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UNCLAS SECTION 01 OF 07 YEREVAN 000100 
 
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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. 
 
------------------------------ 
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. 
 
-------------------------------------------- 
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. 
 
----------------------------- 
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. 
 
------------------------------------- 
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. 
 
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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. 
 
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CORRUPTION 
 
YEREVAN 00000100  005 OF 007 
 
 
---------- 
 
¶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. 
 
------------------------------- 
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. 
 
-------------------------------------------- 
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 
 
 
 
----- 
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