Identifier
Created
Classification
Origin
08YEREVAN100
2008-02-08 03:16:00
UNCLASSIFIED
Embassy Yerevan
Cable title:  

ARMENIA INVESTMENT CLIMATE STATEMENT 2008

Tags:  EINV EFIN ETRD ELAB PGOV KTDB OPIC USTR AM 
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UNCLAS SECTION 01 OF 07 YEREVAN 000100 

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TAGS: EINV EFIN ETRD ELAB PGOV KTDB OPIC USTR AM
SUBJECT: ARMENIA INVESTMENT CLIMATE STATEMENT 2008

REF: 07 STATE 158802

UNCLAS SECTION 01 OF 07 YEREVAN 000100

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TAGS: EINV EFIN ETRD ELAB PGOV KTDB OPIC USTR AM
SUBJECT: ARMENIA INVESTMENT CLIMATE STATEMENT 2008

REF: 07 STATE 158802


1. (U) Per reftel, Embassy Yerevan, Armenia submits the following as
its 2008 Investment Climate Statement.

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BEGIN TEXT
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2. According to data from the National Statistical Service (NSS),
foreign investment in Armenia has steadily increased from USD 70
million in 2001 to USD 470 million as of September 2007. From
January to September 2007, Foreign Direct Investment (FDI) in
Armenia totaled USD 311 million, a 209 percent increase over the
same period in 2006. Major foreign investments were from Russia,
Lebanon, Argentina and Germany. Gross domestic product (GDP) growth
remained strong at approximately 13 percent for 2006, continuing the
trend of the last 6 years. The IMF projects GDP growth of
approximately 10 percent in 2008.


3. The largest foreign investors in Armenia are those who have
acquired interests in the telecommunication, mining, energy, air
transportation and financial sectors. The privatization of
Yerevan's largest hotels, two historic brandy factories, the
Zvartnots International (Yerevan) and Shirak (Gyumri) Airports, the
telecommunications network, several mining assets and much of the
energy generation and distribution system accounts for the bulk of
foreign commercial presence in Armenia.


4. According to the NSS, FDI inflows were up by 33 percent
year-on-year in the first half of 2007. Lebanon was the leading
investor in this period, accounting for around one-third of the
total, attributable to the fact that the Lebanese company K-Telecom
owned Armenia's largest mobile phone network until Russia's MTS
bought it in September. Both K-Telecom and ArmenTel, the national
telecommunications company now owned by Russia's Vimpelcom, have
been investing heavily in the expansion of their competing wireless
networks. Consequently, the telecoms sector remained by far the

largest recipient of FDI in January-June 2007, attracting almost 60
percent of the total. Civil aviation attracted around nine percent
of total FDI, owing to the reconstruction of the capital, Yerevan's
Zvartnots International Airport; construction was the third-largest
destination with eight percent of FDI.


4. Greenfield investments consist of mostly small and medium-sized
enterprises. More than a dozen U.S. information technology (IT)
firms have established subsidiary operations in Armenia.


5. In 2007, the Armenian dram (AMD) continued to appreciate
significantly, especially against the U.S. dollar, contributing to
an increase of 6.8 percent in year-on-year inflation as of November

2007. The Central Bank and IMF both cite increased U.S. dollar
remittance inflows as one of the primary drivers of the dram
appreciation trend. According to the National Statistical Service,
as of November 30, 2007, nominal appreciation of the dram against
the U.S. dollar reached about 12 percent for the year, following a
19 percent appreciation in 2006 and 7 percent in 2005. Some
anecdotal data suggest that AMD appreciation in recent years has
caused the decline of exports of traditional commodities, in which
the export-to-import ratio in the total trade turnover is roughly
27-to-73. This will raise concerns among domestic exporters about
the potential loss of competitiveness in overseas markets,
particularly given the rapid rate of wage growth in Armenia.

--------------
OPENNESS TO FOREIGN INVESTMENT
--------------


6. Armenia's investment and trade policy is relatively open,
although significant obstacles remain, particularly problems with
corruption. Armenia ranked 34th out of 175 economies -- the highest
ranking among CIS countries -- in the "ease of doing business" index
according to the World Bank's report, Doing Business in 2007. The
Armenian Government continues to work to attract additional
investment. Foreign companies are entitled by law to the same
treatment as Armenian companies (national treatment),and in some
cases they may benefit from temporary preferential tax treatment
including a two-year profit tax exemption. While this exemption was
slated to phase out by the end of 2007, there is no clear indication
as to how the transition will proceed.


8. Basic provisions regulating American investments are set by the
Bilateral Investment Treaty (BIT),signed by the United States and
Armenia in 1992, and by the 1994 Law on Foreign Investment. In
addition to providing for national treatment and most-favored nation
treatment, the BIT sets out guidelines for the settlement of
disputes involving the governments of either party.

YEREVAN 00000100 002 OF 007




9. Armenia's 1997 Law on Privatization (amended in 1999) states that
foreign companies have the same rights to participate in the
privatization processes as Armenian companies. Nevertheless, recent
important privatizations of Armenia's large assets have not been
competitive or transparent, and political considerations have in
some instances trumped Armenia's international obligations to hold
fair tender processes.


10. Under the Constitution, foreign individuals are prohibited from
owning land in Armenia, but this prohibition does not apply to
foreign businesses. Armenia does not issue foreign tax credits and
has no double taxation treaty with the United States. To date, no
cases have been identified in which U.S. entities were disadvantaged
for lack of a double taxation treaty. The Armenian government has
expressed interest in negotiating a double taxation treaty with the
United States. The State Department and U.S. Embassy Yerevan would
welcome information from American firms or individuals that would
substantiate whether such a treaty would facilitate U.S. business
interests in Armenia.


11. Armenia is a member of the following major international
organizations: IMF, World Bank/IDA, IFC, WTO, OSCE, Council of
Europe, UN/UNCTAD/UNESCO, MIGA, ILO, WHO, WIPO, INTERPOL, European
Bank for Reconstruction and Development (EBRD),the Asian
Development Bank (ADB),IAEA, World Tourism Organization, World
Customs Organization, International Telecommunications Union and the
Organization of the Black Sea Economic Cooperation (BSEC). Armenia
became the 145th member of the WTO in February 2003.


12. The seemingly open legislative framework and the government's
visible effort to attract more foreign investment is overshadowed by
instances of unfair tender processes and preferential treatment. A
few recent cases of de facto takeovers by certain investors,
facilitated by senior government officials, as well as the state's
failure to ensure a fair investigation and judicial review, has
marred the government's assurances of equal treatment and
transparency.

--------------
CURRENCY CONVERSION AND TRANSFER POLICIES
--------------


13. There are no limitations on the conversion and transfer of money
or the repatriation of capital and earnings, including branch
profits, dividends, interest, royalties, or management or technical
service fees. Most banks can transfer funds internationally within
2-4 days. The Government maintains the Armenian Dram (AMD) as a
freely convertible currency under a managed float. According to the
2005 law on "Currency Regulation and Currency Control," prices for
all goods and services, property and wages must be set in Armenian
Drams. There are exceptions in the law, however, for transactions
between resident and non-resident businesses and for certain
transactions involving goods traded at world market prices. The new
law requires that interest on foreign currency accounts be
calculated in that currency, but be paid in Armenian Drams.

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EXPROPRIATION AND COMPENSATION
--------------


14. Under Armenian law, foreign investments cannot be nationalized;
they also cannot be confiscated or expropriated except in extreme
cases of natural or state emergency, upon a decision by the courts
and with compensation. While the U.S. government is not aware of
any confirmed cases of expropriation, a local subsidiary of a
U.S.-based mining company is engaged in an ongoing dispute with the
Armenian Government and has accused the latter of expropriating
company assets. To date, there has been no court assessment of the
company's claims. The company is seeking an amicable settlement of
its dispute.

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DISPUTE SETTLEMENT
--------------


15. According to the 1994 Foreign Investment Law, all disputes that
arise between a foreign investor and the Republic of Armenia must be
settled in Armenian courts. In late January 2007, however,
President Kocharian signed a new law on Commercial Arbitration,
which provides investors with a wider range of options for resolving
their commercial disputes. The Bilateral Investment Treaty (BIT),
signed by the U.S. and Armenia, provides that in case a dispute
arises between an American investor and the Republic of Armenia, the
investor may choose to submit the dispute for settlement by binding
international arbitration. As an international treaty, the BIT
supersedes Armenian law, a point which Armenia's constitution

YEREVAN 00000100 003 OF 007


acknowledges and that exists in actual practice.


16. Many Armenian courts suffer from low levels of efficiency,
independence and professionalism and there is a need to strengthen
the Armenian judiciary. While there have been a few investment
disputes involving U.S. and other foreign investors, there is no
evidence of a pattern of discrimination against foreign investors in
these cases. In general, the government honors judgments from both
arbitration and Armenian national courts.


17. Disputes to which the Armenian Government is not a party may be
brought before an Armenian or any other competent court, as provided
by law or by agreement of the parties. There is a special Economic
Court that hears commercial disputes. The verdict of an Economic
Court can be appealed to the Court of Cassation, the highest
judicial authority in Armenia. The Law on Arbitration Courts and
Arbitration Procedures provides rules governing the settlement of
disputes by arbitration. According to Constitutional amendments of
2005, the courts of first instance must undergo a major
restructuring; as a result, in January 2008, the GOAM abolished the
Economic Court and launched a new specialized administrative court
and courts of general jurisdiction to hear civil and criminal cases,
in the hope of streamlining these proceedings. Armenia is a party
to the Convention on the Settlement of Investment Disputes between
States and Nationals of Other States (the Washington Convention) and
the New York Convention of 1958 on the Recognition and Enforcement
of Foreign Arbitral Awards.

--------------
PERFORMANCE REQUIREMENTS AND INCENTIVES
--------------


18. Armenia currently has incentives for exporters (no export duty,
VAT refund on goods and services exported) and foreign investors
(income tax holidays, and the ability to carry forward losses
indefinitely). The government amended the VAT law in November 2005
to allow companies to delay VAT payments for 1-2 years on certain
imported goods used in production and manufacturing. Also, in
accordance with the Law on Foreign Investment, several ad hoc
incentives may be negotiated on a case-by-case basis for investments
targeted at certain sectors of the economy and/or of strategic
importance to the economy.


19. The Government of Armenia has imposed performance requirements
for investors as part of privatization agreements, especially for
the privatization of large state assets like mines or the
telecommunications network. There are no performance requirements
for de novo investment.

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RIGHT TO PRIVATE OWNERSHIP AND ESTABLISHMENT
--------------


20. The Armenian Constitution protects all forms of property and the
right of citizens to own and use property. Foreign individuals, who
do not hold special residence permits, cannot own land, but may
lease it; companies registered by foreigners in Armenia as Armenian
businesses have the right to buy and own land. There are no
restrictions on the rights of foreign nationals to acquire,
establish or dispose of business interests in Armenia.

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PROTECTION OF PROPERTY RIGHTS
--------------


21. Armenian law protects secured interests in property, both
moveable and real. Armenian legislation provides a basic framework
for secured lending, collateral and pledges, and provides a
mechanism to support modern lending practices and title
registration. Although the mortgage market has been slow to
develop, increased competition among a number of commercial banks
has led to better lending conditions with interest rates as low as
11.5 percent (compared to 16-17 percent in 2004).


22. Domestic legislation, including the 2006 Law on Copyright and
Related Rights, provides for the protection of intellectual property
rights on literary, scientific and artistic works (including
computer programs and databases),patents and other rights of
inventions, industrial design, know-how, trade secrets, trademarks
and service marks. Armenia's legislation is in compliance with
Trade Related Aspects of Intellectual Properties (TRIPS) Agreement.
In January 2005, the government created an IPR Enforcement Unit in
the Organized Crime Department of the Armenian Police. The onus for
IPR complaints remains with the offended party; the Government of
Armenia has yet to prosecute one case of IPR violations
successfully. It is not yet clear, however, whether the action that
it has taken represents the beginning of stronger IPR enforcement

YEREVAN 00000100 004 OF 007


efforts or selective enforcement. There is also an Intellectual
Property Agency in the Armenian Ministry of Trade and Economic
Development responsible for granting patents and for overseeing
other IPR related matters. While Armenia has made some progress on
IPR issues, strengthening enforcement mechanisms remains a
priority.

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TRANSPARENCY OF THE REGULATORY SYSTEM
--------------


23. The Armenian regulatory system pertaining to business activities
still lacks transparency in implementation. A small group of
businesses dominate several sectors that should be competitive. The
inconsistent application of tax, customs (especially valuation) and
regulatory rules, especially in the area of trade, undermines fair
competition and adds uncertainty for small- and medium-sized
businesses and new market entrants. Banking supervision is
relatively well developed and largely in-line with the Basel Core
Principles. In early 2006, the Armenian Central Bank became the
primary regulator for all segments of the financial sector,
including banking, securities, insurance and pensions.


24. Safety and health requirements, mostly remaining from the Soviet
period, generally do not impede investment activities. Bureaucratic
procedures can nevertheless be burdensome and discretionary
decisions by individual officials still provide opportunities for
petty corruption. Despite persistent problems with corrupt
officials, both local and foreign businesses assert that a sound
knowledge of tax and customs law and regulations enables business
owners to deflect a majority of unlawful bribe requests.

--------------
CAPITAL MARKETS AND PORTFOLIO INVESTMENTS
--------------


25. Armenia's financial sector is not well developed. As of
September 2007, total bank assets were USD 2 billion (32.9 percent
of GDP),up 13.2 percent from September 2006. IMF estimates suggest
that banking sector assets account for 95 percent of total financial
sector assets. Financial intermediation is poor: commercial
lending rates in AMD range from 17 percent to 20.8 percent. Nearly
all banks require collateral located in Armenia and large collateral
requirements often prevent potential borrowers from entering the
market.


26. Although there is a system and legal framework in place,
Armenia's securities market is not well developed. On November 21,
2007, OMX, a leading expert in the equities exchange industry, and
the Government of Armenia signed a Share Purchase Agreement
regarding the acquisition of the Armenian Stock Exchange and the
Central Depository of Armenia. According to the agreement, OMX
becomes the sole shareholder of the Armenian Stock Exchange (Armex)
and the Central Depository of Armenia (CDA). In addition to the
Share Purchase Agreement, OMX and the Government of Armenia have
also signed a Cooperation Agreement outlining joint efforts to
support the long-term development of the capital market in Armenia.



27. Remittances constitute a significant share of Armenia's total
GDP. According to the latest data released by the Central Bank, the
volume of private (non-commercial) remittances for January-September
2007 has increased by almost 40 percent compared to the same period
in 2006. The Central Bank has forecast that remittances will reach a
new, full-year high of USD 1.35 billion in 2007. The Central Bank's
2006 survey states that 37 percent of Armenian households regularly
receive remittances. The most recent Central Bank data indicate
that 80 percent of remittances originate in Russia and the remainder
come primarily from the US and Europe.

--------------
POLITICAL VIOLENCE
--------------


28. We know of no incident involving politically motivated damage to
commercial property in Armenia. In 2007, however, there were
reports of harassment and intimidation of businessmen who have ties
to an opposition candidate in the upcoming presidential election. A
Presidential election is scheduled for February 19, 2008. Armenia's
ceasefire with Azerbaijan has held for more than 10 years; there
have been no threats to commercial enterprises from skirmishes in
the border areas. It is unlikely that civil disturbances, should
they occur, would be directed against U.S. businesses or the U.S.
community.

--------------
CORRUPTION

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--------------


29. Corruption remains a significant obstacle to U.S. investment in
Armenia. The Armenian Government introduced a number of reforms
during the last four years, including the simplification of
licensing procedures, civil service reform, a new criminal code,
privatization in the energy sector, anti-corruption laws and
regulations, and in 2004, establishment of an Anti-Corruption
Council tasked with coordinating the government's anti-corruption
activities and improving policies aimed at the prevention of
corruption. Nevertheless, corruption remains a problem in critical
areas such as the judiciary, tax and customs operations, health,
education and law enforcement. Petty corruption is widespread
throughout society.


30. In November 2003, the GOAM adopted a National Anti-Corruption
Strategy paper which contained an action plan aimed at introduction
of tax and customs reforms, harmonization of legislation and
improvement of public access to information. The plan, completed in
2007, was widely criticized by local and international observers.
The Armenian Government has circulated a draft of a new
anti-corruption strategy, which it has yet to adopt.


31. Relationships between high-ranking government officials and the
emerging private business sector encourage influence peddling
between officials and the private firms from which they benefit.
Powerful officials at the federal, district or local levels acquire
direct, partial or indirect control over emerging private firms.
Such control is exercised through a hidden partner or through
majority ownership of a prosperous private company. This
involvement can also be indirect, e.g., through close relatives and
friends. These practices promote protectionism, encourage the
creation of monopolies or oligopolies, hinder competition and
undermine the image of the government as a facilitator of private
sector growth.


32. The Law on Civil Service, in force since January 1, 2002,
restricts participation by civil servants in commercial activities.
The new Law on the Disclosure of Property and Income for heads of
state authorities has increased transparency in government
officials' decision-making and influence. Corrupt practices exist
widely within private companies as well, mostly in the form of tax
fraud and unregistered business activities.

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BILATERAL INVESTMENT AGREEMENTS
--------------


33. Armenia has bilateral investment treaties (BITs) in force with
21 countries: the U.S., Argentina, Austria, Belarus, Bulgaria,
Canada, China, Cyprus, France, Germany, Greece, Georgia, Iran,
Italy, Kyrgyzstan, Lebanon, Romania, Switzerland, Ukraine, the
United Kingdom and Vietnam. According to the U.N. Conference on
Trade and Development, Armenia has also signed BIT agreements with
Belgium, Egypt, Finland, India, Israel, Russia, Tajikistan and
Turkmenistan, but these agreements have not yet entered into force.
Armenia is a signatory of the CIS Multilateral Convention on the
Protection of Investor Rights.


34. The Treaty between the Republic of Armenia and the United States
of America Concerning the Reciprocal Encouragement and Protection of
Investment (the Bi-lateral Investment Treaty or BIT) was ratified in
September 1995. The BIT sets forth investment conditions for
investors of each party to be no less favorable than for national
investors (national treatment) or for investors from any third state
(a Most-Favored-Nation clause). It protects investment against
expropriation and nationalization, and regulates dispute settlements
between foreign companies and the governments of each party.
Armenia does not have a bilateral taxation treaty with the United
States, nor is there any indication that this lack has done any
economic harm to U.S. business interests. U.S. Embassy Yerevan and
the Department of State would welcome information from U.S. firms or
individuals to substantiate whether such a treaty would materially
facilitate U.S. trade and investment in Armenia.

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OPIC AND OTHER INVESTMENT INSURANCE PROGRAMS
--------------


35. The "Investment Incentive Agreement between the Government of
the Republic of Armenia and the Government of the United States of
America," signed in 1992, provides a legal framework for OPIC's
operations in Armenia. OPIC offers political violence insurance in
Armenia and insures against expropriation. OPIC insures against
currency inconvertibility only on a case-by-case basis. Armenia is
also a member of the Multilateral Investment Guarantee Agency
(MIGA).

YEREVAN 00000100 006 OF 007



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LABOR
--------------


36. Armenia's human capital is one of its strongest resources. The
labor force is generally well educated, particularly in the
sciences. Almost one hundred percent of Armenia's population is
literate. Enrollment in secondary school is 92.8 percent and
enrollment in senior school (essentially equivalent to American high
school) is 85.6 percent. According to a survey by U.N. Development
Program, approximately 20 percent of Armenians have completed some
sort of higher education program.


37. Much of new foreign investment in Armenia is in the high-tech
sector. High-tech companies have established branches or
subsidiaries in Armenia to take advantage of the country's pool of
qualified specialists in electrical and computer engineering,
optical engineering and software design. Pilot training programs
have increased the supply of qualified software programmers, and
Armenia's IT sector is growing based on its qualified pool of
inexpensive labor.


38. The amended Labor Code came into force in June 2005 and is
considered to be largely consistent with international best
practices and the international conventions to which Armenia is a
party. The law sets a standard 40-hour working week with minimum
paid leave of 28 calendar days annually. The draft 2008 budget,
which has been approved by the National Assembly, increases the
legal minimum wage to AMD 25,000, which, given the ongoing
appreciation of the Armenian national currency, exceeds the formerly
prevailing de facto monthly minimum wage of 50 U.S. dollars. Most
companies also pay a non-official extra-month bonus for the New
Year's holiday. Entry-level skilled professionals (such as software
engineers) command wages of about USD500 per month. Wages in the
public sector are often significantly lower than those in the
private sector and, while all wages must be paid in AMD, many
private sector companies continue to use a fixed exchange rate to
denominate employee salaries.

--------------
FOREIGN TRADE ZONES/FREE PORTS
--------------


39. Armenia has no foreign trade zones or free ports at present.
The company that took over management of the Zvartnots airport in
June 2002 has discussed with the Armenian Government the possible
establishment of a free trade zone on the territory of the airport,
but such a zone has yet to be established.

--------------
FOREIGN DIRECT INVESTMENT STATISTICS
--------------


40. The following is volume of FDI based on data by the Armenian
National Statistical Service:

Net FDI (According to IMF data)
Years 2001 2002 2003 2004 2005 2006 2007(est)
Vol(USD m) 70 111 121 217 287 305 350


41. In 2007, some of the most significant foreign investments for
the Armenian economy came from Russia, Lebanon and Argentina. The
Russian Mobile Telephone Operator Vimpelcom (operating under the Bee
Line brand),which purchased 100 percent of the Armenian National
Telephone operator Armentel (which itself had been acquired by the
Greek OTE company in 2006),has made significant investments to
upgrade the network. [NOTE: It had previously announced plans to
invest around USD 100 million in 2007 and has relinquished its
monopoly over international calling and access to the internet. End
Note]


42. Argentinian-owned Armenian International Airports Company has
made considerable investments as it continues to upgrade Zvartnots
International Airport. Its investment is expected to increase in
2008, once it commences renovation of Armenia's second largest
airport in the north of the country.


43. In September 2007, another Russian telecom company, MTS,
acquired 80 percent ownership in Vivacell, the second mobile
operator in Armenia, with the remaining 20 percent remaining under
the ownership of the Lebanese K-Telecom Company. Prior to the sale
of the controlling stake to MTS, the Lebanese company had made a
significant investment to expand the network further.


44. Dutch Haypost Trust Management, which entered into a
concessionary management agreement of the Armenian postal service in

YEREVAN 00000100 007 OF 007


2006, has invested around USD two million out of projected USD 10
million in upgrading the postal system and establishing local postal
bank branches all over the country.


45. The Armenian National Statistical Service reported that total
foreign investment for the first nine months of 2007 was USD 470
million, up 58 percent from the same period in 2006. Of that
foreign investment, USD 311.6 million was foreign direct investment
(FDI),up 209 percent compared to the previous year; FDI accounted
for 4.8 percent of GDP growth in 2006 and 5.8 percent of GDP growth
for the first nine months of 2007.

End text.

PENNINGTON