EurasiaNet Business & Economics - Lack of Strong Legal Framework, Corruption Hinder Foreign Investment in Armenia

BUSINESS & ECONOMICS

LACK OF STRONG LEGAL FRAMEWORK, CORRUPTION HINDER FOREIGN INVESTMENT IN ARMENIA
Mark Berniker 1/16/03

This is the first in a series of reports examining the investment climates of states in the Caucasus and Central Asia.

Despite a number of structural changes and recent strong economic growth, Armenia is failing to attract significant foreign direct investment. Analysts say an insufficient legal framework and corruption are the main reasons Armenia continues to been seen as a risky market.

According to a recent report by the Economist Intelligence Unit, Armenia attracted a "paltry" $19 million in foreign direct investment during the first quarter of 2002, down almost 50 percent, compared to the same period the previous year. "Despite a favorable, market-oriented legislative framework, and a liberal trade system, foreign companies have remained reluctant to invest in Armenia because implementation and enforcement of the laws has been extremely weak," the report said.

Election politics may be one reason for the implementation problems. Armenia is scheduled to hold a presidential election February 19 in which the incumbent, Robert Kocharian, is expected to win another five-year term. [For additional information see the EurasiaNet Human Rights archives]. During the election campaign, Kocharian supporters have downplayed the foreign investment issue. Instead, they have trumpeted statistics that show the Armenian economy growing at an impressive rate. For example, Armenian Finance Minister Vartan Khachatrian said the country’s economy grew by 12.7 percent in 2002, according to a January 14 report by the RIA Oreanda news agency.

US Ambassador to Armenia John Ordway echoed the strong assessment, telling an audience of the Armenian Assembly of America in Washington, D.C. on January 13th that the country is "showing remarkable, strong and stable growth."

Armenia’s biggest trading partners are Russia, Belgium, the United States and Iran. The 2003 Index of Economic Freedom, a joint report of The Wall Street Journal and The Heritage Foundation, ranked Armenia 44th among 146 countries surveyed. The report noted that Armenia’s "corrupt bureaucracy often applies regulations haphazardly, and political strife hampers the progress of reforms."

Indeed, despite impressive economic numbers, Armenia continues to be dogged by political violence. Recently the international community has focused on the December 28 assassination of Tigran Naghdalian, the chairman of Public TV and Radio Council in Armenia. On January 14, Walter Schwimmer, Secretary General of the Council of Europe, said the timing of this murder ahead of presidential elections was unfortunate and "strongly condemned" the assassination.

Another significant obstacle for Armenia in attracting foreign investment is the lack of a political settlement to the Nagorno-Karabakh conflict. Talks between Armenia and Azerbaijan on Karabakh’s status are currently stalemated. [For additional information see the Eurasia Insight archives].

The Armenian business climate can often pose substantial challenges for both domestic and foreign firms. On January 13, Armenialiberty.org, an Armenian information service of Radio Free Europe/Radio Liberty, reported that The Union of Traders, which comprises 700 Armenian small entrepreneurs, "continue to be harassed by tax authorities and dismissed government assurances that the business environment in Armenia is improving."

Even if official Armenian growth statistics are questioned, the International Monetary Fund in 2002 revised its growth figures for the Armenian economy from 7.5 to 9.5 percent. The IMF declined several interview requests, but in a recent report jointly authored with the European Bank for Reconstruction and Development, said "the [Armenian] government must advance its efforts to improve the investment climate."

Unable to attract significant foreign direct investment, Yerevan remains dependent on assistance from international financial institutions. In late December, Armenia obtained a $20 million loan from the World Bank, and arrived at an agreement with the bank under which an additional $40 million in funds will be released in 2003. As part of its deal with the World Bank, Armenia agreed to privatize its power utilities. Armenia’s economic prospects will be the subject of an upcoming conference to be hosted by the World Bank on January 25.

Perhaps the most attractive sector of Armenia’s economy at present is the diamond industry. The sector has grown sharply in the past few years with Armenia importing diamonds from Russia and elsewhere, then finishing the stones for export worldwide. Domestic processing of diamonds and other precious gemstones are expected to drive export growth in 2003. Belgium is Armenia’s leading export market contributing nearly a quarter of all the country’s export revenues. A report from Caspian News Agency in August 2002 said that during the first seven months of 2002 Armenia produced and exported $82 million in cut diamonds, which was an 83 percent increase over the previous year. Armenia also has commercially viable deposits of iron, copper, molybdenum and polymetallic ores, with elements including gold, silver, lead and zinc.

Editor�s Note: Mark Berniker is a freelance journalist specializing in Russian, Eastern European and Central Asian affairs

The Central Eurasia Project aims, through its website, meetings, papers, and grants, to foster a more informed debate about the social, political and economic developments of the Caucasus and Central Asia. It is a program of the Open Society Institute-New York. The Open Society Institute-New York is a private operating and grantmaking foundation that promotes the development of open societies around the world by supporting educational, social, and legal reform, and by encouraging alternative approaches to complex and controversial issues.

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