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R 121247Z JAN 07
FM AMEMBASSY YEREVAN
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UNCLAS SECTION 01 OF 06 YEREVAN 000044 
 
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SIPDIS 
 
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SUBJECT: ARMENIA INVESTMENT CLIMATE STATEMENT, 2007 
 
REF: STATE 178303 
 
¶1. (U) Following is our submission per reftel for the 2007 
Investment Climate Statement for Armenia. 
 
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BEGIN TEXT 
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Foreign investment in Armenia has steadily increased from USD 70 
million in 2001 to USD 297 million as of September 2006, according 
to data from the National Statistical Service.  From January to 
September 2006 Foreign Direct Investment (FDI) in Armenia totaled 
USD 149 million, an 8 percent increase over the same period in 2005. 
 Major foreign investments were from Greece, France, US, Argentina, 
Russia.  Gross domestic product (GDP) growth remained strong at 
approximately 13 percent for 2006, slightly down from 14 percent in 
¶2005.  The IMF projects GDP growth of approximately 9 percent in 
¶2007. 
 
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 braQ 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.  Some of these companies, including the 
telecommunications network and electrical distribution network were 
recently sold to new foreign investors.  There are also significant 
foreign investments in construction, the primary driver of Armenia's 
continued economic growth. 
 
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 the mining, chemicals, and 
telecommunications sectors. 
 
The Armenian dram continued to appreciate significantly, especially 
against the dollar, in 2006, contributing to an increase of almost 6 
percent in year-on-year inflation.  The Central Bank and IMF both 
cite increased remittances as one of the primary drivers of the dram 
appreciation trend. According to the IMF, by September 30, 2006, 
nominal appreciation of the dram was 33 percent against the U.S. 
dollar.  Dram appreciation in recent years seems to have had have 
some impact on external competitiveness, and appreciation and the 
undiversified structure of exports may limit future potential for 
export-led growth. 
 
------------------------------ 
OPENNESS TO FOREIGN INVESTMENT 
------------------------------ 
 
Despite significant obstacles to investment, particularly problems 
with corruption, Armenia's investment and trade policy is relatively 
open.  Armenia ranked 34 out of 175 economies-the highest ranking 
among CIS countries-in the "ease of doing business" index according 
to the World Bank's 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 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 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.  In 
addition to 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, WTO, OSCE, Council of 
 
YEREVAN 00000044  002 OF 006 
 
 
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.  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.  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 
ceQain 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 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 natural or state emergency, upon a decision by the courts and 
with compensation.  While we are 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. 
 
------------------ 
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.  In late December 2006, however, the 
Armenian Parliament passed, and President Kocharian is expected to 
sign, a new Law on Commercial Arbitration, which will provide 
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 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, a point which is acknowledged under 
Armenia's constitution and 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.  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, the 
highest judicial authority 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 these 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 new bankruptcy 
courts and a new specialized administrative court.  While 
implementation of the proposal is underway, the timeline for 
completion remains unclear. 
 
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 
 
YEREVAN 00000044  003 OF 006 
 
 
--------------------------------------- 
 
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.  Foreign individuals, who 
do not hold special residence permits, cannot own land, but may 
lease it and 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. 
 
----------------------------- 
PROTECTION OF PROPERTY RIGHTS 
----------------------------- 
 
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 
supporting modern lending practices and title registration.  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 and the National Assembly is considering new 
legislation for primary and secondary mortgage market development. 
 
 
Domestic legislation, including the new Law on Copyright and Related 
Rights which was adopted in 2006, 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.  It is not yet clear, however, whether the action taken 
represents the beginning of stronger IPR enforcement efforts or 
whether it was a case of 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. 
 
------------------------------------- 
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 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. 
 
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 
 
YEREVAN 00000044  004 OF 006 
 
 
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 
----------------------------------------- 
 
Armenia's financial sector is not well developed.  As of September 
2006, total bank assets were USD 1.2 billion (28 percent of GDP). 
IMF estimates suggests that banking sector assets account for 97 
percent of total financial sector assets.  Financial intermediation 
is poor:  commercial lending rates range from 11.7 percent to 22 
percent.  In December 2006, the official bank lending rate was 14 
percent.  Nearly all banks require collateral located in Armenia and 
large collateral requirements often prevent potential borrowers from 
entering the market. 
 
Armenia's securities market is not well developed although there is 
a system and legal framework in place.  The Armenian stock market 
(ArmEx) introduced foreign exchange trading in November of 2005 and 
the first commercial paper was issued in September 2006.  The main 
trading on ARMEX is in the form of privatization vouchers' trading, 
but there was also significant foreign exchange trading in 2006. 
 
Remittances constitute a significant share of Armenian's total GDP. 
According to the latest data released by the Central Bank, the 
volume of private (non-commercial) remittances for Jan-September 
2006 has increased by 43 percent compared to the same period in 
¶2005.  A recent Central Bank survey states that 37 percent of 
Armenian households regularly receive remittances.  Seventy-two 
percent of remittances originate in Russia and the remainder come 
primarily from Europe and the US. 
 
------------------ 
POLITICAL VIOLENCE 
------------------ 
 
We know of no incident involving politically motivated damage to 
commercial property in Armenia.  In 2006, however, there were 
unconfirmed reports of harassment and intimidation of journalists, 
many of whom are alleged to have ties to opposition parties.  There 
also were a number of reported attacks against individuals related 
to prominent members of the Armenian business community.  National 
Assembly elections are scheduled for May 2007 and a Presidential 
election is scheduled for 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 
---------- 
 
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, 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 introduction 
of tax and customs reforms, harmonization of legislation and 
improvement of public access to information.  The plan, scheduled 
for completion in 2007, has been widely criticized by local and 
international observers.  The Armenian Government has circulated a 
draft of a new anti-corruption strategy, but it has not yet been 
adopted. 
 
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 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. 
 
YEREVAN 00000044  005 OF 006 
 
 
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. 
 
------------------------------- 
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 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. 
 
-------------------------------------------- 
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 is 
also a member of the Multilateral Investment Guarantee Agency 
(MIGA). 
 
----- 
LABOR 
----- 
 
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. 
 
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 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 and is considered to be largely consistent with international 
best practices and 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 2007 budget, 
which has been approved by the National Assembly, increases the 
legal minimum wage to AMD 20,000, which, given the ongoing 
appreciation of the Armenian national currency, exceeded the 
formerly prevailing de facto minimum wage of 50 U.S. dollars 
monthly.  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 drams, 
many private sector companies continue to use a fixed exchange rate 
to denominate employee salaries. 
 
------------------------------ 
FOREIGN TRADE ZONES/FREE PORTS 
 
YEREVAN 00000044  006 OF 006 
 
 
------------------------------ 
 
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 2005 was 
approximately USD 1.27 billion. 
 
Net FDI (According to IMF data) 
Years          2001 2002 2003 2004 2005(Act) 2006 (proj.) 
Vol(USD M)     70 111 121 217 252  267 
 
In 2006, some of the most significant foreign investments for the 
Armenian economy came from Russia, Great Britain and Greece.  The 
Russian Mobile Telephone Operator Vympelcom (operating under the Bee 
Line brand) purchased 90 percent of the Armenian National Telephone 
operator Armentel previously owned by Greek OTE company for USD 480 
million.  The company announced plans to invest around USD 100 
million in 2007 and has agreed to give up its monopoly position over 
international calling and access to the internet.  British 
Rhinoville Property acquired 90 percent of the shares of a 
previously-government owned artificial rubber plant for USD 40 
million.  In late 2006, Dutch Haypost Trust Management entered into 
a concessionary management agreement of the Armenian postal service 
and announced plans to invest USD 10 million in upgrading the postal 
system and establishing local postal bank branches over the next two 
years.  The Armenian National Statistical Service reported total 
foreign investment of USD 297 million for the first nine months of 
2006, up by 31.8 percent from the same period in 2005.  Of that 
foreign investment, USD 149.1 million was foreign direct investment 
(FDI), up 8 percent compared to the same period in 2005.  FDI 
accounted for 5.8 percent of GDP growth in 2005 and 3.4 percent of 
GDP growth for the first nine months of 2006. 
 
 
GODFREY