2011 Investment Climate Statement - Armenia

2011 Investment Climate Statement
Bureau of Economic, Energy and Business Affairs
March 2011


While the Armenian government (GOAM) officially welcomes foreign investment and the country has received respectable rankings on some global indices as a place to do business, the country's investment climate poses several significant challenges: a population of just three million; relative geographic isolation due to closed borders with Turkey and Azerbaijan; per capita GDP of about USD 3,500; and high levels of corruption in both official and commercial spheres. Foreign businesses must frequently contend with tax and customs processes that lack transparency and add to costs; the court system lacks independence, making it an unreliable forum for resolution of disputes; and while it has made progress, the GOAM does yet not ensure the prompt and transparent refund of Value-Added Tax (VAT) payments across the board, a problem that creates serious problems for export-oriented companies.

Major sectors of Armenia's economy are controlled by well-connected businessmen—-some of them members of Parliament or with other government positions-—who enjoy government-protected monopolies. This raises barriers to new entrants, limits consumer choice, and discourages investments by multinational firms that insist on partnering with politically-independent businesses. The GOAM also continues on occasion to deploy government agencies, including the tax and customs services, against political opponents.

According to the National Statistical Service (NSS), foreign direct investment in Armenia increased from USD 70 million in 2001 to USD 1 billion in 2008. However, in January – September 2010, foreign direct investment totaled USD 348.7 million (a 9.3 percent decrease compared to the same period in 2009, when a 27 percent decrease was registered over the previous year). Gross Domestic Product (GDP) made a slight recovery in the first ten months of 2010, increasing by 2.4 percent. A dramatic 15 percent decline in GDP in 2009, driven by a general economic recession, was a departure from primarily double digit growth earlier in the decade.

The largest foreign investors in Armenia are those that have acquired interests in the telecommunications, 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 the foreign commercial presence in Armenia.

The communications sector was the largest recipient of FDI in January-September 2010, attracting almost 42 percent of the total. The energy sector attracted 24.6 percent of total FDI, due to increased gasification of the country. Investments in air and ground transportation, as well as the mining sector have grown slightly compared to previous years, constituting 6-7 percent of the total. There are currently about 36 U.S. information technology (IT) firms operating in Armenia.

The foreign exchange market has remained relatively stable, with no major currency shocks following the 20 percent Armenian dram (AMD)devaluation in March 2009 (precipitated by the Central Bank of Armenia (CBA) ceasing its interventions through sales of foreign reserves). The AMD/USD exchange rate has been fluctuating between 360 and 370 drams to the dollar, with a gradual appreciation of the dram from June to November 2010. The dramatic dram depreciation drove significant price increases for certain commodities, including food staples, in 2009. This price trend has persisted throughout 2010, pushing the officially reported inflation rate to 8 percent as of November, exceeding the GOAM’s original projection of 5 percent. Although official reports blame increases in international commodity prices and a poor Armenian harvest, most embassy sources point fingers at import monopolies for the continued increases.


Armenia's investment and trade policy is relatively open, and the GOAM consistently asserts its interest in obtaining foreign investment. Significant obstacles remain, however, particularly with respect to corruption. Armenia ranked 48th out of 183 economies in the World Bank's Doing Business 2011 report, down 5 points from 2010. Noticeable improvement was made in trading across borders rating (82nd, up from 102nd in 2010). In all other ratings Armenia ranked poorly compared to the previous year, including: starting a business (22nd compared to 21st in 2010); dealing with construction permits (78th compared to 72nd in 2010; paying taxes (159th compared to 153rd in 2010); and closing a business (54th compared to 49th in 2010.) Although Armenia compares favorably to regional averages, that group includes Central Asia.

Foreign companies are entitled by law to the same treatment as Armenian companies (national treatment). Under the Armenian Law on Profit Tax, taxpayers engaged in agricultural production are exempt from tax on that income. This was set to expire in 2010 with an introduction of VAT for agricultural products in line with Armenia’s WTO commitments. However, no changes have been made to date.

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.

Armenia's 1997 Law on Privatization (amended in 1999) states that foreign companies have the same rights to participate in privatization processes as Armenian firms. Nevertheless, the majority of 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.

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. The Armenian government has expressed interest in negotiating a double taxation treaty with the United States, and a few private companies see the absence of such treaty as potentially harmful and an excessive burden.

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.

The seemingly open legislative framework and the government's visible effort to attract more foreign investment are overshadowed by instances of unfair tender processes and preferential treatment. Such instances, as well as the state's failure to ensure a fair investigation of abuses and judicial review, has undermined the government's assurances of equal treatment and transparency. However, in a December 7 decision the WTO Committee on Government Procurement invited Armenia to join its Government Procurement Agreement (GPA), which will make Armenia the first CIS country to accede once required domestic legislation is passed. This accession, expected in spring 2011, is viewed as a positive move aimed at increasing the openness and transparency of the internal markets.




TI Corruption Index



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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 two to four days. The GOAM maintains the AMD as a freely convertible currency under a managed float, although between September 2008 and March 2009 the CBA sought to maintain the AMD through intervention in the foreign exchange market. According to the 2005 law on "Currency Regulation and Currency Control," prices for all goods and services, property and wages must be set in AMD. 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.


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 paid to the owner. While the U.S. government is not aware of any confirmed cases of expropriation, a local subsidiary of a U.S.-based mining company was engaged for several years in a dispute with the GOAM over mining rights, and accused the GOAM of attempting to expropriate company assets. The parties reached a settlement in 2008 after lengthy negotiations at various levels.


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, then Armenian 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 acknowledges and which holds in actual practice.

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.

Disputes to which the GOAM 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. Following the court reform in January 2008, commercial disputes are tried in courts of general jurisdiction. The verdict can be appealed to the Court of Appeal and 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 have undergone 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.


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 GOAM amended the VAT law in November 2005 to allow 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 Armenian Parliament has recently amended the Law on Excise tax in an attempt to equalize duties and taxes on gasoline, alcohol and tobacco for local producers and importers, following Armenia’s WTO commitments of non-discrimination. The fuel-related provisions entered into force as of January 1, 2011, while the implementation of alcohol and tobacco provisions is deferred until 2014, allowing for prolonged protection of domestic producers through lower tariffs.

The GOAM 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.

The GOAM takes considerable interest in economic activities in the disputed region of Nagorno-Karabakh. In August 2008, the CBA terminated operations of Western Union's money transfer services in Armenia following the company's decision to close its operations in Nagorno-Karabakh under pressure from the National Bank of Azerbaijan. As the CBA's mandate does not officially include Nagorno-Karabakh, the decision by the CBA is viewed as politically motivated.


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.


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.

Domestic legislation, including the 2006 Law on Copyright and Related Rights, provides for the protection of intellectual property rights (IPR) on literary, scientific and artistic works (including computer programs and databases), patents and other rights of invention, industrial design, know-how, trade secrets, trademarks, and service marks. Armenia's legislation is in compliance with the 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.

Despite the existence of relevant legislation and executive government structures, the IPR concept remains unrecognized by a large part of the local population. While pirated audio and video production is largely available at major entertainment retail shops in Yerevan, some anecdotal evidence suggests tightened measures for computer software piracy. The onus for IPR complaints remains with the offended party. Although exact statistics are unavailable, the police assert the number of court cases involving IPR violations have increased in 2010 compared to the previous years; about 70 percent of all the cases are settled through out-of-court proceedings. 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, enforcement mechanisms are inadequate.


The Armenian regulatory system pertaining to business activities still lacks transparency in implementation. A small group of businesses dominates several sectors and suppresses full competition. The inconsistent application of tax, customs (especially with respect to 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 consistent with the Basel Core Principles. In early 2006, the CBA became the primary regulator for all segments of the financial sector, including banking, securities, insurance and pensions.

Safety and health requirements, most of them holdovers 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.


Armenia's financial sector is not highly developed. As of October 2010, total bank assets were USD 4 billion (52 percent of GDP), up 25 percent from September 2009. The insurance market is very small, with total annual premiums for 2009 amounting to approximately USD 21 million and the first quarter of 2010 at USD 4.7 million. These numbers may increase slightly with the introduction of mandatory third party liability motor insurance, beginning January 1, 2011. IMF estimates suggest that banking sector assets account for 92 percent of total financial sector assets. Financial intermediation is poor: commercial lending rates in AMD range from 13 to 14 percent for business entities and from 18 to 22 percent for individuals. Nearly all banks require collateral located in Armenia, and large collateral requirements often prevent potential borrowers from entering the market. This remains the main barrier for SMEs and start-up companies. As of November 2010, a slight drop in commercial lending rates was registered, due to decreased business activity and increased competition among banks. Banks have restored lending after a suspension with the onset of the economic crisis in Armenia at the end of 2008 that continued throughout the first half of 2009. Mortgage rates at the end of November 2010 were 13 -13.4 percent, a decline of 6 percentage points compared to December 2009. A drop in mortgage rates is attributed to decreased demand in the real estate market.

Although there is a system and legal framework in place, Armenia's securities market is not well developed, with minimal trading activity. 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 became the sole shareholder of the Armenian Stock Exchange and the Central Depository of Armenia. 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 capital markets in Armenia.

Remittances constitute approximately 11-14 percent of Armenia's total GDP, a variable statistic because of the difficulty of tracking cash payments. According to the latest data released by the Central Bank, the volume of private (non-commercial) remittance inflows for January-October 2010 has increased by USD 91.5 million, or 12.3 percent compared to the same period in 2009, but falls short of the 2008 peak. The CBA's 2006 survey states that 37 percent of Armenian households regularly receive remittances. The most recent CBA data indicate that 88 percent of remittances originate in Russia and the remainder comes primarily from the US (3 percent), Europe and other CIS countries.


There is not a widespread understanding of corporate social responsibility in Armenia. It is rare to see examples of companies that contribute to their local community through charity, employee service days, or other similar programs. A positive, but rare, example is a local branch of a U.S. information technology firm which has planted trees to combat deforestation and has set up joint education programs with local universities.


The political scene has remained relatively calm since the 2008 post-election violence. Most of the opposition detainees in 2008 have been released under amnesty or pre-term release. Unsanctioned gatherings and small-scale rallies proceed regularly, mostly without incident, though the GOAM does restrict the freedom of assembly at certain locations and through intimidation.

The GOAM continued to use its agencies to retaliate against businesspersons who support the political opposition. Since the 2008 Presidential election, the GOAM has conducted tax audits of businesses owned by opposition supporters. In 2009 one of the leading bottled-water factories, owned by an ardent supporter of the opposition presidential candidate, was seized and put up for auction. The GOAM in late December 2009 sent police and tax inspectors to several of this person's companies after he and his brothers gave newspaper interviews criticizing the government and supporting an opposition parliamentary candidate.

Armenia's ceasefire with Azerbaijan over the disputed region of Nagorno-Karabakh has held for more than 15 years; there have been no threats to commercial enterprises from incidents 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 remains a significant obstacle to U.S. investment in Armenia. The Armenian Government introduced a number of reforms over 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.

In November 2003, the GOAM adopted a National Anti-Corruption Strategy paper which contained an action plan aimed at the 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 for failing to yield any result. After lengthy discussions initiated at the beginning of 2008, the Armenian Government adopted a new anti-corruption strategy paper and action plan for 2009-2012. Priorities set by the new strategy include improvement of legislation and infrastructure to combat money laundering, increasing transparency in the public sector, and enhancement of accountability of all branches of government. Beginning in early 2010, the Armenian Prime Minister publicly, and repeatedly, reprimanded various government ministers for failing to cut down on corruption within their institutions. The President and Prime Minister noted that the replacement of four cabinet ministers in December 2010 was partially to address problems with corruption.

According to the Transparency International (TI) 2010 Corruption Perception Index (CPI) report, Armenia ranked 123th among 178 countries, with a score of 2.6 (on a "10-0" scale, where "10" is the cleanest country and "0" the most corrupt). Armenia's score places it in the category of "mostly corrupt." The latest score is consistent with Armenia’s pattern of a gradual decline in the annual rating. During the last three years, Armenia's CPI was 2.9, 2.7, and 2.6 in 2008, 2009, and 2010, respectively. Meanwhile, recent findings of the Global Corruption Barometer (GCB), a worldwide public opinion survey, identified the Armenian education sector as the most corrupt, followed by the police and judiciary.

Relationships between high-ranking government officials and the emerging private business sector encourage influence peddling. 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.

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.

In a move to increase transparency and introduce a degree of

"naming and shaming" of major tax-dodgers, since 2006 the GOAM has published quarterly lists of the country's largest business taxpayers. It is not clear if this has had the intended effect, as companies of some major businesspersons feature prominently on the list, while others remain conspicuous by their absence.

As of January 1, 2009, in an attempt to cut back on shadow economic activity and tax evasion, as well as to increase budget revenues, the GOAM tightened enforcement of a 2005 law that obliged traders to report all transactions through cash registers. To maximize the effectiveness of implementation, GOAM resorted to an innovative tactic of encouraging customers to demand cash register receipts from retailers; state-run lotteries were instituted at the end of each month, during which control numbers of the receipts were to be drawn. Monetary prizes for winners ranged from USD 16.60 to 1,600. Although after a few months the lottery was suspended due to fraud allegations, most retailers, fearing unexpected tax audits, continue to provide receipts to customers. According to official estimates, as a result of this action, the GOAM has managed to raise about USD 30 million in additional revenues.

Another recent effort to increase tax compliance by larger companies was legislation permitting the State Revenue Committee to place tax inspectors on the premises of large companies (those with annual turnover exceeding USD 10.5 million, and/or those with more than USD 1.3 million in imports in a three-month period) to oversee sales volumes, prices and corresponding documentation, product deliveries, etc. The amendment went into effect January 1, 2010.


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 Bi-lateral Investment Treaty or BIT) was ratified in September 1995. The BIT mandates that investment conditions for investors of each party be no less favorable than for national investors (national treatment) or for investors from any third state (a Most-Favored-Nation clause).


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).


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 the U.N. Development Program, approximately 20 percent of Armenians have completed some sort of higher education program.

Much of the new foreign investment in Armenia has occurred 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. A number of IT firms that had faced the risk of a significant phase-out and/or shutdown due to the latest global economic developments, have gradually stabilized during 2010.

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 work week, with minimum paid leave of 28 calendar days annually. The current legal minimum wage established by the 2011 budget, equals AMD 32,500 (about USD 90) per month. 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 USD 500 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.


Armenia has no foreign trade zones or free ports at present. However, the Armenian Government has approved a concept to create a free trade zone in the area of Zvartnots International Airport. Another free trade zone was proposed to cover the Gyumri area as part of the Gyumri Techno-City concept paper unveiled by the former Minister of Economy but its future is uncertain.


The Armenian National Statistical Service reported that total foreign investment for the first nine months of 2010 was USD 472 million, down 9.5 percent from the same period in 2009. Of that foreign investment, USD 348 million was foreign direct investment (FDI), down 9.3 percent compared with the previous year.

In 2010, the most significant foreign investments in Armenia came from Russia (USD 148 million) and France (USD 116 million) constituting 42 and 33 percent of the total, respectively. This was due to Russia's continued investment in the energy sector as well as the expansion of services by France Telecom (dba Orange) that entered the Armenian market in 2009. Argentina was the third biggest investor, its FDI reaching USD 26 million, or 7 percent of the total, which consists predominantly of investments in the air transportation infrastructure as it continues to upgrade Zvartnots International Airport.

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












Volume (USD m)










The final FDI numbers for 2010 will be available after March 2011.