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R 050659Z NOV 09
FM AMEMBASSY YEREVAN
TO SECSTATE WASHDC 9708
INFO USDOC WASHDC
EUROPEAN POLITICAL COLLECTIVE

UNCLAS YEREVAN 000782 
 
 
E.O. 12958: N/A 
TAGS: ECON EFIN ETRD KTDB AM
 
SUBJECT: ARMENIA'S STANDING IN 2009 "DOING BUSINESS" RATINGS 
 
REF: 2008 YEREVAN 634 
 
 
SUMMARY 
------- 
 
¶1. (SBU) Some reports on "doing business" indicators have in recent 
years given Armenia relatively high marks, in a few instances 
ranking the country on the same level as western democracies.  The 
GOAM and potential investors have begun to pay greater attention to 
these ratings, as the GOAM seeks to attract foreign investment and 
investors attempt to assess the business environment. As was the 
case last year (reftel), there is considerable variation in the 2009 
ratings.  Most reports point to corruption as a significant and 
continuing problem that impedes business and economic development in 
Armenia, despite many recent reforms attempted by the GOAM. Some 
ratings remain, in our view, surprisingly high, especially since 
three of the eight rank Armenia ahead of Turkey -- by most measures 
a significantly more mature, open and transparent economy.  Most 
also likely reflect the ideological predisposition of their 
sponsoring organization.  End Summary. 
 
HERITAGE FOUNDATION RATES ARMENIA HIGHEST 
----------------------------------------- 
 
¶2. (SBU) The Heritage Foundation's 2009 Index of Economic Freedom 
gave Armenia its highest ranking among all the surveys under review. 
 As in 2008, Heritage placed Armenia in the category of "mostly 
free," ranking it 31st out of 183 countries surveyed.  Among 
neighboring countries, Georgia placed 32nd, Turkey 75th, Azerbaijan 
99th, Russia 146th, and Iran 168th.  Armenia ranked 18th freest 
among the 43 countries assessed in the Europe region. 
 
¶3. (SBU) Heritage cites Armenia's main advantages as flexible and 
relatively simple commercial regulations, low tax rates and moderate 
government spending, few restrictions on foreign investment, and a 
wholly private and well regulated banking sector. According to the 
report, the freedom to start, operate, and close a business is well 
protected under Armenia's regulatory environment.  (Comment: While 
Heritage gives Armenia high scores for low government spending, that 
is in large measure a consequence of a dysfunctional system of tax 
administration and systemic corruption for which it elsewhere gives 
the country low marks.  End Comment). 
 
¶4. (SBU) On the other hand, widespread corruption and weak 
protection of property rights reduce Armenia's overall level of 
economic freedom, according to Heritage. Despite numerous attempts 
at reform, Armenia's lowest score was in the area of corruption (30 
points out of 100), which is perceived as widespread in spheres 
ranging from tax and customs operations to law enforcement.  The 
report identifies burdensome bureaucratic procedures and 
discretionary decisions by individual officials as factors 
encouraging petty corruption. Heritage also criticizes the GOAM for 
subsidizing public transportation and public utilities, thus 
distorting domestic prices. As a shortcoming, the report also 
mentions lack of transparency in investment regulations, and 
government administration that is inefficient and prone to 
corruption. 
 
WORLD BANK: DOING BUSINESS 2010 
------------------------------- 
 
¶5. (SBU) In its Doing Business 2010 report, the World Bank and 
International Finance Corporation (IFC) ranked Armenia 43rd among 
183 countries, seven places higher than in 2009.  Georgia moved up 
by five places to 11th, well above neighboring countries. 
Azerbaijan placed 38th, Turkey 73rd and Russia 120th. 
 
¶6. (SBU) Data in this report covers the period June 2008 to June 
2009 and evaluates countries in 10 specific areas of business 
regulation.  Armenia achieved its highest score (second in 2008, 
sixth in 2009 and fifth in 2010) for ease of registering property 
(on paper, it requires three procedures, takes four days, and costs 
0.25 percent of the property value to register a property in 
Armenia).  Compared to last year, Armenia also improved its 
positions in the areas of starting a business, cross-border trade, 
and obtaining construction permits. (Comment: Some of these 
processes work more smoothly on paper than in practice. Anecdotal 
evidence suggests it is still common practice for people to pay 
bribes to expedite construction permits.  The State property 
registration system remains highly corrupt and dysfunctional, and if 
a property has any complication, it can take days of shuttling 
documents between offices to resolve the issue if the transacting 
parties are not ready to pay bribes. End Comment). 
 
¶7.  (U) Starting a business was made easier by the GOAM's 
elimination of both minimum capital requirements and a requirement 
to obtain approval from the national police department to prepare 
the company seal, as well as by making registration forms available 
online.  Armenia strengthened access to credit information by 
establishing a legal framework for credit bureaus and by regulating 
credit information collection and the preparation of credit reports. 
 By encouraging competition in banking, transportation and customs 
brokerage services, as well as by reducing the number of goods 
requiring inspection and streamlining the number of documents needed 
to clear goods, Armenia has sped trade across borders. 
 
¶8.  (U) Armenia's worst-performing area remains the ease of paying 
taxes (number 153).  According to the report, an average medium-size 
business requires 958 person-hours annually to deal with tax issues. 
 By comparison in Georgia it is 387 hours, in Azerbaijan 376 hours 
and in the USA only 187 hours. 
 
FITCH RATING: ARMENIA'S CREDIT FUNDAMENTALS WEAKENED 
--------------------------------------------- ------- 
 
¶9. (U) Fitch Ratings downgraded Armenia's Long Term Foreign and 
Local Currency Issuer Default Ratings (IDRs) to "BB- with Stable 
Outlook," from "BB" last year.  Fitch projects that Armenia's 
economy will contract by 15 percent in 2009 (as do, at present, the 
GOAM and the IMF), the third worst performance of any Fitch-rated 
sovereign (ahead of only Lithuania and Latvia, whose GDPs are 
projected to decline 16% and 18%, respectively), as remittance and 
investment inflows and demand for exports drop amid the global 
crisis.  According to the report, the severity of the shock has 
materially weakened Armenia's credit fundamentals, warranting a 
downgrade.  (Note: Turkey was given the same "BB- with Stable 
Outlook" in January 2009, though Fitch has recently indicated it may 
soon upgrade its rating. End Note). 
 
¶10. (U) Fitch considered as main rating strengths the low level of 
public debt ($1.5 billion, or 15% of GDP as of the end of 2008), 
although this strength will be eroded by the GOAM's accumulation of 
an additional $1.5 billion in debt in the form of loans from the 
World Bank, IMF, Asian Development Bank and Russia to fund 
anti-crisis spending in 2009-2010, and the concessional nature of 
the debt composition.  Fitch also acknowledges the high quality of 
Armenia's key economic policy-making institutions, praising the 
authorities' management of the crisis.  The business environment 
overall compares favorably with peer countries, although Armenia's 
relatively poor performance in corruption indicators mars the 
picture. 
 
¶11. (U) As a weakness, Fitch notes the volatility of Armenia's 
macroeconomic performance related to the economy's small size, 
narrow base, high dependence on remittance and investment inflows 
from Russia, low share of tax revenues as a share of GDP, and an 
upsurge in dollarization which has weakened the financial stability 
of the country. 
 
PROPERTY RIGHTS ALLIANCE: WORST IN IPR PROTECTION 
--------------------------------------------- ---- 
 
¶12. (U) In its 2009 International Property Rights Index (IPRI), the 
Property Rights Alliance--an affiliate of Americans for Tax 
Reform--placed Armenia in the bottom quintile, at 98th place among 
115 countries surveyed. Turkey ranked 53rd, Russia 87th, Azerbaijan 
107th.  The 2009 IPRI is an international comparative study that 
measures the protection of both physical and intellectual property 
rights. The study analyzes data from various sources, including the 
World Economic Forum, World Bank, the United States Trade 
Representative (USTR) Special 301 Watch List, Organization for 
Economic Co-operation and Development (OECD), as well as data 
obtained from expert surveys.  The Index focuses on three areas: 
Legal and Political Environment, Physical Property Rights, and 
Intellectual Property Rights. 
 
¶13. (U) While close to the median in terms of Physical Property 
Protection, Armenia is the worst performing country (115th) in terms 
of Intellectual Property Rights, which includes IP Rights 
protection, Strength of Patent Rights, and Copyright Piracy.  In 
this ranking, Armenia shares the lowest score in any of the core 
components of the study with Chad (rated the last in Legal and 
Political Environment). 
 
WORLD ECONOMIC FORUM: GLOBAL COMPETITIVENESS REPORT 
--------------------------------------------- ------ 
 
¶14. (SBU) Armenia's position in the World Economic Forum's Global 
Competitiveness Index was largely unchanged - Armenia ranked 97th 
out of 133 countries, compared to 93rd of 131 in 2008.  Armenia is 
behind Azerbaijan (51st), Turkey (61st), Russia (63rd) and Georgia 
(90th).  According to the report, Armenia has moved from the group 
of countries rated as "factor driven" to the group of "efficiency 
driven" countries. The index is based on 12 pillars of 
competitiveness, taking into account factors such as strength of 
institutions, quality of infrastructure, macroeconomic stability, 
health and education, market efficiency and size, innovation and 
business sophistication.  In addition to publicly available data, it 
also uses Executive Opinion Surveys among individuals doing business 
in particular countries. 
 
¶15. (SBU) As was the case last year, corruption, tax regulations, 
inefficient government bureaucracy and access to financing were 
mentioned by businessmen as the most problematic factors for doing 
business.  Armenia's main competitive advantages remained a 
relatively stable macroeconomic environment (ranked 53rd) and labor 
market efficiency (47th).  The most troubling areas include 
effectiveness of anti-monopoly policy (132nd), burden of customs 
procedures (131st), extent of market dominance (129th), intensity of 
local competition (128th), judicial independence (122nd), tariff 
barriers (119th), ease of access to loans and venture capital 
availability (119th and 129th), and quality of management schools 
(125th). 
 
FAILED STATES INDEX 
------------------- 
 
¶16. (SBU) The latest Failed States Index, published by the Foreign 
Policy Journal in collaboration with the Fund for Peace, an 
independent research organization, ranked Armenia 101st in 2009, a 
slight improvement over its 2008 ranking (the higher the rank, the 
less "failed" the country is believed to be).  To compile the 
indices, Foreign Policy Journal ranked 177 states in order from most 
to least at risk of failure, using 12 social, economic, political, 
and military indicators of state cohesion and performance, compiled 
through a close examination of more than 30,000 publicly available 
sources.  The data used in each index are collected from May to 
December of the preceding year. Foreign Policy Journal describes 
Armenia as a "borderline" country.  It is the only country among its 
neighbors that is not considered "in danger" of state failure, with 
Turkey (85th), Azerbaijan (56th), Iran (38th) and Georgia (33rd), 
exhibiting various indications of potential failure. 
 
¶17. (SBU) The most troubling factors for Armenia include demographic 
pressures, with negative population growth, an aging population, and 
massive deforestation from illegal logging, 
lack of employment opportunities, and corruption among politicians, 
police and the court system.  (Note: The Economy and Values Research 
Center estimated in 2007 that over the previous decade illegal 
logging and illegal trade in wood was worth nearly ten times the 
annual legitimate harvest, generating about $135 million in illegal 
revenues.  End Note.) The report praises Armenia for its 2007 
parliamentary elections -- calling them "free and fair" by 
international standards despite numerous irregularities -- and for 
the ability of opposition forces to hold public rallies during the 
campaign without police harassment.  However, the report also 
mentions the flawed 2008 Presidential election and the police 
crackdown on opposition protests. 
 
TRANSPARENCY INTERNATIONAL: STILL "MOSTLY CORRUPT" 
--------------------------------------------- ----- 
 
¶18. (SBU) Transparency International's 2009 Corruption Perceptions 
Index (based on data from 2007 and 2008) ranks Armenia 109th.  The 
CPI ranks 180 countries by their perceived levels of public-sector 
corruption--as determined by expert assessments and opinion 
surveys--on a scale from zero (highly corrupt) to ten (highly 
clean).  With a 2.9 score, Armenia is categorized as a "mostly 
corrupt" country, behind neighbors Turkey (4.6) and Georgia (3.9), 
but ahead of Azerbaijan (1.9), Iran (2.3), Russia (2.1), Ukraine 
(2.5) and Kazakhstan (2.2). 
 
¶19.  (SBU) TI's Armenian branch believes that close ties between 
government and business is the root cause of the problem.  While 
Armenian authorities claim to have stepped up their fight against 
corruption in recent years, there is no significant decrease in the 
scale of corrupt practices among state officials. 
 
FORBES: BEST COUNTRIES FOR BUSINESS 
----------------------------------- 
 
¶20. (U) Forbes Magazine's annual Best Countries for Business survey 
ranked Armenia 94th among 127 countries, down from 63rd of 120 in 
¶2008. In this rating, Armenia is outranked by Turkey (41st), Georgia 
(64th) and Azerbaijan (87th).  The ranking uses economic data for 
2008 and is based on expertise, research, and reports by a number of 
organizations, including Heritage Foundation, World Economic Forum, 
World Bank, Transparency International and Freedom House.  The 
ranking analyzes business climate and political factors, focusing on 
degrees of personal freedom, level of security of investors, and 
corruption levels, in addition to economic policy favorable for free 
trade and low inflation. 
 
¶21.  (U) Armenia's worst indicators include 106th for technology, 
105th for tax burden, 100th for innovation, 96th for protection of 
property rights, 94th for personal freedoms and 89th for corruption. 
 According to Forbes, despite improvements made by the GOAM in tax 
and customs administration in recent years, anti-corruption measures 
will be difficult to implement. Another issue mentioned by Forbes is 
high unemployment rates. The disruption of rail transit into Armenia 
during the August 2008 Georgia-Russia conflict also highlighted how 
Armenia's supply chains for key goods -- such as gasoline -- are 
vulnerable to instances of regional instability. 
 
COMMENT 
------- 
 
¶22. (SBU) As change in a business environment is an evolutionary 
process, it is not surprising that most ratings -- with the 
exception of the precipitous drop in the Forbes survey -- changed 
only slightly from last year.  The surveys correctly cite continuing 
problems in such areas as tax, customs, property registration, 
protection of property rights, monopolies, and Armenia's 
vulnerability to political disruptions in Georgia.  As most of these 
surveys draw from data obtained prior to the onset of the global 
financial crisis--which has hit Armenia especially hard--they may 
not adequately reflect current conditions and we would expect next 
year's ratings to be somewhat lower.  The GOAM will need to continue 
on a path of political and economic reform -- often against powerful 
entrenched interests -- in order to see a credible rise in its 
ratings and a meaningful increase in foreign investment.  End 
Comment. 
 
PENNINGTON