[ busines overview ]

Market Overview

During the past several years, Armenia has experienced an impressive expansion in investment, in exports, and in real incomes. This has been the result of stabilizing fiscal and monetary policies, continued economic reforms, and substantial support including significant flows of remittances, from the Armenian Diaspora--meaning both longstanding Diasporan communities in the U.S. and elsewhere, and also more recent Armenian emigrants, especially to Russia. Nevertheless, poverty is still high, and the sustainability of growth remains a concern. The economic reform agenda remains unfinished.

• Real GDP growth for the period 2001 - 2006 has been strong, rising from 9.6% per annum in 2000 to 13.9% in 2005 and reaching 13.4% in 2006. The Armenian government (reasonably) predicts 9% growth in GDP during 2007. Construction and agriculture remain leading sectors; foreign trade turnover for January-December 2006 grew by 15.9 %, while imports growth amounted to 21.8%.

• Armenia's main trade partners in the period January - November 2006 were the Russian Federation (13.2% of total trade turnover), Germany (9.5%), Belgium (7.5%), Israel (6.4%), the Ukraine (6.1%) and the USA (5.4%). According to the National Statistical service of Armenia, trade volumes between the USA and Armenia for January - November 2006 were $152.7 million. Armenia's main imports from the USA were precious stones and metals, mineral fuels and oils, chemical products, means of transportation, machinery and equipment, textile articles, etc. Armenia's primary export items to the USA included precious stones and metals, textile and prepared food products.

• The high official rates of economic growth have not been accompanied by a commensurate increase in employment or reduction in poverty. According to the latest "Armenia's Social Picture and Poverty" report published by the National Statistical Service in 2006, citing data from a 2004 household survey, 34.6% of the population still lives below the official poverty line.

• The Armenian Government's Poverty Reduction Strategy Paper (PRSP)--also Armenia's de facto development strategy--aims to reduce the poverty rate to less than 20% by 2015. The PRSP aims to accomplish this by increasing social expenditures while providing for steady growth of private enterprise to increase the tax base.

• Armenia's accession to the WTO in 2003 and progress in privatization contribute to an improving business climate. With United States Agency for International Development (USAID) and World Bank assistance, the government has been implementing an ambitious program of reforms aimed at restructuring the banking and financial services sector, liberalizing trade, attracting foreign investment through improved tax and customs regimes, establishing a Western accounting system, and implementing a private property regime. However, many reforms remain incomplete, and the government will have to show strong political will to make necessary changes, especially in the tax and customs services.

• Corruption, nepotism and interference by state authorities, uneven and unpredictable application of laws (particularly those relating to enforcement of contracts, bankruptcy and registration of property rights) and a weak banking sector remain serious constraints on business.

• Due to Armenia's closed borders with neighboring Turkey and Azerbaijan, nearly all goods traded with Armenia must transit Georgia, where high transport tariffs are imposed, impeding growth in Armenia's external sector. Long-term economic prospects depend significantly on whether Armenian will be successful in resolving the Nagorno- Karabakh conflict, and in establishing normal diplomatic and trade relations with Turkey and Azerbaijan.

• In the period of January - September 2006 the total inflow of Foreign Direct Investment (FDI) in Armenia was $149.04 million. Greece has been the largest investor in the country since 1991, followed by Russia. Total American FDI in Armenia was approximately $235 million. Main sectors of the economy of Armenia attracting foreign investment have been telecommunications, power and utilities, food processing, mining and metallurgy, trade, construction, information technologies and hotel services..

• Armenia receives one of the world's highest levels of assistance per capita. United States Government assistance to Armenia was $74.4 million in fiscal year 2006, and totals more than $1.7 billion since 1992. In addition, the IMF, World Bank, and EBRD, as well as other financial institutions and foreign countries, have extended grants and loans to Armenia exceeding $1 billion since 1993.

• The Millennium Challenge Corporation has signed a contract with Armenia valued at $235.65 million. MCC's first transfer of $1.38 million was disbursed in December 2006

Market Challenges

The Armenian government has recognized the need to create a more inviting business environment. In 2005, President Robert Kocharian announced important reforms of the tax and customs administration, many of which have been realized. The government also has ongoing programs to strengthen the financial intermediation role of the banking sector, improve governance in the administration of public services, and minimize corruption and interference by state authorities. The government's Poverty Reduction Strategy Paper and Anti-Corruption Strategy Paper (2004-2007) outline plans for reform in broad terms, but fail to address structural reforms and deregulation. The Action Plan of the Anti-Corruption Strategy Paper expired at the end of 2006. While a new draft strategy has been circulated, it has not yet been approved. The business climate will likely remain difficult, as vested interests continue to be the main impediment to good governance.
Maintaining economic growth and progress will depend on positive political developments as well. The trade embargo imposed by two of Armenia's four neighbors - Turkey and Azerbaijan - is a major impediment to development. Transport costs through Georgia are expensive. Trade with Iran is small, restricted by poor transportation links (bad roads, no railroad) and by the fact that the portion of Iran adjacent to Armenia is a remote and underdeveloped region . U.S. involvement in trade with Iran is also limited by the Iran Sanctions Act (formerly Iran-Libya Sanctions Act, ILSA), and the risk of new sanctions which might be imposed by the United Nations, in connection with Iran's illicit nuclear programs.

Market Opportunities

Due to Armenia's small domestic market and the high transport costs, there are still relatively few--but growing--opportunities for traditional direct export of American products. While many American goods do make it to Armenia, many are resold from dealers in neighboring countries, at times without authorization from the original producer. The best opportunities for export probably lie in the services sector, including international financial services, or services that require direct investment in Armenia, such as travel and tourism. American brand names are often highly regarded in Armenia, creating yet-untapped opportunities for franchising and distributorships in consumer-oriented sectors.
There is greater opportunity in Armenia for foreign direct investment. Foreign investors can benefit from largely unexploited assets, a favorable trade regime both with the CIS and with the West, and Armenia's relatively skilled workforce and low wages. However, occasional, opaque, transaction-driven economic policy decisions have called into question the government's commitment to welcoming foreign investment.

Market Entry Strategy

In the past, doing business in Armenia in almost all cases required having someone on the ground. However, some foreign businesses now report success at establishing trade relationships in Armenia without a preexisting local network. All business representatives underscore the need to have a strong understanding of local legislation, particularly tax and customs legislation, in order to avoid paying unnecessary fees. Communications networks have noticeably improved in the past eighteen months, and additional telecommunications investments continue, though service quality and availability still lag behind the European norm. The importance of person-to-person contact in the Armenian business culture cannot be overemphasized. While some Western-style legal consultancies exist to help find partners or perform due diligence, their capacity to act as responsible agents is limited, largely due to the lack of transparency in the business culture as a whole. Most successful foreign investors have Armenian partners who are familiar with the local business environment.

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