrial output was relatively positive throughout 2010, with year-on-year average growth of 10.9 percent in the period January to September 2010, due largely to the mining sector where higher global demand for commodities led to higher prices.^[17] According to the National Statistical Service, during the January–August 2007 period, Armenia's industrial sector was the single largest contributor to the country's GDP, but remained largely stagnant with industrial output increasing only by 1.7 percent per year.^[40] In 2005, Armenia's industrial output (including electricity) made up about 30 percent of GDP.^[49]

Mining

40 percent of Armenia's exports in 2009 were mining exports.^[22]

Agricultural sector

As of 2010, the agricultural production comprises on average 25 percent of Armenia's GDP.^[17] In 2006, the agricultural sector accounted for about 20 percent of Armenia's GDP.^[50]

Armenia's agricultural output dropped by 17.9 percent in the period of January–September 2010. This was owing to bad weather, a lack of a government stimulus package, and the continuing effects of decreased agricultural subsidies by the Armenian government (per WTO requirements).^[17]

Foreign aid

United States

The Armenian government receives foreign aid from the government of the United States through the United States Agency for International Development and the Millennium Challenge Corporation.

On March 27, 2006, the Millennium Challenge Corporation signed a five-year, $235.65 million compact with the Government of Armenia. The single stated goal of the "Armenian Compact" is "the reduction of rural poverty through a sustainable increase in the economic performance of the agricultural sector." The compact includes a $67 million to rehabilitate up to 943 kilometers of rural roads, more than a third of Armenia's proposed "Lifeline road network". The Compact also includes a $146 million project to increase the productivity of approximately 250,000 farm households through improved water supply, higher yields, higher-value crops, and a more competitive agricultural sector.^[51]

In 2010, the volume of US assistance to Armenia remained near 2009 levels; however, longer-term decline continued. The original Millennium Challenge Account commitment for $235 million had been reduced to about $175 million due to Armenia’s poor governance record. Thus, the MCC would not complete road construction. Instead, the irrigated agriculture project was headed for completion with apparently no prospects for extension beyond 2011.^[17]

European Union

With curtailment of the MCC funding, the European Union may replace the US as Armenia’s chief source of foreign aid for the first time since independence. From 2011 to 2013, the European Union is expected to advance at least €157.3 million ($208 million) in aid to Armenia.^[17]

External trade

Exports

In 2010, Armenia’s exports remained resource-dependent, largely because the non-resource-intensive sectors were significantly less competitive. Armenia has not succeeded in increasing and diversifying exports beyond raw materials thus leaving room for a greater vulnerability to external shocks.^[17] There was a 43.9 percent increase in overall exports during the January to September period. The main three export destinations were Bulgaria with 15.2 percent of total exports, followed by Germany with 14.2 percent and Russia with 13.9 percent. Raw minerals were the main export sent to Bulgaria and Germany.^[17]

Imports

The global economic crisis has had less impact on imports because the sector is more diversified than exports. In the first nine months of 2010, imports grew about 19 percent, just about equal to the decline of the same sector in 2009.^[17]

Deficit

During the first half of 2008, Armenia's widening current-account trade deficit grew by 66 percent to $1.39 billion USD, with a 40 percent rise in imports. Furthermore, Armenian exports fell by about one percent to $520 million USD.^[44]

According to the National Statistical Service, Armenia's trade deficit in 2006 was $1.2 billion with growth in exports being largely flat.^[52] During the first 11 months of 2006, net imports grew by 21 percent to $1.95 billion, while exports stood at $895 million, up 0.3 percent from the same period in 2005.^[53]

Partners

European Union

In 2010, EU countries accounted for 32.1 percent of Armenia’s foreign trade.^[17] Germany is Armenia’s largest trading partner among EU member states, accounting for 7.2 percent of trade; this is due largely to mining exports. Armenian exports to EU countries have skyrocketed by 65.9 percent, making up more than half of all 2010 January to September exports. Imports from EU countries increased by 17.1 percent, constituting 22.5 percent of all imports.^[17]

During January–February 2007, Armenia’s trade with the European Union totaled $200 million.^[52] During the first 11 months of 2006, the European Union remained Armenia's largest trading partner, accounting for 34.4 percent of its $2.85 billion commercial exchange during the 11-month period.^[53]

Russia and former Soviet republics

Bilateral trade with Russia stood at more than $700 million for the first nine months of 2010 – on track to rebound to $1 billion mark first reached in 2008 prior to the global economic crisis.^[17]

During January–February 2007, Armenia’s trade with Russia and other former Soviet republics was $205.6 million (double the amount from the same period the previous year), making them the country’s number one trading partner.^[52] During the first 11 months of 2006, the volume of Armenia’s trade with Russia was $376.8 million or 13.2 percent of the total commercial exchange.^[53]

China

As of early 2011, trade with China is dominated by imports of Chinese goods and accounts for about 10 percent of Armenia's foreign trade.^[54] The volume of Chinese-Armenian trade soared by 55 percent to $390 million in January–November 2010. Armenian exports to China, though still modest in absolute terms, nearly doubled in that period.^[54]

Iran

In 2010, the volume of bilateral trade with Iran was $200 million - which is approximately equal to the trade between Armenia and Turkey.^[17] The number of Iranian tourists has risen in recent years, with an estimated 80,000 Iranian tourists in 2010.^[17]

Turkey

In 2010, the volume of bilateral trade with Turkey was about $200 million, with trade taking place without open borders, across Georgian territory.^[17] This figure is not expected to increase significantly so long as the land border between the Armenia and Turkey remains closed.^[17]

United States

From January–September 2010, bilateral trade with the United States measured approximately $150 million, on track for about a 30 percent increase over 2009.^[17] An increase in Armenia’s exports to the US in 2009 and 2010 has been due to shipments of aluminum foil.^[17]

During the first 11 months of 2006, U.S.-Armenian trade totaled $152.6 million.^[53]

Georgia

The volume of Georgian-Armenian trade remains modest in both relative and absolute terms. According to official Armenian statistics, it rose by 11 percent to $91.6 million in January–November 2010. The figure was equivalent to just over 2 percent of Armenia’s overall foreign trade.^[55]

Foreign debt

Armenia's national debt has increased significantly since 2008 when public external debt consisted of only 13.5 percent of GDP.^[17] By the end of 2010, Armenia’s external debt is projected to form about 42 percent of GDP, and 50 percent in 2012.^[17]

As of late November 2009, the Armenian government's foreign debt was around $3 billion USD, having doubled in size over the course of the previous year.^[22] With the Armenian government needing more anti-crisis loans from the World Bank and other foreign donors, the debt-to-GDP ratio is expected to exceed 40 percent in 2010.^[22] According to a World Bank official, a country that has around 12 percent rate of growth or even lower, at the range of 7 to 8 percent, can afford a level of public debt of up to 50 percent. The official warned that the debt servicing payments of the Armenian government will surge by 2013 and absorb "quite significant part of tax revenues."^[22]

According to another estimate, the ratio between the country's Gross Domestic Product (GDP) and the state's foreign debt has reached 46 percent.^[56] Economists generally agree that a country is insolvent, if its foreign debt surpasses 50 percent of its GDP.^[56] Critics of the government say that the $500 million credit from Russia should have gone to develop industry, instead of going to the construction sector.^[56]

Transportation routes and energy lines

Internal

Since early 2008, Armenia's entire rail network is managed by the Russian state railway.^[57][58]

Through Georgia

Russian natural gas reaches Armenia via a pipeline through Georgia.

The only operational rail link into Armenia is from Georgia. During Soviet times, Armenia's rail network connected to Russia's via Georgia through Abkhazia along the Black Sea. However, the rail link between Abkhazia and other Georgian regions has been closed for a number of years, forcing Armenia to receive rail cars laden with cargo only through the relatively expensive rail-ferry services operating between Georgian and other Black Sea ports.^[57]

The Georgian Black Sea ports of Batumi and Poti process more than 90 percent of freight shipped to and from landlocked Armenia. The Georgian railway, which runs through the town of Gori in central Georgia, is the main transport link between Armenia and the aforementioned Georgian seaports. Fuel, wheat and other basic commodities are transported to Armenia by rail.^[58]

Armenia's main rail and road border-crossing with Georgia (at 41°13′41.97″N 44°50′9.12″E / 41.2283250°N 44.8358667°E / 41.2283250; 44.8358667) is along the Debed river near the Armenian town of Bagratashen and the Georgian town of Sadakhlo.

The Upper Lars border crossing (at Darial Gorge) between Georgia and Russia across the Caucasus Mountains served as Armenia's sole overland route to the former Soviet Union and Europe.^[59] It was controversially shut down by the Russian authorities in June 2006, at the height of a Russian-Georgian spy scandal.^[59] Upper Lars is the only land border crossing that does not go through Georgia's Russian-backed breakaway regions of South Ossetia and Abkhazia. The other two roads linking Georgia and Russia run through South Ossetia and Abkhazia, effectively barring them to international traffic.^[59] This crossing is expected to reopen starting on March 1, 2010.^[59]

Through Turkey and Azerbaijan

The closing of the border by Turkey has cut Armenia's rail link between Gyumri and Kars to Turkey; the rail link with Iran through the Azeri exclave of Nakhichevan; and a natural gas and oil pipeline line with Azerbaijan. Also non-functioning are roads with Turkey and Azerbaijan. Despite the economic blockade of Turkey on Armenia, every day dozens of Turkish trucks laden with goods enter Armenia through Georgia.

In 2010, it was confirmed that Turkey will keep the border closed for the foreseeable future after the Turkey-Armenia normalization process collapsed.^[17]

Through Iran

A new gas pipeline to Iran has been completed, and a road to Iran through the southern city of Meghri allows trade with that country. An oil pipeline to pump Iranian oil products is also in the planning stages.

As of October 2008, the Armenian government is considering implementing an ambitious project to build a railway to Iran.^[57] The 400 kilometer railway would pass through Armenia's mountainous southern province of Syunik, which borders Iran. Economic analysts say that the project would cost at least $1 billion (equivalent to about 40 percent of Armenia's 2008 state budget).^[57] As of 2010, the project has been continuously delayed, with the rail link estimated to cost as much as $4 billion and stretch 313 km (194 mi).^[17] In June 2010, Transport Minister Manuk Vartanian revealed that Yerevan is seeking as much as $1 billion in loans from China to finance the railway’s construction.^[54]

Labor

Monthly wages

According to the state-owned Armenpress news agency, the average monthly wage in Armenia for the first half of 2007 was 70,700 drams (about $210 USD).^[60]

As of April 24, 2008, the average monthly salary is 75,000 drams (about $242 US dollars).^[38] According to the ROA National Statistical Service, the average monthly salary during January - June 2008 is 86,850 drams (about $287 at the time). About 62% of officially registered wage earners earn at least the average monthly wage, while only 19.6% receive a monthly salary of over 100,000 drams (about $330 at the time).^[61]

Unemployment

According to research commissioned by the Yerevan office of the Organization for Security and Co-operation in Europe (OSCE), at least one in three working-age Armenians was unemployed as of February 2005 despite several consecutive years of double-digit economic growth. The finding sharply contrasts with government's official unemployment rate of about 10 percent.^[45] A 2003 household survey conducted by the National Statistical Survey found that the real unemployment rate is about 33 percent.^[45]

Migrant workers

Since gaining independence in 1991, hundreds of thousands of Armenia's residents have gone abroad, mainly to Russia, in search of work. Unemployment has been the major cause of this massive labor emigration. OSCE experts estimate that between 116,000 and 147,000 people left Armenia for economic reasons between 2002 and 2004, with two-thirds of them returning home by February 2005. According to estimates by the National Statistical Survey, the rate of labor emigration was twice as higher in 2001 and 2002.^[45]

According to an OSCE survey, a typical Armenian migrant worker is a married man aged between 41 and 50 years who "began looking for work abroad at the age of 32-33."^[45]

Appreciation and depreciation of the dram

In 2010, the value of the Armenian Dram (AMD) was artificially kept high during the height of the global economic crisis. Had the AMD been allowed to depreciate to its market level, exports would have become more competitive and the purchasing power of the majority of the population who are dependent on remittances from abroad would have increased. Instead, the value of the AMD was kept high, out of a fear of inflation and concern about alienating the powerful government-connected importers of oil, sugar, flour, cigarettes and beverages.^[17]

The AMD/USD exchange rate depreciated by 6.1 percent in the first three quarters of 2010 compared to the same period in 2009, before it began to show the expected end-of-the-year appreciation. In comparison, between the January to October periods of 2010 and 2009, depreciation stands at 4.7 percent.^[17]

Government revenue and taxation

The Armenian government collected 383.5 billion drams ($1.26 billion) in various taxes in the first nine months of 2008 (a 33.2 percent increase from the same period last year).^[62]

Many large companies have a privileged status when it comes to taxation. Big business is not taxed in proportion to its capacity and output, and the disproportionate burden falls on small and medium size businesses.^[17]

New value-added tax

Over half of the tax revenues in the January–August 2008 time period were generated from value-added taxes (VAT). By comparison, corporate profit tax generated less than 16 percent of the revenues.^[62] This suggests that tax collection in Armenia is improving at the expense of ordinary citizens, rather than wealthy citizens (who have been the main beneficiaries of Armenia's double-digit economic growth in recent years).^[62]

Tax evasion

Many Armenian companies, especially those owned by government-connected tycoons, have long reported suspiciously low earnings, thereby avoiding paying larger taxes.^[62]

Environmental issues

Armenia is trying to "address its environmental problems". It has established a Ministry of Environment and has introduced a pollution fee system by which taxes are levied on air and water emissions and solid waste disposal. The resulting revenues are used for unknown purposes. Armenia doesn't seem to be interested in cooperating with other members of the Commonwealth of Independent States (a group of 12 former Soviet republics) or with members of the international community on environmental issues. The Armenian Government is working toward closing the Armenian Nuclear Power Plant and has already made an agreement with Russian "businessmen" about the construction and operation and ownage of a new Nuclear power plant.

Energy

Banking

Armenia's financial system is not integrated into the global network. According to the head of the Armenian Central Bank’s (CBA) department for financial system policies and analyses (Vahe Vardanyan) Armenian banks have no large asset concentrations in foreign markets, particularly in capital markets. They nearly have no purchased securities (so-called securitized packages). For this reason, Armenia was virtually unaffected by the Liquidity crisis of September 2008.^[63]

Armenian banking assets are very low and make up only 25 percent of the Gross Domestic Product (GDP).^[63]

Takeover of Armenian industrial property by the Russian state and Russian companies

Since 2000, the Russian state has acquired several key assets in the energy sector and Soviet-era industrial plants. Property-for-debt or equity-for-debt swaps (acquiring ownership by simply writing off the Armenian government's debts to Russia) are usually the method of acquiring assets. The failure of market reforms, clan-based economics, and official corruption in Armenia have allowed the success of this process.^[64]

In August 2002, the Armenian government sold an 80 percent stake in the Armenian Electricity Network (AEN) to Midland Resources, a British offshore-registered firm which is said to have close Russian connections.^[64]

In September 2002, the Armenian government handed over Armenia’s largest cement factory to the Russian ITERA gas exporter in payment for its $10 million debt for past gas deliveries.^[65]

On November 5, 2002, Armenia transferred control of 5 state enterprises to Russia in an assets-for-debts transaction which settled $100 million of Armenian state debts to Russia. The document was signed for Russia by Prime Minister Mikhail Kasyanov and Industry Minister Ilya Klebanov, while Prime Minister Andranik Markarian and National Security Council Secretary Serge Sarkisian signed for Armenia.^[64] The five enterprises which passed to 100 percent Russian state ownership are:

• Armenia's largest thermal power plant which is in the town of Hrazdan and is gas-burning
• the Mars electronics and robotics plant in Yerevan, a Soviet-era flagship for both civilian and military production
• three research-and-production enterprises—for mathematical machines, for the study of materials, and for automated control equipment—these being Soviet-era military-industrial plants

In January 2003, the Armenian government and United Company RUSAL signed an investment cooperation agreement, under which United Company RUSAL (which already owned a 76% stake) acquired the Armenian government's remaining 26% share of RUSAL ARMENAL aluminum foil mill, giving RUSAL 100% ownership of RUSAL ARMENAL.^[64][66]

On November 1, 2006, the Armenian government handed de facto control of the Iran-Armenia gas pipeline to Russian company Gazprom and increased Gazprom's stake in the Russian-Armenian company ArmRosGazprom from 45% to 58% by approving an additional issue of shares worth $119 million.^[67] This left the Armenian government with a 32% stake in ArmRosGazprom. The transaction will also help finance ArmRosGazprom's acquisition of the Hrazdan electricity generating plant’s fifth power bloc (Hrazdan-5), the leading unit in the country.^[67]

In October 2008 the Russian bank Gazprombank, the banking arm of Gazprom, acquired 100 percent of Armenian bank Areximbank after previously buying 80 percent of said bank in November 2007 and 94.15 percent in July of the same year.^[68]

Controversy over non-transparent deals

Critics of the Kocharian government say that the Armenian administration never considered alternative ways of settling the Russian debts. According to economist Eduard Aghajanov, Armenia could have repaid them with low-interest loans from other, presumably Western sources, or with some of its hard currency reserves which then totaled about $450 million. Furthermore, Aghajanov points to the Armenian government's failure to eliminate widespread corruption and mismanagement in the energy sector – abuses that cost Armenia at least $50 million in losses each year, according to one estimate.^[65]

Political observers say that Armenia's economic cooperation with Russia has been one of the least transparent areas of the Armenian government’s work. The debt arrangements have been personally negotiated by (then) Defense Minister (and now President) Serge Sarkisian, Kocharian’s closest political associate. Other top government officials, including Prime Minister Andranik Markarian, had little say on the issue. Furthermore, all of the controversial agreements have been announced after Sarkisian’s frequent trips to Moscow, without prior public discussion.^[65]

Finally, while Armenia is not the only ex-Soviet state that has incurred multimillion-dollar debts to Russia over the past decade, it is the only state to have so far given up such a large share of its economic infrastructure to Russia. For example, pro-Western Ukraine and Georgia (both of which owe Russia more than Armenia) have managed to reschedule repayment of their debts.^[65]

Production

Industrial production growth rate:

3% (2008 est.)

country comparison to the world: 105

Industries: Diamond processing, cigarette production, metal-cutting machine tools, forge-pressing machines, electric motors, tires, knitted wear, hosiery, shoes, silk fabric, chemicals, trucks, instruments, microelectronics, jewellery manufacturing, software development, food processing, brandy.

Agriculture - products: Fruit (especially grapes and apricots), vegetables, livestock, wheat, wine, brandy

Value of stock exchange: $42.8 million (2005)

Currency: dram (AMD)

Currency code: AMD

Exchange rates: Armenian dram per US dollar - 310.00 (2008), 457.69 (2005), 533.45 (2004), 578.76 (2003), 573.35 (2002), 555.08 (2001), 539.53 (2000)

Energy

Electricity - production: 5.544 GWh (2007)
country comparison to the world: 108

Electricity - consumption: 4.539 GWh (2006)
country comparison to the world: 109

Electricity - exports: 322.6 GWh; note - exports an unknown quantity to Georgia; includes exports to Nagorno-Karabakh (2007)

Electricity - imports: 400.6 GWh; note - imports an unknown quantity from Iran (2007)

Oil - production: 0 barrels per day (0 m³/d) (2005 est.)
country comparison to the world: 208

Oil - consumption: 41,090 barrels per day (6,533 m³/d) (2006 est.)
country comparison to the world: 100

Oil - exports: 0 barrels per day (0 m³/d) (2005)
country comparison to the world: 207

Oil - imports: 44,670 barrels per day (7,102 m³/d) (2005)
country comparison to the world: 90

Natural gas - production: 0 m³ (2007 est.)
country comparison to the world: 207

Natural gas - consumption: 2.05 billion m³ (2007 est.)
country comparison to the world: 81

Natural gas - exports: 0 m³ (2007 est.)
country comparison to the world: 201

Natural gas - imports: 2.05 billion m³ (2007 est.)
country comparison to the world: 44

See also

• List of companies of Armenia
• Diamond industry in Armenia
• Geographical Issues in Armenia

Notes

Sources

Books

External links

• Armenia Economic Development at DMOZ
• Ministry of Economy
• Fund for Rural Economic Development
• Armenian Development Agency

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