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P 131441Z OCT 09
FM AMEMBASSY YEREVAN
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INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE PRIORITY
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C O N F I D E N T I A L SECTION 01 OF 04 YEREVAN 000719 
 
SIPDIS 
 
E.O. 12958: DECL: 09/20/2019 
TAGS: EAID ECON ENRG ETRD PROG PREL AJ AM TU
SUBJECT: OPEN BORDER COULD INCREASE TRADE AND COOPERATION, 
ENHANCE TRANSPARENCY 
 
Classified By: Ambassador Marie L. Yovanovitch.  Reasons 1.4 (b/d) 
 
SUMMARY 
 ------- 
¶1. (C) The closure of Armenia's border with neighboring 
Turkey has isolated this landlocked country and imposed a 
high price in terms of lost economic opportunities.  Armenia 
is not part of any regional transportation or energy network. 
 Its isolation has helped foster import monopolies, stifled 
development of a politically independent business culture, 
discouraged foreign investment and prompted out-migration of 
many talented workers.  Nearly all of Armenia's 
imports--including food and refined petroleum--come through 
Georgia, a fact that results in premium-rate tariffs on 
Armenia-bound freight, contributes to a higher cost of 
living, and as the August 2008 Russia-Georgia conflict 
demonstrated, leaves Armenian supply lines vulnerable to 
disruption by events in Georgia. 
 
¶2. (C) Opening Armenia's border with Turkey offers many 
potential economic benefits and enjoys the support of most, 
but not all, Armenians.  Some caution that economic 
competition from Turkey would devastate small businesses. 
Less clear is the impact on the small number of 
well-connected businesspersons ("oligarchs") who monopolize 
many sectors of the economy and could see their control 
threatened. None have to date actively opposed the 
President's initiative, and some have openly supported it. 
Ultimately, Armenia may have no other way to achieve healthy 
economic growth than through opening its borders. END SUMMARY. 
 
HIGH COST OF LIVING, AND DOING BUSINESS 
--------------------------------------- 
 
¶3. (SBU) For a developing country, Armenia is surprisingly 
expensive.  Surveys have shown that retail prices for many 
consumer goods in Yerevan are higher than in many western 
European countries.  In part, this reflects the choke-hold 
the Georgian transit industry/regime has on Armenian import 
markets.  With closed borders with Turkey and Azerbaijan and 
minimal trade through the mountain roads from Iran, up to 80 
percent of Armenia's imports flow through Georgia -- an 
advantageous position the Georgians fully exploit. 
 
¶4. (C) Given the high tariffs for Armenia-bound freight 
transiting Georgia, Armenia has, according to some estimates, 
the highest freight transportation costs in the world.   A 
2007 study of the impact of opening the Turkish border 
estimated that transport comprises 20-25 percent of the costs 
of imported goods in Armenia.  The Deputy Director of the 
Khimpro chemical plant in Vanadzor told Econoff that when 
importing inputs from Donetsk, Ukraine, transport costs for 
the segment from Donetsk to the Georgian port of Poti (a 
distance of 2,000 km by rail and ship) are the same as for 
transporting them from Poti to Vanadzor (500 km) by road or 
rail.  With an open border, he could instead purchase inputs 
from Turkey and avoid shipping freight through Georgia. 
 
¶5. (C) Closed borders also contribute to a high cost of 
living through the monopoly pricing they enable.  With 
Turkish competitors out of the equation and imports through 
Georgia coming in at inflated prices, local businessmen can 
charge a premium for the goods they produce.  For example, 
cement production in Armenia is controlled by two oligarchs, 
Gagik Tsarukian and Mika Bagdassarov. Khachatur Kokobelian, a 
leading pro-opposition businessman involved in the 
construction business, indicated he would prefer to import 
cement from Turkey, which would be considerably cheaper than 
what is available in Armenia.  Kokobelian noted that for a 
project he is doing in Poland, he is able to import cement 
from Pakistan for less than it costs in Armenia. 
 
MISSED OPPORTUNITIES IN ENERGY TRANSIT 
-------------------------------------- 
 
¶6. (C) Armenia has paid a high price for its closed borders 
with both Turkey and Azerbaijan in being unable to serve as a 
transit corridor for energy pipelines.  If not for the frozen 
Nagorno-Karabakh conflict, the Baku-Tbilisi-Ceyhan pipeline 
could have been routed through Armenia, reducing the distance 
and construction cost, and providing Armenia both an 
alternative source of gas as well as much-needed transit 
fees.  With other energy pipelines proposed for the southern 
Caucasus--most notably Nabucco--restoration of relations with 
Turkey, and ultimately with Azerbaijan, could allow 
Azerbaijan to connect to Nabucco and possibly other pipelines 
through Armenia. 
 
IMF SEES NOWHERE ELSE TO GROW 
----------------------------- 
 
 
YEREVAN 00000719  002 OF 004 
 
 
¶7. (C) IMF Senior Economist Carlo Sdralevich suggested to 
Econoff that, without open borders, Armenia is up against a 
developmental wall.  While Armenia enjoyed double-digit GDP 
growth from 2002 to 2007, before leveling off to 6.8 percent 
growth in 2008 and an expected 15 percent decline in 2009, 
that growth was based in large measure on a construction 
bubble and remittances from Russia.  Neither of those 
improved the country's productivity or competitiveness. With 
few engines of sustainable growth in Armenia, and neither 
Iran nor Georgia emerging as significant trading partners 
despite their shared borders, Turkey offers Armenia its best 
hope for significant economic growth, Sdralevich told us. 
 
ECONOMIC SECURITY 
----------------- 
¶8. (C) Armenia learned in August 2008 just how much its 
economic security relies on stability in Georgia.  During the 
Russia-Georgia crisis, Russia bombed the port of Poti and 
damaged roads and rail lines that carry the bulk of imports 
to Armenia, disrupting imports of food and fuel for several 
weeks.  While the crisis was too brief to lead to a serious 
increase in prices, fuel stations began to ration gasoline 
and diesel, and some closed entirely.  Fortunately for 
Armenia, this occurred in the summer, and there was no 
disruption to the natural gas pipeline running through 
Georgia.  Despite minimal observable impact on the Armenian 
population, the GOAM and IMF estimated that Armenia suffered 
economic damages of over USD 600 million as a result of the 
events in Georgia. (Comment: While we consider that estimate 
to be too high, the conflict clearly had an impact and gave 
greater urgency to GOAM efforts to engage with Turkey. End 
Comment). 
 
-------------------------- 
BENEFITS OF AN OPEN BORDER 
-------------------------- 
 
¶9. (C) Studies undertaken in recent years have attempted to 
estimate the potential economic impact both of opening the 
border with Turkey as well as of reaching a peace settlement 
over Nagorno Karabakh.  While estimates vary, they range from 
about one to three percent additional GDP growth over the 
next 10-15 years.  Gains would be expected in such areas as 
reduced transportation costs and increased exports, foreign 
direct investment (FDI), and temporary employment 
opportunities for Armenians in Turkey.  A 2006 study by the 
Armenian International Policy Research Group, estimated that 
a peace settlement that reduced external conflict risk by 25 
percent could lead to a 50 percent increase in annual FDI and 
an increase of GDP of three to ten percent. 
 
INCREASED TRANSPORTATION AND TRADE ROUTES 
----------------------------------------- 
 
¶10. (C) Prior to the 1993 border closing there were at least 
six Turkey-Armenia border crossings in addition to the 
Gyumri-Kars railway (reftel).  Reopening and upgrading these 
routes over time could stimulate the movement of both imports 
and exports by reducing travel distances and increasing 
competition among transport companies.  Georgia might also, 
in this new competitive environment, reduce its tariffs on 
movement of freight through its territory so as to not 
completely cede the market.  Armenian Deputy Finance Minister 
Vardan Aramian estimated that an open border would reduce 
costs of transporting products into Armenia by at least 20 
percent. (Comment: With transport costs currently accounting 
for about 25 percent of the cost of imports, a 20 percent 
reduction in transportation costs could reduce import prices 
by five percent.  While this discount would be welcome, 
breaking monopoly power over imports would likely achieve 
much greater savings. End Comment).  New transit links would 
also hold the potential to benefit Azerbaijan (pending 
resolution of its conflict with Armenia) which also suffers 
from an over-dependence on transit routes through Georgia. 
 
¶11. (C) While a reopened border would benefit consumers by 
lowering the cost of imports, it is less clear how Armenia's 
exports would be affected.  Although an open border would 
also decrease transportation costs for exports, there are 
relatively few products where Armenia is currently 
competitive. Besides information technology -- which does not 
rely on an open border--and metals subject to world market 
prices (primarily copper and molybdenum), Armenia lacks a 
significant export sector.  However, would-be entrepreneurial 
exporters who have been hindered under a closed-border regime 
could emerge if given access to new markets.  Arsen Kazaryan, 
Chairman of the Union of Businesses and Manufacturers of 
Armenia, noted that an open border would improve access to 
traditional trade partners Syria and Lebanon, perhaps giving 
rise to new businesses ready to exploit the new opening. 
 
 
YEREVAN 00000719  003 OF 004 
 
 
ARMENIA'S WINNERS AND LOSERS 
---------------------------- 
 
¶12. (C) While most economists predict significant long-term 
economic benefits for Armenia from an open border, there will 
certainly be some losers, at least in the short term.  Two 
sectors thought to be especially vulnerable to Turkish 
imports are agriculture and textiles, both of which largely 
continue to employ outmoded, Soviet-era technologies and 
practices.  Although by U.S. standards Armenian produce tends 
to be very inexpensive, quality is also inconsistent, and 
farmers generally cannot compete with Turkish producers, as 
they find when they attempt to sell produce in Georgia; 
ultimately they might need to shift to new technologies or 
close operations.  Armenian textiles are also likely to 
suffer from an influx of cheaper Turkish goods.  Many also 
predict SMEs in general will be harmed by the new 
competition, as inexpensive Turkish goods flood across the 
border.  (Comment: Turkish textiles and some produce are 
already imported into Armenia.  However, an open border could 
be expected to reduce travel distances and transportation 
costs, thereby increasing the volume -- and reducing the cost 
-- of these and other imports relative to domestic products. 
End Comment.) 
 
¶13. (C) The prospect of such adjustment elicits some anxiety 
here.  But as Samvel Nikoyan, Deputy Parliament Speaker, told 
us, many of these concerns could be overstated.  He noted 
that even with open borders, any country can still regulate 
its own trade through laws and ease the transition to more 
open markets.  In addition, he asserted that in free economic 
relations, Armenians will always do well, pointing to the 
prosperity of Armenian Diaspora in the U.S., Russia and other 
countries as proof of the entrepreneurial spirit that should 
serve Armenians well with expanded economic opportunity. 
 
¶14. (C) The impact on Armenian from stronger Turkish 
competition might also be mitigated through investment in 
Armenia by Turkish firms hoping to sell into Russia.  The 
Chairman of the Turkish-Armenia Business Development Council 
suggested recently to the Ambassador that Turkish companies 
could establish operations in Armenia in order to take 
advantage of a Russia-Armenia Customs agreement that allows 
goods with just 5)10 percent Armenian content to be sold 
duty-free in Russia. 
 
OPEN BORDER COULD THREATEN MONOPOLISTS 
------------------------------------- 
 
¶15. (C) While epanded trade might give rise to new 
enterprises, conventional wisdom holds that many of the old 
enterprises will resist change.  Armenian oligarchs -- 
well-connected businessmen who control imports of food, fuel 
and consumer products and comprise a major base of support 
for the President -- oppose a reopened border, the thinking 
goes, because of the potential threat to their monopoly 
positions.  An increased number of border crossings could 
make it more difficult for businessmen to co-opt the Customs 
service (more palms to grease) to block competing imports. 
Opposition businessman Khachatur Kokobelian posited that 
Armenians' inherent entrepreneurial capabilities, unleashed 
in this new, more open environment, would result in enough 
competing product getting through so as to undermine monopoly 
power. 
 
¶16. (C) Oligarchs may be concerned not only about losing 
their monopoly positions but about being able to compete at 
all.  While some Armenian businesspersons may well prosper in 
a free economy, Richard Girakosian, director of the Armenian 
Center for National and International Studies (ACNIS), 
asserted that Armenia's oligarchs are not particularly 
sophisticated.  Open borders would bring competition and 
sunshine to their commodity-based cartels, 
and would force them to compete in the "big leagues." 
Theoretically, the oligarchs could continue to use their 
political connections and corrupt practices to maintain their 
monopoly/oligopoly positions.  But Girakosian suggested they 
may not be bright or flexible enough to succeed in that new, 
more competitive, complicated environment. 
 
¶17. (C) Another potential area of unwelcome competition could 
come from Turkish buyers for products where Armenian 
businessmen now enjoy a monopsony (single-buyer) position. 
According to Kokobelian, a significant amount of Armenia's 
annual grape production is currently purchased by two leading 
oligarchs -- Prosperous Armenia leader Gagik Tsarukian (owner 
of the Noy Brandy factory) and parliament speaker (and 
potential 2013 Presidential candidate) Hovik Abrahamian. 
Because of their dominant market position and the inability 
of grape producers to export to Turkey, they are able to buy 
grapes for about half what Turkish buyers would be willing to 
 
YEREVAN 00000719  004 OF 004 
 
 
pay for them if there were an open border. 
 
 
BUT THEY ARE NOT VISIBLY OPPOSING IT 
------------------------------------ 
 
¶18. (C) Despite their possible concerns about the impact of 
an open border, Armenia's oligarchs have not offered any 
visible opposition to the President's initiative. Indeed, the 
Prosperous Armenia party, headed by Tsarukian, has come out 
publicly in support of the President's reconciliation efforts 
with Turkey.  Kokobelian posited that while many express 
concern in private about the impact of an open border on 
their business interests, they dare not openly oppose the 
process for fear of possible retaliation. 
 
COMMENT 
------- 
 
¶19. (C) While there are sure to be both winners and losers 
from an open border, on the whole we believe that the net 
effect will be overwhelmingly positive for Armenia.  There is 
the potential for a significant increase in cross-border 
trade, due to reduced transportation costs, an erosion of 
monopoly positions, and gains from comparative advantage. 
While competition from Turkey could overwhelm some SMEs, it 
is also possible that over time a freer business culture 
could help Armenian businesses lacking high-level connections 
compete in the regional market.  An economy that typically 
relies on clan-based relationships and rent seeking would 
need to become more open, transparent, and based on 
arms-length transactions in order to succeed in a new 
regional market. END COMMENT. 
YOVANOVITCH