ARMENIA: INCREASING (BUT STILL MODEST) TRADE

UNCLAS SECTION 01 OF 02 YEREVAN 000350

SIPDIS

SENSITIVE BUT UNCLASSIFIED

E.O. 12958: N/A
TAGS: ECON EFIN EAIR ETRD AM
SUBJECT: ARMENIA: INCREASING (BUT STILL MODEST) TRADE
WITH RUSSIA



1. (U) Sensitive but Unclassified. Please protect
accordingly

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SUMMARY
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2. (SBU) The Armenian press noted that trade turnover
for the first nine months of 2003 between Armenia and
Russia increased 84 percent over 2002 levels of the
same period and was distributed almost equally among
Armenian exports to Russia and Russian exports to
Armenia. Despite this statistical increase, actual
trade remains at a near constant level and
transportation through Georgia as well as a small
domestic Armenian market remain the major obstacles for
a substantial long-term increase of trade between
Armenia and Russia. Although trade turnover between
Armenia and Russia increased, in 2003 Russia lost
market share relative to Armenia's other major trading
partners. End Summary.

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RUSSIAN EXPORTS TO ARMENIA
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3. (SBU) Official statistics from the GOAM showed that
the total value of imports from Russia to Armenia
during January to September of 2003 was USD 165
million, an increase from USD 118 million during the
same period in 2002, placing Russia as the number one
exporter to Armenia, with twice the turnover of second
place Belgium. Of the USD 47 million increase, USD 37
million was in the import of diamonds. (Note:
Diamonds were also a significant component of trade
with Belgium. End Note.) Despite growth in Russia's
trade turnover with Armenia, Russia lost market share
for the second year in a row: Russia's total trade
turnover share decreased from 19.2 percent in 2001 to
17.3 percent in 2002 and to 15.5 percent in 2003.


4. (SBU) Russian diplomat Aleksandr Zyganov told us
that the biggest imports to Armenia from Russia were
oil, gas, nuclear fuel and diamonds. He stated that
Russia was Armenia's number one trading partner and the
trade had increased every year for the past three
years. He gave an example of a successful Russian-
Armenian joint venture, Armenia Lada, which sells
approximately 400 Russian made vehicles a month in
Armenia. Other Russian exports to Armenia were wheat,
sugar, chemical products and vodka. Despite the
statistical increase Zyganov admitted that the small
domestic market in Armenia inhibited trade and large-
scale Russian investment.


5. (SBU) According to Tigran Davtyan, the Deputy
Minister of Trade and Economy, the main increase in
Armenian imports for 2003 from Russia was in diamonds;
he believed the other main exports, oil, gas, and
nuclear fuel were about at the same level as 2002.
Davtyan felt that the overall statistical 40 percent
increase in imports from Russia was misleading as most
of the imported diamonds were refinished and re-
exported to Belgium and Israel or back to Russia for
final sale. Nerses Mkrtchyan, Head of the
International Economic Cooperation Department, believed
that the increase in diamond imports could be traced
back to one Russian-based Armenian businessmen, Ara
Abrahamyan. The reason for this spike was unclear to
Mkrtchyan; he believed it could have easily been an
anomaly and did not represent an overall strategy of
increasing trade between Russia and Armenia.


6. (SBU) Mrktchyan, as well as Gagik Hairapetian, the
Russian desk officer at the Armenian Ministry of
Foreign Affairs, felt that while refined oil was a
major Russian import, the country of origin of oil
imports at the Georgian port of Poti was not always
clear. Management of MIKA, a gas station franchise
that owns roughly 50 percent of the Armenian domestic
market, told Hairapetian that up to half of the fuel
sold by MIKA comes from either Romania or Turkey.

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ARMENIAN EXPORTS TO RUSSIA
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7. (SBU) Official GOAM statistics show that from
January to September of 2003, Armenian exports to
Russia equaled USD 64 million, as compared to USD 46
million. Of the USD 18 million increase, USD 6 million
was refinished diamonds. Zyganov said that Armenian
exports consisted of cognac, vegetables, fruits,
cheese, tobacco, metals, light machinery, chemicals,
and even Armenian beer. Hairapetian stated that since
many Armenian farmers do not have money for
fertilizers, there was also a demand for their
environmentally friendly food products in Russia. The
USDA has encouraged this trend by helping found the
Armenian Organic Agriculture Foundation (AOAF) as well
as offering a USDA-Extension mini-grant program that
encourages an organic component for crop production as
well as livestock. Hairapetian stated that a soon-to-
be-opened Armenian consulate in Southern Russia,
coupled with good cooperation with local Russian
officials, a large Armenian Diaspora, and cheaper costs
of transporting goods to southern Russia than to the
Moscow region, all contributed to higher import demand.
Hairapetian and Mkrtchyan both felt the expanding
Russian economy would always be an outlet for Armenian
goods.

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COGNAC: NUMBER ONE EXPORT
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8. (SBU) The Sales Manger of the Yerevan Brandy Company
(YBC),Serge Der-Sahaggian told us that 80 percent of
their export market was in Russia. In 2003 they
exported approximately 6.4 million bottles, or tens of
millions of dollars worth of brandy, which made cognac
the leading export item to Russia. Der-Sahaggian
stated that the YBC and its competition, Great Valley,
constitute about 90 percent of the Armenian export
brandy market in Russia. The YBC shipped all their
products through the Georgian port city of Poti, and
despite the uncertain political climate in Georgia, the
YBC had no plans to curtail exports. Der-Sahaggian and
Haripetian were optimistic that tariffs and duties and
corrupt practices would finally be lowered and/or
minimized under a new reform-minded Georgian
government.

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OBSTACLES TO INCREASED TRADE
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9. (SBU) Der-Sahaggian, Zyganov, Hairapetian and
Mkrtchyan all agreed that high tariffs, corruption,
encounters with Georgian criminal groups and the
uncertainty of goods transiting unmolested through
Georgian customs all combined to make exporting goods
from Armenia to Russia through Georgia a substantial
obstacle to increased trade with Russia. Hairapetian
and Zyganov both strongly believed that a railroad link
through the breakaway republic of Abkhazia could boost
trade between the nations significantly. Zyganov
believed that Armenian cement and construction
materials could be sold in Russia as well as an
increase in exporting fruit, vegetables, foodstuffs,
and cheese. Russia could also export more wheat, sugar
and oil. All agreed that politically this rail link
was unlikely to be opened anytime soon. Zyganov stated
that in March of 2003, Russian President Putin and
former Georgian President Shevardnadze had agreed to
build a new railway through Georgia to link Russia and
Armenia, but this was still in the discussion stage.

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COMMENT
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10. (SBU) While Russia is clearly Armenia's most
significant trading partner, any hope for significant
growth in real trade will depend on improving
transportation links between the two countries, a
prospect unlikely in the near future.
ORDWAY