ARMENIA: PRECIOUS METALS AND BRANDY VS CORRUPTION, TAXES AND LAW ENFORCEMENT.

Armenia reported 6 percent GDP growth last year, despite a drought which caused agricultural production to decline. Industrial output grew 6 percent, thanks to 28-percent growth in exports. An important factor in last year’s industrial growth was the restart of several formerly idle factories, mainly with the help of foreign investors. Significant increases were recorded in the production of jewelry, copper, aluminum and brandy.

The impact of foreign investment on industrial production and export growth is most apparent in nonferrous metallurgy, especially precious metals. Production of finished diamonds and jewelry made from precious stones and metals accounted for 41 percent of Armenian exports in 2000. The three largest diamond-finishing companies operating in Armenia are Belgium’s Arslanian Cutting Works, the Diamond Company of Armenia (owned by the United Kingdom’s Furfano), and Shoghakn (recently purchased by Israel’s LLD). Copper production rose nearly 14-fold in 2000, thanks to the restart of the Manes & Vallex copper plant, which is owned by companies from Liechtenstein and Switzerland. Aluminum output was reported up 240 percent in 2000 after Russia’s Siberian Aluminum purchased the previously idle Kanaker plant. Another Russian-Armenian joint venture, Armenal, was established at the Kanaker plant in May 2000 to produce aluminum foil.

The impact of foreign investment is also apparent in the food-processing sector. Armenia produced 2.85 million liters of brandy last year, 140 percent more than in 1999. Armenia’s largest brandy producer, the Yerevan Cognac Distillery, is owned by the French company Pernod Ricard, while the second biggest producer is the Armenian-Cypriot company Great Ararat. A US$5 million investment by Great Ararat last year contributed to the increase in overall production.

Despite such positive developments, Armenia’s investment climate continues to be hindered by corruption, inadequate law enforcement and a complicated tax system. The privatization of the country’s four electricity distribution companies, scheduled for this spring, will therefore be a major test. Last year political squabbling almost prevented these sales, which are required by Armenia’s programs with the IMF and World Bank. Of the four firms in the running–AES Silk Road of the United States, Union Fenosa of Spain, the Swiss-Swedish company ABB and Electricite de France–none submitted a bid in the tender which took place late last month, and only AES sent a letter requesting more time. The tender was delayed until April 19, and the announcement of the winner is expected by the end of the month. Meanwhile, parliamentary opposition to these sales–because of the companies’ “strategic importance”–seems to be strengthening. Whether due to lack of interest or domestic interference, the sale’s failure would clearly send a bad signal to other potential foreign investors, and this could threaten Armenia’s fragile economic stability (Russian agencies, February 5, 12; Snark, March 25, April 6).

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