After a decade of rapid expansion, Armenia's diamond cutting industry, which manufactures the country's number one export item, suffered a major slump in 2004. The almost 20 percent decline in production, measured in the Armenian currency, the dram, calls into question the success of an ambitious government plan to promote the sector's growth.
According to government officials, the drop in production is largely due to the plunge of the US dollar in international currency markets. Publicly, authorities say they are not concerned about the diamond-cutting sector's health, and predict that production should rebound this year.
"Rumors about the industry's death are exaggerated," Gagik Mkrtchian, head of the department on precious stones and jewelry at the Armenian Ministry of Trade and Economic Development, said earlier this month.
Gem diamonds have long accounted for the biggest share of Armenian exports, making the tiny ex-Soviet republic one of the world's major suppliers of the highly expensive stones. Though there are now more than 50 diamond cutting firms in Armenia, the sector is dominated by a handful of foreign investors. One of the largest gem-cutting firms is owned Israeli tycoon Lev Leviev, an internationally prominent diamond dealer.
The share of gem diamonds in Armenian exports has decreased in recent years, but it still stood at a commanding 39 percent in 2004. The production decline in cut diamonds was enough to bring export growth, along with Armenia's overall industrial output, to a virtual halt. Even though the economy as a whole expanded at a robust rate of 10 percent last year, economists believe that Armenia's long-term development should depend heavily on exports, given the small size of the domestic market.
In late 2003, the government approved a three-year plan that aimed to nearly double annual cut-diamond production to $500 million and create roughly 10,000 new jobs. However, the sector's trouble in 2004 would appear to put those targets out of reach.
According to government estimates, diamond production only slightly shrunk from the 2003 level in dollar terms, totaling about $280 million last year. But officials admit that dollar-based statistics are misleading, given the US currency's more than 20 percent drop in value against the Armenian dram since beginning of 2004. In general, the greenback has lost considerable ground against major world currencies, especially the euro.
The weaker dollar made the diamonds more expensive in the United States, which accounts for more than 50 percent of global sales. Mkrtchian explained; "2004 was a year of retreat for the global diamond industry. ... The main reason for that was a decline in the dollar's value."
A shortfall in anticipated deliveries of rough diamonds from Russia has added to Armenia's problems, officials indicate. A 2001 Russian-Armenian agreement enabled Armenian firms to process up to 400,000 carats of Russian rough diamonds annually from 2002 through 2004. The quota was subsequently raised to 450,000 carats for 2005 and 2006.
Only a fraction of that has actually been delivered to date. Armenia, for example, imported about 970,000 carats of uncut diamonds in 2004. Yet, only 16 percent of them were of Russian origin. The bulk of the rough supplies came mainly from Israel and Belgium, explaining why the two countries are among Armenia's leading trading partners.
Mkrtchian blamed the shortfall on "unjustified" Russian price hikes, but expressed confidence that Yerevan will negotiate better terms with Russia's Alrosa diamond monopoly this year. That, he said, should help to ensure the sector's growth by at least 30 percent.
But some analysts believe that even if the industry soon turns the corner, the benefits for Armenian government coffers will remain marginal. Eduard Aghajanov, a former head of the National Statistical Service, has long argued that gems exported from Armenia are not quite Armenian because their owners are mainly foreigners.
"Given that those products are exempt from the excise and value-added taxes, Armenia's state budget is not getting anything from that industry except employee income taxes," Aghajanov. "Big profits made as a result are taxed abroad because those products do not belong to Armenia."
Payroll and social security taxes collected from Armenia's 12 biggest diamond plants totaled a meager $2 million in 2004, while the average monthly salary of their approximately 4,000 workers was only $150, according to official figures. In addition, the government calculated that diamond-related business activity injected only $37.7 million in the Armenian economy in 2003.
"Making the sector a strategic priority is therefore wrong," argues Aghajanov. "Nobody is against its existence as it provides quite a few jobs. But Armenia's future lies in high-tech industries and especially information technology."