Armenia: Is Yerevan Caught in a Trade Trap?

With less than a week to go before Armenian Foreign Minister Eduard Nalbandian signs protocols to normalize Yerevan's relations with longtime foe Turkey, attention is focusing on what an open Turkish border will mean for Armenian businesses. Many entrepreneurs worry that the prognosis is unsettling.

Turkey has pledged that it will lift its economic blockade against Armenia within two months after the protocols win legislative ratification in both Ankara and Yerevan. The protocols are scheduled to be signed on October 10. [For background see the Eurasia Insight archive]. The Armenian economy has long struggled in the face of a lack of trade routes. [For background see the Eurasia Insight archive]. But these days, some entrepreneurs and economists in Yerevan believe domestic producers could go into trade shock if they are exposed too rapidly and haphazardly to competition with Turkey.

In 2008, despite a closed border and lack of diplomatic ties, Armenia conducted some $269 million in trade with Turkey, according to the National Statistical Service. This is twice the level of trade with Georgia ($131.3 million), the current transit country for Turkish goods to Armenia. Turkish trade volume is projected to rapidly rise if the border is opened.

At a September 16 news conference in Yerevan, Mark Lewis, the head of a visiting International Monetary Fund delegation, expressed the belief that the Armenian economy "would significantly benefit" from an open border with Turkey, with Armenian exporters gaining access to "a new and lucrative market."

But local opinions differ about how far those benefits will actually go. Thirty-three-year-old Yerevan resident Lusine Harutiunian has been importing jeans from Turkey via Georgia for the past several years. Although Harutiunian describes the Georgia route as "expensive" and time-consuming, she remains uncertain about how an open border with Turkey could improve things. "I don't know what our situation will be like in case the border opens," Harutiunian said.

Tatoul Manasserian, a professor of international business and economics at Yerevan State University, worries that the Armenian economy could be swamped by a trade imbalance with Turkey. Manasserian argued that Armenia "has no competitive goods to offer Turkey" apart from electricity. In March 2010, Armenia is expected to begin delivering annual power supplies of 1.5 billion kilowatts per hour to Turkey.

But in other sectors, there exists a belief that Armenian firms are not ready to compete against their more experienced Turkish counterparts. Manasserian explained that production costs within Armenia tend to be higher than in Turkey, and rates of foreign investment lower. The global economic crisis could also play a role -- the Armenian economy is expected to shrink by roughly 15 percent by year's end, according to the IMF. [For background see the Eurasia Insight archive].

"[I]f the government does not demonstrate a special attitude and have a clear strategic program, local producers will have ? difficult time," Manasserian said.

Vazgen Safarian, chairman of the Union of Domestic Manufacturers of Armenia, an association of some 500 Armenian companies, agrees. Armenia exported about $1.8 million in fur, ferrous scrap metal, aluminum and foil to Turkey in 2008, according to the group's data. That amount is just a fraction of the value of goods that Turkey exports to Armenia. "On the one hand, our consumers will benefit from the cheap goods, but on the other hand, this will doom our local producers to having to shut down or to suspend operations," Safarian said. Armenia last year imported mostly bitumen, fuels and knitted fabrics from Turkey, Safarian's organization reports.

To help Armenian manufacturers survive amid Turkish competition, the manufacturer's union has proposed that the government give discounted loans to domestic producers and erect trade barriers. The proposals will be submitted for consideration this month to President Serzh Sargsyan's Public Council, a 1,200-member advisory body.

One lobbyist for expanded business ties with Turkey disagrees with the union's tactics, however. Once the border opens, Armenia could again become a crossroads for trading routes between Europe and Asia, contends Arsen Ghazarian, a co-chairman of the Armenian-Turkish Business Development Council, which promotes trade between Armenia and Turkey. Lingering "psychological" issues among Armenian consumers mean that Turkish goods will have a tough time making inroads in Armenian markets for the time being, Ghazarian added.

Instead, the heightened competition could help Armenia's agricultural, healthcare and science sectors, he told reporters on September 11. Ghazarian did not specify how these sectors in particular would benefit from increased competition. Chances for "serious joint projects" in the manufacture of clothing, one of the most popular areas for Turkish imports, also exist, he continued.

But one Yerevan businessman who imports fabrics from Turkey is skeptical about the potential benefits of an open border. Lernik Yesaian says that his business has picked up considerably in the last seven to eight years. But he now worries that when an open border causes import costs to fall, other Armenian firms will be induced to join the trade, and his own company's profits stand to shrink. "Then, many people will start importing goods, maybe the prices will go down," said Yesaian. "[T]his will hit everyone, [but] I think my business will suffer."

Economist Manasserian similarly cautions that Armenian businesses should expect the worst and be prepared. "We should understand that the opening of borders will not resolve problems, but, rather, mark the beginning of new problems," said Manasserian.