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 You are in: Under Secretary for Economic, Energy and Agricultural Affairs > Bureau of Economic, Energy and Business Affairs > Finance and Development > Organization > Investment Affairs > Investment Climate Statements: 2006

Armenia


2006 INVESTMENT CLIMATE STATEMENT -- ARMENIA

INTRODUCTION

Foreign investment in Armenia has been steadily increasing from USD 70 million in 2001 to USD 217 million in 2004 according to data from the International Monetary Fund (IMF). From January to September 2005 Foreign Direct Investment in Armenia totaled USD 138 million, a 20 percent increase over the same period in 2004. Major foreign investments are from Russia, Greece, Germany, Argentina, Lebanon, France and the U.S.

The largest foreign investors in Armenia are those who purchased interests in valuable Soviet-era state assets. Privatization of Yerevan's largest hotels, two historic brandy factories, the Zvartnots International Airport, 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.

Greenfield investments are made up of mostly small and medium enterprises. More than a dozen U.S. information technology (IT) firms have established subsidiary operations in Armenia. There have also been new foreign investments in diamond processing, chemicals, mineral water bottling, television and the financial sector.

OPENNESS TO FOREIGN INVESTMENT

Despite some obstacles to investment, particularly problems with corruption, Armenia's investment and trade policy is among the most open in the CIS. The Armenian economy depends heavily on remittances, foreign trade and investment, and the Armenian Government has made significant efforts to attract additional investment. Foreign companies are entitled by law to the same treatment as Armenian companies (national treatment) and in some cases may benefit from temporary preferential tax treatment including a two-year profit tax exemption. The Armenian Government plans to phase out this exemption in 2007 with the aim of creating a completely level playing field for local and foreign businesses.

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. Besides providing for national treatment and most-favored nation treatment, the BIT sets out guidelines for the settlement of disputes involving the government of either party.

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 a fair tender process.

Under the Constitution, foreign individuals are prohibited from owning land in Armenia, but this prohibition does not apply to foreign businesses.

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

CURRENCY CONVERSION AND TRANSFER POLICIES

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 of Armenia maintains a freely convertible currency, the Armenian Dram, under a managed float. A new law on "Currency Regulation and Currency Control" came into force on June 28, 2005. According to the new law, 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 may be calculated in that currency, but must be paid in Armenian Drams.

EXPROPRIATION AND COMPENSATION

Under Armenian law, foreign investments cannot be nationalized; they also cannot be confiscated or expropriated except in extreme cases of a natural or state emergency, upon a decision by the courts and with compensation. We know of no cases of expropriation of a foreign investment since independence.

DISPUTE SETTLEMENT

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. Contradicting the Foreign Investment Law, the Bilateral Investment Treaty (BIT), signed by the U.S. and Armenia, provides that in the case of a dispute that 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. 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. The government has recently honored judgments from both arbitration and Armenian national courts.

Disputes to which the Armenian Government is not a party may be brought before an Armenian or any other competent court, as provided for 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, which is the Supreme Court of Armenia. The Law on Arbitration Courts and Arbitration Procedures provides rules governing the settlement of disputes by arbitration. The Armenian Constitution was amended in November 2005 to, among other things, increase judicial independence. In line with the recent amendments, the Minister of Justice has proposed a judicial reform package aimed primarily at restructuring the courts of first instance. According to the proposal, the Economic Court would be replaced by specialized administrative and bankruptcy courts.

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

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 indefinitely carry forward losses). The government amended the VAT law in November 2005 allowing companies to delay VAT payments for one to two 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.

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.

RIGHT TO PRIVATE OWNERSHIP AND ESTABLISHMENT

The Constitution of Armenia protects all forms of property and the right of citizens to own and use property. Although foreigners have no right to own land (they can only lease it), a company registered by a foreigner in Armenia as an Armenian business entity has the right to buy land. There are no restrictions on the rights of foreign nationals to acquire, establish or dispose of business interests in Armenia.

PROTECTION OF PROPERTY RIGHTS

Armenian law protects secured interests in property, both moveable and real. While nearly all lending is secured, the mortgage market has been slow to develop. The German Development Bank (KfW) recently approved a USD 21 million mortgage lending program to help develop the Armenian mortgage market. There is no secondary mortgage market.

Domestic legislation 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. In July 2005, the Unit took significant action against three companies allegedly marketing unlicensed cassettes, CDs and DVDs. 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.

TRANSPARENCY OF THE REGULATORY SYSTEM

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 to medium size businesses and market entrants.

Labor, 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.

CAPITAL MARKETS AND PORTFOLIO INVESTMENTS

Armenia's financial sector is not well developed. As of September 2005, total bank assets are USD 926 million (29 percent of GDP) and non-bank financial institutions are very small. Financial intermediation is poor: commercial lending rates are from 13 percent to 22 percent with an official bank lending rate of 17.7 percent. Nearly all banks require collateral located in Armenia.

Armenia's securities market is not well developed although there is a system and legal framework in place. There is trade in Armenian Government bonds and the country's first commercial bond was issued in December 2005. The Armenian stock market (ArmEx) introduced foreign exchange trading in November of 2005. Turnover in corporate equities, however, is less than USD 1.5 million annually.

POLITICAL VIOLENCE

We know of no incident involving politically motivated damage to commercial property in Armenia. 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

Corruption remains an 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, the introduction of a new criminal code, privatization in the energy sector, and dissemination of laws and regulations in an effort to combat corruption. Despite these reforms, 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.

Authorities finalized the anti-corruption strategy in November 2003. The strategy contains a three-year action plan with a number of measures to be implemented, notably:

The harmonization of legislation to specify sanctions for corruption, protect witnesses, and improve access to information;

Reforms on tax and customs administration and the judiciary; and

Public financial audit standards and a strengthened role for parliament in the audit process.

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 may be exercised through a hidden partner position or through majority ownership of a prosperous private company. The 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.

The new 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.

BILATERAL INVESTMENT AGREEMENTS

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.

The Treaty Between the Republic of Armenia and the United States of America Concerning the Reciprocal Encouragement and Protection of Investment (the official title on the 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 (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.

OPIC AND OTHER INVESTMENT INSURANCE PROGRAMS

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 has also joined the Multilateral Investment Guarantee Agency (MIGA).

LABOR

Armenia's human capital is one of its best resources. The labor force is 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.

The bulk of de novo foreign investment in Armenia comprises high-tech companies that have established branches or subsidiaries in Armenia to take advantage of Armenia'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.

The amended Labor Code came into force in June 2005. The law sets a standard 40-hour working week, with minimum paid leave of 28 calendar days annually. The legal minimum wage has been raised, but is below the prevailing de facto minimum wage of 50 U.S. dollars monthly. Some 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 USD 400 per month.

FOREIGN TRADE ZONES/FREE PORTS

Armenia has no foreign trade zones or free ports at present. The company that took over management of the Zvartnots airport in June 2002 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

The Armenian National Statistical Service reported that total foreign direct investment (FDI) in Armenia at the end of 2004 was just over USD 1 billion.

Net FDI (According to IMF data)
Years 2001 2002 2003 2004 2005(Proj.)
Vol(USD M) 70 111 121 217 255

In 2005, some of the most significant foreign investments for the Armenian economy came from Germany, Russia, Lebanon and Greece. The German company Cronimet invested USD 29.2 million in Armenia's largest copper-molybdenum complex in 2005. Cronimet owns a 60 percent stake in the plant and has agreed to invest a total of USD 150 million to improve plant operations over a four year period. The Russian aluminum company, RUSAL, invested approximately USD 25 million to refurbish the ARMENAL aluminum foil plant, and has agreed to invest a total of USD 70 million for plant development. K-Telecom (Vivacell), a Lebanese-owned mobile phone network operator, became the second mobile phone service provider in Armenia in June 2005 with an initial investment of USD 20.7 million. According to the Armenian Ministry of Trade and Development, Greek-owned ArmenTel, Vivacell's only competitor, invested USD 58 million in its Armenian operations during the fist six months of 2005.

The Armenian National Statistical Service reported total foreign investment of USD 225 million for the first nine months of 2005, up by 28 percent from the same period in 2004. Of that foreign investment, USD 138 million was foreign direct investment (FDI), up 20.2 percent compared to the same period in 2004. FDI accounted for 6.1 percent of GDP growth in 2004 and 4.4 percent of GDP growth for the first nine months of 2005.


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