Institute for War and Peace Reporting | Giving Voice, Driving Change

Armenia Woos Investment at any Price

Economists have accused the Yerevan government of selling the cream of Armenian industry at bargain-basement prices
By Artur Erndzhakian

The growing trend in Armenia for selling off appetising chunks of the nation's industry to large foreign corporations is causing widespread concern in local economic circles.


Many observers feel that President Robert Kocharian is betraying the country's economy by accepting knock-down prices for the most profitable Armenian concerns. And the issue has become especially sensitive as the government prepares to privatise the electricity distribution network - some of which may go to foreign buyers.


Opponents point out that few of the marriages between foreign investors and Armenian industry have been happy ones with the big corporations quickly establishing iron-clad monopolies and fixing local prices.


The first major foreign investment in the Armenian market came in 1996 when a Greek company, Coca-Coca Bottlers Armenia, paid $150,000 for the Osharak state drinks factory.


The company, owned by Vache Manukyan, a British businessman of Armenian origin, was the only prospective purchaser. It paid off Osharak's $20,000 debts and invested $3 million in overhauling equipment and production lines.


The government hailed the buy-out as an economic triumph for Armenia, proving that serious multinational corporations were prepared to invest in a notoriously unstable market.


Armenian economists, however, pointed out that Coca-Cola Bottlers Armenia wasn't invited to build a new factory in the former Soviet republic but had instead been sold an already functioning enterprise. As a result, Osharak, the largest factory in the region, simply ceased to exist and was replaced by Coca-Cola.


With almost no competition, the Greek company quickly monopolised the market, although it refused to make its sales figures public. In 1998, however, Coca-Cola Bottlers Armenia was investigated for tax evasion with the authorities claiming it had failed to declare around $3 million in earnings.


Despite repeated claims by Artashes Tumanian, former head of the tax inspectorate and current adviser to the prime-minister, that the company kept "very lax books", the investigation was mysteriously dropped.


In the following year, 90 per cent of the shares in ArmenTel, the country's largest telecommunications network, were sold to another Greek company, OTE, for $142.5 million. The Armenian government even pushed a law through parliament granting the new owners a complete monopoly on the local communications market.


The decision was overturned in the Constitutional Court which ruled that it directly contravened the Armenia constitution. However, OTE was still granted a monopoly for 15 years, with a five-year limit on its domination of the mobile communications market.


Although in 1997, the year before the sale, ArmenTel showed a gross income of $47 million, OTE promptly raised telephone costs nine fold. As a result, the number of telephones in Armenia dropped by nearly 15,000 in the year after the deal was signed while the company's takings soared to $70 million.


In just three years, OTE has covered its capital investment and the Armenian telecommunications market remains in the hands of a single corporation.


In 1998, France's Pernod Ricard snapped up the world-famous Yerevan Cognac Factory for $30 million, pledging to use exclusively local grapes, increase production figures and move into new markets.


Granted a complete monopoly on the Russian market, Pernod Ricard estimated it would sell 3.27 million litres of cognac to Russia in 1998 (ie no less than in previous years) and increase overall sales volumes by 20 per cent between 1999 and 2000.


However, after the first year of privatisation, the new management announced that total sales for 1998 had reached only 1.86 million litres - half the figure for 1997 - while the share of the domestic market fell by 31 per cent.


Pernod Ricard blamed the slump on the economic crisis which hit Russia in August of that year as well as illegal use of its trademark - a case which the French company intends to take to court.


Given the troubled history of foreign investment in Armenia, the forthcoming sale of the electricity distribution network is likely to attract intense local scrutiny: payment rates in Armenia are currently running at 85 per cent, making it an extremely profitable concern.


Armenia's national airline could also be dragged on to the auction block although it is thought unlikely the ageing air fleet will attract serious investors. The government, however, is set to sell the airline's routes along with its infrastructure and this is likely to arouse far greater interest.


Artur Erndzhakian is an independent journalist in Yerevan